AND THE WINNERS ARE. . .
A good way to hit the jackpot in the Arizona Lottery may not have anything to do with luck.
According to some unhappy lawmakers and business people, all you have to do is make promises about creating jobs." Apparently, it also helps if your business is fund raising.
Stung by questions about who has gotten the first $5.5 million of lottery money doled out to businesses by the state's Commerce and Economic Development Commission (CEDC), officials at the Arizona Department of Commerce decided last week to issue a nine-page press release of their own questions and answers.
State representative Cindy Resnick, a Tucson Democrat who has tried for more than two months to get answers to her questions about the CEDC from Jim Marsh, the commerce department director, says the lengthy press release still doesn't answer her requests for specific information. "I didn't think I was asking anything that difficult," she says.
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Marsh and other state officials have staunchly defended the CEDC loan program as having created jobs and being "on track."
A 1989 state law created the CEDC to stimulate the economy by investing in businesses in "economically disadvantaged" areas of the state. Since it's illegal for the state to invest taxpayers' money in private ventures, the money was to come from Arizona Lottery games. The questions have been: Who has gotten the money and why?
"All that seems to be literally required is you make a lot of promises," says Resnick. "Near as I can tell, it's kind of a good-old-boy system."
Resnick and others have a laundry list of complaints about how state officials, faced with severe budget problems, have spent the first $5.5 million of their pot of lottery money.
Among the complaints:
One of the first recipients of CEDC money was the Muscular Dystrophy Association, which received an outright grant of $1 million aimed at helping it move its national headquarters from New York City to Tucson. Lawmakers question why the money wasn't loaned-instead of just given-to the already thriving MDA. A former CEDC board member recalls that the decision was hasty and probably wouldn't have been made if it hadn't been the first request for money.
Nearly one-third of the CEDC's $5.5 million has gone to "administrative costs." "That's the top of the pie," fumes Mike Palmer, a Bisbee Democrat who has criticized the CEDC. Among the administrative costs, according to commerce department records, are "some travel money so various staff members can attend conferences, conventions and seminars on economic development, lending, developing economic data bases, economic forecasting and the like." The records also say that "a modest amount goes for consultants that assist with various projects or the operation of the commission and fund."
A total of $350,000 was loaned at low interest rates not to small businesses but to two Tucson for-profit companies that invest in small businesses.
Legislator Palmer criticizes as "high risk" the loans to First Commerce and Loan, which received a $150,000 loan, and Coronado Venture Fund II, which received a $200,000 loan. According to CEDC records, both companies offer "venture capital" to start-up businesses. "They're gambling not with their money," Palmer says, "but with our money."
When asked by New Times for details of the Tucson companies' investments, a Department of Commerce spokesman dismissed the questions as "negative."
"We don't have the specifics on who they've lent money to," said the spokesman, Bruce Sankey, until recently the business editor of the Arizona Republic. "Who they lend it to is part of their operation. If we thought it was necessary to have details on every one of their loans, we could obtain it. But it's not necessary. To dig it out is enormously time-consuming and difficult."
A total of $700,000, at an interest rate of 5 percent, was loaned to McDonnell Douglas Travel Company of Huntington Beach, California, sparking protests from Phoenix travel agents that the loan "subsidizes" one of their competitors. The commerce department is "misappropriating state funds," charges Rosemary Janicki, owner of Seven Continents Travel, Inc. and president of the Arizona chapter of the American Society of Travel Agents.
The interest rates on the commission's first eight projects varied from 3 percent to 9 percent. Marsh and other commerce officials have said the rates were set individually on each loan, based on the market rate and the strength of each project. (Late last week, however, the commission handed out $1 million in loans to four companies, three from rural Arizona, and all three rural loans carried interest rates of 6.5 percent. None of the four loans went to "venture capital" firms.)
Former board member John Martin says terms of the CEDC's first eight loans weren't ever discussed in commission meetings, but were hashed out beforehand by staff and the borrowers.
Martin, a certified public accountant from Safford, says he figures his questions about administrative costs might be a factor in why he no longer sits on the commission. When less money than expected from the lottery came in, Martin says, he kept asking if the administrative budget would be cut. "They just flat didn't want to address that," Martin says. "That's cutting into the cow."
Martin was the only one of the CEDC's original four business people not reappointed to a second term. (All were originally appointed by former governor Rose Mofford.) Officials told him only that they wanted to "pass it around," he says.
Sankey confirms that Martin was an aggressive questioner. "He challenged every loan and held staff's feet to the fire," says Sankey. "I do know he is an excellent CPA and has an excellent mind." Sankey says Martin's assertive questioning had nothing to do with his being replaced by Kingman Mayor Carol Anderson. "The governor wanted to make a change," Sankey says.
Other changes are brewing. The CEDC may get even more funding, but state Senator Karan English, a Flagstaff Democrat, says she plans to introduce a bill that would limit the loans to rural businesses. That had been the intent back in 1989, she says, but the original bill that set up the CEDC was watered down.
Former board member John Martin says that, despite its problems, he doesn't think the CEDC is throwing away money-now, that is.
Martin admits the CEDC got off to a shaky start by approving the $1 million grant to MDA, which ate up one-third of the program's entire first-year budget. "With the way we started with the MDA thing," Martin says, "we would have given out three grants and gone home."
When Department of Commerce officials talk about the MDA grant, they tout the "national exposure" that comes from broadcasting the annual Jerry Lewis Telethon from Tucson. The charity got a grant instead of a loan because that's what it applied for, says commerce spokesman Sankey. "The MDA was a special situation," he says. "They rounded up $9 million, and we gave them $1 million."
However, Martin recalls that the grant was a decision made under pressure by an inexperienced board. Commissioners had barely been appointed when they were summoned to an emergency meeting in August 1989 to consider the MDA money, he says.
"In my opinion, had MDA applied three months later, I think it wouldn't have been approved as a grant," Martin says. "That was probably a no-win deal. It's not a win because we granted them the money. Yet if we didn't grant it, it was like `You're being tough to Jerry's kids.'"
Martin adds, "That was our first grant. We had no guidelines, no plan, no nothing, just people lining up with their hands out."
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