Posted: January 29, 2010

By Philip Newswanger

philip.newswanger@Insidebiz.com

Local economic development authorities are complaining. But legislators remain deaf to their pleas.

The problem is the administrative fee that authorities and the Virginia Small Business Financing Authority charge on bond proceeds for 501(c)3 organizations, such as nonprofit organizations.

Both the local and state authorities can issue bonds for the purpose of economic development. But here's the catch.

The Virginia Small Business Financing Authority charges 1/10 of 1 percent of the total amount of a bond. On a $10 million bond, that equates to $1 million over the life of a 20-year bond.

By contrast, local authorities charge 1/8 of 1 percent, which would equate to $1.25 million on the same bond, a higher expense. So local authorities are competing with the state authority for a share of the fees on bonds issued for nonprofits in the state - and they don't like it.

Last year Norfolk Economic Development Authority competed against the state authority on a bond issue for Sentara Healthcare. The state authority's rate was lower, so Sentara asked it to issue the bonds.

Norfolk's economic development authority matched the lower rate, so Sentara chose Norfolk.

But the competition persists.

The problem began in 2003 when the General Assembly approved a change in the law, allowing the state authority to issue bonds for nonprofits regardless of size, income or employment.

Prior to the change, the state authority was restricted to issuing bonds to for-profits based on gross income, employment and net worth.

In a letter to 14 local economic development authorities sent Jan. 21, Don Jellig, chair of the Virginia Beach Economic Development Authority, said the state authority's lesser fee is forcing authorities in Hampton Roads to reduce their fees and in some cases lose out completely.

"As we experience larger nonprofits beginning to use the VSBFA, the revenue stream used by local authorities for local economic development activities is being significantly reduced or eliminated," Jellig wrote.

Localities use the fees for business retention and expansion. The fees also underwrite grants for nonprofits.

Jellig said the fees are one of the few sources of revenue derived from 501(c)3 organizations to compensate localities for municipal services they provide since tax-exempt entities generally do not pay taxes.

Jellig said that the state authority's issuance of bonds will have the unintended consequence of hampering the long-term economic development activities in the very communities where the nonprofits operate and seek to expand.

Jellig said in a later telephone interview that the letter was intended to prompt a regional approach to the issue of bond fees.

"The question is: Where does that fee go? Usually to the locality. But now it goes to the VSBFA," Jellig said. "All of the cities are having to take a difficult look at this year's budget and next year's budget. Losing this source of funds further erodes our ability to incentivize businesses to grow and to relocate to this area.

"Clearly jobs are created by the city and the region," said Jellig, who is past chair of the Hampton Roads Economic Development Alliance, which markets the region to investors. "That's the lion's share of growth. That's where we ought to be spending our resources."

"Administrative fees collected on tax-exempt bond issuances by the VSBFA, just as fees collected on all VSBFA products, go to capitalizing VSBFA loan and loan guarantee funds," said Will Vehrs, communications manager of the Virginia Department of Business Assistance. The fees also underwrite salaries of four VSBFA employees, Vehrs said.

"These employees are not paid through general funds, as are most state employees," he said.

The VSBFA is self-sufficient and doesn't receive an annual appropriation, Vehrs said.

Virginia Beach has asked the General Assembly to amend the law to reflect language prior to the 2003 change of the law.

According to the letter, state Sen. Jeffrey McWaters, R-Virginia Beach, is the patron of the bill. But according to McWaters spokesman Ross Grogg, the city released Jellig's letter prematurely. While there had been preliminary talks with the city on bond fees, those talks did not produce language or a draft for a bill, Grogg said.

McWaters has introduced five bills in the 2010 General Assembly session and intends to introduce a sixth, but none pertain to the bond fee issue, Grogg said. nib