Having promised to create 250,000 jobs by the end of his first term, Gov. Scott Walker championed a bold strategy: Abolish the state’s faulty Commerce Department and replace it with a public-private hybrid more responsive to business needs.
But a toxic mix of hasty decision-making, competing public and private sector objectives and political pressure to create jobs threatened to undermine the Wisconsin Economic Development Corp. from the start, according to several former employees and top managers who spoke with the State Journal.
Four years in, the experiment to create WEDC offers an object lesson in what can happen when the institutional safeguards that are the hallmark — and to some, the bane — of state bureaucracy are bypassed in pursuit of looser controls on taxpayer money.
The agency’s willingness to hand out $1.3 billion in economic incentives over four years — occasionally without thoroughly vetting the viability of the businesses that received them — illustrated the Republican governor’s “Open for Business” philosophy. It also contrasted with the more austere approach he took to government spending in such other areas as education and social welfare.
Amid a State Journal investigation that found his top aides pressed for a $500,000 loan to a failing company that had falsified its application, Walker in May called for the dissolution of WEDC’s lending programs, which have delivered about $73 million to state businesses.
WEDC’s defenders, including former CEO Paul Jadin, say the handful of problematic awards pales in comparison to the agency’s success stories. Any systemic problems are history, and the more than 100 policy changes implemented since 2013 and an upcoming performance review by a national economic development consultant are righting the ship, they argue.
“It’s clear that the 250,000-job political agenda overshadowed our economic development strategy on a regular basis, and moving to a more apolitical board is a good start to remedying that,” Jadin said.
But even as Walker has removed himself as the leader of the WEDC board, the agency remains under scrutiny as he mounts a campaign for the 2016 Republican presidential nomination while touting his economic record in Wisconsin.
Walker, new board chairman Dan Ariens and CEO Reed Hall, who replaced Jadin, have not responded to interview requests.
Stumbling out of the gate
On his first day in office, Walker, who once joked about tattooing “250,000 jobs” on his Cabinet secretaries’ foreheads, called a special session of the Legislature to create WEDC, which received little Democratic support. The agency officially launched on July 1, 2011.
The agency assumed fewer than half of the economic development programs Commerce operated, hired a mix of longtime civil servants plus new managers with experience in the private sector, and reported to a board made up of lawmakers and volunteers from the business community and headed by Walker.
Although WEDC isn’t a public agency, it is subject to some government oversight, such as the open records and meetings laws as well as a range of state and federal regulations for administering different programs. Almost all of its money comes from taxpayers, but it is exempt from other state laws, which gives it greater operational flexibility.
Former WEDC officials say the new agency faced significant challenges from the outset. New personnel and banking systems had to be created from scratch, some Commerce employees were using outdated computer programs and paper files with company information were scattered in various desk drawers.
“In the private sector, they say it takes two to three years to turn around an organization,” said Mike Klonsinski, WEDC’s first chief operating officer who was hired from the private sector. “Here you had something even more dramatic — moving from a state agency to all of a sudden being an optimized private-like organization. That’s not going to happen in six months.”
The challenge was exacerbated by the loss of many senior Commerce staff who opted not to stay after the battle over Act 10, the landmark 2011 law that severely curtailed the collective bargaining power of public workers, said Todd Jensen, an underwriter for Commerce and WEDC from 1999 until 2013.
One key departure was the employee who oversaw loan collections. Auditors later found the agency wasn’t properly tracking delinquent loans.
“There was nobody there doing this work. We made this clear to the higher-ups, and it appeared that nothing was done,” Jensen said. “The attitude from the beginning was: ‘We’re just here to get this thing up and running and get some good headlines and do it as quickly as possible.’”
Speed, politics factors
Even as it developed new systems and overcame early hurdles, WEDC and other top Walker officials pushed for employees to move quickly to approve economic incentives, which sometimes led to costly shortcuts.
In September 2011, just months after WEDC was formed, Department of Administration officials at the direction of Secretary Mike Huebsch pushed the agency to assist a Milwaukee construction company whose owner had made a maximum $10,000 donation to Walker’s campaign. Within a week, WEDC awarded a $500,000 loan but failed to perform a thorough financial review, which should have revealed the firm erroneously reported that it had not been sued in the previous five years.
Emails and records obtained by the State Journal under the state open records law show Brenda Hicks-Sorensen, then WEDC’s vice president for economic and community development, hustled to get the loan out the door, expediting the normal timeline for cutting a check at the urging of a DOA administrator.
Months later, after Huebsch urged Jadin to have WEDC give the company more money to no avail, Hicks-Sorensen was informed by another employee that the company’s owner planned to repay debt to a luxury car-leasing company with state funds. Yet the agency continued for the next year to seek additional public assistance for the company.
The loan, which has not been repaid even after a successful lawsuit against the defunct company, was one of 28 awards totaling $126 million in the agency’s first two years for which there is no record underwriters wrote up a formal financial review, according to an internal report.
Jadin said he worked with lawyers and underwriters directly in reviewing eight of the top 10 awards on that list worth more than $100 million, so a written review wasn’t needed. Many of the awards were performance-based, so companies would have only received funds if they created promised jobs. “I was not aware of any corners being cut on any of them but, if they were, I was ultimately responsible,” Jadin said.
In another case, first reported by the Milwaukee Journal Sentinel, the agency loaned $1.2 million to clean energy company Green Box, despite the owner misrepresenting his history of litigation on his application.
A warning ignored
WEDC also ran into problems with the U.S. Department of Housing and Urban Development after the Walker administration failed to heed two warnings from the federal agency in 2011 that it needed a signed agreement with WEDC before the agency could administer millions of dollars of federal Community Development Block Grant funds. Previously, the grants were administered by Commerce.
That agreement wasn’t finalized until March 2012, two weeks after Walker announced that WEDC had already awarded $9.6 million to several municipalities. HUD ordered an immediate end to the program and concluded the awards violated federal law because the agency wasn’t authorized to make them.
Jadin said WEDC had continued past CDBG loan practices until agency attorneys advised they were not in compliance with the latest HUD guidelines, at which point, he said, he halted the program and used limited state funds to cover pending awards. He said the bigger problem was that the agency lacked the authority to act as an agent of the state.
“That is a perfect example of things that should have been finalized prior to becoming a corporation,” Jadin said. “As secretary, I was never able to interact with the federal government on one of our most significant programs.”
The Department of Administration ended up taking over all of the CDBG programs.
Doug Thurlow, who worked as a federal grants specialist at both Commerce and WEDC from 1991 to 2013, said political influence at Commerce picked up under Democratic Gov. Jim Doyle, whose administration used $12.3 million in CDBG funds to lure a company to Kenosha County. The deal fell through, and the state had to repay the federal government.
But the problems took on a different dimension under Walker as longtime public sector workers who were sticklers for the rules clashed with private sector managers who were brought in to shake things up. Thurlow said at one point he was reprimanded for taking too long to review company applications for grants that were missing key information.
“In 1991 you could get in trouble for not following the rules, and by 2013 when I left you could get in trouble for following the rules,” Thurlow said.
Thurlow said he raised concerns at WEDC staff meetings about the agency’s use of CDBG funds amid HUD’s warnings but was told by Hicks-Sorensen: “We don’t want to hear what we can’t do; we want to hear what we can.”
Hicks-Sorensen did not return repeated requests for comment.
In one case also the subject of a State Journal investigation, WEDC used CDGB money to loan $686,000 to Morgan Aircraft, which said it was developing a vertical lift-off plane despite lacking experience in the aerospace industry. Before issuing the loan, WEDC failed to conduct a review of the company’s financial status. The loan has not been repaid.
“They were like kids you put in a candy shop,” Thurlow said of the new managers. “They were hired because they had experience in a related field and were all trusted by Republicans. You knew who the real boss was there. It was Scott Walker.”
Hicks-Sorensen, who left the agency in March 2014 and now leads Nebraska Gov. Pete Ricketts’ economic development agency, caused other problems for the agency, according to several letters from economic development officials around the state obtained by the State Journal.
Many complaints involved her efforts to coerce local communities into contributing their pots of CDBG money to a regional revolving loan fund or risk having WEDC cut off additional funds. Alerted to those concerns by the two Democratic lawmakers on the WEDC board, a HUD official responded in an email that imposing a penalty for non-participation in a regional revolving loan fund “would be a substantial concern for us.”