Can DCED Recover Money From Bankrupt Company?

Member Group : Allegheny Institute

(April 26, 2017)–Summary: Aquion, a recipient of state tax incentives by promising to create hundreds of new jobs, recently filed for Chapter 11 bankruptcy. Comments from the state’s Department of Economic and Community Development (DCED), which handles these incentives, indicate the state will try to get the money back. A 2014 audit looked at the department’s efforts to recover money from companies that do not fulfill job promises as well as what may happen with companies that go bankrupt.

When a company receives economic development incentives (grants, loans, loan guarantees, etc. from taxpayer sources) in return for a promise to retain and/or create jobs and fails to meet job goals promised in return for those incentives, the public agency can choose to impose various penalties on that company. Recovering the penalty funds from companies that are still operating but falling well short of their sales and job goals could be very difficult—but the situation is even more problematic in the case of bankruptcy.

Case in point: Aquion, highly touted recipient of incentives from the state Department of Community and Economic Development (DCED), was involved in the manufacture of renewable energy batteries in a facility that has seen its share of public involvement over the decades. The company filed for Chapter 11 bankruptcy in March in the U.S. Bankruptcy Court in Delaware.

Based on DCED’s investment tracker and news articles, Aquion promised to retain 70 jobs and create 341 new ones in return for five separate incentives, all awarded in 2012. Three were grants (a $2 million Alternative Clean Energy award, a $5.6 million Opportunity Grant, and a $1 million Discovered and Developed in PA award) and two loans (a $3 million Alternative Clean Energy award and a $5 million MELF award). In addition money was awarded to customize part of the former Sony plant in Westmoreland County for the company ($2.2 million from PIDA-Multi awarded to the Regional Industrial Development Corporation (RIDC) according to the investment tracker; a March 10th news article said RIDC loaned about $1.5 million to the company).

In the filing listing the "creditors who have the 20 largest unsecured claims…" DCED is listed three times: for the Opportunity Grant, the Alternative Clean Energy Grant, and the Discovered and Developed in PA Grant (RIDC is listed as an unsecured creditor for $191,726 for unpaid rent and utilities). In different news articles separate DCED officials stated DCED "…will pursue full recovery of [the development] money in the bankruptcy reorganization proceeding" and "…is prepared to take whatever steps are necessary and legal under the bankruptcy code to recover our loans".

Sounds good, but a 2014 audit on DCED’s job creation programs and its penalty efforts casts a shadow on how likely taxpayer dollars will be recovered when bankruptcy is involved. In December 2014 the Auditor General’s office produced a performance audit which included a finding on penalties imposed by DCED on companies that fell short of their job creation promises (finding two). The penalties included increases in interest rates on loans and recouping some or all of a grant, which the audit referred to as a "clawback". In the time period covered in the audit (July 1, 2010 through June 30, 2013) DCED had imposed interest rate increases on 46 companies that received a loan and penalties of $10.9 million against 72 businesses receiving grants. At the time of publication $4.5 million of the $10.9 million had been collected; $1.6 million in payments were outstanding; $0.5 million had been written off; and $4.2 million was with DCED legal staff.

The audit finding spoke to efforts to get money back from bankrupt recipients, noting "…the probability of DCED collecting the penalty from these bankrupt businesses is low because DCED is an unsecured creditor and by its own admission, it is unlikely that they will be able to recover a significant portion of their claim".

In the Department’s response to the audit finding, the DCED director at the time wrote "it is true that, as an unsecured creditor, if a grantee files bankruptcy it is very unlikely the Department would be able to recover grant funds".

Still, this current bankruptcy could develop differently from the experience covered in the 2014 performance audit (according to the Auditor General’s office, this was the most recent examination of DCED and according to DCED they agree with the sentiments expressed on bankruptcy in the audit, although according to DCED they are a secured creditor for the loans). If DCED does recover some or all of the secured credit, it will no doubt go back into the pool of dollars for other companies to compete for in the future, not to the taxpayers.

But this latest episode raises two important questions. Would having to return funds to DCED not make it tougher for struggling companies to stay afloat and make it even harder to fulfill their promises? This is a real dilemma created by having the taxpayers underwrite businesses in the first place. Should DCED be giving grants or loans to companies with untested technology in terms of reliability or marketability? If a lot of research and development is still required, the projects should be funded by angel investors or venture capital. The state can provide assistance in the form of loss carry forward and greater deductibility of R and D spending in the company’s taxes. However, there is little merit in having a state agency borrow money to be put at risk as the Commonwealth Financing Authority does in funding untried technology, (see Policy Brief Volume 14, Number 8).

Eric Montarti, Senior Policy Analyst
Jake Haulk, Ph.D., President

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