The Havre de Grace city government once again finds itself wrongly in the position of acting as loan officer, bank board of directors and financier in a business matter.
Last week, the city council, with two members abstaining, voted, 3-1, to loan $100,000 to
Billing itself as the world's largest postcard store with a business track record spanning 40 years, Mary Martin Ltd. is as worthy as any business, maybe more so, to receive government subsidies in the form of low-interest loans.
The problem here is that no business should be eligible for low-interest loans from the government. Keep in mind, the loan program the city manages is not government backing of a private loan — which is typically the kind of financing associated with things like disaster relief and student loans — but essentially a bank the city operates. Known as a revitalization and development, or RAD, fund, it was begun with grant money from the state, which was subsequently loaned to businesses over the years, at below-market interest rates. As the loans have been repaid with interest replenishing the fund, new loans have been made to other businesses. Under the program, there are requirements that a business receiving a loan is obliged to create a certain number of jobs, and in the case of the most recent loan approved, it is estimated eight to 10 jobs will be the result.
The problem with the program — and the one in Havre de Grace is hardly unique — is that making loans and collecting interest are the business of businesses, namely banks and other lending institutions. When a city government wades into this line of work, there are several key philosophical and practical concerns.
If a business receives a low interest loan from the government, that financial transaction undercuts the ability of private lending institutions to make loans and collect interest, thus employing bank staff.
If a business gets a loan from the city after being rejected by a private lending institution, there is reason to suspect the city might not be making a great investment of public money. If a loan is too risky for a bank to make, especially given the recent history of housing loans, should the city be making it instead?
As one city councilman pointed out, loans made through the program are generally of a higher risk variety than most other business loans. In the world of private lending institutions, high risk is reflected in higher interest rates, but higher interest rates are not necessarily part of this city-funded loan program.
There are instances where government involvement in finance can be appropriate — as in the cases of backing disaster relief loans and college educations — because there is a public policy rationale. In the case of RAD loans, there is also a public policy reason, namely the stimulation of business and the creation of new jobs, but there is also the matter of taking business from local financial institutions.
There are instances where government backing of business ventures is warranted, such as to do things like encourage a transcontinental railroad, or keep food supplies plentiful and affordable, to encourage energy independence, or for war production.