Colorado out to divert CAPCO funds - Treasurer trying to send $100 million to insurance program
Rocky Mountain News, December 18, 2003
By Rachel Brand And David Milstead,
CAPCO's Bite Dust
Colorado's certified capital company program got $100 million to invest in the state's emerging businesses,
but it "simply failed," said Gov. Bill Owens.
On Thursday, he signed bills that ensure the CAPCOs don't get another $100 million to try again, effectively
putting an end to the program.
The new law concludes a mad legislative dash to roll back $100 million in tax credits the state was
scheduled to allocate to the program next month. Two of the top plans were merged. The money was split
between a new state venture-capital authority and the CoverColorado program, which provides health
insurance benefits to chronically ill Coloradans.
They were, said Owens, "two bills that equal one unified plan to solve the problem."
The CAPCO industry has defended its value to the end. Spokesman Eric Anderson points to more than $20
million in investments since 2002 and said the program "brought jobs and investment to Colorado and has
the potential to bring more of both."
The program was created in 2001 to give $200 million in tax incentives to insurance companies for
providing money to certified capital companies, or CAPCOs, which would then invest in Colorado
businesses. The program, pitched in part as a way to provide venture capital to rural Colorado, had
bipartisan support. But it also had bipartisan opposition, and passed narrowly. Owens let the bill become law
without his signature.
The first companies were certified in 2002, and the first $100 million in tax credits was committed. The staff
of Colorado's Office of Economic Development began its oversight of the program.
The more OED staff members studied the law, the less they liked it. Their issues:
- CAPCOs are required to invest 30 percent of the certified capital after three years and 50 percent after five
years - but are never required to invest 100 percent of the money.
- The law allows CAPCOs to take more than 5 percent of the $100 million each year for management fees,
operating expenses, plus other "reasonable" expenses.
- The state does not get the principal of the investments back, and the profit-sharing part of the law was not
enforceable, OED staff felt.
- Insurance companies' money was guaranteed with bonds, so the $100 million in tax credits turned into
about $40 million to $50 million of investable money at the beginning of the program.
The industry said the OED staff simply didn't understand the program, misinterpreted the language of the
law, or assumed worst-case scenarios that simply wouldn't come true.
But Bob Lee, head of the Office of Economic Development, decided not to wait and see how it turned out.
His staff talked to regulators in other states and "we became convinced the model was flawed, the program
wouldn't work, that jobs would not be created and the taxpayers would not be getting a good return on their
investment," Lee recalled in an interview Thursday.
Attempts were made in the spring of 2003 to eliminate the second $100 million round of tax credits, but no
consensus emerged, and the bills failed.
In July 2003, the program's opponents' views were featured in a Rocky Mountain News article in which Lee
said "The program is structurally flawed, and it needs to be fundamentally changed, or it needs to be
abolished." That article was the first of two dozen on the program and the legislative push to kill it.
One report detailed the investments of Wilshire Colorado Partners and its parent company, Newtek Business
Services. Newtek/Wilshire had made $4 million in investments by July 2003, representing more than 95
percent of the "rural" money invested at that point.
But Newtek/Wilshire unabashedly invested the money in companies controlled and majority- owned by
Newtek, with a goal of developing its own business-service companies. And the two "rural" investments so
far employ just a handful of people out of an office park 600 yards west of the Jefferson County line in Clear
While Newtek Chief Executive Barry Sloane said this generated economic activity, exactly the intent of the
program, Lee said it was a perfect example of the problem, since the investments were "legal, but they
violate the legislative intent."
By late August, Owens made his views known: Fix the program or kill it. He used his annual State of the
State address in January to say abolishing CAPCOs was one of the top priorities in the legislature this
session. "We can't mend this program. We must end this program."