The FBI and the milkman: Got fraud?

The Palin-era dairy bailout seemed like such a bad idea back in 2007 — propping up an industry that couldn’t stand on its own two feet, then appointing unqualified cronies to key positions and allowing them to give away state agriculture loans without guarantees or proper collateral. But today, rumors abound that the FBI has come knocking.

Several of my longtime confidential sources stated last week that the Federal Bureau of Investigation is knee deep in trying to unwind some of the financial activity surrounding the use of federal government grants awarded to the Matanuska Creamery.

In a phone interview with andrewhalcro.com, Anchorage Federal Bureau of Investigation Special Agent Eric Gonzalez refused to confirm or deny an investigation into the Matanuska Creamery. Saying it was agency’s policy not to publicly comment, Gonzalez offered nothing by way of confirmation.

But given the number of unconnected individuals who reportedly have been approached by the FBI concerning possible kickbacks from creamery disbursements, law enforcement’s attention appears leveled at the way the fledgling creamery put its initial grants to use.

While this normally might be surprising, after five years of following this bizarre dairy debacle, not even the FBI’s shadow fazes me.

For the last five years, I have chronicled the unfortunate story of Alaska’s dairy industry and the state’s descent into cow-powered crony capitalism. This mess didn’t begin well, and by all accounts, it ain’t ending well either.

In 2007, faced with strong local competition and rising costs, Alaska’s iconic dairy, Matanuska Maid (Mat Maid), faced insurmountable financial losses and inevitable bankruptcy. And while Mat Maid had been a ward of the state for the previous two decades, it never received one dime of taxpayer money.

“The bottom line is the troubles at Matanuska Maid are not management’s fault. In fact, they should be commended for keeping the dairy afloat when it should have been privatized years ago. The demise is attributable to global economics where price is king and where although 85 percent of Alaskans say they support Mat Maid, 62 percent of all milk consumed in Alaska is less expensive brands,” I wrote on June 24, 2007.

After Mat Maid’s overseer, the Creamery Board, had recommended shutting down the state-owned dairy to prevent major financial losses to taxpayers, then-Governor Sarah Palin began a public assault on the board and Mat Maid executives. She falsely accused them of being dishonest and mismanaging the dairy. The Valley milk farmers, who stood to lose if a state bailout didn’t happen, were Palin’s neighbors and friends.

Over the next six months, Palin fired Mat Maid’s management and the Creamery Board. She installed her friends and neighbors to run the daily operations of Mat Maid and the state Division of Agriculture, which grants agriculture loans.

Record financial losses followed the transition because Mat Maid was kept open. Palin responded by allowing her appointed friends to loan themselves hundreds of thousands from the state’s Agriculture Revolving Loan Fund to start a new dairy.

Today the end is near, and the story line continues to highlight how Palin’s populist bailout has grown into a financial and possible criminal disaster.

In 2008 on the heels of the liquidation of Mat Maid, a new dairy called the Matanuska Creamery emerged with state financial backing, even though it was obvious it was never going to make money. The new dairy was loaned Mat Maid’s old dairy equipment and was supposed to pay it off.

The new dairy was also given a $600,000 federal government grant. And they were loaned $1 million from the state’s agricultural loan fund — all without the requirement of personal guarantees or equitable collateral from the dairy owners or the dairy farmers.

Over the last four years, the creamery has had more loan modifications and extensions than they’ve made principal payments. They’ve run up more debt than equity. And they’ve left a wake of more unpaid bills than they’ve paid.

Finally, this past spring, the state acknowledged what had been evident from the beginning: The Matanuska Creamery was never going to pay back taxpayers. As a result, their loans were turned over to the Attorney General’s office for collection.

In a Nov. 17 interview with KTVA news, Matanuska Creamery President Karen Olson confirmed what some of us predicted five years ago. “We hit rock bottom a couple of months ago,” she said. “We are struggling to keep our current dairy farmers ... they made it clear they need more money.”

And while that should have been the end to the notion that the state could jump start an unsustainable industry, it wasn’t. Just as the state began to accept that the creamery was never going to turn the corner financially, they rushed back into the collapsing industry by fronting yet another small Valley farmer who had dairy desires of their own.

The state Board of Agricultural Conservation (BAC), obviously not having learned its lesson after writing off a cool million in cash for its first dairy dance with the Matanuska Creamery, loaned even more money to another Valley farmer to start up yet another dairy. The Havemeister farm, which had been supplying the creamery with raw milk, was fronted more than $600,000 in public funds to begin its own milk production facility.

Now let’s stop here for just a minute and consider history: Matanuska Maid failed because of high cost and low volume. The Matanuska Creamery has failed because of high cost and low volume. But today, the state believes the Havemeister dairy, producing just one-third of the milk the creamery does with the same cost structure, will somehow reset the economics of Alaska’s dairy industry.

If that wasn’t highly troubling enough, why would the state loan money to the Havemeister dairy when the milk they’d produce would come at the direct financial expense of the struggling creamery, which already owes them a million dollars?

The state, through the Division of Agriculture, has irresponsibly thrown the public’s money at the Southcentral dairy industry with absolutely no viable plan except to keep throwing the public’s money into a milky hole without any accountability.

Matanuska Creamery’s $1 million state debt will end up charged off, and the Havemeister dairy will not be able to meet the market, nor will it be able to generate positive cash to pay off its debt. After all, if the Matanuska Creamery couldn’t create cash flow with $600,000 plus federal grants and $1 million in state loans, plus state equipment, how is a mom-and-pop operation going to do any better at paying back taxpayers?

The turmoil extends beyond the state loans that will be defaulted. Vendors, including farmers who supply the creamery with milk, are not getting paid on a regular basis. By one account, Wells Fargo, the creamery’s bank, has ceased cashing creamery checks.

The source who informed me of this in an email added, “The main reason I would like others to know about the waste of money and mismanagement that has taken place is because they have hurt others and need to be held accountable for creating a fraudulent business plan and wasted taxpayer money.”

But that’s not how Karen Olson, president of the creamery, sees it. In an August letter to the state, Olson wrote the creamery would not pay another dime on its outstanding million-dollar loan obligation until the state helped move the operation to another location. Then, in a completely delusional tone, she accused the state of failing to support the dairy industry.

There was never a time over the last four years when Olson wasn’t asking the state for either more money or more time to pay off the cash she’d already borrowed. Her accusation that the state was abandoning the dairy industry, when in fact the state has been the only thing keeping her dairy doors open with loans and extensions, demonstrates hubris of the worst kind.

Meanwhile, at a recent BAC meeting, the board seriously seemed to be considering allowing Olson and the creamery to sell off some of the old Mat Maid equipment to pay down their debts. Even the fact that the creamery hasn’t paid for that equipment didn’t seem to be a factor in the board’s discussion. Imagine being able to sell off equipment the state owns, to pay off the debts you owe the state?

On Dec. 5, the BAC will hear a reconsideration request from Olson to reverse its decision to cease any additional loans or current loan modifications.

Over the last five years of writing about the dairy fiasco, my interest in this topic has been fueled by a white-hot anger over the way good, honest, hard-working people were treated so outrageously by a governor who possessed no class and even less intelligence.

Good people, like former CEO Joe Van Treeck, spent decades keeping Matanuska Maid afloat without so much as a dime from state taxpayers. Instead, Mat Maid relied on hard work and penny pinching to introduce new product lines and keep the state-owned dairy from the financial abyss as long as humanly possible.

These good people, after decades of hard work, were pilloried in the news media by a lazy former governor who not once picked up the phone to call Van Treeck, the 20-year CEO of Mat Maid, to ask for a thorough briefing. Instead, they endured nightly installments on the evening news where their governor accused them of gross mismanagement without any evidence, all while waving signs with Valley farmers protesting Mat Maid’s closure.

Yes, those are the same Valley farmers whose unrealistically high milk prices were the root cause of Mat Maid’s money woes.

Even putting the creamery’s blatant mismanagement, the BAC’s brutal cronyism, and the resulting financial losses aside, there are strong signals from insiders that the FBI still has much to say. At the end of the day, the Palin-era dairy bailout will stand the test of time as a very costly and very ill-conceived attempt at government-subsidized crony cow capitalism.

Andrew Halcro is a political blogger and former state legislator who lives in Anchorage. His blog can be found at andrewhalcro.com. Contact him at ahalcro@alaska.net.