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Sunday, May 07, 2006

Ind. Gov't. - Yet more on: State FSSA exec goes from public to private at twice the price

As noted at the end of this ILB entry from May 4th: "The ILB is attempting to obtain from the Ethics Commission copies of its informal opinion on the contract."

I can now report that the FSSA faxed over copies of the documents to the ILB late Friday afternoon.

Before discussing them, some quotes about the contract from Matthew Tully's column in today's Indianapolis Star:

This latest flap involves the agency's former chief financial officer. CFO Richard E. Rhoad quit his $100,000 post earlier this year, but only after he agreed to an outside contract to do the same work for up to $180,000 per year.

I know what you're thinking: Are you kidding?

No, I'm not.

That's why [Dan] Parker, the Democratic chairman, must have been feeling like it was Christmas last week and he was a spoiled 5-year-old kid.

Because as far as press conferences go, this one was as easy as it gets for an opposition party. You don't often hear a tale of a top government executive working out a new outside contract for himself -- for more money -- while he is still a state employee. * * *

[At the press conference, FSSA head Mitch Roob] defended the contract, saying the money is actually the same. First, he said, in addition to Rhoad's former $100,000 salary, Rhoad also received about $80,000 in benefits and travel expenses. Under his new contract, Rhoad receives no benefits and must pay for his own travel and the portion of taxes employers typically cover. * * *

The head-shaking details kept getting worse last week. An FSSA spokesman, for instance, told me that as a contractor, Rhoad is free to take other outside jobs -- with certain conflict-of-interest guidelines. He also gets to use a state-funded office in Indy.

Don't expect this issue to go away.

My first question, when reading the above, was, if, as Roob is quoted, "the money is actually the same" as when Rhoad worked for the state, then why do the contract?

The answer, as far as I can determine from the facts available, is that when Roob offered the FSSA job to Rhoad in early 2005, he said the State would pay Rhoad's travel and living expenses. Rhoad accepted this offer and went to work for the State.

This agreement apparently was unwritten, and it was illegal in that its terms did not comply with laws governing state employment, and it was not processed through the state system.

The Budget Agency at some point picked up on this and said FSSA couldn't pay all these travel and expenses for Rhoad anymore. I can't tell whether Budget has yet required that the past illegal payments, which may have continued for nearly a year, be reimbursed.

So when Roob says that the money is the same, maybe it is, but the initial oral employment agreement was illegal. And to remedy this problem, FSSA and Rhoad entered into what appears to be the ultimate no bid, revolvng door contract.

Here is the fax the ILB received from the FSSA. There are three documents.

This first document, from page 2 through 5 of 9, is a memo from John Davis, FSSA general counsel, dated Nov. 18, 2005. He writes:

Facts: FSSA's CFO lives in the Fort Wayne area. The CFO was recruited specifically by Secretary Roob for the position. The understanding in the recruitment was that the CFO would be able to commute to work from Fort Wayne and FSSA would pay him for his travel and lodging expenses. This arrangement was satisfactory for a period of time, but has now been determined impermissible by the Indiana State Budget Agency.

The issue was then raised as to whether the CFO could have his travel expenses included in his pay. This would make him an extremely high paid State employee.

The final solution reached was to discontinue the CFO's State employment and hire Allied Professional Services, LLC, a corporation run by the former CFO, under contract. In this way FSSA could cover his travel expenses and honor the original employment agreement.

The terms of the agreement with Allied Professional Services, LLC allow more flexibility with respect to the services the CFO previously provided. The contract requires less supervision of the CFO by FSSA and provides FSSA with more services than if the CFO had remained a State employee.

Issue: Will hiring a company run by FSSA's former CFO violate any State ethical laws/policies?

[The memo then sets out the text of IC 4-2-6-9, 4-2-6-10.5, and 4-2-6-11, plus 40 IAC 2-1-9.]

Analysis: The CFO's employment arrangement was originally agreed to before the CFO began work for FSSA. The new contract FSSA would have with the CFO's company would only fulfill FSSA's part of the employment agreement, with respect to the reimbursement of travel expenses.

One ethical implication here which could be raised is conflict of interest. However, upon investigation this does not create a conflict of interest. The CFO has not been a part of the negotiation of this contract and has been screened from all drafting of this contract.

In this situation a distinction exists between when the employment agreement was created and when it needed to be memorialized into contract form so as to honor the original agreement.

The CFO's employment also raises the issue of the 1 year restriction specified in IC 4-2-6-1 1. The current situation does not violate this code section. This is true since the CFO was not involved in the negotiation of the contract between his company and FSSA, and was not in a discretionary position with respect to the outcome of the contract. The CFO while working for FSSA was not in a position to make any licensing decisions over his company. Futhermore, the company the CFO will be working for is his own and therefore his service with them is not the result of a state contractor attempting to influence a state employee with the prospect of a job. In light of the circumstances, the 1 year restriction has clearly not been violated.

Conclusion: The hiring of FSSA's CFO by a company under contract with FSSA, in order to honor the CFO's original employment agreement does not violate any ethical laws or policies. The CFO originally negotiated the agreement before becoming an FSSA employee. The CFO had no discretion over the acceptance or denial of the contract with his company, The contract at issue here was the direct result of the need by FSSA to honor their end of an employment agreement. No conflict of interest is implicated as all negotiation which occurred with respect to this agreement took place before the CFO was originally hired as a State employee.

According to this AP story by Ken Kusmer:
Davis signed and dated his memorandum the day after Rhoad, Davis and Roob signed a contract that would have paid Rhoad's private company up to $2 million over two years for Rhoad and two other employees to provide consulting work _ including the duties of agency CFO.

The $2 million contract never was executed. Instead, FSSA in January awarded Rhoad a three-year contract worth $540,000 to essentially act as the agency's CFO and to supervise the closing of the Fort Wayne State Developmental Center.

"Mitch (Roob) wanted to keep him," agency spokesman Dennis Rosebrough said Thursday. "He said this all along. This whole issue was how can we keep Dick at CFO and abide by the compensation policy that Mitch recruited him at. That's the bottom line."

FSSA reached the $180,000 figure by combining Rhoad's $100,000 FSSA salary with what he would have collected in benefits and travel costs that Rhoad will continue to incur while commuting to the agency's offices in Indianapolis.

Rosebrough said the timing of the $2 million contract signing and the Davis memo was not unusual. Discussions over how to resolve the compensation issue and satisfy ethics requirements were occurring simultaneously, he said. The $2 million contract would have included work developing a new accounting system for FSSA, work that eventually went to other contractors.

Rosebrough also defended the $180,000-per-year contract even though the State Budget Agency found it impermissible for a state employee.

"The State Budget Agency was not debating Mitch's agreement in principle with Dick. They weren't debating whether we should be paying this or not paying this," Rosebrough said.

FSSA also consulted State Ethics Director Mary Lee Comer, who said in an informal opinion that FSSA needed to screen Rhoad from any involvement in the agency's decision to accept his employment contract.

I find the reasoning and conclusion in the Davis memo hard to accept. The memo itself states that Allied Professional Services LLC is a professional corporation run by Rhoads. But FSSA did not enter into a services contract with the corporation in early 2005; it entered into an unwritten employment arrangement with Rhoads to come work for the State that did not comply with the requirements of state law and that could not be honored by the State Budget Agency.

The second document, on pages 6 through 7 of 9, dated Dec. 22, 2005 at 10:50 a.m., is a memo originally from Mary Lee Comer of the State Ethics Commission to Steve Schultz, then Counsel to the Governor, giving an informal opinion. The pertinent part:

It is our understanding that Mr. Rhoad will not be accepting "employment or receiving compensation from an employer." He will, in fact, be self employed and contract with FSSA to provide personal services. In addition, his new employer is FSSA, not an employer who did business with FSSA. Therefore, the post-employment statute does not prohibit Mr. Rhoad from contracting with FSSA to provide services to FSSA after terminating his position as an employee of FSSA.

[The memo sets out the text of 4-2-6-11.]

Thus, in the same paragraph, it is first said that Rhoads will be "self-employed" and then it is said that "his new employer is FSSA."

The third memo, on pages 8 through 9 of 9, dated Dec. 22, 2005 at 11:52 a.m., is also from Judge Comer to Mr. Schultz, and is labeled "supplemental opinion." The relevant part:

Steve and Anne [Murphy of FSSA]: Steve asked us to render a supplemental opinion regarding the application of IC 4-2-6-10.5 (copied below) to Mr. Rhoad's contract with FSSA.

FSSA must screen Mr. Rhoad from any involvement in the agency's decision to accept the terms of his employment contract. In addition, as an employee of FSSA, Mr. Rhoad cannot have a financial interest in a contract with any state agency without complying with the terms of Section 10.5. Since compliance with the terms of Section 10.5 takes time, we suggest that Mr. Rhoad's contract not be executed by FSSA until after his date of termination as an employee of the agency.

[The memo sets out the text of part of IC 4-2-6-10.5.]

Read with care the provisions of IC 4-2-6-10.5(a) and (b), as quoted in Judge Comer's memo. According to this story by Niki Kelly in the Fort Wayne Journal Gazette:
State Ethics Director Mary Lee Comer also said Rhoad’s contract should not be executed by the agency until after his date of termination as a state employee.

It doesn’t appear this caveat was met. Rhoad’s resignation letter was given Jan. 12 but was “effective as of the close of business Friday, January 13, 2006.”

Rhoad entered into the contract with the state as president of Allied on Jan. 13, the same day other state officials also signed off on the contract.

And what about Governor Daniels' Executive Order 05-12, para. 8?
8. No state officer, employee, or special state appointee who leaves state government after January 10, 2005 shall accept employment or receive compensation for one year:
a. as a lobbyist engaged in lobbying the executive or legislative branches of state government in Indiana;
b. from an employer [i.e. Rhoad's corporation] if the former officer, employee, or special state appointee was engaged in the negotiation or administration of one or more contracts with that employer or in a position to make a discretionary decision affecting the outcome of the negotiation or administration of such a contract; or
c. from an employer if the former officer, employee, or special state appointee made a regulatory or licensing decision that directly applied to the employer or to a company that controls, is controlled by, or is under common control with, the employer.
Finally, there is this case, reported in the Indianapolis Star on Feb. 23, 2006, headlined "Ex-state employee suing over work ban."

[More] The ILB did not receive a copy of the FSSA contract, only the three memos. I will try again Monday.

For background, start with this ILB entry from May 3rd and this one from May 4th.

Posted by Marcia Oddi on May 7, 2006 03:03 PM
Posted to Indiana Government