Legislature(1995 - 1996)

04/19/1996 08:20 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  HOUSE BILL 551                                                               
       "An Act relating to the lapse of unexpended balances of                 
       one-year appropriations; and providing for an effective                 
  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                 
  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.                      
       *    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                 
  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                 
  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                 
  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                 
  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.                                        
  that  the  proposed   legislation  was  not  needed.     The                 
  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                 
  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                 
  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                 
  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                 
  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                 
  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.                     
  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                 
  become  more  efficient  using  that  system.   Mr.  Snowden                 
  offered  to  provide  Committee  members  back-up   material                 
  supporting the theory.                                                       
  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                 
  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                 
  reasonable estimates.  Co-Chair Hanley countered that if the                 
  ability is abused, then concerns exist.                                      
  HB 551 was HELD in Committee for further discussion.                         

Document Name Date/Time Subjects