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The USDA's Losing Effort
Costly Program for Rural Businesses Yields Dubious Results

By Gilbert M. Gaul
Washington Post Staff Writer
Wednesday, December 5, 2007

Under a program to create jobs in rural America, the U.S. Department of Agriculture guaranteed $1.6 million in loans to Aztec Environmental Inc., an asbestos-removal company in Panama City, Fla.

Aztec did create jobs -- for hundreds of workers from Guatemala. "Locals didn't want the work," said Debbie Livingston, one of the owners.

Three years later, in February, Aztec went out of business after a federal investigation into allegations of environmental abuses and the hiring of illegal immigrants. Now, the USDA could lose hundreds of thousands of dollars on the loan.

The Aztec case is one graphic example of the scores of troubled loans that the USDA has backed in a little-known part of the agency's vast system of farm subsidies. Since the 1970s, the loan program has endured nearly $1.5 billion in losses while backing almost $14 billion in guarantees to private banks, a Washington Post investigation found.

Actual losses are almost surely higher, according to a Post analysis of thousands of USDA loans and grants. USDA officials refuse to disclose losses on loans to individual companies, even after they go out of business, arguing that it "could substantially harm" the companies' competitive positions.

More than three decades after the loan program was created, USDA officials still don't know whether it works. Funds have gone to firms that have hired foreign workers instead of Americans. Millions more have gone to failing and bankrupt businesses. Most of the jobs are not new. Many are low-tech and low-wage.

In addition to the loan program, the USDA has handed out almost half a billion dollars in rural development grants to businesses and nonprofits since 2001.

Loan guarantees or grants have gone to a car wash in Milford, Del.; a country club in Great Falls, Mont.; a movie theater in Smithfield, N.C.; a water park in Myrtle Beach, S.C.; an alligator hunter in Dade City, Fla.; snowmobile clubs in Maine; and dozens of gas stations and convenience stores in Maryland, Ohio, Pennsylvania and Arkansas.

"You know, some people could argue a job at minimum wage is better than no job at all," said William Hagy, the USDA's deputy administrator for business programs. "In a lot of rural areas, that's all there are."

In congressional testimony and news releases, USDA officials stress that the loan and grant programs have helped revitalize rural America by creating or saving 1.5 million jobs since 2001. But in some cases, creating a single job costs hundreds of thousands of dollars.

Meanwhile, the USDA's losses continue to climb. More than one in five loans -- nearly 2,700 -- result in a loss in the Business and Industry Guaranteed Loan Program, the agency's largest rural lending effort. Yet the USDA has asked for its money back from just 19 banks for fraud or mismanagement since 1974.

Congressional committees charged with overseeing USDA business programs rarely question the agency's claims or probe deeply into the programs. Instead, some lawmakers have aggressively lobbied the USDA to approve costly projects in their districts.

In 1999, members of Washington state's congressional delegation urged the USDA to guarantee a $20 million loan to a troubled sugar beet refinery near Moses Lake. The agency agreed, even though the borrower was already in default on existing loans. Within months the plant failed and defaulted on its newest loan, sticking taxpayers with a $12.1 million loss.

Thomas C. Dorr, USDA undersecretary for rural development, did not dispute The Post's findings. He said the USDA is developing new tools to measure the effectiveness of its business programs and lately has begun to see more high-quality jobs created. He attributed the high loss rate in the loan program to a handful of "aggressive lenders."

"We are making a legitimate effort to deal with all of these issues," Dorr said. "We've made a substantial change in how we go about doing our business and are much more concerned about creating value and not just giving out grants. I think that's beginning to show up."

A 'Bank for Rural America'

Most Americans probably are not aware that the USDA is in the lending business. But while they represent a small fraction of overall USDA spending, which includes programs from farm subsidies to school lunches, the programs administered by the agency's Rural Business-Cooperative Service account for more than $1 billion annually in loan guarantees, loans and grants.

In 2006 alone, the USDA backed more than $766 million in private loans to businesses, guaranteeing up to 90 percent of the face value of some loans. It awarded $75 million in grants to nonprofits, local governments and businesses, including $100,000 to the agricultural giant Welch's to market grape juice in Mexico.

"We are essentially an investment bank for rural America," Dorr said in a speech in November 2006.

The efforts date back to the 1930s, when rural credit was lacking and unemployment among farmers was high. In 1946, the Farmers Home Administration Act authorized the USDA to insure bank loans. Over time, the initiative expanded, with additional types of loans and grants added to the mix.

Some economists, government groups and lenders contend that the USDA's efforts duplicate those of the Small Business Administration and other federal agencies. The USDA operates 50 state programs, each with its own business staff. They are supported by a national staff.

"From our perspective, it's highly inefficient," said Anthony Wilkinson, the head of a trade group representing banks and lenders that participate in government-guaranteed loan programs. "We'd like to see it centralized with a few experts in one place, like the SBA does it. The amount of time it takes to process applications gets dragged out. It's a bureaucratic nightmare."

In addition to providing support for businesses, the USDA also backs lending efforts for utilities and rural housing initiatives. The agency requires the businesses, utilities and nonprofits it funds to estimate the number of jobs they expect to "create or save." USDA officials use those figures as proof that the programs are working. But until recently, they didn't verify that the jobs existed or track what they paid.

"You may create jobs in an undeveloped area, and that's good," said Thomas G. Johnson, a University of Missouri economist who is helping the USDA develop a more sophisticated tool for measuring the impact of its business programs. "But you may also displace workers at another, similar business. So what you really want to know is the number of net new jobs."

In 2004, Mickey Buffaloe discovered that the USDA had guaranteed a $4.2 million loan to a developer to build a 10-screen multiplex theater just a mile and a half from his older theater in Smithfield, N.C. The retired firefighter had purchased the Howell Theater, built in 1935, several years earlier with a private bank loan.

After the new theater opened, Buffaloe said that his income dropped by more than half and that he had trouble getting first-run movies. He was forced to convert to a discount theater offering second-run shows.

Buffaloe, 51, complained to USDA officials that the federal government was helping to put him out of business. But he didn't get very far. "They basically handed me a package to fill out and said they would see about doing a loan with me," he said. "The way I figure, if my business goes under, I lose, and my tax dollars are going to help my competitor."

Buffaloe attempted to get the developer's application under the Freedom of Information Act but was told it would cost him $843, money he didn't have. The multiplex's owner projected that it would create 45 jobs, but as of this summer, it was averaging about 25, according to the USDA.

Three-fourths of the jobs that the USDA attributes to its guaranteed-loan program are "saved," not new, a Post analysis found. Missouri's Johnson said such loans may serve "as a bridge to fight another day" but they do not help revitalize rural economies. "If your purpose is a development program, it should be to transform the economy, not to fill in the dips in the economy," he said.

Often the loans create or save few jobs for the money. The Savannah Inn of Carolina Beach, N.C., estimated that it would save five jobs with its $1.3 million guaranteed loan -- $260,000 per job. The loan was to help the beachfront motel to stay open year-round. The owners declined to comment.

Many of the "saved" or "created" jobs are part-time or seasonal, or pay minimum wage or slightly above.

The USDA recently backed a $4.5 million loan to Wild Water & Wheels, a water park near Myrtle Beach, S.C. Owner Mark Lazarus said the park is a seasonal operation with "about 150 employees" in season and "about 10" employees in winter. "The wages average anywhere from $6 to $10" an hour, he said, "depending where they work. It's mostly high school students. High school and college."

The Prime Shine Car Wash in Milford, Del., got a guarantee on a $1.4 million loan in 2003 after the owners said they needed the money to save two jobs and create two others.

"It's like flipping burgers and making minimum wage," said Jim Waters, a USDA official who oversees business programs in Delaware. "What you have is college kids and high school kids working on Saturday. And maybe a dad who's lost his job. But at the same time, we're reaching a segment of the economic scale where people need somewhere to go."

The car wash's owners did not return calls. They have since paid off the loan.

Aid for Snowmobilers

In Maine, the USDA is using rural development aid to fund dozens of snowmobile clubs.

Over the past eight years, the agency has awarded nearly $1.4 million to 47 snowmobile clubs to buy equipment to maintain paths. The checks came from the Rural Business Enterprise Grants program, which seeks to aid rural communities with populations below 5,000.

"The snowmobile industry is vital to Maine's winter economy," said Michael W. Aube, the USDA's rural development director based in Bangor. "It has a tremendous economic impact on local communities."

Aube cited figures from the snowmobile clubs stating that the grants would "impact" 342 businesses, "equating to 115 jobs created, 708 jobs saved." Maine officials have not done their own research into the claims. Aube said the businesses affected included nearby gas stations, convenience stores, motels, restaurants and clothing outlets. "My guess is most of these jobs are going to be at minimum-wage level," he said.

Still, he said, the grants are "critical" to help the towns survive the tough Maine winters. "There's not a lot of economic activity in some of these local communities for the people hanging around in winter," Aube said. "We've done those families a big favor."

Since 2001, the enterprise grant program has awarded more than $265 million nationally. Money has gone to a maple-sugar trade group in Vermont, to repair docks near Mystic Seaport in Connecticut and to a beach resort in New Jersey.

Borrower's Checkered Past

Over the years, thousands of businesses large and small have lined up to take advantage of the USDA's generous grant and loan programs for rural America. Few have been busier than Erwin David Rabhan, a colorful 81-year-old entrepreneur with a long and checkered career that stretches from his family farm in Georgia to Swaziland to Iran.

In the 1960s, Rabhan operated a string of nursing homes and day-care centers. A pilot, he ferried Jimmy Carter around in his private plane during Carter's campaign for Georgia governor in 1970 and later was a guest at the governor's mansion.

In 1978, Rabhan was indicted on securities fraud charges. But the case was put on hold after Rabhan was accused by Iran of being a spy, an allegation he denies, and was jailed in that country in the early 1980s. He was in prison for nearly a decade until he was released with Carter's help.

Many of Rabhan's ventures ran into trouble: A fish-protein company went out of business, a bank foreclosed on his nursing homes and day-care centers, his plan to build an infant-formula plant in Africa stumbled. Nevertheless, Rabhan easily succeeded in getting the USDA to back two loans totaling nearly $15 million.

Rabhan quickly defaulted on the loans, and the government has paid off millions in guarantees to the banks that lent him the money. In 2002, Rabhan pleaded guilty to conspiracy to commit bank fraud involving a $5 million guaranteed loan to build a catfish-processing plant in Georgia. He spent 4 1/2 years in federal prison. In 2006, Rabhan was indicted in Mississippi on charges involving a $9.5 million USDA-guaranteed loan to purchase a catfish farm near Inverness. He denies the charges and is awaiting his trial, scheduled for March.

On at least two occasions, lower-level USDA employees questioned Rabhan's business activities but were ignored by their superiors, records show. Agency officials did no due diligence on their own, relying exclusively on the banks to investigate Rabhan. At least one of the banks failed to uncover Rabhan's 1978 indictment and business struggles.

Even though top USDA officials were aware of allegations involving Rabhan's past, they decided to back his loans. "We were hoping the bank had the expertise to make all of these investigative inquiries," said Howard Franklin, a former director of USDA business programs in Georgia.

Foreign Farmworkers

In Glennville, Ga., the USDA backed a $17 million loan for a farm that the Justice Department later accused of turning away American workers.

Delbert Bland, the owner of Bland Farms, the largest grower of Vidalia onions in the nation, said he began hiring Mexican field hands about two years before he received a USDA guaranteed loan in 1998. Bland said it was impossible to find enough workers. "Absolutely, I can't get local help," he said.

Bland turned to a federal program that allows farms to use temporary foreign help so long as they consider American workers first. He said he has used "anywhere from 400 to 600" foreign workers.

In 2001, a number of longtime black and Hispanic workers at Bland Farms filed a complaint with the Justice Department contending that the business rejected them "due to the presence and preference" for foreign workers, court records show. The workers alleged that Bland didn't like using American workers because they complained about their wages and working conditions.

"It's ironic," said Dawson Morton, a lawyer for the Georgia Legal Services Program, which represented the American workers. "The purpose is to create jobs for Americans, and they get rejected."

Bland said that there simply were not enough local workers and that the charges were exaggerated. In December 2001, his company settled with the Justice Department, agreeing to pay a $15,000 fine and about $62,000 in compensation to the American workers.

Bland filed for bankruptcy protection but has since recovered and says his business is thriving. He has paid off his loan and still employs hundreds of Mexican laborers on his sprawling farm, for $7 to $8 an hour. For this year's harvest, he sent 14 Greyhound buses to Mexico to pick up laborers, he said.

Jobs for Guatemalans

The owners of Aztec Environmental projected that they would save 210 jobs and create eight when USDA officials agreed to back two loans in 2003 and 2004 totaling more than $1.6 million.

Aztec specialized in bidding for government contracts and was aided by designations as a minority business enterprise and as a woman-owned business. Operating out of an office in Panama City, a beach resort of 37,000 on the Florida Panhandle, the company won millions in contracts for environmental cleanups at military bases, records and interviews show.

"The last good year we had was about $22 million," said Debbie Livingston, who owned Aztec with her husband, Jimmy. "About 95 percent of that was government."

Aztec relied heavily on foreign workers, especially from Central America. "When we were in full swing, we had 125 employees working in five different states," Livingston said. "Most of them came from Guatemala. We had supervisors who hired them. I couldn't speak Spanish."

Livingston said she tried to hire locals but had trouble finding workers. "In asbestos removal, you have to work a lot of nights and weekends, and a lot of Americans don't like to work nights and weekends," she said. "Spanish people, they never fuss about how long they work as long as they get paid their overtime."

Turnover was high, Livingston said, with workers usually staying 30 to 90 days. She said she checked their papers to make sure they were in the United States legally, "but if they were forged or faked, that wasn't my job."

In 2003, immigration authorities reviewed Aztec files and identified four illegal immigrants, whom Livingston fired. Two years later, the Air Force moved to bar Aztec from bidding on government contracts, alleging that it dumped "improperly bagged asbestos into unmarked dumpsters" and employed "many illegal aliens," according to court records and investigative files.

Aztec denied the charges and challenged the Air Force's claims in federal court. After being debarred for about a year, the company was allowed again to bid on government contracts. But by then it was too late, according to Livingston. "We were already in the hole so far, it was impossible to get back up," she said. "The bank has liquidated everything we own. It's not enough. Eventually we'll have to file bankruptcy."

Research editor Alice Crites contributed to this report.

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