Act 221 to go untouched
By Sean Hao
Advertiser Staff Writer
The state has decided to leave the technology tax incentive Act 221 alone for now but tomorrow will start eliminating programs that provide higher-risk business loans and venture capital to high-tech companies.
The Department of Business and Economic Development will lose about $5.3 million from two special loan funds that will be transferred into the general fund to help balance the state's 2004-05 budget. One year later, on July 1, 2004, both funds will be eliminated.
Key Democrats have defended the move by explaining that Act 221 addresses the need to help businesses raise needed capital. House Democrats blocked efforts by the Lingle administration to scale back on Act 221 incentives during the past session.
Even with Act 221 left untouched, Hawai'i businesses need more, not fewer programs that help them raise money, said Mike Fitzgerald, president and chief executive of Enterprise Honolulu.
By supporting the venture capital fund, Hawai'i gets a return not only in the form of jobs but on the return of its money should businesses flourish, he said. Hawai'i Strategic Development Corp., which oversees the state's venture capital program, has committed $14 million to venture firms investing in about 50 Hawai'i startup companies.
"There's more benefit to the state to beef that up than (Act) 221," Fitzgerald said. "They shouldn't be trading one off for the other.
"Capital formation becomes the test before all of us right now."
The Hawai'i capital loan fund was cited for criticism in a recent state audit. Both funds have been self-sufficient in the past by paying for activities through loan repayments and returns on investments, according to DBEDT.
Once the funds are repealed, any remaining money would be shifted into the state general fund and current program staff positions would be financed through the general fund. In the interim, it's unclear whether the venture capital program will have money to make new investments, said John Chock, president of the Hawai'i Strategic Development Corp.
"We're confident we'll be around in one form or another, but we have no idea as to how much financing we'll have," he said.
Bill Spencer, president of the Hawai'i Venture Capital Association, said Act 221 and the state's venture capital program are designed to raise two different kinds of capital for Hawai'i businesses. Act 221, which provides tax credits for technology investments, addresses the need for startup or seed money for new businesses, while the venture capital program provides money for more established companies' need to expand and grow, he said.
Spencer and others said they'll lobby in favor of retaining the programs before they are eliminated.
"The hope is that next year we will be able to reverse what happened this year," Spencer said.
In addition to the $5.3 million, DBEDT also stands to lose control over another $117 million and 400 employees tomorrow, though officials aren't complaining.
The losses come as the Housing and Community Development Corp. of Hawai'i moves from DBEDT to the Department of Health and Human Services. The move isn't expected to result in any significant cost savings, but it will allow DBEDT to better focus on its core mission of developing the state's economy.
HCDC's mission, which includes providing affordable housing for Hawai'i residents, has only tangential ties with the mission of economic development and diversifying the economy.
In the past, DBEDT staff provided the housing agency with personnel and help with budgetary matters. After the transition, DBEDT will have about 200 employees and a $158 million budget in fiscal 2004, which covers the department's operations and other agencies such as the Hawaii Community Development Authority that is charged with developing Kaka'ako.
"What's left is certainly much closer to what we do," said Tom Smyth, administrator of DBEDT's business support division. The move "eases perceptions and it takes away administrative load. And it keeps us pretty attuned to the rest of the department."
Putting state housing and social service programs under one roof is also expected to improve service since people won't have to deal with two agencies, Smyth said.
During her gubernatorial campaign, Linda Lingle charged that DBEDT had strayed from its primary task of developing the economy. She pushed several measures to streamline DBEDT during the legislative session, although the housing agency's move was the only significant step approved by lawmakers.
Lingle also sought to combine the housing agency with the Aloha Tower Development Corp. and move the Office of State Planning and the Land Use Commission to the Department of Land and Natural Resources.
In the absence of legislative support, Lingle has ordered the planning office to work more closely with the Land and Natural Resources department, although the office remains part of DBEDT.
With DBEDT's budget shrinking, the department needs to focus its efforts, a task more easily accomplished by moving the housing department, Fitzgerald said.
"I think the more slimming that they do and the more focused that they get, the better," Fitzgerald said. "The secret to their success is concentration."
DBEDT also needs to develop a coordinated marketing message, compile better data on the state's economy and manage leads for prospective businesses, Fitzgerald said.
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
