SB 213-LEGISLATIVE AUDIT DIVISION POWERS  10:23:42 AM CHAIR MCGUIRE announced the consideration of SB 213. 10:23:56 AM SENATOR FRED DYSON, Alaska State Legislature, said he has had interesting discussions on the scope of auditors' authority. Page 1 of SB 213 notes that: "Audit has authority to look at the books and accounts of all custodians of public funds and all disbursing officers of the state." Senator Dyson wants the division to have authority, if directed by Legislative Budget and Audit Committee (LBA), to audit any organization that has public funds. Pat [Davidson] said she only has authority to audit state organizations. The bill makes it clear that she has authority to audit any organization that gets money from or through the state, including federal money. 10:26:17 AM SENATOR BUNDE said line 13, page 1, is current law, and he asked if the difference of opinion is what constitutes a custodian. SENATOR DYSON said yes. "Paragraph 2 doesn't quite go where we would want, because it seems to mandate that that be done every three years, and I wouldn't want Pat and her organization to have to audit every group that receives money every three years." So the new paragraph is necessary. 10:27:12 AM SENATOR STEVENS said senior citizen organizations are funded by the state, including the one in Kodiak, which pays for and performs its own audit. That duty will now go to the state. Is that what would happen? SENATOR DYSON said he would hope not. His goal is giving LBA the authority to order an audit, "at their discretion and for their reasons," on any organization that gets money through the state. "It wouldn't be anything that they would be required to do, only that they would have the authority to do." SENATOR FRENCH said the bill says "shall … perform an audit of an organization that receives money from or through the state." He asked how many organizations that entails. SENATOR DYSON said he missed that. 10:28:38 AM CHAIR MCGUIRE moved conceptual Amendment 1 to replace "shall" with "may" on line 4 of page 1. SENATOR FRENCH objected and said, "Don't we want them to keep doing what they have been doing?" CHAIR MCGUIRE apologized. SENATOR FRENCH suggested adding "as necessary" after "shall". SENATOR GREEN suggested putting "may" at the end of line 22. CHAIR MCGUIRE said conceptual Amendment 1 will change page 2, line 22 or 23, adding "and may" or "or may". SENATOR GREEN said the drafter might want to rewrite the paragraph. CHAIR MCGUIRE said that is conceptual Amendment 1. Hearing no objections, conceptual Amendment 1 was adopted. SENATOR GREEN said the legislature can't audit or require an audit of a school district. It is up to the school board or the borough assembly to order the audit. "I think we are making a mighty reach here to think that we can go to nonprofits and funders that happen to receive state money that they can come under our authority." She doesn't object to it, but there needs to be legal consideration. There are audits in the department that are required for school districts, but they aren't necessarily legislative audits. 10:31:31 AM SENATOR DYSON said some states have this wording so they can be a watch dog for public funds. Several states are allowed to audit schools. He asked what can be done if there is a rogue school district that the state pours money into. The legislature has the responsibility to watch public funds. He said there was some scandal with money that was distributed to nonprofits out of health and human services. There was a cozy relationship between the department and the grantees. Currently the audit division can only audit health and human services and its process, not how the money was used. He wants the division to see how the public money was used. SENATOR BUNDE noted that the Adak School District had no students for a year or more, and the superintendent kept getting money and the school board kept hiring him because he kept hiring them. He thinks the education department finally shut them down. He asked if the bill refers to federal money passed through the state and funded directly. SENATOR DYSON said, "From or through the state, that's line 23 and 24 on page 2." The federal government trusts the legislature to be stewards of the money it gives. 10:34:12 AM SENATOR GREEN said the federal government sometimes does an audit, taking a cue from the state. She noted an audit on sewer wastewater. SENATOR DYSON said he has seen some past federal audits, and if the state is not conforming in several areas there will be some draconian things that happen. He wants to catch them before the federal government does. 10:35:14 AM PAT DAVIDSON, Auditor, Division of Legislative Audit, said her ability to go beyond state agencies is limited. "Legislative audit has very broad but very vague authority." Legislative auditors have been around prior to statehood. Auditing other than a state agency depends upon the grant agreement, and some allow audits and some don't. If, for example, the Department of Health and Social Services gave money to an entity to build a health facility and LBA required Davis-Bacon wages, unless it is in the grant agreement that they will comply with that, she doesn't have a basis for an audit. The intent of the bill is to open up the scope of inquires that could follow state money or federal money flowing through the state. It would broaden her ability to look at financially and, possibly, performance-based issues. If the legislature wanted legislative audit to evaluate a school district's policies, procedures, and how well it is achieving goals, the bill will allow it. 10:38:39 AM SENATOR BUNDE asked if Ms. Davidson wants this authority. MS. DAVIDSON said anything that will help the legislature make decisions is something that her group should do. SENATOR BUNDE said he served on LBA and has seen some audits with personal and political agendas, and audits aren't cheap. How much does it cost to conduct an audit? MS. DAVIDSON said from $10,000 to over $100,000. "We do bill out under federal at a complete billing rate at about $50 an hour for the division." Professionals do the work. "Whether or not you want that section to be able to be done at my direction as legislative auditor or you want to invest that authority only in the budget and audit committee to authorize that … is an important distinction." Now the legislative auditor is required to do certain things, and the way it is written is permissive for the division to start a financial-related audit. But a performance audit needs to be approved by LBA. The LBA is a gatekeeper of her work load. 10:41:23 AM SENATOR BUNDE suggested that the cost of an audit should be put forward so the LBA knows what it will cost, particularly if an audit is not motivated by altruist reasons. MS. DAVIDSON said financial audits can be estimated, but performance audits can't. "You don't know what you're going to get into. You don't know what sort of records are available." The LBA asks if an audit will be big or small or go smoothly. 10:43:01 AM SENATOR BUNDE said the number of audits will blossom if the committee isn't extremely thoughtful. SENATOR STEVENS said the custodians perform their own audits, and asked if the division has access to those. It would be duplication unless the organization's audit was respected. MS. DAVIDSON said she would not duplicate any audits, and she would not assume the responsibility for audits of any entity. That model already exists. The division is required, by law, to audit the state's financial statements; however, organizations such as the Alaska Housing Finance Corporation and the permanent fund contract with CPA firms to do their audits. There is a way the division can rely on the work of others. 10:45:38 AM SENATOR STEVENS asked if the division can use the school districts' audits. MS. DAVIDSON said she believes that is true. She has been asked to audit school busses. There are a number of statutes governing how school districts deal with bussing. The statutes are referred to when the money is given to the districts, so she has done those audits. The division doesn't repeat financial audits. The bill authorizes something beyond that, like performance audits or something very specific. CHAIR MCGUIRE asked if anything needs to be added to the bill regarding duplication. MS. DAVIDSON said conceptual Amendment 1 may do that. The other policy is to let the legislative auditor initiate the audit or require direction from LBA. It is the practice of the profession to work with other auditors instead of duplicating work. CHAIR MCGUIRE said SB 213 is a good idea and will keep everyone on their toes, but she wants legal advice. 10:48:18 AM SENATOR BUNDE asked Ms. Davidson's opinion if the additional audits allowed by the bill should be originated by the LBA. MS. DAVIDSON said that is a policy call. She has seen issues come up where she approached the chair of LBA. Not being able to initiate audits wouldn't create any substantial barriers. The legislature needs to decide who to give the authority to. SENATOR BUNDE said he agrees with the goal of the bill. But he is concerned about political motives from the people on LBA to intimidate people or cause trouble. SENATOR FRENCH asked how many extra audits can actually be done. There are 2,000 groups that receive grants through the state. 10:50:52 AM MS. DAVIDSON said audits with statutory deadlines are a priority. Everything else just gets done as it comes up. The delay can be several months. There have been informal discussions about creating a priority process. She doesn't know how many audits will be generated by SB 213. As legislators understand that these organizations can be audited, there will be more requests coming to LBA. 10:52:22 AM SENATOR DYSON said there may be some additional costs at the discretion of LBA, but fraud and wasting money has a cost. The legislature has an innate responsibility to be stewards of public money. There is no downside to SB 213. It may be misused, but he trusts those on the LBA. On page 2, line 23, he has thought about adding "when approved by LBA" after "perform". 10:54:31 AM SENATOR BUNDE moved conceptual Amendments 1 and 2. CHAIR MCGUIRE said conceptual Amendment 1 has been addressed. The committee can offer conceptual Amendment 2, as follows: Page 2, line 23, following "perform" Insert: "when approved by the Legislative Budget and Audit Committee" SENATOR BUNDE said there may be some problems, but there is more good to this bill than negatives. A positive unintended consequence will be more forethought. Hearing no objection, conceptual Amendment 2 was adopted. SENATOR BUNDE moved to report SB 213 from committee with individual recommendations and attached fiscal note(s). There being no objection, CSSB 213(STA) passed out of committee. SENATOR DYSON said he will get legal advice to ensure that the statutes do not preclude this, "and if there is, we'll deal with it."