Restoring Trust in an Independent Watchdog
An Exclusive Interview with New York State Comptroller
Thomas P. DiNapoli

By Mary-Jo Kranacher

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DiNapoli was selected by the state legislature for the Comptroller’s post after his predecessor, Alan G. Hevesi, resigned after pleading guilty to using state employees for personal functions. In this exclusive interview, conducted on May 27, 2008, DiNapoli discussed how the circumstances of his appointment have shaped his agenda of emphasizing ethics and transparency. He describes the reforms the Office of the State Comptroller has implemented and the initiatives it has recommended to the legislature and the governor. He also discussed the challenges of ensuring fiscal responsibility in local agencies and governments, as well as current and proposed programs to improve accountability in the wake of recent scandals.

The CPA Journal: For those who may be unfamiliar with the responsibilities of the Office of the State Comptroller, please give us an overview of your responsibilities and the office’s purview.
Thomas P. DiNapoli: The Office of the State Comptroller conducts a wide range of activities. Most people are not familiar with what we do, because we do so much. Although much of our work falls below the radar in terms of public awareness, we have a significant impact on many aspects of state operations. In other states, the work that we do is divided up into two or three different offices; there may be a state auditor, a state treasurer, and a state comptroller. These are often appointed positions rather than elected ones.

Since about the 1840s, the tradition in New York has been to elect a comptroller, and over the years, increasing responsibilities have been assigned to the office. I am the state’s chief fiscal officer, which includes commenting on state fiscal practices from a long-term perspective with the goal of achieving a stronger financial position. My office comments on the governor’s proposed and actual budgets on an ongoing basis. We address borrowing and spending practices, and handle the state’s payroll.

The Office of the State Comptroller approves all state contracts. That accounts for approximately 40,000 contracts per year—everything from vendors doing business with the state to not-for-profits that receive state grants. We are in charge of signing off on the paperwork and cutting the checks. If we don’t process the contractual paperwork in a timely fashion, vendor payments or not-for-profit funds may be held up. Therefore, we have to put a high priority on these business operations.

We manage the state’s retirement system—whose members include all state employees and local government employees outside of New York City. There is a lot of information to be processed with about a million active employees, beneficiaries, and retirees. For example, we handle preretirement information for those considering retiring, beneficiary changes, and problems with benefit checks.

Then there’s the other side of retirement, the pension fund [New York State Common Retirement Fund]. The Office of the State Comptroller not only pays out benefits, but also invests employee and employer contributions. At $155 billion, the state’s pension fund is the third largest in the country and one of the largest in the world. We are responsible for safeguarding that fund.

New York is one of a few states that has a sole-trustee system, as opposed to a board. The state comptroller is the sole trustee—with a lot of staff and outside advisors to guide the decisions for safeguarding those pension dollars and earning a good rate of return.

Finally, the office handles the abandoned property for the state. After a certain period of time, bank accounts or investment accounts that are inactive are considered to be abandoned property. We deposit this property into our unclaimed funds unit while we try to locate the rightful owners. In conjunction with the Higher Education Services Corporation, we also manage New York State’s 529 college savings programs [IRC section].

Finally, we also conduct the audits of state agencies and local governments—approximately 600 audits per year for about 200 state agencies and 400 local governments, including school districts. It’s an initiative which we worked on very closely with the Society [NYSSCPA].

CPAJ: When your predecessor resigned, serious questions were raised about the internal control structure in the Executive Office of the State Comptroller. What programs have you implemented to strengthen controls and address public concerns about the transparency in this office?
DiNapoli: From the moment I was selected for this office, I felt that the issue of ethics would be fundamental to my tenure. One of my first official acts as comptroller was to update our executive order on ethics, which lays out the framework for ethical behavior within our agency, and make it clear that the order would apply to everyone, including me.

We hired a special counsel for ethics who has experience with the New York State Ethics Commission [now the New York State Commission on Public Integrity], and she is in charge of providing ethics training to all of our employees.

We also set up a management review commission that was chaired by former New York City Mayor Ed Koch and former NASD Chairman Frank Zarb. One of their recommendations was to create an inspector general position, which did not exist within the agency before. This is a new, independent office. Although the state comptroller appoints the inspector general, the inspector general has the authority to investigate any improprieties, including those involving the comptroller, or to refer the allegations to outside law enforcement. This independent office strengthens internal controls within the agency.

We have also done more to update our internal audit function. Our executive committee meets and reviews the comptroller’s executive operations and ensures those functions are handled appropriately.

The problems that occurred during my predecessor’s tenure resulted from a lapse at the top of the agency. One of my challenges was to make clear that the overwhelming majority of the people working in the Office of the State Comptroller are career civil servants who were doing their job well. Since then, we’ve tried to strengthen the checks and balances internally, and I believe we have been successful in that regard. Now there is more emphasis on ethical issues. If anyone in our office is unsure of the proper way to handle an ethical dilemma, I’ve encouraged them to reach out to our ethics team for guidance. They shouldn’t be afraid to ask questions. I think that’s made a world of difference.

You didn’t raise this in your question, but I’d like to add something else: When I began in this role, some questions were raised in the newspapers about how the state pension fund was being handled. Since that time, we changed many things, particularly the policy regarding how placement agent fees are handled, with an emphasis on transparency, accountability, and ethical standards. A pension task force meets to make sure we are operating the pension fund in a world-class way—not only from a performance point of view, but also from an ethical point of view.

We are also working with the New York State Insurance Department to revitalize the regulations and oversight of the pension fund. All of this emanates from a concern about avoiding the pitfalls that befell my predecessor.

CPAJ: Regarding transparency, I’ve been told that you have refused to accept any campaign contributions since you were sworn into office. Is that true?
DiNapoli: Yes. I felt from the beginning that given the reputation of this office—and, frankly, some of the criticism of the selection process that resulted in my appointment—I needed to focus on doing the job and doing it right. Too often the public is left with the impression that those in public office are concerned only about where their next contribution is coming from. I was fortunate in that during my years in the New York State Assembly, I had a community that was very supportive, and I did not have to raise a lot of money for campaigning other than the first time I ran. But I am familiar with how this can be a very distracting part of what we are required to do in public life.

Last year, we proposed a system for public financing of election campaigns with a matching-fund program, similar to what New York City does. The more you can remove the influence of money, the better the system will work, especially for the State Comptroller’s Office. This office is meant to be an independent watchdog, and as such should be above the partisan fray. I have suggested to our legislative leaders and the governor that this office be used as a test case. Unfortunately, the legislature hasn’t acted on it yet.

At some point soon, I’ll need to begin to raise money or people will think I don’t want this job. I think I have made it clear that my priority has been to focus on doing the job of this office the best way I can and not worrying about the 2010 campaign. But I don’t want to send the wrong signal. This job has been a wonderful opportunity in public service for me, and I fully intend to run for election. So in the near future, we will be doing some fundraising, perhaps with some voluntary restrictions on my part. When I decide to start that process, that information will be publicized.

CPAJ: To return to the Pension Fund Task Force, has it made any progress? Do you believe that the current sole-trustee system should be replaced by one that includes the comptroller and a board?
DiNapoli: Late last year, we worked with then–Governor Spitzer and Eric Dinallo, the New York superintendent of insurance, to revitalize the regulatory framework. According to current regulations, the insurance department provides some oversight regarding how the pension fund is managed. We are audited by the New York State Insurance Department once every five years, but we thought there needed to be a more robust implementation of that oversight role. One of the new requirements that we proposed includes an audit committee and a policy for dealing with conflicts of interest, particularly with regard to our advisory committee members.

The Insurance Department is in the process of promulgating the specifics of those regulations and how they will be implemented. I have announced that we are setting up a Pension Task Force headed by Shannon O’Brien, the former Massachusetts state treasurer. This group has had three meetings already, examining how the funds operate, such as the placement agent policy changes we made last July. It’s an ongoing process, and they’re coming up with additional suggestions for change.

The task force is not looking at the sole-trustee issue. I think that is a separate question. My own feeling is that any system—whether it is a board or sole trustee—is open to compromise or corruption. Some people criticized the New York State Pension Fund under the prior administration and believed that if we didn’t have a sole trustee, that wouldn’t have happened. But there have also been difficulties with boards—Illinois, in particular, has faced some serious charges. I don’t think there is a simple answer to whether a board structure is inherently better than a sole trustee.

One of the advantages of a sole-trustee system is that you have a clear level of accountability. If something goes wrong, you know who to blame. We have many boards in New York State, but if you asked most citizens to name the members of these boards, they wouldn’t know. There is a level of invisibility with boards, which I think lessens their accountability. With a sole-trustee system, the person responsible is known; I think that is a plus in an era when we talk more and more about transparency and accountability.

Other states—New Jersey, for example—have had some real problems with their pension funds because their boards have utilized the funds to help the state with other fiscal problems. Because New York has had a sole trustee, we have an independent guardian of the pension fund. Whether it was under the control of [Arthur] Levitt, or [Ned] Regan, or [Carl] McCall, the sole trustee has been able to say no to the governor and the legislature—even to the point of going to the courts to protect the interests of the fund. That’s the strength of the sole-trustee system.

Under a board structure, the question is: Who is appointing the board members? If the board is appointed by the legislature and the governor, it will be subject to some of the partisanship and gridlock that people complain about in Albany. Those problems could transfer to a board, because the members are going to be accountable to the political interests of whoever has appointed them. There are some cases where boards work very well and others where they don’t work so well.

My goal right now is to make the sole-trustee system function at a world-class level, from the point of view of both performance and ethics. Changing the system is going to require a constitutional amendment, and it would take many years if, in fact, it happened at all. We are going to focus on making the current system work the right way.

The last point I want to make on this is that the sole-trustee label is sometimes misleading. The pension fund does not operate based on my reading the Wall Street Journal and deciding what to buy and sell. We have a very professional staff. We have a very involved and professional process to evaluate investment decisions. We have several levels of internal staff review, and approve any investment decisions that are made. We have paid external advisors who give us financial advice and recommendations on investments decisions, and a variety of advisory committees on investment, real estate, actuarial, and retirement issues. Yes, there is one person ultimately responsible, but there are a lot of people who have input into the decisions.

This is one of the reasons why ours is one of the top-tier funds in terms of performance. The average public pension plan is funded at about 88%, meaning that the fund has less money than it will need to pay out. As of last fall, our fund level was at 104%, meaning we are fully funded. One of the reasons for the strength of our fund derives from the sole-trustee structure. As with anything, before we advocate change, we need to consider what the new structure would look like and whether it might compromise some of the good things about the New York fund.

Controls over Payroll Classification

CPAJ: It was recently discovered that a Long Island attorney was misclassified as an employee by multiple school districts before he retired, fraudulently qualifying him to collect a pension. About a month ago, your office suspended the pension of a second Long Island attorney for the same issue. How extensive is this problem in Long Island and New York State in general?
DiNapoli: It’s certainly a serious issue and we are undertaking a systematic review of the pension fund, starting with attorneys. We found instances of this problem not only on Long Island, but upstate as well. Suffice it to say that we are living in a time where every dollar is scrutinized. And there are obviously instances where individuals were listed inappropriately as employees, because of either a misunderstanding of the rules or a deliberate attempt to manipulate the rules.

We are reviewing everybody in the system now, whether already retired or not, to make sure their status is recorded appropriately. That is going to take some time. I think we’ve identified about a dozen people so far. It remains to be seen how widespread the problem is, but it is certainly not limited to one geographic area.

We have also promulgated new regulations that are intended to help local government officials determine how to classify someone as either an independent contractor or an employee.

Additionally, the chief financial officer for the entity now is required to sign a certification when putting somebody on the payroll. In the past, the local government employer determined who should be listed as an employee. Having a certification from someone in authority now helps to ensure the proper classification of these professional individuals.

CPAJ: What does this certification consist of? Is it essentially the same as the IRS guidelines for classification of employees versus independent contractors?
DiNapoli: That’s right. Basically, there is a checklist with standard guidelines that needs to be followed. Everyone’s awareness has been raised on this issue and we wanted to give clearer guidance to local government. This certification by the CFO establishes clear accountability.

New GASB Disclosure Requirements

CPAJ: On March 27, 2008, it was reported that the combined pension funds of New York City and New York State had more than a quarter-million shares of Bear Stearns stock. New York, along with other state pension funds, took a big hit as a result of the near-collapse of Bear Stearns and its subsequent buyout by JPMorgan Chase. Has your office initiated, or do you have any plans to initiate, an investigation into what transpired at Bear to determine whether the investment bank’s failure was due to miscalculation or deception?
DiNapoli: We have been monitoring the situation closely, but I wouldn’t go so far to say we’ve been investigating. We have not initiated an investigation on it.

CPAJ: By some estimates, state and local governments owe their current and future retirees considerably more than they have committed to their pension funds. From your perspective, where does New York stand on the adequacy of the funding for retiree pensions and other postemployment benefits?
DiNapoli: GASB 34 now requires that we report other postemployment benefits, such as health insurance. When we include those amounts, New York’s exposure is estimated at $50 billion. However, that’s just for the state; local governments are calculated separately and will add up to many more billions. For example, the estimate for New York City is approximately $58 billion.

New York City has taken the lead in this matter by setting up a trust fund and contributing money to the trust for those benefits. The Office of the State Comptroller has put forward legislation to set up a trust for the state in partnership with local governments to manage these funds. By establishing the trust and contributing money that will earn income, the state and local governments can plan for how we will pay for these future obligations.

GASB’s requirements right now are to report the obligation, not necessarily to come up with the money to pay for it. But obviously that has to be the next step. This has forced us to take a clearer look at our long-term obligations and begin to plan how to manage them. It’s going to force us all to think more carefully about how we budget and how we come up with the money to pay for our commitments.

CPAJ: What role will your office have in moving this forward and securing funding?
DiNapoli: We’ve been pressing hard on our legislative proposal, and we would like the legislature’s and the governor’s support. Our position is that we need to authorize the creation of a trust and then start to put money into this trust, as a part of the regular budget process. We have been very active in getting this to be considered a front-burner issue.

Passing our proposal won’t be easy given all the other difficulties that the state is facing—the downturn in the economy, a very tight budget for this year and next. It will be difficult to get the attention on this that it deserves, but we are going to keep pressing.

Fire District Audits and Internal Controls

CPAJ: Legislation became effective about a year and a half ago to strengthen the accountability and oversight of fire districts. According to your website, fire districts with less than $200,000 in annual revenues are not required to have independent audits. Doesn’t this remove a basic deterrence to fraud by eliminating the possible perception of detection?
DiNapoli: There was a lot of input from the fire districts, and that threshold was part of the legislative negotiations; it’s certainly something we could revisit if we see continuing problems.

In New York, we have a lot of fire districts, and most of them are above that threshold anyway. The provision for independent audits was intended to deal with the small minority of districts where there is perceived to be a problem.

We have been working on implementing the new accountability requirements. We provide training in conjunction with the Association of Fire Districts. We’ve been proactive in helping them to develop a model code of ethics, and a template for requests for proposals (RFP) to identify independent auditors. So far, it’s worked well, and we’ve seen improvements, but we can revisit that threshold if there continue to be problems in that area.

CPAJ: Most people recognize the need for a cost-benefit tradeoff, but perhaps surprise audits, for example, could give the perception that wrongdoing will be detected.
DiNapoli: That’s something we will certainly consider.

CPAJ: In reviewing the fire district audit reports on your website, lack of internal controls is persistently cited as a problem. Given that the required training for fire district commissioners includes just one hour on internal controls, do you think more training is warranted?
DiNapoli: We review our training on an ongoing basis. If we see a persistent pattern in a difficult area, we can readjust the emphasis. I think at this point we are comfortable with the training that we are providing. But if we don’t see the kind of results we expect, we can certainly put more emphasis in the area.

Government and Nonprofit Accountability

CPAJ: Many state-funded programs administered by local governments and not-for-profit organizations have no clearly defined set of audit requirements. What are your thoughts on requiring the audits of programs and organizations that spend more than a specific dollar threshold per year to be conducted in accordance with Yellow Book standards?
DiNapoli: We are living in a time where accountability and transparency are key. We take our audit function very seriously, and the public is expecting more of the auditing role, whether it’s conducted by our office or whether it’s an external or internal audit. I do think Yellow Book standards are something we need to consider, and I believe there would be a lot of public support for strengthening the audit function across the board.

Much of our focus has been on school districts, because of the amount of money involved. For many years, with rare exceptions, we didn’t do school audits. As a result of what happened in some Long Island school districts, that accountability measure was initiated. As we are learning through the school district audit process, we need to encourage similar accountability measures across the board. I think your suggestion is one worth exploring.

CPAJ: Do you believe that SOX-like provisions, such as establishing an audit committee or an anonymous whistleblower hotline, should be required of governments, governmental agencies, and not-for-profit organizations?
DiNapoli: Our office has a hotline and an active internal audit group. We are setting up a separate audit committee for the pension fund, and we have an inspector general. We are a fairly large government agency, so it makes sense to do all of this, but for a smaller not-for-profit, it may not be feasible. However, an entity that is receiving government funds could report inappropriate or illegal behavior to our office’s hotline.

Reflections on Public Service

CPAJ: On a personal note, what was it like to be elected at 18 years old, and has your view of politics and public service changed over the years?
DiNapoli: Each experience has an impact on you, but my overall view of public service probably hasn’t changed. I am an optimist about the electoral process, and my belief that public service can be an avenue to produce positive change has not changed. Even with all the ups and downs in my career, my optimistic view about the process has been confirmed all these years later.

To answer the first part of your question: At the time, I probably didn’t fully appreciate the opportunity I had as a teenager, what it meant for adults to place their confidence in me by voting for me. When I was 18, I thought I was all grown up. Now that I am much older, I have a greater appreciation of the opportunity that was extended to me by the community in which I grew up.

At the time I ran for elected office, it was without any expectation of winning. So when, on the evening of May 3, 1972, I won the election, I was quite surprised. I had a similar feeling when I was selected as state comptroller, because that was an unexpected turn of events. Every now and then life throws you a curveball and you say to yourself, “Is this really happening?” I haven’t forgotten that sense of wonder.

CPAJ: How do you reconcile being the state’s fiscal watchdog with having the reputation for being Mr. Nice Guy?
DiNapoli: I don’t think they are mutually exclusive. I tend to think that, especially in politics, there is a bit too much gridlock, because of either partisanship or personality conflicts. I’ve always thought that individuals should bring their ideas to the table and argue it out, and, through debate and compromise, come up with a good solution for everyone. I believe that spirit has enabled me to be an effective legislator. I’ve had a reputation for being able to work across party lines.

I have always felt that the right way to do things for the long term is to focus on the issues rather than trying to make the other person look like the bad guy. And I believe that is also what the public expects.

While the politics of tearing someone else down might make for good theater, it doesn’t make for the kind of healthy debate and discussion that a democracy should have. I have tried to transfer that ideal from my legislator role to the comptroller role. When we comment on the state’s budget or recommend a legislative change—for example, managing the state’s debt differently or releasing an audit critical of another agency—I would like others to see us as fulfilling our role and calling the shots as we see them. I don’t want our actions to be seen as part of a partisan or personal agenda.

From my point of view, that’s what it means to be independent. Being negative for the sake of being negative doesn’t make you a more credible watchdog—in fact, it probably does the opposite. I would like to think that in the year and few months since I was named state comptroller, people perceive that when we’ve taken action, it’s been on the merits of an issue.

CPAJ: Is there anything else you’d like to tell our readers?
DiNapoli: I would like to point out that we have many CPAs working in our office. Our relationship with the auditing professionals at the New York State Society has been mutually beneficial. The Society has given us good input on many of our legislative initiatives, and the goals of the CPA profession are very much in line with our goals—in terms of ensuring that organizations operate with efficiency and integrity.

Finally, I would also like to encourage young people starting out in the profession to look to our office and other government agencies when considering their career choices.

©2009 The New York State Society of CPAs. Legal Notices