Feds slam state agencies over use of economic-development money

Feds slam state agencies over use of economic-development money

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Mike Huebsch

Secretary of Administration Mike Huebsch

A federal agency has ordered the state to improve the way it handles economic-development money from the U.S. Department of Housing and Urban Development.

In a strongly worded Aug. 12 letter to Department of Administration Secretary Mike Huebsch, federal officials said two state agencies failed to follow federal law and their own policies in issuing economic development grants.

Among the findings:

  • The state gave out aid worth $20,000 per job created to Kapco, a company with a plant in Polk County — twice as much as its own policies allow.
  • Officials failed to check the financial soundness of two companies receiving $1.4 million in federal grants.
  • Eleven out of 20 loans using Community Development Block Grant funds awarded since Jan. 1, 2011, are "forgivable," despite the fact that the state's own policy calls for allowing businesses to get no-payback loans only in "extraordinary circumstances."
  • Questions remain about an $8.6 million chunk of CDBG funds withdrawn under unusual circumstances late last year.

The HUD monitoring report, obtained by the State Journal, covers activities stretching back to 2007.

DOA spokeswoman Stephanie Marquis said the agency for the most part agrees with the conclusions and the corrective actions ordered by HUD.

"We will continue to work collaboratively with HUD and incorporate its feedback about the program," she said.

Walker announced grants

The criticisms target both the Department of Administration, which oversees the CDBG economic development program, and the public-private Wisconsin Economic Development Corporation created by Gov. Scott Walker that runs it.

HUD said some of the problems resulted from the "hasty" transfer of duties from the former Department of Commerce to the new economic development entity without a formal written agreement. The monitoring apparently was triggered by an announcement in February by Walker that four communities had received $9.6 million in CDBG funding.

"At the time these awards were made," HUD said, "WEDC had no legal authority under the CDBG program to award or administer the CDBG funds."

The federal agency ordered Wisconsin to hire a high-level administrator for monitoring, oversight and compliance, saying DOA currently lacks "adequate staff or experience to adequately oversee ... the new activities that are being undertaken by the WEDC."

Among the most serious findings are that the state failed to perform required underwriting — the proceess of determining the financial soundness of a company — before giving $390,000 to Gilman USA LLC, a machining company in Grafton, and $1 million to Morgan Aircraft in Sheboygan. The aircraft company's website said it is developing a vertical lift technology that "combines the operational advantages of a helicopter with the range and speed of a fixed-wing aircraft."

In the case of Gilman, "WEDC staff indicated that the underwriting process was skipped in order to accommodate the business' timeline," HUD said. "In the case of Morgan Aircraft, WEDC staff indicates that an updated underwriting was performed, but not placed in the file. HUD staff requested a copy ... but it has not been provided."

Responded Marquis: "Underwriting should be done prior to issuing a grant. In response (to the HUD report), the state has implemented a stringent policy for new project requests."

In the case of Kapco, a metal fabricating company, HUD questioned both the per-job cost of the $3 million loan to create 152 jobs at its Osceola plant — $20,000 versus the $10,000 "maximum" set in state policy — and the fact that the loan is forgivable.

"The state's guidelines indicate that forgivable loans are only provided under extraordinary circumstances, however no documentation of a qualified circumstance was observed in the project file for Kapco," HUD said.

Marquis responded that Kapco's loan "may be forgivable only if Kapco achieves this goal" of creating 152 new jobs, at least half of them occupied by low and moderate-income workers.

$8.6 million withdrawn

Marquis also said the agency is "carefully reviewing" records of the withdrawal of $8.6 million in CDBG funds by a former WEDC controller on Dec. 27 reportedly to pay for projects in 2011.

HUD said the transfer was made "without any approval from DOA" by an unnamed controller "on the last day of employment as the WEDC controller."

Marquis said once the records are compiled, the state will notify HUD so it can review them to ensure the funds were spent properly.

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