79-006

106TH CONGRESS

REPT. 106-706

HOUSE OF REPRESENTATIVES

2d Session

Part 1
NEW MARKETS INITIATIVE ACT OF 1999

JUNE 28, 2000- Ordered to be printed
Mr. LEACH, from the Committee on Banking and Financial Services, submitted the following
R E P O R T
[To accompany H.R. 2848]

TITLE III--AMERICA'S PRIVATE INVESTMENT COMPANIES
Sec. 301. Short Title.
Sec. 302. Findings and purposes.
Sec. 303. Definitions.
Sec. 304. Authorization.
Sec. 305. Selection of APICs.
Sec. 306. Operations of APICs.
Sec. 307. Credit enhancement by the Federal Government.
Sec. 308. APIC requests for guarantee actions.
Sec. 309. Examination and monitoring of APICs.
Sec. 310. Penalties.
Sec. 311. Effective date.
Sec. 312. Sunset.

TITLE III--AMERICA'S PRIVATE INVESTMENT COMPANIES

SEC. 301. SHORT TITLE.

SEC. 302. FINDINGS AND PURPOSES.

SEC. 303. DEFINITIONS.

SEC. 304. AUTHORIZATION.

to be appropriated up to $36,000,000 for the cost (as such term is defined in section 502(5) of the Federal Credit Reform Act of 1990) of annual loan guarantee commitments under this title. Amounts appropriated under this paragraph shall remain available until expended.

SEC. 305. SELECTION OF APICS.

SEC. 306. OPERATIONS OF APICS.

may have outstanding at any one time shall not exceed an amount equal to 200 percent of the private equity capital of the APIC, as determined by the Secretary; and

SEC. 307. CREDIT ENHANCEMENT BY THE FEDERAL GOVERNMENT.

the Secretary of its ownership rights in the debentures in the corpus of a trust under this section.

SEC. 308. APIC REQUESTS FOR GUARANTEE ACTIONS.

to any commitment of funds to such investment (except for such purposes specified in the regulations issued under paragraph (2)(B)), the APIC submits to the Secretary a request for guarantee of a qualified debenture that is accompanied by evidence of a certification of the State or unit of general local government which meets the requirements of paragraph (4). The approval by the Secretary of any such certification shall be deemed to satisfy the Secretary's responsibilities pursuant to paragraph (1) under the National Environmental Policy Act of 1969 and such other provisions of law as the regulations of the Secretary specify insofar as those responsibilities relate to the guarantees of qualified debentures, any parts of the proceeds of which are to fund such investments, which are covered by such certification.

SEC. 309. EXAMINATION AND MONITORING OF APICS.

SEC. 310. PENALTIES.

SEC. 311. EFFECTIVE DATE.

SEC. 312. SUNSET.

EXPLANATION OF THE LEGISLATION

H.R. 2848, the `New Markets Initiative Act of 1999' authorizes in Title III (entitled `America's Private Investment Companies Act') the Secretary of Housing and Urban Development (HUD) to license a number of privately managed, for-profit investment companies for purposes of making large-scale, equity and debt investments in low-income urban and rural areas. Each America's Private Investment Company (`APIC') must have a minimum of $25 million in private equity capital contributed by investors in order to be licensed by HUD. An APIC would be eligible to issue debentures, guaranteed by the government, for twice (200%) the amount of its total equity capital. The contributed equity and amounts raised through issuance of debentures are to be invested in businesses operating in low and moderate-income areas. The government-guaranteed debt would be repaid first.

The legislation provides that APIC licensees are to be chosen by HUD pursuant to a competition. The number of APICs licensed at any one time would depend upon the amount of budget authority available to support the total credit subsidy provided to the program, but would be limited in the first year to no more than fifteen. Of those APICs chosen in the first year, subject to the existence of an approvable application, at least one shall have as its primary mission objective business investment in Native American lands.

HUD shall monitor each APIC as to its progress in meeting its stated public purpose goals. The Secretary may reward well-performing APICs which exceed their public purpose investment goals by increasing the credit subsidy allocated to those APICs, to the extent there is credit subsidy still available. Such APICs must have been licensed for a minimum of two years. Any such increases are to be provided based on a competition of eligible APICs.

The proposed credit subsidy for the program is $36 million each fiscal year for FY 2000 through FY 2004. HUD estimates this level will support $1 billion in investments. In addition, $1 million is authorized for each of these fiscal years (2000-2004), for administrative expenses in connection with carrying out the provisions of the legislation.

In addition to monitoring APICs' progress in meeting their public purpose goals, the Secretary of HUD shall, for purposes of managing the financial risk of the federal government, regulate APICs for financial soundness and ensure that each APIC is structured so as to operate based on sound management practices. The HUD Secretary shall consult with the Secretary of the Treasury for purposes of accomplishing these functions. The legislation requires each APIC to submit an annual independent audit to the Secretary detailing its investments. The legislation also requires the HUD Secretary to report annually to Congress on the status of the APIC program. In addition, the General Accounting Office is required to report on the APIC program two years after the date of enactment of the legislation.

The effective date of the legislation, for licensing and other operations, is six months after the date of enactment. Authority to grant licenses shall sunset five years after the date that the Secretary awards the first license for an APIC under this Act.

LEGISLATIVE HISTORY

H.R. 2848, the `New Markets Initiative Act of 1999', was introduced by Representatives Watts, Talent, Leach and Baker at the request of the Administration on September 13, 1999, and contains the Administration's New Markets Initiative legislative program. H.R. 2764 was introduced by Ranking Member LaFalce on August 5, 1999 and contains the APIC portion of the Administration's legislative proposals. H.R. 2764 is substantively the same as Title III of H.R. 2848, both of which fall under the jurisdiction of the Committee.

On November 10, 1999, the Subcommittee on Capital Markets, Securities, and GSEs held a hearing on capital formation in underserved areas. The hearing focused on the APIC proposal embodied in H.R. 2764 and on other ideas for promoting economic growth in these areas. The Committee held a markup of H.R. 2764 and Title III of H.R. 2848 on April 12, 2000.

During the markup, the Committee approved one amendment, by unanimous consent, which inserted in lieu the provisions of H.R. 2764 as marked up and ordered reported on April 12, 2000. With a quorum present, a motion to adopt H.R. 2848 and favorably report the bill, as amended, to the House was approved by voice vote.

BACKGROUND AND NEED FOR LEGISLATION

In an era of unprecedented economic growth and prosperity, there remain many economically distressed communities, both rural and urban, where many people have not benefited to any great degree from the most recent economic expansion enjoyed by our Nation. In these communities, levels of unemployment, poverty, and other indicia of social distress, remain stubbornly high--yet untapped market opportunities exist to establish and expand businesses and to develop jobs and community assets.

There is bipartisan consensus in Congress that the federal government can and should play a role in encouraging investments in these communities. For several years both Republicans and Democrats have proposed and supported granting tax and regulatory relief, including capital gains tax relief to businesses operating within distressed areas. Many of these proposals were part of H.R. 815, the `American Community Renewal Act,' introduced by Representatives Jim Talent and J.C. Watts, which would have designated a number of these areas as `renewal communities' eligible for such benefits. The House has already passed the tax provisions of H.R. 815, and this Committee has passed provisions relating to HUD property disposition within these communities as part of H.R. 1776, the `American Homeownership and Economic Opportunity Act of 2000.'

The Administration has also proposed a series of programs, collectively known as the `New Markets Initiative,' also intended to foster economic development in low-income communities. These proposals include tax credits for businesses in these areas (`New Markets Tax Credits'), a small business component (establishing a `New Markets Venture Capital Program'), and the formation of a number of companies intended to make relatively large scale equity and credit investments in distressed areas--APICs. The FY 2000 VA/HUD Appropriations Act provided that $20 million in credit subsidy would be available for use by APICs for Fiscal Year 2000 if the program was authorized by June 30, 2000. If the program is not authorized by that date, the funding reverts to the Community Development Financial Institutions program administered by the Department of the Treasury.

The APIC portion of the New Markets Initiative falls under the jurisdiction of this Committee. The proposal is closely related in concept to the Small Business Investment Companies (`SBIC') program currently administered by the Small Business Administration (SBA), except that the SBIC program is limited in the size of projects it can serve and that SBICs invest in ventures only, not real estate. Community development organizations maintain that the infusion of additional amounts of equity capital is especially vital for enabling large-scale investments to occur in distressed areas. Importantly, these investments would be economically viable as freestanding business entities, providing a profitable return to investors. However, because the costs of establishing these businesses in some of these distressed areas are higher relative to other areas due to a variety of factors (remediation of environmental contamination, for example), the return on investors equity is not as high as demanded by these investors. APICs are intended to lessen the cost of capital so that these large-scale investments would be made.

APICs are not intended to fund or subsidize the operations of businesses, that are not economically viable. On the contrary, the goal of these entities is to encourage the establishment of fundamentally sound businesses in certain locations. Possible uses for APICs' funds include the establishment of a new facility, such as a call center, data processing `back office,' or factory, by a large company (or a small company joint venturing with a large one). In addition, a mid-size manufacturing company seeking to increase production could use APIC investments for expansion of an existing facility, the upgrading of equipment or the hiring of new employees. Other uses could include expansion of the service area of a mid-size service company, such as a trucking company, building contractor, or home health care firm; development of a multi-tenant shopping center; or opening or expanding a large retail company in a new geographic area. Buyout of a company to be revitalized in its existing facility, acquisition of the property of a departing large company, and development of an incubator or industrial park, or investment in another fund that invests in businesses locating or expanding in targeted low-to-moderate income areas are all methods whereby an APIC could fulfill its public purpose investment role.

By passing this APIC legislation, the hope and expectation of this Committee is that a bipartisan, comprehensive package of measures to help revitalize America's distressed urban and rural communities, which would include the best elements of the American Community Renewal Act and the New Markets Initiative, be enacted this year.

COMMITTEE ACTIONS REGARDING INTRODUCED LEGISLATION

The Committee adopted a Managers' Amendment during the markup of H.R. 2764, sponsored by Chairman Leach, Mr. Lazio, Ranking Member LaFalce, and Mr. Kanjorski, which made substantial changes to the original bill. H.R. 2764, as marked up by the Committee, was subsequently substituted for Title III of H.R. 2848, which was then reported by the Committee.

In broad terms, the changes in the Managers' Amendment were meant to accomplish three major goals. The first of these goals was to minimize the potential for fraud and abuse and protect the American taxpayer from unnecessary exposure. Second, the Committee wanted to ensure that the statutory language clearly reflected Congressional intent, and provided adequate direction for the program so that it gives rise to types of investments in low-income communities that will truly improve the lives of our citizens. Finally, the Managers' Amendment contained provisions designed to address concerns with HUD's current capacity to administer the program, and to ensure HUD's sound management of the program established by the legislation.

Minimizing the potential for fraud and abuse

The Managers' Amendment adopted by the Committee added certain defined terms to the legislation found in Section 303 of H.R. 2848, `Definitions,' and further defined some existing terms of the bill. These additions and revisions make more specific and strengthen the language of the bill. The most important of these is a new definition for `private equity capital'. A central feature of the APIC program is its reliance on market discipline. APIC investors and managers make investment decisions based on the ability of a business ultimately to succeed because the investor's equity is at-risk first if the business fails. The interests of the investor therefore coincide, with the interest of the taxpayer. The legislation as introduced, however, provided that `equity' was to be defined through guidelines issued by the HUD Secretary. The Committee felt that, at a minimum and as a matter of prudence, the legislation should include a statutory definition of equity that would prevent an overly expansive definition from allowing APIC investors to comply with the letter of the law without truly risking any of their own capital. In accomplishing this goal, the Committee looked to existing statutes, such as those governing SBA programs similar in concept to the APIC program, and worked through the specifics of the definition with HUD to ensure that it was not overly restrictive or that it conflicts with guidelines issued by the Department of the Treasury which would govern tax credits under the New Markets program.

Additional changes were included in the Managers' Amendment to enhance the integrity of the program. For example, the Committee believed it was important to set forth more clearly in Section 307 of the bill the seniority of the federal government's position in relation to any other obligation the APIC may have. A change to require the HUD Secretary to make a determination, prior to the licensing of any APIC, that the management of the entity is clearly qualified was also made. Section 309, `Examination and Monitoring of APICs' has been revised to require that each APIC submit an annual independent audit detailing its investments to the Secretary. Changes were also made to Section 309 to require the HUD Secretary to report annually to Congress on APICs and their investments. Finally, in Section 310, `Penalties', the Committee

strengthened the power and sanctions available to HUD so that the Department can more effectively avert any undue taxpayer losses.

Clearly stating congressional intent regarding APIC investments

This Committee intends that an APIC licensed under the provisions of this legislation shall be in the business of making investments that benefit low-income people and communities, and that such an entity does not become an example of `corporate welfare' by making investments that would bring profits to its investors without the requisite social benefits accruing to distressed areas from these investments. The Committee is aware of well-intended programs once administered by HUD, such as the Urban Development Action Grants (UDAG) program, that spent government funds on projects that could easily have been financed through private sources, and which resulted in little or no additional benefit to distressed areas. The intent of the Committee is that APIC investments be made in communities where they are truly needed, and not in areas which technically may be within a low-income community but where incomes may in reality be much higher. Affluent sections can coexist within very distressed areas in census tracts that would meet the definitions for low- and moderate-income areas eligible for APIC investments. However, a statutory requirement that HUD define all of these areas nationwide would have been overly burdensome and impractical in the Committee's view.

For this reason, language added by the Managers' Amendment and appearing in Section 305(a)(6), `Statement of Public Purpose Goals,' refers to investments `that further economic development objectives by targeting such investments in businesses that comply with the requirements [of this Act] * * * in a manner that benefits low-income persons.' The Committee intends by addition of this language that APICs channel their activities toward truly meritorious investments without precisely delineating within individual census tracts where the businesses these APICs invest in must be located. The Committee does not intend that APICs meet compliance requirements under this legislation by primarily making investments in subareas of an otherwise qualifying low-income community that have resident incomes disproportionately higher, or that show patterns of displacement and more rapidly increasing property values, than those of the larger qualifying area. By the same token, in determining compliance with the `qualified active business' test for APIC investments, the term `low-income community' may be interpreted to include specific locations in an area with a very high population density that are located immediately adjacent to, but not within, a low-income community. Investments that qualify under this interpretation must primarily benefit low-income persons within the qualifying adjacent low-income community.

The Committee notes that under Section 306(b), `Substantially all investments that an APIC makes shall be qualified low-income investments * * *' Rather than establishing a specific percentage in the statute, the intent of the Committee is that the term `substantially all' in this context be read in accordance with and reflect existing Treasury guidelines and Internal Revenue Service regulations governing investments in low- and moderate-income areas, such as those existing for investments made in empowerment zones, for example. Similarly, under Section 142 of the IRS Code, 95% of proceeds raised under the provision must be used for the purposes specified. The intent of the Committee is that `substantially all' in the context of APIC investments be read to mean this approximately 95% level that currently permeates the world of tax-exempt financing.

In addition to providing additional guidance and Congressional direction as to where APIC investments should be made, the Committee was concerned with the legislative language governing selection of APICs. In the Committee's view, the selection process for licensing APICs as set forth in the original legislation did not provide enough direction to the Secretary, either as to the types of entities that should be chosen or the criteria that should be used in making these determinations.

Regarding the types of entities that should be chosen as APICs, the Committee believed further specificity was required in the legislation to set forth examples of the underlying public purpose goals and nature of each APIC. Specifically, in Section 305, `Selection of APICs', the Committee believed a further delineation of the types of goals that licensed APICs can be expected to pursue was appropriate. Therefore, Section 305(A)(6) now includes references to the following: creating jobs within two years of making an investment; enhancing economic competition, including the advancement of technology; promoting rural development; achieving certain environmental goals; and benefiting small business. By setting forth more clearly in statute the types of goals to be pursued and the activities in which these APICs are to be engaged, the Committee intends to provide additional guidance to the Secretary as to the types of APICs which should be considered favorably in the selection process.

In terms of specific selection criteria, the Committee believes that the criteria as set forth in the original legislation served as minimum eligibility requirements rather than as true measures for selecting among various applicants. For example, the Secretary under the original legislation could determine whether an applicant had qualified management prior to licensing the applicant as an APIC. The Committee, however, intends that the statute reflect the Secretary's ability to make qualitative distinctions regarding management, allowing licensing of one APIC over another based on the existence of an exceptional management record and proven expertise in making investments benefiting low-income communities. In other words, the Committee believes the Secretary should choose among the applicants those APICs that meet not just the minimum statutory requirements, but whose investments are more likely to result in the most benefit to low- and moderate-income communities. With that in mind, the Managers' Amendment added language in Section 305(d) establishing selection criteria the Secretary shall use to determine which APICs are to be licensed. An APIC applicant will be chosen for licensing based on the extent such applicant is expected to achieve the goals of the legislation by meeting or exceeding the selection criteria established under this subsection, which may include additional criteria established by the Secretary.

The Committee intends that rural and small communities not be unfairly or arbitrarily disadvantaged in the selection process. For this reason, Section 305(c)(2) was added by the Managers' Amendment to provide that when selecting APICs for licensing, the HUD Secretary to the extent practicable ensure geographical diversity and a mix of APICs so that both rural and urban communities may be served by this program. The Committee notes that in addition to large cities, there are also economically distressed areas in mid-sized and smaller metropolitan areas and non-metropolitan areas. Consideration of the needs of these communities should not be

absent from APIC selection process. The intent of the Committee is that the Secretary strive for balance, fairness and diversity in the selection process.

In adding legislative language regarding the selection process, the Committee attempted to avoid imposing requirements as to exactly how many of each type of APIC should be chosen in the selection process. In the Committee's view, imposing numerical requirements would not be the proper approach because neither Congress nor the Administration can know in advance exactly what entities will apply to be licensed. The Committee made one important exception to this approach regarding the selection process for Native Americans. By definition, most of the lands on reservations would qualify for investments by APICs, as would rural and other low-income communities. However, the Committee was concerned that the added complexity of investing on Native American lands, including dealing with the Bureau of Indian Affairs, unfamiliarity with the varied tribal laws, and what in too many cases amounts to a cultural discomfort on the part of much of the finance community in doing business on Indian lands, were factors making business investment in Native Americans lands qualitatively different, and much more difficult, than investments in other low-income rural or urban communities. The Committee was concerned that the available applicants would not include entities with the capacity, or which viewed as their mission, to invest specifically on Native American lands. For this reason, the Managers' Amendment included a requirement that of those APICs selected in the first year, one would be a Native American Private Investment Company. The Committee believes that this would encourage application by would-be APICs that would serve Native Americans. Any such applicant would still need to meet all of the requirements for licensing contained in this bill. Native Americans should not be unintentionally excluded from benefiting under this program.

The Committee notes that under Section 305(b)(1) of the legislation, an APIC applicant must be a for-profit entity in order to be licensed as an APIC. The Committee notes that this is not intended to exclude for-profit entities controlled by non-profit organizations, such as through a subsidiary, partnership, or limited liability structure.

Regarding the application of federal securities laws to APICs, and for that matter to New Market Venture Capital companies (`NVCCs') created under other provisions of the Administration's New Markets Initiative, the Committee notes that nothing in this legislation alters or affects any Federal securities laws or regulations promulgated under the Federal securities laws. Further, federal securities laws continue to apply to NVCCs and APICs created under this legislation, to any securities issued by or on behalf of NVCCs or APICs, and to their distribution. NVCCs and APICs may seek to qualify for certain exclusions contained in the Investment Company Act. Notably, in order for NVCCs and APICs to qualify for the exclusion from regulation under the Investment Company Act provided by Section 3(c)(7) of the Act, they must make only a private offering of their securities and each of their investors must meet the definition of `qualified purchaser' in Section 2(a)(51) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a) (51). The Committee expects that private offerings of NVCC and APIC securities (including those relying on the exclusion from regulation under the Act provided by Section 3(c)(1)) generally will entail an evaluation of whether the NVCC or APIC securities are suitable investments for the proposed investors.

Ensuring HUD's capacity to administer the APIC program

The Committee was concerned with HUD's current capacity to administer the proposed APIC program. While the Committee notes that the Secretary has made great efforts to improve the management of HUD's programs, there are still many areas which require attention. Adding another program to those already administered by HUD, and especially one as complex in terms of the required financial expertise as the program envisioned by this legislation, called for careful, bipartisan consideration. An alternative approach, which was indeed debated during the Committee's markup of the legislation, was for the program to be administered by the Department of the Treasury rather than HUD. A crucial reason for having HUD administer the program, however, was the Department's experience in dealing with distressed areas and with complex, large-scale community development investments, in particular. In order to address the Committee's concerns regarding capacity and taxpayer safeguards, key changes to the original legislation were made by the Managers' Amendment regarding program administration.

The Committee's goal was to ensure that HUD had the expertise and the time available to structure and administer this program properly, and that the program not be too complex to administer in the beginning stages so that HUD would be able to develop capacity. Therefore, the legislation as revised by the Committeee, now imposes a first year limit on the number of APICs of 15, with no one APIC receiving more than 20% of the available credit subsidy. This accomplishes two things--it keeps the number of APICs at a manageable level in the first year, to give HUD experience in working with this program, and it diversifies the government's risk by ensuring that no one APIC is too large. In addition, the Committee included a provision setting the effective date of the legislation at six months after enactment, so that HUD would have the time to develop adequate procedures in a deliberative fashion, working with the private sector as well as nonprofit and government entities important to community economic development.

The Committee also strengthened financial soundness provisions by setting forth the HUD Secretary's duty to cooperate with Treasury in determining what procedures to follow to ensure competent management of APICs. Because the Committee wishes to approach conservatively those matters involving the federal government's financial exposure, particularly at the program's inception, the program feature allowing an increase in leverage for a class of APICs from 200% to 300% was also deleted.

In order to ensure close oversight of the program, the Committee added a requirement for an Annual Report from the Secretary to Congress on the achievements of APICs, which would provide information on all APIC investments, the level of financial exposure, and other such matters. In addition, the legislation now requires a report by the General Accounting Office on the APIC program two years after enactment of the program. Finally, language granting the HUD Inspector General the authority to work with the Small Business Administration Inspector General in monitoring the APIC program at HUD was added in order to ensure that monitoring experience of these types of programs was available. The many changes made by the Committee to address the concerns with HUD's management of the program should give some assurance that this program will be structured and administered in a proper fashion, with the interests and protection of the taxpayer as priorities.

COMMITTEE CONSIDERATION AND VOTES (RULE XI, CLAUSE 2(L)(2)(B)

The Committee met in open session to mark up H.R. 2848, `New Markets Initiative Act of 1999' on April 12, 2000. The Committee considered H.R. 2848, as introduced, as the text for purposes of amendments.

During the markup, the Committee approved one amendment, by unanimous consent, which inserted in lieu thereof the provisions of H.R. 2764 as amended and ordered reported by the Committee on April 12, 2000. With a quorum present, a motion to adopt H.R. 2848 and favorably report the bill, as amended, to the House was approved by voice vote.

COMMITTEE OVERSIGHT FINDINGS

In compliance with clause 2(l)(3)(A) of rule XI of the Rules of the House of Representatives, the Committee reports that the findings and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT FINDINGS

No findings and recommendations of the Committee on Government Reform and Oversight were received as referred to in clause 2(l)(3)(D) of rule XI (and clause 4(c)(2) of rule X) of the Rules of the House of Representatives.

CONSTITUTIONAL AUTHORITY

In compliance with clause 2(l)(4) of rule XI of the Rules of the House of Representatives, the constitutional authority for Congress to enact this legislation is derived from the general welfare clause (Article I, Sec. 8).

NEW BUDGET AUTHORITY AND TAX EXPENDITURES

Clause 2(l)(3)(B) of rule XI of the Rules of the House of Representatives is inapplicable because this legislation does not provide new budgetary authority for increased tax expenditures.

CONGRESSIONAL BUDGET OFFICE COSTS ESTIMATE AND UNFUNDED MANDATE ANALYSIS

The cost estimate pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives and section 402 of the Congressional Budget Act of 1974 is attached herewith:

U.S. Congress,

Congressional Budget Office,

Washington, DC, June 26, 2000.

Hon. JAMES A. LEACH,
Chairman, Committee on Banking and Financial Services,
House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2848, the New Markets Initiative Act of 1999.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contacts are Mark Hadley and Lanette Keith (for federal costs), and Victoria Heid Hall (for the state and local impact).

Sincerely,

Barry B. Anderson

(For Dan L. Crippen, Director).

Enclosure.

H.R. 2848--New Markets Initiative Act of 1999

Summary: H.R. 2848 would provide credit assistance and tax credits in exchange for private investments in certain communities. The bill would authorize appropriations for two federal loan guarantee programs: the America's Private Investment Companies (APIC) program within the Department of Housing and Urban Development (HUD) and a New Markets Venture Capital (NMVC) program within the Small Business Administration (SBA). In both cases, the federal government would guarantee loans made to venture-capital corporations that agree to operate in low-income or moderate-income communities. The NMVC investments would be targeted to small businesses and start-up companies. Other provisions would modify SBA's general business program by reducing fees for certain loan guarantees and increasing the limit on the portion of a loan that can be guaranteed by the government. Finally, the bill would establish a new tax credit for taxpayers who invest in qualified community development entities.

Assuming appropriation of the necessary amounts, CBO estimates that implementing H.R. 2848 would cost $1.4 billion over the 2000-2005 period, including revenue losses from the new tax credits. The Joint Committee on Taxation (JCT) estimates that the revenue loss associated with this legislation would be $1,061 million over the 2000-2005 period and $1.781 million over the 2000-2010 period. CBO estimates that costs to be paid from appropriated funds would total $338 million from 2000 through 2005. We also estimate that provisions modifying the terms of existing loans would increase direct spending by $45 million in 2000. Because H.R. 2848 would affect direct spending and receipts, pay-as-you-go procedures would apply.

H.R. 2848 contains intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA), but CBO estimates that the cost of the mandates would not be significant. The legislation does not contain any new private-sector mandates.

Estiamted cost to the Federal Government: The estimated budgetary impact of H.R. 2848 is shown in the following table. The costs of this legislation fall within budget functions 370 (commerce and housing credit) and 450 (community development). 



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                                             By fiscal year, in millions of dollars--                          


                                                                                 2000 2001 2002 2003 2004 2005 


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CHANGES IN SPENDING SUBJECT TO APPROPRIATION                                                                   


Authorization Level                                                                17   86   85   78   79   43 


Estimated Outlays                                                                   1   42   68   75   78   74 


CHANGES IN DIRECT SPENDING                                                                                     


Estiamted Budget Authority                                                         45    0    0    0    0    0 


Estimated Outlays                                                                  45    0    0    0    0    0 


CHANGES IN REVENUES                                                                                            


Estimated Revenues                                                                 -5  -30 -119 -234 -322 -351 


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Basis of estimate: For this estimate, CBO assumes H.R. 2848 will be enacted in fiscal year 2000 and that the amounts authorized will be appropriated for each year.  CBO expects outlays to follow trends for similar programs.

The majority of the discretionary costs associated with this bill would result from implementing the APIC and NMVC programs.  For each year over the 2000-2004 period, the bill would authorize the appropriation of $36 million to cover the subsidy costs of the APIC program and $1 million annually for related administrative expenses. The NMVC program would be authorized for six years (fiscal years 2000 through 2005), with appropriations limited to $30 million for technical assistance and such sums as necessary to subsidize and administer up to $100 million in NMVC loan guarantees. H.R. 2848 also would increase the cost of guaranteeing new business loans by an average of $35 million a year, assuming the program is extended beyond 2000. The estimated increase in direct spending reflects the cost of modifying the fees paid on outstanding general business loan guarantees made by SBA. Finally, JCT estimates that the new tax credit for qualified community development

entities would reduce revenues by $1,061 million over the 2000-2005 period and $1.781 million over the 2000-2010 period.

Spending subject to appropriation

The majority of the discretionary costs associated with H.R. 2848 would be for credit subsidies. The Federal Credit Reform Act of 1990 requires appropriation of the subsidy costs and administrative costs for operating credit programs. The subsidy cost is the estimated long-term cost to the government of a direct loan or loan guarantee, calculated on a net present value basis, excluding administrative costs. In fiscal year 2000, the Congress appropriated a total of $35 million for subsidy and other costs related to the proposed APIC and NMVC programs.

America's Private Investment Companies. CBO estimates that H.R. 2848 would authorize an additional $17 million for APIC activities in fiscal year 2000 and $38 million a year over the 2001-2004 period. (The current appropriation for 2000 is $20 million.) This annual sum includes the $36 million specified in the bill for subsidy costs and an estimated $2 million for administrative expenses. While the bill would authorize the appropriation of $1 million annually over the 2000-2004 period for administrative costs, CBO estimates this amount would not be sufficient to administer these loan guarantees after fiscal year 2000. Based on the operation of similar SBA programs, we estimate that about $2 million annually would be needed to administer the APIC loan guarantees over the 10-year term of the guarantees.

New Markets Venture Capital program. CBO estimates that H.R. 2848 would authorize the appropriation of an additional $40 million over the 2001-2005 period for the NMVC program. This cost reflects the difference between the total amounts authorized in the bill and the $15 million appropriated for the current year. Specifically, H.R. 2848 would authorize the appropriation of up to $30 million over the 2000-2005 period for technical assistance, which is $21 million more than has been appropriated for fiscal year 2000. Likewise, CBO estimates that it would cost about $20 million to subsidize $100 million in NMVC loan guarantees, which is $14 million more than was appropriated for NMVC subsidies in fiscal year 2000. Finally, experience with other SBA programs suggests that it would cost an average of about $1 million a year to administer the program, net of any examination fees paid by borrowers.

CBO estimates, that the subsidy cost of the NMVC program would be about 20 percent of the amount guaranteed. We based this estimate on defaults and recoveries for similar SBA programs and on information regarding the likely terms and conditions of the guarantees. Experience with other programs suggests that NMVC borrowers would default on about 45 percent of guaranteed loans. In the event of a default, CBO expects that the agency would liquidate the NMVC investments and that recoveries would average about 50 percent of the loan balance three years after default. Information from the Office of Management and Budget (OMB) suggests that SBA would allow borrowers a grace period of five years during which they would not pay interest; instead, such interest would be added to the outstanding debt. Because H.R. 2848 would authorize SBA to guarantee up to $100 million of loans, we estimate that this program would require the appropriation of about $20 million for credit subsidies.

SBA's general business loan guarantee program. CBO estimates that provisions modifying certain aspects of SBA's existing general business program would increase the subsidy rate for those guaranteed loans by between 0.25 percent and 0.5 percent. Under H.R. 2848, certain borrowers would pay a smaller up-front fee for guaranteed loans (reduced from 3 percent to 2 percent); some would pay lower annual fees on guaranteed loans (reduced from 0.5 percent to 0.3 percent); and some would be eligible to have the federal government guarantee a higher portion of the loan (up to 80 percent from the current limit of 75 percent).

Assuming that the general business program is extended beyond 2000 at the $10 billion loan level specified in the fiscal year 2000 appropriation act, CBO estimates that those modifications would require the appropriation of an additional $35 million a year. The modifications also would affect the subsidy cost of any loans guaranteed in the months remaining in fiscal year 2000 after enactment of the bill, but we assume that any increase in the subsidy cost of new commitments in fiscal year 2000 would lead to a reduction in the volume of loan obligations rather than additional appropriations.

Direct spending

In addition to its effects on future discretionary spending, CBO estimates that reducing the annual fee on loans guaranteed under SBA's general business program would increase direct spending by a total of $45 million in 2000. H.R. 2848 would reduce the annual fee on guaranteed loans from 0.5 percent to 0.3 percent of the outstanding balance on loans that were originally for $150,000 or less. This change would modify the expected cost of the guarantees SBA has provided for existing loans under the general business program. According to OMB's Circular A-11, Preparation and Submission of Budget Estimates, `If the modification is mandated in legislation, the legislation itself provides the budget authority to incur the subsidy cost obligation (whether explicitly stated or not).' CBO estimates that this provision would increase the subsidy rate by an average of about 1 percent on $4.5 billion of outstanding loans at the end of 2000.

Revenues

H.R. 2848 would establish a new tax credit for up to 6 percent of the amount taxpayers invest in a qualified community development entity. The Joint Committee on Taxation expects that these provisions would result in an increase in tax-exempt financing and a subsequent loss of federal revenue. JCT estimates that the revenue loss would be $1,061 million over the 2000-2005 period and $1,781 million over the 2000-2010 period.

This bill also would provide for civil penalties against APICs that fail to comply with regulations that would be established under H.R. 2848. Payments of these civil penalties would be recorded as governmental receipts to the Treasury. CBO expects that any increase in penalty collections as a result of this provision would not be significant.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. The net changes in outlays and governmental receipts that are subject to pay-as-you-go procedures are shown in the following table. For the purposes of enforcing pay-as-you-go procedures, only the effects in the current year, the budget year, and the succeeding four years are counted.





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                    By fiscal year in millions of dollars--                                                   


                                                       2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 


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Changes in outlays                                       45    0    0    0    0    0    0    0    0    0    0 


Changes in receipts                                      -5  -30 -119 -234 -322 -351 -331 -240 -122  -31    4 


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Estimated impact on state, local, and tribal governments: Title I would preempt state laws by prohibiting states from limiting SBA's ability to exercise its ownership rights in certain debentures issued by a New Markets Venture Capital company. Title III would preempt state laws with regard to the seniority of debt issued by APICs. Such preemptions of state law are intergovernmental mandates as defined in UMRA, but CBO estimates that these mandates would impose no significant costs on state, local, or tribal governments.

Title III also provides that state and local governments may choose to assume responsibility for environmental reviews needed for certain projects and activities financed by an APIC. Any costs to carry out such environmental reviews would be incurred voluntarily.

Estimated impact on the private sector: H.R. 2848 contains no new private-sector mandates as defined in UMRA.

Estimate prepared by: Federal Costs: Mark Hadley and Lanette Keith; Impact on State, Local, and Tribal Governments: Victoria Heid Hall; Impact on the Private Sector: Patrice Gordon.

Estimate approved by: Robert A. Sunshine, Assistant Director for Budget Analysis.

CONGRESSIONAL BUDGET OFFICE COSTS ESTIMATE


The cost estimate pursuant to Clause 2(l)(3)(C) of rule XI, of the Rules of the House of Representatives and Section 403 of the Congressional Budget Act of 1974 has been requested, but had not been prepared as of the filing of Part I of this report. The estimate will be included in Part II of this report to be filed at a future date.

ADVISORY COMMITTEE STATEMENT


No advisory committees within the meaning of Section 5(b) of the Federal Advisory Committee Act were created by this legislation.

CONGRESSIONAL ACCOUNTABILITY ACT


The reporting requirement under Section 102(b)(3) of the Congressional Accountability Act (P.L. 104-1) is inapplicable because this legislation does not relate to terms and conditions of employment or access to public services or accommodations.

SECTION-BY-SECTION OF COMMITTEE AMENDMENT


Section 301. Short title

The act may be cited as the America's Private Investment Companies Act.

Section 302. Findings and purpose

Section 302 finds that: (1) people living in distressed areas, both urban and rural, characterized by high levels of joblessness, poverty, and low incomes, have not adequately benefited from economic expansion experienced by the Nation as a whole; (2) the costs of joblessness and poverty to our Nation are very high; and (3) there are significant untapped markets in our Nation, and many of these are in areas that are underserved by institutions that can make equity and credit investments.

Purposes of this title are to: (1) license private for-profit community development entities that will focus on making equity and credit investments for large-scale business developments that benefit low-income communities; (2) provide credit enhancement for those entities for use in low-income communities; and (3) provide a vehicle under which the economic and social returns on financial investments made pursuant to this Act may be available both to the investors in these entities and to the residents of the low-income communities.

Section 303. Definitions

Defines terms used in legislation, including `Administrator', `agency', `APIC', `community development entity', `HUD', `license', `low-income community', `low-income person', `private equity capital', `qualified active business', `qualified debenture', `qualified low-income community investment', and `Secretary'.

Section 304. Authorization

Authorizes the Secretary of HUD to license and regulate America's Private Investment Companies (`APICs'). The number of APICs licensed at any one time would depend upon the amount of budget authority available to support the total credit subsidy provided to the APICs, subject to a first year limitation of 15 APICs. After the initial appropriation, the Secretary is authorized to license and allocate credit subsidy to additional APICs, or, as provided, increase the credit subsidy allocated to an APIC as reward for high performance. Any such credit subsidy increase shall be provided only to an APIC that has been licensed for not less than two years, and pursuant to a competition among eligible APICs. The Secretary shall establish criteria for selecting among APICs eligible for a credit subsidy increase, which criteria shall include such factors as the financial soundness and performance of the APICs as measured by achievement of the public performance goals required under the Act.

Requires that the HUD Secretary consult with the Administrator of the Small Business Administration and the Secretary of the Treasury in establishing regulations, requirements or procedures regarding the financial soundness and management of APICs. Authorizes budget authority of $36 million in credit subsidy for Fiscal Year 2000 to guarantee an estimated $1 billion in debt. An additional $36 million would be authorized to be appropriated for each of Fiscal Years 2001-2003, with an additional $1 million authorized for the administrative expenses incurred in carrying out the Act for FY 2000-FY 2003. Requires APICs to be regulated by HUD in cooperation with SBA and the Department of the Treasury. The Secretary is authorized to impose fees and charges for the operation of APICs.

Section 305. Selection of APICs

Establishes procedures for selection of APICs, sets forth minimum eligibility requirements, and sets forth selection criteria to be used by the Secretary in selecting among applicants for licensing as APICs. An entity applying for an APIC license must: (1) be a private, for-profit entity that qualifies as a `community development entity' as defined in the legislation; (2) have a minimum private equity capital of $25 million; (3) have qualified financial management, with experience in direct equity investment and portfolio management and expertise in community development settings, as determined by the Secretary; (4) be structured to preclude financial conflict of interests between the APIC and its managers or investors; (5) submit an investment strategy with evaluation benchmarks; (6) submit a statement of public purpose goals, examples of which are delineated in the statute; (7) agree to comply with other federal requirements imposed from time to time (i.e., Executive Orders or OMB circulars); and (8) satisfy any other application criteria that the Secretary may impose by regulation or notice.

The Secretary shall select eligible entities for licensing based on a competition. Selections shall be made on the basis of the extent to which the entity is expected to meet or exceed the selection criteria set forth in the legislation. Selection criteria include factors such as the APICs capacity, investment strategy, public purpose goals, and other criteria the Secretary may establish to carry out the purposes of this Act. To the extent practicable, in selecting APICs the Secretary shall

strive for geographic diversity and a diversity of the types of APICs chosen so that both rural and urban communities are served by the program. Of those APICs selected in the first year, at least one must be devoted primarily to making investments on Native American lands.

Section 306. Operations of APICs

Sets forth requirements for the operation of APICs. Requires that substantially all APIC investments that use government-guaranteed proceeds be in qualified low- to moderate-income (LMI) areas, and prohibits an APIC from having an investment in any one business that would amount to more than 35% of the APIC's equity capital plus the limit of outstanding debt allowable (the leverage limit) under Section 306(c)(2) of this title.

Provides that an APIC may issue debentures guaranteed by the Secretary pursuant to the provisions of the Act. The total amount of debentures that an APIC may have outstanding at any one time shall not exceed 200% of the equity capital of the APIC. An APIC may not have more than $300 million in face value of debentures issued at any one time. Sets forth requirements for repayment by APIC of debt.

Includes an `anti-pirating' provision prohibiting APICs from using funds to make an investment that would assist directly in the relocation of any industrial or commercial plant, facility or operation from one area to another if such relocation would result in a significant loss of employment in the labor area from which the relocation occurs. Also provides for reuse of debenture proceeds of sale of Treasury securities and excludes APIC from the definition of debtor under bankruptcy provisions.

Section 307. Credit enhancement by the Federal Government

Authorizes HUD to make commitments to guarantee the timely payment of all principal and interest on qualified debentures issued by the APICs. The qualified debentures guaranteed by HUD would be senior to any other debt or equity. The qualified debentures could be issued by APICs for up to 21 years and could be pooled and sold.

Section 308. APIC requests for guarantee actions

Sets forth procedures for APICs to request loan guarantees from HUD, which shall include a description of the manner in which the APIC intends to use the proceeds from such debentures and a certification from the APIC that it is in substantial compliance with: (1) the terms of this Act and applicable laws; (2) the terms and conditions of its license; (3) requirements relating to the allocation and use of New Market Tax Credits. The APIC must also provide any other requirements established by the Secretary. Sets forth procedures for compliance with provisions of the National Environmental Policy Act of 1969 regarding environmental reviews.

Section 309. Examination and monitoring of APICs

Requires that the Secretary examine and monitor the activities of APICs for compliance with sound financial management practices and for satisfaction of program goals. Requires the Secretary to establish annual or more frequent reporting requirements for APICs. Requires that each APIC have an independent annual audit conducted annually. The Secretary, in consultation with the Administrator of the SBA and the Secretary of the Treasury, shall establish requirements and standards for such audits. Not less than every two years, the Secretary shall examine the operations and portfolio of each APIC to assure compliance with sound financial management practices.

Provides that in carrying out its monitoring of HUD's responsibilities under this Act, the Inspector General of HUD shall consult, as appropriate, with the Inspectors General of the Department of the Treasury or the Small Business Administration, and may enter into memoranda of understanding as may be necessary to carry out this function. Requires the Secretary to report to Congress annually regarding the operations, activities, financial health and achievements of APICs, listing each investment made by each APIC. Requires the General Accounting Office, not later than two years after the date of enactment of the Act, to submit a report to Congress regarding the operation of the APIC program.

Section 310. Penalties

Authorizes the Secretary to impose penalties on any APIC that commits an act of fraud, mismanagement or noncompliance with regulations. Penalties include civil monetary penalties not to exceed $10,000, cease-and-desist orders, suspension or revocation of an APIC's license for very serious infractions, or other penalties that the Secretary determines to be less burdensome than the aforementioned penalties.

Section 311. Effective date

Provides that the Act shall take effect six months after the date of enactment. Authority of the Secretary to issue regulations, standards, guidelines or licensing requirements, and the authority of any official to enter into agreements or memoranda of understanding regarding such issuances, shall take effect upon enactment of the legislation.

Section 312. Sunset

Provides that the Secretary may not license any APIC, nor provide credit subsidy for any APIC, after the expiration of the five-year period beginning upon the date the Secretary awards the first APIC license. The section does not affect any license or credit subsidy provided for an APIC before the expiration of such period.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED




SMALL BUSINESS INVESTMENT ACT OF 1958


TITLE I--SHORT TITLE, STATEMENT OF POLICY, AND DEFINITIONS


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TITLE III-- [Struck out->][ SMALL BUSINESS INVESTMENT COMPANIES ][<-Struck out]  INVESTMENT DIVISION PROGRAMS


PART A--SMALL BUSINESS INVESTMENT COMPANIES


ORGANIZATION OF SMALL BUSINESS INVESTMENT COMPANIES




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PART B--NEW MARKETS VENTURE CAPITAL PROGRAM


SEC. 350. DEFINITIONS.


































SEC. 351. PURPOSES.














SEC. 352. ESTABLISHMENT OF PROGRAM.










SEC. 353. SELECTION OF NEW MARKETS VENTURE CAPITAL COMPANIES.
















































































SEC. 354. DEBENTURES.










SEC. 355. TECHNICAL ASSISTANCE GRANTS.






















SEC. 356. ISSUANCE AND GUARANTEE OF TRUST CERTIFICATES.










































SEC. 357. FEES.




SEC. 358. BANK PARTICIPATION.






SEC. 359. FEDERAL FINANCING BANK.




SEC. 360. REPORTING REQUIREMENTS.




SEC. 361. EXAMINATIONS.














SEC. 362. INJUNCTIONS AND OTHER ORDERS.












SEC. 363. UNLAWFUL ACTS AND OMISSIONS BY OFFICERS, DIRECTORS, EMPLOYEES, OR AGENTS; BREACH OF FIDUCIARY DUTY.




































SEC. 364. REGULATIONS.




SEC. 365. AUTHORIZATION OF APPROPRIATIONS.




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SECTION 109 OF TITLE 11, UNITED STATES CODE


Sec. 109. Who may be a debtor




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-

SECTION 5 OF THE HOME OWNERS' LOAN ACT


SEC. 5. FEDERAL SAVINGS ASSOCIATIONS.




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SECTION 7 OF THE SMALL BUSINESS ACT














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SECTION 12 OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT ACT


 SEC. 12. (a)  * * *

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 (e) DEFINITIONS- For purposes of this section:





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INTERNAL REVENUE CODE OF 1986


Subtitle A--Income Taxes


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CHAPTER 1--NORMAL TAXES AND SURTAXES


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Subchapter A--Determination of tax liability


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PART IV--CREDITS AGAINST TAX


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SUBPART D--BUSINESS RELATED CREDITS




Sec. 38. General business credit.

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Sec. 45D. New markets tax credit.



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SEC. 38. GENERAL BUSINESS CREDIT.








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SEC.  39. CARRYBACK AND CARRYFORWARD OF UNUSED CREDITS.




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SEC. 45D. NEW MARKETS TAX CREDIT.






















































































































































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Subchapter B--Computation of Taxable Income


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PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS


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SEC. 196. DEDUCTION FOR CERTAIN UNUSED BUSINESS CREDITS.




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