City Administrator Defends Refusal of SPARK Board, On Which He Sits, To Release Audit Statements To The Public

Please Note: Kai Petainen is a member of The Ann Arbor Independent’s Editorial Board.

ANN ARBOR CITY Administrator Steve Powers (below) sits on the Executive Committee of Ann Arbor SPARK. SPARK is funded with public money from both state and local sources, as well as income generated from lending public money and investments in fledgling companies made with public money, audited financial statements show.

Powers recently sent an email to all City Council members in which he alleges that Kai Petainen, a Forbes.com writer who lives in Ann Arbor and who teaches finance at the University of Michigan, has sent Council members emails that “contain a number of false allegations” concerning the release of SPARK’s audited financial statements to Mr. Petainen by the Michigan Attorney’s General’s Office.

Powers writes, “I believe an accurate summary regarding the financial statements may be of interest to you.”

Mr. Powers goes on to inaccurately claim that Petainen used the Freedom of Information Act to gain access to the audit statements.

Powers claims that “Because Spark is governed by a self-perpetuating board, Michigan law requires only that Spark release  financial statements to the directors themselves.”

Self-perpetuating boards select their own replacements. In a nonprofit with a self-perpetuating board, the Board of Directors is typically the ultimate seat of authority within the organization. There is, however, no law which bars self-perpetuating boards from releasing their audited financial statements to the public. Best practices in non-profit management encourage such boards to do so to foster transparency.

Over the past six years, Ann Arbor SPARK has received over $5 million dollars in public money from Ann Arbor’s General Fund, the fund used to pay for police, fire and other citizen services. Washtenaw County taxpayers have given SPARK well over $1 million dollars thanks to a millage imposed in 2009 and renewed in 2011 by the Washtenaw County Board of Commissioners.

Despite extensive public financial support, SPARK officials, including Ann Arbor’s City Administrator Steve Powers, are embroiled in a tussle with Council members who asked officials at SPARK to release its audited financial statements.

Poking A Grizzly Bear

Powers’s email to Council members is analogous to, perhaps, poking a stick at a grizzly bear. Several Council members have expressed concerns over the fact that Ann Arbor’s City Administrator serves on SPARK’s Board of Directors.

“As city officials, we have to encourage transparency. It concerns me that the City Administrator is defending secrecy on the part of an organization that is funded with public money,” said one Council member.

Ward 4 Council member Jack Eaton openly questions whether Ann Arbor’s City Administrator should be a member of the SPARK Board. Eaton, when campaigning prior to his August 2013 primary election win, stressed the need for more robust transparency in city government, including making it less costly for residents to get information using Freedom of Information Act requests.

Eaton has not commented on whether he would vote to withhold money from Ann Arbor SPARK in response to the organization’s efforts to keep audits from the public.

Ward 1 Council member Sumi Kailasapathy, however, is prepared to vote to withhold money from SPARK.

According to audit statements and income tax returns, in 2012, almost half of the money SPARK spent on operating costs came from local sources. That is up from 38 percent in 2010. Withholding that money could significantly impact the organization’s ability to finance its operations.

“I will read the email Mr. Powers sent to me out loud every time there is a request for money for SPARK,” said Kailasapathy.

SPARK: “No Violation of State Law”

In an email to The Ann Arbor Independent, SPARK officials noted that at the upcoming end-of-November Executive Committee meeting, members will discuss whether to make audited financial statements public. Officials also strongly objected to any implication that not releasing the entity’s audited financial statements was in violation of any state laws.

Members of the Executive Committee who will decide whether to change the organization’s policy concerning its refusal to release audited financial statements to the public include Steve Powers, Dr. Rosa Bellanca, the President of Washtenaw Community College, Dr. Stephen Forrest, Vice President of Research at the University of Michigan, Paul Krutko, President and CEO of Ann Arbor SPARK, Washtenaw County Administrator Verna McDaniels and former Ward 3 Council member Leigh Greden, the Vice President of Governmental Relations at Eastern Michigan University, among others.

It was Greden who, in 2009, put forward a resolution to change Ann Arbor’s FOIA policies. The changes made it more costly for residents to obtain public records. Freedom of Information Act requests made in 2008 and 2009 for Council emails sent during open meetings, and subsequent articles about the contents of those emails published in the former Ann Arbor News, cost Greden his seat. Voters quoted in an article posted to AnnArbor.com in August 2009 cited the immature and unprofessional nature of the content of Greden’s emails.

SPARK’s 2008 Audit Fiasco

In 2008, when MEDC CEO Michael Finney still headed SPARK, and Governor Rick Snyder was a member of the Board of Directors, SPARK came under fire in the local media. An audit that revealed poor internal controls and unaddressed conflicts of interest was made public.

To the media, SPARK officials brushed off the problems identified by its auditor, and allegedly claimed that adhering strictly to terms of the contract with the city would be “crippling.” This triggered an angry letter from the Treasurer of the Lower District Financing Authority (LDFA) Board charged with oversight of the no bid contract between Ann Arbor and SPARK to Ann Arbor City Council. LDFA Treasurer Mike Reid then resigned, but not before the local media published his allegations that SPARK’s internal controls were so lax that there was the danger of undetected fraud and misuse of public money.

Meanwhile, then SPARK CEO Michael Finney assured the media and the public that the problems that had led to the issues identified by the auditor had been corrected and were the result of growing pains.

It was this 2008 event, in fact, that prompted Council member Kailasapathy, who is a Certified Public Accountant, to ask for copies of SPARK’s audited financial statements. Council member Kailasapathy told The Ann Arbor Independent, “In 2008, SPARK’s audit revealed several serious problems. I have had constituent questions about SPARK.”

SPARK CEO Ignores Council Member’s Emails

On October 29, 2013, The Ann Arbor Independent reported that Ward 1 City Council member Sumi Kailasapathy had asked Ann Arbor’s City Administrator for copies of SPARK’s audited financial statements. Powers responded with an email in which he wrote:

CM Kailasapathy,

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.

In the November 19th issue of The Ann Arbor Independent,  it was reported that Kai Petainen, a Ward 2 resident and a writer for Forbes.com, the website of Forbes magazine, had attempted to use the Freedom of Information Act to obtain SPARK’s audited financial statements from the City of Ann Arbor. After he was told the documents “did not exist,” he appealed to Ward 2 Council member Jane Lumm for help.

Lumm contacted the CEO of Ann Arbor SPARK, Paul Krutko, as well as to the Ann Arbor City Administrator (and SPARK Executive Board member) Steve Powers. Krutko, whose annual $243,050 salary is funded with public money, did not respond to Lumm’s emails.

Emails between Powers and Lumm show she was offered, as was Council member Kailasapathy, SPARK’s 990 income tax returns. Powers reiterated that SPARK was not “required to share” its audited financial statements with the public.

Lumm, like Eaton and Kailasapathy, is concerned about transparency in government, and made it one of the subjects of her successful 2013 re-election campaign.

Petainen then filed a complaint with the Michigan Attorney General’s office. He requested copies of SPARK’s audited financial statements, and was subsequently given copies of the 2006-2012 audit statements.

Petainen wrote a November 9, 2013 piece about his experience for Forbes.com. He also and shared the copies of SPARK’s audits, as well as emails concerning the lengths to which he was forced to go to get the audits, with Ann Arbor City Council members, The Ann Arbor Independent, The Ann Arbor News, the AnnArborChronicle.com and the Detroit Free Press.

Stephen Lange Ranzini is the President of University Bank and serves on the city’s Economic Development Board. In response to a question about whether  he thinks the City Administrator’s refusal to provide Council members with SPARK’s audit statements, Ranzini said: “Transparency should be a goal of our city and city council and it helps make our city better.”

Ann Arbor’s “Engine For Economic Development” 

SPARK officials market the organization—created by the Michigan Economic Development Corporation—as “Ann Arbor’s engine for economic development….dedicated to the economic prosperity of the greater Ann Arbor region. We use our skills and knowledge to attract, develop, strengthen, and invest in driving industries to help our region thrive.”

In the November 19, 2013 issue of The Ann Arbor Independent, it was reported that “In Ann Arbor, the unemployment rate rose from 5.1 percent in March 2013 to 6.2 percent in August of 2013. Over the last six months, the city has seen the total number of people employed drop by 4,200. The number of people in Ann Arbor’s civilian labor force, the number of people employed and the total nonfarm wage and salary numbers all declined between March and August 2013, according to the U.S. Bureau of Labor data.”

Over the past six years, Ann Arbor’s total nonfarm workforce has increased from 197,100 individuals to 201,800 individuals, well below the city’s November 2004 high, when 211,000 individuals were employed.

There have been numerous questions about the accuracy of SPARK’s self-reporting with respect to its job creation and job retention numbers.

The organization’s 2008 Annual Report, prepared under the supervision of Michael Finney and signed by Rick Snyder, claims that Ann Arbor SPARK created or helped retain over 12,000 jobs in the two year period previous to the report’s release. Subsequent reporting by the Detroit and Lansing newspapers refuted that claim.

Under the 2012 Board Chairmanship of University of Michigan Vice President for Research Dr. Stephen Forrest, SPARK’s 2011 Annual Report claimed 431 FTE jobs had been created. AnnArbor.com pointed out that the “numbers are more conservative than past reports, since past job creation numbers reflected companies’ growth targets and not necessarily actual jobs created.”

Released Audits Prompt Questions

After the release of SPARK’s 2006-2012 audit statements, questions arose. Forbes writer Kai Petainen identified several irregularities when comparing the audit statements to 990 income tax forms filed with the IRS, as well as filings made with the United States Securities and Exchange Commission.

In his November 9th Forbes.com piece titled, “Governor Snyder’s Former Non-Profit Venture Capital Firm Refuses To Release Audited Financial Statements,” Petainen identifies several troubling issues revealed in the audits which SPARK’s Board refused to release to elected officials and the public. Petainen writes:

SPARK provides a limit of $250,000 for firms.  Why do the documents show $300,000 for the company NextCat and a valuation of $250,000?  Was $300,000 given but valued at only $250,000?

According to Tom Crawford at 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 located 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?

According to SPARK:  ”The 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?  Newton is also the CEO of Esperion Pharmaceuticals – a public company.

This last one has Council member Kailasapathy studying SPARK’s audited financial statements and Kai Petainen digging into SEC documents. Esperion was the beneficiary in a real estate deal that involved Ann Arbor SPARK while Newton was on SPARK’s Board. SPARK lost money in the deal, while Esperion went public and raised over $70 million in its IPO.

Petainen shared these concerns, as well as others, in emails to City Council members. Ward 2 Council member Sally Hart Petersen replied in an email shared with The Ann Arbor Independent that she wasn’t sure what Petainen expected Council members to do. Petersen’s husband Tim—a managing director at Arboretum Ventures—sits on the Board of one company in which SPARK has invested,

City Administrator Steve Powers in his email to Council members concerning Petainen’s efforts to alert them to alleged irregularities revealed in SPARK’s audits and filings with other federal agencies writes, “Should you receive any communication regarding these matters, I suggest referring them to Donna Doleman at Spark so a complete and accurate response can be provided.”

Yousef Rabhi is the Chair of the Washtenaw County Board of Commissions. Rabhi, who was recently appointed to SPARK’s Executive Committee, had a meeting with Paul Krutko regarding SPARK’s refusal to release its audited financial statements.

“I talked to Jane. I talked to Sumi. Kai shared his emails with me. Then, I contacted Paul and asked for a meeting. He agreed and we talked about the audit statements and the importance of transparency when public money is involved. He promised to put the issue on the agenda for the next meeting, and he did.”

Rabhi, went on to say that he would “fight” at the meeting to convinced his fellow Board members to change SPARK’s policy of keeping the audits private.

“I told Paul that the County policy surrounding how Act 88 Millage money was changed, and it requires more transparency and the use of metrics. We’re no longer giving the money to people because we gave it to them in the past,” said Rabhi.

Unlike those who have been highly critical of Council members Kailasapathy and Lumm, as well as Kai Petainen for their efforts to push transparency, Rabhi praised the trio, especially Petainen: “I have worked with Kai in the past, and think he does great research and work holding people accountable. I think he’s doing the right thing.”