March 31, 2000

To:    County Treasurers, City Treasurers, Township Treasurers, Village Treasurers, Michigan
         Municipal League, and Michigan Township Association

From:    Richard L. Baldermann, CPA, CGFM
             Administrator, Local Audit and Finance Division
             Bureau of Local Government Services

RE:    State Construction Code Act

The Public Act 245 of 1999 (effective January 1, 2000)  was signed on December 28, 1999 by Governor Engler to amend the State Construction Code Act (Public Act 230 of 1972) which provides for statewide application of the Act and the State Construction Code. Public Act 245 of 1999 specifies that the statewide code would apply to the plumbing, electrical, mechanical, and building codes (in the Administrative Code) only after rules promulgated under the Act to update each code are filed with the Secretary of State after January 31, 2000.

Department of Consumer and Industry Services has been given the responsibility to provide oversight of the State Construction Code Act. The accounting within the local unit of government is the responsibility of the Treasury Department under Public Act 2 of 1968, as amended.

The Act in Section 22 requires that the legislative bodies of the local government establish "reasonable fees" which "bear a reasonable relationship" to the cost of operating the enforcing agency. Typically, the enforcing agency is the building department or planning department issuing building permits; examining plans and specifications; inspecting construction before issuing building permits; and issuing certificates of use and occupancy. The Act states that the use of fees generated under this section can only be used for: the operation of the enforcing agency, the construction board of appeals, or both and shall not be used for any other purpose. In the past, the accounting was generally established as a General Fund activity. Because Public Act 245 of 1999 requires that these fees only be used for a specific purpose, a separate special revenue fund must be established to account for the enforcement activities.

Section 22 states that fees are to be based on the direct costs of the enforcing agency and the indirect cost of operations, known as "overhead." Overhead costs will usually include common costs such as telephone service, building maintenance, utilities, general insurance and office supplies. Other indirect costs may include the allocation of the cost of salaries and fringe benefits related to certain support activities, such as human resources and the accounting staff. However, the allocation of costs should not include those offices required by statute, such as the clerk and treasurer. Since a local unit of government would incur those costs, regardless of the decision to enforce the state building code, they do not represent appropriate allocable costs.

Cost allocation is a process by which costs not directly identifiable with a service are assigned to those services in a logical and consistent manner. This allocation is necessary to accurately determine the full cost of each service. To recover the cost of operations, revenue-producing activities must carefully allocate all expenses to be recovered. Where possible, the costs directly identifiable should be assigned to the individual service. However, many costs associated with a service cannot be directly identified with it, which makes it necessary to allocate indirect costs. To do this, revenue-producing activities must establish a logical and consistent basis for allocating costs. It is very important that all direct costs of operating the enforcing agency be charged to the budget of the building department. Many local units do not allocate fringe benefit costs and payroll taxes to the user department. To properly calculate the cost of this function, all direct costs such as salaries and wages must be charged to the enforcing agency, including fringe benefit costs and payroll taxes used to provide the service. We recommend that the local unit of government review prior years' expenditure reports to determine the actual cost of operating the building and inspection department in helping to establish fees which are "reasonable."

Audits

An annual audit is required. The audit is to be performed in accordance with generally accepted auditing standards, and the financial statements are to be in accordance with generally accepted accounting principles. The audit of the Building Department Fund (249) may be in conjunction with all funds of the county or local unit and in compliance with the provisions of PA 2 of 1968, as amended. The requirements of the Bulletin for Audit of Local Units of Government must be adhered to in the performance of the audit. Two copies of the audit are filed with the Michigan Department of Treasury, Local Audit and Finance Division in accordance with the provisions of PA 2 of 1968, as amended.

Accounting

The following procedures should be adopted to provide uniformity in accounting for revenues and expenditures resulting from the enforcement of the State Construction Code Act of 1999 (PA 245 of 1999).

Special Revenue Fund

Building Inspection Department--fund number 249 (special revenue fund) for accounting of revenues and expenditures under Public Act 245 of 1999. (Following is a summary to be inserted in your Chart of Accounts notebook.) Revenues from user fees should be recorded as "Charges for Services" account numbers 607 through 625.

Activities

Expenses should be charged to Activity 371--Building Inspection Department or 372 to 399 for various inspection activities that may be assigned as needed.

Accounts

Detailed asset, liability, revenue and expenditure accounts as needed and provided for in the Uniform Chart of Accounts. Detailed fixed asset accounts as needed and provided for in the Uniform Chart of Accounts.

If you have any questions, please call  (517) 373-3227 or write: