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Md. legislators trimming venture fund proposal

ANNAPOLIS — Lawmakers are slimming Gov. Martin O’Malley’s top economic proposal in response to concerns over the potential cost of his plan to spur growth in high-tech startups with a state-run venture capital fund.

The governor is seeking $100 million for the Invest Maryland program. But to hit that level using the mechanism included in his bill — auctioning off tax credits that don’t go into effect until the final year of O’Malley’s term — the state could have to shell out as much as $142 million in credits.

“We have a lot of concerns about borrowing so much from the future,” said Sen. Richard S. Madaleno Jr., a Montgomery County Democrat working on the bill.

The Senate and House of Delegates are both crafting changes to the legislation, filed as SB 180 and HB 173, and have been mum on the details for the most part.

The House plan would include a venture capital fund of at least $75 million, according to Del. Bill Frick, whose Revenues subcommittee is handling the legislation.

Frick said he expects to have a bill ready for the Ways and Means Committee, which sets tax policy, “in the next few days.”

“Everyone is engaged on it, to pass something that works and that puts people to work,” he said.

Senate Budget and Taxation Committee Chairman Edward J. Kasemeyer, D-Baltimore and Howard, said his chamber’s version of Invest Maryland would “probably not be as significant a program as it once was.”

“We seem to be just about there,” Kasemeyer said about work on the bill in the Senate.

O’Malley spokesman Shaun Adamec said discussions have included long-term funding sources that could supplement the tax credit auctions, which supporters say would allow the state to invest in job creation when it needs it most, and pay for it in what lawmakers hope will be healthier fiscal times.

Under the governor’s original proposal, the credits on insurance premium taxes would be auctioned off between 2012 and 2014. The credits would take effect between 2014 and 2018, with up to $28.4 million being applied each year.

State officials are quick to point out that because the credits would be sold in an auction, the price could rise above the floor of 70 cents on the dollar. A Colorado program with a similar funding method sold its credits to the highest bidders for 86.2 cents.

Invest Maryland follows a long line of state initiatives with the goal of nurturing homegrown companies with financial boosts in their early years. Using certified capital company programs, states starting with Louisiana in the 1980s offered insurance companies tax credits in exchange for investments in venture firms.

“Early-stage [venture funding] is problematic everywhere in the country,” said Julia Sass Rubin, a Rutgers University professor who was paid by the administration to review the Maryland legislation. “It does make sense for the states to do more early-stage, and you’re seeing more of that now even internationally.”

Many states have shifted away from the certified capital company, or CAPCO, model, which has proved in many cases to be ineffective and does not return investment principal or other earnings to the state, Rubin said.

Indeed, a CAPCO program in Washington, D.C., cost the city between $50 million and $76 million, according to a city audit, and created only 31 jobs. And after a 2003 audit, Colorado shifted funds from its CAPCO to its venture capital fund program, similar to the one being discussed in Maryland.

The Department of Business and Economic Development estimates that investments would be made in 40 to 80 companies a year. And under O’Malley’s proposal, the state would be repaid all the principal of successful investments, and 80 percent of the profits. The returns would be recycled and reinvested.

Colorado’s program uses a similar split, according to Nick Lepetsos, chairman of that state’s Venture Capital Authority. He said Colorado has made $16 million in investments in 11 companies so far, and saw its first investment prove successful a few months ago when the company was sold and returned “three or four times” the state’s investment.

“It can hopefully create jobs now, and hopefully it can create larger companies later,” he said.

Adamec said Maryland, too, is primed for more venture capital investment.

“All you have to do is look at the I-270 corridor, with the biotech startups, the high-tech startups, that are leading the way in health care and life sciences discoveries,” he said.