CHICAGO – New criminal charges stemming from the Flint, Michigan water contamination crisis accuse two former state-appointed emergency managers and two other ex-city employees with using false and misleading tactics to participate in the bond-financed Karegnondi Water Authority project.
The charges
The four charged are Darnell Earley and Gerald Ambrose, both former Flint emergency managers appointed by Gov. Rick Snyder, and former city executives Howard Croft and Daugherty Johnson. They face a mix of felony and misdemeanor charges tied to what Schuette called their failure to protect Flint citizens from health hazards from the contaminated water.
The charges include acting on false pretenses and conspiracy to commit false pretenses related to their roles in a process that paved the way for the city's 34% repayment pledge on the $220 million 2014 bond financing issued by the Karegnondi authority.
"The tragedy we know as the Flint water crisis did not occur by accident," Schuette said in announcing the charges. "No, Flint was a casualty of arrogance, disdain, and a failure of management, an absence of accountability, shirking responsibility."
Schuette was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andy Arena at the news conference announcing the third round of criminal charges against individuals in the ongoing probe.
Schuette launched the probe in January to determine if state laws were broken and in announcing the first round of charges in April said the water authority deal and the city's participation in the project were part of the investigation.
The hammer came down Tuesday.
The crisis occurred after the city's contract with Detroit to receive Lake Huron water ended and the city shifted to Flint River water in April 2014 as it awaited the completion of the new Karegnondi pipeline. The $285 million pipeline will provide Lake Huron water to Flint and most Genesee County communities. The city failed to properly treat the Flint River water and in the fall of 2015 shifted back to Detroit-supplied water, but the lead contamination of the city water continued due to pipe corrosion from the improperly treated river water.
"The false pretenses and conspiracy to commit false pretense charges against Earley and Ambrose are based on the defendants gaining authorization to borrow millions using the alleged reason of an environmental calamity," AG documents say. "Without the funds from Flint, the Karegnondi Water Authority Pipeline would have to be mothballed."
The AG's allegations stem from steps the defendants took to win Michigan Department of Treasury approval to pledge repayment of about 34% of the bond issue.
Earley, who was then emergency manager, attempted to win approval in January and February of 2014 but efforts were rejected because of the city's precarious financial position that included a $13 million deficit and lack of a credit rating. "State law banned the city from accumulating any more debt," Schuette's documents say.
The defendants allegedly used the Home Rule City Act emergency bond clause, created to deal with cases of "fire, flood, or other calamity," to enable it to pledge bond repayment without the debt counting against its state law-imposed debt limits.
The defendants cited the need to clean up a troublesome lime sludge lagoon – holding by-products of water treatment -- as the reason Flint needed a debt waiver, even though the funds were to go to the city's participation in the pipeline.
"Tucked inside the 15-page Statement of Purpose for an upgrade of Flint's Water Treatment Plant system was a one-paragraph requirement that bound the city to use the Flint River as an interim water source, and the Flint Water Treatment Plant as the sanitizing and distribution center," the documents say.
The charges accuse Earley of allowing the Flint Water Treatment Plant to distribute the water despite knowledge the plant was not ready for use and making false and misleading public statements that the water was safe to drink. In congressional testimony, he claimed that other officials assured him the water was safe.
Croft and Johnson are accused of pressuring employees of the Flint Water Treatment Plant to get the plant in working order before April 2014, the scheduled date for water treatment. "When the deadline closed in, rather than sound the alarm, the defendants allegedly ignored warnings and test results and shut off the pipes pulling clean water from Detroit, and turned on the Flint River valves," the documents read.
Earley was named EM by Snyder in September 2013 and served until January 2015. The charges against him carry a maximum term of 20 years and/or a fine of $35,000. He faces additional charges of misconduct in office, which carries up to a five-year sentence and/or $10,000 of fines, and willful neglect of duty in office, a misdemeanor.
Ambrose began working for Flint in January 2012 as finance director for three emergency managers and then succeeded Earley as emergency manager from January 2015 to April of 2015. He is charged with the false pretenses, conspiracy to commit false pretenses, misconduct in office, and willful neglect of duty in office.
Ambrose is also accused of obstructing and hindering a healthcare investigation conducted by the Genesee County Health Department with regard to a Legionnaires' disease outbreak and whether it was tied to the contamination.
Croft, who was department of public works director, and Johnson, who was utilities director for public works, are accused of aiding and abetting the two EMs in the phony process that allowed for the use of bond funds. They are charges with false pretenses and conspiracy to commit false pretenses.
The new charges bring to 13 the number of defendants accused of wrongdoing in the attorney general's investigation. The first round of criminal charges were filed in April against two Michigan Department of Environmental Quality employees and one Flint employee. The second round came in June with the filing of a civil suit against water infrastructure firms Veolia and Lockwood, Andrews & Newnam for their alleged roles in the crisis. In July, criminal charges were filed against four current and two former employees from two state departments. The investigation is ongoing. Schuette, a Republican, is expected to run for governor in 2018.
Nationally, the crisis sparked congressional hearings and cast a national spotlight on the problems with old lead pipes used to deliver water across the country. A congressional probe faulted state and federal authorities.
At the state level, Snyder and his administration have come under fire for the state's slow reaction to the crisis as have federal environmental protection authorities. The crisis has also cast a negative light on the state's EM law for distressed local governments.
"It's taken the voice of the people and taken our democracy," Flint Mayor Karen Weaver said of the blame she puts on the EM law because of the tight grip on powers given to an appointed official.
"Today's criminal charges, including against two of Governor Snyder's state-appointed emergency managers, is an indictment not only of their decisions, but an indictment against the administration's failed emergency manager law that contributed to this crisis," U.S. Rep. Dan Kildee, D-Mich., said in a statement.
"These are serious accusations that should be moved through the legal process as soon as possible," said Synder spokeswoman Anna Heaton. "That's a job for the Attorney General and the courts. Anyone charged with a crime is innocent until proven guilty and they deserve every chance to defend themselves against any accusations and charges. We remain steadfast in our commitment to helping the people of Flint recover."
Earlier this year, a task force appointed by Snyder concluded that the state's EM law should be reviewed to identify measures to compensate for the loss of the checks and balances provided by the local elected government. The task force's report said the EM law hamstrung the city as it attempted to manage its water supply.
As the crisis continued, Moody's Investors Service earlier this year affirmed Genesee County and the Karegnondi Water Authority's A2 ratings despite the risk associated with Flint's support for the new water system. Weaver earlier this year recommitted Flint to the project.
The county and Flint are partners in the authority.
"Affirmation of the county's A2 rating is based on its flexibility to make adjustments to absorb the full operational and debt service costs for KWA should the financially distressed city of Flint be unable to fulfill its obligation," Moody's wrote.
The A2 assigned to the KWA bonds is based on Genesee County's GOLT pledge of contractual payments and a step-up requirement should Flint water revenues or Genesee County water revenues fail to cover debt service.
The county, about 60 miles northwest of Detroit, could see its credit deteriorate if it fails to promptly adjust water rates should Flint fail to make timely KWA debt service payments or higher than projected costs associated with the project pressure county financial operations, Moody's warned. About 24% of the county's 426,000 residents live in Flint.
The system was established in 2010 and is being financed with an initial investment from a $220.5 million bond issue in 2014. The project includes an intake facility, 63 miles of pipe, and two pump stations. While only Flint and Genesee County will initially use the system, other KWA members may tap into the water system at a later date. KWA expects to eventually supply raw water to a three-county area consisting of 2,232 square miles and over 500,000 residents.
The city joined the authority as a means to insulate itself from Detroit's rising rates and save money.
Genesee is responsible for paying roughly 66% of the debt service and Flint 34%. The KWA expects the pipeline system to be up and running next year with the first debt-service payment due on May 2017.
JPMorgan, Wells Fargo Securities, and Stifel underwrote the issue. Miller, Canfield, Paddock and Stone Plc served as bond counsel. Stauder Barch & Associates was advisor. The bond deal was named The Bond Buyer's Midwest Region Deal of the Year in 2014.
