Tuesday, May 21, 2024

Sunlight is the best disinfectant: A look at reimbursements

I wish I could say that exploiting the state reimbursement system is strictly a Republican phenomenon. Between Mark Martin and the legislators exposed as salary padding hypocrites Wednesday, one might even get that impression. The fact of the matter, however, is that salary padding under the guise of “reimbursements” is about the only thing that has bi-partisan support, year in and year out; according to records requested by Blue Hog Report, only five legislators – four Democrats and one Republican – are not receiving statutory reimbursements this year.

Basically, the system works like this: A legislator uses an existing business; creates a new business, usually by calling him- or herself a consultant; or, in particularly egregious cases, simply has a spouse act as a third-party biller. The legislator then contracts with the billing party – frequently resulting in a legislator contracting with himself – to provide “legislative support services” for a fixed amount each month. At the end of each month, regardless of whether the legislature was in session or whether a newly elected legislator had even been in office for the entire month, an invoice is submitted, billing the State for the contract amount. Most invoices are little more than a single line entry for “office expenses” or “constituent services,” with no explanation. A check is then cut to the billing party. Lather, rinse, repeat.

This scheme would be questionable enough on its own simply for paying the legislators a flat-rate “reimbursement” that has no correlation with actual expenditures. The sense that something isn’t quite right gets much stronger when you consider that it is designed specifically to circumvent Amendment 70’s restriction on legislators’ receiving additional income, and it does so in the most dishonest way imaginable: by allowing legislators “rent” themselves part of their home or business. The shadiness meter goes all the way to 11, however, when you realize that this constitutional end-run was put in place by the same legislature that submitted Amendment 70 to the voters, and they passed it at the very same time they were proposing Amendment 70.

Born of Anger: Amendment 70

On November 1, 1990, Arkansas’s then-Attorney General, Steve Clark, was convicted of theft by deception for his misuse of a state-issued credit card to the tune of $28,564 in state money on non-business or personal expenses from 1986 to 1990. Over the course of his trial, it was discovered that Clark had used the card to pay for dates with five different girlfriends, private vacations, and even some part of his gubernatorial campaign. By November 3, Clark had resigned his position as Attorney General.

Public outrage lingered, however, even after Clark’s resignation; his actions led directly to the filing House Joint Resolution 1018 in 1991 to amend the state constitution to prevent a recurrence of expense abuse by elected officials. That resolution was submitted to the voters in the 1992 general elections, where 60.4% of the electorate voted in favor of it, creating Amendment 70, which states that members of the Executive branch and of the General Assembly receive a set salary and no member can receive any other income from the state (or “for service in the General Assembly”), whether in the form of salaries or expenses. As applicable here, section 1(b) of Amendment 70 reads:

Except as provided herein, no member of the General Assembly shall receive any other income for service in the General Assembly, whether in the form of salaries or expenses, including, but not limited to, public relations funds. Provided further, that no member of the General Assembly shall be entitled to per diem unless authorized by law, or to reimbursement for expenses or mileage unless authorized by law, documented, and reasonably related to their official duties. (emphases added)

Clearly, then, the purpose of Amendment 70 was clear: the people of Arkansas wanted legislators to be paid only the statutorily defined salary for that office, but the people recognized that legislators should be able to be reimbursed for actual, documented, work-related costs incurred.

Subverting the People’s Will: Statutory Reimbursements

Without so much as a hint of irony, at the same time that they were working on the joint resolution that would become Amendment 70, both the House, in House Bill 2122, and the Senate, Senate Bill 736, were also working on bills that would lay the foundation for widespread abuse of the system. As codified in Title 10 of the Arkansas Code, a Representative or Senator may seek “reimbursement for legislative expenses incurred as authorized by law by filing a signed statement of expenses incurred during each calendar month.”

To that end, each chamber was empowered to “determine, within the limitations of the Arkansas Constitution and Internal Revenue Service guidelines, which expenditures constitute ordinary and necessary expenses and the amount of per diem and mileage reimbursement to be paid from Senate appropriations.”

Had the lawmaking stopped there, everything would have been fine. The language about reimbursements being made “within the limitations of the Arkansas Constitution” should have insured that the edict of Amendment 70 that the expenses be “documented” was followed. Unfortunately, the legislature went further, and created flat-amount “reimbursements” and they allowed legislators to choose which of three amounts they wanted to receive, without providing any guidance on how to choose. As originally enacted, A.C.A. § 10-2-212 (c) read:

Except as otherwise provided by law, the maximum amount of reimbursement for legislative expenses incurred by members of the General Assembly shall be, at the option of each member, either five thousand eight hundred twenty dollars ($5,820) per year, six thousand five hundred forty dollars ($6,540) per year, or seven thousand two hundred dollars ($7,200) per year.

No requirements for documentation of costs incurred or substantiation for why a legislator chose a specific reimbursement level were imposed. No criteria for what constituted an expense that was “reasonably related to their official duties” were delineated. The statute only said, effectively, just pick one of these amounts — $485, $545, or $600.  Thing is — and this bears remembering throughout this post — the statute as written sets the chosen amount as the maximum that a legislator could receive; there is absolutely nothing in this law that requires a legislator to bill the state for 1/12th of the maximum every month.

The 1991 legislature was not done circumventing the possible impact of Amendment 70, however. Despite the amendment’s requirement that mileage reimbursements be documented, the legislature added subsection (d)(1), which reads:

Any member of the General Assembly may elect not to receive per diem and mileage payments for attending legislative sessions and for attending legislative activities and in lieu thereof be reimbursed up to an additional four thousand eight hundred dollars ($4,800) per year.

This is currently applied only to legislators who live within 50 miles of the Capitol. The cynical person might think that is because anyone living more than 50 miles away from Little Rock would actually bring in more money by tracking mileage and getting reimbursed for their actual amount.

Even at this point, the 1991 legislature was not done carving exceptions to the rules, at least as those rules applied to them. HB 2122 and SB 736 also created “Additional compensation for committee chairs, vice chairs, and cochairs,” now codified as A.C.A. § 10-2-215.

In addition to the expense allowance provided by § 10-2-212 and all laws amendatory and supplemental thereto, the chairman of each of the standing, select, and joint committees of either house of the General Assembly and the co-chairman of any committee of the General Assembly which does not function during the legislative session shall be eligible to receive an additional one thousand eight hundred dollars ($ 1,800) per year.

Quite literally, by the time Amendment 70 was approved by the people of Arkansas in November of 1992, the very legislature that proposed that amendment to the people had already sowed the seeds that would make the amendment’s strong language illusory at best.

Too Much is not Enough: How Does Your Greedy Garden Grow?

In 1995, the Arkansas Senate passed SB 226. Among other things, this bill increased the maximum amount under A.C.A. § 10-2-212(c) from $7,200 to $9,000. Two years later, the Senate acted again, passing SB 480, which increased the highest amount under A.C.A. § 10-2-212(c) to $9,600 and increased the in-lieu-of amount in A.C.A. § 10-2-212(d) from $4,800 to $6,800.

It was in 2007, however, when the biggest changes occurred. Under SB 785, the maximum under A.C.A. § 10-2-212(c) shot up to $14,400; the in-lieu-of amount in A.C.A. § 10-2-212(d) was increased to $10,200; and several substantive changes were made to A.C.A. § 10-2-215, resulting in that bill providing $3,600 for committee chairs, vice chairs, co-chairs, the Senate President Pro Tempore designate, and other similar positions.

At this point, the law had been amended three times, and only the maximum amount had been touched by any of the amendments.  So, as a legislator, your options were (a) pick a lower maximum that might actually approximate your costs in a given month or (b) take the maximum amount that gets amended fairly frequently so you can exploit this glaring hole in the system every month.

Go ahead and guess which route every legislator took.

Somewhat shockingly (or, perhaps, disgustingly), the bill contained both a provision that would make it retroactive to March 1, 2007 (it was passed on March 16) and an emergency clause that would give it immediate effect rather than require 90 days’ time after the session ended. The emergency? That the statute, which provided for undocumented expenses to be “reimbursed” a flat amount regardless of actual expenditures, had not been updated since 1997. No claim was made that the amounts set in 1997 were inadequate; it was only stated that they were being updated to reflect inflation and the act was “necessary for the preservation of the public peace, health, and safety.”

Apparently, the state would have descended into total chaos if the legislature had to wait until July to give themselves extra money.  It was that important.

The Scope

To get a sense of just how prevalent legislators’ choosing the maximum statutory reimbursement and renting part of their home or business to themselves was, we requested reimbursement records from 2007 to present from both the House and Senate.  The 2007 – 2008 data showed only two legislators who did not take statutory reimbursements, Representatives David Johnson (D-38, Little Rock) and Jim Medley (R-64, Fort Smith).

The rest of the legislators not only took statutory reimbursements, but every single one of them elected to take the maximum amount.  After the statute was amended and given retroactive effect, every single legislator who was receiving statutory reimbursements went back and filed an amended legislative services contract to recoup the difference.  (Changing the terms of a signed contract simply because a new maximum amount is created stretches the concept of a “contract” to the point of absurdity.  Apparently this did not bother anyone.)

Similarly, the 2009 – 2010 records revealed only two legislators who were not taking office reimbursements, Senator David Johnson (D-32, Little Rock) and Representative Nate Steel (D-21, Nashville). Again, all other legislators not only took reimbursements under the statute, but took the maximum amount.  Also as in 2007 – 2008, more legislators had their spouse simply bill them, with no pretense of an actual business being involved, than had even a nominal third party do the billing.

Surprisingly, the 2011 numbers are slightly better, with five legislators apparently not receiving office reimbursements — Senator David Johnson and Representatives Nate Steel, Duncan Baird (R-95, Lowell), Jody Dickinson (D-58, Newport), Leslie Milam Post (D-83, Ozark). I am tempted to chalk this up to my requesting the House records very early in February, before some of these lawmakers submitted the initial paperwork, as Reps. Baird and Dickinson previously received monthly reimbursements.  For that reason, we have requested updated records, and I have emailed all the legislators in question. The only confirmations thus far are Sen. Johnson and Rep. Steel.

Assuming for the moment that all five of the above legislators are not receiving monthly checks, the numbers are nonetheless staggering: In January 2011 alone, the State of Arkansas paid $206,750 to legislators for reimbursements under A.C.A. § 10-2-212 and A.C.A. § 10-2-215.  That is, of course, $2,481,000 per year, and that is without accounting for Rep. Bruce Cozart (R-25, Hot Springs) if he chooses to receive the extra salary.

And, if nothing else gets through, let’s be clear about one thing: it is extra salary, at least for the legislators who are billing the state in a way that the money comes to them or their spouses.  (I include the spouses in this because (a) the money is still going to the same household, which violates the spirit of Amendment 70, if not the letter, and (b) claiming that the money isn’t salary because money that would be illegal for you to accept is channeled through an intermediary to be made legal…well, we probably don’t want to go down that route.)

Not Exactly Running A Tight Ship

While stressing that, other than the previously mentioned Representatives, everyone in the House is receiving the maximum statutory reimbursement every month, there are certain lawmakers who are billing the state through a business that is not exactly … um …

  • Fred Allen (D-33, Little Rock) — $2350, Destiny Developers, LLC, which was formed by Allen in 2002 and had its LLC status was revoked at the end of 2010.
  • Billy Gaskill (D-78, Paragould) — $1500, Gaskill Investments, LLC, which was formed in 2006 shortly after Gaskill was elected, had its LLC status revoked in 2008, and has not been renewed since that time.
  • Ed Garner (R-41, Maumelle) — $2350, Mama’s Manna, Inc., of which he is President and owner, and which had its incorporated status revoked in 2009.
  • Clark Hall (D-13, Marvell) — $1500, Russell Hall, LLC, which technically does not exist, but which I think is a reference to this.
  • Jon Hubbard (R-75, Jonesboro) — $1200, Masree LLC, which does not exist.
  • Lane Jean (R-4, Magnolia) — $1350, Lane Jean Farm & Timber, which was created in 2007 and revoked in 2008.
  • Josh Johnston (R-59, Rose Bud) — $1200, JLC, LCC, which does not exist, but which seems to refer to JLC Quarries, LLC, which was created in 2007 and revoked in 2008.
  • Bryan King (R-91, Green Forest) — $1500, Bryan King LLC, which was created in February 2007 shortly after King took office and was revoked in December 2008.
  • Buddy Lovell (D-56, Marked Tree) — $1500, Budon Consulting, which was created in 2005 and is currently listed as “Dissolved.”
  • Gary Stubblefield (R-67, Branch) — $1200, K&GQ LLC, which does not exist.
  • Jeff Wardlaw (D-8, Warren) — $1350, J & B Care, Inc., which the Secretary of State’s office shows as “Not Current.”

Other trends emerge when examining the records as well.  Many of the businesses were created between the period when the legislator was first elected and the end of his or her first month in office.  An inordinate number of “consultants,” nearly all of whom use a home address and most of which are not listed in the yellow pages, seem to be in the legislature as well.  These trends are visible regardless of which chamber one examines or, at least back through 2007, which year one chooses to look at.  I suppose it is nice to know that, even in these divisive political times, blatant salary padding is one area where a supermajority is easy to find.

500-lb Gorillas: Extra Salary & Taxes

Salary padding, of course, presents a legal issue.  As already noted, Amendment 70 explicitly prohibits legislators from receiving additional income from their service in the General Assembly. Yet, to the extent that the reimbursements claimed under the statute go beyond actual costs incurred in a given month, what could you call that money other than “income”? After all, a “reimbursement,” by definition, is repayment for costs incurred. Where costs were not incurred, or where the amount received exceeds those costs, the additional money is income, according to both the IRS and common sense.

What does receiving extra income under these statutes say to Arkansans, given both when the laws were put in place and the continued avarice and greed displayed in amending and abusing the system? More importantly, what can and should be done in response? It is an understatement to suggest that some changes are needed in how expenses are documented and repaid, of course. That is a given. What is not given, though, is how quickly these changes will be made; that answer almost certainly depends on how Arkansans react to the salary padding.

Speaking of the lack of any required documentation, that presents its own problems. The public has no way to verify just how much, if any, of the money received each month is technically a reimbursement and how much is income. Furthermore, by having no accountability or documentation, 100% of the reimbursements received is subject to be taxed as ordinary income. Reimbursements are only non-taxable when there is specific accounting of the amount spent and the amount reimbursed. Even where there is accounting and documentation, unless the overage is returned each month, the IRS treats the extra money as income because it is clearly income.

I have no way of knowing which legislators pay taxes on the money received under these statutes, nor do I particularly care.  That is something that is between them and the IRS.  That said, to the extent that some of them are not paying taxes on it, that might be something that they want to address sooner rather than later.

Parting Shot: A Note of Thanks

I would be remiss if I ended this post without mentioning Rep. Steel and Sen. Johnson a second time.  In an environment where so many people are getting the maximum extra money that they can, these two (and possibly Reps. Baird, Post, and Dickinson) are not.  Both as a constituent of Sen. Johnson and, because Sen. Johnson and Rep. Steel are attorneys, as a fellow member of the bar, this little bright spot is most welcome.  Thank you.

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