Summary

The Public Act 245 of 1999 (effective January 1, 2000) was signed on December 28, 1999 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.

State Construction Code Act (PA 245 of 1999)

The Department of Licensing and Regulatory Affairs 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 Audits of Local Units of Government Manual must be adhered to in the performance of the audit. The audit is filed on the Michigan Department of Treasury online portal, 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 Department Fund number 249 (special revenue fund) for accounting of revenues and expenditures under Public Act 245 of 1999. Revenues from user fees should be recorded as "Charges for Services" account number 627.

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 capital asset accounts as needed and provided for in the Uniform Chart of Accounts.

Below are several questions that Treasury received related to State Construction Code Act ( PA 245 of 1999).

What is the effective date of the Act?
1. The effective date for implementation of the accounting requirements is January 1, 2000. The act was signed on December 28, 1999 by Governor Engler and took immediate effect.
What does the act state related to the accounting for the fees? Where can I obtain a copy of the act?
1. The only section of the act that applies to the accounting is section 22. The entire act is fifteen pages long and may be obtain from the Michigan Compiled Laws website (http://www.legislature.mi.gov/).
  1. Section 22 states (new language is in italics):
    1. The legislative body of a governmental subdivision shall establish reasonable fees to be charged by the governmental subdivision for acts and services performed by the enforcing agency or construction board of appeals under this act, which fees shall be intended to bear a reasonable relation to the cost, including overhead, to the governmental subdivision of the acts and services, including, without limitation, those services and acts as, in case of an enforcing agency, issuance of building permits, examination of plans and specifications, inspection of construction undertaken pursuant to a building permit, and the issuance of certificates of use and occupancy, and, in case of a board of appeals, hearing appeals in accordance with this act. The enforcing agency shall collect the fees established under this subsection. The legislative body of a governmental subdivision shall only use fees generated under this section for the operation of the enforcing agency or the construction board of appeals, or both, and shall not use the fees for any other purpose.
Is the establishment of a separate fund mandatory?
1. Yes, unless your local unit's fee structure is not intended to recover the full cost of the enforcing agency and your local unit has the ability to track the full costs and revenues of this activity without creating a separate fund.
2. The Act 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 that issues building permits; examines plans and specifications; inspects construction pursuant to a building permit; and issues 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. It also states fees shall not be used for any other purpose.
3. Based on these legal provisions, each local unit's accounting system must be able to accomplish the following three objectives:
  1. The accounting system must accumulate the total revenues generated under this Act;
  2. The accounting system must accumulate the total costs of this activity, including overhead costs; and
  3. The accounting system must accumulate the cumulative excess revenues over or (under) expenditures from January 1, 2000 forward.
4. The Department of Treasury feels that the most appropriate manner to accomplish this is to create a separate fund and allocate all related overhead costs to this fund. In that way, the resulting fund balance will be separate from the General Fund.
5. The Department of Treasury will allow local units to continue to account for this activity within the restricted fund balance in the General Fund, as long as the local unit's fee structure is not intended to recover the full cost of the enforcing agency and the local unit has the ability to track the full costs and revenues of this activity without creating a separate fund. The annual financial statements must present a schedule of revenues and expenditures (including overhead). This schedule may be presented in the footnotes, or as supplemental information.
Is it appropriate to use an enterprise fund rather than a special revenue fund?
1. Yes, paragraph 67 of GASB Statement 34 states that "enterprise funds may be used to report any activity for which a fee is charged to external users for goods and services. Activities are required to be reported as enterprise funds if..." certain criteria is met. Use fund 549 for this purpose.
What happens to any excess fees collected?
1. Any excess fees collected (excess of revenue over expenditures) must be included in the separate fund balance or retained earnings of the separate special revenue fund or enterprise fund.
Since the effective date is January 1, 2000, are there problems for local unit of governments with March, June, or September year-ends that have surplus revenue?
1. Yes. Since the effective date is January 1, the local unit must calculate the revenue over expenditures from January 1 to the fiscal year-end and transfer the balance to the new fund. If the unit of government has not established a separate fund, any excess revenue over expenditures should be shown as "restricted fund balance" in the General Fund at the end of the fiscal year ending in 2000. The new fund should be established and the amounts included in "restricted fund balance" transferred to the new fund at the beginning of the fiscal year 2000.
2. If the local unit's calculation results in an excess of expenditures over revenues for the period January 1, 2000 to the end of the fiscal year, the new fund should not begin with a deficit. If the local unit's fee structure is intended to recover the full cost of the enforcing agency, a General Fund appropriation may be necessary. Also, refer to the answer to question 3.
Can the General Fund make an appropriation to the fund to make up a shortfall?
1. Yes.
Must the new fund be budgeted?
1. Yes, an operating budget must be established for the new special revenue fund in accordance with the Uniform Budgeting and Accounting Act.
If our local unit has a biennial audit in accordance with statute, is an annual audit required?
1. No, the audit of the Building Department Fund (249) is in conjunction with all funds of the county or local unit as required by the provisions of PA 2 of 1968, as amended. If the audit is required biennial, then the audit of the fund is biennial.
2. The requirements of the Bulletin for Audits 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.

If you need further assistance please call (517) 335-7469 or write our office: Michigan Department of Treasury, LAFD, P.O. Box 30728, Lansing, Michigan 48909-8228 or email our office at TreasLocalGov@michigan.gov.

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Numbered Letter 2000-02 (Revised)