Philadelphia, January 2, 2011-The 2009 federal Recovery Act included a $15 billion bond program that allowed private companies to borrow money for certain projects at a tax-free interest rate.
The hope was to jump-start economic development in areas picked by county governments and help pull the country out of the worst economic downturn since the 1930s.
Expiring on Friday, the program with an unwieldy name – Recovery Zone Facility Bonds – fell far short of the expectations set by Congress and provides an example of how difficult it is to create effective economic stimulus.
In Pennsylvania, companies could have borrowed, in aggregate, up to $231 million. Only $61.5 million was used, according to the state Department of Community and Economic Development.
The Pennsylvania total includes $16 million borrowed the week before Christmas by Liberty Property Trust for work at the Philadelphia Navy Yard. The money, lent by Wells Fargo, will contribute to the cost of constructing two flexible-use buildings.
New Jersey’s allotment was $377 million, but the state did not say how much was used. Locally, Camden and Gloucester Counties used none of the combined $40.7 million allocated to them. Burlington County did not respond to a request for information about its $23.4 million.
Nationwide, companies borrowed just $1.6 billion under the locally administered program through November, according to the Bond Buyer, a trade publication.
The bond program reduced interest rates for borrowers because the lenders – banks or bond holders – do not have to pay state and federal taxes on the interest they receive. The difference between a taxable and tax-free interest rate is now a bit less than 2 percent, experts said.
So why didn’t the program gain more traction?
One possibility is that lower interest rates don’t spur the economy when interest rates are as low as they are now.
“The Fed can say what it wants. It’s not the cost of money that matters,” economist Joel Naroff said.
Weak commercial real estate markets were another problem. “You still had to have a project,” said Alan Greenberger, a deputy mayor of Philadelphia. “There’s plenty of places in the country that didn’t have projects.
“You had to have an applicant that was already credit-worthy,” and the project had to meet the financing deadline of Dec. 31, he said.
President Obama signed the $787 billion American Recovery and Reinvestment Act of 2009 in February of that year, but it was a year before local authorities could begin marketing it. That left little time to complete deals.
Greenberger said Philadelphia had a half-dozen applications, but most could not meet the deadline: “All of them were decent projects, but Dec. 31 was Dec. 31.”
The $16 million Philadelphia used was $3 million more than the $13 million originally allocated to it. The additional allotment came from money that Forest, Juniata, Clarion, Cambria, and Perry Counties did not use, according to state officials.
The allocations were made on a county-by-county basis to prevent states from dumping all the money into one politically connected project, said Chuck Katz, a partner in the Chicago office of the Philadelphia law firm DrinkerBiddle.
Chester County also used more than its original allocation. A $2.4 million issue of bonds handled by Boenning & Scattergood Inc. went toward a Marriott Courtyard Hotel in Coatesville, and DNB First lent $3.98 million to help developer Eli Kahn buy a shuttered Alcoa packaging plant in Downingtown, said Gary Smith, chief executive of the Chester County Industrial Development Authority.
Last week, Bucks County closed on a $2 million loan from Sovereign Bank for an expansion at Gelest Inc.’s chemical plant in Falls Township, said Bob Cormack, executive director of the Bucks County Economic Development Corp.
State data showed that Delaware and Montgomery Counties used none of their respective allocations of $6.05 million and $9.25 million. Montgomery County officials did not return a call seeking comment.
Adam Matlawski, solicitor for the Delaware County Industrial Development Authority, said it was not for lack of trying. “We made a big push in December,” he said. “We wanted to use it. We desperately wanted to use it.”
By Harold Brubaker, The Philadelphia Inquirer