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When a state loan is not a loan, it's a ‘forgivable'

Hartford - Forgiveness is becoming a defining virtue of Gov. Dannel P. Malloy's strategy to expand or at least maintain the state's employment and tax base.

The Democratic governor has made six major announcements in the past four months about companies that will commit to growing, staying or moving to Connecticut in exchange for state financial assistance. Four of them are beneficiaries of his new First Five program.

The size and structure of each development agreement varies by business. Yet, at the core of all six deals is a distinct type of economic development tool: the so-called forgivable loan.

For most businesses and people, a loan is money that must be paid back - with interest - over a set period of time. A forgivable loan is different.

When the recipient of one of these loans meets certain benchmarks, such as creating a set number of jobs, the state Department of Economic and Community Development will "forgive" the principal - in effect converting the loan to a grant.

The state's recent deal with ESPN involves a $17.5 million, no-interest 10-year loan to construct a new digital center on the company's Bristol campus. If the sports broadcaster creates 200 new jobs within two years, $10 million of the loan would be forgiven. If it creates 800 jobs by the end of the 10 years, the state pardons the entire loan.

Some development experts can find little difference between a forgivable loan and a traditional grant with safeguards. But, they say, forgivables can have public relations advantages for an administration that wants to avoid the perception of generous state giveaways.

Joseph McGee, who served as development commissioner for former Gov. Lowell P. Weicker, recalled how Connecticut started using forgivable loans in the mid-1990s under the administration of then-Gov. John G. Rowland, a Republican who criticized his predecessor's practice of extending grants to private companies.

McGee emphasized that the Weicker grants had "clawback" mechanisms for recovering money from companies if they didn't perform.

"He wanted to differentiate himself from the Weicker administration so he came up with 'These are loans. We're never going to give a company a grant - that's corporate welfare - but we'll give them loans,'" said McGee, now a vice president with The Business Council of Fairfield County. "I would say it's a marketing concept."

Still, officials in Malloy's administration say there is more to a forgivable loan than political spin.

Tim Bannon, the governor's chief of staff, said the six forgivable loan deals were structured so that the state recoups its investment even if companies fail to meet their targets. When a company succeeds, the state is paid back indirectly through the added tax revenues and spin-off businesses that result from the new jobs and investment, he contended.

The forgivable loan "carries both the carrot of forgiveness and the stick of being callable," Bannon said. "These are hard negotiated agreements. This is not just opening a bag and inviting someone to reach in and grab some money."

Ronald Angelo Jr., deputy commissioner of economic development, described a forgivable loan as a more cautious and secure development tool than a traditional grant, even a grant with a so-called clawback.

States that issue such grants have to "chase after" their money if companies don't do what they say they would, Angelo said. The beneficiaries of forgivable loans have a strong incentive to work with the state and achieve their job goals so that the loan is pardoned.

"Most states we are in competition with for jobs and for our major industries are giving grants - direct grants - and we don't necessarily believe in those," Angelo said. "We are being financially responsible and requiring companies to perform before they receive any forgiveness."

Connecticut has offered forgivable loans to large and small businesses since their introduction here in the mid-1990s, officials say. But state officials last week could not identify the number of forgivable loans the state has issued.

The development department's latest annual report says there were 103 loan or loan-and-grant projects in its financial assistance portfolio from 1992 through mid-2010. The total value of the loan assistance was nearly $180 million, and the default rate for "active projects" in the portfolio was 0.1 percent.

However, the report does not distinguish whether a loan made to a business was of the pay-it-back variety or forgivable.

"Even though a company might have a forgivable loan, it's booked as a loan," Angelo said, "and until a certain milestone is met you wouldn't know."

Department spokesman Jim Watson said last week that it would take an in-depth review of the entire portfolio to determine the number of forgivable loans on the books, as well as how many have been forgiven.

Start-ups usually the target

Connecticut's state assistance and disclosure standards were recently criticized by the Washington-based policy organization Good Jobs First in an October report titled "Connecticut Economic Development Subsidies: Costly and Blunt." The organization says it promotes "corporate and government accountability."

The authors faulted Connecticut for not disclosing in annual reports whether companies that received state development assistance but later missed job creation targets ever had to repay the subsidies.

"Taxpayers have a right to know whether a clawback occurred, and if so, how much money was recaptured," the report said.

In an interview, Greg LeRoy, the organization's executive director and one of the report's authors, said states that use forgivable loans typically target them for start-up businesses and small young businesses. It is less common for states to extend forgivables to large and established companies such as ESPN, which generally have easier access to credit, he said.

Prior to the 1990s, the concept of a forgivable loan in the United States typically applied to federal housing programs and some student loans. Brokerage firms also offered a type of forgivable loan in bonus packages designed to lure top performers away from competitors. After the new hire stayed on for two to four years, the loan balance disappeared.

Georgia and Iowa were among the first states to apply the concept to economic development. Rolled out in Connecticut under a Republican governor, forgivables ultimately found bipartisan support.

"Through the mechanism of the forgivable loan you had a way of tracking their progress," said former State Rep. Cameron Staples, a New Haven Democrat and former finance committee co-chairman. "It wasn't just up front 'Here, take the money,' it was 'We're going to wait X number of years to make sure you've actually fulfilled the commitments you've made, and then we'll forgive it at the end."

Bannon, Malloy's chief of staff, said the strategy behind the six big deals this year was to further develop areas of the economy where Connecticut already has strength, such as broadcasting , bioscience and insurance. By building up these business clusters, the state is setting the table for greater private investment to occur here.

"This is an important arrow in our quiver as we compete with other states," Bannon said of forgivable loans.

j.reindl@theday.com

 

Malloy's forgivable loans

The Malloy administration has announced the following six forgivable loans since July. Each state assistance package includes tax credits or grants that are not listed. Many of the contracts have yet to be finalized.
Cigna: Receives a $15 million, 10-year loan at no interest for relocating its headquarters to Bloomfield from Philadelphia. If the insurer creates 200 new jobs within two years, $10 million is forgiven. The entire loan is forgiven after 800 jobs.
TicketNetwork: Receives a $4.5 million, 10-year loan to assist with the purchase and renovation of a new headquarters in South Windsor. The state will forgive $2.5 million within two years if 200 new jobs are created. Additional $500,000 increments will be forgiven for every additional 100 jobs.
ESPN: Receives a $17.5 million, 10-year loan at no interest to build a new digital center on its Bristol campus. The state forgives $10 million if 200 jobs are created within two years. The full loan is forgiven after 800 jobs.
UBS Group Americas: Receives a $20 million, 5-year loan for staying in Stamford. The loan is forgiven if UBS keeps at least 2,000 employees in Connecticut and meets spending requirements for technology and job training.
NBC Sports: Receives a $20 million, 10-year loan at 1 percent interest for moving from New York's Rockefeller Center to Stamford. Half of the loan is forgiven if the company creates 200 jobs within two years. The full loan is pardoned if 450 jobs are created within five years.
Jackson Laboratory: Receives a $192 million loan at 1 percent interest to build a genetics research lab at the University of Connecticut Health Center campus in Farmington. The loan is forgiven after 10 years if 300 jobs are created.
- JC Reindl

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