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      Campaign to Rein in Mega IRA Tax Shelters Gains Steam in Congress Following ProPublica Report

      pubsub.do.nohost.me / ProPublica · Wednesday, 7 July, 2021 - 19:15 · 9 minutes

    Two members of Congress who have long been responsible for shaping federal laws on retirement savings are considering major reforms after ProPublica exposed how the ultrawealthy are turning retirement accounts into gargantuan tax shelters .

    Rep. Richard Neal, the Massachusetts Democrat who chairs the powerful House Ways and Means Committee, told ProPublica that he has directed the committee to draft a bill that “will stop IRAs from being exploited.”

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    The committee is considering “limiting the total amount of money that can be saved in tax-preferred retirement accounts,” Neal said in a written statement.

    “Incentives in our tax code that help Americans save for retirement were never intended to enable a tax shelter for the ultra-wealthy,” Neal said. “We must shut down these practices.”

    In addition, Sen. Ben Cardin, a Maryland Democrat who has co-authored a series of changes to retirement savings laws in the past decade, is also in favor of reforms that his spokesperson said would “prevent the type of massive abuses exemplified by the ultra-wealthy.”

    But provisions lurking deep in unrelated legislation currently wending its way through Congress could undermine those efforts.

    In its June 24 story , ProPublica detailed that one technique investors have used to sock hundreds of millions of dollars — even billions — away in their IRAs is to fill the accounts with bargain-basement shares in companies that are not publicly traded, so they have no clear valuation. Then, when the companies go public or are sold, their accounts explode in value — with all of the gains tax-free.

    Cardin’s spokesperson told ProPublica that the senator now supports banning such transactions, which would be one of the biggest reforms in decades to the rules governing the accounts. The Internal Revenue Service recommended a similar change more than a decade ago. Congressional investigators wrote that an IRS team in 2009 had suggested “limiting the types of investments IRAs can make to publicly traded or otherwise marketable securities with a readily ascertainable fair market value.”

    Cardin is “considering reforms, such as banning the use of IRAs to purchase nonpublic investments,” calling it “a good starting point while protecting IRAs for every day Americans to save for their retirement,” his spokesperson wrote in an email.

    The growing interest in changing the system gives momentum to the plans of Oregon Sen. Ron Wyden, chair of the Senate Finance Committee, who last month declared that he was eyeing a similar crackdown on giant IRAs.

    Wyden’s move came after ProPublica detailed how the Roth IRA, a ho-hum retirement account designed to help the middle class save for retirement, had been hijacked by the ultrawealthy, who used it to create gigantic onshore tax shelters. Tax records obtained by ProPublica revealed that Peter Thiel, a co-founder of PayPal and an early investor in Facebook, had a Roth IRA worth $5 billion as of 2019. As long as Thiel waits until he is six months shy of his 60th birthday, he will be able to withdraw his fortune tax-free.

    Thiel made an end run around the strict limit on what can be put into a Roth IRA by purchasing so-called founders’ shares of PayPal in 1999 when he was chairman and CEO of that company, according to tax records and a financial statement Thiel included in his application for citizenship in New Zealand. Securities and Exchange Commission records show Thiel bought 1.7 million shares for $1,700 — a price of a tenth of a penny per share. PayPal later told the SEC that the shares were among those sold at “below fair value.”

    When PayPal took off and Thiel’s shares ballooned in value, he sold them and used the proceeds — still within his Roth — to invest in other startups, including Facebook, long before they went public, according to court records and Thiel’s financial statement filed in New Zealand. He never had to make another contribution to his Roth again. The account’s stratospheric growth all stemmed from a private stock deal available only to a handful of people.

    This is the type of nonpublic IRA investment that Cardin is considering banning. A spokesperson for Thiel did not respond to requests for comment.

    But this new appetite for reining in the accounts may be too late to slow contrary bipartisan legislation already rolling through Congress. Buried deep inside two complex and sweeping bills — each more than 140 pages long — are provisions that could make it harder for the IRS to crack down on the ultrawealthy who dodge tax rules.

    Those bills, paradoxically, are co-sponsored by Cardin and Neal, two of the lawmakers who are now calling for reining in giant retirement accounts.

    The House and Senate bills were introduced before ProPublica launched its ongoing series last month exposing how the country’s richest citizens sidestep the nation’s income tax system . ProPublica has obtained IRS tax return data on thousands of the wealthiest people in the U.S., covering more than 15 years, allowing it to conduct an unprecedented examination of how the ultrawealthy employ tricks to avoid taxes in ways that most Americans cannot.

    The bills are being pitched as helping ordinary Americans save for retirement, including automatic enrollment of workers in employer-sponsored retirement plans. But they also include perks for retirement and financial industries, such as relaxing certain rules in ways that are seen as a boon for insurers.

    Deciphering the handouts is nearly impossible without a background in the intricacies of retirement plan tax laws and the help of experts. The bills hide critical changes in language most laypeople would never understand. For instance, a key piece of the Senate bill reads, “Paragraph (2) of subsection (e) of section 408 is repealed.” But the scope of that change only makes sense when layered with this: “Section 4975(c)(3) is amended by striking ‘the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if’.”

    ProPublica had to reverse-engineer the meaning of that series of numbers and letters to determine that it would take away one of the most potent weapons in the IRS’ arsenal: the ability to strip an entire IRA of its tax-favored status.

    Complicated IRS and Department of Labor rules prohibit IRA investments that involve conflicts of interest or self-dealing. That can be a particular concern with nontraditional IRA investments, such as purchases of real estate or of shares of companies that are not publicly traded. Under the current law, if the IRS determines that a retirement account has engaged in a prohibited transaction, the agency can blow up the entire account — an event that Warren Baker, a tax attorney whose practice focuses on IRAs, likens to “Armageddon.” The whole account then ceases to be an IRA, and the owner has to pay income taxes on it.

    The two bills propose defusing that bomb. In the House bill, the tax benefits would only be stripped from the part of the account involved in the forbidden transaction. The Senate bill would loosen the rules even more, applying a 15% excise tax on the part of the account involved in the prohibited transaction without blowing up the account. A spokesperson for Cardin said, “The penalty jumps to 100% if not corrected in a timely manner.”

    Still, someone who violates the rules suddenly would have a “massive long-term upside benefit” of tax-free growth, Baker said, while “your downside risk is a penalty that is smaller than the capital gains rates,” the federal tax on the income that’s generated when stocks or other assets are sold.

    Bob Lord, a tax attorney and tax counsel to Americans for Tax Fairness, said he has represented clients who settled Roth IRA cases because the threat of losing the tax benefits of their entire accounts was “leverage the IRS had.” He was stunned when he read the bills and saw that power stripped from the IRS.

    “These changes will lead to more aggressive transactions that lodge greater wealth in Roth IRAs, with less risk if the IRS audits,” Lord said.

    The proposed Senate bill, experts say, makes another concession to IRA owners who might be tempted to dodge the rules. Under current law, an IRA account holder who violates rules is never totally in the clear. That’s because the current statute of limitations for violations is a bit of a gray area, experts say. The IRS, “could virtually go back indefinitely,” said Jeffrey Levine, a CPA and chief planning officer at Buckingham Wealth Partners.

    The Senate bill proposes stopping the clock at three years. Yet, it can take more than three years for some nontraditional investments to balloon. If the IRS were to discover something amiss, under the bill’s proposed statute of limitations it would be too late to act.

    “For the little guy this makes all the sense in the world,” Levine said. But for the ultrawealthy with huge accounts and squadrons of lawyers, he said, the changes could incentivize bad behavior. “Someone with all the resources in the world could say, ‘I’ll do this now that my risk-reward calculation is different and I’m looking at getting through three years and then I’m kind of home free.’ That, you know, is a real boon for those who want to take advantage of the system.”

    The House bill is co-sponsored by Neal and Rep. Kevin Brady, a Texas Republican, and the Senate bill is co-sponsored by Cardin and Sen. Rob Portman, an Ohio Republican.

    A spokesperson for Portman defended the legislation, which she said was “borne out of contact from our constituents — including innocent middle class savers who had their retirements wrecked by innocent and minor errors.” ProPublica asked aides to Portman and Cardin for examples, but neither provided any. A Cardin spokesperson wrote in an email that “there usually is not litigation when this happens, and non-public examples are confidential taxpayer information.”

    In a joint statement, the offices of Portman and Cardin defended the Senate bill, saying it would help small businesses offer 401(k) retirement plans, expand access to savings for low-income Americans and “allow people who have saved too little to set more aside for retirement.” The new legislation, they added, included measures to prevent Americans from inadvertently losing their IRAs while “implementing safeguards to prevent abuse.”

    Brady’s communications director asked for questions in writing, then did not respond.

    A staffer with Neal’s Ways and Means Committee said the House bill had broad support and touted many provisions, including the automatic enrollment of employees in retirement plans, a national lost-and-found to locate retirement plans from prior jobs and a requirement that employers let certain long-term, part-time workers enroll in 401(k) plans.

    The House bill, she noted, doesn’t repeal the prohibited transaction rules; it limits the impact to the inappropriate purchase. She described Neal as “very committed to maintaining these important rules and believes that full sanctions should apply when violated.”

    Doris Burke contributed reporting.

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      Do You Live in the Kanehili or Kauluokahai Subdivisions? We Have Questions About the Quality of Your Homes.

      pubsub.do.nohost.me / ProPublica · Wednesday, 7 July, 2021 - 19:00 · 1 minute

    I’m Rob Perez, a reporter at the Honolulu Star-Advertiser, working in partnership with the newsroom ProPublica. I’ve been reporting on people who got homes through the Hawaiian Homes program but are experiencing a variety of problems — sewage backups, cracking walls, poorly graded lots, faulty plumbing and more. The state Department of Hawaiian Home Lands does not keep a public record of complaints, which means I need your help to understand what’s happening to you and your neighbors. I’d like to ask you some questions about how you like living in your home, neighborhood and community. We hope to hear from one person in each of the roughly 500 homes in Kanehili and Kauluokahai.

    This questionnaire should take you about 10-15 minutes. You can also call or text me anytime: 808-479-2109.

    I hope to publish my story this summer, so please fill this out by Sunday, July 18 .

    A note: My reporting team and I are the only ones reading what you submit. Your privacy is important to us. We are reading these stories for our reporting. We will not use your name or any of your information without first asking your permission.

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      A Banking App Has Been Suddenly Closing Accounts, Sometimes Not Returning Customers’ Money

      pubsub.do.nohost.me / ProPublica · Tuesday, 6 July, 2021 - 17:30 · 15 minutes

    The day after Jonathan Marrero’s federal stimulus payment landed in his bank account, he took his 5-year-old twins out for lunch at an Applebee’s near where he lives in New Jersey. When he went to pay, his only means of payment, a debit card issued by the hot financial technology startup Chime, was declined.

    He didn’t understand why. Marrero had checked his account earlier that day and saw a balance of nearly $10,000. With the Applebee’s server standing next to him, he quickly pulled out his phone to check his Chime app, just as he had hundreds of times since he signed up in January.

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    Marrero couldn’t log in. He immediately checked his email and found a message from Chime that read, “We regret to inform you that we have made the decision to end our relationship with you at this time. Your spending account will be closed on March 18, 2021.”

    He had no choice but to call his parents and have them pay the lunch bill. “I was so embarrassed,” said Marrero, a 32-year-old motorcycle technician. “I’m a grown man, and I was tearing up and everything.” Speaking of the $10,000 that he was suddenly locked out of, he added, “If it was $100, I wouldn’t sweat it. But it was everything I had for my kids.”

    Marrero’s grievance is not unusual. Chime, which provides app-based banking services to an estimated 12 million customers, has according to experts been generating a high rate of complaints, with 920 filed at the Consumer Financial Protection Bureau since April 15, 2020. “For a company that most people have never heard of, I think that’s a lot of complaints,” said Lauren Saunders of the National Consumer Law Center .

    Many customers have told the CFPB that they can’t access their money or accounts, and that, among other things, Chime is slow to resolve problems. Of the 920 complaints filed about Chime, 197 were tagged as involving a “closed account.” The CFPB’s complaints are labeled inconsistently, and many of the other 723 also detail problems involving accounts that were closed against customers’ will. By comparison, Wells Fargo, a bank with six times as many customers and a lengthy recent history of misbehavior in its consumer bank, has 317 CFPB complaints tagged for closed accounts over the same time period. Marcus, the new online bank created by Goldman Sachs, with 4 million customers, has generated seven such complaints.

    Customers have also filed 4,439 complaints against Chime at the Better Business Bureau, compared to 3,281 for Wells Fargo.

    A message from Chime to Jonathan Marrero after his account was closed suddenly.

    (Courtesy of Jonathan Marrero)

    Meanwhile, several Facebook groups have sprung up with names like “Chime Bank has FAILED” and “Chime Thieves.” They’ve attracted some 700 members combined. One group has more than 100 posts and comments, almost all of them saying some version of the same thing. “Chime stole my entire unemployment backpay,” reads one typical post. Another says, “I’m a single mom of 4 kids and they stolen $1400 from me and refuse to give it back and now we are about to be evicted.” Chime doesn’t look much better on Google, where, according to the site’s “People Also Ask” feature, two of the questions most often posed about Chime are “Is Chime bank a real bank?” and, at various points in recent weeks, “Is Chime a ripoff?” or “Does Chime steal your money?”

    Most of the company’s CFPB complaints have been “closed with explanation,” a designation that conveys that Chime has resolved the dispute privately with the customer; the company is in the process of responding to the rest. As for the BBB complaints, Chime has said on the BBB’s website that it “takes these issues seriously” and that its “top priority is protecting its members.”

    Chime portrayed the customer complaints as largely driven by the company’s attempts to crack down on accounts that use fraudulently obtained unemployment insurance or federal stimulus payments. “As a leader in the US payments ecosystem and as part of our commitment to Chime members, we take seriously our responsibility to detect and prevent fraud,” asserted a statement provided by spokesperson Gabe Madway. “The past year has seen an extraordinary surge in activity by those seeking to illicitly obtain pandemic-related government funds and defraud US taxpayers. By some credible estimates, $400 billion worth of unemployment fraud alone may have transpired. We are proud of Chime’s robust anti-fraud efforts, which have returned hundreds of millions of dollars to state and federal agencies during the pandemic. While it’s important for us to fight fraud, our top focus will always be to take care of our members. And despite our best efforts, we do make mistakes.” The statement also touted Chime as having “proven that basic banking services can be helpful, easy and free.”

    It’s easy to see why Chime has caught on. Opening an account takes minutes. Chime’s app is intuitive and easy to use. The service welcomes customers with spotty credit histories and doesn’t require a credit check. It has no monthly fees and keeps other charges to a minimum. (It takes a small slice of the interchange fees paid by the merchant each time a customer uses a Chime card.) For customers who sign up for direct deposit, Chime offers two-day interest-free advances on paychecks, IRS refunds or government stimulus checks.

    The company has marketed aggressively in both new media and old. The company displays a youthful sensibility online, tweeting out memes on its Twitter feed. At the same time, its logo is plastered in many locations, including opposite the Nike swoosh on the uniforms of the NBA’s Dallas Mavericks.

    Chime is now the largest in a growing subcategory of financial technology, or fintech, companies known as “neobanks” (more on that later) that serve low- to moderate-income individuals underserved by traditional banks. The neobanks have thrived in the past year, vying with each other to land consumers looking for somewhere to deposit government stimulus payments, according to Jason Mikula, managing director for 312 Global Strategies, a fintech consultancy. Chime offered new and existing customers a “Stimulus Sweepstakes” that dangled a chance of winning $1,200.

    Chime built a base of 8 million customers between its launch in 2013 and 2020, then jumped to 12 million over the past year, according to Cornerstone Advisors. Many of the new accounts began with deposits from federal stimulus payments, according to a recent analysis by Cornerstone and StrategyCorps, two financial service companies that specialize in consumer research.

    All that growth has made Chime, which is based in San Francisco, a hit in Silicon Valley. Venture capitalists have given the company a valuation of $14.5 billion, and the company’s CEO said in late May that Chime might prepare to go public as early as this fall.

    For all of Chime’s Silicon Valley tech patina, one thing it’s not is an actual bank. Like others in its category, Chime is a digital interface that hands over the actual banking to, in this instance, two regional institutions, The Bancorp Bank and Stride Bank. Chime customers interact with the Chime app, but Bancorp and Stride, both of which are FDIC-insured, hold their money.

    Since Chime is not a bank, that leaves it in a regulatory no man’s land, according to Alex Horowitz, senior research officer for the consumer finance project at the Pew Charitable Trusts. The rules and jurisdiction are murky at best. “When you have a fintech that is the consumer interface, they don’t have a primary regulator,” he said. “They’re primarily regulated as a vendor to the existing bank, because banks are required to manage their vendors and they’re responsible for third-party relationships. But it’s still a step removed.”

    Bancorp and Stride have an obligation to police Chime, according to Mikula. “The regulatory treatment should not be any different than if I myself went directly into Stride and opened up a demand deposit account or checking account,” Mikula said. “There should be no different threshold because Chime is a fintech.” (Bancorp and Stride did not respond to requests for comment.)

    The legal environment may be murky, but Chime has already attracted the attention of state regulators. In late 2019, the California Department of Financial Protection and Innovation received complaints about an outage in Chime’s system that prevented consumers from accessing accounts and left many unable to pay their bills. The agency investigated and found a different violation: It concluded that Chime had violated state law by describing itself as a bank on its website and elsewhere. “DFPI found this was likely to confuse consumers into thinking Chime was an online bank,” the agency said in a statement to ProPublica. “Chime itself is not licensed or insured as a bank.” DFPI and Chime agreed to an administrative settlement in late March. Chime neither admitted to nor denied the findings but agreed to take a detailed series of actions on its website and promotional materials to make clear that it is not a bank. (A similar agreement was also reached with regulators in Illinois.)

    Even after the settlement, as of early July, Chime’s homepage offered mixed messages. At the top, it stated, in large letters, “Banking that has your back.” A bit lower, below the “get started” button, in much smaller type, were the words, “Chime is a financial technology company, not a bank.”

    The word “banking” is much more prominent on Chime’s home page than the words “not a bank.”

    (Screenshot from Chime website)

    Chime told ProPublica that it is in compliance with the settlement agreement and that all of the necessary changes have been made.

    California has also responded more broadly to the rise of fintech companies. On Jan. 1, a new law, the California Consumer Financial Protection Law, took effect. It gives the state new authority over providers of financial products and services. (The March settlement with Chime was based on preexisting statutes.) “The purpose of the new law was to clarify that if you’re meeting the definition of being in the business of providing consumer financial products and services, then yes, DFPI has jurisdiction over you,” said Suzanne Martindale, senior deputy commissioner of the agency’s Consumer Financial Protection Division. “We can supervise, we can draft regulation, and we also have authority to stop unfair, deceptive and abusive acts and practices and can enforce any state or federal consumer financial law.”

    Martindale did not comment directly on the complaints about account closures, but said, “We continue to monitor for compliance.” She said that if regulators uncovered “new activities that suggest there may be a violation or there may be a deceptive misrepresentation,” then “we may have to take a look.”

    Many of the complaints about Chime relate to the same things that spurred the company’s growth over the past year: government payments for stimulus aid, PPP, unemployment insurance and tax refunds. Indeed, many account closures occurred directly after a government deposit, according to customers interviewed by ProPublica and the CFPB complaints. That meant Chime was simultaneously pushing to land new accounts from customers with stimulus checks while trying to vet millions of new accounts for suspicious payments. (There is widespread agreement that fraud involving unemployment-insurance and stimulus claims has been rampant during the pandemic, though estimates of its scope have varied wildly.)

    Banks and neobanks are expected to take action if they see signs of suspicious activity, typically by filing a report with federal authorities, according to Mikula. Chime’s approach involves three levels of potential action. If Chime decides that the evidence of fraud is conclusive, it typically closes the relevant account and returns the money to the government if the account was opened with a check from the government. If Chime sees what it considers suspicious behavior — but can’t conclusively determine that fraud has occurred — it can still terminate the account, but then typically returns the funds to the account holder. Finally, Chime says that if its investigation confirms that a payment was legitimate, it unfreezes the account.

    In reporting for this article, ProPublica interviewed 13 current or former Chime customers who claimed the company had wrongly frozen their funds or closed their accounts. ProPublica discussed the details with the company. Chime confirmed that five of the anecdotes were well-founded; the company acknowledged making mistakes and returned each customers’ funds. In two other instances, the company was able to provide documentary evidence of fraud and said it had not returned the customers’ funds.

    That left six complaints, and there the situation was much murkier and raised questions about the company’s approach. In its statement, Chime asserted that those six “did in fact involve fraud and/or violations of our terms.” Yet the evidence of misbehavior that Chime cited in conversations with ProPublica generally consisted of the same act that its marketing encouraged: Opening a new account using a federal stimulus check or a payment from unemployment insurance. In those instances, Chime said, it or its bank partners had closed the accounts but returned the funds to customers.

    Inadequate compliance management may be partially to blame for Chime’s problems, said former CFPB staff member Chris Peterson, who is now a law professor at the University of Utah. “As fintech businesses start to move into banking services,” he said, “they have to have adequate resources to monitor problems that emerge in their financial services” and then resolve them.

    The sudden account closures have put financially vulnerable customers under stress.

    That’s the situation Michelle Robertson, 52, found herself in. After getting burned by overdraft and minimum balance fees at her traditional bank, Robertson signed up with Chime three years ago.

    The pandemic wasn’t easy for Robertson, a computer technician in Richmond, California, who is also a single mother and the full-time caregiver for her elderly father.

    A much-needed infusion of cash was set to be deposited into Robertson’s Chime account the week of March 10: a $1,200 stimulus deposit and a $3,500 tax refund. She planned to use the money to catch up on the stack of bills that had been piling up.

    But on March 4, after setting up her Chime direct deposit with the IRS, Robertson received an email closing both her spending and savings accounts. Chime’s email, which Robertson shared with ProPublica, offered almost the same explanation as the company email provided to Marrero: “Following a recent review of your Spending Account, we regret to inform you that we have made the decision to end our relationship with you at this time.” She was unable to use her debit card, access the money in her accounts or sign in to the mobile app. The email informed Robertson that a check for any remaining balance would be mailed to her within 30 days.

    Citing “security reasons,” Chime’s email stated the company couldn’t explain to Robertson why her account was closed. (The company confirmed, in interviews for this article, that it should not have closed Robertson’s account.) She was directed to a passage in the company’s account agreement that states, “Chime and/or Bank may suspend, freeze, or close your Account for any reason with or without notice” and “Funds on deposit in any Account are subject to hold at the Bank’s discretion until the source of such funds and/or the activity is properly verified.”

    Robertson didn’t have much money in the account when it was closed, but the prospect of not knowing the status of her incoming deposits scared her. “I lost my mind. I couldn't believe it,” she said. “It was very shocking, just for them to tell me that and then not know why and then have all this money that I was really, really counting on.”

    What followed was a frustrating roundelay in which Chime directed Robertson to the IRS, and the IRS directed her to Chime. In one email, Chime told Robertson, “Please note that any Direct Deposits such as your Tax Refund that can be received during the account access restriction, may have been rejected and returned to the sender in the next 1-3 business days so, we encourage you to contact the originator of your deposit to avoid any further delays.”

    Robertson’s interaction with Chime’s customer service provided no new answers. She kept getting emails telling her to “contact the issuer” and stating that no “further information” could be given about the closing of her account. (According to 10 other Chime customers, users are discouraged from contacting customer service via phone or sending multiple emails; they’re told that doing so could “cause the review time to be extended,” as one Chime email put it.)

    With more than two months having passed with no access to her money, the consequences grew dire for Robertson. Unable to pay her bills, she feared eviction from her home, car payments were delayed, her cell phone was shut off, and late-payment fees piled up.

    Eventually, in late May, the federal government came through: Robertson received a paper check for her stimulus payment; the tax refund followed a few weeks later. She no longer has a Chime account and has no intention of ever signing back up.

    In its statement to ProPublica, Chime said that “for those cases where Chime did make a mistake, including the two highlighted in this story, we sincerely apologize. We have made efforts to make things right with these members.” (Robertson said that, beyond unfreezing her funds, Chime has not contacted her.)

    For his part, Jonathan Marrero finally got his account reopened in late May after filing complaints to the CFPB and BBB. He said Chime (which confirmed to ProPublica that it had erred in closing Marrero’s account) provided no explanation for blocking him from his funds for more than two months beyond telling him there had been suspicious activity in his account. Marrero immediately withdrew all of the remaining funds.

    “It’s been torture,” he said.

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      Some Hawaii Homeowners Damage Beaches to Protect Their Homes. A New Law Could Help Change That.

      pubsub.do.nohost.me / ProPublica · Friday, 2 July, 2021 - 10:00 · 6 minutes

    This article was produced in partnership with the Honolulu Star-Advertiser, which was a member of the ProPublica Local Reporting Network in 2020.

    Property owners selling homes, hotels, condos and businesses along Hawaii’s coastlines must disclose whether the properties are susceptible to damage from sea level rise under legislation that’s set to take effect next May.

    While the risks of building and maintaining property along the state’s shorelines have been evident for decades, state lawmakers passed the measure this year to make sure that prospective buyers are fully aware of those risks, which will only increase as the state’s coastlines are increasingly battered by flooding and stronger storms.

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    “It’s looking at making sure that if people are buying our shoreline properties that they are well aware of what the drawbacks might be in the future,” said Sen. Gil Keith-Agaran, D-Wailuku, who introduced the bill, which will become law this month.

    The action follows an investigation by the Honolulu Star-Advertiser and ProPublica that found property owners were routinely selling beachfront homes on Oahu that were poised to be damaged or sucked into the ocean and commanding record prices in the process. To protect their properties — and sometimes to position them for sale — dozens of homeowners have skirted Hawaii’s environmental laws by winning emergency exemptions from the state to install large mounds of sandbags and drape heavy tarps along the state’s public beaches.

    The emergency structures are only supposed to remain in place temporarily, but the state has granted repeated extensions and in some cases lost track of the approvals, the news organizations found. The exemptions, part of a series of environmental loopholes investigated by the Star-Advertiser and ProPublica, have fueled development along sensitive coastlines and hastened the erosion of Hawaii’s renowned beaches, which are disappearing at an alarming rate.

    On Oahu’s famous North Shore, about one-third of the homes that received emergency approvals beginning in 2018 were subsequently sold or listed for sale. Some of the buyers said they didn’t realize that the permits were going to expire.

    State law already requires that a seller disclose all “material facts” about their property, including any conditions that are expected to affect its value in the future. The new law requires that sellers specifically cite whether a property is located in an area that is expected to be affected by sea level rise by midcentury, based on maps developed by scientists at the University of Hawaii at Manoa. The detailed maps, which are searchable by lot number, provide an analysis of the risks of flooding and coastal erosion for individual properties based on different sea level rise projections.

    Similar real estate disclosure bills have failed in the past amid opposition from the real estate industry, but state lawmakers and environmental groups said they redoubled their efforts after the Star-Advertiser and ProPublica reported on the emergency exemptions for sandbags. Environmental groups, including the Surfrider Foundation and the Sierra Club, saw the legislation as a means to help curb further environmental exemptions. Buyers, they said, would have a harder time getting state approval for emergency sandbags, for instance, if they were officially warned of the risks of coastal living beforehand.

    According to scientists, the sandbags pose an existential threat to Hawaii’s beaches in the same way that seawalls do. As waves hit a hardened shoreline, they pull sand into the ocean with no way to replenish it, causing beaches to essentially drown. Seawalls have contributed to the loss of about one-quarter of the beaches on Oahu, Maui and Kauai, and local scientists have warned that the state will be down to just a handful of healthy beaches if property owners don’t start retreating from the coastline.

    The overall impact of sea level rise on Hawaii’s coastal properties is expected to be vast. Statewide, 6,500 structures located along the shorelines, including homes, hotels, shopping malls, schools, churches and community centers, are expected to be damaged or destroyed by 3.2 feet of sea level rise, which could occur by 2060, according to the Hawai‘i Sea Level Rise Vulnerability and Adaptation report , published in December 2017. An estimated 20,000 residents will be displaced. The value of damaged structures and 25,800 acres that are projected to be flooded is pegged at $19 billion.

    Keith-Agaran said that the Legislature appropriated funding this year to relocate inland portions of the highway that runs along Oahu’s North Shore. “Ultimately, I think what needs to happen is the government needs to serve as an example and leader and move back infrastructure and roads,” he said.

    The Legislature also passed a bill this year that requires state agencies to identify existing and planned state facilities that are vulnerable to increased flooding and more powerful storms associated with climate change, and assess such options as flood-proofing or relocating buildings and infrastructure inland.

    More aggressive measures that sought to rein in emergency shoreline approvals and limit easements for old seawalls died this year after Hawaii island Sen. Lorraine Inouye declined to hear them. Inouye, the chair of the Senate Water and Land Committee, said she wanted more time to work with Hawaii’s Department of Land and Natural Resources, which is in charge of protecting the state’s beaches, on potential fixes to Hawaii’s laws and policies.

    One of those measures would have set a hard deadline of three years after a permit has been issued for property owners to remove emergency sandbags and what are referred to as burritos: heavy, black material anchored by sand-filled tubes. Rep. David Tarnas, D-Waimea, who chairs the House Water and Land Committee, said after the measures were shelved that he planned to push for the legislation again next year if the state didn’t put limits on the emergency approvals. Tarnas said there was too much pressure from the public and within the Legislature not to act.

    Officials with the Department of Land and Natural Resources said in December that they would be working to address the issue by amending the administrative rules that allow the emergency approvals, but still haven’t indicated what changes are being considered.

    Sam Lemmo, who oversees the department’s Office of Conservation and Coastal Lands, said by email that the proposed rule revisions should be released sometime this summer. They will need to be approved by the board that oversees the department.

    Meanwhile, emergency sandbags and burritos continue to dot Oahu’s North Shore, many with permits that have expired or are set to expire this summer. The conservation and coastal lands office said in February that its latest tally indicated 44 properties had installed the protections, either legally or illegally. However, Lemmo said he couldn’t provide the media with that list, an earlier version of which was previously public, because it is now considered an “enforcement tool.”

    Lemmo declined to comment on whether the state intended to force property owners to remove their burritos or fine them for failing to do so, but said the state will soon be corresponding with property owners who have the temporary emergency structures. He told the Star-Advertiser and ProPublica the same thing in December after the news organizations reported on the North Shore exemptions. Several authorized burritos were set to expire in January.

    “Apologies for the lack of detailed answers, but my staff is in the thick of this,” Lemmo said last week. “We cannot comment publicly until we execute our actions publicly.”

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      Why You Can’t Turn Your Roth IRA Into a Billion-Dollar Tax Shelter

      pubsub.do.nohost.me / ProPublica · Thursday, 1 July, 2021 - 09:00 · 1 minute

    ProPublica is a nonprofit newsroom that investigates abuses of power. The Secret IRS Files is an ongoing reporting project. Sign up to be notified when the next installment publishes.

    Last week, ProPublica published the story of how PayPal co-founder and tech investor Peter Thiel was able to turn a Roth IRA initially worth around $2,000 into a jaw-dropping $5 billion tax-free retirement stash in just 20 years.

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    The story is even more remarkable because Congress created the Roth IRA in 1997 to encourage middle-class Americans to save for their golden years. Most Americans have struggled to do even that; the average account was worth about $39,000 in 2018. But Thiel and other billionaires have managed to turn their mundane Roths into giant onshore tax shelters.

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    Thiel was able to launch his Roth into the stratosphere through a complicated strategy involving the purchase of nonpublic stock at bargain prices — the kind of deal most people can’t access. Experts say it risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. (Thiel’s spokesman didn’t respond to questions.)

    Other ultrawealthy Americans have used different means to build Roths worth tens or hundreds of millions of dollars. Senate Finance Chairman Ron Wyden is now looking at how to end the use of the Roth as “yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes.”

    How are they able to do it while you can’t? Check out our explainer of one way the Roth works for the ultrawealthy and not for you.

    Help Us Report on Taxes and the Ultrawealthy

    Do you have expertise in tax law, accounting or wealth management? Do you have tips to share? Here’s how to get in touch. We are looking for both specific tips and broader expertise.

    James Bandler and Patricia Callahan contributed reporting.

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      This Company Got a $10 Million PPP Loan, Then Closed Its Plant and Moved Manufacturing Jobs to Mexico

      pubsub.do.nohost.me / ProPublica · Wednesday, 30 June, 2021 - 09:00 · 9 minutes

    Late last summer, after churning along through the pandemic with only a two-week pause, managers at FreightCar America called hundreds of workers into the break area at the company’s factory near Muscle Shoals, Alabama, to tell them that the plant was closing for good.

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    For some employees, the news wasn’t a shock: They’d been hearing rumors that management would move the work elsewhere for years. The timing, however, seemed odd. Only a few months earlier, the publicly traded company had received a $10 million Paycheck Protection Program Loan — the maximum amount available under a pandemic relief program designed to keep workers employed. Some had believed the funds would keep the doors open for a little while longer.

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    Nevertheless, the plant’s managers announced that all production would move to FreightCar’s new facility in Mexico, which meant most of the assembled workers would lose their jobs.

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    Jim Meyer, FreightCar America’s CEO, told ProPublica in an email that he had not intended to shutter the plant when he received the PPP money, and that it had allowed the company to keep workers on the job through most of 2020 despite a sharp dropoff in new orders.

    Robert Bulman, however, thinks the $10 million just helped FreightCar’s Shoals plant keep producing while company officials got ready to shut it down.

    “When the Mexican plant opened, we were told at the beginning they would just be helping Shoals and making parts for the trains,” said Bulman, who worked at the Alabama plant for seven years before getting laid off last year. “But the whole time, it was a setup, we were gone.”

    FreightCar America isn’t the only large company to have taken out a multimillion-dollar Paycheck Protection Program loan and then laid off a substantial chunk of its workforce. An analysis of applications for trade adjustment assistance, which the federal government provides to workers whose jobs have disappeared due to imports, shows that at least half a dozen companies that applied for more than a million dollars apiece in PPP loans terminated more than 50 workers in 2020 after their aid was approved.

    To be clear, the companies may have complied with program rules, which put a premium on getting money out fast. The regulations changed frequently in the months after the Congress established the PPP as part of the CARES Act in March 2020, and the law was later amended to allow more of the money to be used for non-payroll expenses. The law also contained many exemptions that stretched the definition of what qualifies as a small business.

    A paper mill in northeast Washington state called Ponderay Newsprint , for example, went bankrupt and laid off 150 workers, two months after being approved for a $3.46 million loan. Its bankruptcy trustee John Munding said the money was used to pay workers and the government forgave the loan, while the company’s assets were acquired by a private equity firm.

    A Nebraska aircraft parts manufacturer called Royal Engineered Composites was approved for $2.74 million in April 2020 in order to support 250 jobs, but laid off 99 workers by mid-May. The company declined to comment.

    Canadian-owned Supreme Steel took $1.69 million in May 2020 for its plant in Portland, Oregon, which it closed five months later, terminating 112 employees. Spokesperson Rhandi Berndt said that “the closure was the result of market forces” and declined to answer further questions.

    In order for PPP loans to be forgiven, the federal Small Business Administration initially required borrowers to spend 75% of the funds on payroll over eight weeks. Since the maximum PPP loan amount was for 2.5 times companies’ average monthly payroll in 2019, that should have guaranteed that wages and hours could be maintained, as required by the CARES Act.

    In the case of FreightCar and some other borrowers, the original eight-week “covered period” of the PPP loan passed before layoffs occurred, allowing the companies to have their loans fully forgiven. But the other cases may have easily qualified as well, because Congress changed the rules.

    Last June, after businesses protested that they couldn’t spend their PPP money fast enough in a stalled economy, the legislation was amended to require only that 60% of a loan go toward workers’ pay, and the covered period was extended to 24 weeks. Since borrowers had to spend less of the loan on payroll over a longer period to keep the money, they had wide leeway to let people go as they saw fit.

    “It wouldn’t be difficult to lay off 50% of your workforce and still get full forgiveness,” said Eric Kodesch, an attorney at Lane Powell who has helped many clients with their PPP applications.

    The SBA has not publicly released data on forgiveness of specific loans, but aggregate statistics show that so far, out of all applications processed, more than 99% of the total dollar value has been forgiven. The SBA declined to comment on individual borrowers or identify loans that have been forgiven.

    There’s another reason why a casual reader of the CARES Act might think companies would not qualify for PPP money: Many are actually very large businesses.

    In general, the CARES Act set an upper size limit of 500 employees. With a few exceptions, the law required SBA to count all “ affiliate ” companies toward that total. That would include companies owned by private equity firms as well as subsidiaries contained within holding companies. It exempted hotels, restaurants and franchises, but no other industries. (That’s why Shake Shack and Ruth’s Chris Steak House qualified for loans, though each returned the money after a barrage of negative press coverage.)

    However, a number of program nuances allowed large companies to obtain PPP loans.

    FreightCar laid off 550 people with the Shoals plant shutdown, according to a notice filed with the state of Alabama. Along with its headquarters employees, that alone would exceed the PPP’s ostensible 500-employee cap. But FreightCar availed itself of a loophole baked into the PPP. The SBA’s alternative size standards, a complex set of industry-by-industry thresholds that have been debated for decades , allowed it to qualify with up to 1,500 workers.

    Originally, the SBA allowed foreign-owned applicants to count only their U.S.-based employees under the 500-person cap. That guidance changed last May, requiring foreign-owned applicants to count their entire global workforce. But plenty of companies had already gotten PPP loans, and were allowed to keep them.

    For example, Ledvance LLC , a Chinese-owned global lightbulb manufacturer operating in the U.S. under the brand name Sylvania, was approved for a $9.36 million PPP loan in April 2020. Then, between May and July, it laid off 50 people while closing down a distribution center near Bethlehem, Pennsylvania. Ledvance spokesperson Glen Gracia said in an email that the layoffs were “unrelated to the pandemic and in full compliance with LEDVANCE’s participation in the Paycheck Protection Program.”

    Then there’s Chick Master Incubator Company , which took $1.34 million in April 2020. In June, its corporate parent — a Zurich-based private office that invests the fortune of a long-established industrialist family — announced it would combine Chick Master with its other hatchery holdings and close the plant, laying off 68 people in Medina, Ohio, by year’s end. Chick Master didn’t reply to a request for comment.

    One type of applicant, however, still likely should not have qualified: companies controlled by private equity firms whose total holdings exceed the SBA’s size standard for the borrowers’ specific industries. Cadence Aerospace , a supplier of aerospace and defense parts that itself has bought three companies in the last three years, is majority-owned by Arlington Capital, a private equity firm managing billions of dollars. Cadence was approved for a $10 million PPP loan in April 2020, and later that month laid off 72 people at its Giddens Industries subsidiary in Washington state, according to a notice filed with the state. Arlington Capital did not respond to a request for comment.

    The Shoals plant was the last remaining U.S. manufacturing facility for FreightCar, a 120-year-old company headquartered in Chicago that had been shrinking its U.S. footprint for years. In 2008, it shuttered its plant in Johnstown, Pennsylvania. In 2017, it shut down its factory in Danville, Illinois. In 2019, it closed its plant in Roanoke, Virginia and announced it would open a new facility under a joint venture in Castaños, Mexico. When executives informed investors in September that the Shoals facility would also close and manufacturing would shift to Mexico, they projected $25 million in overall savings, including a 60% reduction in labor costs.

    “Our manufacturing transformation is now largely complete, and we have taken control of our own destiny,” Meyer said on an earnings call in March . “We have dramatically repositioned our competitive profile and in so doing created a new company, one that is able to win.”

    In 2013, the future looked different. When the Shoals plant opened, it offered about $12 an hour to start and a chance at advancement. One worker, who asked not to be named in order to protect her future employment prospects, left a tile-making job to become a welder, constructing a variety of rail cars, from hoppers to gondolas. Soon, she moved up to air brake tester, sliding underneath the massive steel vehicles to fix pipes.

    “I went to FreightCar to retire,” said the worker. “I wasn’t planning on leaving when I got there.”

    In the following years, safety, pay and management concerns led to a union drive. During the campaign, anti-union employees circulated flyers warning that the plant would shut down if workers voted to organize, and in 2018 they voted decisively against it.

    As it turned out, the Shoals facility wouldn’t last long anyway.

    Leading up to 2020, FreightCar touted the Shoals plant’s competitiveness. A marketing video showed production lines run by industrial robots and skilled workers. “This is the largest, newest, most purpose-built factory in North America,” boasted Meyer. “A modern, state-of-the-art factory in every sense of the word.”

    But the company was still losing money, to the tune of $75.2 million in 2019 . When the pandemic further slowed down orders, executives started talking up the new facility in Mexico instead.

    “The Mexico labor rate is approximately 20% of that in the U.S.,” Meyer said on an earnings call in August 2020. “And the new plant provides other sources of savings beyond just labor.”

    Also on the August earnings call, executives explained that loan proceeds had made up for some of the cost of the company’s move to Mexico. Chris Eppel, then the company’s chief financial officer, said that the money also “partially offset” operating losses and inventory purchases. Meyer still got his $500,000 base salary in 2020, plus stock options worth nearly that and a $1 million bonus for securing a $40 million loan from a private investment company.

    FreightCar did not take out a second-draw PPP loan; updated rules excluded publicly traded companies.

    After the plant closure announcement, the air brake tester found a job making dashboards and bumpers for Toyota. It takes three times as long for her to get to her new job as the 20-minute drive she had to FreightCar , and she’s paid six dollars less per hour. Although FreightCar gave employees a few thousand dollars in severance payments, she said all of hers went towards bills.

    “It’s like starting all over again,” she said. “If they did right by us like they did their supervisors, maybe we’d be in more decent shape than what we’re in now.”

    Did Your Company Get Bailout Money? Are the Employees Benefiting From It?

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      Oregon Lawmakers Set Out to Increase the Timber Industry’s Tax Bill. Instead, They Cut It Again.

      pubsub.do.nohost.me / ProPublica · Tuesday, 29 June, 2021 - 19:15 · 6 minutes

    This article was produced in partnership with Oregon Public Broadcasting and The Oregonian/OregonLive. You can sign up for The Oregonian/OregonLive special projects newsletter and Oregon Public Broadcasting’s newsletter . Oregon Public Broadcasting is a member of the ProPublica Local Reporting Network .

    Oregon lawmakers pledged to increase taxes on the timber industry and rein in its influence during this year’s legislative session. Instead, they handed the companies an unexpected gift — another tax break.

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    As the session wrapped last week, lawmakers gutted the remaining $15 million annual harvest tax paid by timber companies for cutting down trees. The move eliminated about $9 million in annual revenue that helps fund Oregon State University’s forestry research and the Department of Forestry’s enforcement of state logging laws. Money for the programs will temporarily come from the state’s general fund, forcing the costs onto taxpayers.

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    The tax cut came in the final days of the session after the state Senate failed to pass a separate measure, approved by the House of Representatives, that aimed to overhaul the Oregon Forest Resources Institute. Lawmakers left in place nearly $4 million in annual harvest taxes for the institute’s budget, along with $2 million to fight wildfires. The institute had sought to discredit scientists and acted as a de facto lobbying and public relations arm for the industry, a n August investigation by The Oregonian/OregonLive, OPB and ProPublica revealed.

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    While the funding for OFRI and for fighting wildfires is permanent, the portions of the harvest tax that fund Oregon State and the forestry department must receive three-fifths approval from lawmakers every two years to remain in place. This year, a dispute between the House and the Senate over the tax left lawmakers closing the session without agreeing to a renewal.

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    The result: Timber companies, including the real estate trusts and Wall Street investors who have become the largest owners of Oregon’s private forests, saw their tax burden lowered once again, marking a win for an industry that maintains outsized influence in state politics.

    Despite shrinking its contribution to the state’s economy, the timber industry has donated more to Oregon legislators in the past decade than to lawmakers anywhere else in the nation.

    Tom DeLuca, dean of the Oregon State College of Forestry, said he was “hugely disappointed” by the tax cut. He also said he was heartened to hear that lawmakers will tap the state’s general fund this year, but he worries what will happen if they fail to permanently restore the tax.

    “It would be a major hit,” DeLuca said. “It’s hard to say how we would manage a hit like that. It does leave me with quite a bit of concern about how much stability there is there.”

    An investigation last year by OPB, The Oregonian/OregonLive and ProPublica revealed that schools and counties lost an estimated $3 billion over three decades as lawmakers repeatedly cut the state’s severance tax, which assessed a fee on the value of the trees logged by private timber owners.

    While the severance tax was eliminated for all but small landowners in 1999, timber companies continued to pay a harvest tax on the volume of trees they logged. That tax provides about $3.2 million annually to Oregon State’s forestry school, roughly 15% of its budget for research and a broad swath of projects.

    During the session, House Democrats attempted to make the harvest tax permanent after several said they’d grown tired of how lobbyists and other lawmakers use it as leverage each session to bargain for other measures.

    Three weeks ago, the House also passed a bill to cut OFRI’s budget by two-thirds, redirect the money to climate research and increase oversight of the institute. The bill included a requirement that the institute end its public advertising campaign.

    The Senate killed the OFRI measure and voted to keep the harvest tax on a schedule to expire every two years. But the tax died when the chambers failed to resolve the dispute before the legislative session ended.

    Charles Boyle, a spokesperson for Gov. Kate Brown, said Brown hopes ongoing negotiations between environmental groups and timber companies over the future of Oregon’s logging laws will “help build the trust needed for us to reach a negotiated reform package for the harvest tax in the coming months.”

    Boyle said the governor is awaiting the results of an ongoing secretary of state audit of OFRI , which she requested in response to the news investigation. Findings from the audit are expected in July.

    The state’s largest timber lobbying group, the Oregon Forest & Industries Council, opposed eliminating OFRI but was open to a compromise that included maintaining the harvest tax, said Sara Duncan, a spokesperson for the group.

    “In the middle of intense negotiations to find a compromise on OFRI, the biennial harvest tax bill was hijacked in a power play meant to end any successful resolution,” Duncan said. She added that the group looks forward to “more thoughtful and less politically motivated work in the coming months.”

    Sean Stevens, executive director of Oregon Wild, an environmental group, accused Senate President Peter Courtney, a Democrat who represents Salem, of sinking the OFRI bill to appease Republican senators as the end of session drew near.

    “There weren’t the votes,” Courtney said in a four-word statement responding to questions about whether he supported the OFRI bill or endorsed the institute’s lobbying efforts.

    Some House lawmakers, who supported redirecting funding from OFRI and increasing timber taxes, said the stalemate was necessary to show that they were unwilling to continue accepting the status quo. They said they intend to revive the harvest tax in future legislative sessions.

    The Legislature’s decision not to renew the tax is a precursor to a bigger debate over timber taxes, said state Rep. Andrea Salinas, a Democrat from Lake Oswego who sponsored the bill to restructure OFRI.

    “I actually think it’s us taking a pause to be like, ‘Oh, we’re going to take a step back because what we’re coming back for is going to be even bigger,’” Salinas said. “Let’s stop playing games here and go back to what we used to have in the ’90s, which was a real severance tax.”

    The unexpected tax cut and promises to resuscitate the levy echo what lawmakers said when they eliminated the larger severance tax in the 1990s. After the first cut in 1991, lawmakers said the reduction in taxes was temporary. It wasn’t.

    They eventually eliminated the tax entirely.

    Thirty years later, Washington and California, neighboring states that tax logging, generate tens of millions of dollars more than Oregon each year to help pay for local government services.

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      Held Back: Inside a Lost School Year

      pubsub.do.nohost.me / ProPublica · Monday, 28 June, 2021 - 09:00 · 29 minutes

    Editor’s note: ProPublica obtained parents’ consent to feature their children in this story.

    Ashlee Thompson turned on her camera.

    At the other end of the screen one morning last September was a third grader she’d never taught. To assess his reading, Thompson showed the boy a string of letters.

    S

    B

    C

    He made a few guesses, but seemed to only recognize the ones in his first name.

    Unsettled, Thompson shifted to words that most 8-year-old children can recognize, if only by sight. She enlarged the text and held her pointer on the screen.

    Of

    And

    Me

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    The boy’s mother sat behind him, encouraging him to read. He grimaced and shook his head. He had never learned how, he told his mother. He had transferred in from a charter school, but like many of Thompson’s students who’d been in the district for years, he was arriving in her class as though he was starting kindergarten. As his mother began to cry, Thompson turned off her camera so they wouldn’t see her own eyes glaze over with tears.

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    At the start of the 2020 school year, teachers across the country entered their classrooms riddled with anxiety over how much their students could possibly learn amid a pandemic, between the glitch-prone experiments with remote learning and in-person classes that could be interrupted by a single positive coronavirus test.

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    Thompson, at 32, had a lot more hanging over her.

    The Michigan legislature had chosen this year, of all years, to enforce a strict new literacy law: Any third grader who could not read proficiently by May could flunk and be held back.

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    For Benton Harbor, a small, majority-Black city halfway between Chicago and Detroit, the implications were immense. As Thompson screened her 35 students that fall, she realized 19 were not at grade level. She worried that holding them back could do more harm than good, and studies supported this fear; it could bruise their confidence , lead them to act out and even decrease their odds of graduating from high school.

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    As if Thompson did not have enough to worry about, there was this: The existence of her entire school district hung in the balance, and with it, the very fabric of her hometown.

    For the last quarter century, schools in Benton Harbor had struggled to survive as students fled for charters and majority-white districts in neighboring towns. Because a district’s funding is tied to its number of students, Benton Harbor’s budget shrank. It cut academic offerings, froze teacher pay, closed school buildings and consolidated students into crowded classrooms. As its resources eroded, so did students’ performance on tests.

    Michigan had found a remedy for such ailing districts: dissolving them. It had happened eight years ago to two other majority-Black cities, Inkster and Buena Vista. Students were absorbed into surrounding districts without a guarantee they would be attending better schools. Inkster residents, who feared losing their sense of identity, scrambled to start a museum so that their children would know they had once rallied at homecoming games around the Vikings football team.

    This existential threat has loomed over Benton Harbor since 2011, when former Gov. Rick Snyder began to consider whether the state should install an emergency manager to run the city’s schools, a takeover Inkster once faced before it was ultimately dissolved. In January 2017, his administration listed several of Benton Harbor’s schools among the least proficient in the state and slated them for closure. The state offered the district a temporary reprieve if it entered into a partnership agreement that mandated that the schools improve. But in May 2019, Gov. Gretchen Whitmer announced a plan to dissolve Benton Harbor’s high school. To illustrate the dire state of education in the district, she cited the poor test scores of students in the third grade, a crucial year in which kids traditionally pivot from “learning to read” to “reading to learn.”

    The library at Hull Elementary, Thompson’s school. (Cydni Elledge, special to ProPublica)

    The district ran six schools: one for preschool and kindergarten, one for first through third grade, one for fourth and fifth grade, a middle school, a high school and an alternative program. Thompson feared that if the high school was dissolved, it was only a matter of time before parents stopped enrolling younger students and the entire district evaporated. What parent would want to send a child down a path that dead-ended after the eighth grade?

    Thompson, a wide-eyed learner who tackled problems with an analytical mind, sent community leaders a six-page letter, complete with a color-coded data table she assembled, arguing that transferring Benton Harbor’s students outside the city wouldn’t necessarily bring them success. Proficiency is not contagious, she wrote, but comes from years of effective educational support, practice and preparation, which the lack thereof is why our students are behind.

    Amid public outcry, the state backed down from threats to close the high school and began to work with the district to address its crisis. Part of the plan was new leadership , and in February 2020, the district brought on Andraé Townsel, an energetic superintendent who grew up in Detroit and had a singular mission to turn the schools around. A month later, though, the pandemic interrupted all plans, leaving the fate of the schools once again in question.

    Thompson didn’t want to think about what would happen if most of her students were held back. Any failure, she worried, would be cast as theirs.

    She was regarded by many Benton Harbor parents as a miracle teacher. She had attended school with some of them and lived in the community; she cared for their children like they were her own. They were not on equal footing with their peers for reasons outside of their control. It was on her to bridge the gap, one that would widen even further amid a pandemic.

    “Even if I had magic,” she said, “I couldn’t do this.”


    Thompson at home. (Cydni Elledge, special to ProPublica)

    When Thompson was a third grader in Benton Harbor, her brick schoolhouse glowed burnt orange in the afternoon, with classrooms bathed in light among trimmed, green lawns. The schools were the pride of the city, one of the poorest in Michigan, depressed for decades by discriminatory housing policies and deindustrialization; as manufacturing jobs began to vanish in the 1960s and ’70s, white families fled in droves.

    Benton Harbor’s Black families won a critical court ruling in 1977, after white neighborhoods drew up plans to peel off from the city and join communities with fewer Black families. These were “transparent attempts” to dismantle Benton Harbor into “separate and unequal White and Black school districts,” concluded U.S. District Judge Noel Fox. The court mandated integration between Benton Harbor and its surrounding communities through a voluntary busing plan, allowing students to choose where to attend school. Anticipating the financial impact of an exodus, the court ordered the state to pay Benton Harbor for each child who lived within its boundaries, regardless of where they chose to attend school.

    For decades, funding from the desegregation case buoyed Benton Harbor and brought national recognition to its schools. Creative Arts Academy and McCord Renaissance Center, two of the magnet programs set up under the order, were named Blue Ribbon schools by the U.S. Department of Education, one of its highest academic honors.

    Thompson, who attended McCord, thrived in Benton Harbor’s schools. A self-professed bookworm, she spent hours in the library reading The Baby-Sitters Club and Goosebumps books and writing in her journal. Her teachers, many of whom lived in the community, pushed her to excel, and in high school, she volunteered as a library aide, learned Spanish, French, physics, psychology and creative writing, and took advanced placement courses. “I didn’t know that kids had to struggle to attain an education because I never witnessed that growing up,” she said.

    Even so, it had become common for parents to consider sending their children to schools outside the district. She was in 10th grade when her mother decided she would be better served by transferring to a nearby town. “I hated it,” Thompson said. “The teachers were all white and they didn’t have an individual interest in me. Some of the teachers, I don’t even think they even cared to get to know my name.” After a few months, she begged her mother to let her return to Benton Harbor High School, where she graduated among the top 10 students in her class.

    She and many others were unaware of a radical change that was underway. Michigan’s then-governor, Republican John Engler, had pushed to end the desegregation order, citing the cost and insisting the state had done everything it was supposed to do to ensure Benton Harbor’s success. Any shortcomings in student performance, the state argued , had nothing to do with intentional segregation. In 2002, a federal judge dismissed the case. The payments were phased out by 2006, Thompson’s final year of high school.

    The following school year, the district faced a $3 million shortfall, roughly the amount of money it had received annually from the state under the desegregation order. To offset the loss, the district began to cut its academic offerings, which prompted students to leave for other schools. “It was a spiral effect,” said Sheletha Bobo, the district’s assistant superintendent for business and finance from 1999 to 2011. While critics and state officials have long attributed the district’s financial troubles to mismanagement or accounting errors , administrators contended that enrollment and funding losses played a central role. The fewer students Benton Harbor had, the less money it was allocated by a state formula that distributed school funding based largely on student head count . School finance experts have argued the math shortchanges districts that serve a higher percentage of low-income and at-risk students, who are more expensive to teach.

    Recognizing that it needed to increase enrollment to climb out of its financial turmoil, the district brought in Michigan native Magic Johnson for an advertising campaign. “I’m Earvin ‘Magic’ Johnson,” he said in a 2010 radio spot. “[I’m] encouraging parents and students to find out why people are rediscovering Benton Harbor Area Schools. … Quality learning, every student, every day.” But even a basketball legend couldn’t bring students back. By 2011, the district’s annual budget deficit had risen to $16.4 million.

    Weeds grow at Montessori Academy at Henry C. Morton, an elementary school closed after enrollment in Benton Harbor plunged. (Cydni Elledge, special to ProPublica)

    To keep its bills paid, Benton Harbor took on more than $10 million in emergency loans from the state. The weight of the debt led to even more cuts in the district, which hemorrhaged students and money. Enrollment plunged from 3,500 students in 2010 to fewer than 1,800 in 2020. More than two-thirds of the city’s children attend schools outside the district, amounting to a staggering loss of $24 million in funding each year.

    The magnet programs, including Thompson’s former school, were shuttered. The cosmetology and health care tracks were cut. The high school no longer offered calculus or advanced placement courses. In 2019, for a student body of nearly 600, only one instructor was certified to teach mathematics. And that year, about half of the district’s teachers were long-term substitutes, many lacking the credentials or experience to manage classrooms sometimes crammed with 30 students or more.

    Test scores declined. During the 2007-2008 school year, 64% of Benton Harbor’s third graders were deemed proficient readers, compared with 81% across Michigan. During the 2018-2019 school year, according to a different test the state had switched to using, less than 6% could read proficiently , compared with 45% across the state.

    And the buildings, all constructed before 1961, bore signs of disrepair. The school where all of the district’s third graders learned, International Academy at Hull, was plagued by toxic mold. A musty smell often wafted through the hallways, and mildew rings stained ceiling tiles. For years, teachers had noted the building’s crumbling state, filing maintenance orders that were rarely filled. They trapped mice in the classrooms, and on stormy days, they caught rainwater in buckets, carefully positioned between children’s desks.

    A dozen other school buildings sat abandoned, haunting the city like ghosts. Their windows were boarded up and their playground equipment was corroded. In one building, parts of the ceiling were strewn across the floor.

    Fair Plain Northeast Elementary School, closed. (Cydni Elledge, special to ProPublica)

    Thompson had never planned to be a teacher. After high school, she enrolled in Wayne State University but dropped out after her first year, given the high cost and her uncertainty about which career direction to take. She found work in a hotel and later cared for elderly patients in a residential home as a certified nursing assistant. But after the birth of her first three children, she decided to try college again. She had a natural talent for extracting lessons from ordinary moments, showing her kids how caterpillars metamorphose into butterflies and sliding magnets near metallic pipes to explain polarity. She enrolled at Western Michigan University to pursue an education degree.

    For an assignment, she compared the learning outcomes of Benton Harbor’s students to those in St. Joseph, a wealthy town across the district border, where less than a third of the schoolchildren qualified for free lunch and three-quarters of its students were white. Over decades, the waterway between the towns, the St. Joseph River, has come to mark one of the most segregated school boundaries in America. In St. Joseph, more than 63% of third graders could read proficiently, compared with less than 6% in Benton Harbor, where more than 90% of students are Black and live in low-income households.

    The starkness of the inequality stunned her, but it echoed the persistent national reality that students of color were demonstrating a lower proficiency in reading and math than their white counterparts, with similar gaps between students living in poverty and those who were not.

    And while Benton Harbor’s schools are in high-poverty areas, and thus receive more federal funding and have higher general revenue than St. Joseph, Benton Harbor spent $1,000 less per student on basic instructional programs in 2019, in part because of its high debt load , on which the state was collecting with about 2% interest. That year, the district was $16 million in debt and spending $700 per student on annual repayments, according to the state.

    Even though teachers across the river made $17,000 more, on average, Thompson started in Benton Harbor’s schools in 2018 and took over a third grade class midway through the school year. “Our students needed somebody that could help, somebody that could believe in them,” she said. In May 2019, she was certified to teach. But the following spring, just as her students were making the leap from robotically reciting words to fluent reading, the coronavirus ground the school year to a halt.

    Schoolbooks at the closed Montessori Academy at Henry C. Morton. (Cydni Elledge, special to ProPublica)

    While the pandemic caught everyone off guard, disadvantaged districts were less ready to adapt to school shutdowns. Most of the students in St. Joseph had access to computers at home, in part thanks to an initiative supported by the district’s philanthropic foundation . Within about a month, 97% of elementary students were learning online. In Benton Harbor, however, more than 40% of homes lacked broadband internet access and 25% did not have a computer. Thompson and her colleagues huddled around copy machines printing out assignments and spent days tracking down families and checking on their welfare. They finished distributing laptops and tablets, the majority of which were more than six years old, by the end of the summer.

    This divide was playing out across the country, as captured in a national teacher survey that spring . Teachers in majority-Black schools said 34% of the students didn’t have the necessary technology to engage in remote learning, compared with 19% of kids in schools with few Black students. The gap was even wider between poor and wealthy schools.

    The pandemic also brought new urgency to the country’s quiet crisis of dilapidated school facilities. Benton Harbor administrators had more to worry about than the average district when it came to planning for in-person instruction in the fall. In addition to wrestling with social distancing requirements, they had to figure out how to safely teach kids at Hull Elementary, where, in the spring, specialists had found levels of mold so toxic that they recommended shutting down the building. The new location— a shuttered school they were cleaning out — was not yet ready, so administrators relied on portable classrooms and white wedding tents, along with a plastic tarp they put up to cordon off the remediated classrooms from the toxic wing of the school.

    Not many parents knew about the mold, but a majority still insisted on a virtual option when the district surveyed them on their preferred mode of instruction for the fall. The coronavirus had surged through the county’s nursing homes and rehabilitation facilities, and reports from Detroit on the disproportionate number of deaths among African Americans had trickled into Benton Harbor, prompting many to stay home out of fear. Nationally, Black students were disproportionately more likely to have lost a parent to COVID-19 and substantially less likely to have enrolled in in-person school, even as late as April 2021.

    Roberta Taylor wished her two third graders could learn in a classroom that year; for them, every minute of personalized instruction made a difference. Her son, Calvin, had been held back once already, in the first grade. She feared the same would happen to her daughter, Na’Kiyrah, who had finished the previous school year behind grade level. But Taylor had congestive heart failure so severe that she’d had to quit her strenuous job as a certified nursing assistant two years earlier and live on disability payments. “If I caught COVID, I might not make it out,” she said.

    Calvin, left, and Na’Kiyrah, Roberta Taylor’s son and daughter, at home. (Cydni Elledge, special to ProPublica)

    Tina Lash also chose virtual school. One of her three sons was asthmatic and had landed in intensive care a few years earlier. She knew a digital classroom was not an ideal learning environment for her youngest boy, Michael, whose brain ping-ponged from thought to thought. And her shifts at the local Bob Evans restaurant, where she was a manager, frequently overlapped with class hours. Her mother stopped working at Family Dollar and planned to sit with Michael to make sure he wouldn’t wander off.

    Thompson, too, learned she had no choice but to teach virtually. That summer, her breathing grew labored and her chest throbbed so much she couldn’t eat. She rushed to the emergency room, where tests revealed that her own congestive heart failure, a condition she’d had for nearly a decade, had flared up. During her nine-day hospital stay, she asked her doctor whether it would be safe for her to teach in person. He adamantly counseled against it.

    The month before school started, she converted her daughters’ bedroom into a third grade classroom. A shiny, plastic banner of letters lined the walls. A world map made of vibrant blue fabric dangled in front of the window. Stacks of books surrounded her, filled with tales of inspiring young protagonists: Leo the Late Bloomer. Zoey and Sassafras. Harry Potter.

    Hull Elementary had assigned only Thompson to handle all virtual third graders. She tried not to panic when she got the roster; it listed 48 names. Over the last days of summer break, she split her class into two waves of students and, like a telemarketer, called dozens of parents, walking them through how to log in.

    She was ready, or so she thought.


    Thompson converted her daughters’ bedroom into a teaching space. (Cydni Elledge, special to ProPublica)

    “The sound is eh eh eh , E as in elephant, E as in echo, E as in red,” Thompson said on a Wednesday morning in early March, her eyes scanning her classroom grid of 15 fidgety third graders. “I want everybody to say the sound, and if you have low background noise, you can unmute.”

    Na’Kiyrah, a bubbly 8-year-old, always eager to speak even without knowing all the answers, bobbed around next to her brother Calvin. She unmuted her computer and their distorted voices echoed through the class, filling the virtual room with a static buzz.

    “Na’Kiyrah, I’m going to put you on mute because it seems like you have a lot going on,” said Thompson. “You guys, if you have a place that you have absolute quiet, please go to that place.”

    It had gone like this for months. Thompson’s students often forgot to mute themselves, talking over each other. Sometimes the internet wavered and they unexpectedly vanished. Sometimes their connection was so weak that their camera could not turn on, leaving Thompson to wonder if a child was actually at the other end. At times, only a handful would log in at all.

    Thompson had gotten off to a rough start when, after the first day of school, 53 kids showed up on her classroom roster; by the second week, it had ballooned to 79 kids. It turned out that some parents hadn’t answered the district survey about how they wanted their children to learn.

    At the same time, she was supervising the virtual education of three of her own children, including her son who was in her third grade class. One day, when she couldn’t help her 7-year-old daughter with a computer problem because she was in the middle of a lesson, her daughter grew so frustrated that she broke down in tears.

    How will I get through this? Thompson had wondered, doubting not only her choice to teach virtually, but also her decision to teach at all.

    A map of the world hangs over Thompson’s home classroom window. (Cydni Elledge, special to ProPublica)

    After the first two weeks and Thompson’s plea to human resources for help, her principal brought in another teacher, cutting Thompson’s class size down to about 35 children; she split them into two sections, each meeting for three hours a day, four times a week. In a normal school year, they would have had at least double that time to learn.

    Thompson tried to make the best of the time she had. Even when she contracted COVID-19 in March, her head pounding and body weak, she worked through most of her illness, aware that for the three days she took off, her students would have to work on assignments on their own.

    During her lesson on the short sound of the letter E, she switched her screen to a slide with the name Ben printed in thick black and red letters.

    Her students repeated the word in an unruly refrain. Michael, an effusive 8-year-old who often provided his classmates with updates on his morning, was the last to respond.

    “Sorry,” he announced. “I was talking to my mom.”

    Diagnosed with attention deficits, Michael had been suspended so frequently in second grade that he was more than a year behind on his reading. That year, his mother had tried in vain to procure a special education plan for him.

    For months, Thompson worked with him one-on-one and in small groups, cultivating a close bond. He reveled in multiplication drills and superhero tales, and for his own superpower, wished he could save those who died of COVID-19.

    “I want freeze breath, heat breath and healing, so I could have healed my uncle,” he said. “I wish I could heal everyone that had the virus.”

    Michael in his bedroom. (Cydni Elledge, special to ProPublica)

    By late winter, Thompson marveled at his growth: He was paying more attention and participating frequently, and his reading was slowly improving. But she worried that wouldn’t be enough progress for him or many of her other students, especially with the retention law looming.

    Passed in 2016 through the state’s Republican-controlled legislature and signed by then-Gov. Snyder, the retention law, which required third graders to be held back if they were more than a year behind in reading by May, was supposed to go into effect in 2020, but it was suspended that year due to the pandemic. Both Republicans and Democrats introduced legislation to suspend retention again in 2021, but Republicans have attempted to make the law even more aggressive by mandating that both third and fourth graders would face being held back next year. The bill has yet to be voted on by the state Senate and House.

    State Sen. Ken Horn, a Republican who sponsored the latest retention requirement, said it is intended to serve as a consequence for parents who might not pay attention to their children’s academic progress without it. “They don’t want their kids to have to go through this, their teachers don’t want to have their kids to go through this, then they will double down, and they will go to work,” he said. “If there are no consequences, then parents will go on doing what they’re doing.”

    Thompson has heard the argument. “Personally, I’m sick of hearing that,” she said. “That’s somebody that doesn’t understand the economic disparities … doesn’t understand poverty.” Her own mother worked nearly nonstop to support her and relied on the school system, including trained teachers, to help her achieve success. “If our communities could do this ourselves, we wouldn’t be in this situation.”

    Contrary to Horn’s assessment, Michael’s mother, Lash, had long been involved in her children’s schooling. She also had faith in Benton Harbor’s schools, which she had graduated from about 20 years before. She still FaceTimed with her favorite teachers, who had become her mentors, and believed that with the right resources, the district would turn around. But she felt that the abbreviated school days of the past year had shortchanged her son.

    After work, in the evenings, she would read with Michael before he fell asleep, and she noticed that even in late winter, his reading was stunted. He would labor over each word, and often skipped the ones he didn’t know. Her older sons had never struggled like this.

    While Lash and her son were constructing his new loft bed, she sat him down and told him she had decided she wanted him to repeat the third grade. “It’s not because you’re not doing good,” she said softly. “I want you to have a fresh start ... and be able to do the work.”

    Michael was calm. “That’s OK, momma, whatever you think is better,” he said, and then changed the conversation to what color he could paint the walls of his room.

    Parents whose children were learning virtually could opt out of testing and therefore the retention requirement. But Taylor wanted an honest assessment of how Na’Kiyrah and Calvin were doing. They had languished in the second grade. Her son accrued at least 10 suspensions, tied to behavioral problems that she believed originated when he was moved too quickly from special education to a mainstream track. Her daughter felt lost in the large class.

    Taylor’s trust of Thompson ran deep — they had attended high school together and Taylor believed Thompson was her children’s best teacher yet. But this past year, her children’s attention had lagged. She tried to help them, purchasing multiplication flashcards and books and challenging them to spelling bees in the afternoons. But Taylor, who was back in college taking online courses to become a parole officer, knew she wasn’t a teacher.

    Taylor does Na’Kiyrah’s hair in their living room. (Cydni Elledge, special to ProPublica)

    In early May, before the state’s test, Taylor bought new backpacks for Na’Kiyrah and Calvin, one decorated with dinosaurs and the other with sharks. Though she could barely afford her $97 utility bill that month, she hoped the new bags would boost their academic confidence.

    The morning of the exam, just before her children hopped out of her weathered Ford Expedition, she stopped them. “Make sure you take your time and understand what you read before you answer any questions,” she said.

    Na’Kiyrah nodded nonchalantly, which worried Taylor.


    Na’Kiyrah, age 8. (Cydni Elledge, special to ProPublica)

    On a sticky afternoon in late May, while Taylor and her four children were watching “Trolls,” she heard the mail truck drive by. Her son brought two letters inside and put them at his mother’s feet on the couch. One, from the state, was addressed to the parent of Na’Kiyrah.

    Taylor tore it open and began to read.

    We understand that this may be difficult news to hear, it said.

    The more she read, the more she became consumed with how unfair it all felt, to raise the stakes for kids like this in the middle of a pandemic, when so many families like her own were stuck.

    Taylor flicked off the movie and pulled Na’Kiyrah and Calvin to the dining table.

    “You know what this is?” she asked Na’Kiyrah, holding up the note.

    “No, what is it?”

    “It’s the letter from the state saying that you are going to be held back.”

    Na’Kiyrah’s eyes scrunched up in confusion. “For what?” she asked.

    “I was telling you all school year long to be serious about this test,” Taylor said. “That was nothing to play with, it literally determines whether or not you go to the fourth grade.”

    Her children went silent. Na’Kiyrah, with panic beginning to form in her eyes, studied her mother’s face.

    “Mommy, are you mad at me?”

    Taylor shook her head, relaxing her face. She wasn’t mad at her daughter. Taylor was frustrated with herself, wishing she could have done more for her children this year, despite her health limitations. She was relieved to learn that Calvin was promoted to the fourth grade, but knew that he passed “by the skin of his teeth” and feared that, if the Republican bill went through, he could face the threat of retention next school year too.

    Of the 23 students in Thompson’s virtual class who took the test, five were flagged for retention. Such letters were sent to parents of 3,642 students statewide, accounting for about 5% of Michigan students who took the exam. (The state would not provide a racial or economic breakdown of those students, and neither the state nor Benton Harbor would disclose the number of third graders in the district who stand to be held back.)

    “I look at the students like Na’Kiyrah and the other ones that just didn’t make it, and it breaks my heart,” said Thompson.

    Despite its obstacles, Thompson views the year as a success. She witnessed growth in nearly all of her students, even though the state’s exams only measure how they compare to children across the state, many of whom have better resources.

    In recent weeks, Whitmer reiterated her opposition to the strict reading law, as well as to the proposal to expand it. “Governor Whitmer has and will continue to oppose the state law that mandates retention based on reading scores,” said her spokesperson, Bobby Leddy, adding that with the pandemic, “it’s unfair to students, teachers, and parents to prevent children from taking the next steps in their education.”

    Nationwide, students of color suffered a “strikingly negative impact” on their academic growth amid the crisis, with the gap continuing to grow markedly through last winter for Black and Latinx students. Those findings and others cited in this story were captured in a federal civil rights report commissioned by President Joe Biden on the impact of COVID-19 on America’s students. “The disparities in students’ experiences are stark,” the report concluded, calling the pandemic’s effects on existing racial and ethnic inequities “harsh and predictable.” “Those who went into the pandemic with the fewest opportunities are at risk of leaving with even less.”

    Instead of giving Benton Harbor a break in the midst of the pandemic, state officials collected $420,000 in loan payments, with interest, from May 1, 2020, through May 1, 2021, according to the state treasury department. The department said it did not receive requests for loan assistance from the district during the pandemic. About $10 million of the debt remains.

    Meanwhile, state legislators spent months sitting on $841 million in federal COVID-19-relief funds in an attempt to pressure the governor to relinquish her emergency powers to cancel sporting events and close schools when a community’s virus transmission rate went up. While some reports have suggested that Benton Harbor could receive more than $40 million in pandemic relief funds from the state and federal governments, according to district Chief Financial Officer Scott Johnson, the district had only received about $3.5 million as of June 22, money officials could use to enhance summer and online programming, prepare schools for the fall, upgrade ventilation in school buildings and address environmental issues like mold.

    Whether the district will be able to pull itself out of not only the pandemic turmoil, but also the entrenched inequities of its past, only time will tell. “I want to earn our families back,” said Townsel, the superintendent, who has spent the year trying to recruit students to the district and helped secure a $3 million state grant to create new literacy programs over the next five years, which he believes could be a game changer. Whitmer has also proposed changing the state’s funding formula to provide more aid to districts with low-income or at-risk students.

    But residents haven’t stopped worrying about what will happen if the turnaround plan fails and the state once again tries to dissolve its schools, like they did with Inkster and Buena Vista.

    “They destroyed them — strong, rich-in-history Black districts that went through the same things that we went through,” said Reinaldo Tripplett, a district alumnus and former high school principal who sits on the school board and drives with a Benton Harbor Tigers mascot in his car. “Where we are today did not just happen overnight. Where we are today, in my opinion, had been planned a long time ago.”

    Working with Thompson and Na’Kiyrah’s elementary school principal, Taylor was able to find a temporary reprieve for her daughter: Na’Kiyrah will enroll in summer school, which has been extended to eight weeks this year and started in late June.

    At the end of the program, Na’Kiyrah will be reassessed, and if she passes, she will be able to move to the fourth grade with her brother. If she doesn’t, she’ll be forced to repeat third grade.

    “I’m going to fourth grade,” Na’Kiyrah said, promising herself that she would pass at the end of summer. “This time, I’m going to know the answers.”

    Are You Going to School During the Pandemic? Or Working There?

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    • Pr chevron_right

      The Ultrawealthy Have Hijacked Roth IRAs. The Senate Finance Chair Is Eyeing a Crackdown.

      pubsub.do.nohost.me / ProPublica · Friday, 25 June, 2021 - 19:15 · 6 minutes

    ProPublica is a nonprofit newsroom that investigates abuses of power. The Secret IRS Files is an ongoing reporting project. Sign up to be notified when the next installment publishes.

    Senate Finance Committee Chairman Ron Wyden said on Thursday he is revisiting proposed legislation that would crack down on the giant tax-free retirement accounts amassed by the ultrawealthy after a ProPublica story exposed that billionaires were shielding fortunes inside them.

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    “I feel very strongly that the IRA was designed to provide retirement security to working people and their families, and not be yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes,” Wyden said in an interview.

    Never miss the most important reporting from ProPublica’s newsroom. Subscribe to the Big Story newsletter.

    ProPublica reported Thursday that the Roth IRA, a retirement vehicle originally intended to spur middle-class savings, was being hijacked by the ultrawealthy and used to create giant onshore tax shelters. Tax records obtained by ProPublica revealed that Peter Thiel, a co-founder of PayPal and an investor in Facebook, had a Roth IRA worth $5 billion as of 2019. Under the rules for the accounts, if he waits till he turns 59 and a half, he can withdraw money from the account tax-free.

    Never miss the most important reporting from ProPublica’s newsroom. Subscribe to the Big Story newsletter.

    The story is part of ProPublica’s ongoing series on how the country’s richest citizens sidestep the nation’s income tax system . ProPublica has obtained a trove of IRS tax return data on thousands of the wealthiest people in the U.S., covering more than 15 years. The records have allowed ProPublica to begin, this month, an unprecedented exploration of the tax-avoidance strategies available to the ultrawealthy, allowing them to avoid taxes in ways most Americans can’t.

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    Wyden said ProPublica’s stories have shifted the debate about taxes at the grassroots level, underscoring a “double standard” that would have a nurse in Medford, Oregon, dutifully paying taxes “with every single paycheck” while the wealthiest Americans “just defer, defer, defer paying their taxes almost until perpetuity.”

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    Wyden said, “Now, the American people are with us on the proposition that everybody ought to pay their fair share, and in that sense, the debate about taxes has really changed a lot.”

    The focus on recouping lost tax revenue comes at a critical time, Wyden and others say, as lawmakers look for ways to fund President Joe Biden’s infrastructure plan and other domestic spending.

    Wyden had worried for years that Roth IRAs were being abused by the ultrawealthy. In 2016, he put forth a proposal that would have reined in the amount of money that could be stowed inside them.

    “If I had my way back in 2016, my bill would have passed, there would have been a crackdown on these massive Roth IRA accounts built on assets from sweetheart deals,” Wyden said.

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    The proposal was known as the Retirement Improvements and Savings Enhancements Act. It would have required owners of Roth accounts worth more than $5 million to take out money over time, capping the accounts’ growth. It also would have slammed shut a back door that allowed the wealthy to move fortunes into Roths from less favorable retirement accounts. This maneuver, known as a conversion, allows a taxpayer to transform a traditional IRA into a Roth after paying a one-time tax.

    Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, told ProPublica he supported reforms to rein in giant Roth IRAs like his. Weschler’s account hit the $264.4 million mark in 2018 after he converted a whopping $130 million and paid a one-time tax years earlier, according to tax records obtained by ProPublica.

    In a statement to ProPublica earlier this week, Weschler didn’t address any specific reform plan but said : “Although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy. To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold.”

    Wyden’s proposal also targeted the stuffing of undervalued assets into Roths, which congressional investigators had flagged as the foundation of many large accounts. Under the Wyden draft bill, purchasing an asset for less than fair market value would strip the tax benefits from the entire IRA.

    ProPublica’s investigation showed that Thiel purchased founder’s shares of the company that would become PayPal at $0.001 per share in 1999. At that price, he was able to buy 1.7 million shares and still fall below the $2,000 maximum contribution limit Congress had set at the time for Roth IRAs. PayPal later disclosed in an SEC filing that those shares, and others issued that year, were sold at “below fair value.”

    A spokesperson for Thiel accepted detailed questions on Thiel’s behalf last week, then never responded to phone calls or emails.

    The RISE Act was never introduced because, Wyden said, Republicans controlled the Senate at the time and made clear they opposed the effort. The proposal was also heartily opposed by promoters of nontraditional retirement investments. One of them wrote , at the time: “Everything about the RISE Act Proposal is opposed to capitalism and economic freedom.”

    Following ProPublica’s story on Roths, Sen. Elizabeth Warren, D-Mass., said the way to address the gargantuan accounts would be a wealth tax, which would impose an annual levy on households with a net worth over $50 million.

    Warren tweeted a link to the story and wrote: “Yes, our tax system is rigged with loopholes and tax shelters for billionaires like Peter Thiel. And stories like this will keep popping up until we pass a simple #WealthTax on assets over $50 million to make these guys pay their fair share.”

    Daniel Hemel, a tax law professor at the University of Chicago who has been researching large Roths, said that Congress should simply prohibit IRAs from purchasing assets that are not bought and sold on the public market.

    “There’s no reason people should be able to be gambling their retirement assets on pre-IPO stocks,” Hemel said.

    He added that lawmakers should go beyond reforms targeting the accounts directly and address a potential estate tax dodge related to Roths.

    If the holder of a large Roth dies, the retirement account is considered part of the taxable estate, and a significant tax is due. But, Hemel said, there’s nothing to stop an American who has amassed a giant Roth from renouncing their citizenship and moving abroad to a country with no estate taxes. It’s rare, but not unheard of , for the ultrawealthy to renounce their U.S. citizenship to avoid taxes.

    Under federal law, U.S. citizens who renounce their citizenship are taxed that day on assets that have risen in value but are not yet sold. But there’s an exception for certain kinds of assets, Hemel said, including Roth retirement accounts.

    Thiel acquired citizenship in New Zealand in 2011. Unlike the United States, New Zealand has no estate tax. It’s not clear whether estate taxes figured into Thiel’s decision.

    A spokesperson for Thiel did not immediately respond to questions on Friday about whether estate taxes factored into Thiel’s decision to become a New Zealand citizen.

    In his application for citizenship, Thiel wrote to a government minister: “I have long admired the people, culture, business environment and government of New Zealand, as well as the encouragement which is given to investment, business and trade in New Zealand.”

    Patching the hole in the expatriation law, Hemel said, “should be a top policy priority because we’re talking about, with Thiel alone, billions of dollars of taxes.”

    Help Us Report on Taxes and the Ultrawealthy

    Do you have expertise in tax law, accounting or wealth management? Do you have tips to share? Here’s how to get in touch. We are looking for both specific tips and broader expertise.

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