WisDems Chair Mike Tate Calls on Ron Johnson to Release Corporate Tax Records and Schedules, Provide a Full and Honest Accounting of All Government Assistance He Has Received to Build His Business

 MADISON — U.S. Senate Candidate Ron Johnson, who claims that "government doesn't create jobs," has saved at least $1.1 million as a result of getting at least two government-subsidized loans in the 1980s, during a time when the cost of borrowing was substantially higher than today, according to research from the Democratic Party of Wisconsin.

“Ron Johnson has been caught trying to mislead the voters. He says that government doesn’t create jobs, but if he really believes that, then why did his business use a $75,000 federal government grant for a rail spur, and why did he take $4 million in government loans with below market interest rates?” said Mike Tate, Chair of the Democratic Party of Wisconsin. “What other government assistance has Ron Johnson taken? Ron Johnson needs to release his corporate tax records and schedules and give an honest accounting of the tax credits and government subsidies he has taken.”

Johnson has tried to claim that government grants and loans for his business do not constitute government assistance, but as the Associated Press reported, Johnson's government loans were subsidized at below market rate

An independent expert interviewed by the Associated Press concluded:

"Tax-free bonds allow a borrower to borrow at a lower rate," said Andrew Reschovsky, a professor of applied economics at the University of Wisconsin-Madison. "That’s a subsidy from normal borrowing." (Associated Press, 8/26/10)

 

Johnson Saved Estimated $434,615 in Financing Costs in 1983

The bond agreement for his $1.5 million 1983 loan was determined as the product of the Corporate Tax Multiplier Rate (set in the agreement as 70 percent to 65 percent depending on the year) and the reference rate as determined by First National Bank of Neenah, Wisconsin. Over the course of the life of the loan, the Corporate Tax Multiplier Rate averaged 68.33 percent.

Prime rate averaged 8.70 percent between 1984-1998, so PACUR would have averaged an interest rate of 5.95 percent based on an average multiplier of 68.33 percent

By comparison, Aaa-rated bond averaged 8.71% for the same time period. It should be noted that not many businesses qualified for the top-rated Aaa rating, and PACUR would likely have had to pay a higher interest rate if it did not hold an Aaa rating.

How much does that save? At an average rate of 5.95 percent, debt service would total $2,309,099.68 for the subsidized loan. Commercial financing at an average rate at the best-possible Aaa rating of 8.71 percent would total $2,743,714.79. Source: http://www.mycalculators.com/ca/aloanm.html

Annual payments of principal and interest (if they are structured equally) would cost $153,939.98 using the subsidized interest rates and $182,914.31 for commercial financing. Source: http://www.mycalculators.com/ca/aloanm.html

 

Johnson Saved Estimated $590,430 in Financing Costs in 1985

The bond agreement for his $2.5 million subsidized 1985 loan was determined as the product of the Corporate Tax Multiplier Rate (set in the agreement as 70 percent) and the reference rate as determined by Marine Bank of Milwaukee. According to the Wall Street Journal, the reference rate in July of 1985 (when they entered into the agreement) was 9.5 percent.

This would give PACUR an interest rate of 6.65 percent on the start date. Commercial lending on the other hand was much, much higher. A bank would use the reference rate as a starting point for determining an interest rate on a commercial loan or a corporate bond; it would increase based on the corporation's credit-worthiness, assets, future profitability based upon completion of the project, etc. According to the Federal Reserve Web site, a Moody's Aaa-rated corporate bond in 1985 had an interest rate of 11.37 percent and a Baa-rated bond had an interest rate of 12.72 percent. This is an average across all industries. Source: http://www.federalreserve.gov/releases/h15/data.htm

How did this impact PACUR? The bond agreement called for the interest rates to float. It should be noted however that the agreement specifically states, "In no event, however, shall the interest rate payable on this Note exceed thirteen percent (13 percent)" which means that on the start date, the rates would not be allowed to grow to match commercial lending rates.

It should also be noted that it's unlikely PACUR qualified for a difficult to obtain Aaa-rating in 1985, and much more likely they would have gotten a lower Baa rating had they gone to market.

The reference rate averaged 8.404 percent between 1986-2000. So PACUR would have averaged an interest rate of 5.88 percent based on the 70 percent multiplier across the life of the agreement. In contrast, an Aaa- rated bond averaged 8.15 percent for the same time period.

How much does that save? At an average rate of 5.88 percent, debt service would total $3,830,886.98 for the subsidized loan. Commercial financing at an average rate at the best-possible Aaa rating of 8.15 percent would total $4,421,316.17. Source: http://www.mycalculators.com/ca/aloanm.html

 

Annual payments, of principal and interest (if they are structured equally) would cost $255,392.46 using the subsidized interest rates and $294,754.42 for commercial financing. Source:

http://www.mycalculators.com/ca/aloanm.html