Energy program faces loan defaults, scrutiny 4 years after it was introduced

10/14/2012

In 2008, former Gov. Ted Strickland’s plans for Ohio were green.

The Democrat, who serves as a national co-chairman of President Obama’s re-election campaign, pushed sources of clean energy as a way to revolutionize the state’s economy and generate jobs.

From 2007 to 2008, Mr. Strickland’s administration helped usher in a $1.57 billion bipartisan state stimulus package that included a $150 million Advanced Energy Job Stimulus Program.

That program included $84 million for solar, wind, nuclear, and other noncoal initiatives. The entities that received support under it were supposed to use taxpayer-funded loans to become industry leaders, job creators, and technological innovators.

Four years later, it turns out that it isn’t so easy being green.

Four of the 10 companies or projects funded under the advanced energy program have failed to repay the state on time, submit financial reports by designated deadlines, or adhere to stipulations of state loan agreements, a Blade investigation found. Some of them face a combination of these problems. Four of the 16 projects initially approved by the state aren’t moving forward.

Two of the advanced energy loans, which were made to Toledo-area companies, are in default. A third company, Toledo-based Xunlight Corp., could default on its loan if it does not raise $3 million by Monday. All the troubled loans are related to the solar industry.

The issues don’t end there.

The board of the Ohio Air Quality Development Authority, which makes financial decisions regarding the advanced energy program, has not been kept up to speed on the details of problems with loan recipients, sometimes learning about them months later.

The board decided to hire an attorney in September to review the program’s administration, which is split between the air quality’s staff and USA Energy Advisors. USA Energy Advisors was hired in 2008 to vet program applicants. The firm’s duties were expanded in 2009 to underwrite and monitor the loans granted under the advanced energy program.

The attorney is another cost — $250 an hour — that can be added to a growing list of expenses related to the advanced energy program.

The ties between the advanced energy program and the Strickland administration are strong — the former director of the air authority also served as Mr. Strickland’s energy adviser, making him a key player in the program.

Mr. Strickland also appointed his former chief of staff to the air authority’s board before he left office in January, 2011.

All three men went into business together after leaving public office.

According the investigation, Mr. Strickland received at least $144,740 from employees or people connected to companies affiliated with the advanced energy program during his unsuccessful 2010 re-election bid.

Although Republican Gov. John Kasich received $118,245 from some of those sources, only two gave more than $1,000 to his campaign. Mr. Strickland received more than $1,000 from five of those sources.

“The bottom line for me and as far as this discussion is concerned is that political contributions, political considerations, political relationships were not involved in our decision-making regarding the decisions that were made,” Mr. Strickland said. “We were doing our best to advance an agenda that would be good for the economy of our state and position Ohio for future growth.”

Financing the future

The air authority was the go-to agency for handling the advanced energy program loans. This meant that the air authority, which previously had dealt almost exclusively with bond financing, had to build its loan program from the ground up starting in mid-2008.

The air authority’s former director and its board took an aggressive approach to finding a firm to assist the agency with the $84 million piece of the advanced energy program. From August, 2008, to September, 2008, the agency reviewed eight applications, selected two finalists, and hired USA Energy Advisors to vet program applicants.

A year later, the firm’s role was expanded to craft the air authority loan agreements and monitor the loan recipients. To date, USA Energy Advisors has been paid $422,734.

“When the program came to the air authority from the legislature and the administration, we of course took our responsibility very seriously,” said Gayle Channing Tenenbaum, the current chairman of the air authority’s board.

“We had a time frame to try and get monies out to programs and get notification out for how people could apply for the loans. We knew we would need a great deal of assistance in doing that.”

According to a filing with the Ohio Secretary of State, USA Energy Advisors was formed Sept. 3, 2008, just five days before the air authority’s Sept. 9, 2008, meeting.

Barry Fromm, chairman and chief executive officer of Value Recovery Group, made USA Energy Advisors’ presentation to the air authority. In an interview with The Blade, Mr. Fromm said the company’s founding had nothing to do with the air authority contract.

Value Recovery Group is the parent company of USA Energy Advisors.

“I woke up one day and I said, ‘What would be a good name to use?’ So I typed in USA Energy Advisors and it popped up and nobody was using it so I said, ‘Let’s use that name, I think it really tells the story of who we are.’

“It had nothing to do with timing, we had other things going on.”

Collecting money

Value Recovery Group, either on its own or through spin-off operations, has extensive experience with collecting debt owed to the government and has contracts with the U.S. Department of Education and the Federal Deposit Insurance Corp.

It was formed in 1993 and also manages the U.S. Department of Energy’s loan guarantee program.

The company previously was involved in a project that received bond financing from the air authority, and Mr. Fromm said that was the extent of his prior interaction with the air authority.

Although Mr. Fromm and his wife gave at least $13,500 to Mr. Strickland’s re-election campaign, he said politics didn’t play a part in how USA Energy Advisors vetted applicants for air authority loans.

Mr. Fromm said he donated money to the Strickland campaign to attend events headlined by Mr. Obama and U.S. Secretary of Energy Steven Chu.

State records do not show any donations from Mr. Fromm to Mr. Strickland’s campaign in the 2006 election.

“I gave two chunks for two opportunities to meet important people,” he said. “It had nothing to do with Strickland.”

Mr. Fromm also is the chairman of U.S. Railcar Co., which was involved in a $400 million high-speed railway project proposed under Mr. Strickland. That plan was quashed by Mr. Kasich when he took office.

Mr. Strickland said he could not recall why the air authority was selected to handle the advanced energy program, and he said he wouldn’t have made that decision alone because several people crafted the stimulus.

“Obviously [the air authority] didn’t operate in isolation,” he said. “The Department of Development was involved in decisions and the controlling board was involved in decisions the air quality board would make. It was an effort to achieve a level of efficiency in the administration of the resources but certainly not in isolation.”

Air authority chosen

Mark Shanahan, the former director of the air authority who retired in April, 2011, also served as Mr. Strickland’s energy adviser while running the authority. Mr. Strickland said Mr. Shanahan’s experience would have been a factor in why the air authority was chosen.

“I can’t recall exactly what percentage of my thinking was influenced by the fact that Mark was there, but I would assume it was significant,” he said. “He was someone I knew personally and was friends with and had great respect for because of his expertise.”

Although the stimulus package built in a three-step process of approval for advanced energy loans — the official OK had to be granted by the air authority’s board, the state controlling board, and the Development Financing Advisory Council — that is where the multiple layers of oversight for the program end.

The air authority isn’t required to submit annual reports to the legislature on the health of the advanced energy program. It is, however, required to report on loans that are granted to minority-owned businesses.

“It just would seem to me that [when] you create a $150 million program that somebody besides us ought to wonder what in the world we’re doing with it,” Ms. Tenenbaum said during the air authority’s Sept. 11 meeting.

Problems emerge

The air authority’s board only learned of loan repayment issues with Ohio Cooperative Solar — a Cleveland company that received an advanced energy loan — days before its Sept. 11 meeting. Board members were stunned to discover that although the company had payment issues as early as March, they weren’t briefed on the details until six months later.

That gap highlights an ongoing breakdown in the flow of information among the board, the air authority’s staff, and USA Energy Advisors.

“When did we know about this? When did anybody know about this? What have we been discussing all year? What have we been discussing very emphatically since June 30? I think it’s that we want to know, and here’s another loan that we have no idea about,” Jeff Jacobson, an air authority board member, said during the Sept. 11 meeting. “I’m speaking for myself, I have never heard word one that this loan is behind. I’m glad to know they have a reason and a plan, but that is not the issue.

“The first issue is why is this the first time that we have heard anything at all that there is another loan that is in default?”

The communication gaps are one area that could be examined by the law firm hired to review the advanced energy loan program.

That review will add to a growing bill the air authority is footing to examine troubled companies or recoup funds from firms that defaulted on their loan agreements. The air authority hired GBQ Partners LLC, a Columbus accounting firm, for up to $100,000 to assess the financial viability of two advanced energy loan recipients.

“I don’t think that the [air quality] board can function as a loan board as such. We would have to employ experts to help us with that process, which is what we attempted to do,” said Clifford “Kip” Cloud, vice chairman of the air authority’s board. “If we’re going to determine whether a company is viable or not and we have to send somebody to look at their records, who better than forensic accountants who have had experience with this sort of stuff? I think we have to try to get information available to make the best decision.”

The air authority, which contracts much of the work done for it, is improving the communication issues at the staff level and with USA Energy Advisors, said Todd Nein, interim executive director of the air authority. The air authority holds weekly meetings with USA Energy Advisors and began submitting monthly reports to the board in September regarding the status of companies funded under the advanced energy program.

“That’s two areas that we need to make sure we hit,” he said.

Mr. Jacobson worries the board doesn’t have all the information it needs to make informed decisions. Being a good steward of taxpayer dollars is difficult when you can’t fully gauge a situation, he said.

Mr. Jacobson has said during air authority meetings that the board only learned about problems at Perrysburg’s Willard & Kelsey Solar Group after another company funded by the air authority brought it to its attention.

“We are the last people to find out and there is a lot of information that seems to get stuck somewhere in the channel,” he said. “I’ve been concerned we’re not being alerted to potential problems with loans.

“That is very dismaying, and it makes it very difficult for us to do our jobs.”

Richard Rastetter, a principal at USA Energy Advisors, said the air authority’s staff has been made aware of problems with advanced energy loan recipients every time they arise. Whether that information is passed on to the board is not the duty of USA Energy Advisors, he added.

“Again, we don’t report to the board, we simply report to the staff,” he said in an interview with The Blade.

Clearing the air

Politics didn’t factor into deciding what entities would be awarded funding under the advanced energy program, air authority officials and Mr. Strickland said.

“I can say unequivocally that no decision was based on political contributions,” Mr. Strickland said of the stimulus and advanced energy program.

As for going into business with Mr. Shanahan and John Haseley, a current air authority board member and former chief of staff in the Strickland administration, Mr. Strickland said those plans emerged after his term ended. The three joined forces to form Midwest Gateway Partners, a Columbus consulting firm.

“From my perspective, I wanted a place to go to and have a phone and a desk and to be able interact with my friends,” he said.

Mr. Haseley said the conversations about going into business happened after the three men left their public lives.

“It was coincidental that the governor and I were looking at putting a firm together, and I happened to have a phone conversation with Dr. Shanahan and it came up and he expressed interest in being a part of it.

“It was kind of happenstance and a coincidental conversation over the phone.”

Still, Mr. Strickland’s ties to the advanced energy program and the companies remain.

Two of the companies that are tied to substantial donations from people affiliated with them — Willard & Kelsey with $26,400 and Xunlight with $4,700 — have been on shaky financial ground, and issues continue to plague the advanced energy program.

Mr. Strickland said he couldn’t offer a definitive response on how the advanced energy program has fared because he’s been so removed from it.

Xunming Deng, Xunlight’s founder and former chief executive officer, said he donated $4,500 to the Strickland campaign because the governor was invested in making Ohio a renewable-energy state.

“He was a strong supporter of the solar industry,” Mr. Deng said.

Mel Kurtz, president of Quasar Energy Group, and his wife donated $20,000 to the Strickland campaign. The waste-to-energy company is a success story for the air authority and the advanced energy program — it was loaned $3.06 million for a project in Columbus that since has been completed. The company also is eligible for $100,000 in loan forgiveness under the program.

Mr. Kurtz, who said he is a conservative, said giving a donation to the Strickland campaign was all about spreading the word about the work being performed at Quasar.

“It’s to get the message out. It really isn’t an advocacy for the candidate, it was an advocacy for what we’re trying to do,” he said.

Any fledgling industry has risks involved for those who invest in it, Mr. Strickland said. Advanced energy is something that Mr. Strickland said will be vital for the economic success of the state and the country.

“When you are investing in companies, especially companies that are involved with new and emerging technologies, not every pitch is going to result in a home run,” he said. “That does not mean you do not continue to make these efforts to pursue developing technologies.”

Contact Kris Turner at: kturner@theblade.com or 419-724-6103.