DALLAS -- Lawmakers have given the Texas Department of Commerce the authority to create a nonprofit corporation that will issue revenue bonds to help private companies finance job-creating projects.
State officials say the legislation is aimed at helping McDonnell-Douglas Corp. locate an $800 million aircraft plant in Texas, but it also has broader use for other private businesses.
Lawmakers earlier this week approved Senate Bill 4, which allows for the creation of the Texas Major Employer Development Corp. Lawmakers originally considered authorizing the agency to issue $500 million in state-backed general obligation bonds for the McDonnell-Douglas project, but that idea died after a House committee questioned what the state's liability would be if the company did not make lease payments expected to secure the debt.
"There was some question about whether the state would be liable for the bonds," said Glen Hartman, executive director of the Texas Public Finance Authority. "I told them that [as GO bonds], the state definitely would be liable."
"There was no support for a GO program," said Wardleen Belvin, special assistant to Lt. Gov. Bob Bullock, who backed the plan. "At least, very little support."
Mr. Hartman testified before the committee, saying that if the company missed its lease payments on a GO issue, the state would have two options: Go to the state treasury or risk a default thta could affect Texas's double-A credit.
After that warning, lawmakers reconsidered their proposal and decided that bonds would be used only if the state were protected from the consequences of a possible default.
Ms. Belvin said legislators were concerned about both the state's credit risk and the stability of McDonnell-Douglas, which recently has faced Pentagon directives to repay more than $1 billion in defense contract overcharges.
Lawmakers addressed the concerns over liability in S.B. 4, by directing that all bonds issued by the nonprofit firm "must state on their face that the bonds are payable solely from the revenues pledged for that purpose and that the bonds do not and shall not constitute a legal or moral obligation of the state."
The legislation also requires all bond issues to be approved by the Department of Commerce, the Texas Attorney General, and the Texas Bond Review Board.
While self-supporting revenue debt is generally issued by a state agency or independent authority, the legislation is believed to mark the first time Texas has authorized issuance of debt through a non-profit.
Also, lawmakers did not cap the amount of revenue debt the Texas Major Employer Development Corp. can issue.
The nonprofit firm is created under the same provisions that already allow Texas cities to create local economic development corporations to help job-creating enterprises.
Ms. Belvin said that tax-exempt bonds only may be issued in the case of small projects, and then the bonds would require an allocation from the state's already over-subscribed private-activity bond allocation.
Investment bankers and bond lawyers familiar with the proposal say that any bonds issued for McDonnell-Douglas would likely be taxable because of tax law restrictions on the use of municipal bonds.
Even so, they believe that taxable financing could be a viable incentive for the major defense contractor and manufacturer of aircraft.
"Their corporate credit may not be too strong, so it's not a matter of interest rate [savings] for them," an investment banker said. "But [it] would allow then to finance [a facility] with off-balance sheet debt."
The firm is considering two Texas sites -- Ellington Field in Houston and the private Alliance Airport in Fort Worth -- for its MD-12X jet assembly plant.
Other cities bidding for the plant are: Kansas City, Mo.; Salt Lake City; Shreveport, La.; Tulsa, Okla.; Mesa, Ariz.; and Belleville, Ill,; in the St. Louis area.