Taxpayers, through their local governments, have always borne some of the cost of death care. Taxes go toward the maintenance of abandoned cemeteries and the final disposition of the indigent. But as the New York Times reports, the economy is causing more families to abandon the care of their dead to local governments. While many funeral homes will do what they can to assist the indigent, regulators and legislators are being forced to address this growing problem.

When Missouri’s legislature re-wrote that state’s preneed law this year, one of the earlier bill proposals included a revision to the public assistance law that would have allowed a person to set aside funds in a trust to be used for funeral and burial expenses. The trust would serve as an alternative to a preneed funeral contract. The public assistance law would also have been amended to contemplate the preneed reforms to be made to Chapter 436. However, the Chapter 436 reform passed by the Missouri legislature, and signed by the Missouri Governor, did not include any of the public assistance law amendments.

If interpreted strictly, Missouri’s public assistance law (Chapter 208), does not even exclude an irrevocable preneed funeral contract from the resources of an applicant for public assistance. It is unlikely Missouri residents will be denied the use of “spend downs” to qualify for pubic assistance, but legislators and regulators need to understand that SB1 was not a “one and done” fix for the NPS problems.
 

The funeral director’s decision about how to fund his preneed is influenced by the state’s trusting requirement, investment returns, administrative convenience and the volume of preneed business. Essentially, there are three methods of funding preneed: the depository account, the master trust and the insurance policy.

The funeral director’s use of the depository account predates all state preneed laws. The industry has been accommodating families for decades by accepting payment for a future funeral, and then placing those funds in an account at the local bank. The early preneed laws reflected this practice with language that sought to impose how the depository account was to be structured. Those early laws gave rise to the “joint account contract”.

By the 1970s, proactive preneed sales organizations were testing the limits of the depository account. Low returns and administrative hassles caused the proactive seller to abandon depository accounts in favor of insurance or master trusts. For states with high trusting requirements, the proactive seller turned to insurance funding because it provided the commissions required to pay salesmen and finance the preneed program. In states with a lower trusting percentage, the master trust provided the seller the economies of scale to achieve higher returns and lower administrative costs. But, the master trust’s popularity was stunted by Revenue Ruling 87-127.

With preneed insurance carriers now cutting policy benefits, some funeral directors will need to reexamine the master trust, and the use of finance charges.

Generally, the purchase price of a guaranteed preneed contract is set by the funeral home’s general price list (the prices it charges for a funeral that would be performed today). In today’s economy, fewer consumers can afford to pay for a preneed contract with a single payment. But when a family is permitted to pay for the preneed contract over a period of five to ten years, the cost of the funeral at the contract’s performance will often exceed the trust proceeds by thousands of dollars. Regulators assume that the trust’s income will offset or exceed the rise in the costs of the funeral, but that is seldom the case with contracts paid by installments. These contracts often represent a loss to the funeral home.

Some funeral homes already include finance charges in their installment payments to offset the loss of trust earnings. However, funeral homes have not been consistent in their disclosure of the finance charges. In fact, NPS was notorious for incorporating a 12% administration charge into an installment schedule that also included a mortality charge. None of which was disclosed to the consumer.

As reflected by a Kansas Attorney General’s opinion, regulators often perceive that finance charges are an exploitation of the consumer. Instead, regulators should ensure that finance charges (or administrative charges) are adequately disclosed to the consumer, and reasonable to both the consumer and the seller.

The emergency rule that implements Missouri’s $36 per contract fee becomes ‘official’ on October 4th.  Missouri funeral directors question whether the fee is too high, and whether it will contribute to the decline in preneed sales. The analysis required for the emergency rule reports that the fee is expected to generate $612,000 of revenues that will be used by the State Board of Embalmers and Funeral Directors for the enforcement of Senate Bill. No. 1. While funeral directors will challenge the State Board’s need for $612,000, the industry must consider how a few problem sellers contribute to the cost of preneed.

The State Board’s October 20th agenda includes a disciplinary hearing on a preneed seller involving allegations of multiple violations. The administrative order included with the agenda reflects extensive time and effort expended by the Board’s staff, investigators and attorneys. The alleged misconduct covers several years and several preneed purchasers, and the proceeding represents a substantial cost to the State Board.

Missouri has never had an effective preneed exam or audit program.  Consequently, regulators are left to question whether the October 20th hearing is just the tip of the iceberg.

Sellers with a compliant preneed program question why a few bad apples should spoil the barrel for the entire industry. With the $36 fee providing the Board most of its funding for audits and enforcement proceedings, compliant sellers have a reasonable argument that the fee represents an inequitable surcharge to their families. But, Missouri’s sellers face an up hill climb in any fight for a lower fee.

The climb up that hill begins with two proposals: better annual reporting and a shift of audit expenses.

With better annual reporting, Missouri’s regulators could spot trouble accounts without an audit, and when less drastic enforcement actions are an option.

When the State Board’s preneed examination discloses material non-compliance, the costs of an audit and enforcement proceedings should then be borne by the seller.

 

Over the past few years, preneed frauds have been measured in terms of hundreds of millions (with the suggestion that the NPS loss will top a billion).  And, funeral directors and consumers have been frustrated by the perception that regulators are helpless to stop preneed fraud.  Apparently, one local prosecutor from Texas took notice.

When the Texas preneed regulator and Attorney General failed to address an $8,000 fraud, the Galveston County prosecutor obtained a grand jury indictment against a Texas funeral director for the misappropriation of preneed funds.  Generally, the prosecution of preneed fraud falls to the death care regulator and/or the state attorney general.  Realizing that state coffers may be lean for years to come, legislatures such as Missouri’s are granting local prosecutors concurrent jurisdiction to prosecute preneed law violations. 

The prospect of prosecution by a district attorney with no prior experience interpreting an ambiguous preneed statute was sufficient reason for funeral directors to oppose legislation that authorized concurrent jurisdiction.  However, circumstances such as those in Missouri and Illinois have opened the door for comprehensive reform legislation, and concurrent jurisdiction. 

When the attorney general may lack the resources to prosecute an $8,000 preneed fraud, the local prosecutor, looking to make a name for himself/herself, can initiate a prosecution of the wayward funeral director by using statutes such as Missouri’s Chapter 436. 

Governor Quinn’s Cemetery Oversight Task Force worked overtime to get their report done early, and Illinois’ death care industry now faces new questions about reform legislation.  It would appear that SB1682 will not be the last shot fired in the battle for death care reform for Illinois.

The full report is available on the Governor’s website. 

The Missouri State Board of Embalmers and Funeral Directors faces two hurdles to implementing SB1: disagreements over the interpretation of key provisions and informing the industry how the Board will enforce the law. These hurdles have put the Board in to a Catch 22 situation.

SB1 was drafted under the cloud of the NPS crisis. Legislators were lobbied from all sides, with positions as diametrically opposed as outlawing preneed to leaving Chapter 436 in tact. With limited assistance from the industry, legislators used the resources at hand and forged compromises. As a consequence, the law has several ambiguities, and crucial provisions can legitimately be interpreted differently. There is ample room for disagreements.

The disagreements over SB1 requirements have caused the State Board to reconsider how to best educate the industry. When contacted with SB1 questions, the Board’s staff (and website) recommends that licensees seek the advice of an attorney. This may be the appropriate ‘legal’ answer, but it is one that will frustrate the licensee. First, the advice requires the licensee to incur an expense at a time when it can be least afforded. Second, there is no assurance an attorney can provide an answer the licensee can rely upon. Some attorneys will turn to the Board’s legal staff, and it is not clear those attorneys are in a position to field questions about SB1.

As licensees, funeral directors do have a responsibility to educate themselves about the law’s requirements. We have heard this at recent Board meetings. But, before the licensee can educate himself on the law’s requirements, the State Board must be able to clearly articulate the law’s requirements. That could require weeks on most issues, if not months on other issues.
 

The September edition of the Mortuary Management ran an excerpt from a Funeral Monitor article about the California Master Trust suffering a deficit. 

If the story is accurate about the master trust’s shortage, the author’s speculation about the reasons for the deficit omits a possible factor that has existed for years: the 4% administration fee. 

As explained by the Cemetery and Funeral Bureau’s audit guide, California law allows for an annual 4% administration fee.  If the CMT takes the full administration fee allowed by law, no wonder the trust is running a bit short.

One criticism of Missouri’s prior preneed law was that the Attorney General’s office was dependent upon the State Board to refer complaints for legal enforcement. If the State Board didn’t refer a Chapter 436 violation, the AG’s only enforcement alternative was to pursue an action under Missouri’s Merchandising Practices Act (Chapter 407). During the 2008 hearings on Chapter 436 and National Prearranged Services, it was generally recognized that the Attorney General’s office needed independent authorities to pursue Chapter 436 violations. But, the Attorney General also expressed the desire for authority to hold fiduciaries more accountable for their funeral home client’s actions.

The AG’s fiduciary recommendations drew concerns from both funeral homes and the Missouri Division of Finance. The Division of Finance questioned whether the requested powers would make the AG a de facto bank regulator on par with the Division and the bank’s federal regulators. Consequently, the final recommendations for Chapter 436 legislation conditioned the AG’s authority to take action against a fiduciary on having received the consent of the fiduciary’s primary regulator.

However, the Chapter 436 Working Group recommendation regarding this limitation on the Missouri Attorney General did not survive the Senate Bill No. 1 revision process.

Section 436.470.12 of SB1 grants the Attorney General the authority to bring action against a preneed fiduciary whenever an “inspection, investigation, examination or audit” reveals a violation of Chapter 436. A prior subsection provides for information sharing among the relevant Missouri agencies, and arguably, the AG’s authority over preneed fiduciaries could be triggered by the AG’s own investigation or examination.

And, there seems little doubt that the AG may be inclined to apply this new authority with regard to preneed trusts that existed prior to August 28th. Accordingly, Missouri’s preneed fiduciaries should evaluate their accounts with the knowledge that Big Brother may be looking.
 

Missouri will look to a combination of licensing fees from preneed sellers, providers and agents to fund a portion of the projected costs of preneed oversight under SB1. But, most of SB1’s enforcement price will be funded by the $36 to be charged for each preneed contract sold. The ‘per contract’ fee is not new to the Missouri preneed industry, but the fee does represent a substantial increase from the $2 charged under the prior law.

According to State Board’s statistics, the Missouri preneed industry has sold an average of more than 22,000 preneed contracts each year during the past 6 years. Using that average, the new per contract fee will increase the State Board’s annual budget by more than $750,000. Appropriately, consumers and death care companies are asking how this budget will be used.

Another question is who should bare this expense. When the fee was at $2, many funeral homes absorbed that cost. But in today’s economy, the fee represents an expense that many funeral directors can no longer absorb. One of the proposed emergency rules reflects the division that exists between the Attorney General and some the State Board members with regard to how this new fee should be assessed.

With the purchase price of a preneed contract based on the funeral home’s current prices, a preneed seller must already absorb the costs of developing and maintaining a compliant program. Funeral homes and cemeteries must also bare a portion of SB1’s costs through new licensing fees. By passing the per contract fee on to consumers, the death care industry can begin to make regulators accountable to the public for the oversight they plan to provide for the preneed consumer.
 

The first week under the new preneed law was a confusing one for the Missouri funeral industry. SB1 has many drafting conflicts and ambiguities, and that has give rise to different interpretations from the Attorney General’s Office, the State Board of Embalmers and Funeral Directors, and the death care industry.

The State Board and the Attorney General’s Office have been criticized for the NPS debacle. While some of that criticism may be justified, NPS exploited the weaknesses of Chapter 436 (and the Board’s enforcement budget), and kept the regulators at bay for years. With SB1, the regulators have been given the keys to a new vehicle for preneed oversight and enforcement, but they are not in total agreement about the map to follow.

The State Board’s immediate agenda are the emergency rules that will keep the preneed industry functioning for the next 3 to 9 months. Consequently, debate over interpretations must be brief and concessions must be made. In some respects, the resulting emergency rules will be overly burdensome. But, these emergency rules will be the law until regulations are promulgated pursuant to the normal rulemaking process. Funeral homes that disregard the emergency rules, do so at substantial risks. It is crucial that funeral directors also understand that the emergency rules will impact the preneed contracts sold prior to August 28th.