Getting Around “Lending of Credit”

Every economic development blog in the state of Washington has, at some point, railed against the “lending of credit” provision in the state’s constitution. Which is actually a pretty good pun, considering the lending of credit provision was put in as a backlash against “greedy” railroad barons. Zinger! Anyway, you know what I’m talking about: the prohibition against direct investment of public funds into private enterprises. Which is a big deal around the country in economic development, where cities and states will throw money at a company to get it to move there. Sometimes that works out, sometimes it’s money that they don’t quite have.

A lot of folks in the state talk about making a run at a constitutional amendment, but I’ve never seen anyone actually make a go of it. Not that there’s a lot of money in the state government to lend to private companies anyway. But there are actually some interesting approaches that get around that prohibition going on these days.

Two of the most recent successful models have been the Life Sciences Discovery Fund and the Washington Department of Commerce’s State Energy Program, which are both state investment vehicles that get around lending of credit by not using state funds. LSDF is tobacco settlement money, and the SEP was filled with federal stimulus dollars.

But there are definitely other models being pursued. I wasn’t at the Governor’s Life Sciences Summit in October, but I heard that one of the ideas discussed was getting the state pension fund and/or other funds managed by the Washington State Investment Board ($72 billion in assets under management!) to invest in start-up biotech companies as part of their portfolios. I’m not sure exactly the rules, but I imagine it gets around lending of credit because these are technically funds withheld from private citizens on their behalf, rather than state funds, per se. Anyway, apparently it might take some rule changes and some very careful discussion around risk tolerance, but imagine if even just a few percentage points became available for VC-style funding.

Xconomy picked up another approach in its recent article on the UW Center of Commercialization’s soon-to-be-announced Husky Bridge Investment Fund. Of course, this gets around lending of credit through using only private funds, but the direct link to University-generated R&D commercialization is what makes it unique (at least in our state).

One of the cross-cluster issues that we’re looking to tackle in the next Regional Economic Strategy is “access to capital,” and there’s a lot of that area which I feel is frankly out of our hands. I mean, the banks are going to lend what and when they’re going to lend. But there are at least three areas that are worth considering:
1) how does our region do a better job attracting VC investment from outside the state (what WBBA is doing in terms of private tours for VC folks) is a great model worth expanding on)
2) how does our region do a better job of attracting foreign direct investment (FDI)
3) how does our region better leverage the incredible amount of philanthropic giving and foundation dollars that exist here for economic development purposes (like Cleveland has done with the Fund for Our Economic Future)

But maybe there’s a fourth as well. File under “alternative ways to use state-related dollars to invest in local companies”…

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