Audit Statements Raise Questions: Is Ann Arbor SPARK A Private Venture Capital Firm or A Public Nonprofit Organization?

Please note: Kai Petainen sits on The Ann Arbor Independent’s Editorial Board.

SINCE 2009 ANN Arbor’s elected officials have given Ann Arbor SPARK over $5.1 million dollars in public money. In addition, a Washtenaw County tax has funneled over $1.2 million dollars in public money to Ann Arbor SPARK.

According to its 2012 income tax returns, public money paid for just under half of SPARK’s $4.5 million in operating expenses.
However, by refusing requests for its audited financial statements, critics claim officials at Ann Arbor SPARK have behaved as though they work at a private company. In reality, SPARK is a public non-profit corporation.

What would change if SPARK were a privately-held company? For starters, it would never have to release its income tax forms to the public, nor would its audit forms have been released by state officials.

A representative of the IRS explains what else would happen if Ann Arbor SPARK were actually a private company:
“The private company would be taxed by the federal government at the corporate rate and could incur a significant tax liability.”

In other words, Ann Arbor SPARK would pay taxes on its declared income each year. In 2012, SPARK’s total revenue was $5.53 million dollars. At the 2012 federal corporate tax rate, SPARK avoided as much as $1.88 million dollars in corporate federal income taxes. Its $17 million in net assets could also be taxed.

As a private company, then, SPARK would lose easy access to taxpayer money through tax increment financing. City Council members could choose to allocate money to SPARK, but that would mean funding private enterprise with public money.

In emails shown to The Ann Arbor Independent, SPARK officials replied to those who’d asked to see the audited financial statements that the entity was not prepared to share those documents with the public. Ann Arbor City Administrator Steve Powers wrote in an email to a City Council member, “The SPARK audit is not available for public review. SPARK is not required to share its audit. SPARK has chosen to maintain the confidentiality of its financial information. As an executive committee member, I have reviewed the audit and have no concerns with SPARK’s financial integrity and management controls.”

However, according to the Michigan Attorney General’s office, “If an organization is registered with the Charitable Trust Section they are required to submit financial statements to us annually. The Charitable Trust Sections records are open to the public.”

The Ann Arbor SPARK Foundation is registered (MICS 38578) with the Charitable Trust Section through July 31, 2014. In essence, Powers as well as officials at Ann Arbor SPARK elected to refuse to provide records that are “open to the public.”

Ward 4 Council member Jack Eaton doesn’t find that the most troubling aspect of the situation. Eaton said, “For me, the important question is not whether Mr. Powers was required to make the reports available, but instead, whether he should be serving on the SPARK Board.”

While critics claim SPARK officials are behaving as though the entity were a private company, others suggest trying to keep audits private is an effort to avoid more public humiliation.

When Governor Rick Snyder was Chairman of Ann Arbor SPARK’s Board of Directors, an outside audit of the group’s finances revealed SPARK “didn’t have adequate internal controls, submitted invoices late, provided services for companies that weren’t eligible because they weren’t in Ann Arbor and billed for services even when they hadn’t fulfilled the contract’s terms,” according to a 2010 AP news report.
As a result of that 2008 audit, Ann Arbor/Ypsilanti SmartZone Local Development Finance Authority (LDFA) Treasurer Mike Reid sent a sharply-worded letter about SPARK’s lack of internal controls to Ann Arbor City Council—and the letter made it into the Ann Arbor News.
Reid wrote, “The audit report findings are indicative of system-wide internal control failures that obscure the LDFA board’s ability to provide basic oversight and create conditions where misuse of public funds or outright fraud could easily go undetected….”

The LDFA was created in October 2002 to capture property tax money using a tax increment financing (TIF) scheme. Along with John Hieftje, 2002 City Council members included Mike Reid, Marcia Higgins, Wendy Woods, Christopher Easthope and Jean Carlberg.
Since 2003, the LDFA has diverted 50 percent of the operating millage of the AAPS and 50 percent of the State Education Tax levied on the “captured” properties—located within the Ann Arbor Downtown Development Authority’s boundary. In 2012, that amounted to $1.45 million dollars.

LDFA documents show the financing authority is expected to “capture” as much as $25,000,000 in funds which would otherwise have gone to local schools between 2003 and 2018. The ability of the LDFA to “capture” school millage funds expires in 2018.
The LDFA funnels those tax dollars to Ann Arbor SPARK via a series of no bid contracts.

After the embarrassing public fall-out from the 2008 audit, SPARK officials made changes to reporting policies, and added additional conflict-of-interest stipulations. However, refusing to release the audits to the public, has made it difficult for those outside of SPARK to gauge the success of the changes. Until now.

In November 2013, Michigan’s Charitable Trust Section released SPARK’s 2006-2012 audited financial statements to Ann Arbor resident Kai Petainen, who wrote and asked for copies. Petainen, a writer for Forbes.com, found information contained in the audited statements problematic.

Petainen has attempted to get answers to these and other questions:

• SPARK’s “Pre-Seed Fund does not take board seats or ask for observation rights.” Roger Newton is a director at SPARK, and a director at Angott Medical. SPARK gave money to Angott. As SPARK (Newton) gave money to Angott (Newton), is this a conflict of interest?”

Petainen, in an article published at Forbes.com, writes:

• If SPARK is an incubator of jobs, then why is the main expense “Investment Management Fees?” Isn’t that a venture capital firm?
• Why are most of the expenses listed as salaries, “misc,” ‘“all other,” and “other fees?”
• Cleaning costs $194,291? Is SPARK a “dirty job?”
• According to Tom Crawford at Ann Arbor city hall, 100% of the LDFA money to SPARK (about $1.5 million) is for local companies. If so, then why does the audited financial statement say this: “$275,000 is available for companies location in the City of Ann Arbor via funding from the Ann Arbor/Ypsilanti Local Development Financing Authority (LDFA)?” Where does the other $1.2 million go?

Washtenaw County Commissioner Conan Smith, who voted to enact a county-wide millage in order to fund Ann Arbor SPARK, also served on the SPARK Board.

When asked if he thought it was a problem that SPARK President Paul Krutko had refused to release audits, Smith said, “In all, I think that SPARK not providing the audited financials and 990s easily and directly may be annoying, but it’s not really a disaster, right? Those documents are available through other public means if people want them….”

Smith also suggested that making SPARK’s audits public would put “our communities at a competitive disadvantage.” Again, Smith says, “They have interesting and compelling justifications for not broadcasting details on their finances (consider, for example, the upward pressure on them from companies we’re seeking to draw into Greater Ann Arbor if those companies know the details of how we financially support such moves.”

However, SPARK has drawn few existing companies to downtown Ann Arbor, and it’s public record that SPARK support tops out at $250,000 for loans made to start-ups and small businesses looking to expand. The entity’s micro-loan program details are public, as well, and that loan program tops out at $50,000 at 12 percent interest.

Furthermore, public money spent by either the county or the city to attract or retain businesses is subject to public record requests.
It’s unclear, then, what County Commissioner, and former SPARK Board member Conan Smith means when he claims there would be “upward pressure…from companies we’re seeking to draw into Greater Ann Arbor if those companies” knew “the details of how we financially support such moves.”

For instance, when Google opened an office in the city, SPARK was minimally involved. Democratic Governor Jennifer Granholm authorized the Michigan Economic Development Corporation (MEDC) to offer Google tax incentives worth more than $38 million dollars over 20 years. Google, in return, promised to create 1,000 jobs.
Ann Arbor City Council and the Downtown Development Authority sweetened the deal by serving up over $1 million dollars in free downtown parking.

In June 2007 Council established an Economic Development Fund and put $2.18 million from the city’s General Fund into that new fund.
The city committed to fund up to 400 parking spaces for Google employees for up to four years, at an estimated cost of more than $2 million dollars.

City records show more than $1.2 million was spent from the Economic Development Fund before it was dissolved in 2011. Most of it went toward Google parking.

Google, whose officials promised to create 1,000 jobs in Ann Arbor, have created around 300 jobs. In 2011 Google hired a global outsourcing firm to bring contract employees into its Ann Arbor office. Those employees are paid wages lower than required under the state’s tax credit program. Google officials declined to comment on the details of that.

Conan Smith goes on to suggest that, “a more interesting and story would be talking with SPARK about how they set their performance metrics and how they are doing.”

The well-documented problem, of course, is that SPARK officials have been remiss in tracking the creation of actual jobs, and whether jobs created are retained.

Were SPARK a private company, officials would only be expected to answer to a board of directors. However, SPARK is not a private company, so the organization’s ongoing accounting slip-ups and difficulties producing accurate and audited numbers of actual jobs created and existing jobs retained presents a significant challenge to elected officials who are supposed to be minding the store, as it were.
As public funding of SPARK’s operating expenses continues to rise, Council members and citizens such as Kai Petainen expect more transparency and greater efforts to accurately keep track of how funds are spent.

“We dropped the ball,” said a City Council member. “SPARK may not have broken the law in refusing to share its audited financial statements, but is that the message we want to send? I don’t think so. SPARK is a public nonprofit, and I think it’s about time Paul Krutko and his staff started behaving as such.”