Audit of Settlement Agreements and Confidentiality Clauses Across Multiple State Agencies - Finding 1

Executive offices and agencies do not have documented internal policies or procedures on the authorization, development, documentation, and retention of state employee settlement agreements and supporting records.

Overview

The Office of the Governor (GOV) did not issue any policies, or document its procedures, on the use of state employee settlement agreements by executive offices and agencies. There were no documented policies or procedures on these basic aspects of the state employee settlement process, including the following:

1. receipt and handling of complaints filed by nonunion employees;
2. definition of authorization of state employee settlement agreements by agency employees or management;
3. development of draft state employee settlement agreements (who would draft agreements, the use of outside assistance, which employees would be interviewed, retention of discussion notes, etc.);
4. documentation of an employee’s claim resulting in a state employee settlement agreement; and
5. records retention regarding the storage of these records, how they should be retained, where they should be retained, and for what period of time.

When we asked for their documented policies or procedures, agency officials told us that they followed the Office of the Comptroller of the Commonwealth’s (CTR’s) regulations and policies over the processing and reporting of state employee settlement agreements to CTR. These regulations define a state employee settlement agreement and which state employee settlement agreements are required to be reported to CTR for payment and/or proper financial reporting. However, these policies were not incorporated into any policy of GOV or the executive offices and agencies and do not address a variety of important issues, such as records retention or the use of confidentiality language.

Agency officials told us that employee union agreements detailed procedures on how employee grievances should be handled. We note that these procedures are typically detailed in any state employee union agreement in Massachusetts, as they are an important aspect of the labor-management relationship. However, no policies were in place over the handling of nonunion employee complaints.

Additionally, GOV officials told us that some type of policy exists regarding the factors impacting the decision to settle a claim and documentation of the considerations taken. The Governor’s Office refused to make this document available for our review, which it indicated was a formal policy of state government, citing attorney-client privilege. We are therefore asked to believe that a formal policy exists, but that the policy is secret and cannot be disclosed. While we respect the sanctity of the attorney-client privilege doctrine, we disagree that policies outlining the procedures and process for use of settlement agreements unrelated to any specific claim, settlement, or negotiation has any protection under attorney-client privilege.

If GOV does not have policies and procedures for all state agencies to handle state employee settlement agreements, it cannot ensure that employee settlements are handled in a fair, ethical, legal, and consistent manner. This results in an inconsistent process that is not transparent to the citizens of the Commonwealth regarding how their public employees are treated or how their tax dollars are being spent. It can also lead to potential errors in financial reporting by not allowing CTR the opportunity to review how the department intends to process state employee settlement payments. (See Finding 3 for instances of state employee settlement agreements not properly reported to CTR).

Authoritative Guidance

The US Government Accountability Office’s Standards for Internal Control in the Federal Government, known as the Green Book, sets internal control standards for federal entities. The Green Book defines internal controls in the following way:

Internal control comprises the plans, methods, policies, and procedures used to fulfill the mission, strategic plan, goals, and objectives of the entity. Internal control serves as the first line of defense in safeguarding assets. In short, internal control helps managers achieve desired results through effective stewardship of public resources. . . . Management should design control activities to achieve objectives and respond to risks. . . . Management should implement control activities through policies.

While GOV is not required to follow this policy, we believe it to be a best practice.

In June of 2020, Montana’s Legislative Audit Division issued a performance audit titled “State Employee Settlements: Trends, Transparency, and Administration.” In this audit, a recommendation is given that the Montana Governor’s Office work with its administration department “to develop and implement policy establishing support documentation requirements and minimum standard settlement language that must be used for all state employee settlements.”

The report also cites the practices of other states. The state of Iowa required a memorandum documenting why a settlement should be offered and the circumstances surrounding it. The state of New Mexico has its personnel office review the settlement terms and decisions made to ensure that providing a settlement is an appropriate decision.

While GOV is not required to follow these policies, we believe them to be best practices.

Reasons for Issue

GOV was unable to provide policies and procedures relative to state employee settlement agreements. There is no evidence that any policies and procedures were created by GOV and communicated across executive offices and agencies between January 1, 2010 and December 31, 2022.

GOV was unable to demonstrate that CTR policy documents for the processing and reporting of state employee settlement agreements were incorporated into the policies of executive offices and agencies. 

Recommendations

1. GOV should establish and implement policies and procedures over the authorization, development, documentation, and retention of state employee settlement agreements, and requirements for supporting documentation. These policies and procedures should be uniformly communicated across all state agencies. These policies and procedures should encompass all CTR requirements and should be made clear and documented within the newly created policies and procedures.
2. GOV should provide centralized management and oversight over the use of state employee settlement agreements to ensure that policies and procedures are adhered to and to provide reporting to the public regarding the use of these agreements.
3. GOV should establish a public reporting process to ensure sufficient transparency and accountability for the use of state employee settlement agreements. These agreements may impact employees and former employees when they are most vulnerable, which argues for additional public transparency and oversight to ensure that their use is consistent with policies and public expectations. (See Other Matters for more information.)

Auditee Response

The executive department agrees that documenting policy and procedures can help ensure consistent practice across a broad and wide-ranging government. The audit report’s conclusions notwithstanding, several internal and external policies and procedures governed the authorization, development, documentation, and retention of state employee settlement agreements during the audit period:

• The Office of the Comptroller’s Policy on Settlements and Judgments, and the associated regulations at 815 CMR 5.00 et seq., applied to the processing of settlements during the audit period, and were mandatory for executive department offices and agencies to follow. See 815 CMR 5.02. The policy and regulations prescribed, among other things, record-keeping requirements and required written justifications for settlements (815 CMR 5.09(1)); required approvals for settlements at certain monetary levels (S&J Policy at p. 34); limitations on settlement agreement terms and available monetary compensation (S&J Policy at pp. 12-25); and limitations on the enforceability of confidentiality provisions (S&J Policy at p.8).
• The Secretary of State’s Statewide Records Retention Schedule required the retention of settlements and relevant supporting documentation during the audit period and applied to executive department offices and agencies. While the requirements differed somewhat depending on the nature of the claim being settled, the Schedule largely required that settlements and relevant supporting documentation be retained for a period of six years. See Schedule at D01-01(c): Primary copies of payment support documentation and transaction Postings; E05-01: Employee Compliant/Investigation/Disciplinary Records; and E05-02(c): All other records.
• For all cases handled by the Attorney General’s Office, or by Special Assistant Attorneys General, offices and agencies followed the required settlement procedures of the Attorney General’s Office. This included seeking and securing approval from the Attorney General’s Office for all settlement amounts and terms.
• For grievances by union members, offices and agencies followed the terms of collective bargaining agreements, which in some case expressly provide that grievance settlements must be non-precedential. During the audit period, the Governor’s Chief Legal Counsel issued several memoranda to the general counsels of the offices and agencies, prescribing additional required considerations, approvals, and limitations on settlement agreements and terms. While these memoranda were attorney-client privileged communications, their terms were mandatory. The memoranda were intended to ensure additional consistency and accountability in the negotiation and approval of settlements across the executive department.

The report appears to suggest that, in addition to these policies and procedures, it would be helpful to have a written policy, issued to each office and agency, and governing the authorization, documentation, and retention of settlement agreements and supporting records. The executive department welcomes this suggestion and commits to the following steps:

• The Office of the Governor will issue a public Executive Department Settlement Policy applicable to all executive department offices and agencies. The policy will address procedures for settling complaints filed by nonunion employees; the types of supporting documentation to be considered and maintained when settling such complaints; document retention and settlement tracking obligations; limitations on settlement terms; and the required approvals for settlements.
• All executive department offices will adopt their own settlement and judgment policies applicable to themselves and their agencies that adhere to the policies issued by the Office of the Governor and the Office of the Comptroller and set additional appropriate requirements, if any.
• The Office of the Governor will partner with the Office of the Comptroller on both the Comptroller’s ongoing review of its settlements and judgments policy and related regulations, and on developing new training material for use throughout the executive department. 

Auditor’s Reply

In its response, GOV cited policies that existed during the audit period, notably CTR’s Policy on Settlements and Judgments, and the associated regulations at 815 CMR 5.00. We note that this policy and regulation is issued by CTR, not the Office of the Governor, which the agencies audited here report to. CTR’s policy establishes policies that agencies must follow—though not all did—in order to pay for the cost of settlement agreements. These policies and regulations say nothing about the consideration, development or use of settlement agreements, which are critical elements. As such, we do not view these policies or regulations to be sufficient or even applicable policies or regulations on the use of settlements, but rather simply related to the payment, and in some instances, reporting of settlements entered into, with no guidance regarding their consideration, development or ultimate use. It appears a number of agencies did not understand CTR’s policies or regulations, particularly the obligations to report settlement agreements to CTR, regardless of the funding source.

To the extent one wishes to consider CTR’s policy and regulation as being applicable policy and regulation, it was unclear to us as to whether this policy had been properly communicated to agencies. Either way, there appeared to be insufficient oversight of agency compliance with them. While CTR’s policy provided agencies guidelines, they often lacked specificity on what was required. For example, the CTR policy cited that “The Agency Counsel is responsible for maintaining the original or certified copies of all documents related to a claim or identifying the repository for these records in accordance with [r]ecord retention schedules published by the Supervisor of Public Records—Records Management Unit.” The CTR policy does not define what records need to be retained in accordance with specific sections of the record retention schedule. The Executive Department Settlement Policy that GOV suggests creating should provide this detail so it is clear to each department what records need to be retained and for what period of time. We were not provided a documented policy during the audit that provided this level of detail.

Additionally, during our audit, we spoke with executive offices and agencies about who must approve settlement agreements. Agency officials informed us of their office’s approval thresholds of settlement agreements. While the CTR policy and regulation may require approval of a settlement agreement of certain agency officials based on the amount of the settlement prior to CTR processing it, it is possible for an executive office to require additional approval levels. The GOV itself highlighted that executive offices and agencies have varying requirements when it stated in its reply that “[a]ll executive departments will adopt their own settlements and judgments policies.” Our audit noted that these differences in the approval of a settlement agreement were not documented in a policy during the audit period.

Also, not all settlement agreements entered into by executive offices and agencies are processed through CTR. The Executive Department Settlement Policy that GOV suggests creating could help to ensure that all executive offices and agencies have clear guidance on the authorization, documentation, and retention of settlement agreements and supporting records in instances where the settlement agreement is not processed through CTR or does not meet CTR’s definition of a settlement agreement. Our office will be following up in the coming months to review these measures to ensure the results match the spirit communicated to us.

We note that it will be important that GOV ensure proper monitoring of any policy implemented to address these concerns and ensure agencies comply on an ongoing basis. 

Date published:	January 28, 2025