The Minimum Capital Requirement

The new law set out below was carefully tracked through the legislative process by the Texas Cemeteries Association and its Lobbyist. The new law became effective on September 1, 2011 and its main purpose was to clarify and document current practices, standards and criteria already used by the Department of Banking in regulation. However, one item that has not been a standard practice in the past may cause some consternation to some smaller perpetual care cemeteries. Please read further for more information about the minimum capital requirement for perpetual care cemeteries.

Renewal of Certificate of Authority

§712.0037 Texas Health & Safety Code

Effective September 1, 2011

(a) As a condition of renewal, a certificate holder must meet the qualifications and satisfy the requirements that apply to an applicant for a new certificate of authority. Additionally, not later than the certificate’s annual renewal date, a certificate holder shall:

(1) pay an annual renewal fee in an amount established by Finance Commission of Texas rule; and

(2) submit a renewal report under oath and in the form and medium required by the commissioner that demonstrates that the certificate holder meets the qualifications and requirements for holding a certificate.

(b) If the department does not receive a certificate holder’s renewal fee and complete renewal report on or before the certificate’s renewal date, the commissioner:

(1) shall notify the certificate holder in writing that the certificate holder must submit the renewal report and pay the renewal fee not later than the 30th day after the certificate’s renewal date; and

(2) may require the certificate holder to pay a late fee, in an amount established by Finance Commission of Texas rule and not subject to appeal, for each business day after the certificate’s renewal date that the commissioner does not receive the completed renewal report and renewal fee.

(c) On timely receipt of a certificate holder’s complete renewal report and renewal fee and any late fee, the department shall review the report and the commissioner may:

(1) renew the certificate of authority; or

(2) refuse to renew the certificate of authority and take other action the commissioner considers appropriate.

(d) The applicant on request is entitled to a hearing to contest the commissioner’s refusal to renew the certificate. The request must be filed with the commissioner not later than the 30th day after the date the notice of refusal to renew is mailed. The hearing is a contested case under Chapter 2001, Government Code.

(e) The holder or principal of or the person in control of the holder of an expired certificate of authority, or the holder or principal of or person in control of the holder of a certificate of authority surrendered under Section 712.00395, who wishes to conduct activities for which a certificate of authority is required under this chapter shall file a new application for a certificate of authority and satisfy all requirements for the certificate that apply at the time the new application is filed.

Qualifications for Certificate of Authority; Investigation

§712.0034 Texas Health & Safety Code

Effective September 1, 2011

(a) The commissioner may investigate an applicant before issuing a certificate of authority.

(b) To qualify for a certificate of authority under this chapter, an applicant must demonstrate to the satisfaction of the commissioner that:

(1) the applicant’s business ability, experience, character, financial condition, and general fitness warrant the public’s confidence;

(2) the cemetery operations manager has at least two years of experience in cemetery management;

(3) the issuance of the certificate of authority is in the public interest;

(4) the applicant, a principal of the applicant, or a person who controls the applicant does not owe the department a delinquent fee, assessment, administrative penalty, or other amount imposed under this chapter or a rule adopted or order issued under this chapter; and

(5) the applicant corporation:

(A) is in good standing and statutory compliance with this state;

(B) is authorized to engage in the perpetual care cemetery business in this state; and

In addition to the qualifications just listed in §712.0034, the first phrase of subsection (a) of the Renewal Section (underlined above), mandates that one of the requirements that must now be satisfied at the time of renewal (and a requirement that will be scrutinized during any audits), is the Minimum Capital Requirement. Before this law became effective, the minimum capital requirement pertained only to acquiring an initial licensing of the perpetual care cemetery. Now, in order to obtain a renewal Certificate of Authority the minimum capital requirement must be met.

Furthermore, even though the new law pertains to the renewal process, the Department of Banking will review the capital requirements at audit. If the minimum capital requirement is not met the Department will consider the financial condition when determining the overall risk rating to assign the certificate holder.

§712.003 of the Texas Health & Safety Code sets out the minimum capital requirements that must now be met every year at renewal and also maintained throughout the year. Those requirements are:

A corporation chartered prior to September 5, 1955 has no minimum capital requirement; however, the Department will review the certificate holder financials to ensure the cemetery is operated in a safe and sound condition in compliance with Section 712.0034(1) of the Texas Health and Safety Code
A corporation chartered between September 5, 1955 and before September 1, 1993 must have a minimum capital of:

(1) $15,000 if the cemetery serves a municipality with a population of less than 15,000.

(2) $30,000 if the cemetery serves a municipality with a population of 15,000 to 25,000.

(3) $50,000 if the cemetery serves a municipality with a population of at least 25,000.

A corporation chartered after September 1, 1993 must have a minimum capital of $75,000.00.

“Hypothetical” Example

In 2001, Innocent Oaks Corporation filed an application to establish a perpetual care cemetery. The application was approved and Innocent Oaks Cemetery was licensed as a perpetual care cemetery. The corporation had met all initial qualifications and requirements including the requirement to have minimum capital of $75,000, since it was chartered after September 1, 1993.

Over the next ten years the capital account or equity account of Innocent Oaks Cemetery fluctuated between $65,000 and $80,000 as may be expected in the ebb and flow of its business and the economy. During the same ten year period, Innocent Oaks Cemetery filed its annual applications for renewal of its License which were granted each year. Additionally, Innocent Oaks Cemetery endured several audits from the Department of Banking and almost always received a uniform risk rating of 1.

In early October of 2011 Innocent Oaks Cemetery had its regularly scheduled audit. After the audit was completed the cemetery was informed that because its capital account was standing at $64,000, it did not meet the minimum capital requirement of $75,000. The issue would be cited in the report of examination and the overall risk rating assigned to the certificate holder would be downgraded. The cemetery would be required to respond to the examination findings and to provide a corrective action plan to the Department, which would detail how the certificate holder would obtain and maintain the minimum $75,000.00 equity requirement.

Needless to say the cemetery was quite taken aback because never before had the Department of Banking made an issue out of the capital account of the cemetery. But, as of September 1, 2011 that and more has now changed.

Here is a sample write up that Innocent Oaks Cemetery might have received from the Department of Banking. [This is an actual sample write up on the issue that the DOB has been providing certificate holders in the reports of examination since the law became effective].

“During the examination, management was reminded that HB 2495, which became effective September 1, 2011, requires a perpetual care cemetery to possess the business ability, experience, character, financial condition and general fitness to warrant the public’s confidence as previously demonstrated when the certificate of authority was initially issued by the Department. The capital requirements of the Health Code for certificate holders were not changed by the implementation of HB 2495.

In November 2010, all certificate holders were provided a copy of the suggested revisions of HB 2495, along with a summary of the proposed changes, and were advised to review and provide their comments to the Department for consideration. In addition, all certificate holders were invited to attend a meeting in Austin, Texas, in December 2010 to further discuss the proposed amendments. Based on limited feedback received from certificate holders, a second draft of the proposed changes to Chapters 711 and 712 of the Health Code was sent to all certificate holders in January 2011 for their review and comment. Again, no negative feedback was received. HB 2495 was then introduced during the 82nd Legislative Session and passed into law in May 2011. After enactment in July 2011, all certificate holders were provided a summary of the amendments to the Health Code.

Certificate holders must now demonstrate that they meet the qualifications that apply to an applicant for a certificate of authority as required by Section 712.0037 of the Health Code to continue operations. Since the certificate holder was incorporated after September 1, 1993, the minimum capital requirement of $75,000.00 must be maintained”.

Although all certificate holders were given notice by the Department of Banking of the proposed revisions included in HB 2495, and were also given ample opportunity for input, this particular change in the capital requirements may very well have been overlooked by many perpetual care cemeteries. It is very important to take a look at your financials to make sure you exceed your specific minimum capital requirement. Since the capital account of a company or the equity account of a sole proprietorship or partnership almost always fluctuates depending on what’s going on with the business, it is now vitally important that a perpetual care cemetery be constantly alert to keep its minimal capital account balance above the statutory minimum requirement.

We wish to express our gratitude to Mr. Russell Reese, Director of Special Audits, Texas Department of Banking, for his invaluable input in helping us understand and articulate the effects of this change in the law.