SB 78-LEGISLATIVE AUDIT DIVISION POWERS  9:00:40 AM CHAIR MENARD announced the consideration of SB 78. 9:00:44 AM SENATOR FRED DYSON, Alaska State Legislature, sponsor of SB 78, said auditor Pat Davidson has frustrated him over the years because she is always right. "I have come to the conclusion that it's a very well-run function and they have done an excellent job for us." Ms. Davidson tells him that her authority is limited to audits of state organizations. He would like to expand it to cover any organization that receives state funds. SB 78 does that. He has heard that some of the pass-through grants of state divisions were "kinda insider deals" where the people steering the grants gave the money to very close associations, including family members. He is not asserting that that is true, but he is concerned about it. He has asked Ms. Davidson to audit things that he thought were being misused. She told him she doesn't have that authority. When Governor Murkowski took office he said he was surprised at how little auditing there was in the executive branch. The auditors have done magnificent work, and he wants to give them the authority to do audits anywhere public funds pass through state hands. The legislature is a steward of public funds. SENATOR DYSON said Ms. Davidson doesn't arbitrarily audit things. She is subject to the legislature's direction. There is a drafting error on page 1, line 4. The drafter changed "shall" to "may" and it should be changed back. The other change on page 2 clarifies that the legislature and the audit office have the authority to track public money that goes through the state. 9:04:56 AM SENATOR MEYER asked if this would include federal money passed through the state, including the economic stimulus money that the state will receive. SENATOR DYSON said his intention is to give the authority to audit any public monies that pass through state hands. 9:05:34 AM SENATOR FRENCH asked if the boy scouts got $5,000 to work on their ball fields, would SB 78 allow for a total audit of all boy scouts or would it just be limited to the $5,000? SENATOR DYSON said his intention is to only track the money that went through the state. He hears from his district that grants from the state are getting siphoned off for other projects. The auditor could chase that down. He would like to see SB 78 made into a committee bill. PAT DAVIDSON, Auditor, Division of Legislative Audit, said she agreed with changing "shall" to "may". That wouldn't weaken her current authority. In existing law there are two areas that make the audit division as effective as it is. Item number 6 allows access at all times to books, accounts, reports and other records -- whether confidential or not -- of every state agency. It also requires assistance and cooperation of all state officials and other state employees on the inspection, examination, and audit of state agency accounts. That makes the audit division effective and efficient. Because both Section 5 and 6 refer to state agencies, in Section 11 the committee may want to extend the division's authority to nonprofits or local governments. "We are a service agency to the legislature. If it's the legislature's policy call that you want us to be following that state money to wherever it goes, I'm fine with that." It is unclear if she is now allowed to audit once the money has left the state agencies. If there is a grant agreement that allows the department to audit the money, her division can do an audit. There is money that flows out of the state without many strings attached, like revenue sharing, and she can't audit those. It's fine if the legislature gives the audit division that authority, but it should consider whether it wants the auditors to have access to confidential information at that local level. That is an effectiveness and efficiency issue. CHAIR MENARD asked if she supported the bill as written. MS. DAVIDSON replied, "If the legislature wants the audit division to be able to follow all state money into local governments and nonprofits, then I believe that Section 11 will do that for us" But the two other concerns are public policy issues. "Do you want us to be able to look at confidential information, if generated, and require the assistance of state and local officials?" Those are efficiency and effectiveness issues. 9:12:06 AM CHAIR MENARD assumed this would require an increase in staff. MS. DAVIDSON said there is a zero fiscal note because it doesn't mandate any additional audits. It allows the Budget and Audit Committee to approve additional audits. Currently, about 70 percent of her workload is mandated by statute. The other 30 percent is from legislative requests approved by the committee, and they are dealt with on a first come, first served basis. If those audit reports aren't completed in a timely manner, she will hear about it. A staffing discussion would follow. This may increase the workload, but she would have to see. SENATOR MEYER asked what her backlog is now. If someone requests an audit and it is approved, does it take a year to complete? MS. DAVIDSON said it will take about six to nine months. Federal auditors are talking to her about additional requirements for the stimulus money. "Normally that statewide single audit that covers all the federal requirements eats up about 60 percent of our budget - it's going to be going up, and that workload is probably going to be there for the next four to five years." 9:14:29 AM SENATOR MEYER said, "She doesn't need any additional staff to do what's being asked of her in the bill; it's just that if we want it done faster than the six to nine months or year ... then we would have to add staff, and of course that would change the fiscal note." He is concerned about the federal money. The state is responsible for state money. But, for example, if federal money came to the state and was passed to the school district, what would the state do with the results of the audit? MS. DAVIDSON said the federal government is more consistent about putting audit requirements on their money than the state is. The federal government wants the state to be accountable for any federal money passed to the state. The system that is set up now is the single audit approach. So when federal money comes to a school district - either directly or from the state - when the auditors are in there, they will be doing federal compliance work to make sure the money is spent in accordance with the federal requirements. The state agencies are responsible for taking any findings from those audits and acting on them. "And so right now the layer for federal money is pretty well complete, but with all single audits, there's thresholds for what you have to audit and what you don't have to audit." Federal dollars passing through now generally have audit requirements with them. 9:16:58 AM SENATOR MEYER asked if that includes the stimulus money. MS. DAVIDSON said the U.S. Office of Management and Budget, General Accounting, and the Inspector General in each department are scrambling to come up with "compliance supplements," which are the regulations that the auditors will have to follow when auditing that money. Her understanding is that "they're cranking those things up for us to look at more - rather than less -- when it comes to the economic stimulus money." SENATOR FRENCH asked if receiving a small amount of state money would enable the legislative Audit and Budget Committee to order an audit of the entire organization. Language on page 2, lines 24 and 25, suggests that the receipt of just a little state money would allow a "thorough top-to-bottom review of any organization that got any amount of money from the state." In terms of efficiency, it would concern him if the auditors were asked to look at the Alaska boy scout organization "from stem to stern" because it got $5,000 for a ball field. That would not be a wise use of state resources. He asked Ms. Davidson if the bill language was broader than it should be. 9:19:12 AM MS. DAVIDSON said the way she read it and based on her background, "we would follow the state money." But there would be some overlap. If, for example, $5,000 of state money was comingled with $10,000 of Rasmussen money, "we would limit ourselves as much as possible to the $5,000; however, when you get into an organization that small you're not going to find a sophisticated accounting system where they are setting up controls ... for different pots of money, and as a result ... our evaluation would be of the system overall." But there would be a focus on just the state's $5,000. SENATOR FRENCH said Ms. Davidson has a sterling reputation, but for posterity he asked that the language be tightened with respect to the powers of the audit committee and auditing board. 9:21:27 AM SENATOR PASKVAN said if the audit is approved, could the approving language have those restrictions? MS. DAVIDSON said the audits that are approved by the Legislative Budget and Audit committee are generated by individual legislators. They write to the committee chair requesting an audit. In that request they have to identify what the objective is, and she has to understand what the requester wants. The legislature has authority over state funds, but she is not sure that even the legislature can order an audit of raffle receipts of an organization. There is an inherent limitation on what can be audited because the authority comes from the legislature. The bill will allow her to move from state agencies down to nonprofits and local governments. "I didn't read it to expand it beyond state funds or federal funds flowing from the state." 9:23:49 AM SENATOR DYSON remembered previous conversations with Ms. Davidson where he asked if she could hire contract auditors, and she had indicated that she could. If the committee thinks something is a priority, the tools are in place to hire help. Ms. Davidson made a good point about what access an auditor will have when auditing a non-state organization. He will fix that language today. He asked again to make SB 78 a committee bill because it is excellent public policy. SENATOR MEYER moved to adopt Amendment 1, which inserts the word "duties" and on Page 1, lines 4 and 5, deletes "may", and inserts "shall". There was no objection and Amendment 1 was adopted. SENATOR FRENCH moved Amendment 2, conceptually, as follows: On page 2, line 24, "that the audit function be restricted to the state dollars that an organization receives and not an umbrella audit." He trusts Ms. Davidson, but the language says: "perform an audit of an organization that receives money from or through the state." That is a sweeping statement and is too broad. SENATOR DYSON said that would be good. "I would encourage you to consider whether or not that it includes federal funds that flow through the state." He wants the language to include "public funds flowing through the state." SENATOR FRENCH said no one wants to see fraud, waste, or abuse. On the other hand, the powers of the federal government to watch its money versus the state's ability to watch state money is out of whack. State money should only be spent to watch state dollars. He suggested taking a day to tighten the language and pass it out in the next hearing. SENATOR MEYER said the sponsor requested a day to rework it. SENATOR FRENCH said he will draft something for the sponsor. 9:28:55 AM CHAIR MENARD held SB 78 and took a brief at-ease.