State Loan Program That Rick Perry Touted Had To Be Bailed Out
Gov. Rick Perry has anchored his presidential campaign to his claims of creating jobs.
With no business record of his own, Perry must contrast his ability to create jobs with public money against the records of two front-runners, Mitt Romney and Herman Cain, who tout credentials as private employers.
His GOP opponents already have sniped at his gubernatorial record, saying Perry inflates his job-creation numbers and takes credit for a business climate he inherited. Perry’s efforts to create jobs and spur agribusinesses as the state’s agriculture commissioner during the 1990s might provide even more fodder for the opposition.
Over his eight years as Texas’ farmer-in-chief, Perry oversaw a loan guarantee program with so many defaults that the state had to stop guaranteeing bank loans to startups in agribusiness and eventually bailed out the program with taxpayer money.
The state auditor panned Perry’s claims of creating jobs and criticized Perry and his fellow board members at the Texas Agricultural Finance Authority for not following their own lending guidelines.
In some instances, the auditor said, Perry and the authority guaranteed loans to applicants with a negative net worth or too much debt. Citing growing debts, the auditor finally suggested that state officials consider dismantling the program.
Even as the first alarms were sounded, Perry defended the program, saying no taxpayer money was at risk, blaming others and claiming he had fixed it.
It only got worse.
By 2002, Perry’s successor, Agriculture Commissioner Susan Combs, a Republican, stopped making loans as the percentage of bad loans neared 30 percent.
By 2009, her successor, Agriculture Commissioner Todd Staples, also a Republican, asked the Legislature to pay off the loan guarantees with a $14.7 million appropriation. The finance authority could no longer afford the $541,000 to cover the annual interest on the bad debts, almost all of which dated back to Perry’s tenure.
“It’s bad,” Staples told the American-Statesman at the time. “Unfortunately, taxpayers are on the hook for something that happened as long ago as 1987.”
In effect, Perry, as governor, signed his own government bailout when he approved the 2009 appropriations bill.
The Perry campaign did not respond to questions about whether Perry, as president, would use public money in economic development programs and what lessons he learned from his experience guaranteeing risky business loans with public money.
Mired in partisan politics
When the Legislature created the Texas Agricultural Finance Authority in 1987, the intent was to boost the state’s agricultural economy by selling state-backed bonds to guarantee bank loans to entrepreneurs who could not get commercial loans. The goal was to create small businesses and jobs by processing — rather than simply growing — Texas agricultural products.
The program immediately got mired in partisan politics, with Agriculture Commissioner Jim Hightower, a Democrat, on one side, and the Republican members of the finance authority appointed by Gov. Bill Clements on the other.
The impasse ensured that no loans were made during Hightower’s term.
In 1990, Perry campaigned on a promise to create jobs and expand the rural economy by making loans to agribusiness startups that would process the state’s agricultural products.
Clements’ appointees to the finance authority board gave Perry, a board member, sole authority to guarantee loans before newly elected Gov. Ann Richards, a Democrat, could replace them.
Under the program, the state would guarantee 90 percent of a lender’s loan — up to a maximum of $5 million — to an applicant.
Entrepreneurs lined up for money to spin cotton into yarn, process meats, develop cotton insulation, market canna bulbs to wholesale nurseries and sell pinto beans as a ready-to-eat frozen meal, to name a few.
‘This has not cost Texans money’
Perry had made four loan guarantees for $5.8 million by the time the attorney general ruled that he had to share that authority with his fellow board members. Even then, Perry and his staff drove the decisions.
Mary Webb, a Richards appointee who joined the finance authority as chairwoman in 1992, said the part-time board members had to rely on Perry’s staff at the agriculture department when screening loan applications.
“They did the legwork,” she said. “We looked at the deals to see if they fit with the legislation: Would they create jobs and help the agriculture community?”
By the time Webb left the board in 1995, she said she knew a couple of loans were in trouble. She said she learned only later the scope of the problems with other loans.
The first loan guarantees were financed by selling $25 million in bonds.
Twice, in 1993 and 1995, Perry campaigned for voters to approve more bonding authority.
Perry claimed the first two years of the program had created 4,100 jobs and pumped $390 million into the economy by guaranteeing loans to 47 companies. He predicted more than 40,000 jobs could be created with the additional bonding authority.
He didn’t mention troubled loans as he touted the program’s virtues at a 1993 Capitol press conference: “We think that this Texas Ag Finance Authority is, without a doubt, one of the finest programs that the Texas Legislature, that the citizens of Texas have ever gone forward with.”
At another stop, Perry said, “We can truly say it has not cost the taxpayers of Texas any money.”
Voters turned him down in 1993, but Perry finally won an extra $200 million in bonding authority two years later.
“This is one of the few government programs that truly has worked,” Perry said. “This has not cost Texans money.”
In January 1997, State Auditor Lawrence Alwin first alerted state officials, saying Perry and the board had violated their own lending guidelines.
He said 10 of the 48 companies had defaulted, and six more were in trouble. The first bad loans were written off as uncollectible in 1995, according to records.
Alwin also debunked a $40,000 report by a state-paid consultant claiming the program had created or retained more than 5,000 jobs at a cost of $412 per job as well as contributing $600 million to the economy.
The consultant’s data, which Perry submitted to the Legislature, were “unverifiable, incomplete, untimely, and inconsistent” and based on unrealistic assumptions about job creation, Alwin concluded.
A year later, Alwin warned that the situation had gotten worse. The program was $5.7 million in the red because of bad loans.
The issue hit the newspapers.
Perry and his lieutenants defended the program.
Deputy Agriculture Commissioner Larry Soward told The Dallas Morning News that the audit reflected a number of bad loans made early in the program to farmers and ranchers trying their first business ventures.
“The business acumen of the people behind them might not have been as strong as possible,” Soward said.
But he insisted the program would rebound: “The fact that there is a negative balance does not mean the program is in trouble.”
Perry echoed a similar refrain in a guest column in the Amarillo Daily News.
“By their very nature, TAFA loans are considered higher risk. Because of this, some defaults were inevitable and a negative balance was expected in the early years of the program,” he wrote.
He blamed the problems on “some unfortunate decisions made by the previous TAFA board early in the program.”
Perry promised the problem was fixed. “Today, TAFA is on solid footing with a positive balance projected by 2010,” he wrote.
He reminded readers that the loans were funded by debt — commercial paper: “No taxpayer money has ever been used to make TAFA loans.”
In 1998, Perry was elected lieutenant governor, and Combs succeeded him as agriculture commissioner.
She talked of expanding the loan guarantee program to other borrowers beyond food and fiber processors. But she asked Alwin to do a follow-up audit.
His warning was prescient. He said a program that guaranteed loans to people who typically couldn’t qualify for commercial loans would have a hard time finding enough good loans to generate the income to offset the losses from the bad ones.
In 2002, Combs and the agricultural finance authority bowed to that reality, suspending any new loans.
Twenty-nine of 102 guaranteed loans defaulted, almost all of them during Perry’s tenure, according to the records provided this month by the agriculture department.
While the majority of the loans were in good standing, the majority of the original $25 million — $14.7 million — was bad debt. Just as the auditor warned, the income from the good loans could not generate enough cash to make the program self-sustaining.
“We hit a brick wall,” Staples said in 2009.
By: Laylan Copelin, American-Statesman Staff, Statesman.com, October 22, 2011
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