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A ‘McCongressman’ May Get a Coronavirus Bailout for His Business

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Timothy L. O'Brien
·8 min read
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(Bloomberg Opinion) -- On March 24, as Congress struggled to authorize a massive federal rescue of an economy sinking beneath the weight of the coronavirus pandemic, four legislators sent a letter to the senators in charge, Mitch McConnell and Charles Schumer.

The letter asked that the bill significantly increase taxpayer funds available to struggling franchise operators — the folks who run McDonald’s outlets and other fast-food eateries, for example. The legislation already envisioned spending hundreds of billions to help small businesses cover about two and a half months of payroll and other operating expenses. But the letter-writers requested four months of such coverage for franchisees.

“There are more than 733,000 franchise establishments, operating in 300 different industries, which support nearly 7.6 million jobs and $674 billion of economic output for the U.S. economy. Many of them are struggling to retain their valued employees and may only have weeks to survive given the economic effects of this pandemic,” the letter noted. “We urge you to increase the loan size to four times the monthly operating expenses, up to $10 million for franchisees, and increase appropriations for the program to $500 billion to provide parity with the Treasury Department program for larger businesses.”

When the Coronavirus Aid, Relief and Economic Security Act passed three days letter, $350 billion of the $2.2 trillion bill was earmarked for small businesses with fewer than 500 employees. And in a few paragraphs buried inside its 335 pages, the bill tossed an unusual lifeline to franchisees. It wasn’t all the letter-writers had hoped for, but the CARES Act mandated that all franchisees, regardless of how many stores or restaurants they operated or how many people they employed in those outlets, would be eligible for federal small business aid.

In other words, if you’re somebody like Greg Flynn, one of the country’s most savvy and successful franchise operators who ran, pre-coronavirus, a $2 billion network of 1,245 Arby’s, Panera Bread, Taco Bell and Applebee’s franchises employing 48,000 people, you’re eligible. And if you’re somebody like Representative Kevin Hern, who won a House seat in 2018 on the strength of his success running a chain of McDonald’s franchises in his home state of Oklahoma, you’re in, too.

Hern was also one of the four legislators who wrote the March 24th letter to McConnell and Schumer. (Hern is a Republican. The three other authors — a Republican and two Democrats — don’t own businesses and have largely had careers in politics and public service.) Hern once owned as many as 18 McDonald’s franchises in the Tulsa area that employed more than 1,000 people. An Oklahoma non-profit news organization, The Frontier, nicknamed him “the McCongressman.” More recently, Hern has reported owning 10 franchises that employ more than 400 people. Financial disclosures he filed in 2018 said his burger joints contributed $25 million to $50 million of value to an overall portfolio of personal holdings worth between $38.7 million and $92.9 million at the time. His portfolio appears to have shrunk of late.

“While he no longer manages the day-to-day aspects of the business, which includes 5 McDonald’s Restaurants and 216 employees, his family is running it in his stead and are handling all decisions,” Hern’s communications director, Miranda Dabney, wrote in an email responding to questions I asked about the CARES Act and Hern’s business holdings. “They have not laid off anyone since the start of the coronavirus shutdowns and are making every effort to protect their employees.”

Protecting employees and businesses from being permanently fractured by the coronavirus is a paramount goal of the CARES Act. But Hern’s intersection with the bill highlights the degree to which subjectivity, imprecision and possible self-dealing have shaped the historic stimulus package — and just how ham-handed its rollout has been for one of its key beneficiaries, the small business community.

The White House launched the program last Friday before finalizing its outline or clarifying with the banks acting as conduits some basic financial terms, such as interest rates on loans to entrepreneurs (even though waves of billion-dollar defaults are likely). Business owners initially weren’t sure how to apply for aid, and many worried that the largest among them would get preferential treatment. Entrepreneurs and lawmakers immediately complained that banks weren’t moving swiftly enough, and computer glitches further fouled the chaotic application process earlier this week. Soon enough, the Federal Reserve had to step in and promise it would help backstop the loans, and Treasury Secretary Steven Mnuchin tweeted that he already wants Congress to allocate $250 billion more for the program.

Schumer pointed out after the CARES Act passed that Congress made sure President Donald Trump, Vice President Mike Pence, members of Congress, heads of federal agencies, and all of their children, spouses and other relatives are banned from getting any money through the program — for businesses big or small. But it looks as if Hern worked out a nifty loophole for franchises.

He and his office declined to comment when I asked whether his franchises planned to apply for federal aid — and whether doing so would be a financial conflict of interest that would undermine the general prohibition against government insiders getting a piece of the bailout. They also declined to comment on any discussions Hern may have had about the CARES Act with McDonald’s Corp., the fast-food giant that doles out franchises to guys like Hern. Nor did they respond when asked whether Hern would advocate for franchises in the second tranche of small business funding that Mnuchin is now trying to arrange.

Asked whether he thinks the CARES Act should distinguish among franchise-owners based on size (by annual revenue or number of employees pre-coronavirus, for example), Hern, who is 58, emailed this response:

“I was a business owner for 35 years. Since the start of this crisis, I've been approached by business owners across the country and across all industries, and I've made myself available to anyone seeking out guidance. I’ve done a lot of work to help my colleagues in Congress — many of whom have little to no experience as a small business owner or a job creator — to understand the challenges facing our local businesses today. We all support social distancing and other measures to defeat the coronavirus, but it’s important to remember that without government assistance, the economic consequences could be life-altering for millions of workers and small business owners alike. Franchises with locations under 500 employees are small businesses and should be treated as such — that way more workers remain on payroll and more businesses stay afloat. We should be working to minimize the losses and put our small businesses and their employees in a position to rebound when the economy reopens.”

Hern continues to own his McDonald’s franchises while serving in Congress because federal ethics and conflicts-of-interest guidelines allow him to. While the guidelines limit how much outside income legislators can earn while serving in Congress, they permit exceptions for performing some kinds of outside work — including practicing medicine or advising a family-owned businesses. “Congressman Hern’s company is family-owned,” Dabney, Hern’s spokeswoman, pointed out in her email.

Hern, according to one of his biographies posted online, also has “part ownership in a manufacturing facility in Muskogee, real estate ventures, and three technology companies,” and is “the co-founder of a community bank where he served for 17 years on the executive board.”

To be sure, it makes sense for a struggling business owner of any size to seek relief — even private mega-franchisers like Flynn, who recently told the Public Broadcasting System he would seek aid because his revenue has plunged 60% and he’s had to furlough 30,000 employees. Flynn doesn’t have Hern’s catbird seat in Congress, and should be far too large for the CARES Act’s small business aid. But the act’s franchise carve-out gives him a way in. On the other hand, Flynn isn’t operating a Fortune 500 company, either, and would likely be outmuscled by big corporations seeking some of the $500 billion the CARES Act has designated for them. He runs a company that is betwixt and between, so he’s likely to maneuver wherever he can.

The CARES Act has allowed for roomy interpretations of eligibility for small business aid, including for individual franchises that are tied to one another or to large corporations. Some restaurants and hotels that aren’t franchise operations but are part of chains have argued that size shouldn’t matter for those seeking aid. That’s rankled critics who apparently see the chains as playing unfairly. “There are other opportunities for those companies above 500 employees,” one of those critics, Representative Kevin Hern, observed Monday in the Wall Street Journal.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.

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