Legislature(1993 - 1994)
03/15/1994 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE STATE AFFAIRS STANDING COMMITTEE March 15, 1994 8:00 a.m. MEMBERS PRESENT Representative Al Vezey, Chairman Representative Pete Kott, Vice Chairman Representative Bettye Davis Representative Jerry Sanders MEMBERS ABSENT Representative Gary Davis Representative Harley Olberg Representative Fran Ulmer COMMITTEE CALENDAR SB 242: "An Act relating to office hours of state agencies." PASSED FROM COMMITTEE *HB 481: "An Act relating to audits of recipients of grants and of certain other financial assistance from state agencies." HELD IN COMMITTEE *HB 482: "An Act making permanent a temporary requirement relating to the provision of employment information to the state." NOT HEARD *HB 480: "An Act relating to sales and attempted sales of handguns; requiring the Department of Public Safety to issue driver's licenses and identification cards with a magnetic strip encoded with information as to whether the subject of the license or card has been adjudicated mentally incompetent within the previous five years or has been convicted of a felony; requiring the Department of Public Safety to develop a computerized data base of felons and persons adjudicated mentally incompetent; providing that federally licensed firearms dealers must use a magnetic card reader to determine if the subject of the license or card is eligible to purchase a firearm; providing criminal penalties relating to magnetic reader strips; providing for the seizure of driver's licenses and identification cards by the court upon conviction of a felony or adjudication as mentally incompetent; and providing for an effective date." NOT HEARD *HB 513: "An Act relating to financial assistance for certain owners or operators of underground petroleum storage tank systems; and providing for an effective date." NOT HEARD (* First public hearing) PREVIOUS ACTION BILL: SB 242 SHORT TITLE: HOURS FOR STATE OFFICES SPONSOR(S): SENATOR(S) TAYLOR; REPRESENTATIVE(S) Kott JRN-DATE JRN-PG ACTION 01/12/94 2478 (S) READ THE FIRST TIME/REFERRAL(S) 01/12/94 2478 (S) STATE AFFAIRS 02/23/94 2936 (S) STA RPT 3DP 02/23/94 2936 (S) ZERO FN PUBLISHED (ADM/ALL DEPTS) 02/23/94 (S) STA AT 9:00 AM BUTROVICH RM 205 02/23/94 (S) MINUTE(STA) 03/01/94 (S) RLS AT 01:00 PM FAHRENKAMP ROOM 203 03/01/94 (S) MINUTE(RLS) 03/02/94 3029 (S) RULES TO CALENDAR 3/2/94 03/02/94 3030 (S) READ THE SECOND TIME 03/02/94 3030 (S) ADVANCED TO THIRD READING UNAN CONSENT 03/02/94 3030 (S) READ THE THIRD TIME SB 242 03/02/94 3030 (S) PASSED Y20 N- 03/02/94 3031 (S) Duncan NOTICE OF RECONSIDERATION 03/03/94 3065 (S) RECONSIDERATION NOT TAKEN UP 03/03/94 3066 (S) TRANSMITTED TO (H) 03/04/94 2598 (H) READ THE FIRST TIME/REFERRAL(S) 03/04/94 2598 (H) STATE AFFAIRS 03/15/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 481 SHORT TITLE: AUDITS OF STATE GRANT & AID RECIPIENTS SPONSOR(S): REPRESENTATIVE(S) BUNDE JRN-DATE JRN-PG ACTION 02/14/94 2377 (H) READ THE FIRST TIME/REFERRAL(S) 02/14/94 2377 (H) STATE AFFAIRS, FINANCE 03/15/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 482 SHORT TITLE: EMPLOYMENT INFO PROVIDED TO THE STATE SPONSOR(S): REPRESENTATIVE(S) HANLEY,Ulmer JRN-DATE JRN-PG ACTION 02/14/94 2377 (H) READ THE FIRST TIME/REFERRAL(S) 02/14/94 2377 (H) STATE AFFAIRS 03/15/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 480 SHORT TITLE: DRIVER LICENSE/HANDGUN PERMIT SYSTEM SPONSOR(S): REPRESENTATIVE(S) SANDERS JRN-DATE JRN-PG ACTION 02/14/94 2377 (H) READ THE FIRST TIME/REFERRAL(S) 02/14/94 2377 (H) STATE AFFAIRS,JUDICIARY,FINANCE 03/15/94 (H) STA AT 08:00 AM CAPITOL 102 BILL: HB 513 SHORT TITLE: GRANTS/LOANS FOR STORAGE TANK OWNERS SPONSOR(S): LABOR & COMMERCE JRN-DATE JRN-PG ACTION 02/28/94 2551 (H) READ THE FIRST TIME/REFERRAL(S) 02/28/94 2551 (H) L&C, STATE AFFAIRS, JUDICIARY 03/02/94 2586 (H) L&C REFERRAL WAIVED 03/15/94 (H) STA AT 08:00 AM CAPITOL 102 WITNESS REGISTER SENATOR ROBIN TAYLOR Alaska State Legislature Alaska State Capitol, Room 30 Juneau, AK 99811-0460 Phone: 465-3873 POSITION STATEMENT: Prime sponsor of SB 242 REPRESENTATIVE CON BUNDE Alaska State Legislature Alaska State Capitol, Room 112 Juneau, AK 99811-0460 Phone: 465-4843 POSITION STATEMENT: Prime sponsor of HB 481 GARY ANDERSON, Director Division of Audit & Management Services Office of Management & Budget P.O. Box 110020 Juneau, AK 99811-0020 Phone: 465-4668 POSITION STATEMENT: Answered questions on HB 481 JACK FARGNOLI, Senior Policy Analyst Director's Office Office of Management & Budget P.O. Box 110020 Juneau, AK 99811-0020 Phone: 465-3568 POSITION STATEMENT: Commented on HB 481 RANDY WELKER, Auditor Legislative Audit Division P.O. Box 113300 Juneau, AK 99811-3300 Phone: 465-3830 POSITION STATEMENT: Commented on HB 481 BOB WRIGHT, Senior Auditor Department of Health & Social Services P.O. Box 110602 Juneau, AK 99811 Phone: 465-3121 POSITION STATEMENT: Commented on HB 481 TENA BAVARD, Grants Administrator Department of Community & Regional Affairs P.O. BOX 112100 Juneau, AK 99811 Phone: 465-4731 POSITION STATEMENT: Commented on HB 481 LENA SIMMONS, Grant Section Department of Administration P.O. Box 110208 Juneau, AK 99811 Phone: 465-4731 POSITION STATEMENT: Commented on HB 481 ACTION NARRATIVE TAPE 94-30, SIDE A Number 000 CHAIRMAN AL VEZEY called the meeting to order at 8:02 a.m. Members present were REPRESENTATIVES KOTT, SANDERS, and B. DAVIS. REPRESENTATIVE G. DAVIS and OLBERG were detained in a House Finance Committee Meeting. SB 242 - HOURS FOR STATE OFFICES CHAIRMAN VEZEY opened SB 242 for discussion. Number 018 SENATOR ROBIN TAYLOR, PRIME SPONSOR, addressed SB 242. He stated SB 242 was introduced because flexible state office hours would give state agencies leeway in setting their "standard state office hours." Each state office would be required to review the preferences and needs of its' clientele, and recommend to the Administration which hours would be best for each community. This would allow state offices the flexibility to serve the public without adding to the state operating budget. The agencies would have to periodically review their office hour structure. SENATOR TAYLOR commented the state's goal should be service to the public. The state's current 37 1/2 hour workweek requires most people to take time off from work to be able to utilize the services. He felt this was inappropriate and people should not have to lose money or make special arrangements to accommodate the state offices. He felt state offices in the larger communities around the state should shift their office hours, whereby they could be open from 7:30 a.m.-5:30 p.m. He relayed some state employees have responded positively to the idea of shifting office hours, to better accommodate both the public and their personal lives. SENATOR TAYLOR mentioned the Commissioner of Administration, Nancy Usera, indicated to him that even if SB 242 were not to pass, she would still attempt to put it into effect by regulation. SENATOR TAYLOR felt SB 242 should be passed into law to prevent future administrations from disregarding the implementation of the policy. Number 097 REPRESENTATIVE PETE KOTT believed SB 242 was a good idea. He asked for a specific example of how SB 242 would apply to a particular agency. SENATOR TAYLOR replied in a smaller community, with only two or three employees, a state office could announce it would be open from 10 a.m. to 6:30 p.m., rather than closing at 4:30 p.m. This change may appease both the public and the employees, while not increasing cost for the state's budget. Number 124 REPRESENTATIVE KOTT thought vehicle registration would be a similar example. Number 125 SENATOR TAYLOR responded most smaller communities do not have a full-time employee in charge of vehicle registration, therefore it may not be an appropriate assimilation. He implied using a Department of Environmental Conservation office to obtain a building permit might be another example. Number 141 REPRESENTATIVE BETTYE DAVIS stated SB 242 was a good bill. She noted some state agencies were already extending their hours past 4:30 p.m. to accommodate their clients. SENATOR TAYLOR appreciated their motivation. Number 150 CHAIRMAN VEZEY asked what SB 242 would actually do. Number 153 SENATOR TAYLOR answered SB 242 requires agencies to review their hours in an attempt to carry the policy out. The agencies would report back periodically on their success. Having the policy in law would be stronger than having it in regulation. Number 165 REPRESENTATIVE KOTT moved to pass SB 242 out of committee with individual recommendations. Number 168 CHAIRMAN VEZEY recognized the motion and asked the committee secretary to call the roll. IN FAVOR: REPRESENTATIVES VEZEY, KOTT, B. DAVIS, SANDERS. ABSENT: REPRESENTATIVES ULMER, G. DAVIS, OLBERG. CHAIRMAN VEZEY announced SB 242 passed from the House State Affairs committee. HB 481 - AUDITS OF STATE GRANTS & AID RECIPIENTS CHAIRMAN VEZEY opened discussion on HB 481. Number 192 REPRESENTATIVE CON BUNDE, PRIME SPONSOR OF HB 481, gave a brief statement. The intent of HB 481 is fiscal accountability. State grant recipients of $25,000 to $149,999.99 need to be accountable for the use of the money. HB 481 requires organizations that receive less than $150,000 to have a yearly financial audit in accordance with governmental auditing standards. REPRESENTATIVE BUNDE stated approximately 236 organizations are receiving financial assistance without being required to have an audit of any type. Single audits are, however, required of those organizations receiving over $150,000. REPRESENTATIVE BUNDE explained HB 481 would require a financial audit. Number 241 CHAIRMAN VEZEY asked for the definition of single audit and financial audit. Number 245 REPRESENTATIVE BUNDE deferred to the accountants who would testify next for the definitions. Number 250 CHAIRMAN VEZEY clarified single audits are currently required by statute for organizations receiving grants over $150,000. He asked why HB 481 seemed to be adding it to statute when it is already in statute. Number 253 REPRESENTATIVE BUNDE replied HB 481 adds to the current statute requirement of single audits. Number 267 CHAIRMAN VEZEY asked if the single audit provision would be in the statutes twice. REPRESENTATIVE BUNDE corrected the single audits are currently being done by regulation. Number 272 CHAIRMAN VEZEY clarified regulation would change to statute with HB 481. He asked if the state required any type of audit for those receiving less than $150,000. REPRESENTATIVE BUNDE answered no. Number 275 CHAIRMAN VEZEY questioned how long the regulation requiring audits of more than $150,000 has been in effect. He deferred the question to other witnesses. He asked REPRESENTATIVE BUNDE's opinion of the limits set in HB 481. Number 281 REPRESENTATIVE BUNDE thought $150,000 was too high. Anyone receiving more than $100,000 in state moneys should have the more in-depth audit. This policy dates back to when there was a lot of money to give out, however, times are tough and the money should be accounted for. REPRESENTATIVE BUNDE brought up the cost of a financial audit for an organization receiving less than $150,000. The cost would not be easy to judge. The amount of money and the type of organization would have to be taken into consideration. Organized offices may cost less than $1,000, but those in disarray could be rather expensive. Number 306 CHAIRMAN VEZEY clarified HB 481 requires the organization that receive the grant, pay for the audit. Number 326 GARY ANDERSON, DIRECTOR, DIVISION OF AUDIT & MANAGEMENT SERVICES, OFFICE OF MANAGEMENT & BUDGET, introduced himself and answered questions on HB 481. Number 330 CHAIRMAN VEZEY stated HB 481 sets up thresholds for two different audit standards. He asked if single audit was defined. MR. ANDERSON replied single audit is defined in single audit regulation, 2 AAC 45.010. Single audit, however, is better defined in the Office of Management & Budget (OMB) audit guide which they publish annually. Number 337 CHAIRMAN VEZEY inquired if a statutory term should be defined in a regulation, so the regulation could subsequently be changed into statute. Number 341 MR. ANDERSON felt the reference to a single audit currently in statute was a good approach and it was sufficient. Number 348 CHAIRMAN VEZEY believed there were great differences in audits, therefore the definition would be critical. Number 352 MR. ANDERSON responded the differences in audits are what the required products are and at what level of responsibility the Certified Public Accountant (CPA) is taking, with regard to the financial statements. Number 365 CHAIRMAN VEZEY stated he was not even aware that financial and single audits were terms that existed within general accepted accounting principles. Number 373 MR. ANDERSON clarified if a CPA was asked to do an audit, and they were informed that some of the money was from the state of Alaska or the federal government, they would inquire about the level of responsibility they would have to have. A CPA is required to notify a person if they think that person has reporting requirements in addition to a regular financial audit. MR. ANDERSON defined a financial audit as a normal set of financial statements, with footnotes, for full disclosure. A CPA would not be required to issue either a report on compliance or on internal control structure. With a single audit, a CPA is required to issue both a report on compliance and on internal control structure. Number 385 CHAIRMAN VEZEY felt MR. ANDERSON's definition of a financial audit made it sound like a compilation or a review. Number 386 MR. ANDERSON made clear a financial audit is a step above a review or a compilation. In a compilation, a financial statement is prepared and they disclaim any opinion on the results. In a review, they indicate negative assurance. In an audit, they take an opinion on whether or not the financial statements are in accordance with generally accepted accounting principles, or some other basis of presentation. He noted as part of generally accepted auditing and reporting standards, the CPA is not required to provide a letter on internal control or on compliance. Number 396 CHAIRMAN VEZEY clarified under a financial audit, the CPA is not required to provide an opinion on internal controls. He asked what level the single audit would be. Number 407 MR. ANDERSON replied in a commercial background, government auditing standards or single audits, are not frequently dealt with. Number 416 CHAIRMAN VEZEY stated, in commercial practice, the generally accepted accounting principles gives a financial audit the highest level of review. He asked if the government had a higher level of review. MR. ANDERSON answered "absolutely." Number 421 CHAIRMAN VEZEY commented HB 481 is "way out of line," if MR. ANDERSON was referring to a financial audit of the same standard as to what he was familiar with as an audit. He noted HB 481 would ask organizations to spend $2,000-$4,000 for an audit of a $25,000 grant. Number 429 REPRESENTATIVE BUNDE stated a financial audit would be cheaper than a single audit. Number 433 CHAIRMAN VEZEY clarified a financial audit, under generally accepted accounting principles, would be equivalent to an audit. He had never heard of an audit costing less than $3,000. He asked how much assurance was necessary to keep the accountability of the money. Number 444 MR. ANDERSON responded the cost of an audit depends on the organization. If $25,000 worth of state money was within a $1 million organization, the audit would cost a substantial proportion of what that state money was. Number 450 CHAIRMAN VEZEY stated this increase would be because of the verification that the state money would not be mixed with other large pools of money. Number 452 MR. ANDERSON noted a financial audit is typically an organizational-wide audit. He said HB 481 could create a financial audit of the entire organization, and not just the state money. Number 454 CHAIRMAN VEZEY interpreted HB 481 would only audit the state moneys involved. Number 456 MR. ANDERSON clarified when only state moneys are involved, the term "program audit" is used. Number 459 CHAIRMAN VEZEY asked if a "program audit" is not what they were really interested in. Number 461 REPRESENTATIVE BUNDE replied they were not interested in a "program audit" because they want to know what type of organizations the money is going to. He noted the state cannot even provide a list of who is subject to audit and who is not. Number 469 CHAIRMAN VEZEY asked how an entity would relay that the services they were providing were being duplicated. He inquired if the organizations would be classified so different audits from different agencies could be cross- referenced. Number 477 REPRESENTATIVE BUNDE responded the duplication would not be noticed unless someone reads the audit. Number 480 CHAIRMAN VEZEY commented, in reading audits, he has not seen individuals describe exactly the same function in exactly the same way. He felt they were relating to an "idealistic standard of conformity" if they were going to use HB 481 to compare different institutions. Number 495 MR. ANDERSON responded the Federal Single Audit Act and the State Single Audit Regulation both require an entity-wide audit to account for how the organization is handling their money. He noted in the final analysis, one has to judge where the limit is going to be set on the organizational- wide audit. He explained at the federal level, program audits are done below their threshold for single audits. However, HB 481 suggests an organizational-wide audit would still be done down to $25,000. Number 505 CHAIRMAN VEZEY stated a problem may exist when an entity is set up to administer a grant. He asked how far down the corporate structure should the audit be taken. Number 509 MR. ANDERSON answered all single audits, federal or state, require subrecipient monitoring response abilities on behalf of the primary grantee. If a subsidiary was handed down state money from its' major entity, it would require both entities to undergo a single audit. He felt all of the related organizations to an entity would not be included into any particular audit. Number 526 CHAIRMAN VEZEY asked how far into the corporate ladder the audit would go. MR. ANDERSON replied the depth of the audit would depend on who the grantee is. If upper organization fed the state money to a related entity, as long as they both met the threshold, both entities would have an audit. Under generally accepted auditing standards there would be disclosures. Number 549 CHAIRMAN VEZEY clarified an audit of a subsidiary group, which has control of the state money, the audit would scale up the hierarchy of the larger entity. Number 552 MR. ANDERSON affirmed CHAIRMAN VEZEY. The disclosures and financial statements of the relationships would have to be relied upon. REPRESENTATIVE B. DAVIS clarified REPRESENTATIVE BUNDE wanted to cover all organizations getting between $25,000 and $150,000 with HB 481. She had understood program audits were already being done on all nonprofit agencies receiving state money. She believed guidelines were set up by the agencies that were distributing the funds to the nonprofit organizations, whereby a report would have to be supplied to the agency at the end of that year. She noted audits of a different type were also being done randomly, as opposed to program audits. She asked why a higher standard was required of some agencies which only have just enough money to cover their costs. Number 584 MR. ANDERSON answered local governments and nonprofit organizations all have to be treated the same. To have a single audit, they would have to meet the $150,000 threshold. He had not been involved in the program audit process, only the single audit. Number 595 REPRESENTATIVE B. DAVIS thought monitoring the agencies to keep track of the distributed grants should be set in statute, rather than put the full burden on the smaller organizations which do not have the money for an audit. She noted most nonprofit organizations have some sort of volunteer audit done. HB 481 would require those organizations to do more. Number 602 CHAIRMAN VEZEY clarified the type of audit REPRESENTATIVE B. DAVIS was referring to did not relate in definition to either audit included in HB 481. The nonprofit organizations are doing an internal control. Number 609 REPRESENTATIVE B. DAVIS agreed, and stated she would like RANDY WELKER to testify and offer more information. Number 615 CHAIRMAN VEZEY asked how long $150,000 has been a threshold. He felt HB 481 dealt with extremely small sums of money. Number 619 MR. ANDERSON was not sure, but he stated about 3-4 years ago the $100,000 and $300,000 limit in regulation, was changed to $150,000. He believed if an individual was in excess of $100,000 over one year, and in excess of $300,000 over two years, then a single audit was required. He noted the single audit regulation began after the federal act was passed in 1984. He estimated single auditing began in 1985 or 1986. Number 629 CHAIRMAN VEZEY asked, regarding a fairly large organization, what the cost for a single audit would be. He mentioned $25,000. MR. ANDERSON responded from his knowledge, a CPA cannot do an audit for less than $3,000. A large organization may range between $15,000-$25,000. He noted these large organizations may already be having financial audits. Number 639 CHAIRMAN VEZEY stated an audit to a large organization may only seem an incremental cost. If an entity wanted to audit their first grant it would be terribly expensive because the would be going from an audit to a single audit level of review. Number 644 MR. ANDERSON did not think the additional cost to a financial audit would be much more expensive. The number and type of grants an entity has varies the cost. Number 658 CHAIRMAN VEZEY called for a recess at 8:47 a.m. TAPE 94-30, SIDE B Number 000 CHAIRMAN VEZEY resumed the meeting at 8:54 a.m. Number 014 JACK FARGNOLI, SENIOR POLICY ANALYST, DIRECTOR'S OFFICE, OFFICE OF MANAGEMENT & BUDGET (OMB), commented on HB 481. He understood the intent of HB 481 is to reach those programs uncovered by adequate audit procedures. He supported this intent. He questioned the ease in identification of these programs, because a number of programs already have their audit regulations in place and they have not been identified. He questioned the degree of burden applied versus the yield of the organization. He asked what would be done with the yield of information received from the audit in regard to corrective action. MR. FARGNOLI stated departments have different degrees of internal controls and a number of them have formal grant auditing regulations already in place. He felt identifying these organizations would be the main problem. Smaller municipalities and organizations would have a different kind and degree of audit than the larger communities. He mentioned "intractability," whereby solving the problems of smaller communities may be difficult, and should the grants cease or should they be assisted in correction. He noted each administrative agency does, however, view the questions he brought up differently. Number 114 REPRESENTATIVE KOTT stated if HB 481 was passed, there would be approximately 250 financial audits submitted to OMB. MR. FARGNOLI agreed with REPRESENTATIVE KOTT, but felt there may be even more. Number 127 REPRESENTATIVE KOTT asked what OMB would do with the increase in audits and what would be the relationship between OMB and the agencies which administer the grants. Number 134 MR. FARGNOLI responded the audit would be reviewed, the questions that arise out of the audits would be given back to the departments for follow-up, and then the findings of the follow-up would be reported back to OMB. He noted after this point the severity of the question is a judgment call. Moneys could be rescinded or advice can be given to augment correction. He felt the largest volume of problems received would be from smaller communities with little resources or a change in personnel. Number 162 REPRESENTATIVE KOTT asked how an anomaly involving a grant in a small community would be dealt with. Number 166 MR. FARGNOLI replied very delicately, because they may only have one person, without training, handling all of their grants. Smaller communities have a tendency to have a lot of grant management personnel turnover, therefore they require adopting flexible standards. The type of resolution depends on the severity of the problem. Number 214 REPRESENTATIVE JERRY SANDERS believed if the organizations are currently being run by nonprofessionals, there is a steady turnover rate, and the money is not being accounted for, then there is no control for the state. Number 220 MR. FARGNOLI responded even though there are not always formal audits, documentation is required on expenditures. He noted some organizations receive 20 percent up front and the remaining 80 percent is distributed on a reimbursement basis. Desk audits function as an internal control to ensure a person did require and obtain the proper documentation on expenditures. He stated there are virtually no organizations left with moneys untended. Number 247 CHAIRMAN VEZEY introduced RANDY WELKER as the next individual to testify. Number 256 RANDY WELKER, AUDITOR, LEGISLATIVE AUDIT DIVISION, commented on HB 481. He believed HB 481 addressed smaller communities and nonprofit corporations. Most communities fall within the $150,000 threshold and are also receiving federal funds passed through the state government. The federal single audit requirement threshold is $25,000; therefore any entity, small, large or nonprofit, receiving this level of federal funds is already having a federal single audit. He stated it is the responsibility of the department who passes on the funds to ensure with the effort of OMB, that the audits are being done and reviewed. MR. WELKER stated the number of grantees which fall between the $25,000 to $150,000 threshold is difficult to count. There is no central database of pass through grantees. Programming the state accounting system could be done to locate where the money is going, but in what form the money is distributed would be difficult to determine. MR. WELKER felt the major question in HB 481 is what level of audit responsibility should be placed on smaller organizations receiving $25,000 to $150,000 in state assistance. If the grant is the only money the organization receives, the cost of the audit potentially becomes significant. A form of compliance could be added on top of a larger audit already in place in an organization. He noted, when the state single audit regulation was discussed in 1985, the financial burden of the threshold level was important. The state had settled on $100,000 in 1985 and it was increased to $150,000 in 1990. Number 339 REPRESENTATIVE BUNDE offered a federal list (not in the packets) he had of those organizations who currently receive between $25,000 and $150,000. He noted $25,000 may seem to be a low limit, but he felt there were "habitual recipients" who, after 10 years, have collected a large amount of money. REPRESENTATIVE SANDERS asked to be given a copy of the federal list later. Number 378 CHAIRMAN VEZEY asked if the state engages in financial oversight processes less than the audit standards. MR. WELKER answered for those under $150,000 the nonaudit process of grant reimbursement requires some degree of review on the claims submitted for grant reimbursement. This process, however, is not as in-depth as an audit. The amount of review by an agency can also vary. Number 429 REPRESENTATIVE KOTT looked over the fiscal note and asked for a clarification. He commented that if HB 481 were to pass, a half-time employee dedicated to grant review would be taken from another area. Number 447 MR. ANDERSON explained a formal desk review is done on all state single audits currently required and also federal single audits involving state pass through money, approximately 500 per year. With the passage of HB 481, they felt a simplified desk review would take place on financial audits. He clarified HB 481 would merely expand the job priorities of current employees. Number 464 REPRESENTATIVE KOTT questioned if the expanded job priorities would have a devastating affect on the OMB employees. Number 467 MR. ANDERSON replied no, the OMB review would be relatively simple because the financial audit they receive would not be as complex as a single audit. Additional work time might be apparent when agencies try to follow up on the review. There may also be the possibility that auditors will disclaim, instead of render, an opinion. Auditors will identify material weaknesses in the internal control structure. Number 497 BOB WRIGHT, SENIOR AUDITOR, DEPARTMENT OF HEALTH & SOCIAL SERVICES, commented on HB 481. He stated part of the implementation of the original single audit regulations was the elimination of 80 percent of the audit staff. Presently MR. WRIGHT and another half-time staffer, review about 120 single audit reports per year, covering 250 grants worth $80+ million. He relies on the OMB to make sure they comply with the standards, and then he supplies a report, which reconciles the numbers reported to the granting agency, to the numbers reported from the audits. He noted smaller agencies have a problem with turnover and disorganized files, whereby documentation cannot be found. He stated they do 6-8 special reviews per year of either grantees who do not fall within the thresholds of the single audit program or problems that were not addressed in the single audit. MR. WRIGHT stated they often work on a backlog. He explained the reviews are not required to be submitted to the state until a year after the fiscal year, and a large number do not meet the deadline. Number 551 CHAIRMAN VEZEY wanted a clarification as to why 80 percent of the auditing staff was lost with the implementation of the single audit requirements. Number 554 MR. WRIGHT responded the auditors were lost because the grantees were being audited by CPA firms under the single audit regulations, and the auditors were no longer needed to go out into the field and conduct audits. The reason for the single audit program was to eliminate the duplication of audit effort. Number 571 REPRESENTATIVE SANDERS asked if MR. WRIGHT was testifying about grants which would be affected by HB 481 or grants above $150,000. Number 576 MR. WRIGHT replied he was explaining what was being done with the existing single audit regulations. Number 578 REPRESENTATIVE SANDERS inquired if single audits applied to those grantees in HB 481. Number 579 MR. WRIGHT answered single audits are currently only conducted on agencies which receive $150,000 or more. He noted this figure is a combination of all state moneys. For example, an agency may have $10,000 from Health & Social Services, $20,000 from another agency and $120,000 from a third agency, totalling $150,000 and requiring a single audit. Number 584 REPRESENTATIVE SANDERS asked if those agencies were also not audited. Number 586 MR. WRIGHT replied no, not by department auditors. Number 588 REPRESENTATIVE KOTT clarified REPRESENTATIVE SANDERS's point. If HB 481 were to pass, and there was an anomaly in the figures the grant recipient turned into OMB, would OMB convey their findings back down to the department level so he would have to take some action. Number 591 MR. WRIGHT said yes, if the reports do not meet the standards, the OMB will send a letter to the different agencies, who have money with the organization, notifying them their reports did not meet standards and requesting additional information. If the reports show more money was received by the organization than was expended, the agency will find it in the reconciliation process. Number 613 REPRESENTATIVE KOTT asked if there was any impetus that the nonprofit organization would roll the cost of a financial audit into the grant application process. Number 619 MR. WRIGHT responded the organizations do now. The cost of either kind of audit is an allowable grant to be paid with state money. He noted most of the organizations do not have additional resources for an audit. Number 625 CHAIRMAN VEZEY inquired how the incremental cost of going to an audit would be tied into an organization which already has a sort of financial oversight in place. Number 630 MR. WRIGHT answered the grant administrators examine in the grant approval process what other sources the agencies have and what audit requirements there are for the other funding sources. He believed the audit cost should be prorated between the different funding sources or on the terms of how many employees work for a certain program. Number 637 CHAIRMAN VEZEY asked if MR. WRIGHT had any comments about the threshold limits in HB 481. Number 638 MR. WRIGHT said $25,000 seemed awful low, even though it is the federal requirement. Some $25,000 agencies run on volunteers, however, there are some only funded for $25,000 that are part of a larger agency, with additional resources they can tap. Number 652 CHAIRMAN VEZEY asked what he felt a reasonable threshold level would be for a financial audit. Number 654 MR. WRIGHT felt the $150,000 threshold in the current state single audit requirement was reasonable. A threshold below that level would not be worth the necessary amount of resources spent. Number 658 REPRESENTATIVE BUNDE interjected and asked how often MR. WRIGHT found moneys misspent or an "anomaly" as REPRESENTATIVE KOTT stated. How many organizations. Number 661 MR. WRIGHT responded grantees are usually billed between $150,000 and $700,000 a year for misspending. This is a small percentage considering they oversee $80-$90 million. He estimated the refunds come from 50-100 grantees. Number 671 CHAIRMAN VEZEY clarified he meant $1,000-$2,000 refunded per grantee. Number 672 MR. WRIGHT stated on an average, a group will owe $30,000 to $60,000 back and a number of them will owe $1,000 to $6,000 back. Number 676 CHAIRMAN VEZEY thought MR. WRIGHT had said $100,000 was the amount usually reimbursed. Number 677 MR. WRIGHT corrected $100,000 to $700,000. He noted the single audit reports have been improving to where there are not as many variances with the numbers reported to the state at the end of the fiscal year. This is due to follow-up by grant agencies at the end of the fiscal year. The amount of unpaid money is now being requested to be paid back before the single audit report arrives. Number 689 REPRESENTATIVE BUNDE stated MR. WRIGHT was talking about four organizations with 150+ subject to single audit. For those below the 150+ that may not have any audit, he believed there would be a higher percentage of "slippage." Number 693 REPRESENTATIVE B. DAVIS asked what the departments do for grants under $150,000. Number 697 MR. WRIGHT stated currently there is no financial oversight for those grantees under $150,000, unless the grant division notices a problem and requests him or another group to review them. The concern would be to make sure the agency is meeting their goals and objectives of their program, rather than the money. TAPE 94-31, SIDE A Number 011 REPRESENTATIVE B. DAVIS wanted to hear testimony from Community & Regional Affairs. Number 019 TENA BAVARD, GRANTS ADMINISTRATOR, DEPARTMENT OF COMMUNITY & REGIONAL AFFAIRS (CRA), commented on HB 481. Currently, she administers grants under AS 316, unincorporated communities, and AS 317, named recipients. Number 027 CHAIRMAN VEZEY asked her to clarify which statutes she used. Number 028 MS. BAVARD answered AS 37.05.316 and AS 37.05.317, legislative grants. She continued 90 percent of the grants she issues fall within $25,000 to $150,000. CRA requires documentation; however, smaller communities have a harder time always providing it. There are no regulations to force the communities to provide the information, but most communities do. CRA has local government specialists assigned to every community in the state. If there is a problem, she can request a specialist to investigate. Number 054 CHAIRMAN VEZEY asked if financial audits of grants down to $25,000 were desirable. Number 059 MS. BAVARD responded her biggest concern was the grants administrator. The audit section's workload would increase. They currently do not audit her CRA grants specifically, unless there is a concern from a community or if there is a questioned cost, whereby the community has met the single audit threshold. Number 072 CHAIRMAN VEZEY referred to earlier testimony which said the audit burden of the agency went down when grant recipients were required to furnish the single audit. Number 078 MS. BAVARD replied the previous testimony could be true. The CRA audit section consists of two persons. The CRA covers a lot of federal pass through moneys in large state programs. She noted most of the communities she distributes to are small and unincorporated receiving small amounts of money. Most legislative money they receive is for construction projects, boardwalks, etc. The cost of the materials is often not covered; therefore she questioned, with an audit, what would happen if they did not comply. She emphasized her job was to distribute with accountability within her limits, the money that is already appropriated. She felt HB 481 did not answer her questions as to what happens if the communities do not comply. Number 116 REPRESENTATIVE B. DAVIS questioned what the requirements were for a nonprofit organization to receive for example, $100,000. What is the procedure? Number 128 MS. BAVARD replied when she receives the legislative appropriations for the year, she sends out an award letter with a fifteen page questionnaire, asking specific objective questions. The questionnaire also asks if they want an advance, which most of her entities do because they do not have any cash flow. She requires the communities to roughly document how the advance will be used. Most of the small villages need cash up-front to order their materials. If the requests are reasonable, she will give them an advance and they are required to submit monthly reports to her with documentation for their expenditures. She noted some communities are watched closer than others because of their past compliance history. Most of the grants she works with are on an advance-by-advance basis, as the communities send in their month-to-month reports. The procedure is the same for all of her grants, including grants for nonprofit organizations. Number 165 REPRESENTATIVE BUNDE believed she had said that if she wanted financial accounting the community did not have to comply by regulation, and she would still have to distribute the money. Number 171 MS. BAVARD stated she did not have a choice. The grants she administers under AS 37.05.316 and AS 37.05.317 have no regulation because they are legislative appropriation. Even if the money is appropriated again the next year, she cannot interrupt the cycle because they did not spend their money in the previous year. Number 180 REPRESENTATIVE BUNDE clarified MS. BAVARD was obligated to pass on the money even if "it is good money after bad." Number 183 REPRESENTATIVE KOTT inquired if MS. BAVARD would classify the grant money she administers under a project or block grant. Number 186 MS. BAVARD stated her grants are for capital improvement projects. She emphasized she had no idea of who is getting what amount of money until after the legislature appropriated and the Governor has signed the appropriations bill. She then picks out the grants which will come through the statutes to her. She does not split up a lump of money. Number 200 REPRESENTATIVE KOTT questioned if there isn't already an Alaska Statute which covers the fraudulent misuse of legislative appropriations. Is there a penalty? Number 208 MS. BAVARD directed REPRESENTATIVE KOTT to AS 37.05.318. If the money is not used for the intent of the legislature, the community would have to give it back. She stated the example of a community trying to go back and pay off a bill from the previous year, with the current year's appropriations. She emphasized the process to deal with those who misspend money is long and drawn out. Extra money can be withheld from a project if the project is continuing from the previous year, but money for a new project cannot. Number 233 REPRESENTATIVE BUNDE asked if there was any follow-up to see if the projects had been completed. Number 239 MS. BAVARD responded if a community has had previous problems she can require photographic documentation and she also has access to a local government specialist. Usually a desk audit is performed. Number 251 REPRESENTATIVE BUNDE inquired if someone would have to trigger the suspicion in a community. Number 252 MS. BAVARD affirmed REPRESENTATIVE BUNDE. Either the information the community sent was way out of line, or she would receive letters from community members concerned with the application of the funds. She noted the local government specialists do visit the communities for work other than her requested inspections and they contact her with details on the projects. Number 265 REPRESENTATIVE KOTT commented there are Senators and Representatives for those areas if MS. BAVARD needed assistance. (REPRESENTATIVE SANDERS left the meeting at 9:55 a.m.) Number 278 LENA SIMMONS, GRANT SECTION, DEPARTMENT OF ADMINISTRATION (DOA), commented on HB 481. They administer grants for the Older Alaskans, Public Broadcasting System, Municipal Grants, and the Municipal Matching Grants program. She stated the grants are distributed with a 20 percent advance and then the rest of the appropriation is distributed on a reimbursement basis. Monthly reports are sent in. Number 318 CHAIRMAN VEZEY asked MS. SIMMONS how many grants she had above and below $150,000. MS. SIMMONS answered the majority fall below $150,000. More than half. Most of the capital appropriations are for more than $10,000. In Municipal Matching Grants, everyone received at least $25,000. Under statute each project had to be at least $10,000. Number 329 REPRESENTATIVE KOTT asked if the state had any role in the oversight of federal grant money or pass through money. Is there any incentive conveyed back to the state. MS. SIMMONS replied the pass through money the DOA has is in Older Alaskans and those grant program people watch very carefully what is being spent and what is not. In terms of oversight, if the communities do not turn in adequate financial documentation, they do not get their money. She noted since most of the money is federal, the money is audited; therefore, there are not very many findings or questioned costs. MS. SIMMONS stated most of the problems she has with her audits are with separation of duties. ADJOURNMENT Number 355 CHAIRMAN VEZEY mentioned that time had run short and the committee had other commitments. He stated HB 481 would be rescheduled and apologized for not hearing the other items on the agenda. The meeting adjourned at 10:00 a.m. BILLS NOT HEARD HB 482 - EMPLOYMENT INFO PROVIDED TO THE STATE HB 480 - DRIVER LICENSE/HANDGUN PERMIT SYSTEM HB 513 - GRANTS/LOANS FOR STORAGE TANK OWNERS
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