Dan McGowan, WPRI.com Reporter - PROVIDENCE, R.I. (WPRI) – When everything goes right, the Providence Economic Development Partnership (PEDP) is the city agency whose loans help some of the city's hottest restaurants, from Capriccio's in downtown, to Venda Ravioli on Federal Hill and Los Andes on Chalkstone Avenue.
But things don't always go right, and the taxpayer-backed program has picked just as many losers as winners in recent years, writing off more than $4 million in loans to failed businesses since 2012 while also being forced to pay back nearly $2 million to cover loans and other expenditures the federal government ruled never should have been authorized.
Now officials in the Elorza administration are hoping to breathe new life into a program they consider a significant part of Providence's economic development tool box while trying the shed the agency's reputation for lax oversight and poor loan collection habits.
By the end of the year, the city is expected to announce a complete overhaul of the PEDP, separating the program into two entities: the Providence Business Loan Fund Corporation, which will focus on providing loans to the small businesses; and a separate committee that will advise Mayor Elorza on broader economic development issues.
"No one would shed a tear if we scrapped [the PEDP]," Brett Smiley, the city's chief operating officer, told WPRI.com. "But we can't limit the tools in a very limited tool box."
Smiley said the changes will also come with increased protections "to not have some of the sins of the past reoccur," including enhanced loan-collection efforts by Moses Afonso Ryan LTD, the PEDP's legal counsel for the past several years.
The changes will follow months of discussions with the PEDP's 15-member board that began at a March retreat. At that meeting, several members expressed interest in playing a larger role in crafting the city's economic development strategy while having less of a role in the approval of loans to individual businesses.
"I would love for this board to look at the bigger picture," Councilwoman Sabina Matos, one member of the board, said during the retreat.
- Related: PEDP plans to write off more loans
- List: All active PEDP loans
- Also: City repays $1.9M for bad loans, improper expenses
But before the administration granted the board's request, it needed to take a deeper look at the PEDP's problems.
In one form or another, the city of Providence has been approving taxpayer-funded loans to small businesses since at least 1978, when the Cianci administration established an independent panel to review funding requests known as the Providence Local Development Corporation. In the 1980s, under Mayor Joseph Paolino, the city created the Providence Economic Development Corporation (PEDC). In 2003, Mayor David Cicilline changed the PEDC to the Providence Economic Development Partnership and became the first mayor to sit on the board himself.
Over the years, the city approved millions of dollars in loans – most of them with federal money from the U.S. Department of Housing and Urban Development (HUD) – for everything from restaurants to boutique shops and laundromats. At a meeting in 2003, one member congratulated the board on approving $35 million in loans to dozens of businesses in the previous 10 years.
The catch, at least over the last two decades, has been that, in order to be eligible for a loan from the city, borrowers had to show they were denied funding by at least two traditional lenders. City officials and members of the board routinely refer to the PEDP as a "lender of last resort."
"The idea of the program is absolutely beneficial and helpful," Gianfranco Marrocco, one of the city's most well-known restaurateurs, told WPRI.com. "Who in the world is going to let me borrow $300,000 to build a hotel and restaurant [in DePasquale Square]?" Marrocco recently sold another one of his Federal Hill restaurants, Mediterraneo, which was also built in part with a city loan.
While Marrocco has made good on his loans, other businesses haven't been as successful – and HUD has taken notice.
At a February 2004 meeting, an attorney for the PEDP told the board the program's loan default rate was 5%, according to a WPRI.com review of meeting minutes from the time. Seven years later, Thom Deller, the city's former director of planning, admitted to the board that Providence reported a "smoke and mirrors" default rate to avoid penalties from HUD.
"We talk about our default rate as being very low, below the national average, so that it keeps us in a state that we don't have to pay back," Deller told the board in a meeting that was recorded and obtained through a public records request. "But there are a lot of loans that aren't active."
In 2012, a HUD audit found that the default rate grew to approximately 60% between 2001 and 2011. The board has agreed to write off more than $4.4 million in loans – including interest – over the last three years.
Last August the city repaid HUD $1.92 million to cover a slew of loans and other expenditures HUD ruled never should have been authorized, including $618,000 for dozens of purchases that the PEDP made between 2005 and 2011. The majority of the money PEDP was forced to repay – more than $485,000 – originally went to various marketing, advertising or business development consultants during Cicilline's tenure as mayor between 2003 and 2010.
A spokeswoman for HUD told WPRI.com last week the federal agency still has "unresolved findings" with PEDP that "may result in additional ineligible costs," but stated the city is making progress on resolving the problems.
As it stands now, the PEDP's active loan portfolio had 133 loans worth $15.3 million as of Oct. 22, according to the city. Just over half the loans — 68 — were at least 121 days behind on payments to the city. (Thirty-six of those past-due loans have been deemed uncollectable and will be written off, according to the city.)How the new program will work
So how do you revive a program that has caused the city so many headaches in recent years?
It starts by believing in its purpose.
Smiley, who will serve as chairman of the new Providence Business Loan Fund Corporation and attend all meetings of the economic development advisory committee, said he believes there is a "role to play for the actual one-off loans, and we think we've come up with a way professionalize and more rigorously lend and then collect."
He said the city needs to be "honest about our risk tolerance and default-rate tolerance," understanding that not every business that receives a loan is going to be successful. In the past, he said, "there was a sloppiness around collections and follow through" that the Elorza administration plans to address. The loan committee will largely consist of members with loan underwriting experience, Smiley said.
"We've bitten the bullet and written off a lot of bad loans," he said. Under former Mayor Angel Taveras, the PEDP board agreed to end a policy that allowed staff members to sign off on loans of up to $75,000 without approval from the board.
Smiley also stressed that the money Providence lends does not come out of the city budget and can't be used to plug a deficit; instead the loans are made using federal dollars that, as he sees it, will simply be spent by another municipality if Providence were to decline the funds.
"We're not in the business of sending money back to Washington," Smiley said.
As for the advisory committee, he said the PEDP has a diverse board with "impressive community credibility." If the current 15-member board agrees to the changes, each member will resign and then be reappointed to the new panel.
Smiley said the new board will meet less frequently, but for longer periods of time and with more access to Mayor Elorza.
"There's no equivalent of the [Rhode Island] Commerce Corporation at the city level," Smiley said, referring to the former R.I. Economic Development Corporation, a state quasi-public agency. "We want them to be that. We want a sounding board."
While the transformation of the PEDP still needs to be approved by the current board – the next meeting is set for Dec. 16 – the city is already planning for the future.
Smiley said the city is finalizing a partnership with the Providence-based Social Enterprise Greenhouse (SEG), a widely respected nonprofit that provides funding and strategy advice to "socially-minded" businesses. The city will loan money to SEG, which will in turn lend to businesses within its network.
Smiley said PEDP has several proposed loans in the pipeline – they will be carried over to the Providence Business Loan Fund Corporation – but the city still needs to actively promote that it has money to lend. He said Elorza administration officials are planning hold neighborhood meetings as one way to inform residents about some of Providence's economic tools.
At meetings in recent months, some PEDP board members have questioned whether the city intends to limit loans to riskier ventures, like restaurants. Others have noted that the food industry is considered one of the city's bright spots – and PEDP has quietly played a vital role in helping those businesses. At this point, Smiley said, the city is not planning to place restrictions on its lending.
Although Marrocco, the restaurant owner, has rapidly consolidated his business portfolio in the city after clashing with officials on a myriad of public-safety issues in recent years, he maintains the administration is getting it right by continuing to offer loans. (He acknowledged that he is upset that he's had to pay his loans back while others have been written off.)
"It's programs like this that can improve the economy," Marrocco firstname.lastname@example.org ) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan