JOINT COMMITTEE ON LEGISLATIVE BUDGET AND AUDIT April 26, 2000 12:15 p.m. MEMBERS PRESENT Representative Gail Phillips, Chair Representative Con Bunde Representative Eric Croft Representative Gary Davis Senator Randy Phillips, Vice Chair Senator Al Adams Senator Rick Halford Senator Gary Wilken MEMBERS ABSENT Representative Gene Therriault Representative Eldon Mulder (Alternate) Senator Sean Parnell Senator Drue Pearce (Alternate) COMMITTEE CALENDAR APPROVAL OF MINUTES MINIMUM EXPENDITURE FOR INSTRUCTION ANNUAL REPORT EXECUTIVE SESSION AUDIT REPORTS OTHER COMMITTEE BUSINESS WITNESS REGISTER RICHARD CROSS, Commissioner Department of Education & Early Development 801 West Tenth Street, Suite 200 Juneau, Alaska 99801-1894 POSITION STATEMENT: Introduced and explained the Minimum Expenditure for Instruction Annual Report. EDDY JEANS, Manager School Finance and Facilities Section Department of Education and Early Development 801 West Tenth Street, Suite 200 Juneau, Alaska 99801-1894 POSITION STATEMENT: Answered questions on the Minimum Expenditure for Instruction Annual Report. ACTION NARRATIVE TAPE 00-5, SIDE A Number 0001 CHAIR GAIL PHILLIPS called the Joint Committee on Legislative Budget and Audit meeting to order at 12:15 p.m. Members present at the call to order were Representatives Phillips, Bunde, Croft and Davis, and Senators Phillips and Wilken. Senators Adams and Halford arrived as the meeting was in progress. APPROVAL OF MINUTES CHAIR PHILLIPS indicated that the first order of business was the approval of the minutes from the Legislative Budget and Audit Committee meeting held on March 2, 2000. SENATOR PHILLIPS made a motion to approve the minutes from the March 2, 2000, meeting. CHAIR PHILLIPS asked whether there were any objections. There being none, the minutes from the March 2, 2000, meeting were approved as read. MINIMUM EXPENDITURE FOR INSTRUCTION ANNUAL REPORT CHAIR PHILLIPS announced that the next order of business was the Minimum Expenditure For Instruction Annual Report presented by Commissioner Richard Cross, Karen Rehfeld and Eddy Jeans from the Department of Education & Early Development. RICHARD CROSS, Commissioner, Department of Education & Early Development, stated that they appreciate the opportunity to discuss the report, which is required under AS 14.17.520. The report comes out of a requirement of legislation to ensure that school districts are committing a percentage of their expenditures toward instruction and not for other purposes. The law that was passed had an escalated requirement: the first year, it was 60 percent; the second year, it was 65 percent; and in the future it will be 70 percent. COMMISSIONER CROSS explained that the department has been in the process, over the last two years, of implementing the requirement; they are strong advocates of the requirement. There was a good deal of cynicism, when the legislation was passed, [because of a perception] that the mechanism was overly simple and would not work, but the department did not share that view. The department is in support of any mechanism that drives money toward instruction and away from other costs in the districts, to seriously get on with the task of getting the test implemented. They used, as a basis for getting started, the McDowell study that was used to develop SB 36, which is now the current law. One of the primary issues in the McDowell study was that there was an inconsistency in data reported from one school district to the next. It was suggested that the department submit a report to, among other things, improve the quality [and] the consistency of the data reported by districts. COMMISSIONER CROSS noted that in the McDowell study the author, David Teal, coined the phrase "friendly audit cop." What he believes was meant by that, especially the "friendly" part, was that the McDowell group noticed a wide inconsistency in data, had a broad experience in working with data, and knew that cooperation was the best way to get clean data. For instance, in an aggressive audit situation the type of resistance that can occur could make it take years to get the data collected. Although they suggested that the department have auditors begin aggressively looking at and comparing data between districts in cleaning it up, they also suggested that it would require the cooperation of districts to make that happen. COMMISSIONER CROSS reported that the first order of business they had to deal with was what expenditures should go into instruction. They worked with the bill sponsor to make the preliminary Board of Education regulation regarding which parts of the current chart of accounts should be considered as parts of the instructional component, knowing that they would be continuously working to clean up the data and eventually would move to a new chart of accounts that would require a higher level of consistency between districts. The current chart of accounts was not put together with these type of tests in mind. In other words, it is a chart that allowed broad latitude in districts and allowed them to make some broad decisions regarding placement of certain expenditures, which is one of the reasons that the McDowell group had so much trouble making comparisons. He explained that they need to move to a new chart of accounts that has the philosophy of consistency behind it; they believe they will have that chart together by the 2002 review cycle. COMMISSIONER CROSS noted that the first year they implemented it, the legislation passed and was effective June 30, and districts were already in the process of submitting their budgets and audits. Therefore, the first year they ran some broad tests that primarily focused on central administrative expenditures. This year they made a broader set of tests. They were concerned when they saw that there had been some significant changes in reporting from the prior year; in other words, with what they saw as no apparent change in the way of doing business, there was a significant [change] in the way that expenditures were reported. On that basis, they rejected 35 school district budgets this year. They sent a letter asking for further information in order to make a judgment as to why those expenditures had occurred. Retrospectively, they admit that it was a pretty aggressive letter, and it created quite a fir storm. He thinks that their intent was a correct one, but perhaps their approach needed to be softened; the final fallout has ended up being very positive. COMMISSIONER CROSS further explained that two audit firms - Mikunda Cottrell & Company and Altman Rogers & Company - [audit] most of the school districts in the state; they had advised the districts to be pretty tough in terms of responding to the letter. He said that he met with the principal partners of both firms and explained that the purpose was to be able to give the legislature and the people of Alaska a good way of comparing how one district was spending relative to the others. Although the approach was a little aggressive - and in the future they would do it differently - their purpose was serious, and they do want consistent data. The firms agreed that it was important to have consistent data, and they agreed that they could help them do that. In other words, the approach recommended by the McDowell group, a cooperative approach, would be the most successful. He indicated that they have met with the school business officials since that meeting and explained why they did what they did, and asked for their help in the future; the earnest response was an offer to help in the future. COMMISSIONER CROSS noted that the other issue is whether the principal of a school should be considered to be a part of the instructional component. He pointed out that when the bill and the concept were being considered, nearly every district in the state told them that they should be testifying against the concept. He noted that they refused to testify against it. To testify that they are not in support of something that is trying to drive dollars into instruction is not something they could, in good faith, do. COMMISSIONER CROSS said he believes that the districts have come a long way over the last two years. They are trying to improve the quality of their data and to comply with the intent of the legislation. They came so far as to begin to talk about particular areas that they thought should be included in the instruction. In the initial regulation, "building supervision" was not included as the instructional component. The school districts, unanimously, advocated for and told them that all the research in the country points out that "instructional supervision" is one of the most important components of an effective school. COMMISSIONER CROSS explained that the daily supervision of teachers has to be, and is, an important part of the instructional component. One inconsistency they saw in the 35 budgets they rejected was that school districts were shifting their building supervision from a principal, who could supervise teachers, to a head teacher, who could not; therefore, the daily supervision of teachers was going away, particularly in smaller schools. They saw it as a bad trend, one they wanted to stop. They did not want districts to continue to replace B-certified principals with people in the same bargaining unit as the head teachers who were not required to have B-certification. COMMISSIONER CROSS reported that he had asked the Board of Education to make a change; in doing so, they made a sweeping change in that they included non-instructional components because of the way the current chart of accounts was set up. It is their intent to break out the chart of accounts so that only those people involved in the direct supervision of teachers are included in the instructional component. COMMISSIONER CROSS further pointed out that the school business officials, in the idea of the "friendly audit cop," were the first people to come forward and help them do it. It is not the intent of the Board of Education or himself to argue or allow to continue an idea that non-instructional costs of schools should be included in the instructional component. It is important that the person who is directly supervising teachers be a part of the instructional component. It is for that reason that they decided to move forward. Number 1122 CHAIR PHILLIPS indicated that one of the concerns is that more than a quarter of the schools are still requesting waivers. She pointed out that the chart of accounts is going to be a big factor, and she expressed concern that it will take until 2002. She asked if they could get it done in time for 2001. COMMISSIONER CROSS responded that they have approached it from the idea of making steady incremental progress, and not jumping too soon and ending up having to retreat. He thinks they can make incremental progress and certainly clean up the issue of where instructional expenditures are reported, insofar as the direct supervision of teachers is concerned. What they are trying to avoid is having a rolling chart of accounts or continually updating them. CHAIR PHILLIPS wondered whether, if they are fortunate enough to get a school bond package out this year, the new schools will be able to bring their scores up considerably based on maintenance and care of the facility. COMMISSIONER CROSS indicated that it should be true, and he has told the sponsors of the legislation that it may even be a better tool than they intended. He believes it really is making people focus on where they are spending their money. As they move along, people are going to revisit everything outside of the instructional expenditure and look for ways to decrease it. SENATOR WILKEN requested clarification that in the next school year they will be expecting to have 53 school districts on the uniform chart of accounts. EDDY JEANS, Manager, School Finance and Facilities Section, Department of Education and Early Development, clarified that the school districts are using the existing chart of accounts; as Commissioner Cross pointed out, the reason for the timing is they cannot expect school districts to change their accounting systems for July 1 at this time, but they do anticipate to have the revised chart of accounts in place for the 2002 budget cycle. SENATOR WILKEN referred to the spreadsheet on page 10 of the annual report. He said that if they take Alaska Gateway as an example, their goal was 60 percent and their budget was 62 percent. He wondered if that is the audit or the Certified Public Accountant (CPA) audit. MR. JEANS replied that it is the CPA audit. EXECUTIVE SESSION SENATOR PHILLIPS made a motion, in accordance with Title 44, to move to executive session for the purpose of discussing audit reports, which are held confidential by law. There being no objection, the committee went into executive session at 1:00 p.m. CHAIR PHILLIPS requested that the following people attend the executive session: Pat Davidson (Legislative Auditor) and staff; David Teal (Legislative Fiscal Analyst) and staff; and Pat Hartley (Legislative Budget and Audit Committee Aide). SENATOR PHILLIPS made a motion to move back into public session. There being no objection, the committee was back in public session at 1:32 p.m. AUDIT REPORTS SENATOR PHILLIPS made a motion to release the following two special audits to the public: DOR/Alaska Housing Finance Corporation, Financial Analysis (04-4608-00) and DHSS/DFYS - Follow-up Review of Select Aspects of Child Protection Services Operations (06-4604-00). There being no objection, the two special audits were released to the public. OTHER COMMITTEE BUSINESS CHAIR PHILLIPS announced that she had requested an audit request for the Alaska Department of Fish & Game (ADF&G) mariculture development. SENATOR PHILLIPS moved the audit request for the ADF&G mariculture development and asked unanimous consent. REPRESENTATIVE CROFT objected. He explained that they often phrase their requests, "Check into how much cooperation there has been. Check into the reasons for the delay." This audit is phrased, "There has been little cooperation, been met with systematic delays." He noted that they are stating the conclusions in the audits. CHAIR PHILLIPS replied yes, specifically, after a three-year period of time. REPRESENTATIVE CROFT said he thinks they do a better job of asking for audit conclusions when they do not try to predetermine the results. He pointed out that the areas Representative Phillips is asking for are perfectly appropriate, but he had objected to the way that she was asking. He removed his objection to the audit. SENATOR HALFORD indicated he somewhat concurred with Representative Croft. He pointed out that it is an area where people want to privatize a public resource, and it should be done carefully. CHAIR PHILLIPS asked if there were any more objections. There being none, the audit request was approved. ADJOURNMENT CHAIR PHILLIPS adjourned the Joint Legislative Budget and Audit Committee meeting at 1:35 p.m.