Assertion of the attorney-client privilege can, on occasion, inappropriately shield public records from view. This column shines a light on the subject by considering such a case.

Sunshine Week is an occasion to remind ourselves that open government is good government.

Michigan has two laws that are key to open government: the Open Meetings Act (OMA) and the Freedom of Information Act (FOIA). Both of these laws rely crucially on good faith. For example, the FOIA allows a public body to deny access to certain public records – like those that are protected by the attorney-client privilege.

If a record is requested and then denied based on the attorney-client privilege, a requester has no way of judging whether the assertion of privilege is appropriate. A requester relies on the good faith of government officials that privilege is not inappropriately extended to records that are not in fact protected by privilege. A requester can resort to a lawsuit, which under Michigan case law can result in the review of the records by a judge to confirm – or refute – the public body’s assertion of privilege. But few requesters have the wherewithal to file a lawsuit over a FOIA denial.

Here at The Ann Arbor Chronicle, we’re celebrating Sunshine Week by laying out a recent occasion when we requested records under the FOIA, were denied the records, appealed to the city administrator, were denied under the appeal, but then were able to obtain some of the records by other means. The record in question is an email written by Ann Arbor city attorney Stephen Postema. This provides an opportunity to evaluate independently, without filing a lawsuit, whether the city inappropriately asserted attorney-client privilege in denying access to a record.

We consulted on the matter with an attorney, Marcia Proctor, who agreed to analyze the relevant factors in a hypothetical scenario. Proctor is former general counsel of the Michigan Bar Association, a specialist in legal ethics, whose practice specializes in professional responsibility for lawyers and judges.

We first present the hypothetical scenario, followed by a brief discussion of the relevant factors in the scenario identified by Proctor. We then present the text of the email and apply the various tests outlined by Proctor. We reach the conclusion that the city inappropriately asserted attorney-privilege to the document.

We then evaluate whether a different exemption provided by the FOIA might apply. That exemption allows a public body to withhold communications internal to the body – to the extent that they are non-factual and preliminary to a final decision by the body. In the balancing test prescribed by the state statute, we reach a different conclusion than the city did: We think the public interest in disclosure outweighed any interest the city had in shielding this frank internal communication from public view.

Finally, we urge the city council to weigh in on the city’s administrative policy on FOIA response, which is currently being revised. It’s important for councilmembers to set the overarching principle that guides the city’s FOIA responses. And we think that guidance should be biased in favor of disclosure.

The Hypothetical

Here’s the hypothetical scenario we outlined for Proctor:

The results of a city’s annual financial audit are presented to the city’s audit committee at a regularly scheduled public meeting. Among the items in the report, and highlighted by the auditor orally, are instances of an employee who claimed mileage reimbursements while at the same time receiving a vehicle allowance. The auditor characterizes the instances as a “double dip” and violation of city policy. The records produced under a FOIA request identify the employee as the city attorney. The city attorney reports directly to the city council, and serves at the council’s pleasure.

Sometime after the meeting, the city attorney writes an email to all city councilmembers, the chief financial officer and the city administrator, addressing his reimbursements identified in the audit report.

Subsequently a second meeting of the audit committee is convened, in part to discuss the mileage reimbursements. The records produced under a second FOIA request exclude the city attorney’s email, and an appeal to the city administrator challenging the denial is unsuccessful.

Factors to Consider

Proctor identified four key factors to consider, in evaluating whether the email described in the hypothetical scenario might have attorney-client privilege properly attached. Summarizing Proctor, in Michigan the attorney-client privilege attaches to information satisfying the following factors:

1. The information is a communication;
2. The communication is made in confidence by a client to his or her attorney (or by the attorney to his client);
3. In the communication, the attorney is acting as legal advisor;
4. The communication must be for the purpose of obtaining legal advice on some right or obligation.

In the hypothetical, Proctor noted that the record in question is an email communication, thus satisfying Factor 1.

With respect to Factor 2, Proctor identified as relevant whether all the parties copied on the email – representatives of finance and administration – are ongoing clients in the scope of the city attorney’s duties. Although it wouldn’t be unusual for finance and administrative staff to be included in the scope of the city attorney’s  duties, Proctor notes that if the city attorney’s duties don’t cover giving advice to those staff, then communications that include a third party are generally not privileged. She also identified as relevant whether there was a label or some other indication that the communication was made in confidence. Based just on the limited facts in the hypothetical scenario, Proctor couldn’t conclude whether Factor 2 would be satisfied.

For Factor 3, Proctor highlighted that attorney-client privilege applies just when the lawyer is acting as legal advisor to the client in the matter. In the hypothetical scenario, she observed, it’s the city attorney’s own conduct that appears to be the core subject matter of the communication – given that the auditor’s report has called into question whether the city attorney’s mileage reimbursements were proper. Proctor noted that under lawyer ethics rules, a conflict of interest between a client’s interest and the lawyer’s own interests can prevent a lawyer from advising the client. But if the lawyer is not advising the client as the client’s lawyer, then the communication cannot be privileged.

Also related to Factor 3, Proctor notes that a lawyer might be asked to perform a variety of functions beyond providing legal advice – including providing input on business, financial or political issues. The email described in the hypothetical scenario, Proctor observed, appears to relate to the business duties of the audit committee. It’s only when the lawyer is acting as a lawyer for the client that a communication can be privileged, Proctor stressed.

Under Factor 4, Proctor indicated that if the purpose of the email is merely to explain the city attorney’s own past acts, not to advise the city council on some right or obligation, then the attorney-client privilege would not apply. The attorney-client privilege only protects the legal advice requested or provided, Proctor notes, and does not protect underlying facts relating to the subject matter.

Here we note that Proctor’s identification of the relevant factors in the hypothetical scenario should not be construed as Proctor making any claims about anyone’s professional conduct.

City Attorney’s Email

The hypothetical scenario is consistent with an actual recent scenario. How do the four relevant factors apply to the actual text and context of the email? We think that application of the four factors leads to the clear conclusion that the email in question was improperly withheld under Michigan’s FOIA under the exemption covering the attorney-client privilege.

City Attorney’s Email: Full Text

We’ve numbered the paragraphs for ease of reference.

1. From: Postema, Stephen
Sent: Fri 1/18/2013 5:03 PM
To: Postema, Stephen; *City Council Members (All)
Cc: Powers, Steve; Crawford, Tom
Subject: RE: Privileged and Confidential: FW: File: A05-01217 Litigation Updates Mayor and Council:

2. This is to inform you that I am back in the office after a restful vacation in Costa Rica with two of my children. However, I came back with a bad case of bronchitis. My body is clearly not used to all that rest.

3. It is always interesting to find what issues have arisen when one leaves. When I came in on Wednesday, I met briefly with Tom Crawford to discuss e a copy of the audit report. I had never seen the audit report, much less the paragraph on “reimbursement” issues, although Tom had discussed just in general terms the issue with me on December 31st when he asked about my contractual provisions and I gave him the appropriate paragraphs.

4. I will provide you additional information in a longer memo, but the audit report is obviously incorrect:

5. First, there is no violation of City policy as stated. Tom and I called the auditor on Wednesday to inquire what City policy he was referring to. (Steve Powers agreed that we should call the auditor.) The auditor didn’t know off the top of his head and reviewed the file. I spoke with him today and he admitted that there was no violation of City policy in the files he reviewed and the statement was incorrect. However, he is going to talk to his associates further, and let us know if he has missed anything. Any one-second review of the City’s mileage policy demonstrates that the auditor’s statement is incorrect.

6. Second, in any case, the terms of my agreement with the Council is my contract which was specifically negotiated. It calls for a car allowance (not a mileage allowance) and separately for travel reimbursement. This is no surprise to anyone. I have followed mileage reimbursement procedure for almost a decade. (Although I rarely file them even when entitled to.)

7. Amazingly, as to my contract, the auditor confirmed for me that he had not been informed of my contract, nor had he reviewed it, but that it would certainly be relevant. I told him I appreciated his candor.

8. Third, the fact that an auditor has put an incorrect statement in an audit report without even checking whether a City policy is in fact violated or whether another document (such as a contract) may govern the situation raises a host of concerns in my mind, but that is for Steve Powers and Tom Crawford to deal with in the bigger audit picture.

9. As to the specific issue of the incorrect statements in the audit report, Tom and I will be dealing with the auditor on this correction.

10. Fourth, the third sentence of the paragraph is also incorrect: “the City became aware of this situation during the year..” The City and the finance department has always been aware of my contract, as is the whole City, as the contract is FOIAed all the time and is posted on the internet.

11. Fifth, there seems to be a question about my decision to give up the car allowance. I thought about this issue in September as I completed my year end report. I then made this proposal in early October to Councilmember Higgins as I always have done. I did this because the raise I was due this past fall, would have put me in a situation where I had a similar salary to the City Administrator – but still a car allowance. If the City Administrator did not have a car allowance, I thought it best for me to forgo mine – just as a leadership issue. (Steve Powers wouldn’t have cared about the issue, as he is not like that, but I just thought this was the right thing to do.)

12. There was no discussion with the admin. Committee on my part about this first. I just thought it was a reasonable proposal that made good policy sense. It was not because of any issue or problem with a car allowance. Related to this, I have to manage a whole department, and I have other things to spend this car allowance money on in the upcoming budget as I am down two FTEs from when I started this job, and things are always tight.

13. Finally, I will provide additional information to the Council as we resolve this issue. In the meantime, I request that this information not be made public while this is ongoing. It is always a sensitive issue when an auditor has made a factually incorrect statement in an audit, particularly one stating that a violation of City policy has occurred. Tom Crawford will be providing a formal written response the audit, which will include this issue. Obviously, the audit committee will also be involved at the next audit committee meeting.

14. I’m sorry for delay from Wednesday when I reviewed this issue, but I wanted to get an understanding of what was going on here from the auditor’s side before I wrote you.

15. I have been informed that the reporting on this issue has not bothered to link the actual reimbursement policy at issue nor mention the actual terms of my contract. When appropriate I will address this issue also.

16. As always, please contact me with any questions or concerns.

17. Stephen K. Postema
Ann Arbor City Attorney

City Attorney’s Email: Ann Arbor Chronicle’s Factor 1 Analysis

Factor 1 requires that the privileged information be a communication, and there’s no question that the email is a communication. So it’s uncontroversial that this factor is satisfied.

City Attorney’s Email: Ann Arbor Chronicle’s Factor 2 Analysis

Factor 2 requires that the communication be made in confidence and not include third parties who aren’t clients.

The email includes at least two indications that it was sent in confidence. First, the subject line includes “RE: Privileged and Confidential.” The subject line also includes reference to “Litigation Updates.” Because the email itself doesn’t include litigation updates, it’s possible that the subject line label was inadvertently recycled from a different email and that the label was not intentionally applied. But even if the label was recycled, we think it’s almost certain that the label reflects an intention that the email was sent in confidence.

Second, the body of the email, in paragraph (13), includes a statement from Postema that “I request that this information not be made public while this is ongoing.” Here it’s not clear what the antecedent is of “this information.” The phrasing as a “request” – that the recipients of the communication could choose to honor or not – seems to allow for the possibility that this is not meant as an attorney-client privileged communication. That’s supported by the qualification “while this is ongoing,” which implicates that it would be appropriate at some future time to disclose the information – which doesn’t seem consistent with attorney-client privilege.

But all this hinges on the intended antecedent of “this information.” And “this information” might plausibly be the fact that, according to the city attorney, the city’s independent auditor has characterized the audit report as containing an inaccuracy. That is, the referent of the phrase “this information” is plausibly not the city attorney’s email itself, but rather some of the facts contained in it. Based on the email itself, and the subsequent assertion of attorney-client privilege, we think it’s fair to conclude that it was Postema’s understanding that the email was sent in confidence.

And based on The Chronicle’s experience, it’s the general understanding among most city officials that employees of the city – in particular, top level staff like the city administrator or the chief financial officer – are considered ongoing clients of the city attorney’s office. So the fact that Steve Powers and Tom Crawford are included doesn’t exclude the communication from attorney-client privilege.

We think it’s fair to conclude that Factor 2 is satisfied.

City Attorney’s Email: Ann Arbor Chronicle’s Factor 3 Analysis

Factor 3 requires that the lawyer be acting in his capacity as the client’s legal advisor. However, the majority of the email appears to be confined to Postema’s reports on the content of conversations with others – including the auditor, who is not Postema’s legal client – and Postema’s explanations of his past actions. It’s difficult to see how attorney-client privilege could be extended to Postema’s report of a conversation he had with a non-client. Further, the explanation for Postema’s desire to eliminate his car allowance from his contract – which involves Postema’s theory of how his car allowance might be perceived when contrasted with the city administrator’s lack of a car allowance –  doesn’t appear to involve a legal analysis or legal advice, but rather Postema’s theory of good leadership. So by sending this communication, Postema does not appear in any way to be acting as the council’s legal advisor.

The only paragraphs that might conceivably be construed as containing legal analysis or advice are paragraphs (6), (7) and (8). In those paragraphs, Postema might be considered to be offering an implicit legal opinion that his employment contract governs whether there was a policy violation, and an implicit opinion that his contract allows for both a vehicle allowance and mileage reimbursements.

But to the extent that Postema is acting as the city council’s legal advisor by writing the email, then he would have an apparent conflict in rendering this legal advice – because his own interest in establishing that he did nothing wrong obviously conflicts with the city’s interest in having a clear understanding of the facts, so that appropriate policy changes can be undertaken if necessary.

The most generous approach, we think, is to assume that Postema was adhering to his ethical obligation not to provide legal advice to a client on a matter in which he had a conflicting personal interest, in which he could reasonably anticipate could conflict with the city’s interest. But that forces the conclusion that he was not acting in his capacity as anyone’s lawyer by writing the email; thus, he was not making a communication to which attorney-client privilege properly applies.

It’s fair to conclude that Factor 3 is not satisfied.

City Attorney’s Email: Ann Arbor Chronicle’s Factor 4 Analysis

Factor 4 requires that the purpose of the communication be to provide legal advice on some right or obligation. The evaluation of Factor 4 is similar to that of Factor 3. In evaluating Factor 3, we noted that the email does not appear to contain much – if anything – in the way of legal analysis or advice. It’s confined to Postema’s explanation of his past actions and his reports of conversations with others.

Because the underlying facts related to the subject matter aren’t protected by privilege, it’s difficult to see how any of Postema’s reporting of facts concerning the audit are protected by attorney-client privilege.

It’s fair to conclude that Factor 4 is not satisfied.

Frank Communication

In addition to citing the Michigan FOIA’s attorney-client privilege exemption in denying Postema’s email to The Chronicle, the city of Ann Arbor asserted another exemption allowed under the FOIA. That exemption allows a public body to withhold records that are communications internal to a public body – but only to the extent that they are non-factual and preliminary to a final determination of the body, and only to the extent that the public interest in disclosure is outweighed by the public body’s interest in frank communication.

First, it’s not clear how the “frank communication” exemption could apply to the entire text of the email. The exemption applies only to non-factual communication – and much of the content of the email recites factual information pertinent to the audit committee’s work. When a record contains information that does qualify for an exemption as well as information that does not qualify for an exemption, then the Michigan FOIA requires that the exempt information must be separated from the non-exempt information (i.e., it must be redacted), and the non-exempted information must be disclosed.

The only portions of Postema’s email that appear potentially to be eligible for redaction under Michigan’s FOIA are those portions where Postema appears to draw negative conclusions about the professional performance of the independent auditor. For example in paragraph (8), Postema writes:

… the fact that an auditor has put an incorrect statement in an audit report without even checking whether a City policy is in fact violated or whether another document (such as a contract) may govern the situation raises a host of concerns in my mind, …

If we confine ourselves to just those portions of the email where Postema is expressing his exasperation to the council about the auditor’s performance, the Michigan FOIA requires a balancing test to be applied: Does the city’s interest in frank communication among its agents outweigh the public’s interest in disclosure?

In weighing that balance, the city appears to have concluded that the city’s interest in shielding from public disclosure Postema’s attitudes toward the auditor’s performance outweighed the public’s inherent interest in disclosure. Obviously, we weighed the balance differently. We think the public interest is best served by revealing the character of the city attorney’s relationship to the city council as documented in his email.

And in his email, Postema appears to have selectively omitted factual aspects of his conversation with the auditor that tend to mitigate Postema’s apparent position. His position seems to be this: Even though there was no factual basis for doing so, the auditor still inserted the note about mileage reimbursements in his report.

What Postema omitted in his email to the council was a significant consideration, and one we think he certainly should have included – if his purpose was to apprise the council of relevant facts related to his investigation of how the audit was conducted.

In his email, Postema faithfully reported to the council the fact that the auditor had, in conversation with Postema, acknowledged the factual incorrectness of the phrasing in the report – the phrasing indicating that there’d been a violation of city policy. What Postema did not convey to the council was the fact that his conversation with the auditor, described in his email, included a statement by the auditor characterizing the situation as “illogical.” From the auditor’s email to Postema, recounting the same conversation [emphasis added]:

As I also stated in our conversations, from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance. This conclusion is in the absence of knowledge of an agreement that would reasonably identify that payment of both mileage reimbursement and car allowance is acceptable and appropriate.

We think it’s to the city’s credit that this email from the auditor was included in the city’s official formal response to the auditor’s note.

But in his own communication to the council, Postema chose not to include this perspective on the auditor’s original conclusion – that the conclusion had been based on the idea that the mileage reimbursements were illogical, if not a violation of a written policy. At the January council audit committee meeting that followed Postema’s email, the auditor emphasized that there had not been a violation of a policy per se, because there was no written statement among the city’s policies that if an employee had a vehicle allowance, then the employee was not eligible for reimbursement for mileage.

For the auditor, it may have been self-evident that vehicle allowances are not compatible with mileage reimbursements – so self-evident that a written policy wouldn’t be needed. Whether Postema’s “travel” clause in his contract would cover ordinary mileage – for example, to drive to Lansing to represent the city in court – was not a question the city council audit committee wanted to entertain at its January meeting.

It’s worth noting that even in the revised version of the report, the auditor notes the problematic character of the reimbursements, observing that  ”… in each instance the expense report was not subject to independent review and approval.” And the city’s own recommended policy revision includes a new procedure that would require the chair of the council administration committee to sign off on the mileage reimbursements for its two direct reports – the city attorney and the city administrator.

In addition to the omission of a relevant fact, Postema made an assertion in his email to the council that is factually wrong. In addition to the “violation of city policy” phrase, in paragraph (10), Postema disputes the accuracy of part of the auditor’s note:

Fourth, the third sentence of the paragraph is also incorrect: “the City became aware of this situation during the year..” The City and the finance department has always been aware of my contract, as is the whole City, as the contract is FOIAed all the time and is posted on the internet.

First, Postema’s reasoning here is muddled. Whether the finance staff had always been aware of his contract is not material to whether the city became aware of the issue of possibly inappropriate mileage reimbursements during the year.

Postema’s assertion is also refuted by the facts. In responding to a different request made under the FOIA, the city provided The Chronicle with a written statement from the auditor to a member of the city council’s audit committee. And that statement indicates that the issue of the city attorney’s mileage reimbursements had been brought to the auditor’s attention through a fraud risk questionnaire response, dated June 29, 2012, filled out by a member of the financial services staff.

It’s also significant that according to the auditor’s statement, the questionnaire response indicated that the issue had been raised previously, and that the city’s internal staff auditor had communicated the issue to the city’s CFO. This gives additional context to the auditor’s recommendation this year that the city consider having the internal staff auditor report directly to the city council audit committee, instead of to the CFO.

In any case, it’s evident that the auditor’s original report – stating that the city became aware of the situation during the year – was accurate, contrary to Postema’s assertion.

Conclusion: More Sunshine, Please

It’s in the public interest, we believe, for the public to understand the nature of the relationship between the current city council and the person who currently serves as the city attorney.

So we weighed the balance differently than the city did with respect to the “frank communication” FOIA exemption. We think it’s clear from Postema’s email that the city council – at least in this instance – did not receive a complete, accurate and unvarnished report from its city attorney about city business. And we think it’s important that the public be aware of that.

It’s not an appropriate use of Michigan’s FOIA exemptions to shield officials from embarrassment or to allow for needless denials of information. It’s our view that the city of Ann Arbor is routinely over-broad in its assertion of exemptions under the FOIA. And it’s our view that the city’s FOIA response procedures rely too heavily on input and control by the city attorney’s office. But we think it’s to the credit of the city of Ann Arbor that the administration is currently engaged in a revision to the administrative policy on FOIA response.

Given that it’s Sunshine Week, we call on the city council to weigh in on that administrative policy. We think the city council should weigh in on the basic overarching principle guiding the FOIA policy.

Currently, the guiding principle of the policy can be fairly paraphrased as follows:

(A) The city of Ann Arbor will produce no requested records, except those that the city is required by the FOIA to produce.

A better policy would be one that is biased in favor of disclosure. That guiding principle would be the following:

(B) The city of Ann Arbor will produce all requested records, except those records that the city is expressly prohibited from producing by some federal, state or local law.

We think (B) is a better starting point for an administrative policy. Even if the city council were to opt for (A), then the council should make that decision explicitly and openly as the governing body of the city – through a formal resolution put forth at an open meeting.

The Chronicle could not survive without regular voluntary subscriptions to support our coverage of public bodies like the Ann Arbor city council. Click this link for details: Subscribe to The Chronicle. And if you’re already supporting us, please encourage your friends, neighbors and colleagues to help support The Chronicle, too!

Sumi Kailasapathy (Ward 1) questioned CFO Tom Crawford’s conclusions about the travel and mileage policies at the audit committee’s Jan. 24, 2013 meeting. (Photo by the writer.)

Listed among other relatively minor matters in Rehmann’s report was a note identifying three instances of an employee who had claimed mileage reimbursement despite receiving a vehicle allowance. At a scheduled Dec. 20, 2012 meeting of the audit committee, the dual claims were described by Rehmann’s Mark Kettner as a “double dip.” Those claims were also cited in Kettner’s written report as a violation of city policy.

The Chronicle’s write-up of the auditor’s presentation late last year to the audit committee – which did not achieve a quorum on that occasion – included the result of additional reporting: Mileage claims made by city attorney Stephen Postema caused the auditor to flag the issue in his formal report.

But at the Jan. 24 committee meeting, Kettner revealed that he’d been convinced to change the wording of the note. The new wording will not indicate a “violation” of city policy. At the meeting, however, Kettner indicated that a note about this issue would still be included – with the exact wording yet to be settled. City CFO Tom Crawford’s written response to the auditor’s report includes email messages that show it was Crawford and Postema who made a successful effort to convince Kettner to alter the report’s wording.

The wording of Postema’s employment contract factored into arguments made by Postema and Crawford for a revision to the auditor’s report. When Postema made his reimbursement claims, his contract at that time provided for “travel” expenses in addition to a vehicle allowance. Postema’s vehicle allowance was eliminated late last year, as a result of his annual performance review. Also factoring into the argument for revising the auditor’s note was Crawford’s contention that the city’s written policies don’t provide clear guidance on the question.

However, at the Jan. 24 committee meeting, Sumi Kailasapathy (Ward 1) challenged Crawford on that point. [Kailasapathy was elected to the council in November 2012 – running a campaign that stressed her credentials as a certified public accountant.] She reviewed the logic and specific wording of each of the city’s relevant policies, with particular attention to the meaning of the word “travel” – and reached the conclusion that the mileage reimbursements had not conformed with city policy.

And even though Kettner has agreed to change the wording of the note in his report, Kettner wrote in a Jan. 18 response to Postema and Crawford: “… from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance.” Kettner’s response also indicates that his conclusion of inappropriateness was not based on a review of Postema’s employment contract.

At the Jan. 24 meeting, Crawford interpreted the fact that he and Kailasapathy reached different conclusions about the appropriateness of the mileage claims as evidence that the written policies didn’t provide clear guidance.

Stephen Kunselman (Ward 3) seemed to reflect the general sentiment of the two other committee members present – Chuck Warpehoski (Ward 5) and Margie Teall (Ward 4) – in concluding that he didn’t think anyone had been trying to “game the system.” Kunselman indicated little enthusiasm for delving into the wording of Postema’s contract or existing city policies. He was more interested in making sure that the relevant policies would be revised and applied in the future – not just for the travel and mileage policies, but for the other issues identified in the auditor’s report.

Kunselman also indicated that he was keen to see the audit committee take a more active, engaged role – throughout the year, not just once a year on the occasion of the auditor’s report. The committee as a group also seemed favorably inclined toward adopting a more proactive approach. The committee’s extended conversation about the relationship of the city’s part-time internal auditor indicated that while the internal auditor would still report to Crawford, the audit committee would be looped into the ongoing issues that emerged throughout the year as they arose – instead of six months after they happened. It could result in meetings of the committee at other times besides the occasion of the annual auditor’s report.

That reflects a transition from the role that the audit committee has played as recently as two years ago. The committee did not meet at all during that year, even to review the FY 2010 auditor’s report – because audit committee chair Stephen Rapundalo declined to call a meeting. Kunselman complained at the time about the lack of a committee meeting. Rapundalo was not re-elected in 2011 – when he had faced Jane Lumm, who received more votes than Rapundalo that November.

Travel versus Mileage

The note in the auditor’s formal letter, previously conveyed to the city last year, reads:

Employee Expense Reports. We reviewed various employee expense reports to ensure reimbursements were properly supported and approved. We noted in three instances, that an employee was requesting and receiving mileage reimbursement while also receiving a car allowance, which violates City policy. After further inquiry, it was determined that the City became aware of this situation during the year and has since implemented procedures to address this issue.

Travel versus Millage: Background

As The Chronicle previously reported, a request of the city made under Michigan’s Freedom of Information Act revealed that city attorney Stephen Postema made three claims for mileage reimbursement, despite having a vehicle allowance. One was for a professional meeting in Grand Rapids, while the other two were for court appearances in Cincinnati and Lansing. [.pdf of city of Ann Arbor response to initial FOIA request] [.pdf of follow-up city of Ann Arbor response with additional, corrected data on vehicle allowance amounts]

Up until his performance review in November 2012, Postema’s employment contract provided for a vehicle allowance:

Section 2.14 Car Allowance. Employee shall receive a car allowance calculated at $330/per month.

The resolution approved by the city council as the result of the city attorney’s performance review – which included a salary adjustment upward that is just slightly less than the value of the car allowance – explained the elimination of the car allowance this way:

Whereas, The City Attorney has offered to eliminate his contractual car allowance of $330/month as of January 1, 2013, as has been done with the City Administrator’s contract;

Even though the “whereas” clause seems to invite the conclusion that city administrator Steve Powers also had a vehicle allowance specified in his contract, and that it was also eliminated in the context of a regular performance evaluation, that’s not the case. Previous city administrator Roger Fraser had such an allowance, but Powers, who took over the city’s top job in the fall of 2011, never had such an allowance in his contract.

The initial discussions of the city attorney’s performance review are handled by the council’s administration committee. It currently consists of Sally Petersen (Ward 2), Margie Teall (Ward 4), Christopher Taylor (Ward 3), mayor pro tem Marcia Higgins and mayor John Hieftje. At the time of Postema’s performance review, former Ward 2 councilmember Tony Derezinski served instead of Petersen. Higgins did not respond to an emailed query from The Chronicle asking if she was aware of the issue with Postema’s mileage claims at the time of Postema’s performance review. Hieftje responded to that same query saying he was not aware Postema had made mileage claims.

In his response, Hieftje also insisted that the current review of travel and mileage policies was not caused by Postema’s mileage reimbursements:

I should note that going forward there will be a clarification of city policy regarding mileage reimbursement. However, this was not triggered by Stephen’s being reimbursed but as an overall response to something that came up as a minor issue in a “clean” audit.

In an interview with The Chronicle on Jan. 11, 2013, Hieftje explained his written assertion in part with the idea that Postema does not report to the city administrator but rather to the city council. [Under the city charter, the city council hires and evaluates two positions – the city attorney and the city administrator.] From that, Hieftje concluded that whatever policy revisions might be undertaken now by city administrator Steve Powers would not affect Postema’s reimbursements, because Postema’s reimbursements would be governed by his employment contract.

However, Postema’s employment contract explicitly states that reimbursement is to be made under standard city procedures:

Section 2.2 Business Expenses. Employee is authorized to incur such reasonable budgeted travel, cell phone expenses, entertainment and other professional expenses as are necessary in the performance of his duties. The City will reimburse Employee for such expenses in accordance with standard City procedures.

Hieftje seemed unaware during the Jan. 11 interview that the city’s response to The Chronicle’s record request had linked Postema’s mileage claims to the auditor’s note. At the conclusion of the interview, after being shown the records, Hieftje conceded the connection between Postema’s mileage claims and the policy review.

Travel versus Mileage: Significance of the Note

Tom Crawford, the city’s chief financial officer, led off the Jan. 24 meeting of the audit committee by establishing some context for the auditor’s note. He referred committee members to a written response he’d provided them. [.pdf of Crawford's response to auditor's letter]

Crawford reviewed how the basic result of the audit, communicated in the SAS (Statement of Auditing Standards) No. 114 letter, had been essentially a clean audit with two deficiencies. This year the letter had included notes on other matters, of a type that Crawford said he wouldn’t normally expect to see: “I don’t usually look for these comments down here.” The letter typically includes things like a material weakness or other deficiencies, but this year the letter included some other matters, that in Crawford’s experience are usually mentioned orally to staff – the CFO or the city administrator.

Crawford’s portrayal of the notes in the letter is consistent with that of auditor Mark Kettner’s remarks about them – when he presented the report to two audit committee members on Dec. 20, 2012. From The Chronicle’s report:

Kettner described a hierarchy of problems that an auditor can find: deficiencies, significant deficiencies, and material weaknesses.

There are also “other matters” that an auditor is not required to put into writing, he said. But they have to be communicated at least orally, and you have to document who was told and what they were told. So Rehmann’s practice is to include other matters in the management letter, because it’s easier to write down the information.

On Jan. 24, Crawford indicated that typically, the staff just deals with the orally-communicated notes in this category. But because this year the notes were in writing, Crawford said, he wanted to respond in writing. He indicated that a response would be sent to the auditor as well. He wanted the committee to understand that “We take this stuff seriously.”

Crawford welcomed any comments the audit committee members had on the written response. He continued by drawing a distinction between “council policies” and “administrative policies.” Crawford was recommending that the policies be reviewed and he indicated that the revisions to the policies were included in the written response that he’d provided to the committee. He invited questions from the audit committee.

Travel versus Mileage: Definitions

Sumi Kailasapathy (Ward 1) led off questions by focusing attention on the second page of Crawford’s written response. It portrays a lack of consensus among city finance staff about the appropriateness of the mileage claims. But Kailasapathy focused on Crawford’s contention that the city’s written policies don’t provide clear guidance. From Crawford’s written response [emphasis added]:

In evaluating this issue, staff first looks to legal contracts as a guiding document and secondly to administrative policies for guidance. The above employee with 3 trips had an employment agreement (see attached) with the city at the time of travel that included two separate provisions for an auto allowance and for reimbursement of travel expenditures. A review of the travel & mileage policy (see attached APP #504 & #505) revealed they do not provide clear guidance on how to handle this situation. Some finance staff reasonably believed a mileage reimbursement appeared like the same expense was being reimbursed for twice and raised the issue to the CFO. Meanwhile some supervisors and administrators operated with the belief that the vehicle allowance was for ordinary and customary travel within the city/county but not for less frequent out-of-town trips necessary for travel, training, etc.

Kailasapathy indicated that she’d reviewed the administrative policy on travel and on employee mileage reimbursement. She quoted from Policy 505:

The City of Ann Arbor shall pay mileage reimbursement for authorized business travel when an employee uses their personal vehicle.

Kailasapathy said that for her, that sentence is unambiguous: If you use your personal car, then you will be provided reimbursement and that is called “mileage reimbursement.” But in Crawford’s description of the issue, he’d used “travel” repeatedly, Kailasapathy pointed out. That, she felt, was incorrect, because you could come to different conclusions depending on whether it’s considered mileage reimbursement or travel.

By way of additional background on the issue of travel versus mileage, in response to an initial request made by The Chronicle under the FOIA, the city of Ann Arbor did not produce any official “City of Ann Arbor Travel Expense Report” forms for the three mileage claims made by Postema. For other claims, however, such forms were produced. Because the wording of the request had been somewhat vague, The Chronicle made an additional request asking specifically for those forms, if they existed.

After additional back-and-forth with the city in connection with that request, The Chronicle was able to establish that “City of Ann Arbor Travel Expense Report” forms were not submitted for Postema’s claims. Instead, an electronic submission was used, consistent with reimbursement for mileage by city employees who use their personal vehicle for city business. In terms of the distinction Kailasapathy was drawing, the claims appear to have been considered mileage reimbursements, as a opposed to travel expenses. [.pdf of records associated with Postema's mileage claims].

Kailasapathy then appealed to the city’s travel policy, which defines travel in a way that she indicated is consistent with IRS rules, which includes the need to stay overnight:

2.2 General Travel Limitations – Subject to budget limitations, all employees are permitted to attend, subject to authorization by the service area administrator or his/her designee, City work-related overnight conferences, seminars, training, certification programs, continuing education, or other similar work-related educational or professional events. The number of employees from a service area allowed to attend the same travel function will be at the service area administrator’s discretion. Overnight travel will be used only for opportunities that cannot be achieved locally.

Kailasapathy said it’s important to be clear about what it means for someone to be using their personal vehicle. She contended that if an employee has a car allowance, then it is for operating that car – and to her that’s clear. She told Crawford she was disappointed that he was saying the city policies don’t provide clear guidance. She felt the guidance is clear – and that travel and mileage reimbursements are very clearly defined. If you have a car allowance and you’re asking for a car allowance, then you’re asking for the reimbursement for “one and the same thing.” Kailasapathy ventured that a car allowance is not “to park the car in front of your house to look pretty.”

Travel versus Mileage: Intent of a Vehicle Allowance

Earlier in the back-and-forth, Crawford had asked if Kailasapathy was drawing a conclusion about any employee who had a vehicle allowance – and whether “the vehicle they acquire” is still their personal vehicle. Crawford seemed to indicate a view that, to him, it’s reasonable to interpret the intended use of a vehicle allowance to be exclusively the acquisition of a vehicle, not including the operation of that vehicle for businesses purposes.

Responding to Kailasapathy’s “to look pretty” comment, Crawford again reiterated his position that a vehicle allowance was intended for acquisition of a vehicle, saying that if an employee uses their vehicle allowance to acquire a vehicle, that doesn’t make it a city vehicle. Because it’s still their personal vehicle, Crawford contended, the employee could be reimbursed for mileage. He then allowed that it’s at least not clear if an employee with a vehicle allowance could be reimbursed for mileage – because the mileage policy doesn’t mention a vehicle allowance.

Kailasapathy compared the situation to receiving a house as part of your compensation but still claiming rent as an expense. Crawford said he thought Kailasapathy was assuming that the purpose of the vehicle allowance is for the acquisition and use of that vehicle. Crawford asked her what she felt the point of the car allowance was. “Using your personal car to do business,” she replied, giving examples like going to court to defend the city in a lawsuit. Crawford responded by saying, “That’s interesting … that’s not written anywhere what the allowance is for.”

At that point Stephen Kunselman (Ward 3) said, “It’s an outright perk, basically – right? Monetary benefit, car allowance, no strings attached.” Margie Teall (Ward 4) seemed to chafe at Kunselman’s characterization of the car allowance as a perk, saying, “It’s a ‘perk’ if you want to call it that …” Crawford indicated that the vehicle allowance has been used in different ways by different city employees. He was trying to point out that Kailasapathy’s assumption – that the vehicle allowance was meant to cover the operation of a personal vehicle when it’s used for city business – is not recorded anywhere in a written city policy.

Crawford stated that the mileage reimbursement that Postema had been seeking was subject to his contract, which has two clauses that mention travel. At that point, Kailasapathy appeared ready to argue about whether the clauses in Postema’s contract on travel would, in fact, justify the mileage reimbursement. However, Teall indicated no enthusiasm for that kind of detailed debate: “You know, I don’t want get into a contract issue. … I don’t think we can have that discussion here.” Kunselman also indicated he didn’t want to entertain that discussion.

Kunselman came back to the auditor’s note that indicated there had been a “violation” of city policy. It wasn’t the role of the audit committee to interpret the city policy, but rather to have management address any unclarities. Kunselman said it sounded like there were a lot of changes being implemented with respect to car allowances. By way of additional background, in an email to The Chronicle published previously, city administrator Steve Powers wrote:

During the past year, I have removed vehicle allowances from the compensation for service area administrators.

The remaining vehicle allowances are for employees, such as property appraisers, where the use of personal vehicles with an allowance is more advantageous to the City than paying mileage or using a city vehicle.

Kunselman indicated he felt this was the right direction to go, but didn’t want to spend a lot of time looking back and getting bogged down.

Travel versus Mileage: Revision of the Letter

Kunselman was, however, interested in having the wording of the auditor’s letter revised, because Kunselman felt that the statement that there had been a “violation” of city policy was inaccurate. Based on the material provided in Crawford’s response to the auditor’s comment, auditor Mark Kettner had already agreed to revise the phrase that referred to a policy violation – as a result of a phone conversation he’d had with Crawford and Postema.

In Kettner’s written response to Crawford and Postema, he agrees that the phrase “violates city policy” is incorrect and acknowledges that he was not given Postema’s employment contract for review in reaching his conclusion that the mileage reimbursement was not appropriate. Kettner explained his conclusion this way:

As I also stated in our conversations, from a business practices standpoint, our conclusion (with or without the existence of a policy) was it would be illogical and, therefore inappropriate, to make mileage reimbursements to persons having a car allowance. This conclusion is in the absence of knowledge of an agreement that would reasonably identify that payment of both mileage reimbursement and car allowance is acceptable and appropriate.

The question the audit committee was disinclined to settle explicitly is whether Postema’s contract is an employment agreement that identifies payment of mileage reimbursement and car allowance as acceptable.

At the Jan. 24 meeting, Kettner indicated that he’d be willing to change the phrase “which violates city policy.” After “all the extra stuff that has occurred,” Kettner said he concluded that “there is not a policy per se that says ‘You shall not get a mileage reimbursement if you have a car allowance.’” But he would keep the note in the letter – because even though it involves a small dollar amount, it’s an issue involving policies, procedures and contracts, and he felt the city needs to address it and figure out what to do about it. That’s the whole purpose of it, he said.

In the context of the overall city audit, Kettner said, the mileage issue was really a tiny issue. Crawford indicated he felt that the city’s approach to identifying problems seemed to be working. Crawford indicated that there were differing views by city staff about how the policies should be interpreted, and the fact that he and Kailasapathy had different views on interpretation supported the idea that the policies weren’t completely clear. He said the issue had come to light during the audit – in a minor way – and whenever those issues come to light, the staff re-visits them. Teall added that the review of the policy had already started.

Travel versus Mileage: Recommendations

Recommendations by Crawford responding to the audit note on travel and mileage reimbursements include:

• Clarify and revise the city’s travel policy to reflect expectations for reimbursement when an employee receives a vehicle allowance.
• Clarify and revise the city’s travel policy to require travel reimbursement requests for the city administrator and city attorney to be approved by the Council Administration Committee Chairperson.
• Establish a vehicle allowance policy to clarify expectations for what a vehicle reimbursement is intended to be used for.
• Communicate these policy updates with staff and have Service Area Administrators responsible for ensuring consistent treatment across the organization.

Responding to a query from Kailasapathy, Crawford indicated he did not necessarily think that travel reimbursements for mileage should be tied in the future more explicitly to an overnight requirement – because it could create a perverse incentive for employees to stay overnight, thus incurring even greater expense to the city. Kailasapathy countered that whether the travel expense was appropriate or not was already subject to a supervisor’s review. In the case of the city administrator and the city attorney, Crawford pointed out, the recommendation is that their travel requests in the future be subject to review by the council’s administration committee.

Role of the Audit Committee

The travel and mileage issue took about 25 minutes of the Jan 24 audit committee meeting, which lasted about an hour.

In the remaining time, the committee discussed some of other items in Crawford’s written response. For example, they discussed the challenge of implementing regular password changes by employees, when they must log on to several different systems – the sheer number of passwords could result in a sticky-note strategy of recording passwords, which is also not desirable.

However, the main focus of the remainder of the meeting could be summarized as dealing with the future role of the audit committee. It was prompted by Rehmann’s observation about the way the city’s internal auditor reports:

We noted through inquiries of various City employees that the Internal Auditor organizationally reports through the Chief Financial Officer. We recommend that the City review this procedure and determine if this function would be more effective if the Internal Auditor reported directly to the Audit Committee.

But the consensus of the audit committee at the Jan. 24 meeting seemed to be that the internal auditor should not report in an organizational sense to the audit committee. That is, the city council would not want to explore adding a third employee – in addition to the city attorney and the city administrator – to the two they already supervise. But committee members felt that the internal auditor should be able to communicate to the audit committee, if the internal auditor didn’t feel comfortable communicating a concern to the chief financial officer or the city administrator.

The audit committee as a group indicated a desire to be kept apprised of information that comes to light in the course of the year. For example, Crawford noted that the city has an anonymous fraud hotline, and when tips come in through the hotline, they’re investigated – but he pointed out that not many tips come in. The audit committee would be kept apprised of those tips and the outcome of the investigation.

The committee also indicated a desire to meet again, well before next fall, to review how the recommendations from this year’s audit are being implemented. Chuck Warpehoski (Ward 5) seemed to reflect a consensus, however, that the committee did not want to distract the financial services staff from their current preparations for the budget.

In the shorter term, the audit committee will be meeting again before the next regularly scheduled city council meeting on Feb. 4, 2013. No date or time for that committee meeting has been announced. Audit committee member Sally Petersen (Ward 2) was not able to attend the Jan. 24 meeting, and according to some other members of the committee, the next meeting will give Petersen an opportunity to make sure her concerns are addressed.

The Chronicle could not survive without regular voluntary subscriptions to support our coverage of public bodies like the Ann Arbor city council. Click this link for details: Subscribe to The Chronicle. And if you’re already supporting us, please encourage your friends, neighbors and colleagues to help support The Chronicle, too!