Iowans Owed $7.5 Million by Companies that Broke Incentive Deals
By Erin Jordan, Reporter
CEDAR RAPIDS, Iowa - More than 50 companies owe Iowa taxpayers $7.5 million they received, but did not pay back since 2003 after breaking contracts to deliver jobs and capital investment, a Gazette review shows.
The debts make up about 11 percent of all cash assistance paid by the state, which often trumpets the news when a company decides to locate or expand in Iowa.
When those companies fold or don't deliver the jobs, Iowans don't hear a peep.
"They had big plans," Randy Van Winkle said of his former tenant, Vivakor Inc. The Coralville company received $150,000 from the state in 2008 to market cryogenic freezing containers. Five years later, the start-up has dried up without paying its debt.
Among the Gazette's findings:
State officials tout their process for vetting start-ups, but Cedar Rapids firm AgSugar International got $250,000 for technology that didn't work. Democrats say not enough research was done on an Egyptian company offered more than $100 million in incentives to build a fertilizer plant.
Companies that can't pay their debts sometimes depart quietly, leaving the state little recourse for recouping cash.
Firms that fail to create at least half of their promised jobs usually must repay all incentives, but Wells Dairy, in LeMars, was allowed to keep some incentives without meeting that threshold.
The Iowa Economic Development Authority expects to offer more than $120 million in tax breaks and $8.3 million in direct assistance for the fiscal year that ends June 30. Cities and counties provide further incentives, such as tax-increment financing or reduced property taxes.
Companies that have received incentives from Iowa since January 2011 have promised to spend $5.4 billion on buildings and infrastructure while creating 15,000 jobs, according to the economic development group.
Risk comes with any investment, but some Iowans wonder whether potential rewards of business incentives are worth diverting that money from public services.
"The private sector is for taking risks," said David Swenson, an Iowa State University economist. "The public sector is for protecting the public's money."
Sweetening the pot
For decades, Iowa has been sweetening the pot for companies considering expanding or relocating here. Between 2003 and June 30, the state approved more than $1.5 billion in tax credits and cash assistance for more than 920 projects, according to data provided to The Gazette as part of an Open Records request.
"Incentives have made a difference," said Tina Hoffman, economic development spokeswoman. "It's a global economy we're in and incentives help us to push the scale in our favor sometimes."
Just because the state offers incentives doesn't mean companies use them. One-quarter of awarded tax credits are claimed, which amounts to an expected $104.5 million this fiscal year. Companies don't get tax credits until after making a financial investment, such as building new headquarters. Owners may choose not to tap incentives if they have concerns about meeting their contractual goals.
Iowa disbursed $67.6 million in cash assistance between 2003 and June 30, most in the form of low-interest or forgivable loans. Of that, nearly $12 million went to companies that did not fulfill their contractual obligations for job creation and capital investment, records show.
These companies still owe a combined $7.5 million, which is about 11 percent of the disbursed cash assistance.
Most of the companies in collections are small to medium-sized firms that couldn't execute their business plans or were hit hard by the economic recession. At least one, Peregrine Financial Group of Cedar Falls, fell to fraud.
PFG founder Russell Wasendorf Sr. was sentenced last month to 50 years in federal prison after stealing $215 million from customers over 20 years. Included in the lost money is $350,000 in cash assistance the state provided for PFG's $24 million headquarters.
Even good ideas can fail
Another company that owes Iowans is Pohaku, which means "rock" or "foundation" in Hawaiian.
The database-marketing company founded by Iowa native Wendy Gady received a $100,000 loan from the state in 2004 to set up shop in Washington, Iowa. The company looked like a winner, said Curt Nelson, president and CEO of the Entrepreneurial Development Center in Cedar Rapids.
"Wendy was a very successful person in that industry, in advertising," Nelson said. "She had clients, she had the capabilities and skills to make this work."
But Gady wasn't able to land enough customers without extensive travel, Nelson said.
In March, a judge ordered the company to pay the state $49,516, plus interest. West Chester Savings Bank, in Washington, has a $191,300 judgment against Pohaku for another unpaid loan.
The Gadys, who now live in Hawaii, could not be reached with phone numbers and email addresses available online.
About half of small businesses fail within five years, according to the U.S. Department of Labor. Despite the risk, offering business incentives to start-ups like Pohaku is a good investment for Iowa, Nelson said.
"We expect to lose three out of 10," he said. "The ones you invest in pay for the ones you lose."
Balancing risk and reward
Wells Fargo, IBM and Google are among companies to secure multi-million dollar packages from Iowa since 2003, while start-ups were more likely to get $500,000 or less, the data shows.
The state works hard to vet new companies, Hoffman said.
Start-ups are paired with mentors who talk them through their business plan before presenting to the state's Technology Commercialization Committee. That group, composed of investors and industry experts, evaluates the commercial potential of the new idea.
TCC-approved projects go forward to the economic development authority board for review.
Lawmakers have said economic development officials didn't do enough research before offering Egyptian firm Orascom Construction Industries up to $109 million in incentives to build a fertilizer plant in Lee County.
State officials bragged about beating Illinois for the $1.4 billion investment and news reports indicated Illinois lawmakers were talking with Orascom. But officials with Illinois Gov. Pat Quinn's administration say they backed off after seeing the size of Iowa's offer.
"To be clear -- the state never put an offer on the table. We recognized early on that Iowa's bid was excessive and we were not going to engage in a bidding war," Marcelyn Love, communications manager for the Illinois Department of Commerce and Economic Opportunity, told the Quad-City Times.
Iowa Sen. Joe Bolkcom, D-Iowa City, believes Orascom had no intention of building in Illinois because the company was approved for up to $300 million in federal financing to build in Lee County, which suffered in the 2008 floods.
Orascom broke ground on the plant in November and is expected to open in 2015. The firm has promised to hire 165 people.
AgSugar International secured $250,000 from the state in 2011 by promising to hire 24 employees to assemble machines used in ethanol production. When tests showed the technology didn't work, the company changed its focus to LED office lights. The state settled with AgSugar, now Vertecra, in June for the Cedar Rapids-based company to repay the $250,000 over 30 months.
Getting Iowa's money back
The state includes "clawback" clauses in most contracts so officials can recoup money from companies that don't create the required number of jobs at specified salary levels. A compliance team files lawsuits or pursues collections.
In general, if a company creates less than half of the promised jobs, it must repay all of the incentives, Hoffman said.
Wells Dairy was able to collect $983,000 of its approved $4.4 million in incentives for expanding its headquarters in LeMars because it created 52 of the 126 required new jobs, according to a January settlement.
Recouping money from smaller firms is harder. "We do have a couple of examples where we are unable to collect," Hoffman said.
Vivakor Inc. came to Coralville in 2008 promising to work with Iowa manufacturers to commercialize products used for rapid freezing and thawing of biological specimens. The state gave the company a $150,000 Demonstration Fund grant.
CEO Tannin Fuja leased a 2,900-square-foot lab at VJS Executive Park in July 2008, manager Van Winkle said. Fuja came with seven employees, lab equipment and a large cryogenic freezer with temperatures below -238 degrees Fahrenheit.
"He thought they had the next big thing," Van Winkle said.
But the company started running behind on its rent, Van Winkle said. Fuja said the company was waiting for renewal of a federal grant.
"Five to six months later, I was told they didn't get their grant renewed," Van Winkle said.
Vivakor's staff dwindled until it was just Fuja. Eventually, he left too.
When the state tried to contact Vivakor in October 2011 about a late report, the notice was returned because Fuja had left no forwarding address, court records state. A process server who tried to find Vivakor in Irvine, California, also struck out.
A Polk County judge ruled in December that the company had 10 days to take action or default.
Vivakor Inc. has a website that describes itself as a "technology holding company" with special interest in cryogenic preservation. Several messages to this firm's phone number have not been returned.
Some question expansion of incentives
Economic Development Authority Director Debi Durham asked the Iowa Legislature last month to raise the yearly cap on tax credits from $120 million to $185 million. Iowans could lose another $1 billion in business investments this quarter without the credits, she warned.
But spending more public money on incentives could cause losses to schools, roads and conservation efforts – which can also create jobs, Swenson said.
"We're robbing the social Peter to pay the private-sector Paul," he said.