The Malloy administration has opened Connecticut’s credit and grant window to businesses to the tune of $234.7 million the last two fiscal years. That’s about 74 percent more than the state handed out in the previous six-year period, a Hartford Business Journal analysis shows.
HBJ analyzed data drawn via a 2013 annual report and Freedom of Information request from the state Department of Economic and Community Development (DECD). They show business loans and matching grants issued between fiscal 2006 and 2011, Dannel P. Malloy’s first year as governor, totaled about $134.7 million. That number, however, may be higher because the state says it no longer tracks deals made earlier this decade that have met their contractual obligations.
Regardless, the significant jump in state incentive-program spending in the last two years underscores the importance Malloy has placed in providing business loans and grants to boost the economy by preserving or attracting jobs. Indeed, it is a cornerstone of his economic-development strategy.
In particular, two economic initiatives launched on Malloy’s watch — the “First Five” and Small Business Express Loan (EXP) programs — comprise the bulk of Connecticut’s efforts to combine low-interest, forgivable loans and grants to retain and expand private-sector jobs.
In pledging the full faith and credit of Connecticut taxpayers to aid firms, the state also served as “lender of last resort” to at least nine recipients who have since folded.
DECD oversees both programs, which Commissioner Catherine Smith says are taxpayers’ response to the credit gap that blocked many firms from accessing enough private capital in recent years to help them “back on their feet and meet the demand that was starting to percolate.”
With no other state or national model to follow, both were essentially carved from scratch, she said.
“We wanted to do something different and bold,” Smith said of efforts to address Connecticut’s slack job growth dating back more than a decade.
Of EXP in particular, Smith said, “It’s served its purpose extremely well.” However, at some point the state’s role as a “lender of last resort” must end, she and critics say.
“I’m hoping we can wean ourselves out of this business,” the commissioner said.
1000th EXP recipient
The $234.7 million in business incentives includes $183.3 million in loans and $51.4 million in grants handed out between fiscals 2012 and 2013. A few deals were agreed to by former Gov. M. Jodi Rell but paid out by Malloy. The state offered additional incentives during those periods, including tax credits that are not calculated in HBJ’s tally. Additionally, more deals have been hatched since.
Last week, Malloy announced the EXP program’s 1,000th awardee: Seymour manufacturer Microboard Processing Inc., which is getting a $300,000 loan and $100,000 grant tied to its pledge to add 10 jobs to its 81-worker payroll in the coming year.
As of last week, $136 million in EXP aid had been dispensed or pledged to 1,015 small businesses to create or retain 14,014 jobs, DECD said. Some $8.7 million of that has since been repaid from 306 recipients.
Despite signs the state, regional and national economies are improving, Smith says the credit gap still exists, noting DECD is averaging 10 EXP applications weekly. That’s why Malloy said he introduced legislation last week to extend EXP for two more years.
Yet the programs aren’t without hiccups or critics. Of the 397 EXP loans granted, 31 are at least 30 days or more late on principal and interest payments, for a delinquency ratio of 8 percent, DECD says. A delinquency level that high at a bank would prompt strict measures from regulators.
Smith responds that a high delinquency rate is to be expected with a program like EXP, adding DECD’s in-house workout specialists toil hard to get wayward credits back on track.
EXP also has raised eyebrows among bankers and economists, some of whom question whether the state could have stretched taxpayers’ jobs-rescue dollars by letting banks handle loan underwriting and due diligence, with the state issuing loan guarantees, akin to the U.S. Small Business Administration.
Bankers Wanted In
Farmington Bank Chairman and CEO John Patrick, whose bank ranks among Connecticut’s largest small-business lenders, said he aired that view at a gathering of community bankers in Cromwell during Malloy’s “jobs listening tour” shortly after he took office. Smith also attended.
Patrick, with backing from Simsbury banker Martin Geitz and other lenders present, urged Malloy and Smith to consider a loan-guarantee program that would cover as much as 50 percent of the borrowed sum.
Such a guarantee, lenders say, would have made them less skittish, while lowering the loans’ default risk to taxpayers. With the guarantee, too, banks could have leveraged the state’s funding to perhaps twice the dollar volume in EXP loans, they say.
“Everybody’s looking for instant gratification,” Patrick said. “You need to invest and you need to be able to get a return. But the question becomes, by spending the [EXP] dollars, are we seeing the economic growth from these businesses? It’s just too soon to see what the results will be.”
Smith counters that, while a good idea, there wasn’t time to sort out a guarantee program as businesses and jobs languished from the Great Recession.
“We were in a big hurry,” Smith said. “We wanted to get this money to businesses as quickly as possible.”
Though private banks aren’t involved, DECD did recruit some half dozen nonprofit regional economic-development lenders to assist with processing EXP requests.
The Middlesex County Revitalization Commission (MCRC) got $1 million to parcel out among businesses within its 15-town region, said Durham First Selectwoman Laura Francis, who chairs MCRC.
Rather than its usual $10,000-to-$20,000 loans and grants, MCRC issued a handful of loans up to $250,000 each to qualified applicants, Francis said.
“We were thrilled to have the infusion of DECD money,” she said. “We were able to make bigger loans. In our region, it was impactful. I have to believe that has happened around the state.”
While it can be argued the state perhaps missed an opportunity failing to bring bankers aboard its small-business rescue ship, Connecticut Business & Industry Association economist Peter Gioia says lenders weren’t under the same pressure as state policymakers.
“It’s really tough when you have everybody and their brother screaming at you,” Gioia said of the clamor for credit and job growth.
Since EXP launched, Gioia says he’s spoken to 100 small businesses statewide about it. Except for a handful of gripes about delays and paperwork, all claimed the program “really helped them,” he said.
Tracking Results
Both EXP and First Five were spawned in 2011 to stimulate job growth at a time when Connecticut’s unemployment rate was hovering around 9 percent. In January, unemployment was down to 7.2 percent. Lawmakers issued debt to fund both programs.
First Five mixes loans, grants and tax credits to companies who agree to add at least 200 jobs and/or make sizable capital investments. The program has been extended several times, from five to 15 slots, and paid out $61.9 million, DECD data shows. Beneficiaries include Cheshire orphan-drug maker Alexion Pharmaceuticals ($26 million) and Bloomfield health insurer Cigna Corp. ($21 million).
Following criticism that Connecticut’s incentive programs largely favored big corporations, EXP was created during the special October 2011 jobs session, receiving bipartisan support with only two Republican lawmakers casting votes against it.
EXP offers loans or matching grants to businesses with fewer than 100 employees that pledge to add jobs and/or invest capital in infrastructure expansions.
One Hartford area EXP beneficiary is The Bright Spot Children’s Playplace in Vernon.
Former school teacher Dawne Morison in 2010 started her business hosting birthday parties at its indoor playspace for kids as well as preschool and other education programs. Morison says she originally used her credit card to stake her enterprise after several banks denied her a loan.
Children’s Playplace started small, in 1,500 square feet in the Vernon Commons shopping plaza. Within two years, the business was growing, but not as profitably due to limited space. Morison said she could only accommodate about 15 children at one time, but demand was much higher.
Morison said she approached DECD about an EXP loan. The $80,000 allowed her to double her footprint in the same plaza, plus hire three workers. She’s also added a retail component, selling locally made baby products.
“Without the loan, I’d be closed and out of business,” Morison said.
Risky Bets
To track whether recipients live up to their job commitments, DECD follows up its periodic staffing surveys with third-party audits of recipients’ staff levels, Smith said. Typically, forgivable-loan borrowers can see as much as half their loan waived for meeting their job pledges.
Thus far, nine EXP borrowers have gone under, DECD data shows. DECD insists borrowers put up some form of loan collateral, including equipment, real property, personal guarantees and letters of credit. EXP contracts also contain a “clawback” provision to recover funding from recipients who fail in their job-creation or other obligations, DECD said.
“We try to get the best security we can get,” Smith said.
Not all who apply get EXP funding. Four of every 10 applicants are denied, either because they fail loan-underwriting criteria, or their business plan “lacks a route to success,” she said. Smith acknowledges DECD takes on some riskier loans that banks might shun, “but they aren’t hopeless causes.”
The “lender-of-last-resort” label fairly describes DECD’s EXP program, Smith said, adding, “maybe second-to-last-resort.”
UConn economist Fred V. Carstensen said the gulf in the state’s financial aid to businesses the last two years vs. the previous six-year period, until 2011, reflects poorly on the Connecticut’s previously unfocused efforts to keep or create jobs.
He, too, applauds Team Malloy and state lawmakers for crafting a near-term rescue for Connecticut to prevent it from falling deeper into the economic crevasse.
However, Carstensen said longer term, the state should have in place a mechanism that encourages aid recipients to refinance into a traditional bank loan.
“The state cannot remain,” he said, “the banker for the small-business sector.”
