Legislature(2017 - 2018)SENATE FINANCE 532
01/30/2017 09:00 AM Senate FINANCE
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| Presentation: Audit and Accounting Considerations | |
| Adjourn |
* first hearing in first committee of referral
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SENATE FINANCE COMMITTEE
January 30, 2017
9:05 a.m.
9:05:23 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:05 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Mike Dunleavy
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
Senator Peter Micciche
ALSO PRESENT
Kris Curtis, Legislative Auditor, Alaska Division of
Legislative Audit; Senator Gary Stevens.
SUMMARY
^PRESENTATION: AUDIT and ACCOUNTING CONSIDERATIONS
9:06:28 AM
KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF
LEGISLATIVE AUDIT, shared that the Division of Legislative
Audit had been asked by the committee to report on any
important findings from over the past several years that
could help inform budget discussions over the next several
months. She relayed that the division conducted performance
audits and sunset reviews that came before the legislature,
as well as being the independent auditor of the
legislature's financial statements and the federal audit of
federal funds.
9:06:55 AM
Co-Chair MacKinnon recognized Senator Stevens in the
gallery.
9:07:10 AM
Ms. Curtis focused on finding from the financial and
federal compliance audits. She said that the most recent
audit completed was for FY 15. She revealed that the audit
had been markedly different from previous years; typically,
the division had 3 to 5 financial recommendations, but in
FY 15, the division had 15 recommendations. She stated that
the recommendations stemmed primarily from the roll out of
the new state Integrated Resource Information System
(IRIS), and because of the new accounting standard set by
the Governmental Accounting Standards Board (GASB), which
dictates how to report pension activity. She discussed the
implementation of IRIS, which had gone live in July 2015.
She relayed that the impact the system had on the FY 15
financial reporting had been unexpected. She explained that
IRIS was more complex than the 30-year-old legacy system
that it had replaced. She said that state departments had
work for several years to reevaluate their functions and
develop new business rules for the system, which has
several modules; the system is the financial accounting
system book of record, but also has a procurement component
that allows procurement transactions to interface
automatically, a debt tracking module, and a payroll
module. She noted that the payroll module had gone live one
week ago. She said that her comments would be strictly to
the financial roll out and not payroll. She stated that, in
general, the financial roll out had gone well, much better
than the roll out of the new Medicaid system, which had
been a complete failure. She related that there were a
significant number of problems with the system, but that
vendors had been paid. She highlighted that certain
departments had struggled more than others with the change,
most notably the Department of Transportation and Public
Facilities (DOT). She said that the division had worked
with departments to identify and correct problems. She
believed that the main problem was with the reporting
package that reports from the information from the
financial system. She explained that the information from
the financial system was put in a data warehouse and a
separate software reporting package reported from the
system. She said that the upgrade to the reporting package
had added thousands of elements to the possible reports,
which had resulted in a struggle for the division and state
departments in making their reports accurate. She shared
that the division had written three recommendations to
correct conversion problems. The first two had been to DOT,
which had been found to have problems recording
expenditures and associated revenues in the wrong fiscal
year, this resulted in an audit adjustment of approximately
$40 million, and another adjustment for earned and unbilled
revenue of approximately $21.6 million. She stated that
another DOT/IRIS conversion error that had led to $153
million of unrecorded revenue, and had been correct4ed via
an audit adjustment. She said that a recommendation had
been written to the Department of Administration (DOA) for
several errors. She relayed that DOA had booked some
transactions in the old system to help with the conversion
to the new system, but then inappropriately pick those up,
resulting in an error of $103.6 million of overstated
receivables and understated expenses.
9:11:50 AM
Senator Dunleavy asked about the failed Medicaid roll out.
Ms. Curtis replied that the roll out of the state's new
Medicaid system in 2013 had been a failure. She explained
that vendors had not been paid, which had led to litigation
with Xerox that was ongoing. She relayed that further
updates would be given about the Medicaid issue.
9:12:32 AM
Vice-Chair Bishop queried that archival process of IRIS,
and asked whether procurement data would be chronicled by
department.
Ms. Curtis replied that the current archival process
maintained information for a set number of years. She
shared that departments would be able to scan and attach
using IRIS; support for their transactions was part of the
system. She said that support for transactions would be
accessible electronically.
9:13:40 AM
Vice-Chair Bishop understood that legislative requests for
information would be processed more efficiently, but that
documents retrospective to IRIS would be remain in hard
copy.
Ms. Curtis responded that if the sought for information had
been captured through accounting transactions of vendor,
amount, or year, it would be in the data warehouse, which
went back to FY 07. More informative invoice information
would be on hard copy and would eventually be shredded.
9:14:41 AM
Co-Chair MacKinnon noted that the Medicaid roll out had
been such a failure that it could not be audited, which was
of great inconvenience to the state.
Ms. Curtis responded that the division qualified its
opinion in FY 14, due to the inability to obtain evidence
regarding the Medicaid system, which was so inoperable that
it could not be audited. She said that in FY 15 the
division had noticed improvements in the system. She said
that the department had settled litigation with Xerox in
September 2016. She noted that the contract the state held
with Xerox was up for termination in September of 2017,
which begged the question of the state's plan for the
contract termination.
9:16:37 AM
Co-Chair MacKinnon lamented that the department had been
stressed by the inability of the system to perform and had
had difficulty answering audit questions and providing
information to the legislature.
Ms. Curtis responded that there was some audit work done in
FY 15 on the Medicaid roll out, out of concern for the
defect resolution process. She said that there were three
different types of defect resolution processes. She related
that one type of process was being reviewed and approved by
the Department of Health and Social Services (DHSS);
however, the division had found errors in the other two
processes, with the underlaying issue remaining unresolved.
She said that in some instances the defect had been fixed,
but a mass adjustment was not processed to fix the claims
that had been impacted by the defect. She shared that in
one instance a mass adjustment had been closed because of
an existing duplicate, but the duplicate had not contained
all the claims of the original mass adjustment. She said
that it had been determined that the things done to fix the
defects were not working like they should. She stated that
management at DHSS had stated that they planned to review
all the manual fixes before the federal oversight agency
come into certify the system. She divulged that there had
been over 5,300 manual fixes needed and the division
doubted that the department had the resources to tend to
each defect. She believed that there had been a risk
present at the end of FY 15.
9:19:54 AM
Senator Dunleavy asked whether the state had failure to
perform clauses in their contracts with Xerox.
Ms. Curtis replied that there had been plenty of basis for
litigation, and that the litigation had resulted in a
settlement.
9:20:44 AM
Senator Dunleavy stated that his conversations with doctors
had led him to believe that they did not expect to be paid
in full for their services. He furthered that some of them
anticipated $.30 on the dollar, which led him to believe
that the system had been built around apparent flaws. He
said that dealing with inefficiencies was a cost driver. He
hoped for a deeper discussion of the issue.
9:22:01 AM
Co-Chair MacKinnon remarked that further discussion with
DHSS concerning Medicaid was on the agenda for a future
meeting.
9:23:00 AM
Senator Olson wondered whether the public had been harmed
due to the Xerox system failure.
Ms. Curtis replied that she could not specifically address
the question. She said that she did know that the state had
advanced funds to health care providers and vendors to
avoid a cash flow problem.
9:24:11 AM
Co-Chair MacKinnon thought that the conversation about
advanced funds and cost recovery should be had with the
DHSS commissioner.
9:25:17 AM
Ms. Curtis discussed the impact of the IRIS implementation.
She shared that she had alerted the administration to and
legislative leadership that there would most likely be a
significant delay in audited financial statements. She said
that the auditing of draft financial statements was 13
weeks late. She clarified that the audit was not stagnant;
there was plenty of audit work that could be done without
the draft financial statement. She said that the hope would
be that the division would receive them soon, at which time
it would take approximately 2.5 months. She lamented that
it usually took the division 6 weeks to complete the
process, but that there had been so many adjustments to
correct that would each need to be scrutinized. She shared
that in 2016, the division saw 60 audited adjustments, and
expected a similar case in 2017. She stated that she
expected the draft financial statements by mid-April, which
meant that the final, audited amount in the state's savings
account would not be known until after April.
9:27:10 AM
Co-Chair MacKinnon shared that none of the information
supplied in today's meeting had been a surprise, and that
the state had been following what had happened with Xerox
implementation in Colorado, in comparison to the State of
Alaska. She said that a finding was expected in the audit
that related to the deficiencies of IRIS.
Ms. Curtis relayed that the results of the audit were
unknown because it had yet to be completed. She said that
the division anticipated the normal processes of bringing
on a complex system. She offered that the first year of
financial reporting would be difficult, not as the result
of a specific deficiency, but because of the learning
curve.
9:27:29 AM
Co-Chair MacKinnon interjected that the division had
notified the committee of the auditing delay, which was not
without consequences on the federal level.
Ms. Curtis replied that the repercussions from the
statewide single audit from the federal perspective was
that now the state would be considered a high-risk auditee,
which would result in higher audit coverage. She furthered
that because of the rules for calculating major federal
programs the designation would have little impact on the
number of federal programs the state could choose from, but
that the designation would stand. She added that each
federal agency would make the decision about what to do
when the single audit was not received on-time.
9:28:37 AM
Co-Chair MacKinnon shared that the division was working
diligently to keep the state in good standing while the new
system was implemented.
Ms. Curtis replied that the job of the division was to
identify things that did not work. She opined that she
rarely had the opportunity to offer positive comments about
state departments, she stressed that the legislative and
administrative staff that she worked with was professional
and hardworking. She said that the fact that the statements
were late should not be a reflection on the competency or
dedication of said staff.
9:31:48 AM
Ms. Curtis continued that Governmental Accounting Standards
Board (GASB) 68, was a new requirement on how pension plan
participants recognized the liability of their portion of
future pension benefits that were unfunded, and other
pension activity. She said that all the people of the state
involved in Public Employees' Retirement System (PERS) and
the Teacher's Retirement System (TRS) had to report their
portion of the unfunded net pension liability on their
respective financial statements. She said that for the
first-time allocation schedules had to be created that
allocated the net pension liability out to participants,
and those statements had to be audited by an independent
entity. She shared that there was a special aspect of GASB-
68, called "Special Funding", which said that if an entity
was legally required to contribute to a pension plan on
behalf of another entity, they would be considered a
"special funder" and must take on the unfunded liability
proportionate to their extra contribution. She noted that
there was a statute that required the state to contribute
on behalf of planned participants. She said that regardless
of the statute, the executive branch argued in FY 15 that a
special funding situation did not apply because of the
constitutional prohibition against dedicating revenue, and
the requirement that one legislature could not bind future
legislatures. She stated that GASB then came out with
authoritative guidance that said that a statute on the
books was enough to demonstrate legal obligation, and the
binding of future legislatures did not matter - the funding
would still be considered special funding. She relayed that
the executive branch had a legal opinion drafted to support
their argument, which had not been convincing, and the
division subsequently received draft funding statements
that had not included special funding for FY 15. She said
that after corrections the audit was eventually posted. She
shared that the state brought on $2.4 billion in unfunded
net pension liability for their own share as an employer,
and an additional $3.6 billion for the special funding
situation, a total of $6 billion in FY 15. She said that
the total was reflected on the state's government-wide
statement, which did not impact the general fund balance or
the amount in the savings account, but was an accounting
rule meant to foster transparency. She warned that in two
years, the Other Post-Employment Benefits (OPEB) obligation
would need to be brought onto the books.
9:35:50 AM
Co-Chair MacKinnon noted that state statue set a funding
rate to create stability for PERS and TRS pension
contributions from smaller communities and school districts
throughout the state. She relayed that the limit for PERS
was set at 22 percent, and anything above the 22 percent
would be funded by the state. She furthered that the rate
for TRS was 12.5 percent, and anything above 12.5 would be
paid by the state. She argued that because of the base
student allocation (BSA) the state typically engaged in
supporting a large percentage of TRS unfunded liability.
She continued that GASB-68 was now instructing that the
liability above the chosen percentages should be
transferred to the state.
Ms. Curtis clarified that prior to FY 15, no one was
required to put the liability on the books; GASB-68 meant
that for the first time, the unfunded net pension liability
had to be reflected on the books. She noted that the
statute stated "shall", and if the statute said "may" it
would not be special funding; however, the school districts
and municipalities would have to book the liability on
their own books.
9:38:37 AM
Co-Chair MacKinnon suggested that the committee review the
Debt Affordability Analysis distributed by the Department
of Revenue's treasury division. She said that the ability
for the state to bond anything was being leveraged by the
unfunded liability, which affected the debt liability
scenario. She lamented that the state's capability to
borrow had been reduced from $250 million over the next ten
years, to between $50 and $175 million. She said that the
debt analysis would be discussed further later in the week.
9:40:07 AM
Senator Dunleavy requested a meeting with legislative legal
and legislative finance divisions to discuss the concept of
limiting the actions of future legislators.
9:41:27 AM
Co-Chair MacKinnon thought that the conversation could be
fruitful. She understood that the legislature could change
state statue. She asked when GASB-68 had passed the
accounting board, and whether it had been a direct
reflection of the state challenge.
Ms. Curtis responded that GASB-68 had been issued several
years before it was effective. She said that hearing other
states address GASB at national conferences had revealed
that many states were opposed to the complexity of the
statement and wanted more time to implement the statement.
She believed that not binding future legislators had been
language specific to Alaska. She said that one special
aspect if GASB-68 were the allocation schedules, which
impacted all the participants, and had not been issued
until the end of November 2015. The division had
recommended that the allocation schedule be released
earlier; this year it was late, but not as late.
9:45:17 AM
Co-Chair MacKinnon noted that pensions would be discussed
further in the week.
Ms. Curtis relayed that the division was working with the
division of finance to make sure that the statements were
accurate. She said that errors had been found in the
Statutory and Constitutional Budget Reserve Funds (SBR,
CBR), and the amounts reported in those funds. She stated
that DOR had struggled in FY14 and FY15 to make sure the
corporate income tax and oil and gas production tax
receipts went into the CBR. She related that adjustments
totaled approximately $32.4 million. She furthered that DOA
had struggled with correctly reporting activity related to
those funds, which had resulted in $3 billion adjustment
for the funding from the one-time transfer of CBR funds to
pension plans. She stated that a $5.4 million adjustment
had been made to fix a formula error in their spreadsheet
related to the transfer from the SBR to the General Fund.
She continued that a $6.9 billion adjustment related to
investment activity reporting between accounts within the
CBR.
9:46:54 AM
Ms. Curtis commented on the Governor's vetoing of the oil
tax credits. She stressed that there was still an
obligation to pay them. She suggested that the credits
could have their own row on the state's financial statement
so that it didn't get buried within something else. She
admitted that vetoing the credits reduced the draw from the
CBR, but stressed that it was still a liability and would
be reported in the statements.
9:47:46 AM
Co-Chair Hoffman queried the process of giving the credits
their own line item on the spreadsheet.
Ms. Curtis replied that materiality of the numbers would
necessitate a dedicated row on the spreadsheet.
Co-Chair Hoffman understood that no legislative action
would be required.
Ms. Curtis replied no.
9:48:17 AM
Vice-Chair Bishop argued that the deferred maintenance
schedule should have its own line.
Ms. Curtis replied that the schedule would have to be
measurable and qualify under GASB.
9:48:49 AM
Vice-Chair Bishop believed that it was an issue of prudent
bookkeeping. pointing out that private sector business
carried deferred maintenance as an individual line item.
9:49:23 AM
Co-Chair MacKinnon thought that there had been a ruling
from GASB on deferred maintenance, specifically on road
projects.
Ms. Curtis explained that there was guidance on deferred
maintenance and other types of liabilities, and how to
report capital assets. She thought that GASB-34 had brought
infrastructure on the books, but that she couldn't offer a
specific example of deferred maintenance.
9:50:12 AM
Vice-Chair Bishop highlighted that in times of economic
stability the legislature increased the Capital Budget to
pay for deferred maintenance.
9:51:36 AM
Ms. Curtis revealed that the division had found that in
FY15, some of the funds deposited in the National Petroleum
Reserve Fund (NPR) had not been granted out to impacted
communities as required by law. She explained that the
funds must be used by the state for construction,
maintenance, and operation of essential public facilities -
giving priority to municipalities most directly impacted by
oil and gas development. She furthered that the law
dictated that it was the intent of the legislature that
each year all the NPR funds would be available for impact
mitigation grants. She said that the fund had received $6.7
million of revenue, but due to miscommunication and timing
of receipts, the full available funding had been unknown.
She said that the state received application for
approximately $8.5 million for grants in FY15, but that the
department had believed that only $4 million had been
available to grant out. She said that this had resulted in
$2.8 million left in the fund at the end of the year, which
under statute were to be given to the Alaska Permanent Fund
and the Public School Fund. She stated that the funds that
should have been available for the impact grants was
transferred to the Alaska Permanent Fund and the Public
School Fund. She said that the division had recommended
that work should be done with DOL to regrant the funds, and
to change procedure to make sure it did not happen again in
the future.
9:54:06 AM
Co-Chair MacKinnon understood that the timing issue of
understanding what had been in the NPR fund had led to the
improper disbursement of money.
Ms. Curtis replied that the extra $2.8 million had been
received in March of that fiscal year, and that rather than
seeking a supplemental appropriation, which was required by
law, there had been a communication breakdown that required
corrective action. She said that reporting procedures had
since been put into place, as well as changing the nature
of the appropriation to allow excess receipts to carry
forward.
9:55:17 AM
Ms. Curtis spoke to the topic of shortfalls. She shared
that FY15 had not included recommendations regarding
shortfalls because the new accounting system was unable to
generate reports that identified potential shortfalls.
Co-Chair MacKinnon discussed housekeeping.
ADJOURNMENT
9:57:02 AM
The meeting was adjourned at 9:57 a.m.
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