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State proposes to eliminate local revolving loan funds

POSTED August 2, 2018 10:04 a.m.

“We don’t have a lot of tools in our toolbox,” Grant County Economic Development Director Ron Brisbois said of a plan floated by the State of Wisconsin to eliminate local revolving loan fund programs.


    “It’s Grant County’s tool…you are taking it out of our hands, and you are not replacing it.”


    That tool is a product of the Community Development Block Grant - Economic Development (CDBG-ED) program, which is a joint effort by the federal Dept. of Housing and Urban Development (HUD) and the Wisconsin Dept. of Administration (DOA). Depending on who you talk to, it is either the feds or the state driving the elimination of this local economic development tool, a tool which Grant County has used 53 times in the past two decades, creating 338 new jobs, retaining hundreds more jobs, all for initial investments of approximately $1 million.


    Boscobel, Muscoda, Cuba City and Potosi all have revolving loan funds as well, and in total there is $3.3 million in revolving loans within Grant County alone.

   Last month, DOA announced that they wished to end the CDBG-ED program in the state, and instead replace it with CDBG-CLOSE, which would operate between two-four years and reallocate the more than $100 million in the local revolving loan programs.


    Under CDBG-CLOSE, which is based on a similar change made in Illinois, the state would freeze all local revolving loan funds this fall (or whenever HUD approved of the plan), not allowing those programs to lend out any new loans. Those local governments would then be required to pay back all of the money within the loan program within two years, including any losses they had written off, as well as any interest they had made within the program.


    The state would create a new review program for grants to local governments, allowing for those governments that had revolving loan programs to request for funds for up to the amount they had paid back to the state. Those grants could be for a wide array of projects - during a presentation to local officials, it was mentioned broadband projects, opioid centers, and rehabilitating blighted land were all examples - which would not need a local match.
    Local governments would only have two years to request the money, and for most local governments, they would only be able to apply for two projects.


    For those monies not paid back within two years, the local governments would have to turn over the loans to the state to collect, and would not be eligible to be included in the grant program.


    As an example, Grant County has a revolving loan fund that currently has loaned out $679,000, while it has $338,000 in its accounts (but has a loan application being processed). The county also has had losses of approximately $100,000.
    If the county turned over only the cash-on-hand, it would be eligible for $238,000 in grants, while the state would take over and collect the $679,000 in loans.


Why?


    During a presentation made to local officials on June 13 - held one day after the state formally kicked off the 30-day public comment period, representatives from DOA looked to explain the idea, and the reasoning behind it.


    Originally under the old Wisconsin Dept. of Commerce, DOA took the program over when Gov. Scott Walker spearheaded taking Commerce and turning it into the Wisconsin Development Corporation(WDC), which could not oversee the program because it is partly private. Soon after, HUD audited the program, and the state was left with fees of $16 million because some of the 130 local revolving loan funds were not in compliance.


    HUD requires regular reporting on the progress of the funds. It also has caps on the amount of funds these loan funds can have as cash-on-hand.


    Currently, HUD is once again auditing the CDBG-ED program, and DOA officials stated during their June webinar to local officials they worried if they didn’t act quickly, there may be no local funds left anyway. The officials noted that more than half of the $100 million in the programs across the state is cash-on-hand, and is not in circulation.


    Under the Trump Administration, CDBG-ED has come under even more scrutiny. Trump had twice tried to end funding for the program in proposed budgets, only to be saved by Congress, which actually increased the allocation for the program.


    DOA officials worried that the presidential administration’s overtures to the program could mean that HUD may take more drastic measures to show the program is effective, implying during the June 13 presentation that HUD may even just claim all the money from the local revolving loan fund outright, leaving local funds with nothing.


    “We’re on the top of their list,” DOA official Dave Pawlisch said during the presentation.


    So Wisconsin decided to copy a plan from our neighbors to the south, Illinois, which is in the process of taking their regional loan programs, and creating a grant program.


Not the first time changes floated


    If you have a faint thought that you had heard of proposed changes to the CDBG-ED program before, you have a good memory, as in 2012 another idea was floated to revise the program, but ultimately was rejected statewide due to complications of ‘defederalizing’ the funds.


    In 2012, as Dept. of Commerce was turning into WDC, and when HUD was reviewing compliance of the program, the idea of regionalizing the loan programs was floated. The idea was that by putting the funds in regional entities, and ‘defederalizing’ the funds - stripping the requirements of job creation/retention, and income levels, the funding would be more flexible.


    In the end, the state was unable to completely pull off that idea. Defederalizing was a difficult task, and only a few pilot regions were created.


How it works


    Under the current program, the federal government allocates funds for the state to distribute in block grants for economic development projects, in the form of loans to businesses looking to expand somewhere in the state.


    Those loans are given, with a formula for funds based on the number of jobs created, with other requirements based on whether the jobs are made available to those with low-to-moderate incomes.


    The beauty of the CDBG-ED program is that the low interest loans are repaid to a local governments, which then places those monies in a revolving loan fund which, again, can be loaned out to other businesses looking to upgrade and expand.
    That money retains the same requirements on job creation, as well as working to increase and retain jobs for low-to-moderate income residents, and requires the local government to report regularly on how successful the loan programs are, and how active the accounts are.


    Grant County has received nine CDBG-ED grants over the years, and then reloaded that money 44 times. There were two loans that had to be written off, totaling $100,000, but overall, the county program has a total of $1.01 million in loans and assets.


    Brisbois stated that along with tax-incremental finance districts, the revolving loan funds are one of the few things available to local governments for economic development.


    Originally, municipalities were also able to apply for funds, until the state changed things to only allow counties to handle revolving loan funds. Boscobel, Cuba City, Muscoda and Potosi each have funds that are active.


    Muscoda’s fund actually dwarfs the county program, having $1.5 million in its program.


    “Muscoda would not be where we are without that loan program,” Muscoda Village President Dorothy Hackl said of the revolving loan program, which just loaned funds to a cold storage facility recently that created six jobs.


    Grant County Board Chair Robert Keeney felt that the county had handle the program wisely - reloaning the money again and again while only having two bad loans over 44 in 20 years.


    “We have used it wisely and appropriately,” Keeney said of the program.


    “Why are we copycatting Illinois?” Keeney asked about the proposed program, stating that he hoped that the proposal would not go through. If it did continue, Keeney did not think the county would pay off the loans to the state, and instead just hand them over to them to process.


    While the fear of the Federal Government looking to take the money back was stated by state officials throughout their presentation, Brisbois did  not think HUD would come after the local funds.


    Brisbois recently met with a federal employee that deals with the CDBG-ED program, and during a tour of a business helped by the program, the HUD official was touting that a would-be project apply to the current CDBG-ED program.
    To rectify the issues of local fund programs not being in compliance, Brisbois noted that the state could collect all money above the cap levels to help get the program into compliance.


    Brisbois admitted that there are a number of communities and counties who are not running their revolving loan funds efficiently, and in certain sections of the state, money languishes in accounts instead of being loaned out.


    Why was this the case? Brisbois pointed to three different possibilities. The first is some revolving loan funds are holding on to their funds because of the idea some big project will need all the money. Another thought was that some programs are very conservative with approvals, not wanting to risk the funds. Finally, Brisbois thought that another problem was some areas were not marketing their available funds effectively, thus businesses do not know its an option.
    “A lot of the money is just sitting there,” Brisbois noted.


    However, he did not feel that the feds were getting ready to come in and take local fund programs. Brisbois recently met with a federal employee that deals with the CDBG-ED program, and during a tour of a business helped by the program, the HUD official was touting that a would-be project apply to the current CDBG-ED program.


    Brisbois was also skeptical of one of the ideas floated by DOA staff during the June 13 webinar - projects for Community Development Organizations (CDOs) that would mirror the Rural Economic and Area Development Initiative (READI).


    “READI is the pathway we would look to,” Pawlisch said of the idea.


    The problem with READI is that no application have been approved since it began two years ago, according to Brisbois.


    Brisbois noted that part of the problem was limited to the fact that READI projects must have two components - business help and housing for employees - had to be done in concert with one another. Also under READI, the housing component can only help in rehabilitating existing homes, not new construction, further limiting what could be done, especially in southwest Wisconsin. Brisbois is a part of Prosperity Southwest, the regional economic development organization that is one of only seven certified CDOs in the state, and he noted the program is a difficult one to write an application for.


HUD says its not them - Money over cap not much compared to program

    More information continues to come in on the state’s plan to eliminate local revolving loan funds, with the federal agency that started the program stating that they did not come up with the proposal that is currently under review.


    US Senator Tammy Baldwin had contacted the US Department of Housing and Urban Development (HUD) this past me on behalf of Green County, which was concerned about possible changes to the community development block Grant/economic development program.


    The program is where local revolving loan fund are created. In June, the Wisconsin Department of administration proposed shutting down the program and turning the revolving loan fund money into one time grants to be given for programs which add jobs, or clean up blighted areas.


    In a response letter to Baldwin’s inquiry, Field Office Director Dale Darrow responded, stating that the state , as the overseer of the program, must make sure the funds and the programs are in compliance.


    Darrow goes on to say that there are issues with some of the funds handling or properly reporting the use of the funds, and even sometimes utilizing the CDBG program for new funds before existing monies have been utilized.


    As for the proposal of eliminating local revolving loan funds, Darrow went on to say its the state which deals with how the program corrects any issues. “The State of Wisconsin, not HUD, will determine if units of local government will be required to return CDBG funds or program income generated from CDBG funds held in revolving loan funds to the State of Wisconsin,” Darrow responded to a question. “The State of Wisconsin must have requirements in place to ensure that CDBG funds and program income generated through use of CDBG funds comply with HUD requirements.”


    The proposal has come under fire from local governments and economic development groups who feel the program has been a tool in creating jobs.


    Wisconsin Economic Development Association expressed appreciation for the thoughtful design of the proposed CLOSE program to address concerns raised by HUD and to provide an avenue for communities to recapture returned RLF funds to advance local economic development projects. However, WEDA’s comments also expressed concern about the abrupt shift in policy under CDBG-CLOSE and what the long-term impact will be on economic development in Wisconsin.


    There are 133 locally-held revolving loan fund programs across the state of Wisconsin, with $105 million in assets. Of those, 37 funds have cash on hand that exceeds cap levels for funds, which is a total of $6,763,179. There is a total of cash on hand of $61.13 million.

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