Audit rips investment program $200 million CAPCO vehicle needs fixing, state panel says

A state audit concluded Tuesday that a $200 million state-sponsored investment program is badly flawed and needs to be overhauled.

Lawmakers on the Legislative Audit Committee said they will push for statutory changes that could radically change the Certified Capital Company program, known as the CAPCO program, which is backed by tax credits.

"It's an expensive mistake if you consider the return on investment," said the audit committee chairman, Sen. Ron Tupa, D-Boulder. "We definitely need to make some changes."

The state legislature created the CAPCO program in 2001 to spur economic growth by giving $200 million in tax credits to insurance companies that, in turn, lend money to CAPCOs to invest in small Colorado businesses.

Critics of the program, which include state Treasurer Mike Coffman and Gov. Bill Owens, charge that it hasn't created enough jobs or helped enough businesses grow to warrant the $200 million price tag.

The CAPCOs argue that critics are comparing one-year benefits of the program with its full cost, which is spread out over 12 years.

The CAPCOs began investing capital from the program in April 2002 as part of the first phase. The $100 million in tax credits for the first phase won't kick in until next year and will be distributed through 2014.

"All of the benefits today are at no cost to the state," said Ryan Brennan, vice president of Advantage Capital Partners, one of Colorado's six CAPCOs. "You can't take Year One investments and compare that with the costs over 12 years."

The second phase is scheduled to start next April, though insurance companies won't have access to the next round of $100 million tax credits until 2006.

Brennan said the CAPCOs are open to changes recommended by the audit committee, which include giving the government authority to review their financial information, giving the state a greater percentage of the profits from investments and lowering the fees CAPCOs can charge.

"This audit has identified ways that the program can be tightened," Brennan said. "We support every recommendation in this audit."

The 29-page audit report found that, since their inception, the CAPCOs have invested $14.1 million in 13 companies and collected $15 million in startup, management and other fees. While Colorado CAPCOs reported a net increase of 157 jobs, one company experienced a net decrease and two companies had no net change in jobs.

The Colorado General Assembly authorized the audit earlier this year after questions arose about the cost-effectiveness of the program.

Tupa admitted that lawmakers had not asked enough questions before passing the measure. Colorado was the sixth state to adopt such a program.

Tupa said he did not know, for example, that the law allows a business in Colorado to use an investment from a CAPCO to build a new facility in another state or country. Other states with similar programs have stricter requirements.

Bob Lee, director of the Office of Economic Development and International Trade, which oversees the CAPCO program, recommended that CAPCOs be abolished in favor of a venture capital-type program under tighter control by the state.

Colorado's Taxpayer's Bill of Rights, or TABOR law, does not allow the state to eliminate the insurance company tax credits that fund the program.

Lee told the committee that while venture capital funds provide a return to investors equal to 100 percent of the principal and 70 percent to 80 percent of all profits, CAPCOs and insurance companies keep all principal and profits.

Brennan said CAPCOs and insurance companies keep all of the first 10 percent of the return on investment. After that, the state receives 30 percent of the profits. Brennan said the CAPCOs are open to eliminating the 10 percent handle and increasing the state's take.

Lee also warned lawmakers to expect a "hundred-million-dollar lobbying effort" by the CAPCOs, which have authority to use funds from the program to pay for lobbyists.

Brennan said of the $471,000 the CAPCOs have spent on lobbying efforts to this point, only $85,000 has come from the program's funds. He said Advantage would be willing to eliminate the provision that allows CAPCOs to use the program's money on lobbying efforts.

Republican Rep. Tambor Williams, a lawyer from Greeley and vice chair of the audit committee, said she is one of 10 House members who voted against the original legislation.

"It's not that I don't want to invest $100 million in economic development; it's just that in these economic times we don't have it," Williams said. "I was skeptical of the plan because we were handing over $200 million in taxpayer dollars to people who promised us a return, yet there were no guarantees."