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With BERC in limbo, loans, grants are hard to come by

City Hall's economic development operation, still reeling from the One Sunset scandal, is essentially closed for business awaiting an overdue reorganization plan from Mayor Byron W. Brown.

Loans and grants to business slowed to a trickle after the scandal over the Delaware Avenue restaurant broke in May 2009. They ended altogether when Brown announced in February his intention to dissolve the Buffalo Economic Renaissance Corp. and overhaul the city's approach to economic development.

Ten months later, Brown has failed to deliver, much less implement, a reorganization plan.

As a result, BERC's $40 million in assets, which agency officials estimated a year ago gave them the ability to lend up to $5 million a year, are stuck in limbo. That, coupled with tight bank credit, makes it tough sledding for entrepreneurs and small businesses looking to set up or expand shop.

"It's been a long time with no economic development activity going on in the city," said Delaware Common Council Member Michael J. LoCurto, chairman of the Council's Community Development Committee.

"It's almost been a full year since they announced the dissolution, and I'm not sure what they've done in the interim. It's hard for us to get answers out of them," he said.

Indeed, aside from one appearance before a Common Council committee in June by a member of Brown's cabinet, the administration has ignored requests to share details with city lawmakers. And the mayor's office refused to answer questions from The Buffalo News for this story or provide related public records.

"There really isn't much to talk about at this time other than to say that BERC was formally dissolved by its board and that the reorganization process is ongoing," Peter Cutler, the mayor's spokesman, said in an e-mail.

The one administration official who would talk, acting BERC President Dennis M. Penman, said resolving the agency's legal and financial issues has been time-consuming.

"It's more complicated than I thought it would be," Penman said.

In the meantime, The News found a lot has happened.

The mayor forced a dissolution on a reluctant BERC board by reducing funding and filling vacant seats with staff and supporters in a run-up to the vote in October.

The agency, at a cost of hundreds of thousands of dollars, kept staff on longer than there was sufficient work for them to perform once the loan and grant programs were suspended. It finally fired more than half the staff in late October.

Brown and his administration, to the extent they have formulated plans, appear to have done so with a minimum of input beyond the inner circle and have shared little information with outsiders except on a need-to-know basis.

A federal investigation was launched in the past month by the inspector's general office of the U.S. Department of Housing and Urban Development.

Sources said federal investigators have sent letters to a number of former BERC employees and have started interviews.

"They want to know what money was spent on," said one former employee who was interviewed several weeks ago.

While Penman understands some of the criticism and frustrations over BERC's dissolution, he said it's important to keep in mind that BERC was a flawed organization that called for a major change.

"It wasn't the most efficient way to deliver economic development," he said. "The city is entitled some time to figure out a better way."

>Persistent problems

BERC has been troubled throughout most of its 32 years.

Previous mayors used it to bankroll risky ventures, and BERC and secondary economic development agencies operated by the city suffered loan defaults at more than double the national average. City lending programs also fell short of job creation goals.

In a typical year, before the recent slowdown under Brown, BERC was making about 25 loans a year totaling about $2.5 million. Activity nose-dived when Brown took office in 2006 and lending dwindled to 10 loans last year. Although BERC's lending was aimed at creating jobs, the agency did not have a reliable system to track employment and could document the addition of only about 100 jobs during Brown's first four years in office.

The One Sunset scandal proved to be BERC's undoing.

The agency, at the instigation of senior staff who later helped manage the Gates Circle restaurant, arranged $160,000 in public loans and grants despite the misgivings of bankers on BERC's board about the inexperience of owner Leonard Stokes. Stokes later defaulted on those loans when the business closed in December 2008 after being opened for only one year. Subsequent revelations raised questions as to whether Stokes exploited a personal relationship with Brown to obtain city help.

Brown turned to Penman, a prominent developer and former chairman of the Erie County Industrial Development Agency, to head BERC on an acting basis to spearhead a reform effort. That followed the appointment of E.J. Walton, an experienced financial hand, as chief financial officer.

The two were deep into their planning -- Penman had enlisted a host of former city development officials to help draft a reform initiative -- when Brown blind-sided them with his announcement during his State of the City address in February that he was going to dissolve BERC and then shift much of its work to the Buffalo Urban Renewal Agency.

Under Brown's approach, the mayor would gain increased power over community development funds because he chairs the urban renewal agency and appoints a majority of its board members. BURA's board has historically included politicians, bureaucrats and community members supportive of the mayor.

Brown thus far has spurned suggestions that the board makeup be amended to include members with experience in finance and development who could operate in a more independent manner.

>Plodding progress

BERC is technically an independent agency with a self-appointing board headed by the mayor as chairman. Many board members from the private sector, including bankers and attorneys, were cool to the dissolution plan, according to one former member who spoke on the condition he would not be identified. But they were resigned to the agency's demise, partly because the Brown administration cut off block grant funding necessary to help fund operations, the former board member said.

Although Brown assured the board it would be involved in the planning that would lead to dissolution, the board member said no serious consultations ever took place. In fact, monthly board meetings were canceled between March and September.

Board members were not alone in their frustration.

Several Council members during the spring and summer voiced concerns about what they perceived as a lack of progress. Janet Penksa, commissioner of Administration, Finance, Policy and Urban Affairs, finally appeared before a Council committee in the middle of June to answer questions, although details were still hard to come by.

The Council followed up with a request a month later seeking details, but LoCurto said it has yet to receive a response from the mayor's office.

Meanwhile, BERC's board broke with tradition and refused to appoint Niagara Council Member David Rivera to its board to succeed former Ellicott Council Member Brian Davis.

A BERC board meeting was finally held Sept. 15, after several board members complained to Penman and after work by outside attorneys and accountants hired by the board, at a cost of up to $125,000, had progressed to the point where a dissolution plan was on the horizon.

But there was a problem: Enough board members had resigned that no quorum could be raised. Moreover, BERC's general membership had fallen below the required minimum of 25.

Brown responded by appointing a number of board members and general members, including Deputy Mayor Steve Casey, who had previously resigned from the board in late 2008 after skipping his final eight board meetings. The former board member described the additions as "insiders" and "friends of the mayor."

With opponents of dissolution now outnumbered, both the board and membership voted the mayor's way Oct. 20.

Next came the elimination of staff.

>Slow to downsize

BERC had about 25 employees when the One Sunset scandal hit, 11 of them involved in grants and loans. The agency stopped awarding grants and made only a few loans after the One Sunset scandal broke, but BERC did not trim its payroll, which ran about $1.2 million annually, even after Brown announced his dissolution plans.

One former staff member said that for many employees, the last year on the job involved "just showing up. No work."

Penman said some employees, such as those involved in maintaining properties owned by BERC, continued with a full work load, but he conceded that not everyone was as occupied as they had been when the agency was issuing loans and grants.

The former employee complained that no one from the administration ever spoke to the staff about the fate of the agency.

Staff members were finally told their fate in late October and those fired were offered a modest severance package that included one week's pay, plus accrued sick and vacation time and job placement services. Severance pay was pegged to an agreement not to sue or discuss BERC with outsiders in an unfavorable light, one former employee said.

"That's not severance, that's hush money," the former employee said.

Fourteen employees were fired. Five others were transferred to BURA. A half-dozen involved in building management and maintenance remain on the payroll, as does Walton and an assistant who are handling financial and administrative duties.

>Plans evolving

While the Brown administration has not released all the details, a review of documents and interviews with knowledgeable sources indicate this is the game plan:

* About $20 million in cash assets and receivables derived from federal sources would be transferred to BURA, which would in turn set policies for future lending and grant programs and provide seed funding.

BURA has issued a request for proposals seeking a bank or other financial institution to service loans. Brendan Mehaffy, director of the Office of Strategic Planning, is devising a plan whereby loans and grants would be coordinated with other programs, including housing and schools, to target resources in specific areas of the city.

While Brown, in his State of the City address, pledged to create an entity with the "full complement of tools" necessary to help businesses and homeowners, the particulars have not been disclosed -- if they have even been developed.

* About another $20 million in assets, mostly real estate, plus some nonfederal income, would be transferred to the Buffalo Urban Development Corp., a subsidiary of the ECIDA. That would put the Urban Development Corp. in the business of managing and maintaining properties that include several business parks and incubators. The Urban Development Corp. may hire the BERC employees who presently do that work.

BUDC's staff has recommended the transfer, but the board has not acted, and one source said some key details must still be worked out.

While BERC's board and membership have voted to dissolve, those actions must still be approved by the state Attorney General and State Supreme Court because the agency is a nonprofit chartered under state law. Penman said those approvals will probably be sought the first quarter of next year.

In the meantime, City Hall is off limits to businesses seeking loans. About all those seeking help can expect is a referral to other economic development agencies.

The ECIDA lends money to small business through its Regional Development Corp. and has made only a handful of loans the past year that might have otherwise been made by BERC.

The Pathstone Enterprise Center in Rochester, which lends to small business throughout the state, reports it made no loans in the past year that might have otherwise been made by BERC.

Meanwhile, bank credit remains tight.

"It hurts, especially in this economy, that there's no activity going on and everything seems to be up in the air for such a long time," LoCurto said.

e-mail: jheaney@buffnews.com

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