Before July, 2012, the residents and businesses of West Buechel, Kentucky paid 5% of all insurance premiums as a tax to the City. Five percent is the same rate that Louisville Metro residents pay as an insurance premium tax.
In 2011, West Buechel’s General Fund bank balance had increased from $1.5 million on January 1, 2011 to $1.8 million on December 1, 2011.
With that excess of cash on hand notwithstanding, in late 2011 former West Buechel Mayor Sharon Fowler proposed doubling the insurance tax from 5% to 10%. According to the City’s audited Financial Statements for FY 2011-2012, West Buechel’s spending for the year was only slightly more than $1 Million. The City had nearly two whole years of operating expenses already in the bank when Mayor Fowler proposed her tax increase.
At its December, 2011 regular meeting, the West Buechel City Council rejected Fowler’s proposed tax increase.
In January, 2012, Fowler unilaterally implemented her insurance tax increase anyway . . . by highly questionable means.
Background – Kentucky Local Government Insurance Premium tax
Local governments in Kentucky can impose a tax on insurance premiums. This tax is administered, in part, by Kentucky’s Insurance Commissioner. The Commissioner’s office communicates the different tax rates from the many different local governments to the several hundred insurance companies that write policies in Kentucky. The Commissioner also provides geo-location support to identify which policy holders are in what jurisdiction. The insurance companies are responsible for reporting and paying the taxes collected directly to the local governments on a quarterly basis. Kentucky law allows the insurance company to collect a small fee from their respective policy holders to cover the expense of collection.
The legislative body of each local government sets the tax rate for different types of insurance. In a city with the Mayor-Council form of government, the Insurance Premium Tax rate is set by a duly enacted ordinance. The tax rate can be changed by ordinance, and if timed properly, the new tax rate goes into effect on July 1, at the beginning of a new fiscal year.
If the City Council enacts an ordinance establishing this tax or changes the percentage rate of taxation, the City Clerk sends the Ordinance to the Kentucky Insurance Commissioner who then is responsible for communicating the new tax rate to each of the insurance companies.
From a local government’s point of view, it is easy money. With a mere stroke of the pen the checks start to arrive in the mail. Most tax payers don’t read or understand the fine print on their insurance policy declarations. People have become accustomed to regular increases in insurance premiums and a 5% increase in their monthly insurance payment would likely be blamed on the insurance company.
Most would not notice that the increase resulted because of their local city leaders raising taxes.
How did a tax increase rejected by West Buechel’s City Council go into effect anyway?
On January 16, 2012 a former West Buechel Clerk-Treasurer sent a fax to the Kentucky Insurance Commissioner’s office. That fax included a copy of a document she claimed was City Ordinance 162 dating from 1997. (see below)
The story was that Ordinance 167 increased the insurance tax to 10%, it was actually enacted in 1997, but the City had never put it into effect. Fifteen years later, in 2012 and one month after the City Council defeated the tax increase, the Fowler administration suddenly “found” this long lost Ordinance from the 20th Century.
What great good luck! Who would believe such a remarkable coincidence?
Apparently, nobody in a position of authority seriously questioned it. West Buechel’s City Council did not question it and Kentucky’s Insurance Commissioner did not question it. At a later City Council meeting, one West Buechel resident did ask about the tax increase and was given the story about the previously enacted but not implemented Ordinance from 1997.
But, the copy of the Ordinance faxed to the Insurance Commissioner has all the outward appearances of a blatant forgery.
Page one and two of “Ordinance 162” were clearly produced on a laser printer typically used in West Buechel City Hall in 2012. Page three of the hoax document, with the 1997 dates and signatures was printed on a DOT MATRIX PRINTER. One document supposedly produced by two totally different types of printers.
It is amazing that such an implausible story would go unquestioned. It is doubly amazing that such an obviously faked document could go so long undetected.
When the State Auditor looked at selected West Buechel practices during a special audit conducted in 2015, attention was drawn to the 2012 tax increase. The Special Audit Report dated December 10, 2015, included this Finding and Recommendation:
Finding 14: In 2012, the former Mayor submitted a 1997 City ordinance to the Department of Insurance to increase the City’s insurance premium tax from 5 percent to 10 percent after the City Council voted down this proposed increase in 2011.
To facilitate an increase in the City’s insurance premium tax from five percent to 10 percent, the City’s former Mayor provided a 15-year old ordinance to the Department of Insurance (DOI) in January 2012. The December 6, 2011 City Council meeting minutes document the former Mayor’s motion to increase the insurance premium tax to 10 percent failed to be passed by the City Council. The meeting minutes do not document that the City Council was informed of a 1997 ordinance that raised the rate to 10 percent but was apparently never implemented. At a subsequent City Council meeting on February 7, 2012, it is documented in the City Council meeting minutes that a resident asked the former Mayor about the insurance premium tax increase. The minutes further document that the “[m]ayor stated we already had the ordinance in place so we proceeded with the ordinance.”
Recommendations: We recommend that the City work with DOI to further investigate this issue to ensure the legality of this tax increase and take whatever action, if any, is necessary to appropriately address. We further recommend the City Council review this issue to determine the desired City insurance premium tax rate to be established moving forward. This issue was referred to DOI to consider whether further investigation is warranted.
The Richards administration has not followed through with the Auditor’s recommendation.