Why Some Government Contractors Are Returning PPP Loans

Steve Rehnberg, finance chief of MZA, a government contractor in Albuquerque, N.M., said the economic outlook was scary in March when the firm applied for a PPP loan.

Photo: Adria Malcolm for The Wall Street Journal

About five million small companies across the country rushed to get government-backed loans this spring amid fears the coronavirus pandemic would destroy their business.

Now, many are returning the money with interest—including government contractors that could face the loss of new business, or be forced to take a rate cut on future work, if it is determined they didn’t need the money.

“There are risks of running afoul that have very serious consequences,” said Aaron Raddock, a director with the government contracting division of accounting firm BDO USA LLP.

About $30 billion in Paycheck Protection Program loans had been returned as of mid-July, Treasury Secretary Steven Mnuchin said during congressional testimony. There remains a total of about $520 billion in PPP loans outstanding.

Some money was returned after warnings by the Treasury Department that public companies and others with access to capital shouldn’t be seeking PPP loans, which can be forgiven if borrowers retain workers and meet other requirements.

Others, including retailers and restaurants, didn’t use the money because they weren’t able to resume operations. And for some, the worst-case scenario didn’t come to fruition as they successfully transitioned to a work-from-home environment or obtained relief through other government-funded programs.

“Treasury has repeatedly made clear that PPP is intended to provide much needed relief to America’s small businesses with economic need,” a spokeswoman said. “Some businesses decided to return PPP money after determining they did not meet that criteria.”

In the $550 billion government-contracting business, some companies decided to return funds because they continued to be paid during the pandemic and knew they would face added scrutiny if they applied to have the debt forgiven, according to executives of these firms who spoke with The Wall Street Journal.

In addition, the government has made it clear that Federal Acquisition Regulation rules that oversee contracted work are in play. This means the government will receive credits in return for forgiven loans, raising the prospect that prime government contractors would be forced to do future work at a lower billing rate.

‘We will pay it all back, plus interest,’ MZA’s Steve Rehnberg said of the company’s government-backed loan.

Photo: Adria Malcolm for The Wall Street Journal

Among the government contractors giving money back to the government is MZA Associates Corp., an Albuquerque, N.M.-based firm that provides engineering and other support for weapons systems.

On March 20, the Pentagon sent a memo to its contractors, telling them that many of them should keep working during the pandemic to provide the military with “essential products and services needed to meet national security commitments,” such as manufacturing or engineering work.

On April 14, MZA was approved for a PPP loan of about $2 million, according to the company. Like all applicants, its executives had to certify that the loan was necessary to support ongoing operations.

After applying for the PPP loan, MZA was awarded additional funding from subcontracts with Lockheed Martin Corp. totaling about $2.5 million in additional revenue, according to records from USASpending.gov, a website that tracks government spending, and the company.

MZA finance chief Steve Rehnberg said the economic outlook was scary in March when the firm applied for the PPP funds. There were fears of furloughs, shortfalls and potential lost revenue.

But Mr. Rehnberg said the contracts and other business have meant revenue will actually be above the firm’s projections this year.

“We will pay it all back, plus interest,” he said. “The taxpayer will get 1% above what we borrowed.”

A further complication for contractors is a second government program created in section 3610 of the Cares Act, the bill Congress passed in late March as the pandemic took hold. It was created to reimburse contractors for lost revenue. If a contractor chose to do both programs, it could be breaking the law.

“If you took a 3610 and also took a PPP, then you run the risk of double dipping,” said Connie Hammell, managing principal of accounting firm KWC.

Ms. Hammell said that receiving funds from the 3610 program and then also getting a PPP loan for the same shortfall in funds would be the same as billing twice for the same work. This isn’t just a bad look, it also violates Federal Acquisition Regulation rules that help ensure taxpayer funds aren’t misappropriated in government contracts with private companies.

When the coronavirus hit this spring, Atlanta-based Motion Stability owner Brian Yee relied on PPP to pay his staff of physical therapists and keep his business operating. Now his eight-week loan-forgiveness period is ending as Georgia faces a surge in new Covid-19 cases.

Other contractors that took advantage of multiple government programs are keeping the funds.

Orlando-based National Air Cargo Group Inc. has active contracts with the Defense and Treasury departments, according to USASpending.gov, a government-run website that tracks federal spending. It was approved for a PPP loan of between $2 million and $5 million on April 5 and in May also got a $15.8 million grant from the Payroll Support Program, an aviation-industry pandemic loan program run by the Treasury, records show.

Chris Alf, the firm’s CEO, said in an interview that the funds have helped him keep pilots and engineers on the payroll, as the government intended. While the company’s cargo business is humming, its passenger business has disappeared, including government work, he said.

The concern over credits and other program payments are just two areas of scrutiny the government is going to put on any companies seeking loan forgiveness in the coming months. Lawyers, consultants and accountants have advised their clients that the government is likely to also focus on eligibility and fund misappropriation.

In terms of eligibility, a typical small business might be able to argue it didn’t know if it was eligible and figured it was worth applying in case it was. Government contractors, however, have previously been vetted by the government. If a contractor that isn’t eligible tries to argue that it is, the government is likely to punish the firm, these experts say.

“If there are questions about management, personnel, size of the firm and general eligibility, a government contractor would already know. My biggest scramble was companies that had no idea if they were eligible. Government contractors knew,” said Amy O’Sullivan, a partner at law firm Crowell & Moring LLP.

In terms of punishment, the government could limit future contract awards to the contractor. There is also the risk of uncovering misappropriation years down the line because much of the money handed to these contractors is under constant review.

Write to Geoffrey Rogow at [email protected] and Ryan Tracy at [email protected]

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