HB 243-EVALUATION OF AGENCY PROGRAMS Number 0091 CHAIR WEYHRAUCH announced that the first order of business was HOUSE BILL NO. 243, "An Act establishing state agency program performance management and audit powers in the Office of the Governor for the evaluation of agency programs; and providing for an effective date." Number 0103 PAT DAVIDSON, Legislative Auditor, Division of Legislative Audit, Alaska State Legislature, assisted with the presentation of HB 243. She said the history of the audit function in the executive branch has been "a bit spotty." She continued as follows: Many of the agencies actually have internal audit shops in their organization; however, most of that work is in support of a federal requirement to monitor "sub-grantees" ... - they're focusing on auditing externally to the department. We at [the Division of Legislative Audit], for the most part, have been the main audit shop for the State of Alaska. We are an external auditor for both the executive and the judicial branches of government. Our audit work spans financial audits, performance audits, and sunset audits. I don't believe that the creation of this would minimize our audit to any degree; however, having [an] ongoing audit group in the executive branch is one of those internal control items that should be functioning in a state. MS. DAVIDSON concluded that in general she supports [HB 243]. In response to questions by Representative Holm, she said the sunset reviews and the financial audit of the state are mandated by statute. She noted, "The statute also provides for individual legislatures, with the approval of the [Joint Committee on Legislative Budget and Audit, for us to do what we term 'special' or 'performance' audit." Number 0343 REPRESENTATIVE HOLM opined that an audit should not be an internal audit; rather, it should be an external for internal purposes. He asked if anyone else besides [the Division of Legislative Audit] does auditing of state administration or state functions, for example. Number 0460 MS. DAVIDSON answered as follows: Typically, when we get into governmental organizations, the questions that come up have to do with independence. Being in the legislature, having the legislature control our budget, is one of the key functions to ensuring our independence with respect to the ... executive branch or the judicial branch. If you look at it in private industry, private industry CPAs are paid by the agency that they're auditing. In our case that's not what happens. What an internal audit function could do for the executive branch would be to allow the governor's office to respond to issues that come up within their own agency's factor. To answer your question about external auditing: Primarily, the financial statements of what would be termed "the quasi- corporations of state government" - the [Alaska Permanent Fund], ADA, student loans - those typically have had their financial audits done by private CPA firms. And a lot of that has to do with [the fact that] they're also bonding agencies. Number 0552 CHAIR WEYHRAUCH asked if there is a privilege that attaches to an audit, between the auditor and the client. In response to a request for clarification from Ms. Davidson, he said he used the word privilege in a practical sense, rather than a legal one. He continued as follows: If this bill were to become effective and [an] auditor in the executive branch were to conduct an audit ... and evaluation of an agency program, and then [the Division of Legislative Budget and Audit] did an audit, would the earlier executive branch audit be ... reviewable by the legislative auditors, or is that something that would be a privileged document that you would not be able to see or review? MS. DAVIDSON responded that the statutes [regarding] the Division of Budget and Audit allow that entity to review all confidential information. She stated her understanding that in the proposed legislation, "They're asking for confidentiality for their internal audits and their working papers; therefore, we would be able to review those if we were asked to ... do an audit." In terms of privilege, she said, the work papers of [the Division of Legislative Budget and Audit] have been deemed privileged by a superior court ruling. She added that that ruling did not come from the supreme court. CHAIR WEYHRAUCH clarified that he wanted to know whether the audit function that would be carried out if HB 243 became law would be something that [the Division of Legislative Budget and Audit] would be able to review during the course of its audit, so that it would have a full idea of what had transpired. MS. DAVIDSON replied, "Mr. Chairman, I would expect that they would." She added that it would be the same as when the division gets into audits and reviews files of the ombudsman, or the Alaska Commission for Human Rights, if they're relevant in any way, for example. She concluded, "So, I would expect that these would fall under the same review process." CHAIR WEYHRAUCH referred to [page 2, lines 4-5, of HB 243], which read as follows: Internal audit work papers and other related supportive material are confidential, and internal audit reports are confidential until released by the governor. CHAIR WEYHRAUCH asked if that means that they are not released to the public pursuant to "some sort of freedom of information Act request." MS. DAVIDSON surmised that that is true; however, she said she is not the best person to answer the question. Number 0797 REPRESENTATIVE SEATON commented that the type of audit mentioned in HB 243 is regarding performance management and agency programs, for example, which is like comparing apples and oranges next to financial audits. He asked if the type of audit in HB 243 is similar to audits that the division performs for LAA [Legislative Affairs Agency]. MS. DAVIDSON answered that the division does performance audits at the request of the Joint Committee on Legislative Budget and Audit. She added, "That's not to say that we don't do financial auditing as well. We can perform all of those audit functions." She posited that a question could address why [Governor Frank Murkowski] feels it's necessary to have an internal audit shop created so that he has a staff of auditors to do the things on his priority basis. She pointed out that having [the Division of Legislative Budget and Audit] try to meet the needs of all audits is difficult for the executive branch, because it doesn't control the division's audit workload - the legislature does. She concluded that the question that the committee is considering is not whether the division is capable of doing the audits - because it is; rather, it's whether or not it wants to create an audit function in the executive branch, as well. Number 0963 MS. DAVIDSON, in response to a question by Representative Seaton, said whether it is a performance audit or financial audit, the people needed as staff are those who have been trained in a methodical, analytical program and think about things in an analytical way. She opined that the [issue of] the funding for the positions are better left to be answered by the governor's representative. REPRESENTATIVE SEATON referred to the zero fiscal note and said he had just been trying to figure out whether the issue at hand is complicated or simple. Number 1067 CHAIR WEYHRAUCH noted that no one was present to testify on behalf of the administration; therefore, he announced that HB 243 would be held over. [Later in the meeting, a representative of the administration arrived and so discussion of HB 243 was continued.] HB 243-EVALUATION OF AGENCY PROGRAMS Number 2125 CHAIR WEYHRAUCH returned attention to HOUSE BILL NO. 243, "An Act establishing state agency program performance management and audit powers in the Office of the Governor for the evaluation of agency programs; and providing for an effective date." Number 2133 JAY HOGAN, Deputy Director, Office of Management & Budget (OMB), Office of the Governor, said that although he was not present during the previous discussion of HB 243 earlier in the meeting, he has talked with the legislative auditor regarding the concept of "reactivating this function." CHAIR WEYHRAUCH asked why a statute is necessary to reactivate a function. MR. HOGAN noted that there has been an internal audit function "off and on" for as long as he has worked for the state. Originally, he said, that function was in the Department of Administration and was moved over to OMB in 1983 when that office originated. He continued as follows: When we came to deal with the issue of confidentiality of audit records - which was a recommendation to us from the attorney general - we discovered that there never had been a statutory provision granting anyone in the executive branch the authority to conduct internal audits, even though they had been going on ... probably since statehood. Then in the mid-1990s, the function was scoped down to basically a records-keeping function which exists today in OMB. That is why we put in the authorization to do audits. And we broadened the definition to align with the governor's concept of more focus on management and performance of agencies and programs. Number 2245 MR. HOGAN said that when Governor Murkowski took office, he instructed the various departments of state government to perform internal audits on themselves, for purposes of preparation of the budget. He noted that some agencies - for example, the Department of Health and Social Services (DHSS) and the Department of Transportation (DOT&PF) - have internal audit functions because of federal requirements based on the federal funding those agencies receive. He added that the Department of Labor has one or two internal auditors, as well. MR. HOGAN said it is not the governor's intention to duplicate, replace, or combine those functions; rather, it's simply to have a small management audit team to go where the governor feels there may be a problem. [The team] would in some cases use techniques of internal auditing, and in other cases would use management analysis techniques. Number 2330 CHAIR WEYHRAUCH referred to Section 3, which he said would amend AS 44.19. He noted that [AS 44.19] is basically the OMB statutes; therefore, [OMB] would have the management authority over the administration because of the addition to the statute. MR. HOGAN confirmed that statement. CHAIR WEYHRAUCH asked Mr. Hogan if it is his intent, as representative of the administration, to have the papers that are referred to in [Section 3] be confidential from the public and not available to the public under public records of request. MR. HOGAN replied that the purpose of [Section 3] is to emulate the language that applies from legislation to the legislative auditor. He said there is a tradition in auditing of keeping work papers - details and names, for example - confidential for a number of reasons that he said the legislative auditor is better versed in than he is. He continued as follows: But what we attempted to do was to use that very same language, except, rather than clearance from the budget and audit committee, our clearance would come from the governor. So, that's the only significant change we made in that. And ... we're recommending it for exactly the same reason that the legislative auditor has that in the audit statutes today. Number 2427 CHAIR WEYHRAUCH asked if the [Division of Legislative Budget and Audit] would have access to the records and analyses that would be performed [by OMB] under Section 3 of HB 243. MR. HOGAN stated his assumption that the division would [have that access]. He added that [OMB] would want to advise the governor of the division's interest. He noted that [OMB] found, in doing its limited audits in January [2003], that it got "tremendous unofficial help" from the legislative auditor. He said, "We would assume we would be able to return the same courtesy." Number 2469 CHAIR WEYHRAUCH said he wants the committee to study the fiscal note, because it seems it would add a level of work. Furthermore, he indicated wanting to have [the language of Section 3] analyzed by [Legislative Legal and Research Services]. He opined that anticipating [and alleviating] any possible tension or dispute between the legislative and executive branch would serve everyone. Number 2504 REPRESENTATIVE SEATON said he doesn't have any problem with the internal [audit] work papers, for example, being confidential; however, the [audit] reports being confidential "until released by the governor" may set up the scenario where they might not be released by the governor, and he said he sees that as a potential problem. CHAIR WEYHRAUCH said, "We'll have to get some analysis on that point." He commented that the fiscal note does not contemplate the hiring of any new "audit-type folks." Number 2550 MR. HOGAN responded that [the administration] agonized over that fiscal note. He noted that the governor has moved other functions from his office to departments, and in the process, some money was saved, as well as three positions that would be vacated as a result of the movement of those agencies. He told the committee that that money - approximately $300,000 - and those positions are dedicated to OMB should the legislature appropriate the governor's requested budget. Number 2596 REPRESENTATIVE HOLM referred to Mr. Hogan's previous mention of an [audit] team and commented that that would require new duties that aren't within the scope of the current funding. He said he would appreciate a [more comprehensive] fiscal note. MR. HOGAN said, "All right, sir." Number 2654 REPRESENTATIVE BERKOWITZ noted that the last two lines of Section 3 are distinct from the language contained in Administrative Order 202. He said he finds that difference to be substantial, and he is curious to know why it has become more restrictive in law, as opposed to the administrative order. Number 2680 MR. HOGAN explained as follows: The administrative order cannot enhance the law; so, we were bound in the administrative order to not attempt to write a statute. In the Act - including the release, which [Chair Weyhrauch] asked about - again, we copied that statute of the [Joint Committee on Legislative Budget and Audit and the Division of Legislative Audit]. Currently - and ever since the committee was formed - the [Joint Committee on Legislative Budget and Audit] must approve for release any audit conducted by [the Division of] Legislative Audit. They do it in two stages: [first, a] confidential review document; and then later, after that period has expired, a final report. So, we attempted to rewrite that provision to apply on the executive side. And, rather than have the [Joint Committee on Legislative Budget and Audit] do the release, the governor would do the release. So that's sort of the history behind why we chose to do it that way. Number 2787 CHAIR WEYHRAUCH said the committee would be getting some legal analysis of [Section 3] before the next hearing on HB 243. [HB 243 was heard and held.]