Legislature(1995 - 1996)
04/19/1996 08:20 AM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
APRIL 19, 1996
8:20 A.M.
TAPE HFC 96 - 129, Side 1, #000 - end.
TAPE HFC 96 - 129, Side 2, #000 - end.
TAPE HFC 96 - 130, Side 1, #000 - #439.
CALL TO ORDER
Co-Chair Mark Hanley called the House Finance Committee
meeting to order at 8:20 A.M.
PRESENT
Co-Chair Hanley Representative Martin
Co-Chair Foster Representative Mulder
Representative Brown Representative Kohring
Representative Therriault Representative Parnell
Representative Kelly
Representative Grussendorf and Navarre were not present for
the meeting.
ALSO PRESENT
Randy Welker, Legislative Audit Division; Nancy Slagle,
Director, Division of Budget Review, Office of Management
and Budget; Janet Clarke, Director, Division of
Administrative Services, Department of Health and Social
Services; Mike Greany, Legislative Finance Division; James
Baldwin, Assistant Attorney General, Governmental Affairs
Section, Department of Law; Arthur Snowden, Administrative
Director, Alaska Court System; Joe Thomas, Division of
Finance, Department of Administration.
SUMMARY
HB 551 An Act relating to the lapse of unexpended
balances of one-year appropriations; and providing
for an effective date.
HB 551 was HELD in Committee for further
consideration.
HOUSE BILL 551
"An Act relating to the lapse of unexpended balances of
one-year appropriations; and providing for an effective
date."
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Representative Martin stated that a review of the Alaska
FY95 year-end operating encumbrances completed March 5,
1996, by Legislative Audit found that interpretation of the
Alaska Administrative Manual used by agencies to validate
their encumbrances is not reasonable. FY95 year end
encumbrances were checked in all departments, with emphasis
on encumbered funds used to purchase equipment and
contractual services. Of the seventy-nine (79) encumbrances
tested, thirty-four (34) appeared invalid. The value of
those encumbrances was $11.8 million dollars; a total of
$15.9 million dollars in encumbrances were examined.
Representative Martin continued, it is Legislative Audit's
recommendation that changes be made in order to avoid
further misunderstandings and misinterpretation of
encumbrance policy. The legislation proposed will modify AS
37.25.010 to require that unexpended balances of an
operating appropriation lapse on June 30th of the fiscal
year for which the appropriation was made.
RANDY WELKER, LEGISLATIVE AUDIT DIVISION, spoke to the
proposed legislation. In accordance with the provisions of
Title 24 of the Alaska Statutes, the Division conducted a
review to determine the reasonableness of operating
encumbrances established by State agencies at the end of
FY95. The review included year end encumbrances established
for the purchase of equipment and contractual services, with
a primary focus on encumbrances related to reimbursable
service agreements (RSA's) and other contractual services.
Additionally, the Division reviewed the encumbrances related
to the Department of Law's oil and gas litigation
appropriation.
The primary intent of the review focused on encumbrances
either established or increased at the end of FY95 in the
agencies' operating appropriations. The criteria used for
the evaluation was developed from the State of Alaska
Administrative Manual (AAM) and the Office of Management and
Budget (OMB) RSA handbook.
Mr. Welker continued, the review included:
* Extracting and analyzing financial
information from the State's accounting
system regarding encumbrances and related
subsequent expenditures.
* Discussions on the AAM criteria with the
state accountant.
* Review of agency documentation supporting the
encumbrances and a review of OMB's RSA files.
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* Discussing the results of the review with
agency staff.
Mr. Welker referenced the AUDIT REPORT "REVIEW OF FY95 YEAR-
END OPERATING ENCUMBRANCES". [Copy on file]. Alaska
Statute 37.25.010, titled "Unexpended Balances of One-Year
Appropriations", states that the unexpended balances of a
one-year appropriation authorized in an appropriation bill
lapses on June 30th of the fiscal year for which
appropriated. However, a valid obligation existing on June
30th is automatically reappropriated for the fiscal year
beginning on the succeeding July 1st, if it is recorded with
the Department of Administration by August 31st of the
succeeding fiscal year. Mr. Welker continued, the audit was
focused primarily on contractual services.
Mr. Welker referenced Page 7 of the handout which lists the
invalid encumbrances and the associated amounts. The
majority of the money identified existed within the
Department of Law. The Division reviewed several contracts
charged to the Department of Law's oil and gas litigation
appropriation, including the supplemental funding for the
FY95 appropriation. The encumbrances reviewed were related
to on-going litigation matters. The scope of the contracts
are very broad and generally do not reference any case or
project in particular. Of the thirteen encumbrances
reviewed, six were originally established in the 1980's with
the other seven established in the 1990's; only two were
initiated in FY95.
Mr. Welker noted that the Department of Law disagrees with
the Division's conclusions and observations of the
encumbrances. The Department of Law believes that once a
contract is signed, it is okay to encumber the entire
amount. To due otherwise, they feel would do harm to the
State's litigation effort. Mr. Welker disagreed with the
Department's position.
Mr. Welker stated that the primary recommendations focused
on the guidelines established in the State of Alaska
Administrative Manual (AMM). The Division has recommended
that the commissioner of the Department of Administration
revise AAM to provide more explicit instruction on
determining the proper fiscal year's appropriation to be
charged for year-end obligations. The revisions should
realign the AAM criteria to embody the basic purpose of an
operating appropriation, which is, to fund the operations of
a state agency for one fiscal year.
Representative Kelly spoke to the purchasing problems
resulting from passage of the legislation. He thought that
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the legislation could adversely affect certain situations.
Mr. Welker agreed that there are many legitimate reasons
which could need an extension. Representative Kelly
suggested that managers hold off on purchases until the end
of the fiscal year, in order to plan for contingencies. He
felt these are legitimate management decisions. Mr. Welker
agreed.
Co-Chair Hanley also agreed that there are legitimate
concerns, although, he noted concern with the "roll
forward" monies not used. The Department of Law is using
the language to justify encumbrances of those funds. He
requested more details on the contract extensions. Co-Chair
Hanley suggested that the Department of Law is rolling
forward money into a fund well beyond what the anticipated
expenditures are.
Mr. Welker noted that the bulk of money was in the
contractual field. He provided the Committee with a handout
"Schedule of Year End Operating Encumbrances for FY95" which
provided a break down of the sections of encumbrances.
[Copy on file]. In the grants category, the total
encumbrances for FY95 was $33.8 million dollars, equipment
amounting to $9.2 million dollars, supplies at $4.4 million
dollars, contractual services were $7.4 million dollars and
travel amounted to $269.9 thousand dollars.
Representative Brown asked if the legislation would apply to
the Legislature. Mr. Welker replied that the Legislature
has no "innocent" parties involved. Representative Brown
agreed, pointing out that the Legislative majority used
$1.8 million dollars in FY95 appropriations to carry out
work performed after the fiscal year; $878 thousand dollars
to pay salaries and benefits for twenty-four staffers. She
continued, twenty-three of the contracts covered work
beginning on June 16, 1995, and ending on January 7, 1996.
There were forty-eight contracts, paid for from funds which
would have otherwise lapsed. Representative Brown
questioned if the Legislature was exempt from the Executive
Budget Act.
Mr. Welker stated that the Executive Budget Act was included
in Section 37.07, whereas, the language proposed, changes to
Section 37.25, a provision in the finances of government,
but not part of the Executive Budget Act.
Representative Brown asked if Mr. Welker was prohibited from
investigating the practices of the Legislature. Mr. Welker
stated that the Audit Division does not audit the
Legislature as part of the financial auditing of State
government. The Legislature is audited separately.
Representative Brown asked who made the request for the
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forty-eight encumbrances which were extended beyond the
fiscal year. Mr. Welker replied that the majority of the
money passed through the Legislative Affairs Agency.
Representative Brown asked if the Director of the
Legislative Affairs Agency (LAA) had the authority to enter
into the encumbrances. Mr. Welker believed that the rules
of those funds originate from several different
appropriations. Each appropriation originates with a
different chairperson. There is a variety of approval for
authority in that function.
Representative Brown inquired if the Governor's Office
activities had been audited. Mr. Welker acknowledged they
were, noting the Office of the Governor maintains a clean
operation.
Co-Chair Hanley stated that in the past, when the budget had
not been rolled off, there was a "roll forward" of money,
appropriated for the next fiscal year. The Office of the
Governor had $3 million dollars of carry forward money which
their encumbrances were charged against. He emphasized that
the Legislature did not roll money forward last year. Co-
Chair Hanley reiterated his concern with the Department of
Law's encumbrances. He thought it appeared that money was
being rolled forward as it had been done in the past,
without the roll-forward language.
In response to Representative Brown's question regarding
contract legislative employees, Mr. Welker noted that they
had been "run through" a personal service contract rather
than a professional service contract. They were "run
through" the State payroll system with taxes withheld. He
added, State government books get closed and are audited on
a timely basis.
Representative Martin inquired if an administrative
procedure was in place which required each agency to report
to the Department of Administration (DOA) for any money
encumbered. Mr. Welker replied that through the Department
of Administration and the State accounting schedule, the
information could be pulled, although, DOA does not have the
ability to know if that is a valid encumbrance. That
decision is made at the agency level.
Mr. Welker added that the report held to the encumbrances of
the Administrative Manual. Neither the Legislature nor the
Court System is bound by that manual.
NANCY SLAGLE, DIRECTOR, DIVISION OF BUDGET REVIEW, OFFICE OF
MANAGEMENT AND BUDGET (OMB), OFFICE OF THE GOVERNOR, stated
that the proposed legislation was not needed. The
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Administration has responded to the legislative audit report
and agrees that there are some problems in interpretation of
the Administrative Manual. A drafting group has been formed
to write revisions to the manual.
She strongly recommended that contingency allowances be
available to division managers for ordering equipment. She
noted the unpredictable situations which exist within the
agencies throughout the year. Consequently, orders are
delayed until the end of the year to guarantee that funds be
available. The legislation counters the intent of
streamlining administrative burdens.
Ms. Slagle listed some areas in which the agencies do not
have control over ordering. Many agencies have seasonal
projects, causing a split of contracts between fiscal years.
Federal budget problems often cause situations to get backed
up, making it difficult for the agencies. There is no
control for successful delivery of products. Back orders
exist. Grant negotiations take a long time. The grantee
situation is out of the Administration's control.
(Tape Change, HFC 96-129, Side 2).
Ms. Slagle continued, purchasing of specialized equipment
often takes many months to receive. The Administration has
no control of the grantee situation for the K-12 foundation
which is basically shut down during the summer making it
outside the August 31st deadline. All these costs would
require supplemental funding. The result could be potential
penalties, and will result with special requests to the
Legislative Budget and Audit Committee (LA).
Ms. Slagle advised that other states allow carry forward
each year. The Administration does not support the proposed
legislation and suggests that these concerns be addressed
administratively. Representative Martin reminded Committee
members that the amount at question was $83 million dollars.
Co-Chair Hanley agreed that a timing question exists in
regard to some of the departments carry forward money, while
suggesting that some departments need to "tighten up". Co-
Chair Hanley stressed concern with the Department of Law's
encumbrances. He advised that the Department of Law had
encumbered money for a project for the Department of Revenue
to update the fiscal forecast method indicating that
justification was not warranted. He suggested that
Department has too much flexibility.
Ms. Slagle reiterated that $33.8 million dollars had been
encumbered for grants, $37.4 for contractual dollars. Many
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of the agencies have billings which are tied to federal
programs. RSA's add an additional layer of reporting and
billing requirements.
Representative Martin asked if it would be possible during
the legislative session that each agency provide a report of
how much money will be encumbered for the following fiscal
year. Ms. Slagle stated that access exists through the
state accounting system specifying the agencies encumbered
funds.
JANET CLARKE, DIRECTOR, DIVISION, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF HEALTH AND SOCIAL SERVICES, spoke to
the grant encumbrances for the Department. Common practice
is to "hold back" ten percent of the final quarters advance
until the final fiscal report comes forward from the
grantees. That amount is 2.5%. She added, if the bill
passes, the Department would have a few options. They could
change the grant regulations and discontinue the practice of
"holding back" grant funds. That would increase the
miscellaneous claim line in the supplemental request.
Accounts payable could be established, although she felt
that passage of the legislation would create many problems
with the grantees.
Ms. Clarke commented that Medicaid was spread throughout the
Department in order to get the 50% federal participation in
those areas. There are many RSA's attached to that service.
Co-Chair Hanley asked if money was spent in FY96 which
reimbursed people for services provided during that time.
Ms. Clarke responded that some of those services were
performed during FY95, but the final payment and billings
were made in FY96. Co-Chair Hanley asked if the money
should be accounted for when it is spent, received or when
the service is provided.
Ms. Clarke clarified that the rules are that encumbrances
can only last for one year unless the Division of Finance
allows them to be extended for special circumstances. A
time certain does exist.
Ms. Slagle explained that encumbrances are established on
regulations and practices. The encumbrance is the funds
reserved before the final payment is made. All services
should have been provided for the year that the funds were
appropriated.
Representative Kelly asked if the encumbered money could be
applied to another category. Mr. Welker advised that the
Legislature appropriates a total dollar amount; the
limitations exist only on the appropriation. The
appropriation can be moved within the category of
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expenditure with OMB's approval. He added, the audit focus
for the Department of Health and Social Services (DHSS) was
only on contractual services.
Mr. Welker interjected from information contained in the
administrative manual, the general rule for encumbrances are
when services are received. The majority of disagreements
exist with agency interpretation of the exceptions. Those
exceptions are being stretched to accommodate things that do
not fit the meaning of the change. He added, auditors are
working with the Department of Administration to tighten up
the manual's language.
Co-Chair Hanley asked if invalid encumbrances were illegal.
Mr. Welker replied that all information links back to
statute. The Administrative Manual is the Administration's
attempt to define a valid obligation and the terms used to
describe that obligation. Representative Brown asked if the
Administrative Manual had the force and effect of law. Mr.
Welker replied it would not have the authority of a
regulation.
Representative Brown asked if the Legislature was under the
procurement code. She noted that she did not understand the
need for the legislation when, currently, the Legislature
practices the same use of fund distribution. Representative
Martin agreed that a problem exists and stressed that there
needs to be a "time certain" when the money is spent.
Representative Brown agreed that there should be reasonable
rules, although recognized that a "time specific" would make
it very difficult for the agencies. Life is a more
"flexible" process than that.
(Tape Change, HFC 96-130, Side 1).
JOE THOMAS, DIVISION OF FINANCE, DEPARTMENT OF
ADMINISTRATION, commented that the proposed legislation
would provide a shift from the way that the State has
operated to date. The shift would delineate that the
agencies operate from an "expenditure base" type system.
ART SNOWDEN, ADMINISTRATIVE DIRECTOR, ALASKA COURT SYSTEM,
referenced a project currently undertaken by Dr. John
Hunsake at Michigan State University to research the effect
of agencies who carry money forward. Many states are now
going to a new system allowing agencies to carry forward
half of the money that they do not spend; those funds are
placed in a separate account which encourages savings. The
money is not counted against their budget and they are
allowed to carry it forward for three years. Mr. Snowden
noted that Mr. Hunsake emphasizes that spending patterns
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become more efficient using that system. Mr. Snowden
offered to provide Committee members back-up material
supporting the theory.
JAMES BALDWIN, ASSISTANT ATTORNEY GENERAL, GOVERNMENTAL
AFFAIRS SECTION, DEPARTMENT OF LAW, commented that the
Department of Law is prepared to offer assistance in
resolving the problems resulting from the need of the
proposed legislation. If there is a solution, the
Department would like to work toward it in a reasonable
manner.
He admitted that the Department of Law believes that they
have been operating within the boundaries of the
Administrative Manual. The Department views the large
litigation procedures as being part of a large single
project which often expands fiscal years. Carry forward
funds have been included in the budget requests for the
following year. Co-Chair Hanley commented that could create
policy differences when determining the budget amount of
total funding, suggesting that would make it impossible to
have a legitimate budget debate.
Mr. Baldwin stressed that the Department is not requesting
any more than they need to pay the contractual agreements.
Timing is the issue. Following research of this type of
arrangement, legal service contracts are given this
treatment when they address single cases that span for many
years. He suggested that there be a special treatment for
legal service contracts. Co-Chair Hanley thought the funds
should be given in years needs and not carried forward. Mr.
Baldwin replied that spending can be unpredictable.
Representative Brown referenced a written response provided
from the Attorney General's office stating that: "The
success of the Department's effort is largely due to the
consideration and discretion granted to the Attorney General
to encourage expenses necessary to prevail in litigation".
She summarized that the attorney general needs some
discretion to meet the tactics of large companies who have
much more money and resources available then the Department
has. Representative Brown stressed that tax payers were
being protected and that the Legislature should focus on the
results. They should focus on whether the Department has
used their money to successfully protect the State's
interest. She recommended that discretion be maintained.
Co-Chair Hanley agreed that the Department needs to have
flexibility although questioned if they need double the
amount of money projected in the budget. Representative
Brown interjected that the amount of money was "tiny" when
considering the amount at stake. The Department is making
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reasonable estimates. Co-Chair Hanley countered that if the
ability is abused, then concerns exist.
HB 551 was HELD in Committee for further discussion.
ADJOURNMENT
The meeting adjourned at 10:10 A.M.
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