m i c h i g a n
m u n i c i pa l
t h e September 2010
C a l e n da r
t r e a s u r e r s
q u a r t e r l y
• Crystal Mountain Resort Thompsonville, MI oct 10 - 13, 2010
MMTA Annual Annual Business Meeting • Crystal Mountain Resort Thompsonville, MI oct 11, 2010
Spring Workshop • James B Henry Center for Executive Development Lansing, MI March 25, 2011
MMTI Advanced • Comfort Inn Mount Pleasant, MI May 11 – 13, 2011
MMTI Basic • Comfort Inn Mount Pleasant, MI May 16 – 20, 2011
APT US&C Annual Conference • Oklahoma City, OK July 24 – 27, 2011
Vo l u m e 5 7
From the President
Important Dates to Remember
MMTA Annual Fall Conference
n e w s l e t t e r
w w w. m m t a - m i . o r g
a s s o c i a t i o n
How quickly this year has passed! I remember the excitement of writing my first President’s letter and now here I am writing my last. So much as has been achieved over the past year at the Board level. We are in the process of revising our Web site, and we anticipate having it ready for your review in time for the Annual Conference. We have reviewed our bylaws and will present our proposed changes for your review and approval during the Annual Meeting held during the Fall Conference. During the review process, we noticed that occasionally our operation practices required a review of past minutes and sometimes contact with previous board members for an explanation of the practice, which lead to the creation and adoption of policies to support our practices. We have successfully separated the Institute into Basic and Advanced Institutes, allowing for greater depth of education during the Advanced without fear of overwhelming our Basic attendees. We have joined with the MGFOA, replacing the Winter Workshop with a joint educational opportunity in the spring of 2011. We have created and implemented the Michigan Certified Professional Treasurer program. I am most proud of this accomplishment and it was a pleasure to work with the committee and the Board as they worked out the details of the program. As you can see, your current Board of Directors has had a very busy year and it has been my honor to work with them as your President. I represented the MMTA during the APT US&C Annual Conference held in July. Attending the APT US&C as the president of one of the most active state associations was quite an honor. MMTA is a very active, progressive association that continues to lead the way for other state associations. It is the commitment of current and past board members that keeps the MMTA shining brightly within the APT US&C. Last year, I challenged our members to “rock the nominations” for the PRIME Award and you did not let me down! Ten members were recognized by their peers, with two declining the nomination, leaving eight members nominated for the PRIME Award! Now it is up to you to “rock the vote” and select one member to receive the prestigious Professional Recognition in Municipal Excellence Award, by returning your ballot as soon as possible. I am looking forward to our Annual Conference to learn who has been chosen to receive the PRIME Award. In addition to “rocking” the PRIME nominations, I challenged you to “rock” the Board nominations as well. Every year, with natural progression through the positions, we have at
Continued on page 1.
Applications for positions on the Board of Directors must be submitted by September 30, 2010. Please don’t delay! You can access the application here.
Continued from cover.
PRESIDENT Janice Thelen, CPFA, MiCPT Watertown Charter Township Phone (517) 626-6593 ext. 206 PRESIDENT-ELECT Rose Dillon, CPFA, MiCPT Fruitport Township Phone (231) 865-3151 VICE PRESIDENT Kim McKay, CPFA, MiCPT City of Rockford Phone (616) 825-5005 TREASURER Jan Steggerda, CPFA, MiCPT Park Township Phone (616) 738-4236 SECRETARY Mary Ann Kornexl, CPFA, MiCPT City of Mt. Pleasant Phone (989) 779-5381 DIRECTORS Cheryl Rhein-O’Neill, CPFA, MiCPT Oregon Township Phone (810) 664-5971 x1
least one vacant position on the Board of Directors. In this newsletter, you will find a link for the application for a position on the Board of Directors. We are looking for people who are willing to make commitments of their time and talents for the good of the Association; people who are willing to be challenged out of their comfort zones. If you make the decision to place your name on the ballot for a position on the Board of Directors, know that you will have the support of current and past board members as well as the entire association. As your soon to be Past President, I have one more request for you; make me proud… ”rock” me with applications for the vacant board position. I look forward to administering the Oath of Office to you at the Installation Ceremony on October 12th at the Fall Conference at Crystal Mountain Resort. My last duty as your president will be administering the Oath of Office to a new president, Rose Dillon, at the Fall Conference. I will then take my place as the Immediate Past President of this outstanding association. I have enjoyed my time on the board and am amazed at how quickly the time has passed. I look forward to joining an impressive group of Past Presidents of the MMTA, many of whom are still actively involved in the success of the MMTA. Thank you to all for your assistance and support over the years.
Janice Thelen MMTA President
Matthew V. Horning, CPFA, CPFIM, MiCPT City of Ann Arbor Phone (734) 794-6541 Annge Klinger, CPFA, CMC, MiCPT City of East Tawas Phone (989) 362-6161 Karin Tebeau, CPFA, MiCPT Delhi Charter Township Phone (517) 268-3015 PARLIAMENTARIAN Barbara Fandell, CPFA, MiCPT City of Ithaca Phone (989) 875-3200 IMMEDIATE PAST PRESIDENT Joseph Ferrari, CPFA, MiCPT Oxford Township Phone (248) 628-9787 ASSOCIATE LIAISONS Nancy A. Robinson, VP Comerica Bank Phone (313) 222-9237 Katherine McDonald, VP JP Morgan Asset Management Phone (616) 771-7860
September 2010 page 1
Winter Workshop – New Format – New Date We are excited to introduce a new format for Winter Workshop this year. Because of the budget and time restraints we are all under, we are introducing a joint one-day Spring Workshop with the MGFOA, which will take the place of the 2011 MMTA Winter Workshop. Many of our MMTA members are also members of the MGFOA and this will alleviate having to choose one over the other or spending time out of the office for both. The scheduled date for the 2011 Spring Workshop is Friday, March 25, 2011. The event will be held in Lansing at the James B. Henry Center for Executive Development at MSU. The location is a state-of-the-art facility with The Candlewood Suites Hotel attached for those wanting to spend the night.
The planning of the Workshop has just begun. If you’re interested in helping, please attend the Winter Workshop Committee meeting during the Fall Conference at Crystal Mountain. The meeting will be held Tuesday, October 12th at 4:30pm. If you can’t attend but would like to help with the planning, please contact me directly at (616) 738-4236 or email@example.com. Don’t forget to mark your calendars!
MiCPT Michigan Certified Professional Treasurer Submitted by: Kim McKay, City of Rockford
In July of 2009, the MMTA board made the decision to pursue a Michigan certification. The idea was to develop and implement a Michigan program that would complement the national certification, Certified Public Finance Administrator (CPFA), that is offered through the APT US&C. Equally, or even more importantly, we wanted to create a program with unique educational benefits for the members of the MMTA. As a result the Professional Development Committee began its quest to craft a curriculum that would provide much needed Michigan training for our membership. The committee’s first goal was to come up with guidelines for certifying and recertifying. We accomplished this and have now moved on to the meat and potatoes of our program - our educational platform. Several years ago, the Professional Development Committee worked with State of Michigan personnel and treasurers from several layers of government. Their purpose was to develop a Best Practices Training Program for treasury professionals in the State of Michigan. They came up with a very good document outlining a multi-faceted approach to this education. The PDC is now using that document as their platform to develop our educational needs and goals. In the long term we would like to offer both the new treasurers and the more experienced treasurers an interesting, relevant approach to our complex duties. Originally, there was hope that at some point the State of Michigan might acknowledge and certify this program much in the way the assessors are handled. At this time, because of budgetary and staffing constraints, the State cannot participate, but we are hopeful that some day they will become a part of this process. For the past year the following people have made up our Committee: Tim Arends, City of Traverse City; Blinda Baker, City of East Tawas; Mary Ann Kornexl, City of Mt. Pleasant; Bruce Malinczak, Canton Township; Cheryl Rhein-O’Neill, Oregon Township; Janice Thelen, Watertown Township and myself. I consider myself extremely lucky to have a group of very dedicated, talented individuals on this committee. Click here for the guidelines for certification.
We need you!
Please consider signing up for one of the MMTA committees. So many of the things we do, including publishing this newsletter and hosting events, wouldn’t happen without the support of our committee members who volunteer their time, expertise and skills. You are all valuable resources for the Association and membership and we could use your help. The committees are open to both Active and Associate Members. A sign up form with more information, including a list and description of each of the committees, is available here.
MMTA Board Meetings
• Friday, September 17, 2010 @ 10:00 am at the Wrought Iron Grill, Owosso September 2010 page 2
Discovery October 10-13, 2010 Crystal Mountain Resort, Thompsonville, Michigan
MMTA 32nd Annual Fall Conference The
MMTA Board of Directors along with the Fall Conference Committee would like to invite you to the 2010 Fall Conference at the beautiful Crystal Mountain Resort in Thompsonville, MI. The committee has listened to your feedback and has worked hard to make sure you find this conference filled with educational classes for your learning pleasure.
Tuesday will also be filled with meat and potato sessions, including break-outs. This day of classes will be followed with our banquet festivities including the Prime Award presentation, dinner, program and entertainment. We are delighted to have Mary Jane Mapes teach us
Please see the link to the MMTA website where you can view information regarding this conference.
how to “Discover How to Create a Great Relationship with Anybody~Even Impossible People” as we end the conference on Wednesday. Look for her article in this newsletter.
are excited about the Past Presidents' Welcome Reception on Sunday night 10.10.10 after the golf outing. The reception will be held at the resort lodge hospitality suite. This reception will be unique with wonderful foods prepared by the committee along with a relaxing atmosphere where you can network with fellow friends.
Monday will be packed with education sessions.
We encourage your attendance at the Annual Business Meeting at 3:45pm. We will ask our membership to vote on revised bylaws. Most of the amendments are to clarify language or to put in writing what we are actually practicing already. There is an amendment that will be voted on separately as it is significant. Our Associate Members have asked to have a vote on the Board of Directors. You will receive information in your conference packet and during Opening Session. Get ready for Monday Fun Night with a picnic on the resort grounds, including live music and chairlift to the top of Crystal Mountain for a breathtaking view.
conference will end with the annual La-Z-Boy drawing. Throughout the conference our Past Presidents will hold drawings. Attendees who bring gifts for those drawings will have their names entered.
invite you to attend this up north conference. This is your opportunity to find rest, relaxation, networking and learn how to “Discover the Treasurer” whether it’s a new eureka you found or learning something about yourself that you never knew.
Rose Dillon, MiCPT, CPFA Fall Conference Chair
The 2010 Fall Conference will be October 10-13 at Crystal Mountain Resort. Please click here for more information. M i c h i g a n M u n i c i p a l T r e a s u r e r s Ass o c i a t i o n September 2010 page 3
www . mm t A - m i . o r g
Are You an Aligned Leader? By: Mary Jane Mapes, CSP
As an aligned leader you acknowledge the physical, mental, emotional, and spiritual realms of existence, choosing to be guided by the invisible spiritual realm of universal laws and lasting principles. You do the right thing because it’s the right thing to do. You may not always feel like being respectful to others, but you are. You might be tempted to act unethically, but you don’t. You may not feel like forgiving others when they harm you, but you do because your operating system is powered by something greater than ego, habit and impulse. If you are a leader who acts out of ego you are driven by a need to feel good in the eyes of others. For example, you may avoid speaking to employees about their poor performance for fear they might take offense, or you may take credit for the ideas and achievements of others because your ego craves praise. You act as you do to bolster or protect your image in the eyes of others because your cup of self-respect is filled by how others view you. Unfortunately you also stand to lose personal self-worth and a sense of control should others disagree with you. As an ego driven leader you often fail to make the right decision, you have a difficult time dealing effectively with conflict, and you struggle with operating from a position of integrity. You are swayed by social mores, norms and values. You offer little moral/ethical leadership. If you are a leader who acts out of habit and impulse, you do what makes you feel good. It’s work to hold people responsible, so you don’t. It’s tough to discipline yourself to stay physically fit, so you don’t. It’s difficult to control your emotions, so you don’t. Much like the ego driven leader, as a leader driven by habit and impulse you are externally controlled. When a negative event occurs, e.g. someone challenges you, your self-respect and self-control dissipate as fear and anger escalate, and rather than respond appropriately to the situation, you react negatively in order to recoup the self-respect you fear you’ve lost. You lack discipline and moral courage. As an aligned leader your operating system is powerful because it emanates from the spiritual realm. You are not driven by short-term, feel good motives. Yours is a world of powerful vision, strong values and universal truths. Your behavior is not dependent on momentary pleasures or reactions. You understand powers and truths greater than you, and live in accordance with them because you allow your thoughts, feelings and behavior to be governed by them. You are in perfect alignment. September 2010 page 4
As an aligned leader if you claim to value honesty and openness, you live the truth no matter how difficult. If you say you value integrity, you are ethical in all your dealings, even when it doesn’t serve you personally. If you live by the principle that you hunger for what you feed on, you make sure you surround yourself with literature that nourishes you, literature that uplifts, inspires and propels you. If you live by the universal law of sowing and reaping, you make sure that you sow good seeds into all your relationships so that both you and your organization reap the rewards that come with mutual respect and caring. If you live by the universal law that says to be a leader of all you must be servant to all, you never ask people to do what you yourself are not willing to do. You lead by example, demonstrating true servant-leadership. As a servant-leader you enjoy self-respect, self-esteem and freedom from external controls. Your goals are unwavering. You welcome conflicting points of view, admit shortcomings, overlook offenses, and make tough decisions, no matter how unpopular. You nurture, respect, value, and maximize the diverse talents that others bring to the workplace, leading with a combination of tenderness and toughness, humility and strength. You guide others using your positional authority combined with the moral courage and wisdom that derive from living life on a higher plane governed by universal laws. Others observe your personal power and commitment, and they respect your choice to remain faithful to something greater than yourself. They sense your commitment to them and their well being. They recognize you as a leader whose word is your bond, who is fair in your dealings, who is respectful of others and who gives credit where due— living a life of purpose and reverence. They sense they are safe with you and can trust you as a person of noble character, and, as a re sult, they choose to follow you and to do willingly that which they would not ordinarily do. Because you are an aligned leader you are a powerful person who possesses the ability to transform yourself, your relationships, and your organization. © 2007-2010 Mary Jane Mapes All rights reserved. Author of three books, Mary Jane Mapes speaks on helping leaders develop irresistible influence. To sign up for her weekly ezine, IRESISTIBLE INFLUENCE, or to find out about her books and other learning resources, contact her at firstname.lastname@example.org or email@example.com
Winning in the Tax Tribunal
By: Ross K. Bower II and William K. Fahey, Attorneys* Fahey Schultz Burzych Rhodes PLC Submitted by: Joe Ferrari, Oxford Township With property values continuing to fall throughout Michigan, it is more important than ever for municipalities to protect their assessors’ determinations of value. Doing so in a cost efficient manner, with effective counsel, is equally important. This article discusses recent Tax Tribunal and appellate opinions in Michigan tax assessment cases. Knowing about these recent developments in the law can help avoid long and expensive appeals in the Tax Tribunal. Estate Planning and Uncapping . . . . . . For Revocable Living Trusts The Court of Appeals recently held that the death of a trust settlor (the person establishing a trust) uncaps the value of property held by the trust. The Court decided that the original transfer of property to the trust during her lifetime did not uncap the taxes, but when the settlor died a “transfer” of ownership occurred that uncapped the taxable value. The Court cited the following example, taken from a State Tax Commission bulletin: “A husband and wife convey property to a trust and name themselves as beneficiaries and their children as contingent beneficiaries. The children do not become beneficiaries until the death of the parents. In this example, a ‘transfer of ownership’ occurs upon the death of the parents, when the children actually become beneficiaries, NOT when the property is originally conveyed to the trust.” Reese v Lyon Township, Court of Appeals (2010). . . . And For Joint Tenancies Late last year, the Court of Appeals held that the death of one joint tenant does not constitute a “transfer of ownership,” and thus, does not uncap the property’s taxable value. A father deeded property to himself and his son as joint tenants, and then died the next year. After the father’s death, the son deeded the property to himself and his brother as joint tenants. The City uncapped the property’s value after the father’s death, finding that a transfer of ownership had occurred. The Court rejected the City’s treatment of the taxable value, holding that there was no transfer of ownership when the father passed away and the taxable value should not have been uncapped. The Court added that the deed creating the joint tenancy also would not be a basis for uncapping the taxable value if (1) at least one of the persons was an original owner of the property before the joint tenancy was initially created, (2) the property is held as a joint tenancy at the time of conveyance, (3) at least one of the persons was a joint tenant when the joint tenancy was initially created, and (4) that person has remained a joint tenant since that time. This September 2010 page 5
case has been appealed to the Michigan Supreme Court, and the parties are in the process of filing briefs and arguing the case in that Court. Klooster v Charlevoix, Court of Appeals (2009). Unfunded Mandates Prohibited The Supreme Court recently reaffirmed the Headlee Amendment’s prohibition of unfunded mandates to local units of government. According to the Headlee Amendment, a state-mandated local activity must be originated with sufficient state funding and that mandated local role cannot be increased by the state without funding for the increased costs. At issue in the case were new recordkeeping requirements for school districts. The Court held that, to prove a violation of the Headlee Amendment, a local unit must show that the state required a new activity or service or an increase in the level of activities or services. If the state has not appropriated funds to cover the increased burden on local government, it then becomes the state’s burden to demonstrate that no state funding was required because the requirement did not actually increase costs or the increased costs were not necessary. The Court found that the new recordkeeping requirements constituted an increase in the level of activity beyond that previously required of school districts, and that the state had failed to prove that state funding was not required for the increase of required activity. Thus, the new recordkeeping requirements were held to be a violation of the Headlee Amendment’s prohibition against unfunded mandates. In addition, the Court awarded attorney fees to the school districts, since their claim of a violation was sustained. Adair v Michigan, Supreme Court (2010). Faulty Assessment Notice The Court of Appeals recently discussed the notice requirements for assessments of section 24 of the general property tax act. An assessment notice must be addressed to the property owner and mailed at least 10 days before the board of review meets. Although the Court held that a municipality’s failure to comply with the notice requirements does not “invalidate” the assessment, the increase in the assessed value was held to be invalid because the notice was mailed late. Oakhill v Shelby Township, Court of Appeals (2010). Exclusive Tax Tribunal Jurisdiction for Personal Property Assessment Challenges The Court of Appeals last month affirmed the Tax Tribunal’s exclusive jurisdiction over personal property tax assessment Continued on page 6.
Winning in the Tax Tribunal
Continued from page 5.
By: Ross K. Bower II and William K. Fahey, Attorneys* Fahey Schultz Burzych Rhodes PLC Submitted by: Joe Ferrari, Oxford Township challenges. The Municipality had initiated a lawsuit in district court to collect delinquent personal property taxes. The property owner defended the district court lawsuit by challenging the validity of its personal property assessment, claiming the Municipality failed to ascertain that the property was located in the Municipality. The Court of Appeals held that the property owner could not challenge its assessment in district court because that subject matter “is within the exclusive jurisdiction of the Tax Tribunal.” Ashland Township v Bam Excavating, Court of Appeals (2010). Substantial Evidence Required In the Tax Tribunal Recently, the Court of Appeals affirmed that municipalities must present competent, material, and substantial evidence of assessed values for the Tax Tribunal or a court to uphold them. In other words, even though a taxpayer has the burden of proof in a tax appeal, municipalities cannot simply rely on a taxpayer’s failure to present sufficient evidence. In the Court of Appeals agreed with the Tax Tribunal that the taxpayer failed to meet its burden with respect to proving the property’s value. However, the Tribunal is required to make an independent finding of a property’s true cash value. It could not simply accept the Municipality’s assessed value, since the evidence presented by the Municipality was not “substantial and competent.” Inn at Watervale v Blaine Township, Court of Appeals (2010).
Housing Development Authority Act, not the General Property Tax Act. The Court of Appeals reversed, holding that the Tribunal has “exclusive and original jurisdiction” over any action relating to a property tax assessment, including an assessment that may or may not be subject to the PILOT exemption. Kasberg v Ypsilanti Township, Court of Appeals (2010). Tax Assessment Based On Market Rents The Court of Appeals recently affirmed a Tax Tribunal decision holding that, in certain circumstances, the true cash value of a property must be determined on the basis of actual rents received, rather than market rent. Importantly, the lease at issue was entered into prior to 1984. MCL 211.27, which states that actual rental income is not the controlling indicator of a property’s true cash value in all cases, does not apply to leases entered into before January 1, 1984. The Court found that the property was subject to an existing “disadvantageous” or “unfavorable” long-term lease, and thus, must have its true cash value determined on the basis of the property’s actual rental income. In addition, the Court agreed with the Tax Tribunal that the petitioner’s (lessee’s) technical ability to purchase the property, by exercising a purchase option in the lease, was “of no practical value.” JC Penny v Ann Arbor, Court of Appeals (2010). Poverty Tax Exemption
Payment In Lieu of Taxes In a recent 2-1 decision, the Court of Appeals held that the Tax Tribunal has jurisdiction over the question of whether the tax exemption known as “payment in lieu of taxes” (PILOT) applies to a property. The PILOT exemption applies to nonprofit housing projects that are financed with federally-aided or authority-aided mortgages, advances, or grants, and exempts the property from all ad valorem property taxes. The property owner claimed that it was wrongfully denied a PILOT exemption for its “nonprofit housing concern.” The Tax Tribunal dismissed the case for lack of jurisdiction because the PILOT exemption is part of the State
The Court of Appeals affirmed the Tax Tribunal’s denial of a property tax poverty exemption to students. The property owners were students with significant monthly financial obligations, part-time jobs that provided income below the federal poverty guidelines, and student loans that paid for some of their expenses. They applied for, and were denied, a poverty exemption for property taxes. MCL 211.7u provides certain criteria for a property owner to qualify for the “poverty exemption,” such as meeting the federal poverty guidelines. The Court of Appeals affirmed the poverty exemption denial Continued on page 7.
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September 2010 page 6
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Winning in the Tax Tribunal
Continued from page 6.
By: Ross K. Bower II and William K. Fahey, Attorneys* Fahey Schultz Burzych Rhodes PLC Submitted by: Joe Ferrari, Oxford Township because “it was never the intent of the statute to allow persons who have the ability to work to be granted poverty exemptions because they chose not to work.” The Court noted that the local governing body has the discretion to depart from the guidelines (i.e., meeting the federal poverty guidelines) when it finds substantial and compelling reasons to do so. The Court found that the student/property owners chose what to pay first, such as their tuition, mortgage, and other expenses, and left property taxes as “an expense left over after they had paid other things.” Thus, they did not qualify for the poverty exemption. Grant v Delta Township, Court of Appeals (2010). Special Assessment and Usage Fee The Court of Appeals recently affirmed the Tax Tribunal’s decision to refund payments made on an invalid special assessment, and denying the property owner’s requests to cancel a sewer-usage fee and capital cost assessment. The property owner argued that the monthly sewer-user fee and capital costs assessed by the Municipality were invalid under Bolt v City of Lansing. However, the Court affirmed the Tax Tribunal’s conclusion that it did not have jurisdiction over the monthly sewage-user fee issue. If a user fee is invalid under Bolt, it is a tax in violation of the Headlee Amendment, and “the tax tribunal does not have jurisdiction to entertain a claim of such a violation.” Further, the property owner had missed its opportunity to present a Headlee Amendment violation claim, since the property owner had begun paying the sewer-usage fee over one year prior to initiating the claim. Rema Village Mobile Home Park v Ontwa Township, Court of Appeals (2010). No Separate Taxation of Common Elements Earlier this year, the Court of Appeals reversed the Tax Tribunal and held that a municipality cannot tax the common elements of a condominium development independent from the individual condominium units. The property owner developed a residential condominium project, reserving the development rights to a “general common area” comprised of the land not part of any
condominium unit. The property owner appealed the City’s assessment of the common area, arguing that it was not subject to taxation separate from the condominium units. The City argued that the “common area” was really a separately taxable “convertible area,” to which the property owner had the exclusive right to develop with additional condominium units. The Court of Appeals agreed with the property owner, holding that the disputed property was a common element, in which the co-owners of the condominium units held an undivided, inseparable interest. The developer’s retention of the right to withdraw or develop the property for six years did not vitiate this fact. However, the Court noted that the disputed property, as a common element, was subject to ownership and taxation via the individual condominium units, since the individual units are “owned and taxed as individual units plus their inseparable and appurtenant shares of the common elements.” Paris Meadows v City of Kentwood, Court of Appeals (2010). Inspection Fee, Not Tax The Court of Appeals recently held that a Solid Waste Inspection Fee charged to the owners of certain commercial and industrial properties is a valid regulatory fee, not a disguised tax. The Court examined the City’s new inspection fee for enforcement of its solid waste ordinance. The inspection fee was charged only to those businesses that contracted with licensed private solid waste collectors, and not to those who contracted with the City’s Department of Public Works. The plaintiff challenged the inspection fee, arguing that it constituted a “disguised tax” and, therefore, violated the Headlee Amendment because the City imposed the “tax” without a vote of the City’s electorate. The City countered that the inspection fee was for a regulatory purpose, namely, ensuring of efficient removal of solid waste from commercial generators and to protect the public health. The City also argued that the inspection fee benefited the fee payer by permitting the property owner to use Continued on page 8.
MUNICIPALITIES. MADE IN MICHIGAN. To learn more contact a Treasury Management Specialist. Linda Hammer Tammy Kerr Scott Leesch Kate Seaman (989) 839-5243 (616) 785-2575 (231) 775-8588 (269) 983-8946
September 2010 page 7
Winning in the Tax Tribunal
Continued from page 7.
By: Ross K. Bower II and William K. Fahey, Attorneys* Fahey Schultz Burzych Rhodes PLC Submitted by: Joe Ferrari, Oxford Township private refuse collection companies and by guaranteeing that the property owner will comply with the City’s solid waste collection and disposal requirements.
private contractor or DPW). Therefore, the inspection fee was a permissible regulatory fee, rather than a tax. Wolf v City of Detroit, Court of Appeals (2010).
The Court of Appeals applied the Supreme Court’s opinion in Bolt v Lansing, which earlier explained the difference between a “tax” and a “fee:” “Generally, a ‘fee’ is exchanged for a service rendered or a benefit conferred, and some reasonable relationship exists between the amount of the fee and the value of the service or benefit.’ A ‘tax,’ on the other hand, is designed to raise revenue.”
Working With Your Attorney to Win In the Tax Tribunal
The Court found that the inspection fee furthers a regulatory purpose, as opposed to being merely a revenue generating purpose, since the purpose of the inspections is to assure that property owners have made arrangements for trash disposal service, and that businesses have an appropriate level of solid waste collection service. The fee is based on the City’s costs of providing the inspections. The property owner determines whether that owner’s property is subject to the inspection fee by the owner’s choice of waste disposal service provider (license
Municipalities need attorneys in the Tax Tribunal who have experience in pre-hearing negotiations, who stay up to date with recent tax tribunal and appellate opinions, and use expert systems for routine pleadings and discovery. Keeping municipal costs down while defending property assessments before the Tax Tribunal should be a high priority. William K. Fahey and Ross K. Bower II are members of Fahey Schultz Burzych Rhodes PLC, a Michigan law firm specializing in the representation of Michigan municipalities. This article is intended for their clients and friends. It highlights specific areas of law, and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation. Copyright © 2010 Fahey Schultz Burzych Rhodes PLC
Congratulations... 2010 APT US&C Certifications CPFA
Pamela Esterline Beck........................................................................................................................ Somerset Township Stephanie C. Brown.............................................................................................................................. City of Charlevoix Susan E. Davison................................................................................................................................ City of Farmington Tammera K. Harmsen.....................................................................................................................City of Roosevelt Park Diane M. Purgiel.....................................................................................................................................Elmira Township Kay M. Sisung.......................................................................................................................................County of Monroe Peter Stanislawski..................................................................................................................................City of Saugatuck Teri L. Vanhall...................................................................................................................................City of Grand Haven Nanette S. Walsh................................................................................................................................. Village of Cass City
Elizabeth Barnabee.....................................City of Gladwin Sharry Budd.......................................Van Buren Township Dennise Clippert................................... City of Sylvan Lake Nancy Culp..........................Charter Township of Oshtemo Cheryl Culpepper....... Charter Township of Independence Frances DeWyse....................................... City of Essexville Diane Giddens..........................................City of Marquette Cindy L. Hanson........................Eureka Charter Township Janet Hollinrake...................................... City of Kentwood Connie Hoverman................... Williams Charter Township Kristy K. Mattson..........................City of North Muskegon Susanne M. McGee..................................City of Montague Katherine Metropoulos............Saginaw Charter Township Cheryl Neu......................................................City of Leslie Enid Pierson......................................City of Harper Woods Bethany J. Smith................................. City of Grand Blanc Jan Steggerda...............................................Park Township Sherry Steinwedel............................................City of Milan Janice Thelen....................... Watertown Charter Township
September 2010 page 8
Debt Policy Certification City of Rochester Hills
Congratulations to Margaret Birch and Matthew Horning for your elections to the Board of Directors for the Association of Public Treasurers of the United States and Canada. We’re fortunate and proud to have you representing our state and association.
Local Units Prevail Over State Government on Unfunded Mandates By: Dennis R. Pollard, Esq., Secrest Wardle, PC Submitted by: Margaret Birch, Waterford Township The Michigan Supreme Court rendered a significant decision on July 14, 2010, concerning unfunded mandates imposed by state government on local units of government in a suit handled by Dennis R. Pollard of Secrest Wardle. As recently reported to the Legislature by the Legislative Commission on Statutory Mandates, of which Mr. Pollard is a member, state government has been ignoring the Constitutional prohibition on the State imposing unfunded mandates on local units of government. This has been occurring over the last 32 years since the Headlee Amendment to the Michigan Constitution was approved by Michigan voters in 1978. This prohibition applies to both requirements imposed by state statute and by rules and regulations created by state administrative agencies. Indeed, it has become routine that requirements have been imposed on local cities, townships, counties and other forms of local government over the last 32 years without any thought about the application of this Constitutional limitation or concern with the costs that will be incurred by local units to meet the mandates. Costs are almost universally treated as the problem of local units, not the state. The Constitutional limitation is very straight forward: A new activity or service or an increase in the level of any activity or service beyond that required by existing law shall not be required by the legislature or any state agency of units of local
government, unless a state appropriation is made and disbursed to pay the unit of Local Government for any necessary increased costs. (Article 9, §29 of the Michigan Constitution.) Suits were being filed to enforce compliance, but they didn’t change the state’s behavior. At least that was true up until a decision was rendered July 14, 2010. The source of the problem has been that the Michigan courts have not effectively drawn a line on this constitutional misbehavior. The courts are expressly assigned the responsibility in §32 of the Headlee Amendment “to enforce” its provisions, including §29. In fact, what has occurred over the last 32 years were desultory attacks brought in the courts by local units of government to contest the state’s failure to fund various required services. School districts throughout the state have been the most persistent in challenging the lack of the required funding. In one case, it cost the state approximately $1 billion in terms of reimbursed costs paid to schools in 1997 for its failure to fund required special education services. The recent decision of the Michigan Supreme Court has the promise of finally drawing the line on this conduct. The pattern that the Attorney Generals of Michigan have developed over the last 32 years is to throw up procedural roadblocks when suits were filed by local units, arguing and frequently re-arguing even previously
decided legal issues adverse to the state’s position and, when that ultimately failed, to argue that the local units of government had not met their responsibility to quantify the full extent of the state’s violation of the Headlee funding requirement. The main line of argument was that the local units did not adequately prove the precise extent of the underfunding that occurred to all similarly situated local units statewide. They argued further that even if that burden was met, the local units did not establish that the costs they incurred were “necessary” costs within the meaning of §29 of the Amendment, quoted above. These arguments could be exploited to the extent that final decisions in these suits were dragged out for years and caused local units to incur inordinate legal expenses. Indeed, this strategy, relying on access to the state treasury to fund it, worked so well that most local units of government chose to absorb the unwarranted costs without contesting them. The Supreme Court’s decision was rendered in a suit known as the Adair case. In order to succeed, the school district plaintiffs (and a named taxpayer for each participating school district) had to secure a reversal in the Supreme Court on three separate appeals within the suit from adverse decisions of the Michigan Court of Appeals. This absorbed a great deal of money and time to fight through the state’s tactics. However, it is quite clear from a reading of the Court’s decision that it does Continued on page 10.
September 2010 page 9
Local Units Prevail Over State Government on Unfunded Mandates By: Dennis R. Pollard, Esq., Secrest Wardle, PC Submitted by: Margaret Birch, Waterford Township not intend to tolerate the state’s attempts to deflect its funding responsibility by trying to force the burden of proving the extent of the constitutional violation on local units of government. The Court also clarified that if local units succeed in their claim they are entitled, as a matter of law, to be awarded reimbursement for the costs incurred, foremost including their attorneys’ fees.
approving the Headlee Amendment that the Legislature is required to meet its funding responsibility at the point that the mandate or requirement is created, not years after the fact when it is challenged. To place responsibility on the affected local units of government to establish the extent of the underfunding after the fact is to require the reverse of what the voters intended.
Specifically, the Court ruled in no uncertain terms that if a local unit can establish that it is providing an activity or service because it is required to do so by operation of either a state statute or because of a state administrative rule or regulation, and that it is incurring costs to do so, the state then has the burden to demonstrate that either the activity or service is not required to be provided or, if it is conceded that it is required, of establishing through evidence that the state is fully paying for the costs of same. Relative to the state’s typical reliance on the argument that the costs local units are incurring are not “necessary” (i.e., are excessive), the Court specified that the state has to first establish through credible evidence the costs it would incur if it were to provide the same activities and services, rather than requiring local units to do so. The state must then measure whether the costs actually being incurred by local units to provide those activities and services are in excess of the costs the state would be expected to incur using its own resources. If they are not greater, then the costs being incurred by the local units are deemed “necessary” and, thus, must be fully funded by the state.
Finally, the Court ruled on the question of whether the Court of Appeals had discretion to deny local units recovery of costs of the litigation, including reasonable attorney fees, because they did not prevail entirely on the claims asserted in the suit as originally filed. The Supreme Court ruled that the local units in these suits are entitled as a matter of law (i.e. §32 of the Headlee Amendment) to receive an award of such costs for any part of the suit upon which they prevailed. This should hopefully cause the state to carefully consider endlessly protracting Headlee suits through arguments that serve no constructive purpose other than achieving delay. Nothing sharpens the focus of litigation decision-makers more effectively than when they have to be accountable for the attorney fees of the other side for the costs of delaying or spurious tactics.
These two points of law should serve to eliminate the incentive of using delaying strategies during the course of defending suits for underfunded mandates. The Court pointed out in reaching this conclusion that the placement of the burden of proof on state government follows from the clearly expressed intent of the voters September 2010 page 10
This decision of the Supreme Court represents a monumental change in the complexion of responsible Headlee litigation. In the end, it may also cause the Legislature, the governors, and state administrative agencies to respect the funding obligation of the state at the point in time when mandates are originally considered. It should also be pointed out that this suit was brought to secure a form of remedy known as declaratory judgment. A judgment for money damages against the state for underfunding for the past costs of the required services was not sought.
Continued from page 9.
Rather the Supreme Court affirmed the issuance of a declaratory judgment concluding that the state is violating the constitution by failing to fund the subject activities and services and thus must discontinue imposing those requirements. This limitation in terms of a remedy relates back to a decision of the Supreme Court reached in 1985. As a result, when future violations arise there will be a premium in reacting sooner rather than later to the state’s failure to fund the costs of required activities and services. WHAT DOES THIS DECISION MEAN AT THE PRACTICAL LEVEL? At the practical level, you may wish to consider how many of the activities and services your municipality provides are being provided because of the requirements of either a state statute or state administrative rule or regulation. This analysis would apply even if the activity or service is highly valued by the community, because the state’s funding obligation under §29 of the Headlee Amendment exists regardless of the popularity of what is required by state law. The next question is what are the costs that you are annually incurring to provide the services? These costs include wages and benefits of employees, administrative overhead, customized computer software and hardware costs, and physical equipment such as vehicles, just to name a few. The next question is when were the subject activities and services first required by the state? The state’s funding obligations under §29 are two-fold. The first sentence of that section requires the state to continue to provide the same level or proportion of funding for activities and services that were required to be provided by local units at the time the Headlee Amendment was adopted; i.e., 1978. Since no attempt was made by state government at that time to document Continued on page 11.
Local Units Prevail Over State Government on Unfunded Mandates By: Dennis R. Pollard, Esq., Secrest Wardle, PC Submitted by: Margaret Birch, Waterford Township
Continued from page 10.
these levels of funding, this required level of funding, with few exceptions, cannot be practically established. However the second sentence of §29 requires that the state must pay local units for the full costs of A) newly required activities and services (i.e., newly required after 1978), or B) any increase in the level of any of any activity or service beyond that required by state law in 1978. It is the latter requirement that was the subject of the Adair decision and presents the most formidable challenge to the state in terms of enforcing many of its mandates going forward. The final point is that, unlike in virtually all other forms of litigation, if a municipality has a viable challenge under the Headlee Amendment and suit is filed and ultimately sustained, the state must reimburse the municipality for all reasonable attorney fees and other costs of the suit. How the state reacts to this very real cost problem at the inception of a suit remains to be seen. However, it would seem unlikely that the Attorney General’s office will be indifferent to its accountability if its opinion on the state’s funding obligation on the underlying question raised in the suit is not well founded, particularly given its heavy burden of proof as a result of the Supreme Court’s recent ruling. SECREST WARDLE NOTES: In a recent decision, the Michigan Supreme Court ruled that when mandates are imposed by the state on local units of government, without fully funding the costs of those mandates, they are unconstitutional because they violate the Headlee Amendment. As such, they are unenforceable on local units unless the state provides full funding of the costs. The Court also ruled that the local units are entitled to be fully reimbursed for the costs of the suit to enforce the Headlee Amendment, including all reasonable attorney fees. This is a landmark decision under §29 of the Headlee Amendment which has been in place since 1978, but largely ignored by state government.
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MMTA Bylaws The MMTA Board of Directors has been working on updating the MMTA Bylaws since September 2009. If you click here, you can access a copy of the current bylaws, the proposed amendments, and the proposed final draft. Active Members in attendance at the Annual Business Meeting on October 11, 2010 at Crystal Mountain Resort will vote on the amendments. Please take the time to review the proposed changes and contact any MMTA board member with questions prior to that meeting.
September 2010 page 11
MMTA members have continually shown their support for scholarship funding through their generous purchases of merchandise at Winter Workshop, MMTI Basic, and MMTI Advanced this year. Between the three events, we earned $3059, all of which will be deposited in the scholarship fund. If you haven’t had the opportunity to stop by the merchandise table at one of the previously held events, please plan to take a look during the Fall Conference next month at Crystal Mountain.
Transforming Government through Strategic Operational Reviews By: Christine Andrysiak and David Asker, Plante & Moran Submitted by: Margaret Birch, Waterford Township
Given the current state of the economy, local governments are feeling the pressure of significantly reduced budgets now more than ever. We’ve seen cuts as high as 30 percent in the past few years. It’s become clear that the current economy can no longer support the existing local governmental infrastructure. Many communities have concluded that conducting business as usual is not an option, and a fundamental change is needed in order to survive and thrive. These communities are taking a holistic look at their entire organization and streamlining operations to create a leaner governmental structure. Start with a Strategic Operational Review Conducting a strategic operational review is often a good place to begin this streamlining process. This type of review involves strategically analyzing your operating practices to identify opportunities for cost reduction and efficiency gains. The main objectives are to: • review overall department structure, supervisor and staffing levels, department scheduling, and overtime policies; •
assess the efficiency and effectiveness of operations to eliminate redundancy within and between departments;
identify specific areas and operations where cost reductions and/or organizational structure changes are possible; and
develop a plan and a corresponding implementation strategy to guide the organization in achieving the outcomes of the assessment.
Methods of data collection often include staff surveys and in-person interviews with department heads and their staff. Where appropriate, benchmarking data is also utilized. Hot Button Issues Operations reviews often reveal opportunities for cost
reduction and efficiency gains that can be challenging to implement. While staffing reductions may be a component of operational reviews, it’s important to remember these suggestions are strategic reductions rather than across-the-board cuts, and that they sometimes go hand-in-hand with recommendations for technology improvements. For example, a city may determine that it can become more efficient by limiting the number of clerical staff and purchasing an updated enterprise resource planning system instead. Another hot-button issue is consolidation. If financial challenges are so great that dramatic changes will be necessary in order to continue delivery of key services, a recommendation toward consolidation or shared services may be in order. City of Saginaw: A Case Study Recently, the City of Saginaw conducted an assessment of city-wide efficiency and effectiveness, strategic organizational restructuring, and proactive cost-reduction opportunities. The city had just conducted a five-year financial forecast and realized their fiscal position going forward was concerning. The need to garner objective, outside advice became obvious. According to City Manager Darnell Earley, “As managers look for ways to retool their operations while maintaining consistently effective and efficient service delivery systems, objective and independent organizational reviews can provide a valuable blueprint for retrenching operations. Working with Plante & Moran, we developed such a blueprint Continued on page 13.
September 2010 page 12
Transforming Government through Strategic Operational Reviews By: Christine Andrysiak and David Asker, Plante & Moran Submitted by: Margaret Birch, Waterford Township for Saginaw, which considered our financial, operational, technical, and facility needs now and in the future.” It’s worth noting that many city personnel were involved in the process. Earley initiated the request, obtained approval from the city council, and oversaw the process. Department heads and staff were available for interviews and feedback. Even the union leaders got involved; Plante & Moran solicited their confidential input and gave them a number to call to voice their feedback. Saginaw’s operational review provided recommendations in five key areas: • Reorganization. These included centralization of functions like information technology and global information systems, and creating a customer service call center. Recommendations also included expansion of duties for certain staff, the creation of new roles, and decentralizing specific department functions. •
Staffing efficiency. Opportunities included headcount reductions coupled with suggestions for increasing efficiency with remaining staff by cross-training personnel to perform multiple duties, combining walk-up service counters, and implementing a lock box for mail-in utility billing and income tax payments.
Outsourcing analysis. Opportunities for outsourcing included several public services and technical services such as web development and the technology help desk.
Operational recommendations. These included suggestions such
September 2010 page 13
as eliminating health benefits for part-time staff and eliminating mandatory overtime pay. •
Investments. Despite the economy, selective, strategic investments need to be made to yield improvements. Specific recommendations included investing in call-center implementation and ERP city-wide reengineering.
The city identified up to $3 million in annual-recurring cost savings in the initial review, and implemented $1.2 million in savings in the first year. The resulting return on investment was more than 12 times the cost of the study in year one. This does not take into consideration the recurring savings each year, which would greatly increase the return on investment. “Through this approach we’ve avoided budget deficits and having to decimate departments with across-the-board percentage cuts in order to balance our budget. It was an excellent starting point for us. The small investment will pay huge dividends in the long-term as we continue to search for the surest and most cost effective forms of economic and community service delivery and sustainability.” Special Note on Police and Fire Due to the high cost of providing police and fire services, Saginaw is exploring the possibility of combining police and fire into a public safety department. The organization review showed that the two departments acting independently are not sustainable given the high cost of operation and other issues such as retirement costs. Failing to take action now will only delay the inevitable. The
Continued from page 12.
city is starting slowly, doing as much research as possible; their initial step was to create a public safety manager position—someone on staff whose main responsibility is to oversee the exploration of combining the two departments. “We are continuing to downsize our operations in a proactive rather than reactive manner, and recognizing the need for change if these services are to be sustained over the long term” says Earley. In Conclusion Strategic organizational reviews are an effective tool to help organizations transform into leaner local government units that are well positioned for economic growth and prosperity for the 21st century. It’s a visionary, progressive, proactive step, and one of the best ways we’ve found to help organizations respond to today’s new economic reality. Christine Andrysiak is a consulting manager at Plante & Moran. David Asker is Vice President at CRESA, Plante & Moran’s Real Estate Division.
Health Care Reform
By: Carol Rito, CFCI, Compliance Officer, Group Associates The time to ensure you are in compliance is NOW! The first set of employer requirements under Health Care Reform become effective for plan years that begin on or after September 23, 2010. A second set of employer requirements become effective on or after January 1, 2011. Employer’s, whose plans do not meet the grandfathering requirements, must begin preparing now in order to comply with the following sets of requirements for January 1, 2011. Mandatory Coverage for Preventive Care Services Group health plans will not be able to impose cost sharing requirements (co-payments, co-insurance, or deductibles) on certain preventive care services. This limitation does not apply to all preventive care services, only to those specifically designated as “recommended preventive care services.” The recommended services are: • Services that have been graded A or B by the US Preventive Services Task Force; • Services appearing in four immunization schedules issued by the Advisory Committee on Immunization Practices that have been Adopted by the Director of the Centers for Disease Control and Prevention; and • Services that appear in comprehensive guidelines supported by the Heath Resources and Services Administration of Infants, Children and Adolescents. In addition, by August 1, 2011, a list of preventive care screening procedures for women will be posted and subject to the cost sharing prohibition. These service lists, charts, and guidelines are continually updated. The best way to learn which services are covered by the cost sharing prohibition is to go to: http://www.healthcare.gov/center/regulations/prevention.html. Note: PPO or network plans are not required to provide coverage for recommended preventive care by out-of-network providers and cost sharing can be imposed on these services. Restricted Annual Limits The restriction on annual limits is a three year phased in approach. For 2011, a plan may establish an annual dollar limit on the dollar amount of benefits provided that the limit is at least $750,000. Continued on page 15.
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Health Care Reform
By: Carol Rito, CFCI, Compliance Officer, Group Associates
Continued from page 14.
The limit applies on an individual-by-individual basis. The plan may continue to exclude all benefits for a condition, but if any benefits apply then the requirements must be applied. The limits do not apply to Health Flexible Spending Accounts (HFSA), Health Savings Accounts (HSA), or Health Reimbursement Arrangements (HRA) that are integrated with other coverage that does comply. Removal of Lifetime Maximums Group health plans (insured and self-funded) may not impose lifetime maximums on the dollar value of “essential health benefits.” The provisions of the Patient Protection and Affordable Care Act do not specifically define “essential health benefits” but the following categories are listed: • Ambulatory patient services • Emergency services • Hospitalization • Maternity and newborn care • Mental health and substance abuse disorder services • Prescription drugs • Rehabilitative service and devices • Laboratory services • Preventive and wellness services and chronic disease management • Pediatric services, including oral and vision care Until further guidance is provided, federal agencies will take into account “good faith efforts” to comply with a “reasonable interpretation.” There are additional administrative impacts and communication requirements on the removal of lifetime dollar maximums. • Administrative impacts – Employees who are not enrolled because they have already reached a lifetime dollar maximum must be provided a 30 day enrollment opportunity, including enrollment for “tag-along” dependents. • Communication requirements – Employees must be provided with a written notice that the lifetime maximum no longer applies. The notice can be included in annual open enrollment materials but must be prominently displayed. The Department of Labor (DOL) has issued specific model language that can be used to comply with this requirement. The model language is on the DOL website: http://www. dol.gov/ebsa/lifetimelimitsmodelnotice.doc. Elimination of Pre-Existing Condition Exclusions for Children Under Age 19 Group health plans (insured and self-funded) may not impose pre-existing condition exclusions for children under age 19. A pre-existing exclusion is any limitation, exclusion, or denial of benefits based on the fact that the condition was present before the effective date of coverage, including exclusion from eligibility for coverage. The pre-existing condition exclusion does not include benefits that are completely excluded from the plan for everyone. For example, if oral surgery is excluded for everyone, not just those who required the surgery prior to the effective date of coverage, then the exclusion may be permissible. Note: This same provision will apply to all individuals beginning on or after January 1, 2014. Prohibiting the Rescission of Coverage Health plans are prohibited from rescinding health coverage once an individual is covered under the plan, unless the individual acted fraudulently or made an intentional misrepresentation of a material fact. It is still undetermined how this will impact a plan amendment that prospectively eliminates coverage for a group of individuals so more guidelines are expected. Extension of Coverage to Adult Children Group health plans that provide coverage for employee’s children must make medical coverage (including HRAs, but excluding stand-alone dental, visions, and HSAs) available until the adult child reaches age 26. The regulations include an eligibility definition, specific enrollment rights, cost limitations, and required communications. • Eligibility definition – A “child” is defined as a biological child, stepchild, legally adopted child, child placed for adoption, or an eligible Continued on page 16. September 2010 page 15
Health Care Reform
By: Carol Rito, CFCI, Compliance Officer, Group Associates
Continued from page 15.
foster child. There is no requirement that the child is a tax dependent and there are no rules on residency, student status, support, or marital status. • Enrollment rights – Employers must offer a minimum of a 30 day enrollment opportunity to eligible adult children, including those who did not previously qualify, previously aged out of the plan, switched to a lower cost benefit, or are on COBRA. • Cost limitations – Employees who elect coverage for an adult child cannot be required to pay more for coverage than they do for other children. For example, a plan may not charge an “additional premium surcharge” or “rider premium” based on a child’s age. In addition, an employer may not limit the availability of benefit options based on a child’s age. • Communication requirements – The employer must notify the employee (or eligible dependent) in writing of the opportunity to enroll. The required notice must be included in annual open enrollment materials and must be prominently displayed. The DOL has issued specific model language that can be used to comply with this requirement. The model language is on the DOL website: http://www. dol.gov/ebsa/dependentsmodelnotice.doc. Restricting Reimbursement to Prescribed Medicines Effective January 1, 2011 over-the-counter medicines and drugs will require a prescription or letter of medical necessity from a physician for reimbursement from a Health Flexible Spending Account, HSA, or HRA. The items include, but are not limited to: • Allergy and Sinus medicines • Ointments and Creams • Cough, Cold & Flu remedies • Pain Relief, including aspirin, Tylenol, etc. Other over-the-counter health care supplies that are not medicines or drugs continue to be eligible. Employers should notify participants in these plans as soon as possible to avoid participants incurring ineligible expenses. Performing Section 105(h) Nondiscrimination Testing on Fully-Insured Plans Fully-insured plans must now pass nondiscrimination testing and cannot discriminate in favor of highly compensated individuals for eligibility and benefits. A highly compensated individual is someone who is among the highest paid 25% of all employees. There are many detailed components to nondiscrimination testing, including different rules which may apply if the plan is a Section 125 Cafeteria Plan. Therefore, this particular requirement should be discussed with your benefit consultant or tax advisor. Reporting the Value of Health Care Benefits on W-2 Forms Employers must report the aggregate cost of employer-sponsored health insurance coverage on an employee’s W-2 form for benefits received in 2011. Employers must report coverage for: • Medical and Prescription plans • Executive Physicals • On-site clinics, if they provide more than de minimus care • Medicare supplemental policies • Employee assistance programs Reporting does not include stand-alone dental or vision plans, Health Flexible Spending Accounts, HSAs, or specific disease or hospital/ fixed indemnity plans. The aggregate cost of coverage under the plan includes employee and employer portions of the cost. Additional guidance on the exact reporting requirements is expected to be released by the end of September 2010. Revised Claim and Appeal Procedures
Continued on page 17.
Scholarship Information Scholarships are available to cover the registration fee for the Fall Conference. Please click here for the guidelines and application. September 2010 page 16
Health Care Reform
By: Carol Rito, CFCI, Compliance Officer, Group Associates
Continued from page 16.
Group health plans and health insurance insurers must implement additional requirements for internal claim review and appeal procedures and new external review procedures. Internal Claim and Review Procedures In addition to the current DOL claim regulations, there are now six additional requirements that include: • Broadened determinations of claims eligible for internal claim and appeal procedures • Shorter time periods for responding to urgent care claims • Providing claimants with advance information and opportunities to respond • Adjudication by impartial decision makers • Notice requirements, including content and language • Stricter standards for failure to comply In addition, continuing coverage must be provided pending the outcome of the internal appeal process. External Review Procedures Health insurers and self-funded plans not regulated under ERISA (i.e. government plans) must comply with the state-provided external review procedures, provided that these procedures include the consumer protections found in the NAIC Uniform Heath Care Carrier External Review Model Act. Michigan has an external review statute that provides for an external review through an independent organization, however, the review does not contain all 16 consumer protections provided for in the new regulations. Therefore, if the Michigan legislature does not update the Michigan External Review Act by July 1, 2011 group health plans will have to comply with the federal external review procedures. Employers with self-funded group health plans will have to implement the requirements themselves or check with their third-party administrators to verify compliance. Employers with fully-insured plans should discuss with their insurer how they intend to comply. 60-Day Prior Notice of Material Modification Group health plans must now provide 60 days’ prior notice of a material modification. This will effect timing and notification issues for changes associated with the annual enrollment process and prevent employers from immediately changing plan terms during a plan year. This accelerated requirement is paired with a new $1,000-per-participant penalty for each willful failure to meet the new 60-day advance notice requirement. Providing Patient Protection Notification Group health plans must notify covered individuals of their rights to (1) choose a primary care provider (PCP) or a pediatrician when a plan requires designation of a PCP; or (2) obtain obstetrical or gynecological care without prior authorization. The notice must be provided whenever the plan provides a participant with a summary plan description or other similar description of benefits under the plan. The DOL has issued specific model language that can be used to comply with this requirement. The model language is on the DOL website: www.dol.gov/ebsa/patientprotectionmodelnotice.doc There is much more to come. Additional requirements will apply beyond 2011 so continued awareness and education on the health care reform provisions will be essential to remaining in compliance. Footnotes: Health Care Reform applies to both the Employee Retirement and Income Security Act (ERISA) and the Public Health Service Act (PHSA). Therefore, even though some State and local government plans have historically opted out of ERISA, they are subject to Health Care Reform through PHSA. The requirements outlined in this article assume that the plan is not eligible for Grandfather status. This article represents a non-binding interpretation of constantly changing regulations. It is general in its nature and is not a substitute for legal advice.
September 2010 page 17
New Report: Tips are the Most Effective Control Against Fraud By: Hungerford, Aldrin, Nichols & Carter, PC
A typical organization loses five percent of its annual revenues to occupational, or insider, fraud, according to a recent report. Companies with fewer than 100 employees are most at risk because they are less likely to have implemented anti-fraud or other mitigating controls. Applied to the estimated $58.07 trillion 2009 Gross World Product, this figure translates to a potential global fraud loss of more than $2.9 trillion, according to the report by the Association of Certified Fraud Examiners (ACFE). The median loss caused byÂ these cases was $160,000. Nearly one-quarter of the frauds involved losses of at least $1 million. The 2010 Report to the Nations on Occupational Fraud and Abuse notes that smaller companies experience the greatest percentage of theft, often with losses so large that they are forced to close.Â These organizations are disproportionately victimized by occupational fraud andÂ are typically lacking in controls compared with their larger counterparts. The most common frauds in the report -representing 90 percent of cases -- fell under the category of asset misappropriation, such as theft, forgery and expense reimbursement schemes. Financial statement fraud, including asset overstatement, hidden liabilities, and improper disclosures, accounted for only five percent of cases. Small businesses are subject to a wide range of fraud schemes. Check tampering, skimming and payroll fraud occurred with far more frequency at small organizations compared with companies made up of more than 100 employees.
Of all the companies reporting, 42 percent of the victim organizations were private businesses, with a median loss of $231,000. Public companies accounted for about 31 percent ($200,000), government agencies were 16 percent ($100,000), and nonprofit organizations made up nearly 10 percent ($90,000).
The report, which is published every two years, spans December 2008 through December 2009
September 2010 page 18
Continued on page 19.
New Report: Tips are the Most Effective Control Against Fraud By: Hungerford, Aldrin, Nichols & Carter, PC
Continued from page 18.
and cites 1,843 cases of occupational fraud. For the first time, the cases in the study were global, coming from 106 nations.
Among other key findings of the report: The fraudulent activity lasted a median of 18 months before being detected. Frauds with greater losses had a median period of 27 months from the initial fraud until discovery. The long periods before detection are thought by many to be a result of more complex fraudulent activity.
Tips are the most effective means of detecting internal, occupational frauds. Three times as many thefts were uncovered by a tip as by other methods. High-level fraudsters cause the most damage. Frauds committed by owners and executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds. Executive-level frauds also took much longer to detect.
More than 80 percent of frauds are committed by employees in certain departments. They are: accounting, operations, sales, executive/upper management, customer service or purchasing. More than 85 percent of fraudsters had no previous fraud record.
There are definite warning signs that fraud is occurring. They include employees living beyond their means (43 percent of all cases) and experiencing financial difficulties (36 percent). The good news: It’s never too late to start combating fraud. An “ounce of prevention is worth a pound of cure.” Here are several steps to consider:
Develop a code of conduct. Although the vast majority of employees will never commit fraud, those who are tempted can be put off by a corporate code of conduct that clearly outlines a zero tolerance stand. The code should contain clear illustrations and information about behavior that violates the code as well as instructions on how to confidentially report suspicious behavior.
Set up a hotline. The ACFE has commissioned research on the overall effectiveness of employee hotlines and found they are the most effective control companies can use. A number of providers offer hotlines designed explicitly with small businesses in mind. The cost per employee is minimal in relation to the fraud it can help to uncover and the losses avoided.
Engage management in the fight. Managers must be seen and heard reviewing controls and urgently correcting weaknesses that are detected. If your organization’s managers are perceived to be unwilling or unable to take the time to review its controls, they may inadvertently be sending a message that it is safe to commit fraud.
Invest in training. Educate staff members about the red flags associated with fraud from inside and outside the company. Training can pay significant dividends. This helps detect and prevent theft and
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Protecting a Municipality’s Financial Interests When Entering Into a Contract – New Considerations for Today’s New Economic Climate By: Ron Richards and Patricia Scott, Foster, Swift, Collins & Smith, PC
We all have heard the phrase “in the good old days, we just shook hands and had a deal.” To be clear, a verbal agreement can create a binding contract in many cases. But experience showed that verbal agreements presented problems too, often times by leaving important terms undefined. Therefore, written contracts became the trend. While written contracts can generally be an effective tool to eliminate many of the common pitfalls that arise when using verbal contracts, we all know that disputes can arise even when using a written contract to capture the terms of the deal. With bankruptcy filings involving individuals and companies on the rise in 2010, a municipality might strongly consider a new way of contracting – as a way to protect its financial interests. This recognizes the stark reality that the present economic conditions mean more uncertainty than in recent years that the entity with whom a municipality contracts will be in business when the time comes for the item purchased to be delivered. Consider the following scenario:
Imagine that a municipality wants to contract with Niagara Company to have the company build an expensive truck for the municipality – e.g., garbage truck, street sweeper, or fire truck. Let’s say that in a written contract, the company proposes a sale price of $100,000. Under the contract, the company will buy all parts and build the truck, and deliver it to the municipality within 12 months. The municipality, in turn, is to pay 80% up front – $80,000 – to the company, and the balance upon delivery of the truck. The parties sign the contract, and the municipality pays the $80,000. Six months later, the company tells the municipality it is on pace. But when 6 more months pass, no truck is delivered to the municipality. When the municipality visits the company, the property appears vacated – and there is no sign of the truck. The company does not respond to the municipality’s calls and later the municipality gets word that the company may have either filed for bankruptcy or skipped town. Could the municipality have done anything to protect its financial interests? Definitely. Below we offer a few strategies that a municipality might consider – before signing its next contract – to help protect its financial interests when contracting to purchase items during these unique economic times. Consider Paying Less Up Front. A municipality might attempt to negotiate a different payment structure in the contract itself. For example, instead of agreeing to pay 80% of the purchase price up front as in the hypothetical above, propose paying less up front – say, 30%. This means the municipality gives less money up front, and therefore, will have less at stake if things go south with the other company later on. Consider Paying More Installments Over the Term of the Contract. This concept works off the same idea as the above recommendation. In the hypothetical above, the municipality agreed to pay 80% up front, leaving 20% due on delivery. By paying over threequarters of the contract price up front, the municipality increased the amount it had at risk up-front. In other words, they had much more at stake earlier on September 2010 page 20
in the contract. The municipality might well consider negotiating to pay less up front – and therefore minimize its risk up front. For example, the municipality may consider setting up additional installments over the term of the contract based on actual progress in construction – such as, agreeing to pay one-third up front, another one-third three months later (half-way through the expected term of the contract), and the remaining one-third upon delivery and acceptance. This would decrease the amount the municipality has at risk during the contract term while it is waiting for delivery of the item it is purchasing. Consider Using an Escrow Account to Hold Money Until Delivery. The above two recommendations would surely minimize risk. But those recommendations still have the municipality paying money directly to the other party to the contract before receiving the item it is purchasing.
So those two recommendations still leave open the possibility of risk: if the other party to the contract goes out of business or files bankruptcy, the municipality may face an uphill battle to get back the money it paid out or actually receive the item it contracted for. A municipality looking for an even more conservative approach that further decreases this risk of loss might consider a third option – using an escrow account for payments. An escrow account is a separate account – like a special savings account – that is not controlled by any of the contracting parties. It is an account set up with a third party, such as a bank, and is segregated and held for a specific purpose – like to hold the money the municipality pays under a contract until the subject of the contract is completed and delivered to the municipality. Each escrow account is overseen by an escrow account agent, who could be a high-level bank manager.
Protecting a Municipality’s Financial Interests When Entering Into a Contract – New Considerations for Today’s New Economic Climate By: Ron Richards and Patricia Scott, Foster, Swift, Collins & Smith, PC
So a contract incorporating an escrow account would work something like this. The parties still enter into a written contract that sets out the terms of the agreement, such as total purchase price, installment amounts and deadlines, deadline to deliver the item purchased, etc. But the parties also would set up the escrow, containing required detail under applicable rules and laws that would likely include the location of the account, the escrow account manager, and the conditions to release the money in the escrow account. The escrow method has some nice benefits if the other contracting party files bankruptcy. First, the money in the escrow account, unlike money paid to the other contracting party in cash, would not automatically become property of the bankruptcy estate if there was a bankruptcy filing. Instead, if the conditions to release the escrow funds have not been met, then the Trustee likely would have no rights to the escrow account funds. Second, even if the other contracting party files bankruptcy, there is still the possibility that the item contracted for could be finished for the municipality, which is usually the goal of these types of contracts. This possibility exists since the Trustee of the bankruptcy estate steps into the shoes of the party filing bankruptcy. The Trustee may opt to fulfill the conditions of the escrow agreement. In other words the Trustee may, depending on many other factors at issue in the bankruptcy case, accept the contract, decide to complete the work required under the contract, and deliver the item to the municipality in exchange for the escrowed funds. So depending on how the underlying written contract and escrow agreement are written and other contract law and bankruptcy principles, the municipality may be able to get its contracted-for item. Some might wonder if the escrow approach might offend the party with whom the municipality seeks to do business. Of course, all municipal contract decisions are ultimately public policy decisions that must weigh several factors and consider many different dynamics. Yet today’s economic climate is unique and municipalities’ budgets are as fragile as ever. For better or for worse, gone are the days in which a municipality can automatically count on every entity with whom it contracts to be in business at the end of the contract. These realities justify municipalities considering the recommendations above to help protect their financial interests.
New Report: Tips are the Most Effective Control Against Fraud By: Hungerford, Aldrin, Nichols & Carter, PC
sends a strong signal about your firm’s intention to fight fraud no matter where it originates. Employees must perceive a high probability that fraudulent activity will be detected. That “perception of detection” is often sufficient enough to dissuade them. Surprise employees and management. To further heighten the perception of detection, consider hiring your accounting firm to institute unannounced audits of key areas. Surprise visits can be unsettling, yet they can uncover frauds that might have remained undetected until they reached unimaginable proportions. Surprise audits
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should be unpredictable.
Force employees to take vacations. It’s not unusual for a seemingly dedicated and loyal employee to commit fraud. Many occupational frauds require extensive maintenance in order to avoid detection. You can help uncover fraud before it reaches critical mass by insisting that all employees use their allotted vacation time. If an employee taking time off suddenly returns having “forgotten” to do something, review in detail what that individual felt compelled to do. It could be a case of forgetting to complete a critical transaction,
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but it may also mean a fraud scheme was in play that required intervention to remain hidden. Accounting and legal firms often work well together putting these controls into effect. It can potentially save your company thousands, if not millions, of dollars in losses and put everyone on alert that fraud will not be tolerated and the consequences will be severe.
This article was reprinted with permission. It was originally published in the Hungerford, Aldrin, Nichols & Carter, PC e-newsletter, dated August 30, 2010.