HOUSE SPECIAL COMMITTEE ON INTERNATIONAL TRADE AND TOURISM March 7, 1996 3:10 p.m. MEMBERS PRESENT Representative Beverly Masek, Chairman Representative Alan Austerman, Vice Chairman Representative Jeannette James Representative Brian Porter MEMBERS ABSENT Representative Pete Kott Representative Irene Nicholia Representative Caren Robinson COMMITTEE CALENDAR LEGISLATIVE AUDIT REPORT ON AK TOURISM MARKETING COUNCIL BY RANDY WELKER PREVIOUS ACTION No previous action to record. WITNESS REGISTER RANDY WELKER, Legislative Auditor Legislative Audit Division Legislative Affairs Agency P.O. Box 113300 Juneau, Alaska 99811-3300 Telephone: (907) 465-3830 POSITION STATEMENT: Reviewed Audit Report on Alaska Tourism Marketing Council DANE LARSEN, Legislative Auditor Legislative Audit Division Legislative Affairs Agency 3305 Arctic Boulevard, Suite 101 Anchorage, Alaska 99501 Telephone: (907) 561-1445 POSITION STATEMENT: Reviewed Audit Report on Alaska Tourism Marketing Council ACTION NARRATIVE TAPE 96-01, SIDE A Number 0005 The House Special Committee on International Trade & Tourism was called to order by Chair Beverly Masek at 3:10 p.m. Members present at the call to order were Representatives Masek and Porter. Members absent were Representatives Austerman, James, Kott, Nicholia, and Robinson. Chair Masek stated other members would arrive later, as they were attending a Community and Regional Affairs Committee meeting. Number 0024 CHAIR BEVERLY MASEK announced the committee would hear a presentation by Mr. Randy Welker, Legislative Audit Agency, concerning the Alaska Tourism Marketing Council (ATMC). She mentioned the amount of time the committee had spent examining the state's approach to tourism marketing. Last year, the committee heard testimony from the ATMC, the Alaska Visitor's Association (AVA), and the Department of Commerce and Economic Development (DCED). The committee also heard testimony from large and small businesses throughout the state and from representatives of the advertising industry on how to use an alternative media approach in marketing Alaska. Chair Masek emphasized the most common complaint heard by the committee was that smaller businesses feel they are being left out of the marketing picture. CHAIR MASEK stated the committee needs to find ways to reach out to all business owners throughout the state who deal in tourism. She said the committee needs to examine Mr. Welker's report with an eye to see what can be done to shape up the tourism industry within the state. Chair Masek called Mr. Welker to the table. Number 0071 MR. RANDY WELKER, Legislative Auditor, Legislative Audit Division, Legislative Affairs Agency, explained the Legislative Audit Report on the Alaska Tourism Marketing Council, currently before the committee, was a sunset report. The report is required by law to be performed by the Legislative Audit Division on all boards and commissions which are subject to the sunset laws of the state of Alaska. These are boards and commissions whose existence terminates automatically on a certain date, unless extended by the legislature. REPRESENTATIVE JEANNETTE JAMES arrived, 3:13 p.m. Number 0143 MR. WELKER explained that this is the second sunset audit performed on the ATMC, and that both reports have recommended continuing the existence of the ATMC. The current report recommends extension of the ATMC until June 30, 2001. REPRESENTATIVE ALAN AUSTERMAN arrived at 3:14 p.m.. MR. WELKER explained the sunset statute mandates a variety of criteria for reviewing the status of sunset agencies. The scope of the review is broad, allowing for flexibility in the audit process. He stated the Legislative Audit Division has concluded that the ATMC is operating in the public's best interest. However, the audit report makes a series of recommendations regarding statutory and compliance matters which need to be addressed. Number 0258 MR. WELKER stated the Report's first recommendation is that the Department of Commerce and Economic Development (DCED) should ensure that the joint relationship between the DCED and AVA is in compliance with Alaska's statutes and constitution. He explained that the Division of Legal Services' Counsel found several provisions in the joint agreement between DCED and AVA which are in violation of the Alaska Constitution and the Alaska Statutes. For instance, the current agreement between the AVA and ATMC allows the AVA to generate revenues through the sale of mailing labels and promotional space in its mailer. Statute provides that the AVA may deduct the expense of doing so, and that the balance is to be remitted to the state. The audit report questions this procedure, because those funds should be subject to the Executive Budget Act. MR. WELKER provided several examples of similar situations, such as the Department of Fish and Game license sales, where the commissions, paid to agents selling licenses, are deducted before the revenues are remitted to the state treasury. He explained that, particularly in view of the current budget situation, it is important that the legislature be aware of all such financial questions. For example, the Department of Motor Vehicles is currently discussing the possibility of allowing the public to pay licensing fees with credit cards. While this may sound like a convenience to the public, there is a potential financial loss to the state because of the bank fees that must be paid. The audit division believes these types of items should be contained in the state budget, so that the legislature and the public will be aware of the cost. From this perspective, the division questions the practice of allowing the AVA to deduct expenses before funds are transferred to the state treasury. MR. WELKER said that Sub-recommendation B of the report states the DCED commissioner should ensure that all funds collected by the AVA under the joint agreement are deposited monthly with the state. Sub-recommendation C states the joint agreement between DCED and AVA should be subject to the provisions of the state procurement code. MR. WELKER explained the report's second major recommendation is that the ATMC continue to identify and propose new means of funding its operating budget. Number 0263 REPRESENTATIVE BRIAN PORTER asked if the types of recommendations made in this report were developing into a universal fix. MR. WELKER replied that such recommendations would be targeted at specific agencies and programs, as they were identified in the course of financial audits. Number 0281 REPRESENTATIVE JEANNETTE JAMES asked if an appropriation for the cost of collecting fees, such as the Department of Fish and Game licenses, could be made by the legislature. MR. WELKER reiterated that, for accounting purposes, such fees would be considered revenue, but the cost could be appropriated by the legislature. Number 0293 REPRESENTATIVE JAMES then questioned whether a similar process could be followed with the AVA funds. MR. WELKER responded that an appropriation for the expenses, which are now being removed from the revenue, would address the concern. However, the monies collected above and beyond the expenses would still be a concern. He reiterated that the costs must be identified somewhere within the budget. Number 0311 MR. WELKER continued his report. He again stated that Recommendation Number 2 deals with the funding source of ATMC. Number 0334 MR. WELKER explained that the audit division replied on a legal opinion prepared by Tamara Cook, Division of Legal Services, in making its recommendations. Number 0342 REPRESENTATIVE JAMES mentioned her concern over the dedicated fund issue and stated that she was pleased it was brought to the committee's attention. MR. WELKER responded it was not always a cut and dried matter. Legal considerations differ, depending upon the type of funds involved. REPRESENTATIVE JAMES noted the timeliness of the issue. Number 0378 REPRESENTATIVE PORTER asked about the recommendation that the industry increase its share of expenses. MR. WELKER responded that the AVA was critical of that recommendation. The budget for ATMC was reduced by $2.5 million, so the industry's contribution is actually smaller. He pointed out there is nothing to prohibit the industry from offering additional funds. When the budget was reduced the industry did not respond to help support the budget and he reiterated the Audit Division's recommendation that the level of support for ATMC be increased. There needs to be discussion on the fairest way to do this. Number 0413 REPRESENTATIVE PORTER asked if figures were available from other states, to show the balance between private sector and government funding. MR. WELKER responded that Dane Larson, Anchorage Audit Manager, Legislative Budget and Audit Division, might have that information. Number 0418 MR. DANE LARSON, Anchorage Audit Manager, Legislative Budget and Audit Division, stated there was a study recapping that information, but it was difficult to compare, since different accounting systems are used. Some states used 100 percent dedicated funds, but other revenue sources were included. Number 0435 REPRESENTATIVE JAMES stated the Long Range Financial Planning Commission suggested taxing the tourism industry. She wondered if other states were doing this, whether through income or sales tax. She asked if a tax on the tourism industry met the criteria for increased contributions. MR. WELKER responded that if such a tax were to be acceptable to the industry, the tax dollars would need to go directly to tourism. He felt that direct contributions would be preferable to forcing a tax. REPRESENTATIVE JAMES said the tourism industry has the ability to put together such a voluntary system, but has not done so. She stated if the industry wants to continue receiving general funds, they should be willing to help in some way. MR. WELKER stated that is why the report's recommendation is directed to the ATMC, rather than to the legislature. It would be best for the industry to develop a voluntary plan, rather than being forced by the legislature. REPRESENTATIVE JAMES concurred. Number 0477 CHAIR MASEK asked if the AVA and the DCED had responded to the audit. MR. WELKER said the Department concurred with the report's recommendations regarding increased industry support. Furthermore, AVA's response was protective of the status quo. CHAIR MASEK wanted to know if the legislature had shown interest in this topic in the past. MR. WELKER replied that the audits of 1993 and 1992 had raised the same issues. Two years ago, the ATMC budget was discussed, and the industry's contribution was increased to 15 percent. Number 0513 CHAIR MASEK asked if the Attorney General had issued any opinion on the report. MR. WELKER responded that he was not aware of any opinion. CHAIR MASEK asked if the relationship between the ATMC and the state made it easier to achieve the oversight needed. MR. WELKER responded that the current structure reduces legislative oversight. However, the agreement between the ATMC and the AVA provides for audit of AVA's affairs, and gives the DCED access to AVA's financial records. The biggest piece missing is legislative oversight. Number 0541 CHAIR MASEK asked how AVA expenses are monitored. MR. WELKER replied that the agreement between the AVA and the ATMC provides for an annual financial audit, conducted by an independent Certified Public Accountant (CPA) firm. The audit does not consider programmatic aspects. CHAIR MASEK asked if the audit division had looked into AVA expenses. MR. WELKER responded that the division only looks at summary information provided to support calculations. The detailed records are not examined. Unless a nonprofit organization receives money from the state on a pass-through grant, the division normally does not look at such detail. Number 0561 REPRESENTATIVE JAMES asked if the audit detail was sufficient to identify total income, less AVA expenses, so that an amount could be appropriated in the budget. MR. WELKER replied that the items would be identifiable. CHAIR MASEK asked for an overall view of how the ATMC and the AVA work together. Tape 96-01, Side B Number 0573 MR. WELKER responded that funds for the operation of ATMC are appropriated by the legislature. The relationship between ATMC and AVA is governed by an agreement that sets out their mutual responsibilities. He stated that, in the Audit Division's opinion, both the tourism planner and the mailing list are state assets which are being administered by AVA, which is why revenues generated from them are considered state revenues. The expenses of producing the planner are deducted from the generated revenues. The revenue then becomes the basis for AVA's contribution to the ATMC. This process is statutorily mandated. The ATMC is broad based in its representation of the visitor industry, and has the responsibility to ensure the agreement between AVA and ATMC is properly administered. Recent improvements have been made in the agreement, to ensure the process works as intended. Number 0980 CHAIR MASEK asked how contracts are handled. Who oversees the contracts, the ATMC or the AVA? MR. LARSEN replied that the bulk of the contracts are under the ATMC. MR. WELKER added that the contracts are subject to state procurement codes. Number 0968 REPRESENTATIVE JAMES asked how the recent changes in the Audit Division of Tourism affected the ATMC. MR. WELKER responded that there is a close working relationship between the Division of Tourism and the ATMC. The Division director is a member of the ATMC. There is no duplication of responsibilities. Number 0957 REPRESENTATIVE ALAN AUSTERMAN stated that the basic distinction is ATMC handles the domestic market, while the Division of Tourism works with Canada and other foreign countries. Also, ATMC handles state funds, while AVA does not. CHAIR MASEK read from the report, on page 10, as follows: "B. The commissioner should ensure that all funds collected by AVA under the joint agreement are deposited monthly with the state." She asked if this money would go into the general fund, and if the Commissioner referred to was the DCED commissioner. MR. WELKER replied that it was the DCED commissioner. He reiterated it is the Audit Division's position that state law requires all revenue collected, less expenses, is state revenue, and belongs in the general fund. Number 0938 CHAIR MASEK asked if the same recommendation regarding revenue was made in the 1992 audit, or the 1993 audit? MR. WELKER responded that the issue was first raised in the 1992 audit report. Actually, the first audit issued in January, 1992, was a special audit request from the legislature, which focused on cost of the ATMC television commercials which aired nationally. The following year, the first sunset audit was performed. Through the sunset process, ATMC has been extended through December 30, 1996. Number 0880 REPRESENTATIVE PORTER asked if AVA was in violation of any statute in their handling of funds. MR. WELKER stated that they are in compliance with the general financial statutes of state government so long as their receipts are deposited in the general fund on a monthly basis. He reiterated it is the Audit Division's position that funds being retained by the ATMC, in accordance with the terms of their agreement with AVA, should also fall under that general financial statute in Title 37. MR. PORTER then asked what is the relationship between the ATMC and the Division of Tourism. MR. WELKER responded that the relationship is only indirect. They have separate functions. He stated it is AVA's position that they are not a state agency, and that, therefore, statutes concerning revenue do not apply. The Audit Division believes that AVA is an extension of the ATMC, and operates under authority of the council, which means the monies that AVA collects are state revenue. MR. PORTER stated perhaps the definition of "agency" needs to be clarified through statute. Number 0862 REPRESENTATIVE JAMES brought up the subject of television advertising that was investigated in the original audit. She stated Alaska should be advertised not just as a pristine wilderness, because this image is detrimental to development of industries such as mining, fishing, oil, and construction. She reiterated for the record that she would like to see a more balanced image of Alaska in television advertising. CHAIR MASEK stated she had reviewed the response of AVA and DCED regarding the state procurement code. She read from the department's response, as follows: "The Department continues to assert that the joint agreement between the Department and the AVA is not subject to the state procurement code. This is not a public procurement. It is a joint agreement authorized in statute between the state and a private, nonprofit association." MR. WELKER reiterated that the Audit Division disagrees with this position. The Audit Division asserts the procurement code is broader in scope, covering all types of state agreements, regardless of what they may be called. He stated AVA is trying to maintain the status quo, but the division's position is supported by legal opinion. CHAIR MASEK asked if the present system would help to keep the costs down for smaller businesses that wish to participate in tourism marketing policy. MR. WELKER replied that was a broad policy matter, which the audit division had not addressed. Number 788 REPRESENTATIVE AUSTERMAN suggested this question was one that should be asked of the ATMC itself. REPRESENTATIVE JAMES added it is critical for the industry to recognize the value of small businesses. CHAIR MASEK stated that many of these questions were raised in previous hearings. It is her understanding that small businesses can not afford to buy advertising in the Vacation Planner, which means the large corporations wind up subsidizing the tourism marketing. Number 0757 CHAIR MASEK asked if AVA had to comply with the procurement code, would they be found in violation? MR. WELKER responded that the agreement between ATMC and AVA should be made subject to the procurement code. He stated the audit division has not investigated the internal procedures of AVA, as that is not subject to their review. He reiterated the agreement should be subject to the procurement code. CHAIR MASEK stated she would call another meeting to consider options regarding the findings of the report. She said the committee should consider adopting recommendations to put forth to the House, Senate, and Governor's office. Number 0730 REPRESENTATIVE JAMES asked if a statute change would be required, or only a change in procedure. MR. WELKER replied it would be a combination of statute and procedure. REPRESENTATIVE AUSTERMAN asked if ATMC would respond to the committee. CHAIR MASEK stated she was not sure. She said she would welcome any response from the ATMC. Number 0710 ADJOURNMENT There being no further business to come before the House Special Committee on International Trade and Tourism, Chair Masek adjourned the meeting at 4:20 p.m.