The Finance Authority of Maine has closed a loophole in a state tax credit program that aims to prevent the inappropriate use of taxpayer-backed loans.

FAME’s board of directors on Thursday made an emergency rule change that prohibits the use of one-day loans in the Maine New Markets Capital Investment program, which was the focus of a Portland Press Herald examination published in April. The rule change takes effect immediately, but is temporary until the standard rule-making process and a public comment period are undertaken.

One-day loans are a financial tool that out-of-state investors used to turn an $8 million investment in Great Northern Paper and its now-defunct mill in East Millinocket into a guaranteed return of $16 million in Maine taxpayer dollars, payable over the next several years. One-day loans also have been used in other investment deals approved under the state program since its inception in 2011. Money that is intended for infrastructure upgrades, modernizing equipment and other capital expenses in qualifying businesses in poor communities is instead used to pay off old or high-interest debt and fees, which benefits the investors, but not the business. The label comes from the span of time when the money enters a business’ books and when it comes off.

The Legislature created the Maine New Markets program to attract investment in low-income communities by providing state tax credits to investors who invest in businesses in these communities. The credits are worth 39 percent of the total investment, payable over seven years. But unlike the federal program on which it was modeled, the Maine tax credits are refundable, meaning the investors can redeem them for cash if they have no Maine income tax liability.

The new rule prevents the issuance of tax credits for any investment where more than 5 percent of the money is used to refinance prior loans, to make equity distributions, to acquire an existing business, or to pay transaction fees. In effect, the language aims to ensure that the investment is actually spent to benefit the low-income community.

“The heart of this whole issue is to ensure the low-income community business gets the full investment to justify the tax credit,” Bruce Wagner, FAME’s CEO, said Friday. “That language does that.”

The board’s change returns the rules closer to their original form. After the Legislature created the program, FAME adopted rules that included a sentence requiring “substantially all” of the investment be spent in the low-income community where the qualifying business is located. However, FAME’s board later removed that sentence after an out-of-state financial service company, Advantage Capital of New Orleans, threatened to pull back on its planned investment of more than $30 million in Maine. Following the removal of the “substantially all” stipulation, Advantage went on to invest $24.8 million in JSI Store Fixtures in Milo, a transaction that included a one-day loan of $15.8 million.

The most high-profile use of one-day loans in the New Markets program involved a $40 million investment in Great Northern Paper in East Millinocket that was intended to upgrade the mill and convert it to natural gas. Of the $40 million approved for the mill, $32 million was in the form of loans that flowed in and out of the mill’s books in a single day. The remaining $8 million was used by the mill’s owner, Cate Street Capital, to pay off old debt and cover fees associated with the investment. None of the $40 million was used to make capital improvements at the paper mill, which closed last year, putting 200 people out of work.

The series of Press Herald articles prompted debate in the Legislature over the future of the New Markets program. The Legislature’s labor and economic development committee unanimously approved a bill last session that would have expanded the program by doubling its allocation of tax credits. But after the revelations in the paper, Democrats on the committee brought the bill back and amended it to prohibit one-day loans and to suspend more allocations until the program could be studied. Republicans also opposed one-day loans but wanted to continue funding the program. The bill died when the two sides failed to find a compromise.

With the Legislature unable to close the loophole, FAME’s board decided to take action. Given that both sides agreed that one-day loans should be done away with, Wagner said FAME’s board was effectively following the Legislature’s wishes.

Wagner believes the change fixed the program.

“I think it does repair the loophole by eliminating all one-day loans,” Wagner said. “I do think the New Markets tax credits is an important program for development in the state and one I hope is funded by the Legislature next year. But regardless of what their decision is, I think it’s in good shape between now and that time.”

The original program received $97.5 million in tax credit allocation; $20 million has yet to be claimed. On July 31 Wagner temporarily halted the acceptance of applications for tax credits to allow the board to fix the one-day loan loophole. That suspension will end on Aug. 31.

The emergency rule change expires on Nov. 20. FAME’s board will accept written comments and plans to hold a public hearing on Sept. 27. Wagner hopes a formal rule change will be adopted by the time the emergency rule expires.

In the meantime, the Legislature’s Government Oversight Committee on Thursday moved forward with a plan to hold a public inquiry into the program, and specifically the Great Northern deal, sometime in November.

Wagner said he welcomes the inquiry and looks forward to FAME’s participation in the process.

 


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