Rigid state rules cripple effort to give $290 million in grants to struggling small businesses

Sloppy planning is at the heart of the enormous problems with the $290 million program to give COVID-19 relief grants to small businesses in Alaska.

The state has been unable to give the federal money away because of the rigid rules it created a few months ago.

The state had planned to distribute the $290 million in less than two months, but so far it has distributed $11 million in six weeks. The grants for businesses with fewer than 50 employees range from $5,000 to $100,000 and are to cover payroll and certain other expenses.

The eligibility rules for applicants—proposed by the Dunleavy administration and approved by the Legislature—are far too rigid. The workarounds proposed by the state are legally dubious, though the Dunleavy administration wants to override the rules it created by allowing the commerce department to ignore them.

A state court refused to issue a preliminary injunction in a lawsuit last week, but that temporary ruling does not begin to deal with the full question of whether the problems with this grant program can be eliminated through administrative changes. The Dunleavy administration should submit a revised plan for legislative approval, but it has refused to do so.

The law approved by the Legislature in May says that businesses that have received any CARES Act funding “do not qualify” for the state grant program. There is no debate about what the words “do not qualify” mean.

But Attorney General Kevin Clarkson and Co. claim it is reasonable to claim that “do not qualify” really means “do qualify,” as long as the amounts are less than $5,000.

In other words, small businesses that got federal grants of up to $5,000 will qualify for grants despite the documents that say they “do not qualify.”

Why is $5,000 the magic number?

“Basically we saw in the legislative record that that sum of money had been mentioned at the LB&A committees, of not penalizing businesses that received up to $5,000. So we saw that referenced by a couple legislators. Or pretty close to that $5,000 number,” said Assistant Attorney General Bill Milks last month.

The state claims that $5,000 is an insignificant enough amount that the Dunleavy administration is allowed to say the commerce department has the flexibility to give grants anyway.

On Tuesday, Commerce Commissioner Julie Anderson said it is possible that the Dunleavy administration will allow businesses that have received more than $5,000 in federal COVID-19 to get grants in the future, but gave no details.

This contradicts the legal theory from the attorney general’s office justifying the $5,000 limit.

But Anderson said “we are considering, as we move forward, what would that look like as far as amending that amount. Because again, as I’ve stated, I hear that continuously and I share those concerns.”

Under the new rules announced Tuesday, businesses that collected more than $5,000 in grants or loans from the federal programs can give money back to the federal government to get down to the $5,000 level. They will be allowed to get state grants of from $5,000 to $100,000, Anderson said.

She also said that fishermen with Limited Entry Permits who had not been deemed eligible will be made eligible and business associations, 501 C (6) organizations, will be able to get grants even though the program approved by the Legislature was strictly for businesses. Grant applicants will have to say they are not double dipping, Anderson said.

She also said she believes the state will be able to give the $280 million out in grants in a responsible manner.

There is no justification for believing that the state can do this quickly with proper safeguards, based on what has happened in the past couple of months.

It is legally dubious to ignore the “do not qualify” language. It is legally dubious to say fishermen can get grants even if they don’t have business licenses. They are business people, of course, but the state rules approved by legislators said they need business licenses. It is legally dubious to say that trade groups such as chambers of commerce can apply because the state document said the program was only open to businesses.

The first step in fixing the situation is getting Gov. Mike Dunleavy’s administration to talk about what went wrong and why.

The excuse that this all had to be done in a hurry is legitimate and some of the blame belongs to the Trump administration for inconsistent rules. The chaos of the pandemic is also a factor. Never before has the state even tried to assemble a plan to disperse more than a billion dollars in a matter of weeks and do it with rules to prevent abuse.

But the need for a hurried response does not excuse the mistakes that have gone uncorrected over the past few months.

On March 27, Congress approved the $2 trillion bailout bill.

On April 21, Dunleavy sent a plan for spending $1.25 billion of Alaska’s share to the Legislature, insisting that it be approved by April 29.

One part of the package was to use $300 million for loans for “struggling small businesses,” supplementing loan programs run by the state commerce department.

“The goal of this funding element is to put money in the hands of these businesses to avoid foreclosure while the crisis passes,” said the document given to the Legislative Budget & Audit Committee.

But exactly one day later, on April 22, the Trump administration put the kibosh on the state plan for $300 million in loans, revealing rules that prohibited a program of that kind.

Overnight, the $300 million loan program became a $300 million grant program.

“The federal guidance that we’ve gotten is a lot more tailored towards grants to small businesses,” Dunleavy Budget Director Neil Steininger told the House Finance Committee on April 24.

He said the money should go to “businesses that don’t really have the option or aren’t good fits for the other existing programs such as the Small Business Administration loans or the Payroll Protection Act,” he said.

But other than saying that the U.S. Treasury guidance that the program “doesn’t really allow loans,” he had no details on how a grant program would be run, which was understandable, given the federal change two days earlier.

Despite what the Dunleavy administration told legislators April 24, it didn’t transform the small business relief loan program into a $300 million grant project for small businesses. The commerce department and the Alaska Industrial Development and Export Authority wanted to stick with loans and make them forgivable.

On May 1, administration officials told the House Finance Committee the state was waiting to hear from the attorney general’s office about whether forgivable loans would be legal.

Commerce Commissioner Julie Anderson said the idea would be to “forgive a significant amount of the loan,” but she and AIDEA officials had no details. She said loans that could be forgiven would be a better approach than direct grants.

On May 1, the governor’s office said the program would be a $290 loan operation to be run through AIDEA. The amount was reduced because $10 million was to be directed to the Alaska Housing Finance Corp. to combat homelessness.

The Dunleavy resistance to creating a small business grant program continued in the days that followed, but various legislators argued for grants instead of loan forgiveness that no one could explain.

On the morning of May 11, the administration accepted the arguments by legislators and submitted a revised plan to the Legislative Budget & Audit Committee for a grant program.

This was after Dunleavy had made numerous complaints about the Legislature being too slow to approve his plans for the federal bailout funds.

One sign that the $290 million program was transformed in haste is that the documents submitted to the Legislature had not been fully edited to remove the references to loans and replace them with references to grants.

Anderson said that businesses with fewer than 50 employees would qualify, but only if they had failed to receive any money from the other programs in the federal bailout law. She said the grants would be approved on a rapid basis.

The grants have not been approved on a rapid basis, The restriction of grants to businesses that had received no other help from the federal COVID-19 bailout law has proven to be its biggest limitation.

There was some discussion in committee about allowing some grants to businesses that had received small amounts from other federal programs, but it was not put in writing.

The changes announced by Anderson Tuesday will not get the state up to the $150 million per month level of grants, a target that may have been impossible from the start. The $5,000 limit on other federal COVID-19 assistance should be raised to a more meaningful level, which will take legislative action of some sort, not an open-ended system in which a state agency makes up the rules as it goes along.

Missing from all of this is public disclosure, the most potent method of limiting waste, fraud and abuse.

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