Audit of Settlement Agreements and Confidentiality Clauses Across Multiple State Agencies - Finding 3

Executive offices and agencies did not report 40 state employee settlement agreements to the Office of the Comptroller of the Commonwealth when required.

Overview

During the review of the 93 employee settlements sent to CTR, it was confirmed 56 were required to be reported for review. CTR found 40 of those 56 (71.4%) monetary state employee settlement agreements across 7 executive offices and agencies, totaling $104,209, were not reported as required. Additionally, due to a lack of documentation, there were 19 state employee settlement agreements that we could not determine whether they were required to be reported to CTR. According to CTR’s Settlements and Judgments Policy, CTR reviews monetary settlement agreements, regardless of whether the settlement agreement is funded through the Settlements and Judgments fund or self-funded by the state agency. This review by CTR is performed to ensure proper accounting and tax reporting for payment of the employee settlement agreements.

The following is a breakdown of state agencies that failed to report to CTR:

Failure to report settlement agreements is a violation of regulation and policy and may result in the improper reporting of the state employee settlement agreement in the state’s accounting system and by the state employee to the Department of Revenue and the Internal Revenue Service. According to CTR’s Settlements and Judgments Policy, agencies are responsible for making any corrections necessary to bring any settlement documentation or payments into compliance if payment was made contrary to the instruction of CTR.

Authoritative Guidance

CTR’s Settlements and Judgments Policy states,

All “monetary” settlements/judgments must be reviewed by CTR prior to payment to ensure that the payments are made using the appropriate codes and that proper tax withholdings and tax reporting are made, irrespective of whether or not the Department plans to pay the claim with Department funds or through the Settlement and Judgment Reserve (1599-3384) or other authorized account.

A “monetary” settlement or judgment includes any action which results in a payment being made to, or on behalf of a Claimant, or which may impact “creditable” service for retirement calculation purposes for a state employee, or which may result in a future commitment of funds, services or state resources.

• A settlement or judgment on an employee grievance which makes an adjustment to vacation or sick time or other leave (which does not have any associated payments, reimbursements or changes in creditable service) will be considered a “non-monetary” settlement or judgment which does not have to be reviewed by CTR prior to the payroll adjustment. (Note that payroll “adjustments” may not be made in lieu of back pay or other salary payments, and may not be made for leave that has not actually been earned, accrued or for time actually worked.)
• A settlement or judgment on an employee grievance which reinstates, promotes, or makes an employee “whole” for a number of days is a “monetary” settlement or judgment” and must be reviewed by CTR for the proper processing instructions. These amounts may not be processed as regular payroll payments using regular pay or any other payroll earnings codes to avoid the CTR approval process, to make payments from current payroll funds which are not authorized by CTR or to avoid the settlement process.

In June 2020, the state of Montana issued a performance audit titled “State Employee Settlements: Trends, Transparency, and Administration.” In this audit, a recommendation is given stating the following:

1. Defining what constitutes a state employee settlement and what should be considered when determining the cost of a state employee settlement, and
2. Requiring reporting of state employee settlements in the State Accounting, Budgeting, and Human Resource System, including defining what information should be reported.

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

Reasons for Issue

The state employee settlement agreements that were not reported to CTR were all paid through the agencies’ own funds. However, some agency officials told us that it was their understanding that CTR’s policies did not require the agency to report an employee settlement agreement to CTR if it was paid out of their own agency funds. State agencies do not have any of their own documented policies over the reporting of state employee settlement agreements. Agencies also report that they were not aware of CTR’s regulation requiring reporting of all settlement agreements to CTR, even if they are paid using agency funds. (See Finding 1.)

Recommendations

1. GOV should establish and implement policies and procedures over the reporting of state employee settlement agreements to CTR. These policies and procedures should be consistently communicated across all executive offices and agencies and should comply with all CTR regulations.
2. All executive office employees should receive training on these policies and procedures.
3. GOV should establish sufficient monitoring controls to ensure compliance and the appropriate management of this issue. 

Auditee Response

OSA identified 40 “monetary” state employee settlement agreements, totaling $104,209, and all paid through agency funds, that were not reported to the Office of the Comptroller in accordance with the Comptroller’s Settlements and Judgments Policy. While we are uncertain of how OSA defined “monetary” agreements for purposes of this analysis. . . .

. . . The Office of the Comptroller’s Settlements and Judgments Policy limits its applicability to a subset of monetary settlements and excludes those settlements that result in “retroactive salary adjustments, unpaid regular time, collective bargaining agreement increases or other routine payroll corrections of errors, or adjustments.” (S&J Policy at p.1). . . .

We agree that offices and agencies must follow the Comptroller’s reporting requirements, even when the settlement at issue requires no disbursement from the settlements and judgments fund. As indicated above, the Office of the Governor will collaborate with the Office on the Comptroller on new training materials to ensure understanding of and compliance with the Comptroller’s requirements, including reporting requirements. In addition, as part of their adoption of their own updated settlement and judgment policies, executive department agencies will be expected to implement appropriate monitoring controls to address this issue.

Auditor’s Reply

For GOV’s edification, the 40 monetary state employee settlement agreements identified in this finding did meet the definition of a “monetary” settlement according to CTR’s Settlements and Judgments policy. As referenced in our finding, 71.43% of the settlement agreements tested during our audit were not reported to CTR even though CTR officials confirmed that they were required to be reported by executive offices and agencies. We note that even when executive offices and agencies pay for a settlement agreement with their own funding, they must still report the agreement to CTR which ensures its proper coding in the state accounting and reporting system. The lack of clarity across executive branch agencies further underscores the urgent need to clarify, document and communicate policies and ensure appropriate monitoring of employee settlement agreements, as there appears to even be confusion as to what a “monetary” settlement is, even though we simply utilized the same definition taken from the CTR’s Settlements and Judgments policy which we were told was the existing statewide policy that GOV says it followed.

Based on its response, GOV plans to take some measures to address our concerns in this area. We will be following up during our Post Audit Review to track progress.

Date published:	January 28, 2025