Some firms fail despite state backing A few businesses never got started, agency report shows

Duds, defaults, bankruptcy

Legislators want closer scrutiny, follow-up procedures

September 15, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

When Freewing Aerial Robotics packs up and moves to Texas in a few months, it will take with it more than a promising Maryland technology, five good Maryland jobs and the prospect of 15 more.

It will take $166,800 in Maryland taxpayers' money, granted to Freewing five years ago in the hope that it would live long, prosper and eventually contribute to the state's economy.

It won't.

To the disappointment of state officials, the College Park-based developer of unmanned aircraft is taking the money and running to an undisclosed spot in Texas. There it plans to open its first factory and "probably" transfer its headquarters, too, President Odile Legeay said in an interview.

"Flown to Texas" is the acerbic comment on Free-wing in a new, confidential state report on economic development financing. The report, prepared by the Department of Business and Economic Development for internal use and obtained by The Sun, details many other state loans, grants and investments worth millions that have gone sour.

Although the state's business-financing successes outnumber its failures, some of its loan recipients can't even be traced. Some companies didn't boost employment as much as promised. Some moved to the state and then closed shop. At least two took Maryland's money and never even moved here, the report said.

The book has attracted notice from policy-makers.

As Maryland's business-development financing reaches an all-time high -- $54 million in new funds this year -- and the General Assembly prepares for next year's requests from Gov. Parris N. Glendening, legislators from both parties wonder if the state's money has been deployed and tracked as well as it could have been.

Sen. F. Vernon Boozer called "shocking" the revelations of the report showing that the state's bond-insurance fund approved risky deals worth millions in the early 1990s without crucial information and documentation.

"Those are taxpayer dollars. I think we need to do a complete audit -- a complete audit, a thorough audit" -- of every state-backed business financing program, said Boozer, a Baltimore County Republican.

As Maryland's economy lags behind the nation's and neighbor states compete ever more fiercely for Maryland's employers, few legislators question the need for business-development spending; nor do they want to cut it. They understand that not all the projects will work out.

But some business people and General Assembly members think the state could simplify its bewildering and sometimes overlapping array of financing programs, created piecemeal over decades. And they want to make sure that James Brady, economic development secretary since last year, keeps promises to aim and account for the financing better than some say his predecessors did.

"Some of that earlier stuff looked a little slushy," said Sen. Barbara A. Hoffman, a Baltimore Democrat who adds that accountability is "getting a lot better" under Brady. "I think we were much more scattershot, and we don't have the money to use the scattershot method. You have to be able to justify who gets these benefits."

Brady, a certified public accountant, disagrees with the criticism of his department even though much is focused on actions years before he arrived.

"I don't know of any deal that's been done at any time where there hasn't been a lot of very intelligent analysis and discussion beforehand," he said. But, he added, "Does that mean we ought to put in place some procedures that are more extensive? Yes. Where we have really concentrated our efforts is developing good credit procedures in the office."

Maryland has more than a dozen programs to financially assist businesses. One program finances day-care centers. One makes energy loans. Others make seafood loans and minority small-business loans.

The "Challenge" fund backs infant high-tech firms; the "Enterprise" fund, toddlers. The "Sunny Day" fund seeks "extraordinary" chances to keep or lure bigger employers.

A few policy-makers adamantly oppose any such sustenance. Robert H. Kittleman, a Republican delegate from Howard County and the only member of the Legislative Policy Committee to vote against the most recent Sunny Day requests, likens it to %J totalitarian-style central economic planning.

Instead of throwing $50 million annually at companies, Maryland ought to cut taxes, reduce regulation and take other steps to change its business climate, he said. "That benefits everybody equally and then we can say, 'OK, fellows, go compete.' "

But most states do what Maryland does, figuring that well-placed grants and subsidies can make tiny companies small, small companies big and big companies loyal.

For many startup firms, capital is simply unavailable in the free market. Even swashbuckling venture capitalists usually won't finance a garage firm whose only assets are a promising idea, a good patent and a founder with a day job. The state will.

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