Trust in an Independent Watchdog
An Exclusive Interview with New York State
Thomas P. DiNapoli
- Thomas P. DiNapoli was sworn in as New York State Comptroller
on February 7, 2007. As the state’s chief fiscal officer,
he is responsible for operating the state’s retirement systems
and overseeing the state’s pension fund. The Office of the
State Comptroller is also responsible for auditing all state agencies
and local governments, as well as reviewing state and city budgets
and contracts. Prior to becoming State Comptroller, DiNapoli, a
Democrat from Nassau County, had represented the New York State
Assembly’s 16th District for 20 years. Before he began his
career in the Assembly, DiNapoli worked as a manager in the telecommunications
industry. He has also served as an adjunct professor at Long Island
University-C.W. Post Campus and at Hofstra University.
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.
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.
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.
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.
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.
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.
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
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].
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].
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
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.
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.
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
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
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
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.
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.
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.
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.
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
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.
over Payroll Classification
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.
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.
What does this certification consist of? Is it essentially the
same as the IRS guidelines for classification of employees versus
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.
GASB Disclosure Requirements
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
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.
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.
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.
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.
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
What role will your office have in moving this forward and securing
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
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.
District Audits and Internal Controls
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
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.
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
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.
and Nonprofit Accountability
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
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.
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
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.
on Public Service
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
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.
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
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.
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.
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.
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.