Eastern Maine Development Corp. teeters on edge, needs to ‘reinvent’ to survive

BANGOR, Maine — Bad loans, large mortgage payments, huge shortfalls and other fiscal problems have pushed Eastern Maine Development Corp. into a fight for its survival. Auditors are at the downtown office this week beginning the task of determining whether the nonprofit economic development agency can be viable.

“We’ve been, frankly, struggling financially for four years now,” said Tom Lizotte, who has served on EMDC’s board for nine years and recently succeeded Eugene Conlogue as board chairman.

But Lizotte doesn’t believe it’s time to throw in the towel on the organization.

“We don’t believe we’ve reached the point where we have to look at packing it in and declaring bankruptcy, although we’ve talked about every option,” said Lizotte, who is vice president of marketing and community relations at Mayo Regional Hospital in Dover-Foxcroft. “We’re really doing our best to get back on our feet. There’s no guarantee we can, but all you can do at this point is work your butt off to get in that direction.”

There are several red flags in the organization’s most recent balance sheet, for the fiscal year that ended Sept. 30, 2011, and other documents it is required to file as a tax-exempt 501(c)(3) entity. EMDC is a private, nonprofit economic development organization based in Bangor that provides various business support and workforce development services in Penobscot, Piscataquis, Hancock counties, and a portion of Waldo County.

EMDC made news recently when 28 communities, members of the newly reinvigorated Penobscot Valley Refuse Disposal District, threatened to sue the organization if it didn’t return $51,000 it had taken from a bank account left untouched when the group disbanded in 1999.

EMDC’s audit for the 2010-11 fiscal year revealed a more than $1 million shortfall, including a write-off of $450,000 in bad loans, a matching increase in the loan loss reserves set aside for future bad loans, and substantial mortgage payments on Norumbega Hall, the building the organization purchased in 2005.

The balance sheet of an organization such as EMDC, which is nearly 100 percent publicly funded, is complex as it serves as a conduit for millions of dollars in government pass-through funds to various business and workforce development programs. To get an accurate picture of the organization’s viability, it’s important to look at its unrestricted net assets, which are funds the organization can use for operational needs and aren’t tied up in the various loan and economic development programs — those are considered “restricted assets.” Its unrestricted assets decreased from roughly $600,000 in 2008 to $72,000 at the end of the 2010-11 fiscal year.

The losses are the result of various factors, including the recession and lax oversight that led to years of accumulated bad loans and bad debt, according to several people familiar with the organization’s internal operations.

Those challenges have pushed EMDC to the brink of extinction, forcing it to operate “from payroll to payroll,” according to Lizotte.

In addition to the bad loans, the organization has been forced over the past couple years to write off more than $450,000 it was owed for various services provided between 2003 and early 2009, when “no one was minding the store, quite frankly, and the board wasn’t being given full information,” according to Michael Aube, who assumed the CEO position at EMDC in early 2009.

Those write-offs included roughly $49,000 from the Knox Waldo Regional Economic Development Council, which was founded in 2005 and is now known as the Maine Coast Economic Alliance, and around $89,000 from the Penobscot Valley Council of Governments, according to Aube.

“That really hurt cash flow tremendously as we absorbed that,” he said. “That $450,000 is really dollars that could have gone toward the bottom line.”

Besides the recession and bad debt, Lizotte said other problems include the decision in 2005 to purchase Norumbega Hall — “we’d love to tee up a Mulligan on that one” — and the lack of an accountable accounting system before 2009.

“You can see how over time the accumulation of some decisions and the difficulty of actually determining where you are at any point in time made it harder to have the lightbulb go on and say, ‘Geez, we have a problem here folks,’” Lizotte said.

Aube, who previously served as EMDC’s CEO from 1981 to 1992, instigated significant changes when he returned in 2009, including the decision to write off the bad debt and loans rather than keep them on the books, layoffs and dropped programs. While it has been a painful process, Aube says it was necessary.

“In the decade of the 2000s, very little was done in terms of servicing loans, the writing of loan loss reserves, and risk assessments,” Aube said. “There was no doubt an inflated value of EMDC during that time. The actions we’ve taken over the last three or four years have really been turning that around.”

Aube has reason to be optimistic that the austerity measures have made an impact. On Thursday, his accounting team handed him preliminary, unaudited numbers that show the organization, for the first time in years, operated in the black during the most recent fiscal year. Specifically, EMDC posted $6.5 million in revenue during the fiscal year that ended Sept. 30, 2012, and roughly $6.3 million in expenses, according to preliminary figures provided by Aube. After deducting loan loss provisions from the roughly $240,000 balance, the organization ends up with a surplus of $6,221, Aube said.

“It’s not huge, but it’s a substantial difference from what it was a year ago,” he said, referring to the organization’s million-dollar loss the year before. “The austerity plan we engaged in 18 months ago … has really begun to show.”

That austerity plan has reduced the organization’s operating budget from roughly $7.2 million to $5.5 million, Aube said. Cost savings have come from reduced payroll, including eight layoffs due to austerity measures and another six or so employees who lost their positions after their contracts expired, Aube said. The current employee total is 45. Savings also have come from the board’s efforts to re-focus on the organization’s core mission and shed other programs and services — such as the Maine Small Business Development Centers and the Bangor Convention and Visitors Bureau — that either didn’t fit that vision or were better handled by another entity. The organization also recently hired Jerry Hayman as its first, full-time chief financial officer.

“Right now we’re trying to reinvent ourselves to survive,” Aube said. “It is a challenging time.”

Going forward, EMDC will be focused on three goals, Aube said: providing capital and credit for businesses; workforce and educational development; and strategic transformative initiatives.

Though the preliminary numbers look good, there are still challenges that pose threats to the organization’s survival. One is the current situation in Washington, D.C., and the “fiscal cliff” that would dry up even more of EMDC’s revenue streams than have already. Even if the cliff is avoided, it’s clear there will be changes to some federal discretionary spending programs that will have an effect on EMDC and the region, Aube said. That uncertainty will make any recovery more difficult, he said.

A challenge closer to home is Gov. Paul LePage’s efforts to centralize federal workforce development funding in Augusta and take it away from regional service providers such as EMDC. Those efforts seem to have stalled for now, but if allowed to take place the effect on EMDC “would be like attaching a large lead weight to a drowning swimmer,” Lizotte said. “When you have an organization on the edge like that, it doesn’t take much to push it over in terms of a public policy decision here or there, or a change in any of the major funders. It’s certainly an organization at risk.”

Conlogue, EMDC’s former board chairman who is now town manager of Houlton, expressed confidence in Aube and the board’s ability to turn the organization around.

Asked if he was concerned about the viability of the organization when he was chairman of the board, Conlogue said he was, but he never lost hope.

“I’m always concerned when your cash flow drops significantly, but I also have confidence that with people like Mike Aube and the board and some of the new hires, the agency will survive these rough times,” he said, then added a hint of caution: “But there are no guarantees today because the economy is so volatile and government funding is so unpredictable, and that’s what adds to the problems EMDC has experienced.”

A big piece of EMDC’s recovery plan is to generate additional revenue streams. Currently, nearly 91 percent of the organization’s funding comes from local, county, state and federal governments — the federal government provides the majority at 76 percent. Aube would like to see that breakdown change over the next four years so 40 percent of funding comes from internal contracts, philanthropic grants and private sector sponsorships, with the remaining 60 coming from the federal and state governments.

One new revenue stream, which Conlogue called a “Godsend,” EMDC has found is the Small Business Administration’s Community Advantage Program, which it has participated in since April. The loan program has generated between $25,000 and $30,000 a month in service fees for EMDC, Aube said. He expects EMDC to net $150,000 this year on the program, and said the goal is to double that to $300,000 next year.

“That’s substantial,” he said, “and that really helps underwrite the cost of all my lending staff and helps right the ship and give us a little discretionary income to deal with everything else.”

Another piece of EMDC’s recovery plan is to generate additional revenue from the private sector through sponsorships. Bangor Savings Bank, KeyBank, Rudman & Winchell have all contracted with EMDC to provide certain services, such as workforce development programs.

The board formed a subcommittee to meet with potential funders, which has garnered a few pledges of support, Lizotte said. “Will it be enough to make a long-term difference? Every little bit helps,” he said. “It’d be nice to have a million dollars fall out of the sky to balance the bottom line and give us some working capital going forward, but one must be realistic about the chances of something like that happening.”

When it comes to private fundraising, Lizotte calls a nonprofit economic development agency such as EMDC “a strange kettle of fish.” While art galleries and hospitals and other similar nonprofits have their constituencies, an economic development agency like EMDC doesn’t have “a natural constituency,” he said.

The organization has come a long way since being founded 45 years ago as PRIDE Inc., which stood for Promoting Recreation and Industry Down East. Though, it still has a ways to go before it digs itself out of the hole it has been in the past several years.

“It’s probably time for a complete new EMDC and with the economy changing and what the growth opportunities are for Maine, I think what we need to do is put our strength and value behind those assets that are transformative to our economy and not focus on all the other minutiae that might be helpful and nice to have,” Aube said. “We’re really at the point where we got to focus on our future. That’s where I hope to lead the organization.”