2017 AB 327/SB 255: Supporting Sound Financial Policies and 
Fair Government Contracts for Child and Family Serving Agencies

Contact: Kathy Markeland, [email protected]

BACKGROUND: Authored by Representative Dale Kooyenga and Senator Howard Marklein, AB 327 (SB 255) is a revised version of a proposal that was approved by the legislature last session, but subsequently vetoed, due to state agency concerns. WAFCA has worked with state agency leaders over the past several months to simplify and refine the proposal.

The specific statutory changes in AB 327 address concerns of our members regarding the ability to retain surplus earnings from “rate-based” contracts with government agencies.

Under a rate-based human services contract, the purchaser and provider agree to a prospective, per-unit payment rate for services. The contract includes a projection of the number of units of service that will be provided, however, the actual units purchased may be more or less than anticipated. The provider of the service bears the financial risk if the units purchased fall short of budget projections.

For nonprofit agencies offering these rate-based services, the expectation is that the rate set at the beginning of the contract is a “break-even” rate. Since the units purchased can vary from original assumptions, sometimes a provider makes money and sometimes a provider loses money. Current law permits a provider to keep up to 5% of earnings, when income exceeds expenses. This retained surplus is intended to help providers build a reserve to sustain their mission in years of losses.

The problem:

• State administration through policy has interpreted the current reserves statutes to allow counties to set a retained surplus cap lower than 5%. As counties have faced mounting financial pressures, contracts have increasingly set lower reserve retention allowances with some contracts setting the retained surplus as low as 1%.
• Counties have placed contract restrictions on expenditure of retained surplus.  Some counties require county approval to use the reserve for any purpose.
• Current law includes a requirement for long-term tracking and a secondary cap on reserves. This multi-year reserve tracking effectively requires nonprofits to treat their reserve as a future liability.
• DCF began regulating the rates of out-of-home care providers and initiated an intensive annual cost reporting and rate review process in 2010 which eliminated the ability for providers to negotiate rates in their contracts.
• Counties have started shifting more services into rate-based contracts, which means there are more service lines where providers bear risk.

The solution = AB 327:

• Consistent Statutes for Rate-Based Contracts. Creates more uniform statutory language for rate-based contracts overseen by the Department of Children and Families, Department of Health Services and the Department of Corrections.
• Contracts Must Allow Providers to Keep Percent of Surplus. Maintains and clarifies current law allowing nonprofit providers of rate-based services to retain up to 5% of revenues received under a contract for rate-based services when a surplus is realized. The bill requires all three agencies to write rules setting a uniform surplus percentage for nonprofit, rate-based services contracts.
• Purchasers Must Claim Excess Surplus within 6 Months. Requires a provider to notify a purchaser of any surplus in excess of the allowable retained surplus and gives the purchaser 6 months to request their proportional share of the surplus.
• Eliminates Cumulative Tracking of Surplus/Loss. Removes the requirement for providers to maintain a cumulative tracking of retained surplus and losses over multiple contract periods and removes the 10% cap on surplus retained over multiple contract years.
• Provider Manages Retained Surplus. Affords a nonprofit provider greater flexibility in reinvestment of retained surplus.

Why AB 327 matters:

• Nonprofit human services providers are critical partners for the state and counties.  Government relies on the availability of private agency human services to fulfill their statutory responsibilities to support children and families.
• There is no mission without a margin. The long-term financial viability of the nonprofit human services sector is threatened if providers are not able to retain reasonable surplus.
• Counties do not make providers whole in a loss year. Under rate-based contracts, counties only pay for the units of service that they actually need. While this benefits counties, it places the provider at risk. In order to manage the risk, nonprofit providers need to be able to retain earnings in surplus years.
• Granting nonprofit providers flexibility to manage retained surplus will foster innovation and allow agencies to prudently plan for future capital improvements and program investments.