In light of the recent closure by Butler Ford in Waupaca, I promised the Waupaca County Board of Supervisors, at their November meeting, a complete update on the revolving loan fund program.
Any in-depth review needs to begin with why Waupaca County is eligible to operate a loan program. The authority to do so comes from the federal government through its Community Development Block Grant program (CDBG).
The U.S. Department of Housing & Urban Development (HUD) is in charge of the CDBG funding. At least 70 percent of the available funds must be used for activities that benefit low- to moderate-income citizens through community and economic development activities.
Typically, the majority of the CDBG funds are used for community development purposes, such as housing rehabilitation. However, there is a small portion of the funds dedicated to economic development, with the major caveat being that the money will help create jobs, which in turn must be offered to low and moderate income people.
HUD’s Entitlement Program directly funds cities with populations over 50,000, and counties with populations over 200,000. All other local governments must access CDBG money through HUD’s State Administered Program.
In Wisconsin, the agency that contracted with HUD was the Department of Commerce.
The total amount Wisconsin received from HUD in 2011 was $80.5 million dollars – $40.7 million for the Entitlement Program communities, and $39.8 million for the State Administered Program.
In order to become a lender for CDBG funds, local governments passed a resolution of intention, and then prepared the required tools for implementing a loan program. These included committees to review loans, a Department of Commerce sanctioned loan manual that followed CDBG rules, and an administrator to service the approved applications.
The seed money for the local loan programs came from the repayments of a CDBG loan between the Department of Commerce and a local company in an industrial sector (the state was required by CDBG rules to only do loans with industrial expansions). The repayments of the state CDBG loan went directly to the newly created local fund, and could now be lent out (revolved) to other local expanding businesses in any sector (retail, commercial, agriculture, not just industrial).
After several years only counties were allowed to become new lenders.
Now the state, through the WEDC, wants to take this a step further and force the loan programs into regional pools.
The reason for this push to regionalization, other than the obvious is that many of the smaller communities ended up leaving most of the repayments in the bank and not revolving the money.
Approximately 50 percent of the CDBG loan funds in Wisconsin are sitting in banks ($46 million).
This fact is problematic on two fronts. First, HUD wants their money out working in communities to create jobs for people in the low- to moderate-income categories. Second, Wisconsin wants to jump start its economy and increase incomes, jobs and tax revenue. They know that $46 million will stimulate at least two times that amount in investment because CDBG loans must be matched dollar for dollar with private investment. However, years of data shows that private-investment dollars for these projects are typically many times greater than the amount of the CDBG loan.
In my opinion, Waupaca County has managed its federal CDBG loan funds very well. Our audits by Commerce have been positive, with only minor administrative corrections required. Our loan portfolio has a reasonable failure rate considering these loans are mostly made to businesses that cannot garner all of their start-up costs from the private sector, usually because they lack the necessary collateral.
Waupaca County’s loan program began in 1997 with a loan from the Department of Commerce to Larsen Cooperative in Weyauwega. In total, there have been 50 loans made to Waupaca County businesses.
Five of these loans were from the Department of Commerce. The rest of the loans were made by Waupaca County, with funds repaid from both the DOC’s and Waupaca County’s loans. Sixteen of these loans, totaling $1.305 million, have been repaid in full (along with $168,897 in interest). Of the approximately $3.6 million that has been loaned to these 50 businesses, over $2.7 million has been repaid (includes interest).
As of today, four loans have been written off by the County Board, for a failure rate of 8 percent. However, of the $130,000 that was lent to these four businesses, almost half ($60,867) was repaid before the businesses closed.
Of course, we have three other loans that likely will be written off (Manawa Pastry, Waupaca Havoline & Butler Ford). This will bring our default rate to 14 percent.
These businesses have invested millions of dollars, created hundreds of jobs and paid thousands of dollars in local taxes. From my perspective, the CDBG program is a great way to return federal tax dollars to the local economy.
As we move into 2012, and the state morphs this program into a regional model, I am committed to doing everything I can to bring as many of the regional CDBG dollars into this county as possible.
David Thiel is the executive director of the Waupaca County Economic Development Corp.