A recovering state economy is creating a shortage for California industrial development bonds the tax-free financing vehicles used by manufacturers to build new plants, buy advanced equipment and hire new workers.

The greater demand has caused the State of California to run out of IDB funding for 1997 with more than half the year left to go even after it increased allocation for the bonds by almost 50 percent.

“We’re not accepting any new projects,” said Joseph Yew Jr., executive director of the California Debt Limit Allocation Committee. “We just don’t have any money left.”

The committee composed of Gov. Pete Wilson, Treasurer Matt Fong and Controller Kathleen Connell originally allocated $100 million for 1997 IDBs, but a greater-than-usual demand this year led the committee to allocate an extra $46 million this year from the state’s $1.6 billion annual budget for tax-free bonds.

Even with that added amount, companies seeking tax-free bonds are being told they will have to wait until next year until more funding will be available. This means that companies either will have to wait to buy new equipment and build new facilities, or issue taxable bonds now with the hope they will be converted to tax-free status next year.

IDBs are preferred by industrial companies looking to expand their factories or make investments in equipment because the rate can be as much as 4.5 percent below that of commercial bonds. Investors who buy the bonds do not pay state or federal taxes on the earnings.

Advanced Aerodynamics & Structures Inc. of Long Beach is among the companies planning to take advantage of industrial development bonds this year.

The company, which makes single-engine turbo prop airplanes, plans to use an $8.5-million bond issue, authorized by the state earlier this year, to build a 200,000-square-foot facility that will house a factory and administrative offices.

“We found it exciting in terms of the obvious savings in cost to us and we thought it was a pretty good incentive to building in California,” said David Turner, chief financial officer.

Turner said the company expects the interest rate to be below 5 percent. The company, which currently employs 16 workers, is expected to increase its work force to 300 when the new factory is up and running.

This year, Los Angeles County companies have received $39.3 million in IDBs, which are supposed to generate 1,321 jobs. Job creation is one of the key reasons the state offers tax-free bonds to industrial companies.

The money for the IDBs comes from private sources, such as mutual funds, and is paid back by the company usually over a 20-to-30-year period. It is backed by a letter of credit from a commercial lender.

IDBs account for a small percentage of the $1.6 billion California is allocated annually for tax-free bonds. The lion’s share of the money typically about 80 percent is used for low-cost, multi-family housing, an area that also has experienced an increase demand for tax-free bonds, Yew said.

Bonds also are issued for other tax-exempt projects, such as recycling facilities, student loans and home loans for low-income, first-time home-buyers.

There are those who feel that IDB allotments should be increased, based on their record at encouraging job retention and growth.

“It’s a fantastic resource and it is profoundly misunderstood and underutilized in California,” said Dan Bronfman, owner of Growth Capital Associates in Santa Monica, which helps companies throughout the U.S. apply for tax-free development bonds.

Typically, IDBs are given $150 million in funding each year. This year, that amount was lowered to $100 million because only $83 million was requested by qualified companies last year. An increased demand, however, has led the California Debt Limit Allocation Committee to raise the allocation for the year back to its usual level.

Because the demand is so much higher this year likely due to an improved economy and improved local efforts to promote IDBs Bronfman believes the allocation should be increased to at least $200 million a year.

“It’s still a very modest piece of the pie,” he said. “I think that’s all we’re asking for.”

But the California Manufacturers Association, the chief lobbying group for the state’s manufacturers, believes such an increase is unlikely.

“I think that it’s going to be difficult, frankly,” said Brian McMahon, executive vice president of CMA Service Corp., the association’s member services division.

Instead, McMahon said, the CMA is pushing to keep funding for IDBs at the $150-million level, and supports a federal bill that would increase the amount allocated by Congress each year for tax-free bonds.

The bill H.R. 979, sponsored by Reps. Amo Houghton, R-N.Y., and Barbara Bailey Kennelly, D-Conn. would raise the amount from the current $50 per person in each state to $75 per person, thus allowing the state to allocate more for all types of tax-free bonds.

State Treasurer Fong, who chairs the California Debt Limit Allocation Committee, is also supporting the bill as a solution to an increasing demand throughout the state for tax-free bonds.

“In California, we see a tremendous demand for capital to build affordable housing, to protect the environment, to begin small businesses and to provide student loans,” Fong wrote in a letter to congressional leaders. “The present $50 per capita limit is woefully insufficient to allow California to realize its full economic recovery.”

That bill may not come up for a vote this year, Yew said, and it remains unclear whether the California Debt Limit Allocation Committee will raise the percentage allocated for IDBs even without an increase on the federal level.