Call to Order and Roll Call
The 1st meeting of the Government Nonprofit Contracting Task Force was held on Thursday, July 7, 2016, at 8:30 AM, in Room 131 of the Capitol Annex. Senator Max Wise, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Max Wise, Chair; Representative Russ A. Meyer, Co-Chair; Senators Danny Carroll, Denise Harper Angel, and Stephen West; Representatives Dennis Horlander, Arnold Simpson, and Addia Wuchner; Norman Arflack, Promod Bishnoi, Cyndee Burton, Danielle Clore, Samantha Davis, Robin Kinney, Mardi Montgomery, Judy Piazza, and Michelle Sanborn.
Guests: Andrew English, Justice and Public Safety Cabinet, Stacy Phillips, Health and Family Services Cabinet, and Beth Bowsky, National Council of Nonprofits.
LRC Staff: Judy Fritz, Van Knowles, Daniel Carter, and Jay Jacobs.
Charge of the Task Force
Senator Wise explained the purpose of the task force and gave background of HCR 89 from the 2015 General Session to study and report on the effect of current laws, regulations, and policies on nonprofits that conduct business with the Commonwealth, any procedures that have been adopted in other states that would create a more timely, cost effective, and streamlined process for nonprofits that contract with the Commonwealth and to eliminate any redundant, unreasonable, or unnecessary laws, regulations, or policies that would negatively affect nonprofit contracting or funding.
Initially, the task force was to meet during the 2015 and 2016 interim sessions and submit a final report to the General Assembly and the Governor with recommendations by October 31, 2016. Unfortunately, the task force was unable to meet during the 2015 interim session. Due to the late start and short timeframe to discuss issues, the task force will request a deadline extension to December 1, 2016. Members will be notified if that extension is approved.
Need for the Task Force
Representative Wuchner explained that the process of developing the task force began in 2015, with the passage of HCR 89. The task force provides an opportunity to listen to the concerns of the nonprofit agencies, review current contracting processes, identify deficiencies to streamline procurement, contracting, reporting, and payment processes while maintaining our commitment to transparency and elimination of unnecessary and duplicative practices that are costing the state and nonprofits time, money, and resources important to the people of the Commonwealth.
Overview of Kentucky’s Nonprofit Sector and the Cultural Shift Ahead for Contracts with Government
Danielle Clore, Executive Director and CEO of the Kentucky Nonprofit Network, explained how the Kentucky Nonprofit Network is one of 42 state association and affiliate members of the National Council of Nonprofits, exempt from federal and state taxes, a 501(c)3 charitable organization where donations are deductible, self-governed by a volunteer board of directors, and exists solely to contribute to the public good. Mrs. Clore also explained how nonprofits are big business in Kentucky and said they aid in attracting business and in bringing revenue to the state. The bottom line is that nonprofit employees pay taxes, nonprofits create jobs, and nonprofits spend money. Significant opportunities exist for state government and nonprofits to collaborate and find solutions that streamline practices, reduce duplicative efforts, and save money which all benefit the citizens of the Commonwealth. Nonprofits are recognizing that overhead costs are necessary for doing business and effectively managing a nonprofit organization. Nonprofits are working to educate funders on the necessity of overhead and walking away from grants and contracts that do not adequately cover overhead.
Kentucky Findings, Urban Institute Research
Beth Bowsky, Policy Specialist for Government-Nonprofit Contracting with the National Council on Nonprofits, discussed some of the problems that Kentucky nonprofit agencies are experiencing with government grants and contracts. According to the Urban Institute’s research, Kentucky nonprofits are experiencing issues with late payments, government changes to contracts midstream, complex reporting and application processes, and payments that do not cover the full costs of services. Charts of Kentucky’s rankings in regard to nonprofit contracting issues and the reality of reimbursement costs were also shared.
In response to a question by Representative Simpson, Mrs. Bowsky stated that contracts between nonprofits and government agencies are discussed as if they are negotiated, but in reality the contracts are “take it or leave it.” Nonprofits usually “take” the contract because they are mission driven and assume the mentality that “something is better than nothing,” even if the contract will cause the nonprofit to lose money.
In response to a follow up question, Mrs. Bowsky responded that the nonprofits may bring up the challenges of past contracts but they do not force the issue for fear of retaliation on future contracts. The power differential creates a problem in the negotiation process.
Mrs. Bowsky responded to a follow up question by Representative Simpson and stated that scope of services are not flexible and that the nonprofits have to find a balance between cost, effectiveness, and quality.
Cyndee Burton commented that overhead reimbursement on many contracts is capped from seven to ten percent.
In response to a question by Representative Simpson, Mrs. Burton stated that expenses are higher than the amount reimbursed for overhead costs.
In response to a follow up question by Representative Simpson, Mrs. Burton stated that she is required to have the same software for billing as the for profit agencies.
Mrs. Bowsky commented that there is not any flexibility for nonprofits to share software due to specific requirements.
Federal Office of Management and Budget Guidance and the Impact on Kentucky’s Contracting Processes
Beth Bowsky shared how the OMB Uniform Guidance (Uniform Guidance) streamlines and simplifies processes while reducing waste, fraud, and abuse. Uniform Guidance requires reimbursement of indirect costs, delineates the differences between grants and contracts, provides consistent cost principles, and specifies application and reporting requirements.
In response to a question by Representative Simpson, Mrs. Bowsky stated that at the federal level a block grant would be issued and at the state level there would be a request for proposal and competitive process. Uniform Guidance suggests that the selection should be based on merit.
Mrs. Clore commented that the feedback from a previous survey is that the process is not always consistent.
In response to a question by Representative Wuchner, Mrs. Bowsky stated that an application usually asks about the outcomes being sought, but those outcomes should be included in the contract. Uniform Guidance encourages outcomes over compliance and setting outcomes that are realistic and fair.
Lessons Learned in Structuring Task Forces in Other States
Successful task forces in other states have embraced collaboration. States that have embraced collaboration have eliminated redundant and unnecessary application and reporting requirements; established document vaults; established a prequalification process; allowed for cross-cabinet or agency coordination of monitoring and auditing of contracts; standardized the data elements, contracts, applications, and reports in common format; standardized policies and procedures; and aligned with Uniform Guidance.
In addition to collaboration, education for government agencies and nonprofits about indirect costs and Uniform Guidance to assist in equity in reimbursement for services has also been critical for success.
In response to questions asked by Representative Simpson, Mrs. Bowsky clarified that, if Uniform Guidance is adopted in Kentucky, there would still be an advertised competitive process and the contract would still have to meet state criteria and contracts would be scored and awarded based on the criteria. Contract price would still be an important element in the selection process.
In response to a question by Senator Wise, Mrs. Bowsky stated that for profit agencies are reimbursed at cost plus profit.
In response to questions by Andrew English of the Justice and Public Safety Cabinet, Mrs. Bowsky stated that most nonprofits do not deal with multiple scopes of work and the need for multiple audits would not be necessary unless in a rare circumstance.
Mrs. Clore commented that Illinois found fewer differences in scope of work than expected.
In response to a question by Mardi Montgomery with Education and Workforce Development Cabinet, Mrs. Bowsky stated that the outcome data are in the reports provided by nonprofits regarding the contract or grant and Uniform Guidance requires that outcomes be tied to the budget.
Mrs. Clore commented that doing fewer audits is a cost savings to the cabinet and frees more dollars to invest in the work that the cabinet wants to accomplish.
Representative Wuchner stated that outcomes are important, rather than “lives touched” stories that are often used, and the General Assembly is looking for reasonable outcomes to best serve citizens.
Open Discussion of Goals and Objectives
Senator Wise opened the floor for discussion of task force objectives, potential topics for future meetings, and to answer any additional questions.
Mr. English stated his interest in feedback from the nonprofits on how to adjust the contract process to performance based outcomes tailored to the nonprofits’ needs.
In response to a question by Representative Simpson, Stacy Phillips, Cabinet of Health and Family Services, stated that the time of services rendered could yield as long as a six week turnaround on payment, but by law the cabinets have 30 days to pay.
In response to the same question, Mrs. Clore stated that some roadblocks occur when there are questions about purchases that nonprofits thought were approved and are later disapproved. The review process can delay the payment process up to 90 days, which can cause a cash flow issue for some nonprofits.
Representative Wuchner stated concerns that nonprofit reimbursements are not covering the cost of services.
Senator Danny Carroll stated that his nonprofits have struggled to receive timely payments from Managed Care Organizations (MCOs). New MCOs are not prepared to deal with the systems that handle payments. The MCOs are changing rules and eligibility and each MCO has its own process. There are many inconsistencies in the regulations and there are different interpretations of the regulations among people in the cabinet. The organizations want to things to run smoothly and are good with accountability but the relationship needs to change, working towards the goal of providing better services.
Senator West stated that he would like to address duplicative and overlapping services. He would like to compile a complete list of nonprofits that do business with the state, how much they are paid, and what they do.
Representative Wuchner suggested that the task force look at the application of the OMB Uniform Guidance, how to implement it, and how it impacts government contracting Kentucky. As the state moves to outcome and performance-based models, it is important to understand how the new guidelines will work with expectations of the cabinet as well as organization and training.
In response to a question by Senator West, Mrs. Bowsky stated that OMB Uniform Guidance is law and can be found in the code of federal regulations.
Mrs. Phillips stated that it would be important for the task force to look at interpretation of OMB Uniform Guidance. Different agencies and organizations interpret things differently. Looking at interpretation can cut down on confusion, especially in implementing contracts and contracts with sub recipients.
Mrs. Clore would like for the task force to look at changes to contracts by the cabinet midstream.
Michelle Sanborn, President of Children’s Alliance, stated that the task force should look at the list of services and look at the two different types of contracts with the state such as Request for Proposals (RFPs) and agreements.
Mrs. Clore would like for the task force to identify when nonprofits should put a contract for bid, when it should not place a contract for bid, and the reasoning for each.
Senator Wise said that the next meeting will be August 22, 2016 at 11 a.m.
A copy of the PowerPoint presentation and other meeting materials are a part of this official record in the Legislative Research Commission Library. There being no further business, the meeting was adjourned at 10:25 a.m.