CITY OF NEWPORT NEWS CITY ATTORNEY’S OFFICE May 1, 2023 TO: Cindy Rohlf, City Manager Susan R. Goodwin, Director of Finance FROM: Collins L. Owens, Jr., City Attorney SUBJECT: Questioned City Council Credit Card Charges You advised that all members of City Council, with the exception of one (1), utilize City credit cards, With regard to recent City credit card use by members of City Council, you asked that T ascertain whether such use was in compliance with Federal and State law, as well as with the City’s Travel Policy. In this regard, the following credit card charges have come to your attention: approximately eleven hundred dollars ($1,100) in restaurant charges during a single month incurred during constituent meetings by a City Council member, with some restaurant receipts containing multiple meal charges; two (2) or more five hundred dollar ($500) cash advances received by a Council member and then paid to non-City employees for constituent/administrative services; payment for meals at a restaurant where three (3) City Council members dined together in celebration of their election victories; a Foodbank donation made in a City Council member's personal name; payment for an upgrade to a City Council member's personal LinkedIn subscription; payment for air travel to Indiana, including hotel and Iugeage expenses, for a City Council member's attendance at a Christopher Newport University basketball game in contravention of the Travel Policy, and unassociated with City business; payment for a Woodside High School basketball game ticket, unrelated to any City Council purpose at the game; and a travel request for payment of expenses associated with attendance ata conference associated with a political party. Lastly, you advised that in the past, members of City Council have, on occasion, made charges on their respective City issued credit eards without providing receipts or explanations for the charges. The issues are whether the aforementioned expenses are official and reasonable City Council business expenses for which the City may assume financial responsibility in accordance with applicable law and its Personnel and Administrative Manual Travel and Meeting Expense Policy (Travel Policy), and, if not, what consequences result from use of City eredit cards in the manner described. In addressing these issues, it is first important to note that the Internal Revenue Service (IRS) has promulgated regulations to help employers determine the correct tax treatment of employee remuneration other than stated pay (such as meals, travel expenses and other working condition benefits), and when such remuneration should be treated as income for withholding and reporting purposes. Addressing this issue is significant, because if certain expenses charged donot qualify as excludable fringe benefits under Internal Revenue Code (IRC) regulations then, in cordance with such regulations, the City must report the amount of those charges as taxable income to the City Couneil members in question. 26 U.S.C. § 61(a)(1)(2); 26 CFR 1.132-1(a). However, if the City is required by IRS regulations to count any of the charges mentioned as income, the City Council members and/or Mayor would exceed the mandatory annual income limitations set for them under Va. Code § 15.2-1414.6, at $25,000 and $27,000 respectively. In such case, and because these salary caps are mandatory, City Council members and/or the Mayor would be required to refund the City any expenses that must be attributed as income to them. In this regard IRC provisions identify what is called an “Accountable Plan”, which is an allowance or reimbursement policy (not having to be memorialized in a written plan) wherein an employer may pay business expenditures incurred by employees as long as the following factors exist: 1) there is a clear business connection to the expenditure, 2) there is adequate accounting by the recipient within a reasonable period of time, and 3) excess reimbursements or advances are returned within a reasonable period of time. 26 CFR § 1.62-2(c)(2). The “business connection” means that the employee must have paid or incurred allowable business expenses while performing, services as an employee.” 26 CFR § 1.62-2(d). Regarding the “adequate accounting” requirement, the employee must verify the date, time, place, amount and business purpose of the expenses, and receipts are required unless the reimbursement is made using per diem rates (per diem rates are used for meals and lodging while traveling away from home overnight and regarding which receipts are not required as long as other requirements are met). 26 CFR § 1.62-2(e). In order for non-travel meeting meals to qualify as an Accountable Plan fringe benefit, the above referenced Accountable Plan qualifiers must be met. Further, in accordance with 26 U.S.C. § 274k), a business meal may only be excluded from income if such expense is not lavish or extravagant under the circumstances and if the employee is present at the furnishing of such meal In addition to the aforementioned, an employer may exclude working condition fringe benefits from an employee’s income. However, to be excludable, the working fringe benefit must: 1) relate to the employer’s business, 2) the expense would have been an allowable business expense deduction to the employee if the expense had been paid personally, and 3) the business use must be substantiated with records. 26 U.S.C. § 132(d). Nevertheless, “cash payments or cash equivalents are not working condition fringe benefits; however they may be excluded if they represent reimbursements paid under an Accountable Plan.” IRS Publication 5137 (Tax Exempt & Government Entities Fringe Benefit Guide 10-2022, p. 8). Anexception to the general rules detailed above regarding whether to include the value of {fringe benefits provided to employees in their gross income, are de minimis fringe benefits. These are any property (including meals) or service provided by an employer for an employee, the value of which is so small in relation to the frequency with which it is provided, that accounting for it is unreasonable or administratively impracticable. To reiterate, if the property or service is provided infrequently and of minimal value, then the same can be excluded from income as a de minimis fringe benefit. 26 U.S.C. 132(e); CFR § 1.132-6(a)(b)& (d)(2). Lastly, pursuant to 26 U.S.C, § 274(a)(1)(A) entertainment, amusement, and recreation expenses paid by an employer for the benefit of an employee must be included in the employee's income.With the above-mentioned Internal Revenue Code and Code of Federal Regulations’ provisions as a backdrop, in the following paragraphs I will examine the City oredit card charges and expense reimbursement requests in question, and analyze them in light of relevant Virginia Code and City Travel Policy provisions. As to State standards for reimbursement, Va. Code § 15.2-1414.6 states that, “Any member of council shall be eligible to be reimbursed for any personal expenses incurred by him for official business. However, all claims for reimbursement shall be for reasonable expenses to the extent permitted by law incurred in the conduct of official city business and shall be itemized and documented by stamped paid receipts to the extent feasible.” This standard, limiting reimbursement to the payment of reasonable expenditures incurred by city council members in connection with official City business regarding which documented and itemized receipts are required, is consistent with the dictates of our Travel Policy, which became applicable to City Council through its adoption of Resolution No. 12673- 14. Lastly, when examining the charges in question, it is also important to note that Va. Code § 15.2-953 proscribes the parameters under which a locality may provide gifts. Generally speaking, a locality may only provide monetary or in-kind gifts to charitable and other specified organizations (including other governmental entities) for non-sectarian use. This issue is relevant with respect to City Council’s use of credit cards to pay for the meals or donated services of others. In this regard, the payment of meals for private individuals is not permitted; however, the payment of a meal for another governmental official, during a City business meeting with that official, is permissible. As stated previously, in order to be counted as fringe benefits payable by the employer and excluded from the employee’s income, 26 CER § 1.62-2(c)(2) requires that such expenses be “allowable businesses expenses” by the employer, the business purpose of the expense must be documented, non-travel/off-business premises meals must meet Accountable Plan requirements, and the meals cannot be extravagant. In this instance, and because the City business purpose of the constituent meetings meals was not provided, the aforementioned requirements have not been met. Additionally, the $1,100 meal charges, do not appear to have been allowable business expenses paid by the City under 26 U.S.C. § 274(k) and Va. Code § 15.2-1414.6, as their reasonableness is questionable due to the high cost. Section XIV(A) of the Travel Policy prohibits reimbursement above 50% of the applicable U.S. General Services Administration (GSA) rate, and it is not clear whether the meals charged exceeded that amount (the GSA meal and incidental, expense rates for FY 2023 are $59-79, with the standard rate at $59). Additionally, the Council member did not provide names of the persons involved as is required under Section XIV(A) of the Travel Policy, and Section II(A) thereof only permits reimbursement for the City Council member, not for the constituents whose meals were charged. It is also my understanding that receipts for some constituent meeting meals were not provided as is required by § 15.2-1414.6, the Travel Policy, and Accountable Plan procedures. For these reasons, the expenses charged do not qualify for exclusion from income under IRC Accountable Plan and business meal requirements and must, therefore, be attributed as income to the City Council member in question pursuant to 26 CFR § 1.62-2(c)(2). To the extent such expenditures included purchases of meals as gifts to private persons, the same would also violate Va. Code § 15.2-953 which, as stated,permits gifts of City money or property only to charities, and other identified organizations, for non-sectarian purposes. 3 Person Councilmember Celebratory Dinner Gathering for a meal to celebrate election victories does not constitute official business of the City and was, therefore, not an allowable City business expense under Va. Code § 15.2-1414.6 and/or Accountable Plan requirements. Nevertheless, if the members of City Council involved did discuss bona fide City business during the celebratory meal, then the gathering constituted an improper meeting under Va. Code § 2.2-3701 of FOIA, in that three (3) members of the governing, body gathered to discuss business of the City without notice to the public and without taking minutes of the meeting, in violation of Va. Code § 2.2-3707. As a result, and even under this, scenario, the expenses do not qualify as Accountable Plan business expenses because the business ‘meeting associated with the meal was improper. In such case, the expenses must be attributed as income to each respective City Council member (unless you determine that each meal expense was de minimus in accordance with the above stated qualifications for such a finding) Foodbank Donation A donation made by a single member of City Council in their personal name does not constitute official City business as required by Va. Code § 15.2-1414.6. Additionally, Section IX(A)(10) (Non-Reimbursable Expenses) of the Travel Policy provides that personal expenses such as donations will not be reimbursed. As result, the Council member's Foodbank donation charge, made in his personal name, was not an allowable City business expense and should be treated as income to the City Council member pursuant to 26 CFR § 1.62-2(c)(2). Indiana Travel) Woodside High School Basketball Game Because the City Council member’s hotel, luggage, and airline costs to Indiana to attend a CNU basketball game were not associated with official City business, as is required under Va. Code § 15.2-1414.6, the charges were improper and, in that regard, also violated Section TV(A) of the Travel Policy. The charges appear to have been entertainment, amusement and/or recreation charges and, as such, do not meet IRC allowable business expense Accountable Plan criteria and must be included in the Council member’s income pursuant to 26 U.S.C. § 274(a)(1)(A) and 26 CER § 1.62-2(c)(2). The same is true of the Council member's Woodside High School basketball game ticket charge. LinkedIn Upgrade Va, Code Sec. 2.2-3103(1) & (3) of the State and Local Government Conflict of Interests Act (COIA) states that no officer of local governmental shall, “1. Solicit or accept money or other thing of value for services performed within the scope of his official duties, except the compensation, expenses or other remuneration paid by the agency of which he is an officer or employee. This prohibition shall not apply to the acceptance of special benefits that may be authorized by law.” City payment for a private social media subscription for a local governmentofficer is not a special benefit authorized by law, and is not a part of any compensation package or salary offered to members of City Council. It was, therefore, improper for the Council member in question to charge the City for an upgrade to his LinkedIn subscription and, thus, receive a thing of value, outside of his normal compensation for the City Council duties he performs. For these reasons, the LinkedIn charges do not meet the IRC allowable business expense Accountable Plan criteria and must, therefore, be attributed as income to the City Council member pursuant to 26 CER § 1.62-2(¢)(2). Cash Advances for Constituent s In accordance with the Virginia Public Procurement Act (VPPA) any contract, whether oral or written, for goods or services between a public body and a non-governmental source must comply with the competitive procurement requirements of the VPPA. Va. Code § 2.2-4300 et seq. Even with regard to “small” contracts, such as the ones in question, the same must be accomplished through utilization of the procedures established by the City’s Purchasing Agent, pursuant to Va. Code § 2.2-4303.G(1) and City Code § 2-554.1(b). Because the constituent services charged to the City were not obtained in accordance with the City’s purchasing procedures and requirements, it is not proper for the City to pay the same. In addition, pursuant to § 8.09 of the City Charter, no officer of the City may, “expend or contract to expend any money or incur any liability, or enter into any contract which by its terms involves the expenditure of money, for any purpose, in excess of the amounts appropriated for that general classification of expenditure.” This section goes on to state that any written or verbal contract made in contravention of the aforesaid prohibition shall be null and void. The only amounts appropriated for the type of expenditures incurred in this instance were for services provided by the City Clerk and her staff, and because no other monies were appropriated for the expenses that were incurred in this regard, the expenditures were improper. Further, the City cannot simply donate the said amounts to the individual to whom the payments were made as Va. Code § 15.2-953 only permits localities to donate money to charitable and other identified organizations, among other requirements. There is no indication that the payments made to the individual in question for constituent services qualify as donations under § 15.2-953, Payments by the City in this regard are, therefore, not permissible, Lastly, and although the IRC permits employers to exclude from an employee's income certain working condition benefits for property or services supplied to their employees, cash payments do not qualify as working condition fringe benefits. Nevertheless, two (2) of the constituent services’ payments were cash advance payments to a Council member who then claimed to use the cash to pay individuals, with no substantiating records. IRS Publication 5137 (Tax Exempt & Government Entities Fringe Benefit Guide 10-2022, p. 8). Additionally, the payments do not qualify as excludable fringe benefits under an Accountable Plan because they are not allowable City business expenses in that they were procured in violation of applicable City and State Code provisions. 26 CFR § 1.62-2(¢)(2). The expenses in question must, therefore, be attributed as income to the City Council member who charged the expenses. Additionally, the City Clerk has advised that her office informed City Council members during their retreat in January of this year, that the Clerk’s office is willing and able to provide administrative services to City Council members, such as communicating with constituents, organizing emails, and calendaringevents. It appears, therefore, that the expenses were not reasonable as required under Va. Code § 15.2-1414.6, Payment of Travel Expenses for a Political Conference 5 USC Sec. 1502(a)(2) of the Hatch Act prohibits a local officer and/or employee from directly or indirectly commanding or advising another local officer or employee to pay anything of value to a party, committee, or organization for political purposes. This prohibition precludes a public officer from requesting and receiving City funding for the payment of travel and conference expenses for the conference in question because the event is political and/or sponsored by a political organization, Additionally, Va. Code Sec. 15.2-1512.2.F states that employees of a locality are prohibited from suggesting or implying that a locality has officially endorsed a political party, candidate, or campaign. Payment by the City for participation in a partisan conference suggests that the City is in support of a political party, which is prohibited by the aforementioned State statute. Further, the Travel Policy only permits the payment of travel expenses that are necessary and associated with official City business, and official City business does not include that which is prohibited by Federal and State law. Payment of travel expenses for a conference associated with a political party is, therefore, not a permissible City expenditure. Because this travel expense is not an allowable employee business expense it is not excludable from income under an IRC Accountable Plan. 26 CFR § 1.62-2(c)(2). Occasional City Credit Card Charges Without Receipts In accordance with Va. Code § 15.2-1414.6, City payment for expenses incurred by City Council members in connection with official business shall “be itemized and documented by stamped paid receipts to the extent feasible”. Unless an acceptable reason is provided as to why it was not feasible to obtain an itemized stamped receipt authenticating an expense charged, then a receipt is required under the Virginia Code, and Section IV(B) of the Travel Policy. Further, an explanation as to the necessity of the charge, as it pertains to official City business, should also be provided so as to meet the requirement contained in Section [V(A) of the Travel Policy. Nevertheless, if the expense is for a meal or service, the value of which is so small in relation to the frequency with which it is provided, that accounting for it is unreasonable or administratively impracticable, then it can be excluded from income as a de minimis fringe benefit, regardless of whether a receipt is provided or whether the expense qualifies as a business expense under an Accountable Plan, 26 U.8.C. 132(e); CFR § 1.132-6(a)(b)& (42). Consequences/Penalties City Council member violations of the Travel Policy and/or their misuse of City issued credit cards, raises the issue of possible penalties and or consequences. Section XV (Reimbursement of Erroneous Payments) of the Travel Policy states that, “All unauthorized” and “improper” travel advances “shall be immediately reimbursed by the traveler to the City and failure to do so may result in disciplinary action, as well as deduction from one’s paycheck if it remains unpaid past fourteen (14) business days of being notified of the need to reimburse. Alll travelers hereby consent to such deduction by participation under this Travel Policy.” As previously stated, reimbursement will be required for all of the above mentioned expenses that are not excludablefrom income for the City Couneil members in question and the Mayor so that their income does not exceed the limitations specified in Va. Code § 15.2-1414.6. It would appear that such reimbursement can be achieved through payroll deductions unless the City Couneil members in question wish to reimburse the amounts necessary through direct payments. In addition, it is necessary that City officials request reimbursement in order to avoid violations of Va. Code Sec, 18.2-112.1.B. (Misuse of public assets; penalty), which states that, “Any full-time officer, agent, or employee of the Commonwealth, or of any city, town, county, or any other political subdivision who, without lawful authorization, uses or permits the use of public assets for private or personal purposes unrelated to the duties and office of the accused or any other legitimate government interest when the value of such use exceeds $1,000 in any 12-month period, is guilty of Class 4 felony.” My opinion is that if City employees, such as the Director of Finance, the City Manager (and, perhaps, others) permit members of City Council to either retain funds that were improperly charged to the City and/or permit them to continue to make improper charges that exceed the annual amount specified in the aforementioned statute, then such persons may be subject to the criminal penalty prescribed in the statute, In this regard, and in accordance with the City Charter, Section 8.08.C., the Director of Finance has the responsibility to audit “all bills, invoices, payrolls and other evidences of claims, demands or charges against the city government, and, with advice of the city attorney, determine the regularity, legality and correctness of such claims, demands or charges.” It would appear that after auditing the charges in question and determining they are improper, the Director of Finance, and the City Manager as her supervisor, have a legal obligation to request that the members of City Council involved return funds that were improperly charged to the City and that cannot, without exceeding the maximum allowable salary, be attributed as income to them, Further, if after being advised of the applicable Federal and State Code, and Travel Policy provisions, the City Council members involved do not agree to return the funds requested (and assuming, for whatever reason, such funds are not withheld from their pay), Va. Code Sec. 18.2 112, details the possible criminal punishment to which the City Council members would be subject. This Code section states, “If any officer, agent or employee of the Commonwealth or of any city, town, county, or any other political subdivision, or the deputy of any such officer having custody of public funds, or other funds coming into his custody under his official capacity, knowingly misuse or misappropriate the same or knowingly dispose thereof otherwise than in accordance with law, he shall be guilty of a Class 4 felony; and any default of such officer, agent, employee or deputy in paying over any such funds to the proper authorities when required by law to do so shall be deemed prima facie evidence of his guilt.” In addition, and as to a review of the charges involved by an outside agency, Va. Code Sec. 30-138.A. requires that, “Upon the discovery of circumstances suggesting a reasonable possibility that a fraudulent transaction has occurred involving funds or property under the control of any state department, court, officer, board, commission, institution or other agency of the Commonwealth, including local constitutional officers and appointed officials exercising the powers of elected constitutional officers, as to which one or more officers or employees of state or local government may be party thereto, the state agency head, court clerk or local official in charge of such entity shall promptly report such information to the Auditor of Public Accounts (Auditor), the State Inspector General, and the Superintendent of State Police (Superintendent).” This Codesection applies to our situation, if after the City Couneil members in question are advised, they refuse to refund the City. Under such circumstance, fraud would exist pertaining to the funds involved which are under the control of a local constitutional officer (ie., the City Treasurer) regarding which one or more officers of local government may be a party. If applicable, this section requires the “local official in charge” (i.e., the City Manager and/or the Director of Finance) to report any fraudulent activity to the Auditor of Public Accounts. Conclusion/Recommendation Based on the foregoing, it is my opinion that the City credit card charges in question are in violation of the reimbursement restrictions contained in Va, Code See. 15.2-1414.6 and the City’s Travel Policy, for which criminal penalties could result under Va, Code §§ 18.2-112 & 18.2-112.1, against the members of City Council involved and against the Director of the Department of Finance and the City Manager, respectively, (and, perhaps, others), if reimbursement is not sought when statutorily required and/or the amounts in question are not retuned after an explanation of the applicable regulatory laws and Policy is provided. Reimbursement is mandatory due to IRC income provisions regarding fringe benefits when viewed in combination with the income caps applicable to the City Council and Mayor contained in the Virginia Code. If the City Council members do not agree to refund the total amounts owed to the City, then the City Manager and/or the Director of Finance are obligated to advise the Auditor of Public Accounts as to the transactions. Further, the entire City Council, as a body, would need to be advised as well. Ihope that I have adequately responded to the issues you raised. Please advise me should you require additional information or analysis.