Forgivable loans to businesses sometimes work, city and county say
04/08/2012 7:15 PM
04/08/2012 7:15 PM
The city of Wichita and Sedgwick County each have kicked in roughly $7.8 million the past five years to make 25 forgivable loans to businesses locating or expanding here.
Results have been mixed. Some of the companies have made good on their promises of jobs; others realized they wouldn’t be able to and repaid the city and county. Still others have a year or two left on the clock and are hoping to make up time before they have to pay up.
Late last month, the city and county sent a letter to one company, Swift-Cor Aerospace, a California-based company, asking it to repay each government $18,000 loans after it didn’t meet its goals in the last three years of its five-year agreement. The city and county had each loaned the company $30,000. And officials are hoping to work with another company, Burnham Composite Structures, after a review showed it had not met any of the conditions of its $62,000 loans from each the city and county. Burnham did not return calls.
Forgivable loans can be a valuable tool to create and grow jobs, said County Commissioner Dave Unruh.
“I think they can be used effectively,” he said. “There’s always a certain amount of risk. “But we’ve been pretty well satisfied. The overwhelming majority have proven to be beneficial.”
Commissioner Richard Ranzau, thinks the county needs to follow through with “clawback” provisions — repayment — when businesses fail to deliver. And he noted that no bank would loan money without collateral.
“If you made those sorts of deals as a loan officer for a bank, you’d be fired,” he said. “I don’t get any particular pleasure from saying ‘Give us our money back,’ but don’t we have an obligation to our taxpayers?”
Commissioner Karl Peterjohn asked staff recently for a list of where the county’s forgivable loans stood. The county and city provided the same review to The Eagle.
Working together with recommendations from the Greater Wichita Economic Development Coalition, the city and county generally make the same deals with businesses. Allen Bell, the city’s urban development director, said the city and county “stole” the idea of forgivable loans from the state.
The state created the Kansas Economic Opportunity Initiatives Fund for business expansion and recruitment with money from the Kansas Lottery, Bell said.
Bell said the city and county first consider if incentives are necessary to attract a business or get it to expand here. Then they ask if the business would be a good fit.
The GWEDC makes recommendations to the city and county, but ultimately, City Council members and commissioners must OK any deals. Each agreement specifies how many jobs will be added at what average salary.
The Swift-Cor example
For example, Swift-Cor was to create at least 200 jobs at an average wage of $39,500 by the end of its five-year agreement. Its annual payroll on new jobs was supposed to be $7.9 million. As of November, the last review made available to The Eagle, the company had added 85 new jobs at an average wage of just more than $34,000. Its annual payroll fell short by $5 million.
Doug Brown, general manager of Swift-Cor’s Wichita plant, said the company supplies sheet metal and machine parts to businesses such as Spirit AeroSystems. The economy slowed the company’s sales and expansion plans, he said. Brown said he wasn’t involved when the city and county awarded the loans, but he said he has since met with officials from both about the money.
“We’ve grown constantly and steadily ever since the economy started picking up,” Brown said.
The Wichita plant, which opened in 2006, now has about 95 workers, he said, adding that he expects to hire 35 to 40 in the next six months.
He said he’s passed the city and county’s letters asking for repayment of $18,000 along to the company’s owners. But the company is being sold, he said, and he’s not sure what will happen.
That’s the kind of risk that Ranzau worries about.
With the county itself struggling to recover from a down economy, Unruh reiterated that “taking risks is not part of our job description.”
Cash helps some thrive
Some companies awarded forgivable loans have exceeded their job goals.
That’s not surprising, said Chris Chronis, chief financial officer for the county.
“If I’m a business, I’m going to undercommit to avoid the risk” of repayment.
Cessna Aircraft received $5 million loans from the city and county in 2008 but paid them back the next year after canceling its Citation Columbus business jet program.
Neither the city nor the county had to go after Cessna for the money.
“They called us,” Chronis said.
The city’s Bell remembers an assistant telling him that Tom Wakefield, vice president, general counsel and secretary of Cessna, was there to see him.
“He handed me a check for $5 million,” Bell said.
The city and county conduct annual compliance reviews on the businesses to which they loan money. Neither requires repayment until the end of the five-year agreement unless the company closes.
“If the company decides to cease, we don’t wait,” Bell said. “If you cease operations, the interest penalty kicks in at 12 percent.”
If the company isn’t performing, the city and county tries to work with it, Bell and Chronis said.
“We consider what we think the health of the company is,” Chronis said. “We don’t want to put the company out of business” by demanding immediate repayment.
The city and county may agree to send a claim letter, such as it did recently with Swift-Cor. Or it might give the company an opportunity to renegotiate its deal.
But for the most part, Bell said, “I think our elected officials expect that a deal is a deal.”