The Subsidy Game

Manitowoc Kaye Schulz worked at the old Mirro Co. here, mostly as a lathe operator, for almost 35 years. When she walked out of the plant for the very last time in September 2003, she left a well-worn pair of steel-toed shoes at the door right next to a sign with a humorous — and ominous — message: “Try filling these!”

Everyone knew that would be a tall order for this old manufacturing city along the shores of Lake Michigan.

As far back as the late 1920s, the aluminum goods maker known to locals simply as “The Goods” employed more than 3,000 people. Philip Groll, a volunteer at the Manitowoc County Historical Society, said his grandfather and father both worked at Mirro. Along with shipbuilding, “basically, it was the city,” he says.

The company’s origins were simple. In the late 1800s, two local men, Joseph Koenig and Henry Vits, foresaw a burgeoning market for aluminum products and decided to go into business. As the market grew, so did their fortunes. And those of their neighbors. The history of the company became so intertwined with that of the area that there’s a room in the society called “The Mirro Room” — perhaps, Groll thinks, because company leaders helped pay for the building’s renovation.

Today, that history is all that remains. The Newell Companies, which would later become Newell Rubbermaid, acquired Mirro in 1983 and eventually shifted manufacturing to Mexico and China. The last 1,000 jobs disappeared altogether by 2003. Badly stung, local officials tried to find a way to recover.

They didn’t sit back and wait for another Mirro, an old-fashioned capitalist stalwart that was eventually carried away by the tides of global economics. Instead, they — along with their state and federal counterparts — pinned their hopes at least in part on a very different kind of company, which they came to see as a partner: Orion Energy Systems.

Orion has a back-story politicians of all stripes find irresistible. One of the companies that sprouted up along the border of Manitowoc and Two Rivers on over 100 acres where Mirro once had a big chunk of its operations, it is to many a phoenix that arose from the Mirro ashes.

Here, they hoped, was a symbol of how America will re-invent itself in a cleaner, better way. It is also, though, an example of a new sort of government-assisted capitalism that didn’t exist back in the days of Koenig and Vits.

Orion has been remarkably successful in attracting government grants and loans and plaudits from government officials and politicians right up to the president of the United States. Investors, in the meantime, are waiting for the performance to match the hype.

President Barack Obama has been among Orion’s most vocal cheerleaders. So important was Orion to his vision of a new America that the president came to Manitowoc on the day after his State of the Union address in January 2011. He came to praise Orion for its “hard work and ingenuity.” But, in a visit to the factory, he stressed that Orion has also been supported by the Small Business Administration and by government programs that include “tax credits and awards we created to give a leg up to renewable energy companies.”

Indeed, Obama made Orion an example of why — from his perspective — government sometimes needs to “step in” and help private businesses in a way that the private sector finds too financially risky.

While Orion does indeed like to define itself as a “renewable” energy business, it is an atypical one. Inside the same factory where Obama spoke, it manufactures high-efficiency industrial lights, “light pipes” that capture sunlight and stream it inside buildings, and wireless control systems that reduce the use of electricity when it’s not needed. The company also installs solar panels and, as a result, at one time worked closely with the failed California solar panel manufacturer Solyndra.

All told, Orion has done work in more than 6,800 facilities of customers across the country, including some 140 Fortune 500 companies. “We are not a voodoo energy company,” says Kevin Crawford, a former six-term mayor of Manitowoc who joined Orion in February 2009 and is its vice-president of government affairs and corporate communications. “Our potential is really quite immense.”

So too, though, are the challenges that federal, state and local government bureaucrats and politicians have tried to help the company overcome.

Orion started out in Plymouth in the mid-1990s, and didn’t purchase the old Mirro facility plus 30 acres of land in Manitowoc and some machinery until nearly a decade later. It is true, as Obama suggested, that the company did not do it alone.

The deal was financed in part with a low-interest, $500,000 loan from the state and the city of Manitowoc, as well as a private bank loan of approximately $1 million secured through a Small Business Administration-guaranteed debenture, according to records. A separate $500,000 low-interest loan from the Manitowoc Industrial Development Corp., a public entity, was also made and $250,000 of it was eventually forgiven after the company created 100 new jobs between 2004 and 2007, records state.

The list of other assistance to the company is long and includes a state jobs credit package, more low-interest loans or grants and, recently, stimulus funds that were used to help place solar panels atop the Orion factory. (See the sidebar below for a list of the government subsidies.)

By 2007, Orion was strong enough to go public and, at first, was embraced by investors — some of whom paid more than $20 a share and, according to court documents, helped the company raise $115 million in capital.

Manitowoc City Planner Dave Less is unabashedly proud of government’s role in helping the company prosper.

“We really were a partner with them going forward,” he says. “This would not have happened if we had not been a partner.

“This is a company that has done a very, very special thing up here,” he adds. “They went from no employment in Manitowoc to 215 now. They have been great performers. They pay on time.” Orion, he says, is a “terrific story.”

It is also, though, an unfinished and, perhaps, cautionary one.

While public officials continue to adore Orion, investors have been more restrained. Throughout much of spring 2012, the company’s stock price hovered around $2, just one-tenth of what it once was, creating what one local investment adviser calls a “disconnect” between an upbeat story line and what the market actually thinks of it.

The capital raised in the successful public offering did not supplant continued — albeit modest — government investment.

Orion is no Solyndra, the California solar panel manufacturer that siphoned off half a billion dollars in taxpayer money before going belly up. But it was one of thousands of Wisconsin companies to get, for instance, a little bit of the state’s $4 billion in stimulus funds.

In July 2010 — almost a year after the Great Recession formally ended — the Wisconsin Department of Commerce agreed to lend Orion $260,000 in stimulus money at the low interest rate of 2%, with repayment deferred for two years. The money was for solar panels, wiring, mounting and cabling for a rooftop demonstration project at the Orion factory that once served as Mirro’s distribution center, according to a project description attached to a loan agreement. In exchange, Orion promised to keep 190 full-time positions in Manitowoc through 2014 — a number the company has indeed maintained.

A status report on State Energy Program stimulus funding stated that Orion employment by late 2011 was 215. Any quid-pro-quo between the stimulus funding and job retention, however, would seem tenuous given what the money was used for and how the rest of the $1.4 million project was funded.

In addition to the loan and its own funds, Orion also targeted more than $400,000 in investment tax credits, according to project documents. Plus, it received $250,000 from the Wisconsin Focus on Energy Program that slices money off utility customers’ bills and then shifts it elsewhere in an effort to reduce energy use.

It was the Focus on Energy money, in particular, that rankled Manitowoc business owner Mike Fredrich.

Fredrich knows all about the challenges of being a small business. The month after the 9/11 attacks, he leveraged everything he had to purchase MCM Composites, a maker of thermoset plastic parts that he says currently does about $7.5 million in annual revenue and has 60 employees. Fredrich, who testified recently before the U.S. House of Representatives Committee on Small Business about the path to job creation, is worried about the weakened state of free-market capitalism.

He acknowledges that MCM itself is a recipient of low-interest lending from Manitowoc’s revolving loan fund — a total of $123,000 in loans eight or nine years ago, according to the city. He thinks his company also got a tax credit one time on some lights it installed.

Last year, though, Fredrich had a revelation after MCM purchased a $33,000 air compressor. The purchase made good sense because it saved about $1,000 a month in electricity costs. So he was surprised to discover that the company was eligible for a $4,125 Focus on Energy grant.

“Is this a great county or what? We decide to buy a new compressor and the people in Manitowoc are forced to help us pay for it,” he wrote in an op-ed submitted to Manitowoc’s local paper, the Herald Times Reporter. “Actually, it is pitiful.”

In an interview with Wisconsin Interest, Fredrich said he went to the president of the Manitowoc utility and tried to give the money back. Told that wasn’t possible, he eventually donated it to charity, he said. But he also learned a little about who else was getting Focus on Energy money.

Focus on Energy recipients are not usually disclosed publicly. But looking through the utility’s annual report, he found that Orion had been given two large Focus grants: one for the solar project on its roof and another $93,000 grant to help build a wind turbine on the plant’s property.

“If Orion decides to make investments like these, they should do so with their shareholders’ money, not money taken from the electric utility customers in Manitowoc,” he wrote. “These investments need to stand on their own merit.”

Although it was created by statute, Focus on Energy is actually not a government program per se. It is a statewide utility program. Fredrich is not just critical of Focus on Energy, though. He says he would not use government lending again and is critical of the whole gamut of government subsidies.

“Compete on ideas and products,” he says, “not on how well you can lobby the state and federal government.”

Fredrich says he just doesn’t think the role of government should be to subsidize private business. And, he adds, “the fact is, (subsidies) don’t work.”

Crawford, the former mayor who is now an Orion vice president, disagrees.
“It is hard for me to have a bad response to government investing, putting people back to work and helping families,” he said.

At any rate, he pointed out that Orion did not receive any “sizable grants” and most of the assistance came through a revolving loan fund that helps leverage private investment. Orion has been a “great jobs generator,” he said, and pays the money back into a fund that other companies can use.

If people can reduce the cost of money by using a government program, they will, he said, adding that Fredrich did it himself.

The challenge in figuring out if Fredrich is right about subsidies is there are just so many of them — and no good metric by which to judge their success.

The loan that Orion received, for instance, was just one of dozens of loans or grants made through the $55-million State Energy Program. A primary goal of the program is to create jobs, and the state does maintain a website that tracks how many positions have been created. The answer more than three years after the $55 million in federal money was sent to Wisconsin, according to the website: 3.95.

“A number like four does not surprise me because under the OMB (Office of Management and Budget) rules you can only count jobs that were directly created by the federal money,” says Dave Jenkins, director of commercialization and market development for the State Energy Office. “Frankly, to me that is a bunch of nonsense.”

The four jobs were created within state government to administer the grants and loans, so the number doesn’t include private-sector jobs that the stimulus may have helped create by encouraging investment. Determining how many of those jobs have been created would entail examining specific projects and companies like Orion.
Orion, according to the website www.recovery.wisconsin.gov, funneled its $260,000 to a single “vendor”: Solyndra. Federal tax dollars weren’t just used to produce Solyndra products, it appears, they were used to buy them — meaning the federal government took care of both sides of the economic equation, both supply and demand.

Crawford disagrees with the characterization, pointing out that the $260,000 was not a grant but a government loan to Orion that will have to be repaid.

No lasting jobs were created at Solyndra, a company that quickly failed. But it would seem nearly impossible to know whether the $260,000 created any jobs at Orion, either — partly because there were so many other sources of money, both public and private, that were also used to fund the project and the company over time.

Responds Crawford: The public funds leveraged other investment and, because the solar demonstration project was used to stimulate business, it created  jobs.

“The investment was, I think, a wise one for taxpayers,” he said.

Both he and the company’s founder, Neal Verfuerth, stated in an interview the day of the tour that Orion has followed through on its job creation commitments.

“We’ve performed in terms of job creation,” said Crawford.

“Head count, and payroll,” added Verfuerth, sitting across the table from him in the company’s boardroom not far from a bustling and highly modernized factory floor.

Speaking publicly at an investors’ conference in the spring of 2012, Verfuerth said:

“We went public in December of ’07, working on a five-year plan. Of course, had a little set-back as did most people with the economy for a couple years, but everything is now tracking again and we are very optimistic about what the future holds.”

Others aren’t so sure.

Take George Reis, a well-known investment adviser in Two Rivers.

“It seems like, at least if you listen to the company, things are going good,” said Reis, who runs GVR Investment Management Inc. “They just don’t perform with the numbers. The bottom line is the numbers are not there.”

“At one point, the stock was selling in the twenties and it’s now about $2 a share,” said Reis in mid-May. “I think the market is saying, ‘Show me the earnings.’ ”
There “seems to be a disconnect,” he said, between what appears to be a good story and financial performance.

Net income for fiscal year 2011 was only $341,000, and net income for fiscal 2012 was little better at $483,000. For fourth quarter 2012, which ended March 31, the company reported a net loss of $157,000.

On the positive side, Orion has had large year-to-year growth in revenue: Revenue topped $100 million for the first time in fiscal year 2012. The company announced in early June that it “expects to achieve $250 million in annual revenues by fiscal year 2017.”

But there are challenges.

The stock price in early June continued to hover around $2.25.

Crawford emphasizes that Orion has what he calls “an excellent suite of products that compete in the marketplace.” But the company’s basic selling point is that its approach cuts electricity bills, so a sharp decline in energy prices could impact sales, Roth suggests.

In addition, the company is expected to face growing competition and “while short paybacks for its products are not dependent on government subsidies or utility incentives, these programs can influence a portion of potential customers regarding purchases,” the analysis points out.

Incentives that help create markets are common in the energy sector. For instance, manufacturers of solar panels have benefitted from federal investment tax credits given to their customers. Manufacturers of products that help transform renewable resources like wind into electricity, meanwhile, have long benefitted from states’ Renewable Portfolio Standards (RPS) that essentially help create a market for them.
Orion’s Apollo Light Pipe was granted RPS status as well when former Gov. Jim Doyle signed the Renewable Resource Credits bill in 2010, and Wisconsin, as a result, is now the first place to make “daylighting” part of its standards, according to Rusty Haynes, project manager of the Database for State Incentives for Renewable Energy in North Carolina.

At the time, Crawford called the legislation “a market transformation for the company” and was quoted as saying it would spur sales. That hasn’t happened yet, perhaps because administrative rules are still being developed. But it’s easy to see why Crawford said it could. Meanwhile, U.S. Sen. Herb Kohl has already unsuccessfully tried to extend federal investment tax credits to buyers of the Apollo Light Pipe.

Verfuerth appears unrelentingly upbeat about the company’s future.

Sitting in the company’s board room on a day that Orion stock had slipped below $2 in late April, he expressed unmitigated confidence and suggested that a “fixation on short-term” thinking has kept the stock price down.

“It will come back around again,” he said of the stock price. “We will go from being the whipping boy to the rock star.”

That would be a very good thing for Manitowoc — and, perhaps, for those focused on reducing energy costs. Indeed, defenders of government assistance to the renewable energy industry note that the justification goes well beyond jobs. But reality is that such government intervention is often sold by touting job-creation to taxpayers who can’t easily tell if the claims are true.

It is nearing a decade since Mirro left Manitowoc and upended an entire community.

Kaye Schulz, the Two Rivers resident who left her shoes behind, says she worked for a while as a certified nursing assistant and has spent eight years as a seasonal worker. She also spent three weeks in 2007 as a temporary worker building lights at none other than Orion. She has no idea what happened to the old clodhoppers. But she says she knows one thing for sure. They’re empty.

There has been progress in filling Mirro’s shoes, others say, but new challenges, too. In fact, Thermo Fisher Scientific — which just 10 years ago employed over 1,000 people in Two Rivers — is now in the final stages of shutting down manufacturing at its old Hamilton “wood plant” as it moves manufacturing south.

Lee Brocher, the president of the Common Council in Two Rivers, makes it clear local government will do what it can to encourage new development and business. To local government officials, it’s just the way things are done nowadays.

“We are limited, but we will use what we have and have the state be a part of that,” he said. “Our tool chest in Two Rivers is small but we do have a healthy revolving loan fund we have used.” Government, he said, “can’t sit there and be negative.”

Government, indeed, has become both cheerleader and banker. And in an age of free trade, the politicians have learned to protect and retain jobs in exchange for subsidies — at least for a while. The only problem, in the eyes of people like Fredrich and Reis, is cheers only go so far before the market has its say, and subsidies presumably can’t last forever.

“Economic reality,” says Fredrich, “will eventually surface.” Companies will either have to make it or break it on their own.

Says Reis: “Show me the earnings.”

Mike Nichols is a Senior Fellow at the Wisconsin Policy Research Institute.

Sidebar

Orion’s public subsidies

  • $500,000 loan through the city-created Manitowoc Industrial Development Corp. (MIDC) in 2004.
  • $500,000 loan from the Wisconsin Department of Commerce and the City of Manitowoc in 2005.
  • State jobs credit package of $350,000  in 2005.
  • Another MIDC loan for $750,000 in 2007.
  • Additional $163,000 loan from the MIDC structured as an addition to the remaining balance of the 2007 MIDC loan.
  • $854,000 jobs-related tax credit “eligibility allocation” in 2008 that the company has  not yet claimed.
  • $200,000 Wisconsin Energy Independence Fund loan in 2009
  • $220,000 Department of Commerce grant  in 2009.
  • $250,000 grant from the Focus on Energy program for a solar array in 2010.
  • $93,000 rebate from the Focus on Energy program related to an Orion wind turbine  in 2010.
  • $260,000 loan, funded through the American Recovery and Reinvestment Act, from Wisconsin’s State Energy Program in 2010.

SOURCES: Wisconsin Economic Development Corp.; Wisconsin Department of Commerce; Focus on Energy; Manitowoc Public Utilities 2010 Annual Report; City of Manitowoc

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