Hanging by a thread?

The future of the WEDC, the state’s economic development agency, is murky at best.

From the pages of In Business magazine.

Most four-year-olds lead a privileged life. Few expectations, fewer responsibilities, and even when they screw up someone tends to find it cute. However, in the four years since the Wisconsin Economic Development Corp. (WEDC) was born, its successes have often been overshadowed by its well-publicized missteps.

Created in 2011 by Gov. Scott Walker and the Republican-controlled Legislature, WEDC was set up as a public-private agency designed to help fulfill Walker’s campaign promise to create 250,000 jobs during his first term. WEDC replaced the state Department of Commerce and set out to provide economic assistance through loans and grants to companies seeking to grow and employ more workers here in Wisconsin.

Almost from its start WEDC came under fire. Among its highly publicized failures:

• A $686,000 taxpayer loan to Sheboygan-based Morgan Aircraft to build a helicopter-jet hybrid and create 340 jobs, despite the company not having a background in aircraft manufacturing. Those jobs weren’t created, Morgan failed to make its promised investments, and the loan hasn’t been repaid.
• At the urging of former Department of Administration Secretary Mike Huebsch, a $500,000 loan to Milwaukee-based Building Committee Inc. (BCI) whose owner made the maximum $10,000 contribution to Walker’s 2010 gubernatorial campaign.

The owner, William Minahan, submitted false information on his loan application, which wasn’t formally reviewed by WEDC staff. That loan also hasn’t been repaid and U.S. Sen. Tammy Baldwin has written a letter to U.S. Attorney General Loretta Lynch requesting an investigation.

An audit from the Legislative Audit Bureau this spring showed continued problems under the agency’s second CEO, Reed Hall. Hall has since left WEDC and been replaced by new CEO/Secretary Mark Hogan.

As part of the most recent state budget proposal, Walker asked that he be removed as WEDC board chairman and other elected officials also be taken off the agency’s board. Lawmakers granted Walker’s wish and removed him as chairman, but their fellow legislators remain on the board.

Now, lawmakers from both sides of the aisle are proposing serious changes to WEDC. Can the embattled agency survive? What will it look like going forward as it attempts to regain trust?

Focusing on the positives

“We help companies start up, relocate, and grow their operations in the state in cases where a projected positive impact on the state’s economy would not be achieved if it were not for our assistance,” says Tricia Braun, WEDC deputy secretary and chief operating officer.

“In WEDC’s foundational documents, we stated that our goal was to positively impact businesses, communities, and the state as a whole through the attraction of private investment and job creation and/or retention,” Braun notes. “We have not only remained true to our original goals, we have also sought additional ways to improve the state’s overall economic landscape and enhance the quality of life of Wisconsin’s citizens.”

That’s a rosy picture compared to the criticism WEDC has received, but it’s not without merit.

Projects that involve the attraction of new companies investing in development projects with the state get a lot of attention and rightly so, says Braun. Among its notable successes, WEDC helped attract Amazon to Kenosha, a project that includes two facilities measuring more than 1.5 million square feet and representing a nearly $250 million investment. According to the company, Braun says, the project has already created more than 2,000 jobs.

In September, WEDC announced the successful attraction of another major distribution center to the state. Operating 12,000 stores in 43 states and employing 109,000 people nationwide, Dollar General plans to build its 14th distribution center in Janesville. That project is expected to involve $75 million in capital investment and the creation of 552 full-time jobs by 2019. Using industry-standard ROI calculations, WEDC projects that the additional state income taxes paid as a result of the increase in employment from these projects will be twice the original investment within five years of their completion.

“While projects of this nature rightly grab headlines, our investment portfolio also includes many native Wisconsin companies taking advantage of our state’s strong business climate to expand their operations and add new, high-quality jobs,” explains Braun. “As a demonstration of the strength of WEDC’s project portfolio, the top 100 investments designed to produce new jobs in the state are projected to create 14,483 new jobs over the course of their contracts, with capital investment totals of more than $1.75 billion. To date, these contracts have created 76% of their anticipated new jobs and achieved 83% of their capital investment goals, despite there being, in some cases, years remaining in the individual contract terms.”

In response to audits from the Legislative Audit Bureau, WEDC has also put in place more than 100 new policies since 2013 intended to prevent a repeat of its past miscues.

Some of those measures include:

• Hiring a vice president of credit and risk to improve WEDC’s financial management
• Reorganizing compliance functions and expanding staff to concentrate on compliance with state statutes and organization policies
• Establishing and receiving board approval on 101 policies to provide clarity on organizational practices
• Adopting process improvements to strengthen WEDC’s financial award process, reporting, and collections
• Replacing what Braun refers to as an outdated financial management software system, inherited from Department of Commerce, with sophisticated technology to meet WEDC’s tracking, reporting, and collections objectives
• Forming new board committees with public members to be more involved in awards, policies, contracts, and audits.

“By enhancing our performance reporting tracking procedures and formalizing our collections process, we have achieved dramatic reductions in our payment delinquency, principal delinquency, and late performance reports metrics,” says Braun. “We have made tremendous progress since our inception and will continue to evolve our operations to ensure that we are adapting to the very best practices of our industry.”

Toward this end, the WEDC has engaged the internationally recognized Center for Regional Economic Competitiveness (CREC) to help identify areas of greatest strength as well as opportunities to improve efficiencies and future economic impact. Although CREC’s recommendations will not be formally presented to the WEDC board until December, ongoing conversations have already identified some recommended changes, which may be implemented prior to the report being issued, Braun adds.

(Continued)

Reshaping a troubled agency

Successes and improvements aside, WEDC in its current form may not be long for this world. It’s already undergone significant changes in just the past few months.

In addition to Walker being removed as WEDC board chairman, Walker scrapped a proposed merger with the Wisconsin Housing and Economic Development Authority (WHEDA) after the most recent round of Legislative Audit Bureau audits uncovered persistent problems within the WEDC.

WEDC also had the majority of its loan programs stripped by the Legislature, notes Sen. Julie Lassa, D–Stevens Point, a WEDC board member and critic of the agency who has called it “irretrievably broken.”

“I think it was in reaction to that BCI story that all of these loan programs were ended versus that these are potentially higher-risk loans that are going out to entrepreneurs or small businesses,” Lassa says.

“I also think it was the wrong reaction,” she continues. “What we should have done was focus in on what was happening at WEDC and why this award was given in the first place, and the circumstances around it. We heard from WEDA (Wisconsin Economic Development Association) that they were really concerned about the negative impact this would have for businesses who really needed to get access to credit. But those concerns were not listened to.”

Lassa believes the root of the problem with WEDC is that there was a failure to make adequate plans for the transition from Commerce to a new agency when WEDC was created.

“There were only a few months between when the bill that created WEDC was passed by the legislature and signed by the governor and when it started,” Lassa explains. “A similar public-private agency in Ohio, they took two years to make the transition. A lot of the problems that we’ve seen at WEDC stem from the fact that there was poor planning for the transition and the fact that not all of the recommendations by the Be Bold Commission, which I served on and that came up with the idea of a public-private entity, were followed.

“If people remember, the first audit that was done by the Legislative Audit Bureau found that WEDC wasn’t even tracking whether loans were being repaid,” continues Lassa. “I know proponents of WEDC were trying to bring up Commerce since these were a majority of their loans, but it was under WEDC’s watch that they failed to keep track of repayments.”

Wisconsin Manufacturers and Commerce (WMC) President and CEO Kurt Bauer makes just that argument.

“Most of the problems that have been hung on WEDC were created by the old DOC,” Bauer says. “Commerce didn’t have the systems in place, including that they didn’t even have the software. WEDC had to purchase loan-tracking software because DOC never had that. That shows the old system wasn’t working.”

Bauer compares the state’s economic development efforts via WEDC to a four-legged stool.

“You’ve got to attract existing out-of-state businesses to relocate or invest in Wisconsin. That’s the first leg,” Bauer says. “Then, you have to keep businesses here and get them to expand here if at all possible. That, I think, is unheralded but it’s very important because most other states’ economic development arms are better funded than what we have here.

“Third would be to offer funding to startups that otherwise don’t qualify for traditional loans,” continues Bauer. “Obviously that’s your biggest risk. That’s where WEDC has been vulnerable to criticism, but a traditional bank isn’t going to make those loans because they’re so high risk. Going forward, WEDC is going to be removing that as a part of its functions, which I think is too bad.”

The fourth part would be to promote Wisconsin products and services abroad, which is increasingly important because population and wealth are growing outside of North America and traditional trading zones in South America and Europe, Bauer states.

“So you’ve got that four-legged stool and you’re taking one leg away [providing loans for startups], which I think threatens to make the stool a little wobbly,” he concludes. “We don’t want to handicap our economic development efforts, and I fear we might be doing just that.”

Republican and Democrat lawmakers alike have offered ideas to fix or outright replace WEDC.

State Rep. Samantha Kerkman, R–Salem, said in September she’s considering legislation that would create a criminal penalty for defrauding WEDC.

While Wisconsin’s criminal code currently considers bank fraud a Class E felony, punishable by up to $50,000 or 15 years in prison, it’s not directly applicable here since WEDC isn’t a bank.

When the WEDC was created in 2011, it was given powers to impose a financial penalty on award recipients who provide false or misleading information, but not criminal penalties.

More recently, Assembly Speaker Robin Vos, R–Rochester, announced plans to speak with Democratic lawmakers about their concerns with the agency in light of its woes, which includes not acting preemptively to keep Oscar Mayer in Madison after a merger of its parent company Kraft Heinz was finalized this summer.

Earlier this fall, Lassa and Representative Peter Barca, D–Kenosha, another WEDC board member, put forth a plan to scrap WEDC and create a two-pronged hybrid agency that would focus on growing family supporting jobs.

“The first part of that agency would return all of our economic development programs to a public agency — the Wisconsin Department of Economic Opportunity,” says Lassa. “It would be fully transparent and accountable, and protected from any type of political pressure to try to give taxpayer money to a specific business or individual.

“For the second part we would create a public-private board that we’re calling the Badger Innovation Corp., which would help market and promote Wisconsin. That agency would lead trade missions, recruit businesses, and assist with marketing and industry cluster development. As a public-private arm they would also be able to raise funds from the private sector to help economic development activities in the state.”

Among the problems with WEDC, Lassa believes, is its high staff turnover.

“It’s 25% and we just found out that three more vice presidents are leaving,” Lassa notes. “By creating this new jobs agency and putting in state employee protections, we think we’ll be able to curb that job turnover rate as well as be able to attract highly talented people who can help our state grow.”

Lassa says it’s a sign of WEDC’s troubled state that employees of the agency “are voting with their feet.”

“They see the writing on the wall with the fact that the Republican majority in the legislature slashed their budget as well as eliminated their loan programs except for one, so it continues to be an agency that is extremely troubled,” Lassa explains. “I think it’s going to be hard to keep our highly talented staff, as well as attract new people [to WEDC in its current form].”

One person who’s aiming to change that perception is new WEDC CEO/Secretary Mark Hogan.

Hogan’s work experience includes almost four decades at M&I Marshall & Ilsley Bank and BMO Harris Bank. He retired in 2010 as M&I’s executive vice president/chief credit officer before signing on to serve as senior advisor to BMO Harris in 2011.
Hogan also served as chairman of the Board for the Wisconsin Housing and Economic Development Authority (WHEDA).

“In my short time with WEDC, I have been impressed by the progress made by my predecessor — Reed Hall — in enacting the operational improvements necessary and hiring the right people to carry out this organization’s important mission in a manner that warrants the trust of the citizens of Wisconsin,” Hogan says. “I am encouraged both by the talent and the passion that the staff at WEDC bring to their jobs. This organization has demonstrated its commitment to continuous evolution and improvement, and I am optimistic about the path we are on.”

Hogan does express concern that the challenges WEDC has faced in its infancy have overshadowed the many successes the organization has produced.

“My goal is to refocus attention on the good work being done not only by us, but also by our strong regional and local economic development partners throughout the state who care deeply and devote tireless effort to creating the right conditions for business success and job creation in Wisconsin,” he says.

For WEDC to succeed in its mission, Hogan says it must continuously seek to evolve and improve its processes and procedures to meet the highest standards of accountability. Maintaining strong partnerships with organizations throughout the state whose work complements the WEDC’s mission is critically important, he notes, because the agency understands the power of strong economic development capabilities at the local and regional level. He says the agency also recognizes the valuable insights that statewide educational institutions and trade groups bring to the collective purpose of building a strong and resilient Wisconsin.

“If we do our job right, we will be seen as a reliable and productive facilitator of business and community development initiatives, one that adds value to relationships we form and the projects we support to enhance the state’s economy.”

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