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18 Taxpayer-Funded Loans are Still at Least 500 Days Past Due

Wednesday, August 15, 2012


The taxpayer-funded loan program run by the city of Providence still had 18 loan recipients that were at least 500 days behind on their payments as of the end of July, according to an aging report obtained by GoLocalProv.

Collectively, the 18 recipients owe the city $1,083,563.18.

Of the loans – all but two of which have not been paid in more than two years— 12 were for restaurants, bars or caterers. Another recipient, the Heritage Harbor Corporation, was singled out in a recent report from the Department of Housing & Urban Development (HUD) as potentially being ineligible for its $313,000 loan based on its nonprofit status.

Despite being late on its payments to the city, a $9,209.15 consulting fee was paid to Heritage Harbor from the PEDP on December 15, 2010. HUD has ruled that payment as an ineligible expenditure and the city may be forced to pay back the money.

PEDP Under Fire

All of the loans came on behalf of the Providence Economic Development Partnership (PEDP), a quasi-public agency that is connected with the city’s planning department but is not subject to Providence City Council oversight.

PEDP assistant director Stuart MacDonald did not respond to a request for comment.

The PEDP’s struggles have come to light over the last year after GoLocalProv reported last fall that a quarter of all loans were at least 90 days behind on their payments. According to the HUD report released last month, the agency ran up an “approximately 60 percent” default rate between 2001 and 2011.

In June, the PEDP’s board of directors, which is chaired by Mayor Angel Taveras, voted to write off 29 loans, leaving the city on the hook for more than $2 million. The board agreed to consider write-offs every six months moving forward.

Of the 18 severely delinquent loans that weren’t written off in June, recipients owe the city between $4,633.24 (Tina's Caribbean II) and $312,729 (Heritage Harbor). Records show 14 of the loans are at least 1,100 days behind on payment and two are more than 2,100 days late.

First-term Councilman David Salvatore has been out in front of the effort to increase transparency within the PEDP. Last fall, he called for the Council to have more oversight over the agency. In June, he said the city needs to show more due diligence when it comes to investing in small businesses.

“The difficulties of the economy coupled with the City Council’s fiduciary responsibility to taxpayers, give good reason for expanded oversight surrounding economic development loans,” Salvatore said. “The City Council’s committee on finance is committed to exploring oversight resources in the months to come.”

Mazze: Too Much Politics

But critics of the PEDP say that while there are plenty of success stories that came from city-backed loans, all too often the loans went to those who were politically connected. Over the weekend, former Mayor and Council President John Lombardi said “political patronage” dominated the PEDP over the last decade.

For Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island, the PEDP’s struggles are part of a disturbing trend that has developed with government-funded economic development programs in recent years.

“In the last few years we have learned that a number of loan and loan guarantee programs offered by the state and Providence, awarded loans and guarantees for political rather than business reasons,” Mazze said. “Some of these loans are now in default or bankruptcy. Throughout this period, there has been no transparency or accountability while many political people deny that they knew anything about the loan or guarantee.”

Mazze said both the city and the state need a more robust information system that monitors these loans and programs and holds the borrower responsible for reporting on a regular basis their payments. In the PEDP’s case, such a reporting system was not in place.

In its report, HUD suggested the city lacked “adequate oversight” over the PEDP, which kept shoddy records and ran up more than $1.5 million in expenses that were not supposed to be paid for with federal Community Development Block Grant funds.

Mazze said borrowers should be furnishing current income statements, cash flow documents, balance sheets and notices of any change in management to the city or state and suggested a better system needs to be developed to help the public understand the cost and benefits of these programs.

“These benefits should be the creation of new jobs, the retention of existing jobs and/or the growth of in-state or in-city Rhode Island businesses,” Mazze said. “At least twice a year the state and Providence should report on the status of each loan and more specifically if the loan met the targets and conditions that were required for the loan and/or guarantee.”

HUD Says PEDP is improving

Still, there is some upside for the agency. In its report, HUD credited the city for correcting some of the PEDP’s flaws since James Bennett was named the city’s Economic Development Director last year.

“In general, we found that city staff has made progress in strengthening the financial management systems for PEDP,” the report states.

During a June Board meeting, Bennett suggested he would like to apply for an additional $25 million in HUD for the agency.

Mazze had just one piece of advice:

“It is critical to keep politics out of lending,” he said.

Dan McGowan can be reached at [email protected]. Follow him on Twitter: @danmcgowan.


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