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Cities’ lobbyist stays below legal scrutiny

Agency not subject to open government or non-profit rules

– As Indiana continues its yearslong push to reform how its local governments function, one of the most important voices in that discussion has been the Indiana Association of Cities and Towns.

The IACT (often referred to as “EYE-ACT”) is essentially a trade group for municipal officials, lobbying the General Assembly on any issue that affects cities or towns, such as tax policy, annexation and housing inspections.

IACT calls itself “the official voice of municipal government in Indiana.”

But while the towns and cities that make up the organization are subject to transparency laws such as the Open Meetings Act and the Access to Public Records Act, and their budgets are subject to review by the Indiana Department of Local Government Finance and their spending is subject to auditing by the State Board of Accounts – IACT itself is not subject to any of those.

And while a registered non-profit organization would be required to release its annual tax forms to the public, giving insight as to where its money comes from and how it is spent, and who the officers are, IACT is not a registered non-profit, either.

A registered non-profit would have to be incorporated in Indiana, giving the public a view of who started the organization, who runs it and how to contact them.

But IACT is unincorporated.

Being a non-profit would also make it subject to strict federal rules on lobbying and campaign finance activities. According to state records, IACT spent $96,852 on lobbying the General Assembly in 2010.

But if you want to know how much of IACT’s budget that constituted or where the money came from, IACT is under no obligation to tell you.

“I guess it depends on who was asking,” IACT Executive Director Matthew Greller said. “I’ve never had the question, I’d have to see what the circumstances were and run it past the board and see what the result was.”

Legal netherworld

Greller said that in the 1950s, IACT was designated by the Internal Revenue Service as a Sec. 115 organization.

But Sec. 115 organizations are government bodies: The tax code says those groups are not political but perform “an essential government function” and that their income comes from a public utility or “the exercise of an essential government function” and flows to a state or local government. Fort Wayne’s now-defunct City Power & Light would be a good example.

“We’ve asked our legal counsel about it over the years. I know I’ve done it twice in the last 10 years,” Greller said. “Do we need to be re-classified? They’ve said no both times.”

Greller said most, but not all, similar organizations in other states are also Sec. 115s and that designation, “has been the topic of discussion among our counterparts around the country.”

While IACT works closely with state and local governments, no one is arguing it performs “an essential government function” or that its income comes from a public utility or governmental functions.

Greller said about 35 percent of IACT’s income comes from the voluntary dues its municipal members pay. The rest comes from advertising, sponsorships and endorsements the group sells, mostly to vendors looking to do government business.

The city of Fort Wayne paid $40,624 to the association in 2011, according to the city’s online check registry.

That means one of the biggest voices in statewide decision-making – funded by a mix of tax dollars and companies seeking tax dollars and tackling major issues such as property tax reform – has no requirement to give Hoosiers even the most basic of information about their operations, even though their influence could ultimately affect every resident in Indiana.

“They are a huge voice in the Statehouse, not just on government reform and tax issues,” said Julia Vaughn, policy director of Common Cause Indiana, a non-partisan group aimed at citizen participation in the political process. “They were here (Thursday) morning for the debate on conflict of interest and nepotism; they’re a very big player in that debate.”

In Indiana, governmental bodies and non-profits that spend more than $250,000 a year in government money are subject to audits by the State Board of Accounts. But SBA supervisor Charles Pride said the agency has never audited IACT and does not appear to have authority to do so.

“We work with them closely,” Pride said, on efforts to educate municipal officials on what they’re required to do to meet statutory requirements. But he said the SBA does not scrutinize their spending.

Bodies that collect property taxes are subject to budgetary review by the Department of Local Government Finance. But IACT does not collect property taxes.

“We’re not issuing determinations on their budget or including them in our budget process,” said Micah Vincent, Department of Local Government Finance general counsel. “This is new to me.”

So how does IACT exist somewhere between governmental body and a private one?

“It is definitely an intriguing question,” Vincent said.

It’s also a troubling one, according to transparency advocates.

Scrutiny in Kentucky

“It’s essentially a blind spot,” said Kristin McMurray, managing editor of Sunshine Review, a Chicago-based non-profit dedicated to state and local government transparency. “There’s no transparency; there’s no accountability.”

McMurray confirmed that most similar groups across the country also operate as Sec. 115s, despite not being governmental bodies. That means the public has no way to know whether they approve of how municipal leagues are behaving.

“There’s no public meetings, you can’t (file a Freedom of Information Act request),” McMurray said. “It’s not up to you and me to decide whether these organizations are good or bad, it should be all of the citizens who decide that. And that means having access to their financial documents to see what they’re doing.”

McMurray said the Sunshine Review recently tried to examine these groups but had trouble even finding out how much in dues cities were paying.

In Kentucky, both the Kentucky Association of Counties and the Kentucky League of Cities are now subject to open meetings and open records laws, as well as other requirements, after a 2009 series of articles by the Lexington Herald-Leader showing the two organizations spent hundreds of thousands of dollars on travel, meals and entertainment, including expenses at strip clubs.

The Association of Indiana Counties is a non-profit; neither AIC nor IACT has been accused of any wrongdoing.

Greller said the differences between Kentucky’s groups and IACT are stark, as Kentucky’s are vastly larger operations that deal with insurance and a staff multiple times larger.

Rep. Win Moses, D-Fort Wayne, said Indiana is fortunate it has not had the kind of scandals Kentucky did that would have forced a review of how IACT is organized. He was unaware of the group’s Sec. 115 designation.

“I think if people had been aware of this, there would have been legislation already introduced for this session,” Moses said Friday. “I don’t think anyone intended for this group to go unexamined like this.”

Moses said IACT should either be subject to the rules government bodies have to operate under or to those governing registered non-profits.

“Now that we know it is (organized) this way, we need to do something about it,” Moses said.

Common Cause’s Vaughn said there’s another factor to consider when debating IACT’s status: the other organizations that do have to follow the rules for disclosure.

“I’m surprised they’re not on the same field as other organizations in terms of what they need to disclose and how they’re looked at,” Vaughn said. “There should be a level of disclosure that would be comparable to organizations that play similar roles; … you do expect a level playing field.”

More questions

A part of IACT’s operations is subject to some public scrutiny, but it often raises more questions than answers: The Indiana Association of Cities and Towns Foundation is a registered non-profit, making its federal tax returns public.

The foundation’s bylaws, on file with its incorporation papers at the office of the Indiana secretary of state, say the foundation is “to operate solely for the benefit of, to perform the functions of, and to carry out the charitable purposes of the Indiana Association of Cities and Towns.”

And most years, the foundation’s tax returns say the foundation supports IACT.

But only once in the last five years has the tax return said that IACT is in the foundation’s governing documents, and in each of those years it lists IACT as a 501c4. IACT is not a 501c4, which are registered non-profits such as civic leagues and local employee associations.

In 2006 and 2008, the foundation reported $17,544 and $25,000 in support, respectively, for IACT on its tax returns but did not list those amounts in its expenses. Greller said he was unsure why that was reported but said it may have been to account for the foundation paying part of his IACT salary.

In all other years, going back to 2000, the foundation did not list any amount of support. In 2004, the foundation’s tax return said the group did not support any other organization and that it qualified as a charity because it “receives a substantial part of its support from a governmental unit or from the general public.”

Greller said he did not know why the returns were filed that way but suspected it was a clerical error.

Also unclear is why the IRS classifies groups this way.

“I think the rationale is it’s because these groups like IACT help local government do their job better,” said Thomas Schnellenberger Jr., an attorney at IACT’s legal firm, Ice Miller, and a tax expert. “It basically allows some collaboration between jurisdictions.”

Couldn’t a registered non-profit do the same thing?

“(These groups) could probably qualify under either section (of the law),” Schnellenberger said. “It may be as much a product of the historic developments of the code. It’s a much different landscape today.”

And while IACT does not fall under the open meetings or open records laws, the group’s spending is scrutinized, Greller said, just not by those outside the organization.

“We’re not required to release our budget, but it is seen by our 30-member board of directors, and reviewed extensively by our finance and budget committees,” he said. “And we’re required by our bylaws to have an independent audit done.”

But IACT – busy the next few weeks lobbying Indiana legislators on issues such as whether cities can raise your property taxes – is not required to tell anyone what that audit says.

Benjamin Lanka of The Journal Gazette contributed to this story.