By Matt Nordfjord/Managing Shareholder, CST Municipal Law
Counties that administer and enforce the Michigan building code should review their fee schedules and overhead allocation methods to ensure they align with Michigan Department of Treasury guidelines and the Michigan’s Construction Code Act (“CCA”) mandate for a “reasonable relation to the cost” of building department services.
Following 15 years of litigation in MAHB v City of Troy, the Michigan Supreme Court and Court of Appeals have strictly defined how municipalities may calculate and spend building department fees. The rulings emphasize that building fees are intended for cost recovery and not general revenue generation.
The City of Troy was permanently enjoined and found liable for the plaintiff’s attorney and expert witness fees after the City privatized its building department services through a contractor. In exchange, the contractor received 75-80% of the fees collected while the City retained the remaining 20-25%. The Michigan Supreme Court ruled that this violated Michigan’s Construction Code Act. MAHB v City of Troy, 504 Mich 204 (2019).
The reason being that while local units of government, including counties, may charge fees for services provided by their building departments, the CCA requires that those fees “bear a reasonable relation to the cost” of building department services. MCL 125.1522(1). In the lawsuit, the Supreme Court found that a 20-25% “surplus,” “baked consistently into the fees,” violates the CCA’s mandate that fee amounts bear a reasonable relation to the cost of providing the service. MAHB, 504 Mich at 219.
Creative accounting did not change this result. Following the Supreme Court’s ruling, the City canceled its vendor contract and returned to an in-house building department. However, it attempted to make up for the loss of the 20-25% surplus funds by increasing its overhead costs to include services provided by its other departments. The Court of Appeals found this also violated the CCA and the Headlee Amendment. MAHB v City of Troy, unpublished opinion per curiam of the Court of Appeals, issued October 16, 2024 (Docket No. 365166), lv den.
The CCA requires that any unit of local government that elects to administer and enforce the Michigan building code designate an agency (typically, the building department) to be responsible for administration and enforcement of the Michigan building code. This statutory “Enforcing Agency,” is subject to approval by the State Construction Code Commission. Once certified only the “Enforcing Agency,” (i.e. the building department) may administer and enforce the building code and perform the services provided “including, without limitation, . . . 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.” These services, the Court found, may not be delegated to others. Id. at pp 19-20.
The City’s fee structure also violated the CCA and Headlee Amendment due to the recovery of overhead or indirect costs. To be permitted under the CCA, those charges must be calculated using only appropriate items as outlined in the Michigan Department of Treasury guidelines as follows:
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. Id. at pp 21-22.
The CCA requires that fee amounts reasonably relate to the cost of providing the service. The CCA also requires that the revenue derived from the fees be used ONLY “for the operation of the Enforcing Agency.” Violations will likely result in injunctive relief and, in the case of plaintiffs who actually paid the fees, refunds of those fees. Logan v Charter Twp of West Bloomfield, unpublished opinion per curiam of the Court of Appeals, issued Feb.18, 2020 (Docket No. 333452).