Call to Order and Roll Call
The 4th meeting of the Government Nonprofit Contracting Task Force was held on Monday, September 26, 2016, at 11:00 AM, in Room 131 of the Capitol Annex. Representative Russ A. Meyer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Russ A. Meyer, Chair; Senator Max Wise, Co-Chair; Senators Danny Carroll, Denise Harper Angel, and Stephen West; Representatives Arnold Simpson, and Addia Wuchner; Cyndee Burton, Danielle Clore, Andrew English, Robert Jones, Robin Kinney, Mardi Montgomery, Judy Piazza, and Michelle Sanborn.
Guests: Heather French Henry, Department of Veterans Affairs, Lisa Cooper, Northern Kentucky Area Development District, Nikki James, Department of Corrections, Stacy Phillips, Cabinet for Health and Family Services, Michael Dossett, Department of Emergency Management, Stephanie Robey, Department of Emergency Management, and Bradley Stevenson, Child Care Council of Kentucky.
LRC Staff: Judy Fritz, Daniel Carter, Van Knowles, and Jay Jacobs.
Senator Wise moved to approve the September 7, 2016 meeting minutes. Andrew English seconded the motion. The motion carried with a voice vote.
Nonprofit Government Contracting
Lisa Cooper, Executive Director of the Northern Kentucky Area Development District gave an overview of how indirect costs and cost allocation plans affect Kentucky Area Development Districts.
The Northern Kentucky Area Development District (NKADD) operates on a $17 million dollar budget from multiple funding sources. Most of NKADD’s budget comes from federal funds or pass-thru dollars. NKADD’s indirect costs account for $577,000.
Program staff must account for all of their time and it must be applied to specific programs as direct costs. Agency costs that are difficult to assign to a specific program are calculated into an indirect cost pool, which is used in a formula to calculate the indirect cost rate. Examples of indirect costs are rent, utilities, audit fees, legal fees, and insurance.
The indirect cost rate is calculated by dividing the total amount of indirect costs by the total amount of salaries and benefits. Once the indirect cost rate is calculated, it is applied to each program through a cost allocation plan. Pursuant to OMB Guidelines, NKADD establishes a cost allocation plan every fiscal year, approved by their board of directors, and sent to the Department of Local Government. Cost allocation plans are developed with standard accounting practices and financial management software so the rates cannot be artificially created.
NKADD utilizes a cost allocation plan because of the nature of and the way the federal awards are received, and because cost centers and funding streams change throughout the year.
Continuing costs may also be discontinued during the year which impacts the indirect cost rate and rate allocation.
Ms. Cooper stated that cost allocation plans are developed, documented, and maintained for audit or submitted and appropriated to a cognizant agency for review, negotiation and approval. An agency must receive a certain amount of federal funding to submit to a cognizant agency. Because NKADD does not receive the requisite amount of federal funding, its cost allocation plan cannot be submitted to a cognizant agency, and is therefore maintained on-site for audit.
Depending on the cabinet or agency and its interpretation of the federal Office of Management and Budget (OMB) guidelines, NKADD has received inconsistent responses on indirect cost reimbursement. NKADD has been told that the agency will not reimburse its indirect costs, it must have a negotiated rate, or it could use the 10 percent di minimus rate. The 10 percent di minimus rate does not apply to agencies like NKADD. The differing interpretations have caused NKADD at times to be out of compliance with OMB guidelines.
In response to a question by Ms. Montgomery, Ms. Cooper stated NKADD receives different responses from different cabinets, and the inconsistencies have caused NKADD to be inconsistent and not compliant with its own plan.
In response to a question by Representative Wuchner, Ms. Cooper stated that consistency among agencies, training, and for Kentucky to adopt the OMB guidelines would improve compliance.
Contract Negotiation, Prompt Payment, and Indirect Costs
Nikki James, Internal Policy Analyst with the Department of Corrections (DOC), gave an overview of the cabinet’s negotiation process, prompt payment procedures, and payment of indirect costs.
Federal grant dollars must be spent by the agency, as directed by the federal government, with little room for negotiation. The agency has some room for limited negotiation when funding sources are mixed federal and state funds, but grant applications that utilize federal funds are specific. The agency has the most room to negotiate when dealing with solely state funds. No matter the funding source, the agency tries to get the most for the Commonwealth’s money. There are no differences between nonprofits and other vendors in the negotiation and invoice process.
KRS 45.453 is adhered to as best as possible and all invoices are date stamped upon receipt to monitor the amount of time taken to pay. Discrepancies with invoices are typically the only reason a payment would be delayed.
Indirect and administrative costs are watched very closely, and DOC tries to negotiate the lowest amount possible, with a maximum rate goal of 8 percent.
In response to questions by Ms. Clore, Ms. James stated that it is tough to negotiate contracts with a low indirect cost reimbursement rate but DOC has been able to do business with vendors who will accept contracts at the low rate. Reimbursement rates may be higher with contracts that contain flow through federal dollars.
In response to a question by Mr. Jones, Ms. James stated she has seen contracts with the state di minimus rate of 10 percent and has seen contracts using both state and federal funds with differing state and federal reimbursement rates. When dealing with those types of contracts, Ms. James indicated that DOC is flexible.
In response to a question by Ms. Montgomery, Ms. James stated that DOC has outcome data for its programs but no outcome data directly related to indirect costs.
Stacy Phillips, Procurement Director with the Cabinet for Health and Family Services (CHFS), gave an overview of the cabinet’s negotiation process, prompt payment procedures, and payment of indirect costs.
CHFS contracts are mostly federally funded and most of the contracts have multiple streaming funds. Negotiations between vendor and cabinet are handled similarly, but the procurement processes may differ between the departments within CHFS. Each CHFS department carries a unique mission within the cabinet and the internal negotiation process for projects are dependent upon the circumstances for each program. If the cabinet has multiple vendors, it may be able to provide the services by allowing for a Request for Proposal (RFP) to allow all vendors to bid.
Prompt payment is followed according to statute and CHFS always tries to submit payments within the 30 day requirement. Lack of supporting documentation and lack of detail on invoices may cause a delay in payment. Agreements have a clause that allow the contract to be terminated if there is a budget shortfall, and the cabinet may review each contract for targeted reductions, if necessary.
Indirect cost reimbursements for CHFS is 10 percent for state general fund dollars. With federal funds, CHFS uses the cost allocation plan or a 10 percent di minimus rate as recognized by OMB guidelines.
In response to questions by Ms. Clore, Ms. Phillips stated that payment of indirect costs with mixed funding is usually 10 percent within CHFS. The cabinet tries to communicate with the nonprofit upfront about contract terms and information needed.
In response to a question by Ms. Burton, Ms. Phillips stated that, when there are budget cuts, the agency is not given much notice.
In response to questions by Mr. Jones, Ms. Phillips stated that she encourages a direct relationship with the payment specialist and nonprofit agency to avoid payment delays and issues. Communication is the key to a successful relationship between the nonprofit and the cabinet. CHFS has an expectation of good customer service.
In response to questions by Representative Wuchner, Ms. Phillips stated that non-competitive contracts are renewed on a yearly basis if program staff is satisfied with the services. Contracts are reviewed on a case by case basis, and cabinet staff are trying to help vendors understand expectations. Cabinet staff work closely with legal staff to ensure contract expectations are clear.
In response to a question by Ms. Clore, Ms. Phillips stated that the change in the bidding process for nonprofits in 2010 was positive because the cabinet no longer had to submit contracts with nonprofits that have a 501(c)3 status and are performing a government function for bid.
In response to a question by Ms. Clore, Ms. Phillips stated that universities receive 10 percent for indirect costs unless the funding comes solely from federal dollars.
Michael Dossett, Director of Emergency Management (KYEM) and Stephanie Robey, Assistant Director of Emergency Management with the Department of Military Affairs gave an overview of the division’s negotiation process, prompt payment procedures, and payment of indirect costs.
Director Dossett stated that KYEM has implemented a sophisticated reimbursement system, including a transparency tracker that covers approximately $70 million in grants per year. Objectives of KYEM are to maximize available federal funding, provide general guidance to the recipients of federal grants, and ensure reimbursements are documented properly. KYEM has an audit trail that accounts for APA audits, FEMA site visits, OIG audits, Internal Audits, and sub-recipient monitoring. In 2014, KYEM began a process to retool the grants management process. The solutions being sought were customer service, transparency, efficiency of reimbursement, and accountability.
There are five federal grants that KYEM manages. Over the past eight years, KYEM has had 17 presidential declarations and has pushed through $830 million to sub-recipients. Currently, KYEM has three thousand projects with sub-recipients. KYEM grant recipients include county and city governments, quasi-government entities, state agencies, and nonprofit entities.
Assistant Director Robey stated that, based on its programs and funding streams, KYEM is not procuring services of private nonprofits. Private nonprofits receive funding like governmental entities, receiving funds associated with work completed during, before, or after disasters. KYEM was the recipient of numerous audit findings, which revealed that a large number of applicants were not receiving all funding associated with their programs. The audit findings prompted KYEM to establish a new and improved reimbursement system, with an intensive effort to become compliant with federal requirements and to educate applicants in order to obtain the maximum amount of available funding.
Many problems encountered by KYEM sub-recipients have dealt with federal procurement requirements. Sub-recipients do not always understand many of the federal procurement requirements. Federal regulations require agencies to perform risk assessments of some contract sub-recipients. The federal government also requires agencies to perform intensive monitoring of sub-recipients to ensure they have properly used federal dollars for a program. Any entity that spends more than $750,000 in federal funding in a fiscal year must undergo a single audit.
If a sub-recipient receives federal funds from multiple state agencies, multiple risk assessments will be performed by each state agency. Ms. Robey proposed allowing one agency in state government to perform risk assessments for all agencies, and have one agency receive single audits from all sub-recipients, review the findings, request corrective action plans, and determine sufficiency of corrective actions.
Beginning in 2014, KYEM intensified monitoring of federal grants, developed and implemented online applications to simplify processes and increase transparency, and developed and delivered numerous grant management courses and workshops. These courses and workshops focused on federal program requirements, accounting, contracting, documentation, alternative funding opportunities, and 2 CFR 200. Grant specific training was conducted statewide, attended by approximately 3,500 people and recognized by FEMA as a best practice. KYEM will start conducting webinars in the next couple of months to make it easier and more affordable to train and educate.
KYEM developed the EMPG tracker and two other trackers which have online and mobile access for all entities. The trackers illustrate different payment stages, granting entities the ability to see when they will receive payment after they make a reimbursement request. If there is an issue, the tracker shows a red signal and the reason why payment is stopped. If mediation is required, the process begins with an email and is followed up with a phone call. Payments can be made a day after a request is made. The tracker shows all of the required forms that are necessary for payment reimbursement and shows purchase orders and receipts. All boxes must be green to get a reimbursement. All submissions are electronic. The program resides on WEB EOC, which is the disaster management software the entire nation uses.
In response to questions by Ms. Clore, Mr. Dossett stated that KYEM is trying to integrate its system with eMars. Other agencies could use the trackers, but it is not easily adapted by agency programmers.
In response to a question by Representative Wuchner, Mr. Dossett stated that KYEM stays in constant communication with the Auditor’s office and is trying to ensure that compliance when submitting annual audits to the Auditor’s office.
In response to a question by Mr. Jones, Mr. Dossett stated that the biggest issues during his initial visits are communication and accountability.
Contract Negotiation, Prompt Payment, and Indirect Costs - Nonprofit Perspective
Bradley Stevenson, Executive Director of Child Care Council of Kentucky (Child Care Council), gave an overview and history of how the council interacts with state government and how late payments and indirect costs affect their operating budget.
Child Care Council manages multiple state contracts dealing with child care services throughout the Commonwealth, the largest being the child care assistance program (CCAP). The council works with the University of Kentucky to administer some programs dealing with technical assistance, training, mentoring, and coaching. The relationship between the council and CHFS has allowed it to grow from an agency with four staff to the current staff of over 150. The council started in 1984 to help IBM employees find child care while they worked. In 1997, Child Care Council was awarded a $1 million grant to administer CCAP in 22 counties in central Kentucky. In 2008, it was able to bid on multiple regions and was awarded two additional contracts, adding 49 more counties. In 2012, the council was able to bid on all five regions, expanding services to the entire state. The council manages eight contracts consisting of nearly $8 million for child care services. Three of those contracts pass through the University of Kentucky.
As Child Care Council expanded its contractual services, generating cash flow became difficult. To meet its obligations, the council had to establish a line of credit with a banking partner. The crux of cash flow problems stemmed from the award of block grants for childcare and development that required service delivery before payment. The council would then be reimbursed for services provided. Child Care Council has an $800,000 line of credit with its banking partner, and $93,000 in interest has accrued over the last five years. Taking a line of credit is necessary to meet the $600,000 to $700,000 in services provided each month. While the council understands that it agreed to provide services before receiving payment, it would like to have open dialogue with CHFS to develop ways to offset the interest owed and reinvest the money into providing services.
Reimbursement for indirect costs has also been problematic for Child Care Council. It does not understand what kinds of indirect costs are reimbursable and has struggled with discrepancies on purchases that are approved to be reimbursed but are in fact not reimbursed. One example includes legal fees. The council has not been reimbursed for legal services even though billing for legal services is permissible in the contract.
There have also been instances where the council has had indirect cost reimbursement rates as low as 3-4 percent. It is now able to charge a rate up to 10 percent, which has increased funding available to provide more child care services.
In response to questions by Representative Simpson about a headset purchase, Mr. Stevenson stated that if the council purchased the headsets without approval, it would risk not getting reimbursed because a headset is considered a technology purchase, which would pre-approval by the cabinet. The state should also be more flexible in considering interest from loans or lines of credit as part of administrative costs, and there should be a dialogue discussing reimbursement for such costs.
In response to a question by Ms. Burton, Mr. Stevenson stated he hopes to be a part of Benefind when it rolls out for child care.
In response to a question by Representative Wuchner, Mr. Stevenson stated that the council does not participate in the state pension system, and that it has its own healthcare and retirement.
In response to questions by Ms. Clore, Mr. Stevenson stated that it is necessary to have the line of credit to deliver services and then be reimbursed at a later date. It usually takes about 75 days to receive payment after services are rendered. The line of credit allows the council to operate while waiting on payment.
In response to additional questions by Ms. Clore, Mr. Stevenson stated that he does not understand why money funnels through the University of Kentucky when implementing University of Kentucky pass through contracts, but it has been that way since 2005. In regards to OMB indirect cost reimbursement, Mr. Stevenson stated that the council does not have a federally approved rate.
In response to questions by Ms. Sanborn, Mr. Stevenson stated that the University of Kentucky is a pass through agency to administer child care provider training, mentoring, coaching, trainer credentials for training child care providers, and Race to the Top grants. The University of Kentucky acts as the research facility, guiding policy decisions and implementation of various programs throughout the Commonwealth that positively impacts families. Mr. Stevenson stated that the Commonwealth does not reimburse the council for interest.
In response to a question by Ms. Clore, Senator Carroll stated that a non-profit agency that he is affiliated with has a line of credit but has not used it in four years. Ms. Burton stated her organization has a line of credit and utilizes it sporadically based on cash flow. Mr. Jones stated his organization has one but has not needed to use it. Ms. Burton stated that depending on when the contract is signed can delay when payment is made. Mr. Stevenson stated that his organization is waiting on a contract with the University of Kentucky to be signed and that the council has been providing services for three months but is not able to bill. Ms. Sanborn stated that most of her agencies have lines of credit. Mr. Stevenson said it is common to have a delay while waiting on a contract to be signed and then billed for multiple months of service.
In response to a question by Senator Carroll, Mr. Stevenson said that a small percentage of the operating budget is from fundraising and training and membership fees.
Discussion of ways to improve contract negotiation, prompt payment, and indirect cost reimbursement in Kentucky
Representative Wuchner said she would like clarification of definitions and to explore streamlining the layers of processes in contracting.
Ms. Clore stated that Kentucky should adopt OMB guidelines, learn more about how Emergency Management retooled its reimbursement system, mirror some of its best practices, and provide training for both nonprofits and state government.
Mr. Jones stated that there needs to be a lower tech option for communication in the contract process and a billing rejection appeals process.
Senator Carroll stated there is a huge issue with reimbursements for MCOs and would like to know if the task force will be addressing the issue.
Mr. English would like clearer terms regarding billing requirements.
Ms. Montgomery would like to see collaboration between cabinets for consistency and expectations.
Representative Meyer stated that the next task force meeting will be Monday, October 24, 2016, at 11 a.m.
A copy of the PowerPoint presentation and other meeting materials are a part of official record in the Legislative Research Commission Library. There being no further business, the meeting was adjourned at 1:08 p.m.