Lawmakers are calling for changes to a state program that awards tax credits to investors who put their money into businesses in low-income communities.

The legislators’ scrutiny comes after a Maine Sunday Telegram investigation revealed that Maine taxpayers will dole out $16 million in tax refunds for investments that never flowed to a now-shuttered paper mill in East Millinocket.

The program, Maine New Markets Capital Investment, was created in 2011 to channel money from investors into eligible businesses. In exchange, investors receive a state tax credit worth 39 percent of the total investment, payable over seven years. But unlike the federal program on which it was modeled, the Maine New Markets program makes its tax credits refundable – meaning the investors can redeem them for cash if they have no Maine income tax liability.

The program was tapped by Cate Street Capital, a New Hampshire private equity firm, to direct $40 million to Great Northern Paper, a foundering mill it owned in East Millinocket. But of the $40 million, $32 million took the form of one-day loans, $7 million was used to pay down high-interest debt and the rest went to brokers’ fees. None of the money was used to modernize the mill as described in the initial application to the program, yet taxpayers will pay $16 million to the investors. The mill closed and filed for bankruptcy last year.

House Speaker Mark Eves, a North Berwick Democrat who supported the tax credit program in 2011, said the Cate Street situation with the East Millinocket mill was “a classic case of fraud and abuse of taxpayer dollars.”

“I feel like the state got ripped off and we need to look at it in a way that fixes it to make sure it doesn’t happen again in the future,” Eves said.

Cate Street and the project’s investors do not appear to have broken any laws because the 2011 bill does not impose requirements on how taxpayer money would be spent or any mechanism for ensuring the money is invested in the local community. Pressed on the lack of accountability in the law, Eves said Cate Street “went well outside of what the program was designed for.”

“They took this money and used it for purposes it shouldn’t have been used for,” Eves said. “Whether it has to be written in law or not, we would hope that people would act in good faith when they do business in the state. And if we have to put it in writing and clarify that, then that’s what the committee will work on doing to make sure this abuse doesn’t happen again.”

BILL SEEKS PROGRAM CHANGES

A bill to double the investment cap of the Maine New Markets program from $250 million to $500 million got a unanimous vote from the Labor, Commerce, Research and Economic Development Committee in early April. The Finance Authority of Maine, which administers the program, included a provision in the bill to prohibit the use of one-day loans from the New Markets deals, a tactic used by the investors and their middlemen to inflate the value of the deal and trigger the largest award of tax credits.

Gov. Paul LePage, speaking Tuesday morning at the Portland Regional Chamber Eggs and Issues breakfast, said he was not aware of any way the state could decline to pay the $16 million in tax credits awarded to the Great Northern investors.

“I’ll tell you, was I happy about that deal? No,” he said. “But when you make the deal, you make the deal. I don’t know how you stop that” (awarding tax credits despite the failure of the mill).

Later Tuesday, LePage spokeswoman Adrienne Bennett said the governor is “very interested” in this issue and believes the changes proposed by FAME are “good first steps.”

“We will see if (lawmakers) include that in the bill,” Bennett said. “If not, there is a strong chance that he would veto it because there were some unintended consequences as a result of this (2011) bill.

“He is certainly amenable to improving this bill and he agrees that there are changes that need to be made” to the law, Bennett said. “But he is going to allow the Legislature to do its work.”

The bill to double the cap on investment, L.D. 297, sponsored by Sen. Nathan Libby, D-Lewiston, received a unanimous “ought to pass with amendments” vote in the Labor, Commerce, Research and Economic Development Committee, but has not yet been sent to the House or Senate floor. That means committee members can either reopen discussion on the bill to make more changes – which Eves said he believed is the most likely route – or can send it to the full Legislature, where lawmakers can propose changes on the House or Senate floor.

Libby did not respond Tuesday to requests for comment. Neither did Sen. Amy Volk, R-Scarborough, and Rep. Erin Herbig, D-Belfast, co-chairs of the Labor, Commerce, Research and Economic Development Committee.

MILL ‘CHRONICALLY ILL’

Sen. Andre Cushing, R-Hampden, the Senate assistant majority leader, said he was still learning the details of the Great Northern deal’s finances. But based on his discussions with the parties at the time, Cushing believes many of the players were working “in good faith” toward a goal of keeping the mill open. But the Millinocket mill was a “chronically ill facility” beset by a host of factors that led to its closure.

“They were trying to sustain a business that produced a product that continued to see a decline, and they were working on a financial model to make it viable,” Cushing said.

Cushing added, however, that he supports re-examining the program for improvements and that “there always needs to be scrutiny when things don’t work out successfully and we aren’t able to keep jobs.”

U.S. Rep. Bruce Poliquin, who as state treasurer was on FAME’s board at the time of the vote on the Great Northern deal, was unavailable to comment Tuesday, according to Brent Littlefield, his political adviser. But Littlefield said the congressman raised concerns at the December 2012 meeting in which FAME’s board approved the Great Northern deal. Littlefield cited the board minutes from that meeting: “Treasurer Poliquin cited several instances where the state of Maine misused federal funds in the past and his concern is whether this use of tax credits meets the spirit and technical components of the law and questioned if there is a litigation history.”

“His feeling is the minutes speak for themselves,” Littlefield said. “He raised several concerns and the staff recommended approval and the staff stated it met all the qualifications and it was a unanimous vote.”

Reflecting on the way events unfolded in East Millinocket, Sen. Justin Alfond, D-Portland, Senate minority leader, laid the blame at the feet of Cate Street, “a bad actor (who) came in and took advantage of a desperate situation,” even accusing the company of “financial fraud” by misleading state and local officials. Alfond said the Legislature passed the tax credit bill as a last-second, “Hail Mary” attempt in response to the pleas for help from Millinocket-area officials.

NO COMMENT FROM CATE STREET

A call made Tuesday evening to Cate Street seeking comment was not returned. The company has not commented despite numerous attempts by the Telegram over its five-month investigation into the New Markets program.

Alfond said it’s clear the program needs more checks and balances.

“We all have to pause and say, ‘What could we have done better? What accountability measures do we need to have in place?’ Because when you look at the track record of this program federally, there are a lot of success stories,” he said. “But after this example, after this transaction, we have a lot to learn.”

Asked what sort of checks and balances he envisioned, Alfond said he would defer to people with more expertise in the federal New Markets Tax Credits program, but eliminating the same-day loans sounds like a logical step. Alfond said he is open to considering all options, including a clawback provision for companies that don’t fulfill their promises.

Alfond pointed out that the Legislature considered a bill last session that would have required call centers that outsource jobs overseas to pay back a portion of state grants, loans or tax credits paid to the business. The bill passed the House but failed in the Senate.

“That bill was not successful, but the Legislature has had those conversations before,” Alfond said.

The Legislature is currently considering a bill, L.D. 941, that would direct the Office of Program Evaluation and Government Accountability to scrutinize all the state’s tax credit programs.

Beth Ashcroft, OPEGA’s director, said the New Markets program is on the list of programs to be fully evaluated, but not until 2018. She declined to say whether OPEGA would launch its own evaluation of the program, and that it takes its direction from the Legislature.

Whit Richardson can be contacted at 791-6463 or at:

[email protected] Twitter:whit_richardson

Kevin Miller can be contacted at 791-6312 or at:

[email protected]

Twitter: KevinMillerPPH