ELi Investigation Shows Unusual Uses of East Lansing Taxes for ‘Nongovernmental’ Charities

An ongoing ELi investigation into possible improper use of public resources has turned up documents suggesting some City of East Lansing employees have engaged in questionable practices in conjunction with three charitable organizations.

As we detail below, the purposes of these three nonprofit corporations have varied, but all were designed as 501c3 nonprofit organizations, corporations that are supposed to function as nongovernmental charities.

Two of the corporations at issue here, both created by former city manager George Lahanas, were related to local festivals. Both were shut down just a few months before Lahanas’ contract with the city was terminated.

In the third case, the practice of running an external nonprofit corporation from a city office is ongoing. That case involves the Dr. Martin Luther King Commission of Mid-Michigan, a charity of whose board East Lansing Mayor Ron Bacon has long been a member.

Records obtained under the Freedom of Information Act (FOIA) show $43,900 in cash payments by the City of East Lansing to the MLK Commission in the last decade. The commission has also benefited from cost-free labor of city staff from at least four departments, and has had food, office supplies, printing and meeting rooms provided by the city.

A request by ELi to the city under FOIA for information about any other 501c3 nonprofit corporations being operated in this fashion within the East Lansing government turned up no other cases.

In 2020, Lahanas created two corporations related to the East Lansing Art Festival and the Summer Solstice Jazz Festival.

Records from the State of Michigan Department of Licensing and Regulatory Affairs (LARA) discovered by ELi show that then City Manager George Lahanas created two nonprofit corporations in February 2020.

One corporation was called “Friends of the East Lansing Art Festival.” The other was called “Friends of the East Lansing Summer Solstice Jazz Festival.” ELI found out about their existence only through a deep dive of LARA records, as the corporations have never been mentioned publicly, so far as we can ascertain. (Searches for these exact names under Google show no hits on either corporation.)

In the Articles of Incorporation for the two organizations (see them here and here), Lahanas gave himself the power, as city manager, to choose all the directors of the corporations. Each corporation was “at all times [to be] conducted as an organization described in section 501(c)(3) of the [federal tax] code.” That means they were designed to be non-governmental organizations.

A year after he founded the two organizations, in February 2021, Lahanas filed paperwork as president of both corporations to drop the phrase “Friends of” in their names (see the name amendments here and here). The corporations became East Lansing Art Festival and East Lansing Summer Solstice Jazz Festival. The reason is unclear.

Annual reports filed with LARA (see them here and here) show that, by October 2021, Lahanas had named East Lansing’s then-Finance Director Jill Feldpausch as treasurer and East Lansing’s Director of Parks, Recreation & Arts Cathy DeShambo as secretary.

Then, in September 2022, both corporations were dissolved by Lahanas. (See the filings here and here.) No reasons for the dissolutions were stated on the forms.

Asked to explain what these corporations were about and what they did, Lahanas, Feldpausch and DeShambo did not respond. (Of the three, only DeShambo still works for the city.)

But Carrie Sampson of the city’s communications department provided some explanation by email.

Sampson said the two corporations were created to try to get grants from the Michigan Arts & Culture Council. That agency, she said, only allowed “one grant per tax ID.”

According to Sampson, Lahanas created the two “friends of” nonprofit corporations to obtain more tax IDs to get more grant money than would otherwise be permitted.

“The idea of forming a nonprofit ‘Friends of’ organization was recommended to festival staff by the Greater Lansing Arts Council, and the [Summer Solstice Jazz Festival] Advisory Board next asked the City to explore the idea of establishing a 501(c)(3) based on the recommendation,” said Sampson.

Subsequently, Sampson said, “The City Attorney [Tom Yeadon] filed Articles of Incorporation, signed by the City Manager, for the [two corporations] in February 2020 with the intent to then submit applications to the IRS for 501(c)(3) status.”

According to Sampson, “No money ever flowed through these entities; there was no bank account or other financial instrument ever established for either entity. The state’s nonprofit filing fees, which are $20/year, were paid from the SSJF [jazz festival] and ELAF [art festival] funds, respectively. Maintaining this status with the state allowed the City additional time to investigate whether it was a good solution for additional grant-seeking for SSJF and the ELAF. Ultimately, the City decided it wasn’t and made the decision to dissolve these entities.”

While Sampson’s remarks seem to describe these corporations as logical spin-off operations of the city, ELi can find no evidence they were ever reviewed or approved by City Council.

The incorporation documents for these two nonprofit corporations specified that “no part of the assets or net earnings of the corporation may inure to the benefit of or be distributed to its directors, officers, or other private persons.” That seems to protect any donations received.

Nevertheless, the establishment of a corporation would typically allow the directors (in this case, Lahanas, Feldpausch and DeShambo) to do things like open bank accounts in the name of the corporations and enter into contracts in the corporations’ names.

The articles of incorporation specified the corporations could “pay reasonable compensation for services rendered and…make payments and distributions in furtherance of its charitable purposes.” They also indicated the corporations might “solicit, collect, or otherwise raise money” and “expend, contribute, disburse, or otherwise handle and disburse funds” for local cultural events.

To be clear, nonprofit corporations of the type modeled as 501c3s – as these were – are expected under federal regulation to be external to governments. Nonprofit charitable corporations like Friends of the East Lansing Public Library are typically maintained as strictly separate from government. (Friends of the East Lansing Public Library is a case of carefully-observed separation.)

It appears to be unusual for a team of municipal employees to found and run a “friends of” corporation from within – yet legally distinct from – the government for which they work. And, again, this appears to have happened without Council’s approval, with City Attorney Yeadon arranging the legal paperwork. (Yeadon was paid by the job under his contract, so we can assume he was paid by the city’s treasury for the legal work for these two corporations.)

ELi has requested from the city under the Freedom of Information Act (FOIA) all records related to these corporations. We await that response.

Ordinarily, nonprofit charitable corporations of the 501c3 type are not subject to FOIA, because they are by definition non-governmental organizations, and FOIA only applies to government records. But it appears the city considers these corporate records FOIAable. Whether all the corporations’ records were kept at the city is at this point unknown.

To be clear, there is no indication anything nefarious occurred here. But the finding does raise questions about gaming the grant system and what kinds of financial and legal safeguards (if any) were put in place to ensure oversight of these corporations. It also raises questions about how many other corporations might have been running out of city hall, also under the radar, while being legally distinct entities.

Again, we found out about these corporations not through the city, but through a deep-dive of LARA records which turned up these surprising findings.

Responding to questions under FOIA by ELi, the city indicated there’s only one 501c3 nonprofit corporation that has recently consumed city resources without Council approval and contracts.

This is the Dr. Martin Luther King Commission of Mid-Michigan, for which Elaine Hardy, now East Lansing’s DEI director, has long served as chair.

The commission is legally known to the IRS as a 501c3 nonprofit corporation under the name “Greater Lansing Area Holiday Commission” (EIN 35-2405362).

Tax returns that are available through the IRS’s charity look-up site show no individual named as president or executive director, with Hardy appearing to be the top board officer under the title of “chairperson” since at least 2016. Steve Japinga, Senior Vice President of Public Affairs of the Lansing Regional Chamber of Commerce, has been the treasurer since at least 2017.

The commission’s chief activity is holding a large annual luncheon in Lansing in January featuring distinguished speakers and celebrating the life and legacy of Dr. King, the international leader in civil rights who was assassinated in 1968. Speakers at the commission’s events have included nationally-renowned luminaries in civil rights. Having now served the community for over four decades, the commission also provides local concerts and encouragement and cash awards to area youth through essay and art contests.

The City of East Lansing’s DEI Department’s web page says that municipal department’s job includes “supporting” the MLK Commission and, indeed, Hardy has for many years worked for the external nonprofit charity as part of her city job, with Lahanas’s consent while he was city manager.

Material obtained by FOIA shows Hardy using her city email and title to do work for the commission, including arranging events and soliciting support for the charity (examples here, here, and here).

The tax returns from the commission respond to the standard question, “Did the organization delegate control over management duties customarily performed or under the direct supervision of officers, directors or trustees, or key employees to a management company or other person?” The organization answered “no,” but in fact records show Hardy has been working for the organization in her city job, in which she is contractually supervised by the city manager.

Tax returns submitted by the commission to the IRS show no compensation for Hardy or any other corporate director from the nonprofit corporation. This means that, when Hardy works for the commission and she is being paid for commission work, she’s only paid for that work by the City of East Lansing. In short, the city and only the city is paying her to work for this external nonprofit corporation.

In the City of East Lansing’s budget process for the next fiscal year (which begins July 1, 2023), as DEI director, Hardy asked for and was given an additional part-time staff person to help with the administrative load in her own department.

Material obtained by ELi indicates city funds have been used to pay for food from Sam’s Club for the commission’s meetings and to buy supplies from Office Depot for the commission.

In addition, Hardy has used the services of Parks & Rec staff who work the front desk at the Hannah Community Center to sell tickets to the commission’s events (records show her writing to 13 staff members about this) and to receive scholarship award application packets. She has also had Parks & Rec staff help her with things like ordering more office supplies for the commission.

Records released under FOIA show tickets for MLK Commission events have been run through the city’s treasury, with checks cut back to the commission. This means staff time in the city’s finance department has also been devoted to the commission. As detailed below, at least $21,050 in ticket sales have flowed through a “custodial” account, with the city accepting the payments and then passing the revenue on to the commission.

In November 2019, the MLK Commission sent “a delegation to Washington, D.C., to meet with Congressman [John] Lewis and invite him to keynote the 35th Annual MLK Day of Celebration in Lansing,” according to a City of East Lansing Facebook post. That delegation included Hardy along with East Lansing Public Library Director Kristin Shelley, who is also on the MLK Commission, as well as Lahanas, who was and is not on the commission.

FOIA results indicate the City of East Lansing paid for parts of Shelley’s and Lahanas’ travel expenses for this MLK Commission sojourn.

Shelley had $730.71 in her travel expenses reimbursed by the city, while Lahanas had $189.27 reimbursed. A note returned with the FOIA response indicates Lahanas’ city-reimbursed expenses were relatively low because his airfare and hotel were paid for by the commission.

Records show the commission has also benefited from free use of rooms at the Hannah Community Center, space for which other external groups are required to pay.

Recently, the commission also benefited from the use of the city’s communications department to send out a press release about the winners of its art contest.

According to records written by Hardy, this does not appear to be an unusual use of communications staff, as she has said the city’s “communications team works to produce collateral and material for Commission press events as well as design tickets, posters, etc.”

Interim City Manager Talifarro did not respond to questions from ELi about whether other nonprofit charities can use the city’s communications department and press release system to market their activities. He also did not respond to a request for general comment on this report.

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Talifarro became interim city manager in February of this year, so almost all of what is described here predates his being city manager. On the commission’s webpage, Talifarro is listed as an “emeritus” commissioner, having served on the commission for several years.

Mayor Ron Bacon is an active commissioner. His membership on the commission dates back to at least 2016. Bacon has also not responded to requests for comment on this report’s findings, nor has Hardy.

Bacon, Hardy and Commission Treasurer Japinga are all aware that questions have been raised about municipal resources being used for the commission. Six months ago, in December 2022, Japinga tried to obtain financial support for the January 2023 luncheon from the City of Lansing. (Lansing Mayor Andy Schor is on the commission.)

But Japinga was told by Lansing’s Deputy Mayor Jane DiSessa, “As I explained to you earlier, in accordance with the Michigan Constitution and State laws, a municipality has the power to expend funds only for a public purpose. We received a legal opinion regarding this matter a few years ago.”

DiSessa refused to provide cash support from Lansing for this year’s luncheon celebration. She attached in her message to Japinga a fact-sheet from the Michigan Municipal League explaining that Michigan cities can’t legally cut checks to external charities, unless there’s specific contracted work that a city is legally allowed to undertake.

Holding large celebratory luncheons and giving out cash prize awards do not appear to be legal activities for cities to undertake.

Emails obtained under FOIA show Japinga forwarded DiSessa’s message to Hardy and other officers of the commission.

Hardy then forwarded the chain to East Lansing Mayor Ron Bacon with the words “Please be advised.”

She followed up with “talking points” for Bacon to try to persuade Lansing to help the commission financially. Her points included, “as with the mayors [sic] Ramadan unity dinner we have vetted this event through our legal channels and have no concern that it meets with the criteria outlined with the MML that would allow it to be a suitable use for taxpayer funds.”

She did not specify what those “legal channels” were.

Just a few weeks later, Hardy, Bacon and other members of the commission posed with a giant novelty check showing a donation by the City of East Lansing to the MLK Commission in the amount of $5,000.

According to a FOIA response from the city, that $5,000 came out of the “Public Relations” account that is part of the “Mayor and City Council division housed within the General Fund” of the city. It was taken out of that account following a series of approvals by city staff, starting with Lahanas’ assistant. (This occurred in Lahanas’ last week as city manager.)

There was no line-item or resolution approval for this or any support for the MLK Commission by City Council. ELi can find no evidence of formal Council support for this use of funds.

FOIA results do show that, since December 2013, the City of East Lansing has made a total of $66,170 in payments to the MLK Commission.

This sum of $66,170 includes: $1,220 to buy luncheon tickets and ads in the annual luncheon booklet; $21,050 from a custodial account used to hold and transfer revenue from MLK luncheon ticket sales; and $43,900 in cash payments.

That $43,900 in cash payments includes $31,900 in “sponsorships” made out of the City Council “public relations” account. (This includes the $5,000 payment from January of this year.)

The remaining $12,000 was paid out of the East Lansing Public Library’s funds. This included $10,000 paid for “The Dr. Robert L. Green Project” from the “One Book One Community contract services” fund and $2,000 as a “Legacy of Promise Partner” from the “library advertising and promotion” fund. (To be clear, this money came from the public library’s funds – funds chiefly generated through two special property tax millages – not from the Friends of the East Lansing Public Library.)

Advice provided in 2012 by the Michigan Department of Treasury to municipalities states that, with regard to charitable donations to nonprofit organizations, “Unless the payment is in exchange for the provision of a governmental service that the local unit could have provided itself, this is not a valid public purpose.” (See page two here.)

If there was such a service provided, it would normally be governed by a written contract.

A FOIA request for any and all contracts between the city and the MLK Commission (including under the name “Greater Lansing Area Holiday Commission”) came back “no records found.”

Some nonprofit corporations obtain money from the City of East Lansing through legal contracts.

State law does allow the city to transfer funds to external nonprofit corporations if those corporations are being hired under contract to undertake services the city could otherwise legally offer itself. There are also some Council-approved contracted grants the city can legally give.

For example, Council approves the disbursement of federal Community Development Block Grant (CDBG) funds to local social service organizations. Those disbursements occur through a highly-regulated process involving formal applications, public hearings, Council approvals and contracts.

Unlike the MLK Commission, the organizations seeking funding through this mechanism have to actively compete for the grants. They must then also provide the services approved by Council.

Update, June 8, 2023: The original version of this story raised the question of whether City Council would have had the authority under state law to approve the creation of nonprofit corporations to support the festivals. That line has been deleted because Former mayor Mark Meadows commented on the report to note that state law (specifically MCL 117.40) allows municipalities “by ordinance or resolution [to] authorize the formation of a nonprofit corporation” so long as it is “for purposes that are valid public purposes for cities in this state.”

Meadows added, “I was on the Council when [City Manager George Lahanas] filed the corporate documents for the two non-profits identified in the article. I don’t recall any conversation about this activity and a search of likely meeting agendas does not reveal any item related to these non-profits. The lack of authorization may be the reason they never became operational.”