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Businesses borrowing from City Hall have done a better job meeting modest employment goals than they have repaying their loans, a Buffalo News analysis shows.

The default rate for all city loans is more than double the national average, The News found. Loans made under the federally supported Section 108 program -- the city's primary lending tool during the 1990s -- have been especially troublesome, with a 39 percent default rate. That's four times the national average.

The News analysis also found problems with other city lending programs. Companies taking out non-108 loans defaulted on 17 cents of every dollar borrowed, compared with a national average of 12 cents.

But The News also found that the city under Mayor Anthony M. Masiello has done a good job meeting modest job creation goals on loans predicated on increasing employment. Companies have exceeded their hiring goals by one-third.

An average of less than 150 jobs a year have been created over the past decade, however. And many, if not most, appear to be low paying. Restaurants and bars, for example, are the most-common type of business getting job-creation loans.

One national expert who reviewed The News' statistical analysis said "you'd have to be concerned" by the Section 108 defaults. But the default rate for other loans, while higher than the national average, aren't altogether unexpected, given Buffalo's struggling economy, said Christopher Walker, director of community and economic development at the Urban Institute.

"If you're trying to jump-start things in Buffalo, restructure an economy, it's a riskier bet. So it wouldn't surprise if you have a higher default rate," said Walker, author of a study last year that assessed the performance of loans made by cities to private borrowers.

Buffalo's track record creating jobs the past 10 years drew qualified praise from Jeffrey A. Finkle, president of the International Economic Development Association.

"On the face of it, Buffalo is doing OK," he said.

The types of jobs being created gives him pause, however.

"While you're not the first to do bars and restaurants, that's not a strategy for building an economy," he said.

The News' findings are based on an analysis of 736 loans made by the city from 1978 through the end of last year and interviews with 16 economic development experts, borrowers and city officials.

Here's what The News found:

The city has lent $153.4 million to companies since 1978. While the Section 108 program became the centerpiece program during the early years of the Masiello administration, other programs account for $115.8 million of what the city has lent over the years. Big borrowers -- those taking out loans of $500,000 or more -- account for two-thirds of the money lent, yet more than 550 small businesses also have received help.

Overall, companies have defaulted on 22 percent of the money they've borrowed. The national average is 10 percent from 1994 to 1999, according a study of 51 cities released last year by the Urban Institute.

Masiello's default rate for all loans is 27 percent compared with 20 percent for former Mayor James D. Griffin. The default rate for Section 108 loans was 34 percent for Masiello and 47 percent for Griffin. The default rate for all other loans was 19 percent for Masiello and 17 percent for Griffin.

Companies that borrowed money since 1994 in exchange for creating jobs added one-third more than the 1,097 they projected. That's 135 percent of the goal, compared with a national average of 93 percent. Three-quarters of companies met their job goals, compared with a little more than half nationally. Figures before 1994 were not available.

The city doesn't appear to be creating many high-paying jobs with its loans. While salary information is not recorded, most of the companies getting loans are small and involved in retailing, food service and other businesses that typically provide modest compensation. That partly explains why Buffalo's cost per job for non-Section 108 loans was low -- $6,888, compared with $11,615 nationally.

City Hall's lending practices have changed during Masiello's tenure. Since 1994, a much greater share of city loans is being made in the neighborhoods and to start-up ventures and companies owned by women and minorities.

"I made the policy call that we needed to make a greater investment in small business in our neighborhoods," Masiello said.

Who borrows

Government loans started coming into vogue in the 1970s, with federal block grant money used to start loan pools and provide economic development grants. The federal government further encouraged localities to get involved in economic development through urban development action grants in the 1980s and, after they were phased out, through the Section 108 loan program.

The two programs have been the biggest ones operated by Buffalo, accounting for half the city's borrowing since 1978. The city has also offered another 10 specialized loan programs over the years, used for everything from printers to brew pubs, banks to bowling alleys, shops to shippers.

Borrowers read like a who's who of Buffalo business.

Westwood Pharmaceuticals borrowed $2 million to expand and equip its plant on Dewitt Avenue.

Kaufman's Bakery took out three loans totaling $600,000 to expand and equip its Fillmore Avenue plant, which has since closed.

Spot Coffee borrowed $185,060 to buy equipment and fixtures and defaulted on a portion.

Companies borrow from the city because interest rates are lower and terms tend to be easier. The Urban Institute study found that one-third of borrowers said their projects would not have gone forward without the government loan.

The loans come with certain requirements, including that at least 51 percent of new jobs go to low- and moderate-income residents or help the neighborhoods they live in. City residents also are given first crack at new jobs.

Loans have ranged in size from $1,500 to $8.5 million. While the median size is $50,000, 32 were worth $1 million or more, made mostly to developers and businesses downtown. As a result, downtown businesses and developers have gotten 48 percent of the $153 million lent by the city.

That's on top of $51.3 million in float loans the city made, mostly to developers of office buildings in the 1980s. These float loans were not considered in The News analysis because they were short-term and carried no risk because they were backed by a letter of credit from banks.

While risk-free, the last float loan, an $8.6 million borrowing to Dela-ware North Cos. in 2000, resulted in a rebuke from the U.S. Department of Housing and Urban Development.

The company used the money to relocate its headquarters from Main and Court streets to Key Towers. HUD officials questioned how the move met the federal criteria.

"The city said it cured slum and blight by allowing a multibillion-dollar corporation to move into Class A office space," said Stephen T. Banko, head of HUD's local office.

A call went from HUD offices to City Hall, and the loan was recalled. None have been made since, although low interest rates available through banks have more to do with it than a change in city policies.

Different tacks

The city did more borrowing in the 1980s under Griffin, who lent $107 million during his tenure, compared with Masiello's $46.2 million through 2003.

In part because of $39.3 million in UDAGs, the city under Griffin often swung for the fences, making big loans to high-profile projects, ranging from downtown bank buildings to the revitalization of the Theater District. The city also made a lot of loans to manufacturers and retailers.

The city changed gears upon Masiello's arrival. It had less money to work with, as UDAGs had dried up, so the Section 108 program became the primary tool, accounting for 52 percent of the money lent since 1994, when Masiello took office.

Where Griffin made two-thirds of his loans downtown and in neighborhoods with low poverty rates -- under 20 percent -- the city under Masiello has done two-thirds of its lending in high-poverty tracts. Some of the change has to do with Masiello's priorities, but revisions in federal rules have mandated more lending to benefit residents in low- and moderate-income neighborhoods.

Masiello has lent three times more money to start-up companies than did Griffin and has made twice as many loans to firms owned by women and racial minorities.

Masiello's downtown lending was focused on the Theater District. In the neighborhoods, there has been an emphasis on commercial and small business, much of it restaurant and retail, and providing firms technical assistance.

Reasons for defaults

Walker, of the Urban Institute, said government loans are supposed to be riskier than those made by banks.

"If the public sector isn't taking risks, they shouldn't be lending at all," he said.

But Andrew J. Rudnick, president of the Buffalo Niagara Partnership, said city officials too often have lent money to ventures, particularly retail, that "didn't make sense, given the marketplace."

"It's the difference between giving an incentive to be successful and a crutch," he said. "We were handing out crutches, not incentives."

Masiello's relatively high default rate can be traced to three factors: the failure of many businesses in the Theater District, as well as one-third of the start-up ventures and companies owned by minorities and women.

The mayor said the city needed to provide investment.

"We felt there was a tremendous void in the private sector fulfilling that role," Masiello said.

"We've made sincere, good-faith efforts to make a difference, to create jobs and investment. In some cases we succeeded, and in some cases, regrettably, we didn't."

Timothy E. Wanamaker, the city's top economic development official, citied several factors for the default rates.

While he supports smaller loans to small business, they tend to be "much riskier," he said.

The city's management of the program also may have contributed to the high default rate, he said. Too many loans lacked sufficient collateral, he said, and the city was slow to press for payment when borrowers fell behind.

Portfolio management was "a big problem for us," he said. "People have come in and assumed because we're the public sector we should be giving money away."

What happens when loans go bad?

In the case of Section 108 loans, the city must repay the federal government out of community development block grant funds.

Defaults on other loans amount to a drain on city's loan pool: There's either less money to lend, or the city has to replenish it by using block grant dollars or other government funds.

Job numbers up

The city doesn't maintain reliable job creation records on loans made during the Griffin era, but the raw numbers suggest his lending probably created more jobs while falling far short of the ambitious goals that many loans called for.

The city has done a better job tracking job creation during the Masiello era, and the numbers stack up well with national comparisons.

Three-quarters of the 121 companies that took out loans with the provision they create jobs met their goals; the national average was 55 percent. The companies collectively projected the addition of 1,097 jobs within three years of getting their loans; they wound up creating 1,482. City records do not indicate how many of those jobs remain.

Wanamaker isn't impressed with the job creation numbers, which average about 150 a year.

"I wouldn't feel I was doing my job if I was achieving a couple of hundred of jobs a year," he said. "We can do a lot better than that."

At $6,888 lent for every job created, Buffalo is making effective use of its money, said Finkle, of the International Economic Development Association, a leading trade organization based in Washington, D.C.

"You've got a good cost-per-job number," he said.

Finkle cautioned, however, that the figure indicates most of the jobs being added probably don't pay high wages.

"How many pay a living wage?" he asked.

"In order to get better jobs, their cost per job is going to have to get higher. If you're working with a technology company, your cost may run up to $40,000 per job," he said.

While the city has lent money for job creation to a number of manufacturing and technology firms, those loans are far outnumbered by those to service industries. Since 1994 there have been loans to Harmac Medical Products, Buffalo Technologies Corp. and Precision Molding and Millwork, but also to McGuido's Pizzeria, Chopafellaz Unisex Salon and Louie's Texas Red Hots.

The two loan recipients generating the most jobs -- nearly one-third of all the jobs added during the Masiello era -- operate a call center and nursing home, both industries that pay low wages and have high staff turnover.

Masiello said the city lent to the opportunities that presented themselves. He acknowledged that many are "entry-level jobs" but said in some cases the job creation loans accomplished several objectives. For example, a loan to Grace Manor nursing home helped establish the city's first African-American nursing home, which located in what had been a vacant building.

The News analysis shows Buffalo also does a good job of leveraging its money. City loans over the years have accounted for 20 percent of project financing, compared with 26 percent nationally, according to the Urban Institute study.

Griffin did a slightly better job leveraging city dollars -- loans during his tenure accounted for 18 percent of project costs, compared with 23 percent under Masiello. But The News found both made some loans where city funds accounted for a large share of the total investment: A quarter of loans saw the city putting up at least three-quarters of the financing.

Officials familiar with the city's lending operation said it has suffered over the years in a handful of important ways.

The staff of the Buffalo Economic Renewal Corp. and its preceding incarnations has historically lacked sufficient expertise, observers said. The payroll was sometimes used as a political dumping ground, including the hiring of former Common Council members defeated for re-election.

Moreover, while Charles Rosenow, Griffin's top economic development official, was generally well regarded, Masiello's first three development chiefs -- Daniel Bicz, Alan DeLisle and Joseph Ryan -- came in for criticism during their tenures.

Too much of what the city did was driven by developers, rather than a strategic plan, which led to a scattering of loans.

"I think the lending program in the past at times lacked focus and certainly lacked coordination," said Thomas A. Kucharski, president of Buffalo Niagara Enterprise and a member of the Buffalo Economic Renewal Corp. board.


News researcher Andrew Bailey contributed to this story.

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