CORRECTED: Changes amount investors paid in additional investment to receive the $500,000 state grant.
PORT ANGELES — It was a gamble that didn’t pay off: $500,000 in state funds given to a struggling plywood mill to maintain jobs in the wake of an economic recession.
That mill, Port Angeles’ Peninsula Plywood, closed in November after a 20-month run, leaving $1,042,102 in unpaid bills to several public agencies and about 130 people out of work.
For the state Department of Commerce, which tapped into a grant program typically used for low-income housing projects or investments in public infrastructure to provide the funds in June, the move was unprecedented.
The hefty grant, passed through the city of Port Angeles, was meant solely to help the struggling mill cover its payroll and production costs to meet sales that it believed were coming, something the agency says it has never done before.
But would it do it again?
Likely not, according to Kaaren Roe, manager of Commerce’s community development block grant program.
“I think all the stars would need to align,” she said in an interview, later adding:
“I think it will be unlikely that such a situation will arise that we would both have the grant funds and be willing to commit.”
Roe acknowledged that Commerce was taking a chance but said it was seen as one worth taking with the knowledge that the mill, which had already defaulted on a $1 million loan from the agency, would have closed almost immediately without the influx of public funds.
“I don’t think anyone would say that there wasn’t a concern that it wouldn’t work out,” she said.
“But there was a chance it would.
“And it was going to make a big impact on the community.”
Time, Commerce felt, was of the essence.
At a meeting of creditors in May, the state notified PenPly that it would not qualify for another loan, which it had initially sought as a means of staying afloat.
PenPly responded by saying it would close in June without further financing, Roe said, and the discussion turned to another option: the state’s community development block grant program, which unlike the agency’s loan programs does not require the state to look at a recipient’s business plan or other financial information.
The only information it reviewed from PenPly was a document that included how many jobs for low- to moderate-income people would be created or maintained with the funds. The answer: 115.
When it came to community development block grants, which typically go to public entities and nonprofit organizations in rural areas, that was all that was required of the state.
The city, on the other hand, did receive a business plan from PenPly.
It also had two former managers with Nippon Paper Industries USA — Mark Hannah and Dean Reed — review PenPly’s books on its behalf, both of whom recommended an additional investment of $470,000 from the company, which agreed to make the contribution to receive the grant.
A Peninsula Daily News public records request for the business plan was still pending with the city as of Friday.
Roe said Commerce did not review any of the documents provided to the city.
“I don’t know if we could have discovered any more than the city did,” she said.
Roe called the situation unique and, while Commerce had never used the grant program to help a struggling business before, said the agency did not expand its own criteria for vetting the application because it felt the city was doing enough on its behalf.
City Manager Kent Myers said the review conducted by Reed and Hannah was the city’s idea and not a requirement from the state.
Still, Roe said Commerce would not have provided the grant if the city hadn’t conducted some sort of review of PenPly’s finances.
“If they said we want a grant and we are going to pass it through [without a review], we would have said no,” she said.
While the city implemented the recommendations from the two former mill managers, including requiring PenPly to make an additional investment to get the grant, city staff members said they did not see their role as making a determination on whether the mill would survive if it received the additional funds.
“It’s not our role to make that call,” said Nathan West, city economic and community development director.
“With any economic development activity in the city, we want it to be successful; we want do what we can.”
Myers also said he saw the city’s role as being a “conduit” between the state and PenPly for the funds but noted there was reason to be optimistic about the mill.
The mill had recently been certified to sell plywood to Japan, which was in need of construction material after the March 11, 2011, earthquake and tsunami.
“They really thought that their sales volume would see a major increase with sales in Japan,” Myers said. “Those didn’t materialize.”
Commerce staff members weren’t the only decision-makers who didn’t see the business plan.
Members of the City Council, which approved the grant in a 5-1 vote, said they hadn’t seen the document, though they were informed of the recommendations from Reed and Hannah.
“We had assurances from Josh [Renshaw, PenPly president] that he could make it work,” Mayor Cherie Kidd said.
“I can’t imagine why we would not have accepted it,” she added, “with all the information we were getting was that this could help save them, save jobs.”
City Councilman Max Mania, the lone dissenting vote, said he wasn’t sure that seeing a business plan would have made him more confident in the mill’s future.
“Even with a business plan, it was such a long shot,” he said.
“I didn’t see how this was going to work,” Mania added.
“It seemed like a real waste of staff time and financial resources for a company already so behind.”
By the time the grant was approved, PenPly had been in default of its $1 million loan from Commerce for about six months.
The mill had paid $15,305 in principal and interest, according to Commerce. But due to accruing interest, it owed $1,000,192 as of December.
Commerce, according to an internal email, was also notified in November of PenPly defaulting on its $950,000 loan with Enterprise Cascadia, which sent default notices in August, two months after the company received the grant, and again in October.
PenPly investors were honest about the company’s situation.
Grant Munro, one of PenPly’s investors, told the City Council when it was considering approving the grant that the company could still fail, even with the funds.
Munro said Friday he had believed there also was a good chance the mill would succeed.
“That grant, it was our last hope,” he said. “I personally put [up] a lot more money for it. I basically matched that grant.
“I still had faith that we could do it.
“In the end, we didn’t make it. It wasn’t enough.”
West said he didn’t think the city was taking a risk.
“I don’t see the risk in ensuring that jobs are maintained for several additional months at a minimum,” he said.
“I think that this grant was about ensuring jobs were maintained.”
All but about $27,000 of the grant was used. The rest was returned to the state.
Munro said the funds were spent entirely on labor and materials, and none of it went to the shareholders.
Commerce received invoices for how the funds were spent.
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Reporter Tom Callis can be reached at 360-417-3532 or at tom.callis@peninsuladailynews.com.
