A state program to distribute $300 million in grants to small Alaska businesses and nonprofits shut down by the COVID-19 virus has hit bumps.

The latest one is a lawsuit filed by Joe Geldhorf, a Juneau attorney, challenging the procedure by which the state, and the Legislature, approved the grant program, which uses federal funds. Legislators may have to convene a special session to solve a potential legal problem.

Another problem is the state’s decision to block grants to a firm or organization that also received a federal SBA Paycheck Protection Program loan or an emergency disaster grant, also from SBA.

Alaska appears to be the only state making such an exclusion. Just like the larger federal CARES act, the state grant program was rushed out by officials hoping to get cash out quickly to prevent businesses from shutting down for good, resulting in permanent job losses.

Problems came to light later, just as with the larger federal aid programs. State administration officials are attempting to make fixes through emergency regulations but they may not be enough to solve problems that have emerged and there may yet be legal questions.

Even a small SBA loan or grant, and some were as little as $1,000, are enough to knock an applicant out of the state’s program, which involve grants from $5,000 to $100,000.

Julie Anderson, Commissioner of the Department of Commerce, Community and Economic Development, told the House Finance Committee in a briefing June 10 that her department will now allow organizations that received up to $5,000 in federal money to still receive the state grants. The changes would also allow firms that had received more than $5,000 to return the SBA loan or grant funds to become eligible, Anderson said.

An unknown number of small businesses and nonprofits were excluded because they received minor amounts in federal Paycheck Protection Program loans or in small grants from the Small Business Administration’s emergency disaster relief program. However, business groups are now criticizing the state for setting the limit too low, arguing that most business and nonprofits applicants exceeded this limit, and would still be excluded.

Despite the stumbles, however, the grant program is up and running. The Alaska Industrial Development and Export Authority, or AIDEA, the state’s development finance corporation, has contracted with Credit Union 1 to be the administrator, receiving and processing applications. An initial $150 million was made available June 1, with remaining funds to be made available in later phases.

Alan Weitzner, AIDEA’s interim director, told the House committee that 1,509 applications for grants have been received as of June 15 with the requests averaging $43,000. Twenty percent of the $299 million in the program is set aside for rural applicants.

The rollout has gone slowly, however. Weitzner said $2.5 million has been approved and distributed so far to 83 applicants. Rep. Adam Wool, (D-Fairbanks,) a member of the committee, said that with only $2.5 million approved and paid out, “there’s a long way to go to get the entire $299 million out,” to organizations in real need. Weitzner said the paperwork submitted by applicants is more than was expected, which is slowing things down.

Now efforts are underway to speed things up, Weitzner said. AIDEA is reviewing responses to a Request for Proposals out to bring additional grant administrators on board get applications processed more quickly. It may take several weeks to get one or more administrators under contract and in operation, however.

The commissioner said it will still take time for these changes to be made but that organizations that received $5,000 or under of federal money will be able to apply or re-apply for the state grants within a soon.

However, if funds over $5,000 are returned to SBA this has to be verified and the procedure for doing that must still be worked out, Anderson said. This could delay the distribution of state grants to those who return federal money.

Meanwhile, the confusion over this may complicate the efforts of municipalities trying to roll out their own local or regional small business grants using community assistance money using CARES act received through the state.

Local officials have been worried that applicants for municipal grants may be blocked because of the same problem that this CARES act federal assistance was received indirectly, throughmunicipalities,rather than directly. Anderson told legislators June 10 that the new regulations would spell out that federal aid funds received indirectly through municipalities would not cause or nonprofits to be excluded.

Meanwhile, the potential legal problem hanging over all this that the state administration’s proposed change through regulations may be defective because it is contrary to plain wording of the Revised Program Language, or RPL, the action allowing money to be distributed that was ratified by the Legislature. The language is explicit that applicants receiving federal money are excluded.

In this case the streamlined RPL procedure was used, and this is being challenged in court by Joe Geldhorf, the Juneau attorney. Geldhorf has now raised an additional question on whether the state administration can through regulation change the grant program contrary to the wording of the RLP, which explicitly prohibits grant to applicants who have received federal funds.

At the June 10 legislative hearing state attorneys argued that courts have allowed minor deviations of plain language in statutes and in this case strong statement of legislative intent strengthens the argument to the point that the courts would allow this. However, legislative attorneys told the committee that while arguments can be made for the deviation from plain language, there is still risk. “This is uncharted territory,” in law, Megan Wallace, the Legislature’s chief attorney, told the committee.

The lawsuit brought by Geldhof against the state is still in court. Several legislators have warned the process may yet be found legally defective. The fix to this is a quick, narrowly focused special session to enact an appropriation bill with the change in language.

However, many legislators are resisting a special session even though it could leave the state grant program in a potentially defective position.

Excluding applicants who receivedfederal funds was a top-level state administration decision made in the governor’s office, according to sources. It was intended to prevent double-dipping, or a person applying for and receiving a federal SBA loan or grant and then applying for and receiving and state CARES act small business grant.

While the intention may have been good what people in the state administration didn’t expect was that the federal SBA program would undergo revisions, and that some of the SBA loans and grants would wind up being made for small amounts. In some cases $30,000 loans were requested but only $1,000 or $2,000 approved by SBA for various reasons.

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