HOUSE BILL NO. 121 "An Act relating to performance reviews and audits of state agencies, the University of Alaska, and the Alaska Court System; and providing for an effective date." 9:04:32 AM REPRESENTATIVE STEVE THOMPSON, SPONSOR, thanked the committee for hearing the bill that would repeal the statutory requirement for state agency performance audits. He read from a prepared statement: • House Bill 121 repeals the statutory obligation for performance review audits. • In 2013, the House and Senate passed HB 30 that set out to audit all agencies • 4 audits have been completed (3 Agencies): o Corrections o Education o Commission on Post-Secondary Education o Health & Social Services • 15 Agencies Audits remain on the books until the program is set to end in 2023 • Funding requests have been denied for the last 4 fiscal years • This takes it out of the statutes Representative Thompson elaborated that the bill would remove the statutory obligation because it had not been used. The change would mean the statute would be taken out of the books and removed from the budget. He introduced his staff Crystal Koeneman who was available for questions. 9:06:21 AM Representative Josephson agreed that if the work was not being done, it was not being done. He asked if anything had been learned with the audits that had been completed since the passage of the statute in 2016. Representative Thompson replied that the completed reviews mentioned had received recommendations from an auditor located in the Lower 48. He explained that the auditor's recommendations did not fit with Alaska and none of the recommendations had been acted upon. He explained that it had been determined that the state could not afford to continue the reviews without receiving results that could be utilized. Representative Wool asked if the audits were always intended to be outsourced to an outside agency. He wondered if there had been intent for the work to be done internally. Representative Thompson replied that he was uncertain. He deferred to Ms. Curtis with the Division of Legislative Audit. Representative Wool surmised that the Division of Legislative Audit was busy doing its own audits. He believed auditing an agency like the Department of Health and Social Services would be a heavy lift. 9:08:07 AM KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF LEGISLATIVE AUDIT, clarified that the reviews were not audits, but performance reviews. She elaborated that audits communicated a level of assurance in accordance with criteria. The performance reviews had been facilitated by the Division of Legislative Audit and had been conducted by consultants who were experts in the field. The intent had been to review all state departments over a ten-year period. She reported that three departments had been reviewed. The intent of the reviews was to determine whether agencies were performing well and to identify what they could do better. She believed there was a bit of an expectation gap that the reviews would be the mode to reduce the budget, in anticipation that in the future there would be serious budget cuts. Ms. Curtis continued that the statute effective date began on July 1, 2013 before the budget had decreased. She explained that the reviews were not structured to be a mechanism to reduce the budget. She detailed that as part of the reviews, agencies were required to provide a list of 10 percent budget cuts. She expounded that as part of the review, the consultant was tasked with determining whether the list of cuts was reasonable in line with their review of the department. There was a budget implication to the process, but it was primarily to determine what the departments could do in order to do their job better. Ms. Curtis elaborated that the reports for the Department of Corrections (DOC) and the Department of Education and Early Development (DEED) had been fairly well received by the Legislative Budget and Audit Committee (LB&A). The reports were available on the web and were an excellent tool for reviewing a department, especially DOC and DEED. The Department of Health and Social Services (DHSS) was the other review that had been conducted and she agreed that it had been a big lift. The Division of Legislative Audit had been responsible for helping to create the scope of the performance reviews and for hiring the contractor. She reported that the contractor had come out in strong support of Medicaid expansion, which had not been well received by the committee. Ms. Curtis reported that the reviews had been defunded effective FY 16. She believed it was very difficult to review departments when there was so much change underway. She explained that by the time a review was started to the time it was completed "you'd be looking at a different animal." She believed it was likely not the best climate to conduct the reviews until there was some stability. 9:11:07 AM Vice-Chair Ortiz asked if the reviews were called for with the realization that the Division of Legislative Audit had its hands full and the reviews would need to be done by someone else to dig more deeply into things. Ms. Curtis relayed that the concept of the reviews had been underway for years and the legislation was passed when she had started her current position. She believed the idea was modeled after the Texas Sunset Commission - that it was an important function of government to examine itself and make sure it was operating as efficiently and effectively as possible. She explained that it took experts in the field. She detailed that even if the work was done by the Division of Legislative Audit, the agency would have to hire experts in the correctional industry or education to do the deep dive. Representative Wool thought it sounded like there was some value to the reviews, especially in determining how an agency was performing. He knew there had been studies done for the University to identify where it could be doing better and where it was spending too much money. He asked if the reviews had not been done primarily due to cost. He asked if it had always been the intent to outsource the reviews and if the Division of Legislative Audit had been supportive of the concept. Ms. Curtis replied that she was willing to do whatever the legislature directed. She highlighted that the reviews required significant procurement and three additional staff that had nothing to do with the audit function. She had carved the staff out to the side and had interacted with the leader of the group. She relayed that it had resulted in a lot of extra work on her shoulders; however, it was her perspective that if the legislature wanted the Division of Legislative Audit to do performance reviews, it would do them. Ms. Curtis highlighted that how the reviews would be used had not been well thought out and needed to be tweaked. She pointed out that if people did not know whether the reviews had been done and they had not been utilized, something was wrong with the process. She had been asked in the past how the process could be improved, and she had notes on what could be improved from four years back when the process had stopped. She believed there would have to be a rewrite of the process to make it effective. She recommended starting from scratch. She was always supportive of reviews, and whether it was on the legislature's priority list of what it wanted to spend funds on was a question for policy makers. 9:15:07 AM Representative LeBon thought back to his "banking days." He explained that banks were subject to numerous audits, examinations, and reviews. In the banking world there were internal reviews of programs, the most common was in lending in order for the bank to know it was making good credit decisions. Banks also had internal and external audit functions. Additionally, the FDIC [Federal Deposit Insurance Corporation] visited banks to do examinations. He elaborated that the FDIC looked at reviews and internal and external audits to arrive at a conclusion on the soundness of the bank and its operations. He asked if the state auditors looked at performance reviews and made a conclusion about their work when they did an audit. Ms. Curtis replied that the reviews were not exactly helpful for the purposes of the Division of Legislative Audit. She explained that the division was the external/independent financial auditor. The executive branch had an internal audit function for approximately 15 years. She did not know how many states had no internal audit function. She clarified that the focus of the reviews did not have much to do with the financial audit. She elaborated that if the reviews were available, the division would look to them as a source when it did periodic performance audits. 9:16:53 AM Representative Josephson asked if the state used to provide or pay for an executive internal audit function. He asked if the work would be redundant to work performed by the Division of Legislative Audit. Ms. Curtis replied that there had been an internal audit function under the governor's office, and she believed it had been eliminated under the former Knowles administration. She believed there had been eight positions and some of the functions had been moved to the Division of Finance. There was an existing state single audit requirement function. She believed they had done internal reviews on a whole range of topics. Representative Wool remarked on the fact that an outside group had been paid to review the department and had made recommendations, which had not been well received. He surmised the recommendations had not gone along with the presumption of the group, yet [Medicaid expansion] had taken place. Ms. Curtis replied that one of the requirements of the performance reviews was quantifying their fiscal impact. The DHSS review produced over $2 million in net savings to the state. She noted it was the only one. She reported that the review had cost over $1 million to conduct. She stated that hired consultants typically recommended additional studies. She stated it was necessary to keep an eye on consultants who were usually very passionate about the field they were in and were most likely supportive of "that type of thing." It was her opinion that the review had not been well received by the committee or legislature at the time. 9:19:27 AM Co-Chair Johnston referenced performance measures in the budget. She asked if the performance measures had been evaluated as part of the process. Ms. Curtis replied that obtaining the performance measures had been part of the process. She had not seen much value in the performance measures, and they had not been key to any of the reviews. Co-Chair Johnston noted that she had a good friend who had been one of the initiators of the performance measures. Ms. Curtis replied that in theory it was great thing, but she had not seen any impact. Representative Josephson referenced Ms. Curtis' statement that the state had saved money through the DHSS review. He asked if it was due to SB 74 [Medicaid reform legislation passed in 2016]. He asked how the $2 million in savings materialized. Ms. Curtis would have to double check, but she believed the savings had to do with recommendations under the Office of Children's Services (OCS). The savings had something to do with the federal reimbursement. She elaborated that OCS could change its procedures related to documenting and timing and possibly qualify for increased federal reimbursement. 9:20:44 AM Representative Knopp looked at line 1 of paragraph 2 in the sponsor statement. He noted that the sponsor statement specified that four audits had been completed, but it only listed three departments. He asked what the fourth department was. Ms. Curtis replied that there had been two reviews for DEED - one had been done on the department as a whole and the other had been done on the Alaska Commission on Postsecondary Education (ACPE). Co-Chair Johnston requested to hear the sectional analysis. CRYSTAL KOENEMAN, STAFF, REPRESENTATIVE STEVE THOMPSON, complied. She highlighted a list of repealers in committee members' packets (copy on file). She noted that because the bill only listed repealers, she believed it would be more advantageous to provide the list of repealers instead of a sectional analysis. Sections 24.20.231(7), Section 24.20.271(2), and Section 24.20.311(b) were all conforming language changes that removed references to the performance reviews. Section 44.66.020 included agency programs that set out the agency performance audits. Section 44.66.040 included the extensive list of the duties of the review team. Section 44.66.070(2) defined the review team. Representative Josephson stated that when he arrived in the legislature in 2013, he would have thought the legislature funded things it said it was going to fund. He asked if in around 2016 the item had been in the budget's adjusted base, but it had been removed. Ms. Koeneman replied that the budget request had been put forward by LB&A. When Legislative Council reviewed the budgets, it had made the determination to not move forward with that. There had been partial funding in 2016 for FY 17, but Legislative Council had denied the increment in FY 18 through FY 21. Representative Josephson referenced the language "every year, the legislative audit division shall ensure..." [Sec. 44.66.020(a)]. He was thinking of the Permanent Fund Dividend debate and the senior deduction and other things discussed by Representative Jonathan Kreiss-Tomkins. He highlighted that the legislature was the appropriating body. Ms. Curtis clarified that Legislative Council did not review the LB&A budget. She explained the appropriation was separate. She detailed that the funding had been cut in the House Finance Committee process. She relayed that because the item was in her statutes, she was required to request an increment annually. She reported that the request was $1.8 million in the current year. She noted it was a substantial amount of funding. 9:24:28 AM Representative Wool looked at the list of agencies outlined in statute that were to be reviewed in specific years. He observed that the first three departments on the list had been completed and then the reviews had stopped at the Office of the Governor, agencies of the executive [legislative] branch, and the Court System in 2017. He asked for verification that $1.8 million [the figure cited for FY 21 by Ms. Curtis] would pay for one year. He surmised it would depend on the year. He observed that based on the statutory list it would be one, two, or three audits depending on what was called for in a particular calendar year. Ms. Curtis agreed. Representative Sullivan-Leonard asked about the anticipated savings from the legislation that would discontinue the performance reviews. Representative Thompson replied that the budget request was $1.8 million in FY 21. The increment had been removed from the budget, the same as it had been in the past three years. He highlighted that the increment had not been funded for four years. He questioned why it should be included in statute and annually listed in the budget. Representative Wool appreciated Ms. Curtis's statement that a new approach should be made. He thought there was some value in conducting reviews of agencies that were receiving $300 million per year. He speculated that if it cost $1 million to $2 million, the state may end up saving $5 million. He continued there were definitely savings to be had and people want to cut budgets all of the time, but there were ways to cut and ways to take a deep dive to discover how to operate more efficiently. He remarked that sometimes it was necessary to spend money to save money. He thought a new approach sounded reasonable. 9:27:10 AM Co-Chair Johnston OPENED and CLOSED public testimony. HB 121 was HEARD and HELD in committee for further consideration.