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Efforts to attract jobs can pop under pressure

Towns provide incentives, businesses break the deal

Donnelle Eller

Des Moines Register

October 22, 2006

[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]

In 2003, a group of investors promised to bring up to 500 jobs to the former Archway cookie plant in Boone - a pledge that would net investors a $500,000 forgivable loan.

Two years later, the Boone deal came to an end after a federal indictment in Arkansas accused one of the group's principals of taking state economic development money with no intention of creating new jobs. One of those developers - Robert Statman - is still involved with efforts to restart the bakery.

"We dissolved ourselves from it" after learning about the charges, said Darrell Rensink, Boone's economic development director. Robert Fisher, who leads Boone's Future, a private economic development group also involved in the project, said the deal fell apart before the indictment. "We deal in numbers, and they just didn't have them."

Boone was lucky. Pressured to add new jobs, some cities and towns across Iowa are left with debt, empty buildings and roads leading nowhere after taking big risks on companies that failed to meet promises.

Since 2004, state economic development leaders have written off $9 million in debt because of deals gone bad and are still pursuing $2.8 million from companies failing to make good on development pledges. The state has successfully collected about $834,000.

Many of the state's failed deals are older - some dating back to the 1990s - but they also include some recent high-profile Grow Iowa Values projects, such as Phytodyne, an Ames-based biotech company that's now bankrupt, and Brain Fingerprinting, a company that was based in Fairfield and moved to Seattle. Brain Fingerprinting has agreed to repay the $95,000 owed the state over two years.

The state hasn't calculated the overall performance of its economic development efforts, but says individual programs - such as money dedicated for entrepreneurial and rural development - have an 85 percent and higher success rate. By comparison, the national success rate of banks, which are much more conservative, is around 99 percent, according to the American Bankers Association.

Michael Blouin, Iowa's economic development leader, said state and local leaders have to be prudent about their investment but not so cautious that they miss out on good development possibilities.

"For a real growth strategy, you have to be willing to help Iowans take an idea and make it a reality," said Blouin. He points to corporate pledges to create or retain 30,000 jobs and invest $7 billion in new buildings and equipment through Grow Iowa Values, the state's $50 million annual economic development program created in 2003. Those projects are expected to generate nearly $1.5 billion in new taxes for state and local governments over 10 years after incentives are subtracted, Blouin said.

Tom Van Maanen, city administrator in Rock Valley, said the state, cities and towns have to take risks to attract new jobs. "You have to grow or you die. There's no middle ground.

"About every community can point to something that didn't work out the way it was hoped, for 100 different reasons," Van Maanen said after seeing a deal for a new plant - and 170 jobs - collapse.

Taking Precautions

Officials say local and state leaders take as many precautions as possible to ensure the jobs are created - and business investments made - before public dollars are invested.

For example, leaders can require businesses to meet certain goals - like attracting private investment - before they can draw down public loans or grants.

Mark Cory, a bond attorney with Ahlers & Cooney in Des Moines, advises cities to use tax rebates instead of upfront grants or loans. "Then the developer has to put in the investment - create a taxable value - to get a benefit," he said. "If they do nothing, they get nothing."

But Charlie Lynch, a development finance officer for Arkansas' economic development agency, said it's difficult for state and local governments to protect themselves if developers have no plans to make good on their promises.

"Whether it's Arkansas or Iowa, we all do what we can to improve our residents' livelihood - to give them a better future. But when someone is out to get you, it's tough to head off," said Lynch, whose agency sought an FBI investigation into the bakery investors because "we don't want these people to do this again."

'A big win' lost

Rock Valley, a town with 3,000 residents, has a vibrant economy, says Van Maanen, the city administrator.

Rock Valley's 11 metal fabricators have added more than 50 jobs between them in the past year and are still expanding, he said. "We've been seeing fantastic growth," said Van Maanen.

Still, when Cedar Rapids-based American Pallet Leasing said in 2004 it would invest about $8 million in a new factory and create 166 jobs, it was hard not to be excited. "It would have been a big win for community growth," said Van Maanen.

The city pushed ahead plans to buy 40 acres for an industrial park and built a road into the park.

Two years after the project was announced, the city has a new road and the company built a 25,000-square-foot building, but it sits empty. The city has to repay the state Department of Transportation a portion of the grant it received - $150,000 - since the economic development project never materialized. The city is unsure what the company's plans are for the building.

No one answered American Pallet's phone in Cedar Rapids and its parent company had an answering service that could only say the business "is moving." Still, nothing has been lost as far as Van Maanen is concerned.

The state kept its $400,000 in incentives and the city still has an industrial park that it will put to good use.

"We have a lot of good things happening," said Van Maanen. "We were in a good position to take a chance."

Another chance

The Iowa City-Cedar Rapids corridor has seen hundreds of thousands of dollars invested in growing businesses that have created hundreds of new jobs.

One well-known blot on its economic development record is Rudi's Organic Bakery, a Colorado-based company that operated in North Liberty for about six months before closing in 2002. Mark Seckman, president of Priority One, an economic development group in Cedar Rapids, said Rudi's expansion failed because it was unable to establish new sales markets for its Iowa products. Backed by an interest-free state loan, the Iowa Agricultural Finance Corp., a private group, invested $7.9 million into Rudi's, which has since been sold.

Officials with the private finance group did not return Register phone calls about whether the investment was recouped.

Rudi's, said Seckman, "expanded too quickly." Another young company, Dare Devil Shells, a frozen pizza crust maker, expressed an interest in the plant but "it never had the financial wherewithal to get off the ground."

Economic developers feel much more confident about the newest occupant: Michigan-based Cole's Quality Foods.

The maker of frozen garlic bread products is investing about $12 million to purchase and refurbish the plant to make a new product - mozzarella-filled breadsticks called Cheesesticks. The plant has begun hiring workers, initially about 30, but will eventually grow to about 60, said John Sommavilla, Cole's president.

The company, based in Grand Rapids, is moving and expanding its current Cheesesticks production from Muskegon, the company's primary food-processing facility.

Seckman said Cole's is different from the Rudi's deal: It has demonstrated a sales market for the products.

Cole's plans to sell its Cheesesticks to "club chains," which Sommavilla confirms includes Wal-Mart's Sam's Club. The company has been unable to promote its cheesy breadsticks, chosen as a top 10 new frozen food product, because it lacked capacity to meet demand, said Sommavilla.

The most important difference between this project and earlier ones, said Sommavilla: "We're not spending the people of Iowa's money.

"We're very committed to this project," said Sommavilla. Cole's chose North Liberty because of the plant's features, easy access to sales markets and grain supplies, and for its "Midwest mentality," he said.

"We feel comfortable that this will be a good item," said Sommavilla, adding that Cole's is already looking at more Cheesesticks product lines. The plant is expected to be operational before year's end.

Betting on a bakery

Boone, Ia., and Sherwood, Ark., had a lot in common. Both cities were losing long-time bakeries - Sherwood lost the Koehler Bakery in 2000 and Boone lost Archway cookies in 2001 - when investment groups emerged, saying they could keep the plants operating.

Despite the hope that the two groups offered, neither city has seen its bakery restart, although the new owner of the Boone plant expects production to begin soon.

In the Sherwood project, the region's U.S. attorney's office charged three California investors - Gary Kleinman, Joel Rund and Statman - with setting out to defraud Arkansas of about $4 million. Instead of buying equipment, the federal government alleges in a lawsuit that the men spent the money on themselves and gave it to family and business associates.

Kleinman and Rund each pleaded guilty to one count of conspiracy to commit wire fraud. They face up to six years in prison and must make restitution.

Statman, who is working to reopen the Boone plant with a group of Wisconsin investors led by Richard Loefgrin, declined to comment on the charges. Loefgrin said he's confident that Statman will be exonerated of the charges. A trial is expected next summer.

In the meantime, Loefgrin said his investment group has put about $2 million into renovating the plant, which should be operational in the next couple of months, first making waffles and then adding other baked products, such as cakes, pastries and breads.

The plant will employ 30 to 50 people initially, he said, growing up to 100 as production is ramped up.

Loefgrin said his long-term plans are to add 225,000 square feet to the 80,000-square-foot plant.

Boone officials said Loefgrin has made no requests for financial incentives. Any future request would undergo close scrutiny, said Rensink.

Lynch, the Arkansas official, said economic development leaders can only do so much to protect themselves and their communities, since not all financial information can be confirmed and companies can provide false information about meeting performance goals.

"Unfortunately, there's not a clearinghouse that you can call and say, 'What do you know about Joe Blow?' " said Lynch.

Taking the risk
Local and state officials say they work hard to weed out economic development deals that could be bad risks.

Michael Blouin, who heads the state's economic development agency, said he believes all the businesses the state has backed have worked in good faith to meet their promises.

Projects can fail for a variety of reasons, including changes in the state and national economy and unexpected trouble in the industries the businesses supply.

Here are steps the state takes to protect taxpayers:

DUE DILIGENCE: Public leaders usually receive business plans with confidential financial details such as operations, sales, credit sources and employee pay. State leaders also look at information about competitors and past performance on previous loans. Sometimes state deals also go through specialized groups - such as agriculture - to weigh the proposed business plan. Leaders expect the state to be the last investment in a project and necessary only to make a deal happen.

PROTECTION: Governments often require that they be first in line for repayment if a company defaults. The state also writes explicit contracts that include "clawbacks" requiring that loans or grants be repaid if certain goals are not reached. Local leaders also use tax rebates that are only provided after buildings and offices are constructed. State tax credits also reward companies after they have created jobs or made investment in new equipment or in research and development.

GETTING MONEY BACK: State leaders aggressively pursue repayment and, if necessary, lawsuits against companies that fail to meet commitments.