GO Zone program: too many projects, too little money
Posted by Greg Thomas, Real estate writer October 27, 2007 9:54PM
Categories: Breaking News, Times Picayune
Nearly two years ago, the federal government set aside $7.8 billion in Gulf Opportunity Zone bond money to finance hurricane relief projects in Louisiana.
The tax-exempt bonds were expected to unleash a wave of economic development by helping businesses rebuild their hurricane-ravaged facilities and pursue recovery-related projects. Companies quickly lined up with applications for a share of the bonds, which allowed them to borrow money at interest rates far below what they can normally obtain.
Among the applicants was Buquet Distributing Co., an Anheuser-Busch distributor, which sought $8 million in bonds to finance an expansion of its Houma distribution center, more than 100 miles from where Hurricane Katrina made landfall in Buras.
The request won preliminary approval from the State Bond Commission, in part because the project was approved by the Louisiana Economic Development Department. According to a department review, the project counts as a significant recovery project because "the parish of Terrebonne has been drinking more beer after the hurricanes, and this project enhances that opportunity."
Furthermore, the expansion would create "economic development and overall heightened euphoria" for parish residents, the review says.
But final approval of the bonds for Buquet is anything but a done deal. That's because the original $7.8 billion set aside for the bonds is running woefully short. Just $842 million remains, although additional money could be freed up if the projects that have already received bonds fail to use all the funds. Still, billions of dollars in new projects are pending before the bond commission. The reason for the shortfall, those involved with the program say, is that the state was slow to come up with a strategy for evaluating the worthiness of applications and determining how and to whom the money should be awarded.
"It's 20/20 hindsight, but it's very clear that -- in my view -- this program was really poorly planned ... without having some type of guidelines in place" from the beginning, said Secretary of State Jay Dardenne, who is on the bond commission.
The bond commission's failure to critically evaluate all of the applications, and the resulting shortfall in GO Zone money, could haunt the state when it makes future requests for federal money.
"When Congress hears about this ... we're going to have a problem," said Ed Blakely, the New Orleans recovery chief.
When Congress first awarded Louisiana $7.8 billion in bonding capacity, some state officials felt the sum was so large they'd never be able to spend it all.
"We thought it was a nice problem to have," said Jimmy Clarke, Gov. Kathleen Blanco's chief of staff. "I can't overstate that (we were) worried that we'd not be able to use" all of the money. It "was good news."
Still, the bond commission, which was charged with giving clearance to companies wishing to tap into the program, was cautious in its early consideration of projects.
In February 2006, just two months after the GO Zone bond program was funded, the commission postponed consideration of two large construction projects after state legislators complained that the proposals were not tied to hurricane recovery. Those projects included $50 million for a luxury hotel in Baton Rouge and $14 million for a warehouse in Houma that would store offshore drilling equipment. Those two projects eventually received final approval.
"I think these projects were going to go forward without the hurricanes," Sen. Joe McPherson, D-Woodworth, a commission member, said at the time.
McPherson said recently that his position remains the same.
"The fallacy in the system is that the projects to get early approval and move forward were already on the drawing board" before Katrina, he said.
Despite its early skepticism, the commission quickly began spending the money. The state has only until December 2010 to use its bonding authority, and the commission was eager to jump-start the recovery, said State Bond Commission Chairman John Kennedy, who is also the treasury secretary.
Though awards were originally to be capped at $250 million, the commission, confident that it was flush with cash, voted to change the rule and up the ante.
In April 2006, the Marathon Ashland Petroleum LLC refinery in Garyville was granted a $1 billion bond issue for expansion and other construction. An oil refinery in St. John also was granted $1 billion for its expansion. And $600 million was awarded to an ethanol plant project in Plaquemines Parish.
"We couldn't predict the future," Kennedy said of the group's early spending decisions.
But Blakely calls that attitude "crap."
"We could spend that much in New Orleans alone," he said of the $7.8 billion.
The GO Zone bond program has been beset with questions about who has final authority to release bond money.
Last year Blanco signed an executive order saying that even after the commission gives final approval to a project, she must sign a letter officially giving a project developer the green light and making a bond official.
When the Solomon movie theater chain received final approval of its bonds but was kept waiting on a letter from Blanco for months, the company challenged the necessity of such a letter in a state court.
Rather than fight the case, Blanco signed letters during the summer releasing GO Zone bond money for new Solomon theaters in the New Orleans area and a number of other projects.
Now that it's clear there won't be enough money to give to every application, critics say many of the awards over the program's first year and a half weren't vetted properly. They say applications should have been reviewed more closely and prioritized in terms of economic impact.
"There was no procedure," Blakely said.
Indeed, until Sept. 20, there was no system for rating and prioritizing projects. Instead applications were examined by the Department of Economic Development, which looked for accuracy and the ability of each applicant to pull the deal together.
Don Pierson, assistant secretary of the department, said it was not the role of his staff to prioritize the projects.
Rather, he said, "we were charged to do a part of a screening endeavor to make sure applications were complete, representative (and) that the information submitted met guidelines for the program. ... The actual authority to grant or deny this opportunity is not vested in (Economic Development Department) staff but rather in the hands of elected officials. Those are the members of the bond commission and certainly our governor."
Clarke also defended the department's handling of its reviews.
"The fairest, most efficient way was to just have LED evaluate, vet the proposals and reserve a fair amount" for areas damaged the most severely, he said.
But critics also say not enough was set aside for areas hit hard by Hurricanes Katrina and Rita that were slow to get their bond applications together as a result. Too much of the GO Zone bond money, they say, was handed out to developers and businesses that were quick to the table because they were seeking financing for projects that were already in the planning stages before Katrina.
Now that many of those hard-hit businesses are finally submitting their applications, money seems to be at its tightest. Blakely calls the process a "willy-nilly," first-come, first-served approach that shut out hard-hit parishes.
In August, as it became clear there would not be enough GO Zone bond money to provide for every project, the Blanco administration devised a ranking system to prioritize the applications. The ranking system was based on two major factors: the quality and quantity of jobs each project would create.
Furthermore, the policy divided the $3.4 billion in GO Zone money that remained at the time, setting aside half for Orleans and 12 other parishes considered the most damaged. The other half went into a competitive pool that projects from all parishes could vie for.
In addition to devising a prioritization system, the administration reinstated the $250 million limit and forced billions of dollars in projects that had already received preliminary approval from the commission to go back to square one and reapply for the dwindling pool of GO Zone bond money. And even those projects that have already been granted final approval by the commission have just 120 days to complete their financing or be forced to apply for it again.
Buquet, the Anheuser-Busch distributor, was among those forced to start over.
The Terrebonne Economic Development Authority, which submitted the application on behalf of Buquet, was shocked to learn of how the project was evaluated by the Department of Economic Development.
Katherine Gilbert, expansion director for the authority, called the department's comments about the project and the "heightened euphoria" it would create a "joke" and an "insult."
The distribution facility, which is just outside the Houma city limits, is an aging plant that would see its capacity increase if the expansion is pulled off. The project would create seven permanent jobs, retain 70 and create 150 construction jobs, Gilbert said.
Jay Buquet, owner of the 64-year-old family business, said he couldn't believe the department's wording in its approval of the application. "I don't mind if I don't get my project in a legitimate scoring (system), but don't give me derogatory comments about our community," Buquet said.
The midstream change in the vetting process has raised the ire of some public officials and developers.
"I think it's disingenuous coming forward (now) to correct the absence of rules at the outset," Dardenne said.
Bond attorney Fred Chevalier of Jones Walker's Baton Rouge office agreed.
"The goal, of course, has been to reserve money for the hardest-hit areas, which sounds like a good idea. The projects that have the most benefit to the state get done as a priority," Chevalier said. "But the message of changing rules midstream and the detrimental effect on developers outweigh those noble goals."
Until August, a project that had been awarded preliminary approval was considered a done deal by developers and bond attorneys. Final approval was just a bureaucratic step.
As a result, businesses that had been awarded preliminary approval in many cases began moving forward.
"The whole administrative process ... led us to believe that preliminary approval meant final was a pretty perfunctory thing," Chevalier said. "I expect some very serious considerations to lawsuits by different developers that could come in and get some injunction on the awarding of allocations at all."
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