CEO’s Message: “Achieving Our Mission with Sustainability”
The folks of Griggs and Steele Counties are extremely fortunate to have been awarded the designation of the “Empowerment Zone.” The economic and community development advantages afforded by this designation and its resources are unprecedented in North Dakota and indeed, in many other rural states with the same problems. We have been “empowered” to make changes; changes that will reduce the rate of out-migration… changes that can be sustained! We have been given a chance to prove that we can solve our problems and make our own way into the future.
Established in January 1999 under the auspices of the United States Department of Agriculture-Rural Development Office, we have been given money and important tools to accomplish our mission. However, we have also been given a dead line. The question is: can we do it in the time remaining?
The answer starts with a review of what we have done so far. The original funding for the Griggs-Steele Empowerment Zone (Zone) schedule stipulated a 10-year program at $4 million per year. As everyone knows that didn’t happen. Instead, so far the Zone has been funded for 6 years through varying annual awards averaging about $2.7 million per year. The Empowerment Zone designation is scheduled to expire on December 31, 2009.
As of December 31, 2005, the Zone had received a total of $13,041,317 in Federal grants. It should be pointed out that by the close of 2005 not all the funds awarded had been drawn down by the Zone. The total draw down amounted to $11,690,976.
At the close of 2005, a total of $6.4 million or about 55% of these drawn down funds was “invested” in loans and equity deals. About $3.6 million or 31% of the funds were awarded as grants for community development projects, where infrastructure improvements and capacity-building were dearly needed. Zone dollars invested have leveraged over $30 million in other community and private money. Less than 14% of the Federal funds were used for the rather complex administrative tasks required for planning, managing investments, and accounting for this funding. The Zone’s current cost for administration has been reduced to just over 10% of its total operational budget.
It wasn’t until late in the first full year of operation that the first loan was made. Since that time, a total of $5,105,394, or about 69% of the Zone’s investments, have been invested in loans. Generally, most loan deals are struck at 5%, with the Zone in a subordinated position regarding collateral. A total of 86 loans have been made, 52 of which were made under the “Revolving Loan Fund” policy, 29 as “Mini-Loans,” four as “Lines of Credit,” and one as a “Housing Loan.” Total interest and late fees collected on loans to date amounts to $450,980; about 7% of the total amount issued in loans.
No equity investments were made until mid 2001. Since that time, a total of $1,325,250, or about 18% of the Zone’s investments, have been made as equity investments. The deals vary, but usually involve preferred stock with redemptions payable in one to two years and a buyout plan at some stated value within five years thereafter. A total of 11 equity investments have been made. To date, no redemption payments have been collected. Of course, the value of these equity investments will be determined by how successful the companies become. In most cases however, the “buy out” is fixed, preempting the Zone from benefiting in the upside of a successful company.
In addition to the loans and equity investments, a total of $920,000, or about 13% of the Zone’s investment capital, consists of revolved funds that have been placed in Certificates of Deposit (CD’s). Since this practice was initiated in November, 2001 the interest rates ranged from 2.15% to 3.40%. To date, interest earned on CD’s amounts to $27,532. However, by aggregating CD’s in $100,000 blocks, recent bids by local banks are approaching 5.4%.
Given the Zone’s current loans and equity investment schedules, the principal and interest won’t be fully recovered until the year 2018. To date, the Zone has collected a total of $1,182,554 in interest and principal from its investments. However, a total of $1,482,443 has already been written off. Another $514,722 is considered “non-performing” and holds high potential to be written off. One of its initial and largest investments (in excess of $1 million) is also pending and will likely be written off.
Comparing the historical rate of loss with the rate of gain, one can only conclude that maintaining the current investment strategies will result in non-sustainability. Without further “replenishment” of investment money from grant sources and assuming: a) nominal administrative expenses of $150,000 per year; b) historical losses hold true into the future; and c) all of its revolved funds are invested in CD’s, the Zone will be broke within 7 to 8 years!
Despite considerable progress, the work of economic and community development in the Zone will not be completed in the three remaining years of the “promised” demonstration period. In addition to maintaining its assets, the Zone will no doubt require some level of ongoing operations to achieve its mission.
Furthermore, in my opinion, the participating communities and other public and private entities have developed a level of dependency on the Zone’s resources. Based upon what I have experienced in the past year, many entities tend to turn to the Zone first; even before they have explored or exhausted other potential resources. Participating communities lag the Zone in achieving sustainability; despite the capacity building investments made by the Zone and the respective communities in local infrastructure and essential services. If you don’t believe I am right about this observation, those of you who may have been the beneficiary of the Zone’s resources, ask yourself what would you have done without the Empowerment Zone during the past six years?
This situation exerts a great deal of pressure on the Zone. Unfortunately, under the most optimistic scenario, the Zone will have only three more years of funding from USDA-Rural Development available. Sustainability of the Zone must be achieved before the conclusion of the designation period.
Strategies must be developed and implemented immediately to include increased attention on existing businesses, local investment in imported businesses, as well as other approaches, that yield returns on equity and debt investments sufficient to sustain operations until the Zone’s mission isachieved. Achieving its mission must also take into account the sustainability of the participating communities.
A commonly understood principle within successful economic strategies is to “invest first in your own.” In keeping with this proven strategy, during 2005 the Zone provided business development, retention and expansion support for 17 companies. A total of $1,301,300, or 57% of the Zone’s total expenditures last year, was invested in these companies; either as low-interest loans or equity capital. In addition to the money, a total of 1393 hours of service was provided by Zone staff, supplemented by over 620 hours of outside professional assistance; resulting in improved company operations, as well as the retention of 56 full-time and 12 part-time jobs. Six new jobs were created. Moreover, according to one major manufacturer, the average salaries of manufacturing sector employees have increased somewhat. No hard data are available yet.
However, based upon our historical investment portfolios and performance thereof, investment in existing businesses will not be enough to achieve sustainability in three more years. More is needed.
The choice of focusing some significant proportion of Zone resources on importing and investing in proven, profitable, and growing businesses (targeted recruitment) has the highest probability of providing a renewable funding mechanism. By adding the feature of regional or local ownership and control of recruited businesses, the Zone has the potential to improve its long-term viability. The success of this strategy will depend upon full engagement and cooperation of all Zone communities.
There are differing opinions on what is meant by the term “sustainability.” While there may be other ideas, three points of view have been expressed:
1. Continue to do what has been done until the program is terminated or the money is exhausted.
2. Continue to build the revolved funds, investing these funds in only secure accounts (i.e., Certificates of Deposit).
3. Use resources at hand, together with those anticipated, to establish “self-sustaining” ongoing programs, including future loan and equity investments in existing and targeted businesses.
For the purposes of this discussion, I have assumed that “sustainable” is taken to mean reaching for a position of self-reliability (number 3 above) in which:
(a) A maintenance entity (with adequate staffing) is supported and continues to carry out the Zone’s mission;
(b) Ongoing loans and equity investments with are made by the Zone, with leveraged private and other public money;
(c) Limited ongoing investments are used to continue to subsidize small, under-funded, communities to advance their community and economic development objectives.
Based upon historical costs and activities, an annual operating budget for “sustainability” as defined above should be at about $1.3 million (current dollars) applied as follows:
Administration (maintenance level) $150,000
Community Development and Support 50,000
Marketing and Targeted Recruiting 100,000
Strategic Investments (loans and equity) 1,000,000
$1,300,000
In order to reach a level of returns on its investments that will “sustain” its operations into 2009 and beyond, the Zone needs to develop investment strategies that accomplish the following:
- Attend to and strengthen “our own” (business retention and expansion) with a significant portion of Zone resources.
- Conduct thorough “due diligence” on requests for funding; reduce the risk by knowing the deal, the business and the management.
- Reduce the loss rate on current and future investments by providing hands-on business coaching and technical assistance.
- Develop an appetite (attitude adjustment) among private citizens for investment in businesses operating within the Zone.
- Develop an investment group consisting of both private and public players capable of making a substantial investment in strategic businesses.
- Develop an effective “scouting” program designed to identify strategic investment opportunities that have demonstrated (extensive due diligence) high potential for success, with the use of Zone resources as leverage.
- Develop a reliable network of referrals of high-potential opportunities for investment.
- Use investment capital in such a way that the rate of return is proportionate to the risk taken at the time the investment is made; striving to achieve an average annual ROI of at least 14% on equity investment capital.
In conclusion, I believe achieving the mission and sustainability are codependent issues. Stemming out migration is a long term ongoing effort. The Zone is currently positioned to continue this effort in cooperation with participating communities. While the Zone’s grant money may be terminated at the close of 2009, it has exiting and potential resources sufficient to assure its viability well into the future. However, new and more aggressive investment policies are urgently needed in order to continue operations at a meaningful level beyond the expiration of the designation period.
I believe that the various tax incentives afforded by the Zone designation are critical to the Zone and its businesses in the increasingly competitive environment of economic development. It is possible that this aspect of the designation may be extended beyond 2009. I have no doubt that continuation of these incentives will be greatly depended upon the on going sustainability of the Zone.
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