WASHINGTON -- California firms that used industrial development bond financing between 1987 and 1990 created more jobs and were more likely to stay in the state than they otherwise would have been a study by the state treasurer's office has found.
The recent study is the first statewide overview of IDB use since 1986, when Congress eliminated commercial IDBs and allowed the bonds to be issued only for manufacturing firms.
Though it analyzes the effect of IDB use in only one state, IDB supporters said they were confident the study reflects the value of IDBs around the country and that it would boost chances for extending the IDB exemption beyond its scheduled Dec. 31 termination date.
"The California study fits so well with the anecdotal data from other studies that I feel studies in other states would produce fairly similar results," said Guy Land, a lobbyist for the Council of Industrial Development Bond Issuers.
The report also may help to dispel the bad image that continues to dog IDBs, despite Congress's elimination years ago of the ability to do abusive IDB deals, said Nathan Brostrom, executive secretary for the California Industrial Development Financing Advisory Commission, the agency within the treasurer's office that prepared the report.
"I think IDBs still suffer from a lot of the residue from the past," he said.
Between 1987 and 1990, 16 California cities and eight counties issued a total of $330.6 million in small-issue manufacturing IDBs for 79 projects. The study followed up on firms years after the bonds had been issued to find out if IDB financing actually played its expected role in job creation and economic development.
The study centered on the 17 California firms that issued IDBs in 1987, the first year after the Tax Reform Act of 1986 went into effect. The researchers did not delve as deeply into firms that used bond financing from 1988 through 1990 because those firms may not have had enough time to complete their projects. Firms that issued bonds in 1988 are being surveyed now, those that issued bonds in 1989 will be surveyed next year, and firms that issued bonds in 1990 will be surveyed in 1993, Mr. Brostrom said.
But the report contends that 1987 can be viewed as a representative sample for the four years, because the projects that received tax-exempt financing that year are similar to those that used bonds in later years, and the criterion for California's IDB program has not changed since 1987.
Of the 17 firms, 15 responded to a lengthy questionnaire about how their businesses had fared since 1987. All 15 had added job, for a total of 986 -- three quarters of the amount they had projected when the bonds were first issued. Over all, one new job was created for every $54,412 of bonds issued by the 15 firms, the study states.
If those findings are extrapolated to the entire 1987-1990 period, businesses using IDB financing can be assumed to have created more than 6,000 new jobs, according to the study.
Most of the firms said IDB financing also played a factor in the size and scope of their projects. Without bonds, 10 of the firms would have scaled back their projects; three would have relocated outside of California; and one would have dropped the project completely. Only one firm said it would have completed the project without changes, regardless of whether it received IDB financing.
One of the success stories among the 15 firms was Medical Design Concepts, a company that produces trays to hold tools for medical procedures. The company needed to expand its business and built a new plant in Temecula. The new plant, completed in December 1987, cost $8.1 million, of which $4.3 million was financed with IDBs. The business was so successful the company received $3.5 million more in 1990 to finance another new plant.
The 1987 expansion created 190 new jobs, or one job for each $41,053 in bond funding. According to the study, firm officials said they probably would have moved to Mexico without the IDB financing.
The report acknowledged, however, that not all of the projects were successful. Design Time, a manufacturer of vinyl and paper wall coverings for recreational vehicles, expanded its facilities in 1987 at a cost of $1.785 million, of which $1.6 million was financed with IDBs.
Sales peaked at the new facility in 1988, but they have dropped since then, and employment has not kept pace with projections.
According to the study, Design Times' management said IDB financing was useful because the project would have been scaled back without it. But they also said they would not use IDB financing again because it was too costly. They did not elaborate.