LEGISLATIVE FISCAL ESTIMATE
[First Reprint]
ASSEMBLY, No. 4330
STATE OF NEW JERSEY
219th LEGISLATURE
DATED: JUNE 17, 2021
SUMMARY
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Synopsis: |
“Economic Emergency Investment Stabilization Act”; allows EDA to invest in businesses impacted by major economic emergencies. |
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Type of Impact: |
Increased State expenditure, possible increase in State revenue. |
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Agencies Affected: |
New Jersey Economic Development Authority. |
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Office of Legislative Services Estimate |
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Fiscal Impact |
Up to 10 year investment duration |
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State Cost Increase |
Indeterminate |
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State Revenue Increase |
Indeterminate |
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· The Office of Legislative Services (OLS) finds that the bill will result in an indeterminate increase in State costs to make investments in qualified applicants, and depending upon the performance of those investments, result in an indeterminate amount of State revenue representing the profit or loss from those investments. The Economic Development Authority (EDA) will also realize limited additional State revenue from application fees imposed to offset its administrative costs in running the program.
· The amount of investment will depend on the number of qualified applicants that are seeking new investments and are able to identify matching investments. The amount of these applicants and future investments cannot be known at this time.
· The State revenue likely to be realized from these investments also cannot be known at this time because it will largely be dependent upon the future business performance of the applicants and the quality of the investment decisions made by the EDA. A comparable program does not exist to evaluate EDA investing activity against and the applicants to be invested in are also unknown at this point.
· In addition to the direct performance of investing activity under the program, there is also the possibility of indirect State and local revenue gains through the economic incentive effect of taking equity stakes in qualified applicants. If the investment has a material impact on the success of these businesses that would not have occurred if not for the program, that business success is likely to result in increased payment of various State and local taxes by the qualified applicants and their employees that can be indirectly attributed to the program.
BILL DESCRIPTION
This bill creates the “Economic Emergency Investment Stabilization Program” for the purpose of authorizing the EDA to make direct equity investments in businesses that have been financially harmed by a “major economic emergency.”
Under the bill, the EDA may enter into a “matching investment agreement” with a qualified business to invest between $100,000 and $1,000,000 in the business during a major economic emergency, and six months after the end of the major economic emergency. The bill directs the EDA to fund the program with: 1) amounts from the “Economic Recovery Fund”; 2) moneys received by the EDA from the prior sale of equity stakes in businesses under this program; and 3) other EDA moneys.
A business seeking EDA assistance under the bill must identify at least $1 of new outside investment, within 90 days of submission of the business’s application, for each $1 of investment that the business is seeking from the authority. The EDA may match the amount of new investments in a business, up to $1 million, made during a funding round, however, the EDA’s total investment in a business is limited to a 25 percent overall equity stake in a business. An equity investment made by EDA under the bill must be on equal or better terms, for the authority, as those made by any of the outside investors. Under the bill, the EDA may only make an investment if it determines that the potential equity investment will be a material factor in the financial success or failure of the business during the major economic emergency, and that the business is likely, at the conclusion of the economic emergency, to return to a level of financial viability that will allow the authority to exit its equity stake without taking a loss on its investment. The bill provides that EDA may maintain its investment in a business for no more than 10 years after the end of the major economic emergency, however, the bill authorizes EDA to maintain its investment for a longer period of time if it was unable to sell its investment during the first 10 years without taking a loss, and the anticipated increase in value by holding the investment for more than 10 years exceeds the public benefit that would accrue from selling the investment and using the proceeds for some other eligible use of the “Economic Recovery Fund.” The bill directs the EDA, starting 12 months following the end of the major economic emergency, to start selling its equity investments under the bill, and to credit and deposit the proceeds therefrom to the “Economic Recovery Fund.”
FISCAL ANALYSIS
EXECUTIVE BRANCH
None received.
OFFICE OF LEGISLATIVE SERVICES
The OLS finds that the bill will result in an indeterminate increase in State costs to make investments in qualified applicants, and depending upon the performance of those investments, result in an indeterminate amount of State revenue representing the profit or loss from those investments. The EDA will also realize limited additional State revenue from application fees imposed to offset its administrative costs in running the program.
The amount of investment will depend on the number of qualified applicants that are seeking new investments and are able to identify matching investments. The amount of these applicants and future investments cannot be known at this time. The bill limits investments to amounts of $100,000 to $1 million per applicant, suggesting that the companies are likely to be relatively small. The bill also allows for an investment duration of roughly one to ten years. If the EDA has already determined that the applicant is a sound investment, then a ten year investment horizon should be more than sufficient to overcome macroeconomic issues that might pose a challenge to company performance and private investment liquidity. If an investment were to fail it could be due to unforeseen performance issues by the qualified applicant itself, or given the small size of the companies, challenges in identifying private investors to purchase the EDA’s equity stakes due to the potentially limited liquidity of the private or public shares of the applicants.
The State revenue likely to be realized from these investments also cannot be known at this time because it will largely be dependent upon the future business performance of the applicants and the quality of the investment decisions made by the EDA. A comparable program does not exist to evaluate EDA investing activity against and the applicants to be invested in are also unknown at this point. With companies looking at $100,000 to $1,000,000 sized investments, the risk dynamics for these companies are likely not significantly different than companies that the EDA evaluates for many of its loan programs, so EDA staff is likely well equipped to evaluate the companies. The terms of the specific equity investment agreements and the future ability to identify private companies to acquire these equity stakes are likely to be the larger challenges for this program, rather than the actual quality of the companies themselves.
In addition to the direct performance of investing activity under the program, there is also the possibility of indirect State and local revenue gains through the economic incentive effect of taking equity stakes in qualified applicants. If the investment has a material impact on the success of these businesses that would not have occurred if not for the program, that business success is likely to result in increased payment of various State and local taxes by the qualified applicants and their employees that can be indirectly attributed to the program.
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Section: |
Authorities, Utilities, Transportation and Communications |
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Analyst: |
Principal Fiscal Analyst |
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Approved: |
Thomas Koenig Legislative Budget and Finance Officer |
This legislative fiscal estimate has been produced by the Office of Legislative Services due to the failure of the Executive Branch to respond to our request for a fiscal note.
This fiscal estimate has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.).