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Monday, March 29, 2004

Indiana Law - More on the Lake County suit involving Arthur Andersen LLP

This story today in the Munster NWI Times begins:

CROWN POINT -- Faced with the prospect of owing Arthur Andersen LLP as much as $10 million for its canceled reassessment contract, Lake County will stop paying all reassessment bills, which a county commissioner said could throw the county into financial chaos. * * * And until an Indianapolis judge rules on Andersen's lawsuit and determines if and how much money the defunct firm should get paid, county attorney John Dull has advised the commissioners to cast aside all other reassessment invoices as well. * * * The concern is that Lake County is legally required to pay for the reassessment and once the state signs the invoices, if the county won't approve payment, Indiana officials can take the money out of different funds. The state could withhold casino revenue, for instance, or property tax replacement credits. The county, and 16 cities and towns, depend on casino dollars for infrastructure and other capital improvements.
Here in Indianapolis [but receiving little or no coverage in the local press], Marion County Judge Gerald Zore currently is hearing Arthur Andersen's suit against Lake County. The facts of the case are complicated. The upshot, as set out in the NWI Times story today, is that:
The Indiana Department of Local Government Finance hired Andersen in 2001 to perform the court-ordered property reassessment in Lake County But state officials pulled the $25 million contract in April 2002 and hired CLT to run the reassessment instead. The cancellation came in the wake of the Enron scandal, in which the federal government indicted Andersen officials for obstruction of justice.

Because the state controlled its contract, Andersen in 2002 sued the state's local government finance department, and not Lake County But local taxpayers still are potentially on the hook for some of those millions because the reassessment law requires the county to pay for the contract costs.

However, state law also caps Lake County's reassessment costs at $25.5 million, and DLGF Commissioner Beth Henkel has said the county's fiscal responsibility to Andersen could be limited.

Furthermore, state and county officials believe Andersen actually did little work on the reassessment before its contract was terminated, although former DLGF commissioner Jon Laramore signed Andersen's six invoices, totaling $9.6 million in 2002. Laramore, now chief legal counsel to Gov. Joe Kernan, approved one such payment -- for $2.8 million -- five days after the state signed Andersen's contract.

When asked in an earlier interview why payments on work now being questioned were approved, Henkel said the department was "under duress to get the reassessment going."

See an earlier (3/19/04) Indiana Law Blog entry here. Also of interest, but unfortunately no longer available online, is a story from the Gary Post Tribune dated 3/24/04. Some quotes from that story:
Three years after the fall of Arthur Andersen, Lake County taxpayers are still on the hook for what state officials now admit may have been the most expensive reassessment in U.S. history.

Attorneys for the deposed accounting firm were in court in Indianapolis on Monday, asking the judge to enforce their $25 million contract, awarded in November 2001. Within weeks of the contract being signed, Andersen began imploding in the Enron scandal. The state pulled its contract in April 2001, but not before Andersen submitted six bills totaling $9.6 million.

When the $25 million price tag was unveiled, it shocked Lake County officials. The 2001 law that turned over responsibility for reassessment to the state also cut out Lake County officials from the negotiations. The law dictated that Lake County would pay for the assessment, but that the state could control the contract. Even before state regulators were hounded by county officials, court records in the Andersen case reveal that state officials knew they were about to sign one of the most expensive reassessment contracts in the country.

“(It was the) highest or second highest per-parcel re-assessment price in the United States — in the history of the United States as far as we could determine,” said Department of Local Government Finance chairman Jon Laramore, in his July 24 deposition to Andersen’s attorneys. Laramore was one of the contract negotiators. * * *

Laramore went on to be legal counsel for Gov. Joe Kernan. Interviewed in his Statehouse office, Laramore said state regulators felt they had little choice. After the General Assembly passed the law requiring the reassessment, the state was under pressure to sign a contract. The state was under a deadline set by the Indiana Tax Court to conduct a reassessment, based loosely on market value principles. Lawmakers, led by then Rep. Dan Dumezich, had required the state use one of the five major accounting houses to oversee the assessment. Andersen had been the only bidder. * * *

In his deposition, Laramore concedes that even before the details of the contract were made public, he had doubts about whether Lake County would pay for the reassessment. He believed the law passed by the General Assembly may not have been constitutional. Laramore said he could not remember whether he expressed those doubts to anyone, including lawmakers or Gov. Frank O’Bannon.

In September 2001, a letter from the Northwest Indiana delegation to the General Assembly urged the state to solve the dispute with Andersen and sign a contract.

One of the questions being asked more than three years later is: Why did the state agree to a schedule of payments that gave Andersen more than 40 percent of its $25 million before the first home was assessed? Court documents reveal that the payments were made high intentionally at the beginning, including a first payment of $3.1 million. The high initial payments were, in part, a test. “There were some doubts as to whether Lake County would pay,” Laramore said.

Posted by Marcia Oddi on March 29, 2004 12:06 PM
Posted to Indiana Law