PROVIDENCE – At the end of day, the metrics don’t matter, argued J. Michael Saul, deputy director of the state’s economic development agency then known as the R. I. Economic Development Corporation. “It’s all about jobs – jobs, jobs, jobs, jobs, jobs,” Saul said, dismissing the reporter’s questions about benchmarks for measuring the success of the investments.

Saul’s arrogant response was part of a lengthy, two-hour-long interview that took place at the agency headquarters during the first week in March of 2010.

Saul was promoting the concept of a new state bond – a $50 million small business loan fund – an idea that he said had already been floated with key legislators and EDC board members.

Some of the money, Saul told the reporter, would be used to recapitalize the federal Small Business Loan Fund that was now depleted, having run out of money to loan.

The interview took place less than a week before Gov. Donald Carcieri’s fateful conversation with Curt Schilling at a fund-raiser at Schilling’s home in Mansfield, Mass.

Soon Carcieri would hijack plans for the $50 million state bond to support small businesses in Rhode Island, increase the amount of the fund to $125 million, with $75 million earmarked for Schilling’s 38 Studios deal.

Four years later, the debacle that was 38 Studios’ investment is still being played out in the news media and in the courts – and on the campaign trail.

Today, Saul is a defendant in a lawsuit brought by the state of Rhode Island alleging fraud for failure to inform the R.I. EDC board of directors about the full financial risk of the deal.

With the newly enacted state law indemnifying defendants from damages if they settle, expectations are that Saul – and perhaps co-defendant Keith Stokes, the former agency director – may take the deal. If they take the deal, the question remains: what will be their allocution in court in admitting to what happened?

Lost in the translation
Lost in the onslaught of 38 Studios' disaster was the gaping hole in Saul’s “jobs, jobs, jobs” response: the reality was that the agency had failed to track and tabulate the job creation data for the previous five years – from 2005 to 2010 – of the loan fund’s operation.

Instead, it relied on data supplied by the companies at the time of the loans had been granted, with the projected numbers of retained and new jobs. Although a number of companies receiving loans had gone out of business and defaulted on their loans, their numbers were still being included in the agency’s job creation totals for the loan fund.

Companies in Rhode Island that received some $16.7 million in loans between 2005 and 2010 were asked once a year to update the number of people employed, but only about half of them complied, according to agency officials. “We do make an annual request to companies for updated information, however only about half of them consistently report,” Sean Esten, then financial portfolio manager of the agency’s Small Business Loan Fund, told the reporter in 2010.

“We’ve never put that information into a spreadsheet to track it,” Esten said. “There’s a big pile of that. I don’t have time for that.”

[It was Esten’s memo complaining about the lack of financial scrutiny in the 38 Studios deal, saying that a $10,000 micro-loan received more financial scrutiny than the Schilling deal – a concern that was allegedly squashed by Saul and Stokes – that stands as key evidence in the fraud lawsuit.]

Jobs metrics still relevant
Fast forward to last week, when investigative reporter Tim White at WPRI dug out problems that an auditor found in how the state managed $2 million in grant funds from the federal State Small Business Credit Initiative that went to Betaspring in 2011. 

The audit, conducted by Lyon Park Associates, an Arlington, Va.-based firm, found that 71 percent of the money invested in Betaspring was used to pay Betaspring’s operating expenses, compared to only $394,000 that was directly invested in the firms.

Further, the audit report said that Congress had never intended for the program to fund business incubators or any other type of program with significant personnel expenses.

In addition, the audit found that Betaspring had used the money to invest in three out-of-state companies, including one located in Israel.

R.I. Department of Administration Director Richard Licht has contested the findings of the audit, claiming that Lyon Park report was “wrong” because it didn’t understand “the way an accelerator program works.”

The U.S. Treasury Department is expected to make a ruling in April, and it is possible that the R.I. Commerce Department will have to return the $2 million.

Not surprisingly, you won’t find Tim White’s story on either the CommerceRI or Betaspring websites.

What are the job metrics?
The underlying issue at the center of the controversy is the decision by the state’s economic development agency to invest in incubator programs as a small business job creation vehicle. As the legislative intent of the State Small Business Credit Initiative made clear, the goal was to jump start small businesses by spurring private investment in these firms – in order to create jobs.

As successful as Betaspring’s incubator model may or may not be in attracting firms to launch new businesses in Rhode Island [and in attracting lots of glowing media coverage and social media mentions about their efforts], there is no documentation that the companies who participated in the incubator program were able to attract significant private investment, according to the audit. Or, for that matter, any record of whether or not the firms were able to create new jobs beyond those for the entrepreneurs themselves.

A second part of the federal money was earmarked to go to the Slater Technology Fund – some $9 million in total, of which about 22 percent has been delivered to date. Slater, which was created in 1997 to stimulate the creation of new technology-based companies in Rhode Island, developed new metrics to measure job creation in 2010.

“It’s not just about the money,” Richard Horan, senior managing director at Slater, told the reporter in 2010. “It’s about the competence to deploy the money in a prudent and constructive way.”

The new jobs creation metrics measure “man-years of employment,” capturing the fact that the lifespan of new companies and startups is often fraught with risk. Instead of using aggregate job figures, Slater changed its reporting mechanisms to tally up the man-years of employment in its database. “It’s the right way,” Horan said at the time.

One of the reasons why Slater was invited to participate in the state’s grant application was that it could demonstrate through its job creation metrics database the outcomes which the federal grant program was seeking in applicants.

What is Rhode Island’s future job creation strategy?
Licht, defending the way in which the Betaspring money was dispensed, told White that the state had hired the auditor on its own to ensure that it was meeting the federal State Small Business Credit Initiative program’s guidelines.

What the audit – and the controversy swirling around it – do not address is the strategic decisions around job creation strategy – and how job creation metrics should be quantified.

Providing access to capital to start new businesses in Rhode Island by investing in startups as a part of an accelerator model may be a perfectly valid economic development strategy. But it may not lead to the kinds of job creation within Rhode Island that investment and access to capital for existing small businesses can achieve.

There is also the question of who’s responsible for oversight. Back in 2010, when the idea of using state money to recapitalize the federal Small Business Loan Fund was being discussed, the reporter asked Sen. Joshua Miller about what kinds of potential legislative oversight should be considered. Miller said, at the time, if oversight were a concern, “I would be against [adding state funds.]”