Concept
The Federal Stimulus Package has portrayed a focus on construction jobs and public works projects that will create immediate, but temporary, employment during construction of these facilities and infrastructure. The infrastructure programs are viewed as essential by the various jurisdictions that are proposing them but once the projects are built the construction based employment will end as will the funding provided by the stimulus package.

Human service and educational projects that are being proposed can be justified as a method to fill budget holes and provide necessary services but no long term residual or sustained income sources will be developed by these projects to continue the process of rebuilding the industrial sectors for long term job creation after the money has been spent.

There is growing concern that some programs that are being considered will not have resources to continue the programs once the stimulus funds are exhausted and continuation of these programs will add to the budget deficits in future years.

The Federal Stimulus Package may provide an opportunity to create long term financing and economic development vehicles that will survive the construction of the infrastructure, reduce the state budget deficit, refund essential support staff in WI Commerce and Revenue, and provide finance mechanisms that are accessible and affordable.

This proposal is designed to create a lending vehicle originating from a combination of the federal stimulus package and TARP funds that will generate an income stream to help reduce the state budget deficit and contribute to the economic development process on the local level where job creation takes place in Wisconsin. This proposal also is designed to utilize existing agencies, local economic development organizations, and finance and development resources that have a history of success in Wisconsin.

A basic premise of this proposal is that the State of Wisconsin would utilize a combination of stimulus funds, Troubled Asset Relief Program (TARP), and TARP Guarantees to create a long term revenue stream that is not dependent upon income, real estate, or sales taxes generated in Wisconsin.

The challenge for Wisconsin is to utilize a portion of the stimulus package coupled with a new approach to the TARP funds for long term income generation that facilitates infrastructure programs based upon job creation by stable and growing companies over a number of years; and exercise a level of patience to allow the program to get established over the next 12 months, rather than spend down the funds immediately on limited term budget fixes that do not sustain growth in the Wisconsin economy.

In Economic Development terms; empowerment is not the ability to force a person’s will upon another. Empowerment is the ability to act.

Background
A number of companies in the state have debt through institutional lenders generally defined by the media as “Wall Street”. As an example, an Oconto County industry has $65 million in debt issued by Goldman Sachs at 11.9%. The debt is dragging the company down and unless a substitute lender is identified the company will close and 100 jobs will be lost. A planned $150 million expansion that could create 200 jobs, with investments in machinery, buildings, and processing will be canceled. At the present time the company has purchase agreements for 100% of its output for the next 7 years. The business utilizes recycled paper as its primary raw material. No virgin wood stock is used in their process and the company is a “green” manufacturer.

The company is working with WHEDA, SWIB, OCEDC, and their financial consultants to identify replacement financing, but traditional sources within the financial networks don’t appear to be viable options to the extent necessary.

The Process: While the following discussion may be oversimplified the intent is to describe a concept, not establish operational procedures.

Needs Analysis
Local economic development agencies and WI Commerce Area Development Managers can assess the extent that financing sourced by lenders eligible to participate in the TARP program exist in a short amount of time through a polling process. These agencies are familiar with the local industries and financial institutions through retention programs and their regular contact with the companies. Not all companies that utilize institutional debt will be in jeopardy and not all institutional debt will be viewed as non competitive. A standard of measure needs to be established to target appropriate companies. In the interest of efficiency, this process is best accomplished by the local economic development organizations (EDCs) rather than regional marketing groups or the Regional Planning Commissions (RPC) who would rely on data gathered by the local EDCs. The RPCs and professional associations such as the Wisconsin Economic Development Association (WEDA) could be enlisted to distribute information and data base formats. The RPCs or WEDA could be engaged to prepare the data collected in a uniform format. The time necessary to accomplish this task is approximately 45 days.

Financing/Bonding Program Development
WHEDA, the Wisconsin legal community, municipal financial consultants such as Ehlers & Associates, and bond underwriters have the necessary parameters of bonding established. The formats of some of the programs need to be adjusted to work within the TARP program and modify the Business and Industry Bond program such that lenders are not automatically required to purchase the bonds due to the TARP program requirements and the current lending climate.

WI Commerce has the policies and procedures in place through the CDBG-ED program for direct lending via local units of government Revolving Loan Funds (RLFs). Infrastructure grants to communities can follow the procedures of the CDBG-PF and CDBG-PFED programs. WI Commerce has a reporting and monitoring system of local RLFs in place. Other state agency programs such as the WisDOT Transportation Economic Assistance (TEA) program could be utilized for additional leveraging of funds, program format, and documentation of job creation.

Capitol Injection in Infrastructure Grants and Loans
The CDBG-PFED and TEA programs are under funded and have a maximum state participation rate of $5,000 per job created per program for infrastructure construction. CDBG-PFED is funded by repayments of CDBG loans to businesses in communities that have reached their RLF fund retention caps. While the program provides essential grants to local communities, use of CDBG loan repayments for infrastructure development reduces the amount of non Wisconsin tax sourced funding that would otherwise be available to WI Commerce for additional lending to growing companies that are creating employment in the state. The state stimulus package could be used to establish higher participation rates in order to upgrade local infrastructure necessary for ensuring “community preparedness” necessary to provide sufficient land, utilities, broadband, and transportation networks and not diminish the lending base within WI Commerce.

Example: A project recently completed in the City of Gillett utilized a combination of TEA and CDBG-PFED to relocate a road and utilities to facilitate an approximately $4.5 million expansion of Seneca Foods. The $5,000 per job limit restricted grant amounts to be only 8% of the total municipal investment that was necessary for the road and utility relocations and upgrades to the municipal well and water distribution systems. Prior to that project, the City would have needed to cut off the water supply to the food processor in order to combat a major fire. It was fortunate that the City was able to incorporate TIF based borrowing and DNR “Safe Drinking Water Loan” funds to accomplish the project. In this case, the WisDOT and CDBG funds were the critical final piece to put the project in place. Higher participation rates of the TEA and CDBG programs would extend the City’s ability to utilize the TIF program for other local infrastructure projects that have been put on hold pending funding availability.

I. The Wisconsin Plan-Wisconsin Intermediary Lender Program
The State of Wisconsin has developed a number of financing and bonding programs through WHEDA, and the Department of Commerce. Recently WHEDA staff has suggested that the WHEDA bond programs have been stagnant and WHEDA has experienced difficulties in selling bonds that has impacted residential lending programs and the Business and Industrial Bond and financing programs.

Under this proposal the State of Wisconsin would act as an intermediary lender through the TARP Program. The State of Wisconsin would develop a lending/debt purchase program to substitute the higher cost institutional Wall Street financing with state issued debt sourced through and guaranteed by the TARP program. The state would secure the loans through the collateral currently pledged by the loan clients and additional security for the State issued debt could be provided under the TARP guarantee program.

Wisconsin would pay the obligation back to the U S Treasury at a rate of 1% interest or the negotiated guarantee fee as specified in the TARP Program. The debt should be structured to be non-recourse to the State and the U S Treasury would rely on the original credit instruments for security plus other provisions of the TARP Guarantee Program.

Wisconsin issues new debt instruments to replace the institutional debt at a 4% to 6% rate that would be more conducive to business operations and consistent with the state’s bonding yields or interest it charges CDBG-ED loan clients. Local economic development agencies could be engaged to service and monitor the loans due to their close proximity and familiarity with the companies. Many of the economic development agencies across the state have staff that have been trained in credit management and operate a number of financing and revolving loan programs through state and federally sourced lending programs.

Assumptions:

II. Allocation of revenue stream
The proceeds of the interest earned on the WILP could be allocated as follows:

A.State operations: 25%; $5,000,000

Restrictions should be applied to the use of a portion of the funds that would be used for state operations. Restricted or special purpose fees and/or income generated by departments, which have been reallocated by the legislature, must be returned to departments that are critical to recovery of the Wisconsin economy.

Example: Department of Commerce
In 2007 Commerce reported that department staff had been reduced through attrition and staff cuts. In prior years Commerce had the ability to respond to an industrial finance prospect and the community it was located in within 30 days. Currently that response time has been extended to more that 120 days. Again, communities can not wait three to six months to respond to an industrial or commercial development opportunity if Wisconsin is committed to economic recovery.

Recommendations:
1. Legislative action should be taken to provide a warranty to municipalities that safeguards that fees charged to municipalities will be available to accomplish those tasks that are supported by said fees.
2. One-time allocation of $500,000 dollars to the Department of Revenue specifically to return fees diverted by the legislature to return TID review and approval staff to optimal levels.
3. Allocate $2.0 million annually to the Department of Commerce to support economic recovery efforts within the Bureau of Community Development and the Bureau of Community Finance
4. Allocate $1 million annually to fund “Lean Manufacturing” format analysis similar to the Wisconsin Extension Manufacturing Partnership in local secondary educational systems that have less than 98% graduation rates and the University of Wisconsin and the Vocational Technological College systems.
5. Allocate balance of the $2.5 million dollars annually to offset budget deficits within state government that are devoted to providing equipment to teach advanced manufacturing education in secondary schools, technology tracts in secondary schools, alternative energy grants, and community preparedness projects.

B. WI Commerce Loan and Grant Programs-65%; $13,000,000 annually
1. Allocate $3 million annually to the Wisconsin Development Fund as venture capitol or loans to stimulate WI Commerce participation with Wisconsin firms, that employ advanced manufacturing processes, explore new technologies, develop value added agricultural and forest products, and energy production from agricultural and forest waste products. Royalties, income earned on investments, and interest on loans should be returned to the Wisconsin Development Fund.
2. Allocate $2 million annually to the Customized Labor Training Program that supports companies participating in programs suggested in section B (1) above.
3. Allocate $5 million annually to the CDBG-PF and CDBG- PFED programs to support local infrastructure development needed to facilitate industrial expansions with a participation rate of $10,000 per full time job that pay a minimum of $9.75 per hour with health benefits.
4. Allocate $3 million annually to the CDBG-PFED program for communities within counties with populations less than 100,000 for infrastructure development of water, sewer, roads, and medical facilities.
5. Modify the town TIF legislation in counties with less than 100,000 in population to allow Towns or counties to establish TID programs with the same project eligibility as cities and villages.

C. Local Economic Development Projects-10%-$2,000,000
Allocate an average on $27,000 per county to offset local tax levy expenditures that are devoted to CBED style economic development initiatives and industrial retention programs.

III. Possible Benefits of the Wisconsin Intermediary Lending Program Revenue Stream:

IV. Background on the Troubled Asset Relief Program (TARP)
According to the Thompson Hine LLP website, under the Troubled Asset Relief Program (TARP) the Secretary of the Treasury (Secretary) has broad power to take the actions he deems necessary to purchase troubled assets from any financial institution. These powers include designating financial institutions as financial agents of the Federal Government and establishing vehicles that purchase, hold, and sell troubled assets and issue obligations. The Secretary, however, must consider several specified factors when deciding to purchase troubled assets, including: protecting the interests of taxpayers, providing stability to the financial markets, preserving homeownership, the long-term viability of the financial institution, ensuring participation of all financial institutions regardless of size or other characteristics, assisting retirement plans that hold troubled assets and the needs of local communities.

Financial Institution Means:
Any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, Territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa or the United States Virgin Islands, and having significant operations in the United States but excluding any central bank of, or institution owned by a foreign government.

The Act directs the Secretary to make such purchases at the lowest price that the Secretary determines to be consistent with the purposes of this Act and to ensure that prices paid for assets are reasonable and reflect the underlying value of the asset.

Management/Sale of Troubled Assets
The Secretary will also have authority to manage troubled assets purchased under this Act and to sell or enter into securities, loans, repurchase transactions, or other financial transactions with respect to any troubled asset purchased under this Act. The proceeds of such sales will be paid into the general fund of the Treasury for reduction of the public debt.

Insurance of Troubled Assets
Once the Secretary establishes the TARP program, he is also required to establish a guarantee program for the payment of principal and interest of the troubled assets. This guarantee program is available to financial institutions as an alternative to the purchase program. Any financial institution may request a guarantee and will be charged premium payments. The premium payments will be deposited into the Troubled Assets Insurance Financing Fund and payments will be made from the fund to fulfill obligations under the guarantees. The ability of the Secretary to purchase troubled assets will be reduced by an amount equal to the difference of the total outstanding guaranteed obligations and the balance in the Troubled Assets Insurance Financing Fund.