Taxpayers footed $8 million to failed Rough & Ready
PORTLAND — When state and federal officials approved $8 million in taxpayer financing for a Southern Oregon sawmill project, they did so on the premise the investment would bring back jobs. But officials greenlighted the project despite warning signs the plan to retool the mothballed mill was likely doomed to fail.
Sure enough, even with the expensive taxpayer-provided upgrades, the reopened Rough & Ready mill operated for less than 20 months before shutting down for good. Its equipment has been auctioned off, the land sold and the promised jobs only briefly delivered.
The failed project was overseen by Portland environmental nonprofit Ecotrust.
Taxpayers ultimately poured more than $12 million into the small-scale, family-owned mill. On the day the land was sold, only $5 million of it remained.
The other $7 million had been spent for naught. Cave Junction residents like Matthew Davis, who worked on the millroom floor, as did his father and three brothers, have a hard time accepting that work is gone forever.
“It was a game changer,” Davis said of the mill’s closing. “The mill was a really good income. One of the best-paying jobs around.”
After the mill closed, Davis went back to school and landed a better, higher paying job as a diesel engine mechanic. But it requires a 115-mile daily commute to and from Medford.
Government officials who hand out the type of tax credits that Rough & Ready received don’t check a project’s financial viability or budget details first. And that is by design. Lawmakers who created the so-called “new market” credits directed regulators to defer to private sector investors.
Officials at Business Oregon, the state economic development agency, approved Ecotrust’s tax credit application for the mill project despite red flags. Among them: a simplistic hand-written budget, ineligible costs that could have been detected up front and a recent failure by the mill’s operators to keep it open despite substantial public investments.
Then-Gov. John Kitzhaber supported retooling the mill in sleepy Cave Junction, surrounded by national forests just north of the California border. He liked the idea of putting laid-off mill employees back to work.
The sawmill owners, Jennifer and Link Phillippi, wanted as much taxpayer help as possible to buy up-to-date equipment and restart the mill. The size of a tax credit for pumping up a rural business like theirs depends on the total cost of the improvements. Ecotrust decided to include in its tax credit application a $4 million expense to buy the decades-old mill and the land on which it sits. What should have been obvious: The company in charge of the sawmill already owned the mill and the land, so buying them wasn’t a genuine arms-length cost and shouldn’t have counted.
But officials at the state and federal agencies that grant new market credits say digging deep into the workings of individual proposals isn’t their role.
On the federal level, the Department of Treasury scrutinizes the private entities that it authorizes to award multiple tax credits to a spectrum of projects. Ecotrust is one of those. Treasury officials check the performance of each entity’s portfolio before granting it a new round of credits to give out.
Under Oregon law, Business Oregon leaders said, they were required to leave it to Ecotrust and the Phillippis to judge whether the deal would save the mill. Ecotrust was paid $520,000 for arranging it.
When Oregon lawmakers created the state version of new market tax credits in 2011, they instructed Business Oregon to award the credits as long as certain federal requirements were met, no matter how dubious a project may appear. In a low-income community? Arranged by a federally approved entity? Backed with all the investment dollars required? Ecotrust’s Rough & Ready proposal checked all those boxes, so the taxpayer spigot was turned on.
Business Oregon reviewers didn’t spot warning signs because they aren’t allowed to dig deeper than face value, agency spokesman Nathan Buehler said.
The reopening drew high public praise from Oregon officials. “Credit goes to Governor Kitzhaber and to Ecotrust for their efforts on this project and on behalf of the Josephine County economy,” said Sen. Ron Wyden. Rep. Greg Walden hailed the project as “good news for working families in Southern Oregon.” Kitzhaber promised to help the mill project “in any way I can.”
Lawmakers ended the state version of the new market tax credit program in 2016. Congress, however, has repeatedly extended its new market incentive program, allowing project backers to receive $21 billion in tax credits since 2000.
Beginning in November 2017, The Oregonian/OregonLive sought public records about Ecotrust’s Rough & Ready deal. It reviewed tax credit applications, emails and documents given to the state by a concerned Ecotrust insider.
Those records trace the complex financial web that ultimately provided $8 million in federal and $4 million in state taxpayer resources.
Following reporters’ inquiry, Business Oregon notified Ecotrust in February of its plans to claw back more than $1 million of the taxpayer incentives due to misspending. Ecotrust has the option to avoid repayment if by May 3 it spends $2.9 million on other allowable projects in rural Oregon. The nonprofit has indicated it will try to do that.
To qualify for the maximum amount of state tax credits, Ecotrust needed to show that upgrading the Rough & Ready sawmill so it could reopen would cost at least $8 million. Ecotrust’s application to Business Oregon showed half that cost would be to acquire land and construct a building — even though the same three-page application showed the mill was already situated on a 300-acre site with an existing 35,000-square-foot sawmill.
Acquiring land and buildings from Rough & Ready’s owners only to give them to an entity 99 percent owned by those same people is not an upgrade eligible for a state taxpayer subsidy, Nia Ray, director of Oregon’s Department of Revenue, informed Ecotrust. Tax credits should never have been awarded for that purpose, she said.
Yet Business Oregon signed off on the subsidies. Buehler, the spokesman, said Ecotrust’s application didn’t provide enough detail for officials to spot that problem.
Adam Lane, Ecotrust’s chief financial officer, defended the companies’ handling of tax credits.
The incentives are restricted to helping businesses in census tracts with low median incomes and are intended for projects that wouldn’t be able to secure private financing without taxpayer subsidies. Most have gone to urban projects, but Ecotrust’s credits were designated for rural communities.
“One of the key elements of the new markets program, both state and federal, is they are supposed to go to try to fund projects that will create economic and — the way Ecotrust does it — environmental benefits in these rural companies, these needy Census tracts,” Lane said. “It is supposed to go to try to fund things that would not otherwise be fundable.”
Still, Lane was asking hard questions of other key decision-makers at Ecotrust as little as seven days before the tax credit deal closed.
Bettina von Hagen, chief executive of Ecotrust Forest Management, Ecotrust’s for-profit forest management subsidiary, wrote in an internal analysis of the Rough & Ready deal that log supply wouldn’t be a problem because the mill had “resolved supply issues” and could easily secure logs from its previous suppliers.
That raised questions for Lane. He wrote in the margins of von Hagen’s memo, “I think more needs to be said about this given that it was the main reason the mill was closed before. What has changed?”
Lane had other questions, too: Did Ecotrust have proof that a log shortage really forced the mill to close in 2013? Why wouldn’t a commercial lender pony up money for the project? Had von Hagen verified that a log shortage wouldn’t “kill the company” again after reopening?
“Rigorous analysis (i.e. ‘hard questions’) is the expectation we would hold in any project we undertake,” Carolyn Hollard, Ecotrust’s vice president for communications, wrote in an email. “We do not move forward with any transaction until we complete our diligence and questions are answered.”
Ecotrust said when it put the deal together that the public’s investment would create much-needed jobs in unemployment-racked Cave Junction.
“This project will bring back 70 jobs in an economically depressed region of the state with unhealthy forests,” Ecotrust said on its application. “Working people are productive, pay taxes and are not a drain on the state resources.”
Davis, the laid-off mill worker, said his younger brother, Chuck, and a neighbor went back to work when the retooled mill started sawing logs again. But, Davis noted, “It didn’t last very long.” For Chuck — who joined the Marines right after the mill closed again — the mill’s second shuttering brought grief. “He was so upset,” said Davis’ wife, Lynne.
Out of Ecotrust’s 25 new market tax credit deals, Lane said only two have run into problems like Rough & Ready’s. Still, he said “this is heartbreaking for us because when we put this deal together we were incredibly excited about the job creation, not only at Rough & Ready but the surrounding landowners.”
As for the state’s contention Ecotrust got the subsidies improperly by counting ineligible expenses, Lane said, “We are not saying that is correct.” However, Lane said Ecotrust agrees with the state that “this is a good solution” to spend any money left to purchase timberland for the Phillippis to manage.
“We’re working with the Phillippis, or monitoring them, because they’re the ones that sort of have to drive it,” Lane said.
In light of the problems that arose, Ecotrust will repay $250,000 — half of the fees it earned for handling the tax credits — and use it to purchase timberland in low-income tracts, Lane said.
Ecotrust is not ruling out future tax credit deals involving lumber mills, Lane said. “Ecotrust has a strong forestry team. We know a lot about it.”
NINETY YEARS, THEN CLOSED
Rough & Ready had been sawing logs continuously since 1922 and was the last working mill in Josephine County when it closed in February 2013. Its holdings spanned two mills located side by side. One was a 1940s-era mill and had recently been upgraded with $2.5 million of taxpayer help to more efficiently saw large diameter logs. The second mill, added in the 1970s, was capable of sawing small logs but had been dormant since 2002 because it wasn’t capable of turning a profit.
The Phillippis closed the large log mill in 2013, citing the shortage of logs from federal lands. The infusion of taxpayer financing in 2014 was to retool the small-log mill and put it back in business after 12 years.
They were bullish about the chances of success.
“Demand is good right now,” Link Phillippi said at the time. “Our markets are good. Our customers are begging for wood.”
Critical to any mill’s success is its ability to acquire raw logs.
Both Lane and Jennifer Phillippi said they had reason to believe Rough & Ready would be able to buy enough timber to successfully reopen and keep running. The mill had eight federal timber tracts under contract at the time the state and Ecotrust were putting together the deal to reopen the mill, they said.
Rough & Ready had not bought a lot of federal timber sales in 10 years, Phillippi said. But by 2014 they had enough in the pipeline to keep the mill busy for at least a year, she said. The political outlook for area timber harvests also looked better, thanks to an effort to find consensus among groups including loggers and environmentalists, Phillippi said. “It just seemed things had changed.”
The outlook was apparently still good enough as of Nov. 6, 2014, for the Phillippis to accept another $4.3 million in federal tax credits, this time arranged through United Fund Advisors in Portland. The group gave the mill that money so it could buy a costly new planer and have “working capital” to buy logs.
Just over a year later, the Phillippis told Ecotrust they’d have to call it quits. They couldn’t get enough logs. “Rough and Ready has been bleeding and is ready to pull the plug,” von Hagen emailed to Lane and two Ecotrust vice presidents.
Phillippi said it became obvious the mill couldn’t stay open when they landed only two federal timber sales in 2015. They were given first shot at another but declined, since they would have had to haul the logs 75 miles, she said. Their largest private log supplier suffered disastrous fire seasons in 2014 and 2015 and reduced its harvest by 75 percent, she said. They simply didn’t have enough logs to keep operations going beyond early 2016, she said.
Through another company of theirs, the couple also own 25,000 acres of timber in Douglas, Jackson, Josephine and Morrow counties. In an interview, Jennifer Phillippi said their privately-held timber supply isn’t large enough to have sustained the mill.
She and her husband were sorry the mill had to close and had gone to lengths to prevent it, she said. “We risked a lot of our own money and had lost a lot of money during the recession to try to keep the mill going,” Phillippi said. “We just care so much about our community, we just were doing whatever we could.”
It’s not clear the federal timber supply dried up as Phillippi described. The Bureau of Land Management, which manages some of the federal land in the Illinois Valley where Rough & Ready was located, offered 38 million board feet for sale in that general area in fiscal year 2015, according to spokeswoman Maria Thi Mai. Much of that was set aside to give small local businesses first shot at buying it. At the time it closed, Rough & Ready was the only business on that list, Thi Mai wrote in an email.
After the mill equipment was auctioned off and the property sold, roughly $5 million was left from the $12.3 million of incentives taxpayers spent on project, according to an Aug. 9, 2017 email Ecotrust’s Adam Lane sent to a representative at Chase and others involved.
“Of course this is not the outcome for which we had hoped when we originally did the transaction but is the best that can be achieved at this point,” Lane wrote.
The sale of the mill for use as a garden products distribution center in summer 2017 prompted state regulators to ask questions about why the mill project failed. They concluded that Ecotrust’s spending at the launch of the mill retrofit was out of line.
In a Feb. 2 notice to Lane, Ray, the Oregon Department of Revenue director, wrote that Ecotrust mischaracterized its plans to regulators. Almost half the $10 million project involved using a one-day, $4.9 million loan from JP Morgan Chase Bank to allow a new entity 99 percent owned by the Phillippis to acquire the mill and its equipment from a company owned by the Phillippis, it says. But Ecotrust’s application did not disclose that plan to Business Oregon. For the Phillippis to in essence buy the mill from themselves for themselves cannot be counted toward a state new market tax credit, Ray wrote. So Ecotrust must repay the state $1.2 million or invest $2.9 million in an approved project.
Ecotrust has indicated it plans to make such an investment, probably in forestland.
Buehler said Business Oregon will closely monitor Ecotrust to make sure all spending is proper and that conflicts of interest don’t arise.
Business Oregon officials took their questions about Ecotrust’s dealings to Oregon Department of Justice, where prosecutors considered a criminal or civil investigation. They looked into the deal, spokeswoman Kristina Edmunson said, but decided not to investigate further.
Information from: The Oregonian/OregonLive, www.oregonlive.com.