Legislative Budget and Audit July 22, 1998 9:00 a.m. House Finance Committee, Room 519 State Capitol Juneau, Alaska Tape: LBA-982207 Tape 1 Side A CALL TO ORDER Chairman Phillips convened the meeting of the Legislative Budget and Audit Committee on July 22, 1998, at approximately 9:10 a.m. in the House Finance Committee, Room 519, State Capitol, Juneau, Alaska. PRESENT The following members were present: Senators Representatives Chairman Phillips Representative Croft Senator Donley Representative Therriault Senator Halford Senator Pearce Senator Torgerson (alternate) ALSO PRESENT Pat Davidson, Legislative Auditor; Merle Jenson, Deputy Legislative Auditor; Fred Fisher, Acting Legislative Fiscal Analyst; Tom Williams, Senate Finance Committee staff providing staff support for the Legislative Budget and Audit Committee. STATUS OF AUDITS Pat Davidson - Today we have one preliminary audit to discuss and two special audit requests. I recommend that the Committee consider going into Executive Session to discuss the preliminary audit. Senator Halford MOVED to go into Executive Session to discuss the preliminary audit. Hearing no objection, the motion was APPROVED. The Committee went into executive session at approximately 9:11 a.m. EXECUTIVE SESSION Chairman Phillips reconvened the meeting to the public at approximately 9:30 a.m. ACTION ON AUDITS Pat Davidson - We will need a motion to release the preliminary audit. The other issue is we have two audit requests; one from Representative Bunde looking at a contract that was let by the State Recorder's Office; the second is from Senator Ward looking at the Department of Corrections Inmate Accounts. The one on the Inmate Accounts is basically a follow up to an audit conducted in 1996 when we looked at the fiscal operations overall. Back in 1996, we found that the Inmate Accounts were out of balance between the detail ledgers and the control cash account of $182, 000. We found that there was inadequate segregation of duties; there was a sharing of passwords getting into the computer system. It needed substantial improvements. Someone got away with over $180,000. They are I believe at Grand Jury status with that one. So although we may not get into the embezzlement itself it will be another look at the controls. (Representative Therriault is joined the meeting.) Senator Halford MOVED to release the statewide audit for comment. Hearing no objection, the motion was APPROVED. Senator Halford MOVED to approve the two audit requests. Hearing no objection, the motion was APPROVED. OTHER BUSINESS - MEMORANDUM OF AGREEMENT Senator Pearce - Did you explain to the Department of Administration ...? Pat Davidson - Yes, it is included in your packet. Last spring we evaluated what our workload was. My job was to look at it, define what we are required to do by Statute and focus our audit efforts on those. One of the things that came to our attention was the work doing the single audit in the compliance portion was not a mandate of Legislative Audit. I notified the Department of Administration that we would no longer be doing that portion of the audit; that we would be happy to work with anybody they wanted to do it. They have come back with a request to us through a Memorandum of Agreement asking us to continue doing that audit. What they came to us with was some money to fund some unfunded positions that we have right now. But more importantly they have came to us and said we will dedicate a 1000 hours from our internal audit staff to help on the audit and Administration will pick up some of the administrative responsibilities for the audit. I think it is a good thing for the state; I think it is going to get them more active. It will cut down on the number of Federal findings we have because all of the Administration is going to be aware of what those requirements are. If we have more controls then it is going to increase the amount of time and effort the auditors have to work and I think that the direct relationship of falling back to them is a good one. As I indicated in the memo, I was going to be signing the Memorandum of Agreement. Chairman Phillips - That is your recommendation? Do we need to do something officially on that or are you saying this is what we are going to do? Pat Davidson - It will not detract from the efforts and what we are making on our special (cough, tape inaudible). Senator Halford - We are going to spend money through our agency that we haven't formally approved in addition to what we did approve? I think we should do something to approve it? I agree with it. I think it is a good idea. I think the Committee should say something because it is money to be spent through our branch now from the other branch that is not appropriated out of our branch. Senator Halford MOVED to approve the Memorandum of Agreement. Senator Torgerson - You said you are going to hire some people for positions that are not filled now through this transfer? Pat Davidson - Partially, I am going to use this to fund positions. Senator Torgerson - How much money are they transferring? Pat Davidson - A maximum of $250,000. The Department of Administration is going to be sort of brokering it. The costs are actually going to be distributed out to all the agencies. It is all Federally reimbursable. My sense of things is those Federal programs that don't have a cap on them, i.e., CSED, a lot of those are going to be picking up the cost. What we are recognizing here is the cost to handle Federal money is the audit. That is part of the cost of the Federal program and to the extent possible they are going to be billing those Federal programs. For those that have a cap it will be their choice as to whether they want to bill the Federal program or have another funding source; so it isn't going to be the Department of Administration, they are just brokering it. Senator Torgerson - I'm concerned about the integrity of the audit; it's the fox guarding the hen house kind of thing. Your employees, their money. But if you think it is going to work I guess it's going to work. I would question the integrity of the audit if you're using your people and a thousand hours of their people. Where is the independent auditor? There isn't one. It apparently doesn't bother you, but it bothers me as to what your major goals are in auditing and trying to see if we are spending money properly. Pat Davidson - Our auditing standards do allow us to do that and that is why I'm generally comfortable with it. I think in a governmental environment that's even more of an issue. Basically for us to use their staff, what they are going to be doing is basically the leg work. We are going to plan; we are going to review it and we're going to supervise their activity. They are just going to run around and do some more of the work. It is not inconsistent with the type of audits. Additionally, the work that we are going to be using them for is on Federal compliance issues. We have an attitude about how state money should be spent and we are going to keep that attitude and I don't think there is anything that is going to change it. In terms of Federal compliance I am relatively comfortable with our level of supervision of that staff; that we can handle it. Senator Torgerson - What is the advantage of going together on this? Why don't they hire their own auditors? Pat Davidson - That is one of things they did consider. You would probably have to talk to someone from the Department of Administration. But to give you an example, Retirement and Benefits contract out their audit work. Besides the cost of that contract they dedicate between 1-1/2 and 2 positions on an annual basis to do the legwork for those auditors and it fits well with the financial audit. We have the resources and the knowledge of the departments and we are just going to be one step ahead. Senator Torgerson - I won't object but I think we have to watch it. I think it loses the integrity of the audit to have Administration pay for part of our work. To come with a budget next year in spending part of the Administration's money on memorandums of agreement for down the road I think spells trouble. It doesn't keep a clean slate. What we are suppose to do is audit state government. Senator Donley - I don't mind them paying for it; I do share the concern about their employees doing it. I think it is acceptable procedure to charge for the auditing service. I was going to ask the question if we could do more of that? Senator Torgerson - I don't think I would object to charging but we don't when we go into audit their stuff. Now we're saying we might. And to be independent and say you've got to pay me to be independent so I can come in and audit you even if it is on Federal stuff around the state just doesn't seem to fit very well in keeping the integrity of independent auditor. Senator Donley - But we do that with the banks. Banks pay us to inspect them and we do that with insurance companies. We do audits on them. I don't mind taking the money to do it; I share your concern with their employees performing a function like this. Senator Torgerson - This group is suppose to be independent and the insurance industry are overseers by regulation; this by Statute is suppose to be an independent group charged in the Constitution with doing things, the others are not. It is just a concern I have. Senator Pearce - Is there a way for the Federal money to keep directly to you? We are mostly talking about a Federal pass through because it is Federal money. They require us to do the audit; they pay for the audit. Pat Davidson - We don't have the ability to directly access the money. Senator Halford - Senator Torgerson brings up some good points. What is the timing of this request? When do you have to (coughing, tape inaudible) Pat Davidson - December through March. We have to gear up for it. I do understand your concerns and I don't mean to be lackadaisical about them. I think that using their internal audit staff is good because I can visualize how the audit effort works. What we are going to do with them is ask them to prepare schedules, to locate documents basically to do a lot of work that doesn't require a lot of planning or thought process. We are going to tell them what we want; they are going to do it and then we are going to review it. So I'm not concerned about that. The benefit I see to using their staff is then they will understand exactly what the issues are with that Federal money. As the agency operates throughout the year these internal auditors can be aware of those issues and be able to inform the agency about how that is going to play out. Maybe we are going to stop some of this stuff before it happens because we are going to get some internal auditors in this Department who are trained about what the appropriate issues are. In this state we do not have a very strong internal audit function at all. It is pretty dismal actually. I think it shows itself in a lot of things that come up in an audit report where they misspent their Federal money or have not reported things properly or they don't believe these controls are necessary on the dollars. What I'm hoping to do with this is develop stronger internal auditors within the Department and I think it is going to benefit the state. Senator Halford - Once this decision is made people will be hired and an ongoing relationship will be established which is multi year, is it not? Pat Davidson - Yes Senator Halford - I made the motion but that is a bigger decision than I'm willing to make on the amount of information we have in front of us. I would like to WITHDRAW the motion. I'd like us to consider what is really going on. I agree with what Senator Torgerson said; I agree with what you want to do but I think there is a serious potential conflict. Chairman Phillips - The motion has been withdrawn. Senator Torgerson - Who would issue the report? Would Budget and Audit issue the audit? Pat Davidson - It would come exactly like a report is right now. Senator Halford - I would ask that we get back to this in a time when they can still gear up or Administration can still gear up if we say "no". I think this is a significant question. Senator Pearce - Do you have an alternative you'd like Pat Davidson to consider? What more information do you require? I don't disagree. Senator Halford - There is nothing in writing; no hard number about (cough, tape inaudible) $250,00 is a significant amount of money. It's a transfer not just between departments but between branches of government. It is something that if they did it to us we would be furious about. Senator Pearce - Do you want to see the proposed Memorandum of Agreement? Senator Halford - I think there are ways we can do it that maintain that insulation or is it impossible? It is logical. I think there is a separation. Our audits when we audit them is because we want to. In this case, it is an audit they are required to have to get the Federal funds. We are picking up a ministerial function that the Administration needs done at nobody's request; that is why they are willing to pay our branch to do it. Pat Davidson - We've been doing the Federal compliance portion of the audit since 1982. We've always been doing it. The Federal agencies developed the idea about auditing all the Federal programs at one fell swoop in 1982. At that point of time, there is a natural synergy to when they're looking at Federal dollars and how they spend the Federal dollars. Basically we are the audit organization that is geared up to do this. Senator Halford - Why are you talking about a new program and what is the change? Pat Davidson - Basically it was a budgetary issue for me. I had a workload that was ten months behind. In answer to your question we've been doing it free for years and now we are going to charge them. Senator Halford - Are you saying this has been done for free for years and now we are going to charge them? Pat Davidson - Yes. Senator Torgerson - You are going to hire how many people? Pat Davidson - What I would like to do is hire two people and then use the rest of the money to contract out other audits that we have so we can keep momentum going. Senator Torgerson - Would you use the money transferred from Administration to do our work? Pat Davidson - We are going to have to use some of our auditors. We have about a four month window to get the audit done and we can't just take and staff up to do that so what we'd be doing is billing them for the amount of hours we commit. I don't want to staff up a whole bunch of auditors and then experience a reduction in special audits and have to lay off people. I am funding two positions in the Division which are currently unfunded right now in the budget through vacancy factors I can't fill I think that is the historical norm for where the Division is. I think to some degree we had a bubble in the number of requests and I want to be able to deal with that and I think a minimum of two more staff plus contracting out is the best way to handle that. Chairman Phillips - Is four to six weeks going to mess you up when our next Budget and Audit Committee meets? I plan to have a meeting within the next four to six weeks. Pat Davidson - It would just delay things. Things would slow down a little bit. If that's acceptable to you. I would rather have the Committee comfortable with what we are doing. Senator Pearce - You'd told the Department you were going to quit doing this portion of the audit and you still have that ability? They would have to do it but you'd have to audit their compliance somehow. Pat Davidson - Yes. Senator Pearce - We've been looking at their backlog. In terms of your budget we asked you to come tell us how you're going to get rid of that backlog and one of the ideas you came up with was to quit doing the federal compliance which we don't get paid to do. They've come back to Pat Davidson with this idea. You could just say we're not going to take your money and we're still not going to do the federal compliance audit. Then it is their problem? Pat Davidson - Yes. To reiterate - one of my objections and one of the reasons I agreed to this was to step Administration up to the plate with some commitment of resources because I really feel like the Executive Branch has been somewhat insulated from the requirements of their own internal controls because the auditors spend more time doing it. They don't recognize those efficiencies and I think for us to be effective in what we do we want that internal control implemented. I see this deal will bring that additional accountable to the forefront of their own minds because it is going to pay for them to do that and I think it is really important from the overall state perspective. Chairman Phillips - I think I'd be a little more comfortable to delay the decision until the next meeting which we should have within 30 days. How does that effect your scheduling? Pat Davidson - It will just slow things down. If a 30 day delay is acceptable to the Committee to make its decision, then we can do it. Senator Donley - I congratulate you on identifying an area we are not required to do and attempting to save money and free up resources for other things we want to do. Thank you, Pat. Senator Halford - I agree with that. It is a significant decision. Representative Therriault - Basically getting the Administration to kick in money for something we are already doing doesn't seem that much of a leap but the hours that they would commit I'm not sure I followed all of that. That would be a change? Their own personnel would be gathering some of the information that we are now doing? Pat Davidson - To some degree. A lot of our audit staff gets hired away into the Executive Branch, into internal audit positions, finance officers. It is more typical of a private CPA firm to give a list of things they require from the agency for them to produce in order to do an audit because it limits the amount of time the auditor has to spend there. It therefore limits the amount the company has to pay. So if we are talking about a banking institution they are going to commit significant resources doing a lot of the running around pulling schedules together, getting information for the auditors so the auditors can come in, sit down, look at the information, do a test for completion and then go away. That is one of the things I want to bring audit approach is that type of idea, because not only does it save from an audit effort perspective, I also believe it will make the internal controls in the agencies stronger because their people are going to know exactly what is important. Do I have a concern about the caliber of help that I'm going to get? It has to be acceptable to me. So I look at the few internal audit positions there are and I see my former employees out there and I know what the quality of work is and I'm willing to accept that. Representative Therriault - That's acceptable to me. We have this problem that we've told you to catch up on the backlog, you've identified a way of doing that and now we're telling you that you can't do that. I really haven't seen a Committee member scrutinize the audit requests and turn them down and tell people to do those with their own legislative staff so we can't just sit here and say you can't do that. Chairman Phillips - What I normally do with the audits is get a hold of Pat Davidson and ask if she can do it without approving a formal audit. If we can't do it any other way then it comes before the Committee as a formal audit request. On the other hand, you are right, we are getting more audit requests and we have less and less staff. Representative Therriault - I think it is a trend. Chairman Phillips - It is a trend and it's hard to reject an audit request. They may have a legitimate concern about a Department or agency so I try to limit as many formal audits as possible by taking care of it informally if possible. That is the process I've tried to maintain as Chair. What percent do you think it is more these two years versus the last two years, Pat? Pat Davidson - I think it is up almost 100%. It is running high again in 1998 about the previous years. Chairman Phillips - I am concerned but I feel an obligation to legislators to honor their audit requests. Senator Halford - I think it is a trend not because they don't want to use their staff it's because of the credibility of the audit process. They do a good job. If you're trying to expose something, you don't have the same credibility by going through your own legislative staff. You don't have the same product as with an independent audit. I haven't seen people doing their staff work through Budget and Audit but I think it is a credibility question. We are giving them more. It is a budget increase; it's an ongoing program. Once you have the program started and they say they won't pay for it next year then you've got to decide what you're going to do and you have people in those places. Senator Donley - It would show up as a budget increase from the legislature because you'd be accepting that money and it would be legislative employees paying for it. I agree that people are getting more and more confidence in the audit process. Also the staff members have decreased over the years and the Legislative Research and Legal staff has decreased also. It is a natural consequence of us decimating our staff capabilities, which I don't agree with but we are too far into it now. The constituent levels have gone up especially in the Senate districts also. I think it is appropriate if we want to focus efforts on this function because it is the number one function that the Legislature does, the budget and make sure things are operating properly as we go through the budget. I don't begrudge people these audits at all. They are good. I don't think our own staff has the expertise that these folks have developed over time. Representative Croft - It seems if we are going to postpone the decision we should postpone the discussion. This wasn't something that was on the agenda so if we're all discussing how or when or where we postpone it then let's postpone that discussion as well. Senator Donley - If we move forward on the position that we should no longer do the functions we aren't required to do by statute the next decision after that is whether we accept money to do it for them or not. I support the decision not to do those functions under the existing status quo. Chairman Phillips - I guess we will have to bring it up at the next meeting; I will try to get it scheduled within the next 30 days. As to the selection of the Legislative Financial Analyst we are still going through that process. The subcommittee is going to meet hopefully in two weeks to select a candidate and then another two weeks to bring the recommendation before the full Committee. The motion to has been WITHDRAWN. OTHER BUSINESS - Y2K Senator Pearce - Y2K funding. The May 28 memo from Annalee McConnell to Representative Mark Hanley that has something written on it did not happen in our office but was the only copy that we could find yesterday to put in these packets. The first letter we got was May 15 from Annalee McConnell questioning what we were going to do to fund Y2K since it did not get the required 15 votes for a draw from the CBR on the Senate side. The day after we ended session I went to Annalee McConnell and Pat Pourchot and said to them, "You do not have the money to do anything on Y2K. I suggested if you call us back to Special Session for subsistence that you add Y2K funding to the call because otherwise you have no money." The Governor chose not to do that for either call. I got a telephone call in the ensuing weeks after the first Special Session from Pat Pourchot about continuing work on Y2K. I told him he didn't have any money and he said we'd come to you with a supplemental. I didn't give him a positive response. Subsequently I got a letter on July 17 from Annalee McConnell saying we wrote the Finance Committee to seek concurrence since we haven't heard from you so we assume you want us to proceed with the Y2K work, etc., with the most viable temporary funding mechanism to book expenditures against the general liability allocation of the state's risk management budget and that the University should do the same thing and they'll request a special supplemental appropriation. I do not know if other members got it. They've done an analysis and decided the state has a liability if they don't have their Y2K work done in time. My staff asked Pat Davidson's opinion, which was not favorable. I responded on Monday with the letter you have before you. In the meantime the Administration put out a press release stating they'd hired Bob Poe to head up the Y2K program and he was currently attending a Y2K meeting in Washington, D.C. I faxed a copy of Annalee McConnell's request for money to Bob Poe stating he had no money, don't spend anything; but there was no response. The reason I'm bringing it to the Committee's attention is to recommend that the Committee make a motion to send a Committee letter to Annalee McConnell saying they have not money and shouldn't spend it. My suggestion was they look at the Governor's contingency fund for funding the program. Senator Pearce MOVED that the Committee send a letter to Administration as a committee we do not support the funding mechanism for Y2K funding laid out in the July 17 letter. Representative Croft OBJECTED. Representative Croft - It seems to me outrageous to say that when the Governor puts a proposal on us and the Legislature doesn't act on it it's his fault for not calling us back in Special Session to get us to do what we should have done in the first place. It also seems though the apology is on the record it is outrageous to include in the packet such a flippant response. It is the fault of whoever prepared the packet. It doesn't belong in here. On the issue to say we don't have a solution; we didn't fund your solution and yet somehow we are going to try and blame you lacks logic to me. I think we are doing the state an injustice by not trying to find a solution and simply telling them find any lapse and other excess money around for this unquestionably serious problem. We either reject there's or put our own, say it's not a real problem and therefore nothing needs to be done. But to say it is a real problem we don't like your proposal we don't have one of our own and just find some money somewhere is irresponsible and I don't think we should do it. We should work with Ms. McConnell to find that money, to give us a supplemental to work on a problem that everyone concedes is substantial. Senator Pearce - First of all everyone doesn't concede it's a real problem. The Administration did a very poor job in explaining the problem and making it seem like a major problem. Representative Hanley and I repeatedly asked the Administration what are you going to request for Y2K, how much money are you going to ask for, what sort of an appropriation do you want. Until the last two days of session they didn't even have a number for us. It's real hard to put together a budget when you don't have a number. We finally funded it using CBR money. We came up with an amount that Representative Hanley and I thought was a doable figure. We asked them to sell it. When it came before the Senate it was the minority members who turned it down. I went to them with a solution to put it on the Special Session call; they didn't do it. Two times we've come up with solutions. Neither time did the Administration step forward, sell it or make sure we funded it. What you want us to do is tell them go spend money then commit the next Legislature, which we don't control. Representative Croft - On this issue to say we put forward a solution twice but it's the Governor's fault because he couldn't sell it back to us is illogical. It it's our solution we either do it or we don't. At least a conclusion this Committee can make is we don't think this is a problem so get the money wherever you can. Chairman Phillips - Representative Therriault, did you get a letter or follow up call from Ms. McConnell. Representative Therriault - The same letter Senator Pearce received and no call. Senator Pearce - There was no discussion about hiring. Chairman Phillips - I didn't get a letter or call. Tom, did Senator Sharp? Tom Williams - Senator Sharp did receive a follow-up call from OMB. At Senator sharp's request, I advised OMB that the Senator did not believe it was appropriate for him to approve the request, so he would not be approving it. Representative Therriault - I think a member of the Administration should have been here asking us what you want us to do rather than take silence as approval for them to go out and use their creative funding scheme. I am also bothered by having this marked-up memo in the packet just because I don't want any action of the Committee to indicate this is our sentiment. (End, Tape: LB&A-982207 Tape 1 Side 1) (Start, Tape: LB&A-982207 Tape 1 Side 2) Representative Croft - Was there any invitation to Ms. McConnell coming to today's meting to defend this proposal and present another? Representative Therriault - Whether they got an invitation or not, they can't just by letter override a negative vote of the Legislature. Senator Donley - I agree. The point here is this is clearly one of the Constitutional powers of the Legislature that hasn't been usurped by this Executive Branch. There was a specific vote on this by the people with the Constitutional authority to decide this issue and once again the Executive Branch is breaking the Constitution of the state. To raid the risk management account, which is something the Legislature allowed the money to be there for a specific purpose, and now they are going to spend it for another purpose. That is wrong and unconstitutional. It is illegal. Senator Halford - In the last 20 years and six Governors I've never had one who didn't try to do this; but I also believe that it is essential for the Legislature to defend against it. The wording is unfortunate; it doesn't need to be personalized for this Administration. This is truly a separation of powers issue. The only place where it is authorized is a special statute on disaster relief where the preceding officers are asked if they'll go along with disaster funding for or do they agree to call a Special Session. Any time any Administration tries to get the commitment in a formal way of the any body in the leadership to do something for the body in the next Session we who sign that are abusing our power. That was the tack of this Administration on this issue. It is our duty to protect the members of the Legislature who are not here. The four people who received the letter initially voted "yes" but they wouldn't sign the letter to tie the hand of their fellows. That is the way it supposed to be. We should never act to usurp the power of the body. Since there was objection, Chairman Phillips called for a roll call vote on the motion. Yea Senator Donley, Senator Pearce, Representative Therriault, Senator Torgerson, Senator Halford, Senator Phillips Nay Representative Croft Chairman Phillips - The motion was APPROVED by a 6-1 vote. OTHER BUSINESS - CONTRACTED AUDITS Senator Pearce - What is the protocol to decide what should be contracted out and how do you advertise who you are going to contract to? Pat Davidson - We actually have four contracts outstanding out right now. Because the Legislative Auditor's position was vacant for most of FY98 we had some money that was going to lapse and I wanted to try to use it as much as possible. What I was initially looking for because I had a very short window was those audits that had a relatively straightforward scope and where it had been an audit we had done in the past and there were some pretty clear guidelines. The ones that we selected was the Board of Pharmacy which is a sunset which we do periodically so we could provide audit programs or actual examples of our reports; we also have a contract for the Board of Marine Pilots; we have a request from Senator Donley asking about ASMI AIDA positions and there was already an outstanding contract with Peat Marwick for the Salary and Compensation Survey so we asked for an addendum for the same type of issues; and the fourth audit was the Real Estate Surety Fund. I looked at those; they seemed relatively short time frame. We put out a request for a proposal. We sent it around to three of the accounting firms. The reason we used accounting firms is I was looking for an audit to be conducted in the course of government audit standards. Basically I think this is the first time we have done it. We are going to have an evaluation of the results of those audits so we can evaluate what worked well, what didn't and improve it for the next time. In a larger scope audit we will not necessarily contract everything out. I will probably have our audit staff go in and do some of the planning, develop the work that needs to be done and contract for that. Senator Pearce - Do you know if any of those have been subcontracted? Are they all linked to audit firms? Pat Davidson - Yes. Except for the Board of Marine Pilots; we have contracted with somebody with experience in that area. Senator Pearce - I attended a Marine Pilot Board teleconference meeting last week. Walt Parker was at the meeting. Walt is auditing a Board that is not regulating state employees, but involves a state regulated function. At the same time he is actively engaged in an oversight role he has taken on of the industry and a lot of things that directly effect how pilots do their job. I was surprised that he was conducting this audit while having a relationship that could conflict with the state's role in requiring pilots to do or be the best pilots. A lot of money is involved in the industry. I think he has two hats on. What did you go through to decide he was the proper person for the job? Pat Davidson - In that situation what we were doing was hiring an expert in the area. We laid out the things we wanted him to look at; we set the scope. What we recognize is that because he is not an auditor we are going to have to do follow up work on what he has done and make sure there is support for everything he is saying. We'll have to do a little more work with that contract than with some of the other ones. But we felt he had a better handle on the issues with marine pilots than most anybody else. Senator Torgerson - Did he disclose his potential conflict of interest? Merle Jensen - I did ask Walt if he had any obvious or known conflict of interests. He said he didn't think he did. I was unaware of this. We are going to be monitoring him. We actually used him as an unpaid resource in 1992. I thought he did a good job and we thought some of his information was excellent. Senator Halford - One of the questions is to what degree did he inform you of his conflict. He had a serious obligation to inform you of what his conflict was. If he didn't he shouldn't be there. Senator Pearce - He is actually chairman of some group that makes pronouncements on the whole industry. He has a lot of information that is good. Senator Halford - He's been around for a long time. He is a knowledgeable person but sometime knowledgeable people get disqualified for conflict of interest. Senator Torgerson - Do you have people sign something that says they do not have a conflict so that in a case similar to this you have a recourse? If not, I think you should consider that. Pat Davidson - I'll have to go back and check that contract. Senator Pearce - I know he has made the pilots nervous. Pat Davidson - I'll look into it. Senator Torgerson - Does the Chairman approve your contracts or is that under your discretion? Pat Davidson - The procurement code for the state now allows me to sign contracts under $25,000. For the most part, these are ranging anywhere between $5,000 and $8,000. OTHER BUSINESS - SALARY AND WAGE SURVEY Representative Therriault - Where do we stand on the salary study? Tom Williams - KPMG expects to have a draft report by the end of this month. They are coming to Juneau on August 7 to review that draft report with the Administration and a representative of the Committee. They hope to be able to provide a final report in the weeks thereafter. ADJOURNMENT Chairman Phillips adjourned the meeting at approximately 10:40 a.m. (End, Tape: LB&A-982207 Tape 1 Side 2) LB&A 07/22/98