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Michigan Backs Financial Scheme of Convicted Felon & Now Taxpayers on the Hook for $18 Million

by P.D. Lesko

Guess what you can get in Michigan for a $10,000 donation to Rick Snyder’s campaign? You can get $18,000,000 in state money to bail you out when your project crashes and burns just 10 months after it’s launched. You can also get a seat on the board of the economic development entity that oversees such incentives.

In 2010, two men, John Rakolta Jr., John Rakolta, III employed by Walbridge construction company, owned by Rakolta, Jr., donated to Governor Rick Snyder’s campaign. Collectively, the Rakoltas donated over $10,000 to Snyder. Along with his construction company, Rakolta, Jr. is also a partner in the recently failed $80 million dollar Raleigh Studios project, along with philanthropist A. Alfred Taubman. Taubman is a convicted felon. The idea was to build a movie studio in Pontiac and attract film-making to Michigan—with Michigan backing $18 million dollars of the project with a bond pledge.

Taubman’s involvement should have stopped the state cold.

In March 2010, the Michigan House Republicans investigated the Granholm MEDC for almost awarding $9.1 million in tax credits to a felon.

In March 2010, Andy Dillon, then Speaker of the House and now the state’s Treasurer (appointed by Snyder) told the Detroit News:

“The fact that a felon almost walked away with more than $9 million in tax credits shows how badly state government is failing our taxpayers. We don’t even know how many other cases like this are out there, because state tax breaks and contracts don’t require the checks and balances that Michigan taxpayers deserve.”

In June 2010, in response to pressure from state lawmakers, the MEDC issued a “letter of failure” for offering a $9.1 million dollar refundable tax credit to a felon.

That same month, the State Treasurer’s office signed a document which put Michigan taxpayers on the hook should Taubman and Rakolta’s film company, Raleigh Studios (left), default on $18 million in state-backed bonds pledged to the Pontiac, Michigan film company project.

In December 2010, Rick Snyder put his seal of approval on the state backing bonds for felons and struck a blow for crony capitalists everywhere when he appointed John Rakolta, Jr. to the Board of the Michigan Economic Development Corporation (MEDC). The MEDC oversees the kind of incentives given to Rakolta Jr.’s project. In 2011, Rakolta, Jr. was appointed to the MEDC Executive Committee. In December 2010, the Lansing State Journal published an editorial that urged former Ann Arbor SPARK CEO Michael Finney, chosen by Governor-elect Rick Snyder to head the Michigan Economic Development Corp., to make transparency a key priority.

Fat chance.

In March 2010 the MEDC announced that it would begin conducting background checks on companies applying for MEGA tax credits. The bond backed for Rakolta, Jr. and Taubman’s film company project was not a MEGA credit, however. Perhaps this is why Taubman’s criminal background did not present a problem to the same Republicans who had screamed bloody murder when a Democratic governor had almost awarded half the amount which taxpayers must now actually pay to discharge the debt of a felon under the administration of a Republican governor.

When Raleigh Studios opened in March 2011, the state’s generous film incentives were still in place – up to 42 percent. Snyder went on to significantly scale back the incentive program. Michigan’s new film credit program tops out at $25 million. Now, ten months after the launch the the Raleigh Studios project, the film company has defaulted on its $18 million dollar state-backed bond. Instead of being out the money himself, MEDC Executive Board member and Snyder campaign donor Rakolta, Jr. is leaving Michigan taxpayers and public employees to foot the bill.

Michigan Public Radio reported:

“The movie studio is in default of that payment,” explains Terry Stanton, communications director for the Michigan Department of Treasury. “But the bonds will not be in default, since the State of Michigan Retirement Systems is obligated to make those payments.”

The money will come out of the retirement funds of public school and state employees, police and judges.

“In June of 2010, the State Treasurer (at the time Robert Kleine) signed a guaranty and credit enhancement agreement, which promised to pay $18 million of bonds, principal and interest, if the company is unable to make payments to bondholders,” says Stanton.

This is classic “crony capitalism,” as President Obama’s former economic advisor Dr. Lawrence Summers described the MEDC’s programs in a 2009 piece published the New Yorker.

When Governor Rick Snyder was just plain old Rick Snyder businessman, he headed Ann Arbor’s Michigan Economic Development Corporation Smart Zone “job creation” entity Ann Arbor SPARK. As A2Politico has documented, Rick Snyder signed a 2008 Annual Report as the CEO of Ann Arbor SPARK that claimed the creation and retention of over 12,000 jobs in Washtenaw County. Snyder’s claims were phony, as revealed in a May 2010 investigative piece published by the Detroit Free Press. Snyder traded on those same phony job creation successes when he ran for governor.

In response to multiple 2012 Freedom of Information Act requests filed by A2Politico, it was revealed that the City of Ann Arbor, which oversees Ann Arbor SPARK, could produce no outside audited reports of how many jobs were actually retained or created by Snyder and his staff in 2008. In addition, the City of Ann Arbor, Washtenaw County, and the University of Michigan, all of which gave millions in public money to Ann Arbor SPARK for job creation activities, could not produce audited financial statements or 990 tax forms from Ann Arbor SPARK between the years of 2008 and 2011.

More disturbing still, the local Financing Authority board of directors, the entity charged with direct oversight of Ann Arbor SPARK, and headed by Dr. Stephen Rapundalo, CEO of Ann Arbor nonprofit MichBio, could not produce copies of SPARK’s audited financial statements or 990 tax forms for the years 2008-2011. Between 2008-2011, MichBio—a small biosciences industry trade association with about 300 member companies—received almost $2 million dollars from the Michigan Economic Development Corporation. In 2011, MichBio produced a study which concluded there needs to be more state money in the form of venture capital, loans and grants dumped into that industry, despite that fact that The Detroit Free Press reporting uncovered the fact that fewer than 1,000 actual jobs had been created statewide between 2006-2009 as a result of similar use of $145,000,000 in state money.

In 2011, Rapundalo, while speaking before Ann Arbor City Council about SPARK, suggested that “job creation was not the best metric by which to judge” SPARK’s successes. In other words, the job creation entity should not be expected to actually create jobs in exchange for tax dollars skimmed from public schools and taxpayers. At the same presentation, neither Rapundalo nor Paul Krutko, the CEO of SPARK who is paid $250,000 per year, could say how many jobs had been created by SPARK in 2011 in response to a direct question.

In October 2011, political writer Tim Skubick missed the connection between Snyder, Rakolta, Jr., the MEDC Board and Raleigh Studios. However, Skubick did provide an important piece of the puzzle concerning why Raleigh Studios failed when he wrote that Michael Finney and the MEDC had “botched” a $20 million deal to lure Disney and Marvel to work at Raleigh Studios through “low-balling the state’s offer on two occasions”—a tactic that outraged the Hollywood company officials enough that they walked away from doing business in Michigan.

Finney, you should remember, worked with Snyder in Ann Arbor at SPARK and stayed silent when Snyder signed that 2008 Annual Report with its phony job creations claims. After his election, Snyder then appointed Finney to head the MEDC. Snyder pointed to Finney’s extensive “job creation success” at Ann Arbor SPARK as the main reason for Finney’s appointment to lead the MEDC. Of course, while Michael Finney was the CEO of Ann Arbor SPARK, just as when Snyder had headed the organization, neither SPARK nor the LDFA kept records of actual jobs created, nor was there ever an outside audit of  the job creation data SPARK self-reported Freedom of Information Act requests recently revealed.

Rick Snyder didn’t have to come up with an equally inventive explanation when he appointed John Rakolta, Jr. to the Board of the MEDC. Michigan’s mainstream media, including the Detroit newspapers, never reported on the appointment, Rakolta’s $18 million dollar bond pledge from the state, or the fact that the MEDC member was in business with a convicted felon. 

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Short URL: http://www.a2politico.com/?p=13072

18 Comments for “Michigan Backs Financial Scheme of Convicted Felon & Now Taxpayers on the Hook for $18 Million”

  1. This story makes me want to tear my hair out. What’s left of it. Snyder kills the very popular film incentives program then bilks the taxpayers (and public schools-natch) out of $18 million on a film studio debacle when he must have known he was going to kill the budding Michigan film industry.

    Where is the US Attorney on this?

    • @timjbd Snyder made no friends when he killed the film incentive, particularly because he assured those producing movies in Michigan that he would not look at the film incentive for “several years.” The people behind the studio are taking a financial bath right along with the taxpayers. There are thousands of people out of work. Basically, Snyder screwed one of his largest individual donors. That’s a story if ever there was one.

  2. Walbridge is one of the major backers of “Aerotropolis” corridor along I94. They happen to be in the biz of building. This scheme was/is the beloved of several county politicos including former County administrator Bob Guenzel. What it has in common with the present scheme to steal the AATA from Ann Arbor, is that hallowed buzz word: Transit Oriented Development which, like the railroad land grants of olden days, is really a give-away of public assets to privateers. Naomi Klein in her book “The Shock Doctrine” has described this process pretty well. I’m sure many in Ann Arbor have read the book and said ” Oh what a dirty shame”, thinking it was all happening elsewhere. Well Uncle Milty’s crew is at work in Ann Arbor, Washtenaw County, Michigan too. It would be interesting to find out who owns the properties allong the Aerotropolis corridor.

  3. This should be made public big time! State and Federal Prosecutors should be advised! We should look at the possibility of impeachment, criminal sanctions and recall!

    • @Larry, there are efforts afoot to recall individual legislators, as well as governor Snyder (http://www.a2politico.com/2012/01/michigan-rising-aiming-to-recall-snyder—while-disgruntled-former-volunteers-target-michigan-rising/)

  4. A2 Politico-

    It seems like Snyder showed some unusual guilt for screwing over his buddy, and then appointed him to the MEDC.

  5. This article shows unbelievable carelessness on the part of the Snyder administration. Nice work!

    • @Dave, thanks. Another thought I had, of course, is that Snyder took his political pal Rakolta to the cleaners, actually. It’s hard to believe the bunch that backed Raleigh did so believing Snyder was going to drastically cut the incentives. I’m planning a follow-up piece.

      • This is a great piece of work. Look forward to more installments. HUGE Hat Tip.

        • @Hector thanks for the kind words and for stopping by. I have been admiring YOUR writing at Daily Kos for quite some time.

  6. @A2 Politico
    I know little about tax law, but I doubt if the salaries of the major officers at SPARK can be “kept private”. Indeed all the 501c3 applications that I have seen–albeit only 10 or so–
    have that information. It might be that the SPARK claim to provide financial information to the public is is considered to fulfill that obligation.

    A simple way to possibly obtain it is to file a complaint using IRS form 13909. The IRS seems to take this part of tax law seriously….

    • @Rneedle, SPARK is not a 501(c)3. Therein lies the problem….They did have to declare the top earners on the 990s, however.

  7. State pension funds are a popular source of money to bail out failed projects for the politically connected. The failed Lowertown Project also got a state pension fund bail out. I wonder how much of the state pension fund shortfall is caused by these type of failed investments?

    • Karen, it’s the state’s underfunded pension that’s a huge financial dragon waiting to be tamed, just as is the underfunded pension funds in Ann Arbor, Detroit, etc….

  8. Addendum:

    In their 2008 990 form SPARK states: “The Organization makes their governing documents, conflict of interest policy, and financial statements available to the public upon request.”

    If anyone is interested, the IRS has a convenient form for reporting violations……

    • @Rneedle you are, again, spot on! That is exactly what SPARK states on its 990 forms. I consulted a lawyer experienced in such matters when A2Politico was refused the audited financial statements, and was told that SPARK is, indeed, a non-profit entity that may choose to keep some financial information private. It’s obscene that they choose to do this considering that public money provides the majority of their operating expenses. However, the State of Michigan was only to happy to provide copies of the audited financial statements, which SPARK must file yearly.

  9. The SPARK 990s must be immediately provided when requested at their office. Failure to provide them is a serious violation of IRS rules. In any event, I just downloaded the 990s from
    2008-2010 from GuideStar.

    • @Rneedle, when I asked Greg Fronzier at SPARK for the company’s audited financial statements and 990s, he replied that SPARK is a “semi-private” non-profit and as such does not share audits and audited financial statements with anyone except the Board members and staff. SPARK, when requested, sent along the 990 forms quickly. You are absolutely right that the 990s must be provided upon request. GuideStar.org is an amazing site and allows users to view 990 forms (tax returns) of Ann Arbor non-profits, including SPARK.

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