...Contractor Still Out $2.1 Million; Workers Unpaid

I have frequently cited Scott Waltman's July 2013 summary of the costs of building Northern Beef Packers to discuss how much money that failed EB-5 project made disappear. Dirk Lammers now offers updated figures showing the state lost more than I was saying. His breakdown of the $4.3 million we handed to the now bankrupt and fire-saled plant includes the $2.1 million that then-Governor Mike Rounds hurriedly shoveled toward NBP in his final days as Governor.

  1. $67,600: Future Fund grant to Mentor Group in November 2010 for plant appraisal;
  2. $150,000: Future Fund grant to Aberdeen Development Corporation in December 2010 for economic impact study and marketing;
  3. $1 million: Future Fund grant to Northern Beef Packers in December 2010 for construction costs (actually to fill Richard Benda's golden parachute);
  4. $200,000: Future Fund grant to Brown County in December 2010 for road construction;
  5. $582,000: portion of $843,000 Future Fund grant in January 2011 for workforce training;
  6. $300,000: grant to South Dakota Department of Agriculture in January 2011 for the South Dakota Certified Beef Program (another Rounds failure);
  7. $1.2 million: grant in June 2010 "to provide a conditional loan to Northern Beef Packers for construction costs and employment recruiting";
  8. $845,000: state construction tax refunds.

Lammers's total: $4,344.600.

Now that's a small portion of the $167 million in total investment that Northern Beef Packers made go poof. Neither figure is the $80 million that Senate challenger Jason Ravnsborg offhandedly said during last Saturday's debate that we had lost. Senate candidate Mike Rounds tells Lammers that the state loss figure is actually zero, because NBP generated tax dollars and will generate more tax dollars in the future.

The Governor's Office of Economic Development estimates that Northern Beef would account for at least $3 million in sales and use taxes and contractors excise taxes paid to the state, based on filings made during the bankruptcy proceedings.

Rounds added that he expects that the plant will eventually be processing cattle.

"In essence, the taxpayers of South Dakota did not lose any taxpayer money on the bankruptcy of the Northern Beef plant," Rounds said. "And we still have the plant. It has been built, and it will be operational" [Dirk Lammers, "South Dakota's Help for Northern Beef was About $4.3M," AP via AgWeb, 2014.04.17].

Evidently did not means will not, and balancing a Mike Rounds budget requires a time machine.

Rounds also does not account for the losses suffered by Scott Olson Digging, which is still suing to get the $2.11 million it says NBP (now bankruptcy raiders White Oak/New Angus) owes it for work done in 2007. Rounds does not account for the paychecks that hundreds of NBP workers did not get last year.

Rounds of course is playing word games, as seems his wont. He forgets (check that; he wants us to forget) that had we not poured money into the NBP money pit, we could have invested in other projects that might still be operating and employing hundreds of South Dakotans. Instead, he wasted money on an unsustainable business plan that satisfied his dreams of a legacy on which to run for Senate in 2014.

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Family Dollar plans to close about 5% of its 8,100 stores, leaving 370 empty concrete boxes littered across the country. Cheap plastic junk will continue to pour from so many other outlets that the economy will hardly notice. My only ache is that their closing will take that many more subsistence-level paychecks from people who need them.

Causing much greater ache is the failure of Maroney Commons in Howard. Dare I draw an analogy to Northern Beef Packers?

  1. Both projects depended on government funding to get going.
  2. Both projects were built on tenuous business plans (NBP assumed there was enough beef to process around Aberdeen that it could compete against the big meatpackers; Maroney Commons thought it could will into existence conference and tourist demand in the middle of Miner County).
  3. Both projects experienced noteworthy management churn (NBP experienced the SDRC Inc./EB-5 investor takeover during construction; Maroney went through a lot of staff during its operations).
  4. Both projects lasted about a year before capsizing.
  5. Both projects have sale prices of pennies on the dollar.

Chuck Clement reports what was circulating in public chatter: last week's attempted auction of Maroney Commons brought bids of $125,000 from a group of Madison investors and $175,000 from someone else. These bids are for a $6.5-million building. That higher bid is 2.7% of the construction cost. 24 hotel rooms, conference space, restaurant, fitness center, renewable energy systems... compare all those resources to what you'd get in a single-family house for that price.

But compare the utility you'd get from a single-family house almost anywhere in South Dakota to a big hotel in Howard. I want Howard and Miner County to grow and succeed just like every other community in the state... but when it comes to Maroney Commons, did our small-town boosterism cloud our vision to incontrovertible market fact?

I'm curious: looking at Northern Beef Packers and Maroney Commons, which do you think is more likely salvageable?

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Two days before the first big all-candidate debate of the Republican Senate primary, a debate that will be held in front of a roomful of newspaperpeople and webcast live by the Spearfish and Sioux Falls papers, the South Dakota press is reawakening voters to the GOED/EB-5/NBP scandal. Following excellent coverage from Joe O'Sullivan and Denise Ross, Bob Mercer rejoins the story with a lengthy summary of all the surprising facts and disturbing questions about everything that went wrong with the EB-5 visa investment program that the Governor's Office of Economic Development plunged into under then Governor, now Senate candidate, Mike Rounds.

Eleven years after its start, Gov. Dennis Daugaard decided the EB-5 program had to be shut down in South Dakota, because of what was unearthed about its operations and management.

One man is dead. Others have been hurt or wiped out financially. One project failed horribly. One business solidified itself. Two energy projects paid less for their financing. Another casino was built.

And former Gov. Mike Rounds finds himself answering questions about what happened on his watch from 2003 through 2010, as he now runs for the U.S. Senate [Bob Mercer, "Rise, Fall of EB-5 in South Dakota," Aberdeen American News, 2014.04.10].

Mercer reviews all the known machinations, the privatization of the program, Richard Benda's diversion of funds, and Mike Rounds's apparent cluelessness. Read Mercer's article to get back up to speed about this scandal, and you'll understand why GOED/EB-5/NBP will be the talk of this primary season.

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Think EB-5 will just roll off Mike Rounds's back? Oh, the primary has just begun....

First, after lengthy research, Joe O'Sullivan writes up South Dakota's most spectacular EB-5 failure, the bankrupt Northern Beef Packers plant in Aberdeen. O'Sullivan's reports that the last 50 Chinese EB-5 investors may have gotten completely hosed by NBP and SDRC Inc., the private agency South Dakota unleashed to coordinate the EB-5 visa investment program in 2009. They each invested $500,000 in NBP, paid another $45,000 in fees to SDRC Inc. and the lawyers handling their cases (because if you have a mark who's willing to throw a half-million dollars at some beef plant in a state she never plans to visit, you've got someone you can convince throw another $45K at Joop Bollen and Jeff Sveen to do, you know, stuff). They bought in in 2012; NBP went bankrupt in 2013, before the end of the two-year prove-up period for EB-5 visa investors. That means they don't get their money back and they don't get their visas.

O'Sullivan's research also reveals that we were apparently short on our count of how much EB-5 money NBP made go poof. Previously, I've cited two rounds of EB-5 investment: first the 70 Koreans who took over NBP early in its absurdly long construction period, then 90 Chinese investors. That's 160 EB-5 visas total bringing $80 million to NBP. But digging in the bankruptcy documents, O'Sullivan comes up with three rounds of investment: first the 70 Koreans, then 70 Chinese in SDRC Inc.'s loan fund LP 6, then the last 50 EB-5 investors in loan fund LP 9. That's 190 EB-5 visas totaling $95 million. If I'm reading Joe right, brings the amount of money that went bye-bye in one of Mike Rounds's worst investments ever to $167 million.

$167 million sunk into Northern Beef Packers, and White Oak Global acquired it last week for just $4.8 million in additional cash. That purchase price is now down to 2.8 cents on the dollar. Yes, you may use the word steal.

Now hot off the press comes Denise Ross's first entry into the great alphabet soup of EB-5, NBP, and SDRC Inc. Amidst the weeds of explaining all those letters, Ross asks Rounds why he let EB-5 coordinator Joop Bollen turn the state program into a private, for-profit enterprise. Rounds's profound logic: everybody else was doing it, so why shouldn't we?

Former Gov. Mike Rounds approved the switch, and he told The Daily Republic the move brought practices in South Dakota in line with similar economic development offices throughout the nation.

"It's pretty simple," Rounds said. "At that time we had about 500 competitors. The vast majority of them were not connected with state agencies. I think we were one of only two in the entire nation. The other ones could offer different services than we could, and they could be more involved in coordinating loans for different projects" [Denise Ross, "Before Northern Beef Built, Key State Program Turned For-Profit," Mitchell Daily Republic, 2014.04.08].

Rounds further justifies turning his pal Bollen loose for unsupervised profit as a move to appease foreign investors:

Rounds said that standing apart as a state-run entity had caused potential investors to question the structure of South Dakota's EB-5 regional center.

"When it came to competing with the rest of them as well, since they were independent and separate, people would look at it and say, 'Why are you different from the rest of them? Why are they independent and you're part of a state operation?'" Rounds said. "It appeared to be an appropriate move to follow what the rest of them were doing" [Ross, 2014.04.08].

Hmm... South Dakota citizens ask Pierre to answer questions and enforce state laws, and they get stonewalled. Foreigners wave thousands of dollars, and Mike Rounds hops, skips, and jumps to answer their concerns.

Ross reports that the Legislature's Government Operations and Audit Committee will hold its second hearing on EB-5 visa investment and Northern Beef Packers on May 7. But as far as Mike Rounds is concerned, there's nothing legislators or anyone else should fuss about:

Rounds said he hasn't learned anything since Northern Beef's bankruptcy about SDRC Inc.'s operations that concerns him.

"I don't have any other questions right now," Rounds said of SDRC Inc [Ross, 2014.04.08].

I don't have any other questions... It's a Jedi mind trick! Mike is just saying what he wants Denise and all of us to say.

Since NBP's bankruptcy in July, we've learned that the feds are investigating South Dakota's EB-5 program, NBP had crazy offshore finances, the Governor canceled SDRC Inc.'s contract, and Rounds's economic development chief double-billed the state for airfare and diverted even more cash from one of Mike Rounds's last economic development grants while doing the bidding of SDRC Inc. To learn all those things and not have questions suggests either an immense lack of curiosity or access to information to which the general public has not yet been made privy. It would sure be nice if Rounds would share that information with us to put our minds at ease.

And that's exactly what Mike Rounds will have the opportunity to do on Saturday in Pierre in front of a whole bunch of newspaper-people who know how to ask good questions. Go ahead, candidate Rounds, enlighten us.

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Orland organic ag magnate Charlie Johnson opines Socratically on the "community" thrift store being built on Madison's Main Street:

Does anyone know if there was ever a professional study and/or survey taken verifying the feasibility of a new thrift store and building in Madison? Was there ever a public meeting held to discuss the feasibility of such a project. What is the status of the "so called downtown improvement survey of needs" that was undertaken by the downtown improvement committee under auspicious of either the Chamber of Commence or LAIC? Was the thrift store mentioned in the top 10 needs within that survey? Does the investment group building the new thrift store have a professional prepared business plan for their endeavor? [Charlie Johnson, Facebook post, 2014.04.01]

Johnson's questions elicit an interesting bit of recent local economic development history from Rick Sterling:

Charlie, Interesting that you should ask. From 1998 -2002 I was the Executive Director of the Career Learning Center in Madison. At the time our center operated a Goodwill Industries collection site near the current location of Montgomery Furniture/Lewis Drug. We collected used clothing and household goods for Goodwill. At the time several people asked us to start a Goodwill (type) store. When I talked to John Silvernail at the Lake Area Improvement Corporation about this, he said a survey had been done among the Dakota State business students who made a recommendation for such a store. When I told John that I could get grant money to make the store a reality, he said "not only no but hell no." We don't want Madison to be a "junk city" [Rick Sterling, Facebook comment, 2014.04.01].

Fascinating. Sterling says that just 15 years ago, he heard popular demand for a thrift store, but the LAIC refused to support such a project, saying it wold be bad for Madison. Now the general public is underwhelmed by the idea of a downtown junk shop, but the LAIC supports the project with free land.

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Madison City Commission candidate Ashley Allen bristles at backrooms deals in local government. In a Facebook post this week, Allen cites a blog post by Madison Daily Leader correspondent Chuck Clement (wait: did I just use blog post and Chuck Clement in the same sentence?) pointing out the oddity of state open meeting laws that allows local governments to shut out the public when they discuss economic development.

Clement knows his open meeting law; he knows that SDCL 1-25 doesn't mention economic development as a topic our local leaders can keep secret. But he discovers cities and counties are granted secret-keeping authority over economic development schemes by SDCL 9-34-19, an open meeting exemption tucked away under municiapl trade regulations:

Right among the state laws -- for pool rooms and bowling alleys, junk stores, scalpers, employment agencies, public dances, skating rinks, and tattooing and body piercing -- were the rules for closing public meetings to discuss economic development.

Either our lawmakers have a really bizarre sense of humor or they really must not want South Dakotans or anyone else to know much about government involvement in economic development. I will continue to wonder why anyone wanted to hide 9-34-19 among the rules for "Municipal regulation of food sales."

Oh, but there is one set of rules in the same chapter that fits with hiding the regulations for executive sessions - it's 9-34-16, the state's rules for "Mindreaders and fortunetellers" [Chuck Clement, "Tattooing, Junk Stores... and Economic Development?" Madison Daily Leader, 2014.03.20].

Dang: unleash Clement from the formal reporter's beat, and he brandishes a singular statutory wit.

Allen says he would like to repeal SDCL 9-34-19. Repealing state law is a bit tough from City Hall, but opening economic development discussions could happen without a legislative change. Notice that SDCL 9-34-19 says, "Any discussion or consideration of such trade secrets or commercial or financial information by a municipal corporation or county may be done in executive session closed to the public." May. We find the same non-mandatory permission in SDCL 1-25-2: "Executive or closed meetings may be held...."

State law does not order city commissions to go into executive sessions. It gives them the option, upon a majority vote. If you want an open discussion of economic development issues on a five member board, you need to get two other people to agree with you, and that discussion remains open.

So does anyone among Allen's candidates and among the commissioners they will join in City Hall share Allen's zeal for openness on economic development?

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I've been thinking about a pitch I'd love to hear from any candidate for Governor of South Dakota:

I propose that the great state of South Dakota treat teachers the same way we treat corporations. Teachers and corporations are both people, right? So teachers and corporations ought to respond the same way to state policy, right?

I thus promise that, as your governor, I will turn to all those fine corporations we try to recruit and say, "Come to South Dakota! You'll get fresh air, great hunting, easy traffic, nice neighbors, the works!"

I will also tell them that our state will give them the smallest economic development incentives in the nation. "You corporations are just like teachers. You don't work for money. You produce your goods and services for love, for the pride of a job well done. You don't need a bunch of extra money from our state." That ought to have corporations racing for our borders, right?

I see some of you snickering. If you think corporations won't fall for that pitch, then I propose an alternative teacher-corporation equity policy. How about instead I turn to all those fine teachers we need and say, "South Dakota's a great place to live and work, and we want you to be a part of it. We want you badly enough that we'll pay you to come and stay. Maybe we can't match the teacher pay in Minnesota (yet!), but we can do our darnedest to compete. Here's what we have to offer."

I'm going to offer teachers property tax rebates, just like we offer corporations. I'm going to offer teachers Future Fund grants and special loans to buy and build their houses. I'm going to fly to teacher fairs across the country to personally recruit the best and brightest teachers from other states.

And I'm going to raise the average teacher pay in South Dakota by $10,000. We're going to make teaching in South Dakota a $50,000-a-year job.

Given about 10,000 teachers in the state, that means we have to add $100 million to the state budget. $100 million.

Is that a moonshot? Maybe. But we shoot the moon for big corporations. Why can't we shoot the moon for teachers? And should we really view it as a moonshot to raise our teacher pay to a mere 34th in the nation?

And consider that we could get that $100 million without passing a single new tax. We don't need an income tax to do it. We don't need a new corporate tax to do it. We just to get rid of 17% of the $582 million worth of sales tax exemptions that we hand out as favors to various businesses in South Dakota. We just need to get just a sixth of the businesses getting this favor to pay the sales tax most other businesses pay.

What's good for the corporate goose is good for the teaching gander. If we think we can hire teachers on the lowest pay in the nation, then we should recruit corporations with the least incentives in the nation. But if we think we need to compete with other states on corporate incentives, then we need to compete with other states on teacher pay.

Corporate policy and education policy are both about economic development. I'll treat corporations and teachers whichever way you want, South Dakota. But we should treat them the same.

*   *   *
Any candidates care to take up that pitch?

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My post on the reformulation of the rules for funding the "Building South Dakota" economic development fund brought some instructive commentary from a couple of political figures in the know.

First, Rep. Bernie Hunhoff (D-18/Yankton), a critic of the changed funding formula, notes that the problem is not that economic development is taking away from basic government responsibilities in the budget (and I am pleased to see the House Minority Leader use language that says corporate welfare is not a basic government responsibility). Rep. Hunhoff says the real problem with Senate Bill 158, the funding formula revision, is that it hitches the Building South Dakota Fund to a currently spiking but historically unreliable funding source, our unpredictable reserves. "It's a non-funding source," says Rep. Hunhoff, "so in effect they've unfunded Building South Dakota."

Another political insider notes that Senate Bill 158 removes BSDF from competition with K-12 education, Medicaid, and state employee salaries in the budget process. Instead of taking up oxygen in the general appropriations debates, BSDF waits until the fiscal year is done and takes its share from the remaining reserves. "This was a good deal for K-12, Medicaid, and state employees," says the observer, "because it freed up $15.9 m in ongoing money, which allowed increases of 3.0% rather than 1.6%."

But here's my sticking point: if we have any gravy left on the plate at the end of the fiscal year, should an economic development fund be the only piece of bread that gets to sop that gravy up? Why not maintain the leeway to direct any excess reserves to bonuses for teachers and state employees who may have contributed to those surpluses by keeping expenses down?

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