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Rell's Jobs Stimulus: Loan, Credit Ideas Deepen Well-Used State Strategies

MARA LEE

February 04, 2010

Expanding state loan guarantees, lending directly to small businesses and offering tax credits to more companies for hiring workers are the heart of Gov. M. Jodi Rell's vision for economic development — three strategies used by the state for years.

Rell's proposal contains $75 million for loan guarantees through state agencies and $25 million for direct loans to small companies. She would also extend an existing $10 million program under which companies receive up to $7,500 for each added worker so small businesses that do not pay corporate income tax could qualify.

With each of these programs well established as tools embraced by both parties, Rell may see relatively little opposition, and some top Democrats said Wednesday that they agree with the plans in principle. But questions remain about how many jobs they can help to create at a time when many businesses are struggling with low demand for their goods and services.

As she has before, Rell on Wednesday joined the chorus of politicians saying companies are starved for loans. "Their lifeline is credit, and that lifeline has been cut off," she said.

In fact, the pace of lending at the Connecticut Development Authority, a key lending agency, slowed to $11.4 million in the second half of 2009 from $35 million in the full fiscal year that ended June 30. It had doubled in 2008-09 from the prior year.

In her address to the state House and Senate, Rell predicted that the guarantees would generate five times their volume in private lending to small businesses. Last year, however, the CDA typically generated matching funds between two and three times the state's investment, its records show.

The CDA's loan guarantees generally are about 40 percent, said Marie O'Brien, president of the agency — meaning the state would shoulder 40 percent of losses in case of defaults. By contrast, the federal Small Business Administration, which backed $1.37 billion in loans nationwide in December, now guarantees loans at a 90 percent rate and has eliminated its fees.

The SBA's generosity, combined with President Barack Obama's move to add $30 billion in new capital for small businesses, leads some to question whether Connecticut's program could have a meaningful effect on jobs.

"Who would qualify for these loans who would not qualify for an SBA loan? They would effectively duplicate what the SBA does," said Bert Ely, an independent banking analyst in Virginia.

Gerald Noonan, president of the Connecticut Bankers Association, agreed that the candidates for the state loan guarantees are more marginal businesses than those who are borrowing through the SBA. "The solid borrowers don't want to borrow," he said. "I think this is the third tier."

Why, then, would a bank accept a lower guarantee for a riskier client?

O'Brien said the default rate in CDA loan programs has been just 1.7 percent over the last 10 years. And, she said, some community banks don't do SBA lending, but work with the CDA. "I believe they find us flexible," she said.

"I think it can work," said Noonan, who consulted on the governor's plan. "It may not work, I don't know, but it is a definite attempt to extend to that market."

Senate President Pro Tem Donald Williams, D-Brooklyn, said "there's clearly common ground" between the governor's proposal of $25 million in state lending and Senate Democrats' $30 million direct lending idea. The senators on Monday proposed paying for the loan fund by taxing bonuses larger than $1 million received by Connecticut residents who work for financial institutions that received federal bailouts.

Robert Genuario, the governor's budget director, rejected the idea of raising revenue. "I know the governor already feels strongly that Connecticut has a high tax burden," he said.

House Majority Leader Denise Merrill, D-Mansfield, also said the governor and legislature largely agree on economic development priorities.

But, Merrill said, to borrow another $100 million Rell would need to undo previously approved bonding. Merrill questioned whether there is $100 million in unneeded bond authorizations. "I don't know how realistic it is."

As for the tax credit for hiring, it was used in 2009 by just five businesses, although they hired 404 workers and received $3.6 million in credits.

Reprinted with permission of the Hartford Courant. To view other stories on this topic, search the Hartford Courant Archives at http://www.courant.com/archives.
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