The $125 million state financing program that gubernatorial candidates last year criticized as too risky is undergoing an overhaul.
The Job Creation Guaranty Program became a focal point of the election after the R.I. Economic Development Corporation approved a $75 million loan guarantee for Curt Schilling’s video game company, 38 Studios LLC.
Now the 12-member EDC board, two-thirds of which were members when it approved the 38 Studios deal last July, is proposing changes that would limit the size of future loan guarantees to $10 million, and would set aside $5 million for smaller loan guarantees that would be combined with a loan program backed by the U.S. Small Business Administration.
The proposed changes received an endorsement from the board when it unanimously voted to make the new regulations available for public comment for 30 days. A final vote is expected in June after the board considers the feedback, the EDC said. No approval from the legislature is needed.
The push for the new Job Creation Guaranty regulations was led by Gov. Lincoln D. Chafee, the biggest critic of the 38 Studios deal during the campaign last fall. In fact, as a candidate, Chafee was barred from appearing before the EDC board to make a plea for reconsideration last fall. He also threatened to sue board members over the agreement.
Chafee, an independent, and two of the three other candidates, complained that the loan guarantee was risky, putting taxpayers on the hook for millions of dollars if 38 Studios – a largely unproven video game company backed by Schilling – fails.
But at the time, the board was within its rights to approve the deal. Legislation passed by the General Assembly did not set a cap on the guarantee amounts. The regulations said only that priority would be given to projects that would quickly create permanent, full-time jobs with wages in excess of 250 percent of minimum wage.
38 Studios moved to offices in downtown Providence in April and has been hiring new personnel. Right now, the company is in the midst of developing two video games scheduled for release in 2012.
So far, 38 Studios has received nearly $40 million from the bond the EDC issued on behalf of the company in November. The money is being distributed in installments as 38 Studios hits certain milestones, such as selecting a Rhode Island location, and then moving in.
Chafee told Providence Business News in March that he wants to support 38 Studios and hopes the company does well.
Still, ill feelings about Chafee’s criticism of the EDC during the campaign led the agency’s vice chairman, Alfred J. Verrecchia, the chairman of Hasbro Inc., to resign shortly after Chafee took office. The governor also replaced three other board members whose terms had expired.
With $75 million already tied up for the 10-year term of the loan guarantee, the Job Creation Guaranty Program has $50 million remaining to make available to business.
In March, Chafee announced that $5 million would be set aside to assist small businesses receiving an SBA 7(a) loan, which usually comes with a 75 percent guarantee from the SBA to make the risk of default more palatable to lenders.
The use of Job Creation Guaranty funds could boost the guarantee another 15 percentage points to 90 percent, increasing the likelihood that qualifying businesses would be approved for a loan. Projects that would create jobs with annual pay of more than 175 percent of the minimum wage and offer “industry-comparable benefits” would be given preference for the 15 percent loan guarantee.
“Small businesses are the backbone of our state’s economy, and providing them with easier access to working capital is critical to the strengthening of our economy and the creation of new jobs for Rhode Islanders” Chafee said in a statement after proposed rules were unveiled publicly last month.
Under the Job Creation Guaranty Program, the state has a moral obligation to pay off loans if the borrower defaults. Those payments will come from a special reserve fund set up by the EDC. If the fund can’t cover the payments, the governor will request the money from the General Assembly as part of his annual budget proposal.
Even before the EDC unveiled the new program regulation, several legislators submitted bills that would have put their own twists on the loan-guarantee program. So far, none has been approved.
One measure, sponsored by Rep. Laurence W. Ehrhardt, R-North Kingstown, would have placed the $10 million cap on the loan guarantees, but did not include the additional 15 percent guarantee for some SBA loans.
Another bill, sponsored by Sen. Daniel DaPonte, D-East Providence, would have held the guarantee size to $5 million. And a third measure, sponsored by J. Russell Jackson, D-Middletown, would have increased the overall size of the program to $135 million but set aside $10 million of that for loan guarantees for small employers. •
