There has been a lot of publicity lately about the money flowing into volunteer fire departments and benevolent associations from the foreign fire insurance tax, known as “Two Percent Money.” The Journal News, for example, published a “tax watch” article (10/8/2017, page 1), which focused on the enormous sums coming in, and the sometimes extravagant parties funded by those revenues.
It is true that some departments have used the Two Percent Money in ways which are of questionable value to the community they protect. However, the majority of departments which receive the money, and the vast majority of expenses which are paid for by Two Percent Money, are lawful, ethical and appropriate for operation of a volunteer fire department, including retention of members.
Where the money comes from: the New York State Insurance Law imposes a 2% tax on all non-New York fire insurance companies which insure real property in New York. The tax is paid to the State and distributed annually to fire departments or, if they have them, to their benevolent associations (this article focuses only on fire departments; the rules for benevolents is different). A small portion of the money is diverted to fund the Fireman’s Home on Hudson.
On what can you use your Two Percent Money? For a fire department, on pretty much anything which the members determine to be for the use and benefit of the department, other than a purpose which is illegal or contrary to public policy. The money cannot be used to benefit an individual member, for example by buying him or her Jets tickets, or to purchase material which is normally considered to be a municipal expense, such as turnout gear or a Chief’s car. The State Comptroller’s Office has issued this broad determination (Opinion 82-10):
“We have expressed the view, in the absence of a special act, foreign fire insurance monies maybe expended for any purpose which the members of the fire department and the department, municipal or district treasurer, as the case may be, determine to be for the use and benefit of the fire department.”
The Comptroller’s Office stated further, “these individuals [speaking of the members] are in the best position to make a determination as to which expenditures will be most beneficial to the fire department.” (Opinion 79-627).
These expenditures by a fire department have been considered proper:
• Food and refreshment for the monthly meetings;
• Apparel such as T-shirts and uniforms;
• Bands for parades;
• Funding the fire department softball, billiard and bowling teams; and
• Furniture and appliances such as air conditioners for the clubhouse.
The City of Corning was even permitted to use Two Percent Money to reimburse the fire department for losses from a failed fund-raiser.
What expenditures are improper? Generally, those expenditures that benefit one person or group, or which are not for the use or benefit of the fire department, are not allowed. They include:
• Donations to other fire departments;
• Payment of department salaries (except as to actual administration of the Two Percent Money);
• Loans to individuals;
• Fees for members to attend firefighter conventions or firefighter courses;
• Direct cash payments to members; and
• Funding a LOSAP program.
Any entity, whether a fire department or a benevolent association, which receives more than $100 in Two Percent Money must file an Annual Report each year with the State Comptroller. And that entity is subject to audit by the State Comptroller. General Municipal Law Sec. 33-a provides that the Comptroller may cause the records and accounts of the department receiving and disbursing funds to be inspected, and “on every such examination inquiry shall be made as to the method and accuracy of accounts.”
A review of The State Comptroller’s reports on its audits reveals an emphasis on uncovering improper controls more than on finding improper payments. The Comptroller’s Office wants to make sure that there are controls adequate to ensure that financial activity is properly recorded and reported and that Two Percent Money is safeguarded. It wants to see a separate checking account for Two Percent Money transactions and good records kept.
But what if you do get an audit demand? Your department should preserve all of its records and invite the auditors to work with your accountant (if you have one) and your lawyer (you need one) to determine what practices are appropriate for your departments use of all department funds.
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This article was published in the November 2017 issue of the Newsletter of the Westchester County Volunteer Firemen’s Association.
