BUDGET SECTION

The Legislative Council's Budget Section is referred to in various sections of the North Dakota Century Code (NDCC) and the Session Laws of North Dakota. Although there are statutory references to the Budget Section, it is not created by statute. The Budget Section is an interim committee appointed by the Legislative Council. By tradition, the membership of the Budget Section consists of the members of the Senate and House Appropriations Committees, the majority and minority leaders and their assistants, and the Speaker of the House.

Budget Section members were Representatives Ken Svedjan (Chairman), Ole Aarsvold, Larry Bellew, Rick Berg, Merle Boucher, Thomas Brusegaard, Ron Carlisle, Al Carlson, Jeff Delzer, Eliot Glassheim, Pam Gulleson, Keith Kempenich, James Kerzman, Kim Koppelman, Joe Kroeber, Bob Martinson, Ralph Metcalf, David Monson, Earl Rennerfeldt, Bob Skarphol, Blair Thoreson, Mike Timm, Francis J. Wald, John Warner, and Amy Warnke and Senators John M. Andrist, Bill L. Bowman, Randel Christmann, Michael A. Every, Tony S. Grindberg, Ray Holmberg, Ralph L. Kilzer, Aaron Krauter, Ed Kringstad, Elroy N. Lindaas, Tim Mathern, David P. O'Connell, Larry Robinson, Randy A. Schobinger, Bob Stenehjem, Harvey Tallackson, and Russell T. Thane. Representative Janet Wentz was also a member of the committee until her death on September 15, 2003.

The Budget Section submitted this report to the Legislative Council at the biennial meeting of the Council in November 2004. The Council accepted the report for submission to the 59th Legislative Assembly.

The following duties, assigned to the Budget Section by statute, were acted on during the 2003-05 biennium:

1. Status of the State Board of Agricultural Research and Education (Section 4-05.1-19(10)) - This section requires, within the duties of the State Board of Agricultural Research and Education, that a status report is to be presented to the Budget Section.
2. Statement from ethanol plants that received production incentives (Section 4-14.1-07) - This section requires any North Dakota ethanol plant receiving production incentives from the state to file with the Budget Section, within 90 days after the conclusion of the plant's fiscal year, a statement by a certified public accountant indicating whether the plant produced a profit during the preceding fiscal year, after deducting incentive payments received from the state.
3. Higher education campus improvements and building construction (Section 15-10-12.1) - This section requires the approval of the Budget Section or the Legislative Assembly for the construction of any building financed by donations, gifts, grants, and bequests on land under the control of the board. Campus improvements and building maintenance of more than $385,000 also require the approval of the Budget Section or Legislative Assembly. Budget Section approval can only be provided when the Legislative Assembly is not in session and the six months prior to a regular legislative session. The Budget Section approval regarding the construction of buildings and campus improvements must include a specific dollar limit for each building, campus improvement, or maintenance project. If a request is to be considered by the Budget Section, the Legislative Council must notify each member of the Legislative Assembly and allow any member to present testimony to the Budget Section regarding the request. Campus improvements and building maintenance of $385,000 or less and the sale of real property received by gift or bequest may be authorized by the State Board of Higher Education.
4. Allocation of funds from appropriations for undesignated centers of excellence (Section 15-10-41) - This section requires the State Board of Higher Education to allocate funds from appropriations for undesignated centers of excellence relating to economic development based on criteria established and to report on such allocations, in partnership with the North Dakota Economic Development Foundation, to the Budget Section.
5. Transfers to the state tuition fund (Section 15.1-02-14) - This section requires the Superintendent of Public Instruction to report annually to the Budget Section regarding any transfer to the state tuition fund of federal or other money received by the Superintendent to pay programmatic administrative expenses for which the Superintendent received a state general fund appropriation.
6. State building construction projects (Section 48-02-20) - This section provides that a state agency or institution may not significantly change or expand a building construction project approved by the Legislative Assembly unless the change, expansion, or additional expenditure is approved by the Legislative Assembly, or the Budget Section, if the Legislative Assembly is not in session.
7. Job insurance trust fund (Section 52-02-17) - This section requires that Job Service North Dakota report to the Legislative Council before March 1 of each year the actual job insurance trust fund balance and the targeted modified average high-cost multiplier, as of December 31 of the previous year, and a projected trust fund balance for the next three years. The Legislative Council assigned this responsibility to the Budget Section.
8. Irregularities in the fiscal practices of the state (Section 54-14-03.1) - This section requires the Office of the Budget to submit a written report to the Budget Section documenting:
   1. Any irregularities in the fiscal practices of the state.
   2. Areas in which more uniform and improved fiscal procedures are desirable.
   3. Any expenditures or governmental activities contrary to law or legislative intent.
   4. The use of state funds to provide bonuses, cash incentive awards, or temporary salary adjustments for state employees.
9. Transfers exceeding $50,000 (Section 54-16-04(2)) - This section provides that, subject to Budget Section approval, the Emergency Commission may authorize a transfer of more than $50,000 from one fund or line item to another. Budget Section approval is not required if the transfer is necessary to comply with a court order, to avoid an imminent threat to the safety of people or property due to a natural disaster or war crisis, or to avoid an imminent financial loss to the state.
10. Acceptance and expenditure of more than $50,000 of federal funds that were not appropriated (Section 54-16-04.1).
    1. Acceptance of federal funds - This section provides that Budget Section approval is required for any Emergency Commission action authorizing a state officer to accept more than $50,000 of federal funds that were not appropriated and the Legislative Assembly has not indicated an intent to reject the money. Budget Section approval is not required if the acceptance is necessary to avoid an imminent threat to the safety of people or property due to a natural disaster or war crisis or to avoid an imminent financial loss to the state.
    2. Expenditure of federal funds - This section provides that Budget Section approval is required for any Emergency Commission action authorizing a state officer to spend more than $50,000 of federal funds that were not appropriated and the Legislative Assembly has not indicated an intent to reject the money.
11. Acceptance and expenditure of more than $50,000 of other funds which were not appropriated (Section 54-16-04.2).
    1. Acceptance of other funds - This section provides that Budget Section approval is required for any Emergency Commission action authorizing a state officer to accept more than $50,000 from gifts, grants, donations, or other sources, which were not appropriated and the Legislative Assembly has not indicated an intent to reject money or programs. Budget Section approval is not required if the acceptance is necessary to avoid an imminent threat to the safety of people or property due to a natural disaster or war crisis or to avoid an imminent financial loss to the state.
    2. Expenditure of other funds - This section provides that Budget Section approval is required for any Emergency Commission action authorizing a state officer to spend more than $50,000 from gifts, grants, donations, or other sources, which were not appropriated and the Legislative Assembly has not indicated an intent to reject the money or programs.
12. Transfers of spending authority from the state contingencies appropriation exceeding $50,000 (Section 54-16-09) - This section provides that, subject to Budget Section approval, the Emergency Commission may authorize a transfer of more than $50,000 from the state contingencies line item to the appropriate line item in the appropriation of the state officer who requested the transfer. Budget Section approval is not required if the transfer is necessary to avoid an imminent threat to the safety of people or property due to a natural disaster or war crisis or to avoid an imminent financial loss to the state.
13. Tobacco settlement funds (Section 54-44-04(23)) - This section provides that the director of the Office of Management and Budget shall report to the Budget Section on the status of tobacco settlement funds and related information.
14. Form of budget data (Section 54-44.1-07) - This section requires the director of the budget to prepare budget data in the form prescribed by the Legislative Council and to present it to the Legislative Assembly at a time and place set by the Legislative Council, except for drafts of proposed general and special appropriations acts embodying the budget data and recommendations of the Governor for appropriations for the next biennium and drafts of such revenues and other acts recommended by the Governor for putting into effect the proposed financial plan, which must be submitted to the Legislative Council within seven days after the day of adjournment of the organizational session. The Legislative Council assigned this responsibility to the Budget Section.
15. Report from the Information Technology Department (Section 54-59-19) - This section requires the Information Technology Department to prepare and present an annual report to the Information Technology Committee and to present a summary of the report to the Budget Section.
16. Status of the risk management workers' compensation program (Section 65-04-03.1(5)) - This section requires Workforce Safety and Insurance and the Risk Management Division of the Office of Management and Budget to periodically report to the Budget Section on the success of the risk management workers' compensation program.
17. Sources of funds received for construction projects of entities under the State Board of Higher Education (Section 15-10-12.3) - This section requires each institution under the State Board of Higher Education undertaking a capital construction project, that was approved by the Legislative Assembly and for which local funds are to be used, to present a biennial report to the Budget Section detailing the source of all funds used in the project.
18. Game and Fish Department land acquisitions (Section 20.1-02-05.1) - This section provides that Budget Section approval is required for Game and Fish Department land acquisitions of more than 10 acres or $10,000.
19. Annual audits of renaissance fund organizations (Section 40-63-07(9)) - This section requires the Department of Commerce Division of Community Services to provide annual reports to the Budget Section on the results of audits of renaissance fund organizations.
20. Workforce Safety and Insurance building maintenance account (Section 65-02-05.1) - This section requires that if a new Workforce Safety and Insurance facility is built and rental space is included in the facility, Workforce Safety and Insurance is to deposit the building rental proceeds in a building maintenance account and report to the Budget Section on a biennial basis on the revenues deposited into and expenditures from the account.
21. Performance assurance fund (Section 49-21-31) - This section requires the Public Service Commission to report annually to the Budget Section with respect to the payments received under the performance assurance plan and the expenditures from the performance assurance fund.
22. Preliminary planning revolving fund (Section 54-27-22) - This section provides that before any funds can be distributed from the preliminary planning revolving fund to a state agency, institution, or department, the Budget Section must approve the request.
23. Money spent to administer an Internet web site that provides career guidance and job opportunity services (Section 54-60-10) - This section requires the Department of Commerce to report annually to the Budget Section regarding money spent to administer an Internet web site that provides career guidance and job opportunity services.
24. Report on the internship program (2003 House Bill No. 1003, Section 31) - This section requires the State Board of Higher Education to report to the Budget Section at the committee's first meeting after July 1, 2004, on the internship program implemented to attract students to high-growth occupations in the state.
25. Status of outsourcing employee positions (2003 House Bill No. 1004, Section 13) - This section requires the State Department of Health to report to the Budget Section on the status of outsourcing employee positions whenever reasonable.
26. Status of the Veterans Home Governing Board's progress in developing and implementing the Veterans Home strategic plan (2003 House Bill No. 1007, Section 4) - This section requires a representative of the Veterans Home Governing Board to periodically report to the Budget Section on the status of the board's progress in developing and implementing a strategic plan for the Veterans Home during the 2003-04 interim.
27. Veterans Home line item transfers of up to $150,000 (2003 House Bill No. 1007, Section 6) - This section authorizes the Veterans Home to transfer up to $150,000 between line items and to report to the Budget Section any transfers during the 2001-03 biennium to implement changes in technology and telecommunications.
28. Recommendations for merger of the Oil and Gas Division and Geological Survey (2003 House Bill No. 1015, Section 14) - This section requires the Industrial Commission to report to the Budget Section before November 1, 2004, regarding recommendations for the merger of the Oil and Gas Division and Geological Survey.
29. Transfers between line items and between subdivisions in excess of $50,000 (2003 Senate Bill No. 2012, Section 7) - This section requires the Department of Human Services to report to the Budget Section after June 30, 2004, on any transfers of appropriation authority between line items within each subdivision and between subdivisions in excess of $50,000.
30. Delivery of consolidated services to agencies and the status of accumulated savings (2003 Senate Bill No. 2015, Section 30 and 2003 House Bill No. 1505, Section 12) - These sections require the Information Technology Department to report to the Budget Section on information relating to the delivery of the consolidated services to agencies and the status of the accumulated savings.
31. Transfers of funds between line items for state agencies to accommodate information technology funding reductions (2003 House Bill No. 1505, Section 8) - This section requires the Office of Management and Budget to report to the Budget Section regularly on the transfers of funds made by the director of the Office of Management and Budget and the State Treasurer between line items for state agencies, departments, and institutions as may be requested to accommodate information technology funding reductions made by the 58th Legislative Assembly (2003).
32. Information technology organizational study and information technology management study (2003 House Bill No. 1505, Section 13)  - This section requires a final report on the information technology organizational study and the information technology management study to be presented to the Budget Section upon completion of the studies.
33. Implementation and procedures of contracting with counties to house female inmates (2003 House Bill No. 1506, Section 5)  - This section requires the Department of Corrections and Rehabilitation and county jails contracting to house state female inmates to report to the fall 2003 and summer 2004 meetings of the Budget Section on the implementation and procedures of contracting with counties to house state female inmates.
34. State employee positions eliminated by agencies and reported agency budgetary savings (2003 Senate Bill No. 2423, Section 1) - This section requires the Office of Management and Budget to report periodically to the Budget Section on the employee positions eliminated by agencies and reported agency budgetary savings.
35. State employee salary increases (2003 Senate Bill No. 2423, Section 3) - This section requires the Office of Management and Budget and the judicial branch to report to the Budget Section on salary increases provided for each year of the 2003-05 biennium.

The following duties, assigned to the Budget Section by statute or Legislative Council directive, are scheduled to be addressed by the Budget Section at its December 2004 meeting:

1. Receive report on specified commodities and services exempted from the procurement requirements of NDCC Chapter 54-44.4 (2003 Senate Bill No. 2015, Section 42) - This section requires the director of the Office of Management and Budget to report to the Budget Section in December of even-numbered years on specified commodities and services exempted by written directive of the director from the procurement requirements of Chapter 54-44.4.
2. Review and report on budget data (Legislative Council directive) - Pursuant to Legislative Council directive, the Budget Section is to review and report on the budget data prepared by the director of the budget and presented to the Legislative Assembly during the organizational session.

The following duties, assigned to the Budget Section by statute or Legislative Council directive, did not require action by the Budget Section during the 2003-04 interim:

1. Objection to budget allotments or expenditures (Section 54-44.1-12.1) - This section allows the Budget Section to object to a budget allotment, an expenditure, or the failure to make an allotment or expenditure if such action is contrary to legislative intent.
2. Requests by the Information Technology Department to finance the purchase of software, equipment, or implementation of services (Section 54-59-05(4)) - This section requires the Information Technology Department to receive Budget Section approval before executing any proposed agreement to finance the purchase of software, equipment, or implementation of services in excess of $1 million. The department may finance the purchase of software, equipment, or implementation of services only to the extent the purchase amount does not exceed 7.5 percent of the amount appropriated to the department during that biennium.
3. Extraterritorial workers' compensation insurance (Section 65-08.1-02) - This section authorizes Workforce Safety and Insurance to establish, subject to Budget Section approval, a casualty insurance organization to provide extraterritorial workers' compensation insurance.
4. State Forester reserve account (Section 4-19-01.2)  - This section provides that Budget Section approval is required prior to the State Forester spending money in the State Forester reserve account.
5. Investment in real property by the Board of University and School Lands (Section 15-03-04) - This section provides that Budget Section approval is required prior to the Board of University and School Lands purchasing, as sole owner, commercial or residential real property in North Dakota.
6. Reduction of the game and fish fund balance below $10 million (Section 20.1-02-16.1) - This section provides that the Game and Fish Department can spend money in the game and fish fund within the limits of legislative appropriations, only to the extent the balance of the fund is not reduced below $10 million, unless otherwise authorized by the Budget Section.
7. Provision of contract services by the Developmental Center (Section 25-04-02.2) - This section provides that, subject to Budget Section approval, the Developmental Center at Westwood Park, Grafton, may provide services under contract with a governmental or nongovernmental person.
8. Waiver of exemption of special assessments levied for flood control purposes on state property (Section 40-23-22.1) - This section provides that state property in a city is exempt from special assessments levied for flood control purposes unless the governing body of the city requests waiver of the exemption and the exemption is completely or partially waived by the Budget Section. The exemption does not apply to any privately owned structure, fixture, or improvement located on state-owned land if the structure, fixture, or improvement is used for commercial purposes unless the structure, fixture, or improvement is primarily used for athletic or educational purposes at a state institution of higher education.
9. Termination of food stamp program (Section 50-06-05.1(17)) - This section provides that, subject to Budget Section approval, the Department of Human Services may terminate the food stamp program if the rate of federal financial participation in administrative costs is decreased or if the state or counties become financially responsible for the coupon bonus payments.
10. Termination of energy assistance program (Section 50-06-05.1(19)) - This section provides that, subject to Budget Section approval, the Department of Human Services may terminate the energy assistance program if the rate of federal financial participation in administrative costs is decreased or if the state or counties become financially responsible for the energy assistance program payments.
11. Transfers resulting in program elimination (Section 54-16-04(1))  - This section provides that, subject to Budget Section approval, the Emergency Commission may authorize a transfer which would eliminate or make impossible the accomplishment of a program or objective funded by the Legislative Assembly.
12. New correctional programs which exceed $100,000 of cost during a biennium (Section 54-23.3-09) - This section requires the director of the Department of Corrections and Rehabilitation to report to the Legislative Assembly or, if the Legislative Assembly is not in session, the Budget Section, prior to the implementation of any new program that serves adult or juvenile offenders, including alternatives to conventional incarceration and programs operated on a contract basis if the program is anticipated to cost in excess of $100,000 during the biennium.
13. Cashflow financing (Section 54-27-23) - This section provides that in order to meet the cashflow needs of the state, the Office of Management and Budget may borrow, subject to Emergency Commission approval, from special funds on deposit in the state treasury. However, the proceeds of any such indebtedness cannot be used to offset projected deficits in state finances unless first approved by the Budget Section. Additional cash flow financing, subject to certain limitations, must be approved by the Budget Section.
14. Budget stabilization fund (Section 54-27.2-03) - This section provides that any transfers from the budget stabilization fund must be reported to the Budget Section.
15. Budget reduction resulting from initiative or referendum action (Section 54-44.1-13.1) - This section provides that, subject to Budget Section approval, the director of the budget may reduce state agency budgets by a percentage sufficient to cover estimated revenue reductions caused by initiative or referendum action.
16. Children's Services Coordinating Committee grants (Section 54-56-03) - This section provides that Budget Section approval is required prior to the distribution by the Children's Services Coordinating Committee of any grants not specifically authorized by the Legislative Assembly.
17. Federal block grant hearings (2003 House Concurrent Resolution No. 3001) - This resolution authorizes the Budget Section, through September 30, 2005, to hold any required legislative hearings for federal block grants.
18. State agency unclaimed property (Section 47-30.1-24.1) - This section requires the commissioner of University and School Lands to present a report to the Budget Section identifying every state agency that has not submitted a claim for unclaimed property belonging to that agency within one year of receipt of the certified mail notification.
19. Relinquishment of agency rights to recover property (Section 47-30.1-24.1) - This section provides that each state agency that does not submit a claim for unclaimed property belonging to that agency within one year of receipt of the certified mail notification relinquishes its right to recover the property, upon approval of the Budget Section.
20. Purchases of "put" options (Section 54-44-16) - This section requires the Office of Management and Budget to report any purchases of "put" options to the Budget Section.
21. Approval of expenditures exceeding $130,000 from Department of Commerce operating fund for web site maintenance (Section 54-60-10) - This section provides that any additional amounts over $130,000 that are deposited in the Department of Commerce operating fund during a biennium from subscriptions, commissions, fees, or other revenue from the Internet web site may be spent pursuant to legislative appropriations or with Budget Section approval.
22. Construction of equipment and storage buildings in Towner and Bottineau (2003 House Bill No. 1003, Section 11) - This section authorizes the Forest Service, after receiving approval from the Budget Section, to obtain and use funds received from any source for construction of the equipment and supply storage buildings in Towner and Bottineau.
23. Transfers from the Bank of North Dakota to offset declines in general fund revenue (2003 Senate Bill No. 2015, Section 10) - This section provides that the Budget Section may approve the transfer of up to the lesser of $9 million or the revenue shortfall from the earnings and accumulated and undivided profits of the Bank of North Dakota to the state general fund if, during the 2003-05 biennium, the director of the Office of Management and Budget determines that general fund revenues will not meet the legislative forecast.

OFFICE OF MANAGEMENT AND BUDGET

Status of the State General Fund

At each Budget Section meeting, a representative of the Office of Management and Budget reviewed the status of the state general fund and revenue collections for the biennium. The following is a summary of the status of the state general fund, based on actual revenue collections reported in October 2004, reflecting the August 2004 revised revenue forecast for the remainder of the 2003-05 biennium:

Unobligated general fund balance - July 1, 2003	$14,790,311
Add
General fund collections through August 31, 2004	1,049,007,618
Forecasted general fund revenue for the remainder of the 2003-05 biennium (based on the August 2004 revised revenue forecast)	799,854,223
Jobs and Growth Tax Relief Reconciliation Act of 2003 payments	50,000,000
Jobs and Growth Tax Relief Reconciliation Act of 2003 - Enhanced Medicaid federal medical assistance percentage	6,456,581
Total estimated general fund revenue for the 2003-05 biennium	$1,920,108,733
Less
2003-05 biennium general fund appropriations	1,803,661,161
Estimated general fund balance - June 30, 2005 ($106,194,663 more than the 2003 legislative estimate of $10,252,909)	$116,447,572

The August 2004 revenue forecast estimated total revenue for the 2003-05 biennium to be approximately $1,685,000,000, which was approximately $33.3 million more than the March 2003 forecast. The increase in revenue was due mainly to an increase in sales and use tax collections. Based on the preliminary revenue forecast, the transfers to the permanent oil tax trust fund for the 2003-05 biennium are anticipated to be $16.8 million. The average price per barrel of oil has been above the trigger price for five consecutive months, resulting in an increase in the oil extraction tax rate as of October 1, 2004. The tax rate for approximately 58 percent of monthly oil production will increase from 4 to 6.5 percent. The increased tax rate will remain in effect until the average price per barrel of oil drops below the trigger price for five consecutive months. Pursuant to NDCC Section 57-51.1-01, the trigger price is $35.50 as indexed for inflation, and the Tax Commissioner computes the indexed trigger price by December 31 of each year to be applied for the following calendar year. The adjusted trigger price for 2004 is $35.11.

The revised forecast projects total revenue for the 2005-07 biennium to be approximately $1,754,000,000, which is approximately $102.5 million more than the March 2003 forecast. The oil and gas production tax and the oil extraction tax are not anticipated to reach the $71 million cap for the 2005-07 biennium, resulting in no anticipated transfers to the permanent oil tax trust fund for the 2005-07 biennium.

The Office of Management and Budget reported that preliminary deficiency general fund appropriations requests for the 2003-05 biennium as of October 1, 2004, total approximately $11 million as shown below:

Agency	Potential Deficiency Appropriation
Division of Emergency Management	$6,275,000
Information Technology Department	1,070,000
Department of Corrections and Rehabilitation	1,250,000
Veterans Home	200,000
Deep Creek fire - Preliminary	310,000
University of North Dakota (1997 flood)	371,000
North Dakota State University (2000 flood)	1,500,000
Attorney General - Prosecution witness fees and crime lab costs	110,000
Total	$11,086,000

Fiscal Irregularities

Pursuant to NDCC Section 54-14-03.1, the Budget Section received reports from the Office of Management and Budget on irregularities in the fiscal practices of the state. Fiscal irregularities include the use of state funds to provide bonuses, cash incentive awards, and temporary salary adjustments for state employees. The Office of Management and Budget identified the following fiscal irregularities:

• Department of Labor - Overspent its salary line item appropriation by $705.78 due to an error in the calculation of hospital insurance rates for nine employees.
• State Department of Health - Paid $1,570 to an employee for an increase in workload and $29,492 to another employee for early retirement buyout.
• Department of Commerce - Provides quarterly bonuses to an individual with the manufacturing extension partnership.
• University System - Paid $1,000 to an employee for a temporary workload increase.
• Office of Administrative Hearings - Paid $1,000 each to two employees for workload increases prior to official reclassification.
• Land Department - Paid an employee $598.99 for three years of back holiday pay which had been calculated incorrectly.
• Department of Public Instruction - Provided several employees with additional pay for workload increases related to the 2003 legislative session.

The Budget Section was also informed of a statutory requirement that a state agency cannot spend more than 75 percent of its salary and operating line items in the first 18 months of a biennium. State Radio Communications spent more than 75 percent of its salary line item during the first 18 months of the 2001-03 biennium due to overtime payments made to employees for overtime work that resulted from a large number of vacant positions in the agency. State Radio Communications overspent its salary line item by $49,676 by December 31, 2002, but did not overspend the salary line item in total by the end of the 2001-03 biennium.

Preliminary Planning Revolving Fund

Pursuant to NDCC Section 54-27-22, the Budget Section received reports from the Office of Management and Budget on recommendations for the use of money in the preliminary planning revolving fund. The January 2004 balance in the preliminary planning revolving fund was $140,000. The report included the following criteria that are used to evaluate agency requests for money from the preliminary planning revolving fund:

• External mandates, such as a court order and health, life safety, and building code concerns.
• Program needs, such as the impact of the facility on achieving departmental goals or program requirements.
• State policy direction, including gubernatorial and legislative priorities.
• Funding for the project, including the amount available from non-general fund sources.
• Scope of the project, including the estimated costs and the needs to complete the project in multiple phases.

Based on the above criteria, the Office of Management and Budget requested money be provided from the preliminary planning revolving fund for the following two projects that the Office of Management and Budget plans to recommend to future legislative assemblies:

Agency	Project Description	Recommended Funding From the Preliminary Planning Fund
Office of Management and Budget	Fire suppression system for the State Capitol	$35,000
Department of Corrections and Rehabilitation	Replacement of the east cellhouse at the State Penitentiary	60,000
Total recommended funding		$95,000

Pursuant to NDCC Section 54-27-22, the Budget Section approved the distribution of $95,000 from the preliminary planning revolving fund, as recommended by the Office of Management and Budget.

Architect's Study on East Cellhouse Replacement

The Budget Section approved the Department of Corrections and Rehabilitation request for $60,000 from the preliminary planning revolving fund to determine the cost and specifications of a replacement to the east cellhouse at the State Penitentiary. The Department of Corrections and Rehabilitation hired Ritterbush and Associates, Bismarck, and HDR Architecture, Inc., Chicago, Illinois, to conduct the study of the replacement of the east cellhouse.

The Budget Section learned that construction of the east cellhouse was completed in 1910, its capacity is 159 maximum security inmates, and the State Penitentiary needs more segregation cells and a larger inmate orientation area. Results of the study's findings include the Department of Corrections and Rehabilitation's expensive outsourcing of beds, difficulty in managing inmates, and exposure to lawsuits.

Expansion plans for the State Penitentiary include:

1. Relocating the warehouse.
2. Constructing new vehicle access and new south tower.
3. Demolishing existing south tower.
4. Constructing new orientation housing, an inmate intake/transfer unit, clinic, infirmary, segregation unit, visitor's entrance, and laundry facility.
5. Eliminating the east cellhouse.

The expansion would result in a net prison bed gain of 123 permanent beds and would require an additional 38.4 staff. The total cost of the buildings is estimated to be $16.3 million and the total project cost, including demolition costs, contingency, fees, furnishings, and equipment, is estimated to be $29.2 million. The estimated cost per cell based on the buildings' construction costs is approximately $71,000, and the estimated cost per cell based on the total project cost, excluding demolition costs, is approximately $95,000. The total project cost would increase by approximately $2.1 million if the project was delayed from 2006 until 2008.

Tobacco Settlement Proceeds

Pursuant to NDCC Section 54-44-04, the Budget Section received reports on tobacco settlement proceeds received by the state. The Office of Management and Budget reported that as of October 2004 approximately $129.5 million had been received to date by the state and deposited in the tobacco settlement trust fund. Another tobacco company has joined the tobacco settlement, which the Office of Management and Budget expects will result in North Dakota receiving an additional $600,000 to $700,000 per year. The proceeds have been apportioned among the community health trust fund, common schools trust fund, and water development trust fund as follows pursuant to Section 54-27-25:

Tobacco settlement trust fund
Community health trust fund (10%)	$12,952,041
Common schools trust fund (45%)	58,284,181
Water development trust fund (45%)	58,284,181
Total transfers from the tobacco settlement trust fund	$129,520,403

The Office of Management and Budget reported the balances in the trust funds were:

Community health trust fund
Deposits	$12,952,041
Expenditures	7,548,962
August 31, 2004, balance	$5,403,079
Water development trust fund
Deposits	$58,284,181
Expenditures	55,677,434
August 31, 2004, balance	$2,606,747

Information Technology Funding Reductions

Pursuant to Section 8 of 2003 House Bill No. 1505, the Budget Section received reports on line item transfers made to accommodate information technology funding reductions. The Office of Management and Budget reported that as of October 2004 two transfers had been made pursuant to this section--a $8,458 transfer made by the Tax Department from the salaries and wages line item to the operating line item and a $30,650 transfer made by the Land Department from the capital assets line item to the operating line item.

2005-07 Biennium Budget Form Changes

Pursuant to NDCC Section 54-44.1-07, the Office of Management and Budget presented a report to the Budget Section on the form of budget data to be presented to the 59th Legislative Assembly (2005), including any future plans for incorporating performance measurements in budget data.

The Office of Management and Budget reported that the Executive Budget Office worked with Affinity Global Solutions, the software development firm that originally developed the statewide integrated budget and reporting (SIBR) system, to upgrade SIBR through implementation of the firm's budget analysis and reporting system (BARS). The budget and reporting system looks similar to SIBR, but BARS provides greater detail in some areas of the budget. The flexibility of BARS allows the Executive Budget Office to incorporate several items of interest to legislators into the system, such as the telecommute analysis form, reports on continuing appropriations statutorily authorized for each agency, and agency information technology plans. The flexibility of BARS also allows the Office of Management and Budget to incorporate some additional performance budgeting information without modifying the application or incurring additional programming costs. The Office of Management and Budget reported that agencies will be asked to complete narrative fields outlining their mission statements, strategic goals and objectives, program level strategic goals and objectives, and program outcomes and statistical data.

The Budget Section deferred the performance measures component to the Government Performance and Accountability Committee, and the Office of Management and Budget was to coordinate its related budget form changes with the Government Performance and Accountability Committee.

Pursuant to NDCC Section 54-44.1-07, the Budget Section approved changes to the budget data as proposed by the Office of Management and Budget, including information on telecommute analysis, agency continuing appropriations, and agency information technology plans.

Status of State Employee Position Reductions

Pursuant to Section 1 of 2003 Senate Bill No. 2423, the Office of Management and Budget presented a report to the Budget Section on the status of state employee position reductions and the expected agency budgetary savings. Section 1 of 2003 Senate Bill No. 2423 provides legislative intent that 155 full-time equivalent (FTE) positions from the executive branch agencies (excluding offices of state elected officials and higher education), 13 FTE positions from state elected officials (excluding the Governor's office), and 8 FTE positions from the judicial branch be eliminated, with the savings to provide an employee pay raise of 1 percent and 2 percent on January 1, 2004, and 2005, respectively. One-half of the total employee reductions were to be accomplished by December 31, 2003, with the remaining reductions made by December 31, 2004, and agencies were to report positions eliminated and the projected salaries and wages and fringe benefit savings for the remainder of the 2003-05 biennium to the Office of Management and Budget. The savings were to be pooled and used to fund increases for all employees in the salary pool. As of August 1, 2003, the Office of Management and Budget received the following information from agencies that would have eliminated FTE positions to provide a 1 percent salary increase on January 1, 2004:

Agency	FTE Reductions	Anticipated Savings	Cost of 1 Percent Increase	Source of Funds
Agency positions reported to be eliminated by December 31, 2003
Tax Commissioner	2.00	$79,487	$81,300	General fund
Insurance Department	0.50	31,000	31,100	Special funds
State Department of Health	3.00	196,600	196,600	Federal funds (72%); general fund (18%)
Job Service North Dakota	2.14	212,296	213,700	Federal funds
Housing Finance Agency	0.92	27,520	25,300	Special funds
Total	8.56	$546,903	$548,000
Agency positions reported to be eliminated during the 2003-05 biennium
Bank of North Dakota	1.50	$115,943	$165,633	Special funds
Game and Fish Department	2.00	170,000	164,679	Special funds
Total	3.50	$285,943	$330,312
Workforce Safety and Insurance*	3.86	$0	N/A
*Workforce Safety and Insurance is reducing 3.86 FTE positions but will be giving increases based upon statutory performance increases, not the 1 percent identified in 2003 Senate Bill No. 2423.

On November 7, 2003, the Attorney General's office issued Letter Opinion 2003-L-49, which stated that Senate Bill No. 2423 does not authorize pay raises to be granted only to employees of those agencies actually generating savings through job elimination; employees of any agency in the executive branch pool are equally eligible for a raise from any money legally available in the pool for that purpose. A footnote to the opinion stated "Of course, the amount of money available for across the board raises may be insufficient to make such raises practicable or worthwhile." Therefore, because of insufficient pooled funds, no state agency in the executive branch or elected official salary pool was able to provide the 1 percent salary increase to its employees on January 1, 2004, as provided for in 2003 Senate Bill No. 2423.

JUDICIAL BRANCH

Employee Salary Increases

Pursuant to Section 3 of 2003 Senate Bill No. 2423, the Budget Section received a report from the judicial branch regarding employee salary increases. The judicial branch reported that 2003 Senate Bill No. 2423 provided for a 1 percent pay increase if agencies and branches of government could meet the staffing reductions as provided in the bill effective January 1, 2004. The Council of Presiding Judges met in July 2003 and reviewed and revised the judicial branch's procedures for reviewing position vacancies. After the review of the vacant positions, it was determined a few positions could be eliminated without adversely affecting the ability to successfully fulfill the mission of the district courts. Through attrition, the judicial branch reduced a total of four FTEs--one deputy clerk of court position in each of three counties (Walsh, Williams, and Stutsman) and one juvenile court officer position in Burleigh County--resulting in anticipated savings of $393,915 and the cost to implement the 1 percent pay increase was $177,901. The judicial branch reported it will continue to use rigorous standards and periodical management reviews to analyze all position vacancies with the objective of moving or eliminating any positions that do not address core functions of the courts.

HIGHER EDUCATION

Student Internship Program

The Budget Section received a report from the North Dakota University System regarding the status of the student internship program, pursuant to Section 31 of 2003 House Bill No. 1003. The Budget Section learned that the statewide student internship program was developed and started on September 15, 2004. The four specific goals of the program are to:

• Increase the number of students participating in internship programs.
• Increase the percentage of graduates employed in North Dakota.
• Provide students with "real-world" work experiences.
• Increase opportunities for North Dakota employers to recruit potential employees.

The University System will receive followup information on the North Dakota education and training system which will allow the University System to determine the percentage of graduates which remain in the community and state as a result of participating in an internship program in comparison to graduates who do not have an internship experience. The followup information will allow the University System and the Legislative Assembly to measure the effectiveness of the internship program, particularly as it relates to retaining graduates in North Dakota.

Undesignated Centers of Excellence

The Budget Section received a report from the State Board of Higher Education on the allocation of funds from appropriations for undesignated centers of excellence relating to economic development, pursuant to NDCC Section 15-10-41. The State Board of Higher Education received the following six proposals for centers of excellence funding which totaled $1,257,000:

Bismarck State College	National Energy Technology Training and Education Center	$400,000
Williston State College	Oil Field Training Center	139,000
State College of Science	Allied Health	100,000
University of North Dakota	School of Medicine and Health Sciences Neurosciences	135,000
University of North Dakota	Energy and Environmental Research Center fuel and cell infrastructure - Procurement to support hydrogen production	290,000
Mayville State University	Early Learning Center	193,000
Total		$1,257,000

The proposals were evaluated against criteria developed by the Joint Committee on Economic Development Centers of Excellence and adopted by the State Board of Higher Education. Based on the criteria, the Bismarck State College proposal scored the highest and the Williston State College proposal ranked second. The board had a total of $400,000 appropriated for this purpose, of which $300,000 was allocated to the Bismarck State College National Energy Technology Training and Education Center and $100,000 was allocated to the Williston State College Oil Field Training Center.

The Bismarck State College project assumes an 85,000-square-foot facility, specialized equipment and furnishings, a wind turbine, and land contribution for a total project cost of $12.7 million. The city of Bismarck approved a land transfer of seven acres, which is the proposed site for the facility, and as of October 2004, pledges, appropriations, and land contributions total $6.27 million. The Williston State College project established an advisory group of oilfield leaders to provide industry guidance, and meetings held with oilfield companies have resulted in agreements to provide Williston State College with the equipment necessary for training.

Capital Projects

During the 2003-04 interim, the Budget Section received requests relating to the following University System capital projects:

• Minot State University - Old Main renovation project - Pursuant to NDCC Section 48-02-20, the Budget Section approved Minot State University's request to increase other funds spending authority by $400,000 and total authorization from $8,650,000 to $9,050,000 for the Old Main renovation project due to higher than expected costs for steel reinforcement of the roof and wall of the auditorium.
• University of North Dakota - Construction of an addition to the American Indian Center - Pursuant to NDCC Section 48-02-20, the Budget Section approved the University of North Dakota's request to increase other funds spending authority by $500,000 for the construction of an addition to the existing University of North Dakota American Indian Center.
• University of North Dakota - Laboratory renovation at the School of Medicine and Health Sciences and construction of a future underground link and additional storage space for the Center of Excellence in Neuroscience building - Pursuant to NDCC Section 15-10-12.1, the Budget Section approved the University of North Dakota's request to increase other funds spending authority by $750,000 and total authorization from $3,353,462 to $4,103,462 for laboratory renovation at the School of Medicine and Health Sciences and construction of a future underground link and additional storage space for the Center of Excellence in Neuroscience building.
• University of North Dakota - Partial renovation of the Carnegie Building - Pursuant to NDCC Section 48-02-20, the Budget Section approved the University of North Dakota's request to spend $350,000 of institutional funds, in lieu of donations and gifts, for the partial renovation of the Carnegie Building for installation of heating, ventilation, and air-conditioning systems and window replacement.
• University of North Dakota - Expansion of Neuroscience Research Facility - Pursuant to NDCC Section 15-10-12.1, the Budget Section approved the University of North Dakota's request to increase federal funds spending authority by $984,159 for the expansion of the existing Neuroscience Research Facility at the University of North Dakota to include additional laboratory space.

Accountability Measures Report

The North Dakota University System provided the Budget Section with its third annual accountability measures report dated December 2003 and reviewed information regarding fiscal-related accountability measures, including research expenditures, tuition and fees comparison, tuition and fees compared to household income, status of North Dakota University System long-term finance plan, allocation and use of incentive funding, operating and contributed income ratio, and financing of new construction and major renovation projects.

Minot Health Care Facility

The Budget Section received a report from the University of North Dakota regarding the status of the Minot health care facility. The Budget Section learned that the University of North Dakota negotiated a lease with the University of North Dakota Foundation for the construction of a new health care clinic in Minot. The clinic will serve as a regional source of health care services provided by University of North Dakota School of Medicine and Health Sciences clinical training programs. The structure of the lease allows the University of North Dakota Foundation to purchase land and construct a building using plans approved by the School of Medicine and Health Sciences. The facility will be leased by the University of North Dakota with rent sufficient to service the debt assumed by the foundation, and once the debt is retired, title for the land and building will revert to the University of North Dakota. The university anticipates the facility should begin operation as a functional training platform in spring 2005.

INFORMATION TECHNOLOGY DEPARTMENT

Annual Reports

2002-03 Annual Report

Pursuant to NDCC Section 54-59-19, the Budget Section received the Information Technology Department 2002-03 annual report. The annual report is composed of four sections:

• Section 1 - An executive summary that describes and quantifies benefits the state is realizing from investments in information technology.
• Section 2 - A status report on the costs and benefits of large information technology projects completed in the last 12 months and a summary of other small information technology projects completed in the same period.
• Section 3 - Information on the department's performance, including a rate comparison and an update on the department's performance measures.
• Section 4 - An overview of ongoing information technology initiatives.

The Information Technology Department reported that it tracks and monitors the cost and the revenue for each service to ensure that service is not subsidizing another service. The federal government does not allow the department to charge rates that generate revenues in excess of costs; therefore, the department monitors its cash balances and adjusts rates accordingly. The department also monitors what other entities are charging for similar services in an effort to maintain quality services at a fair price. Approximately 93 percent of the department's total revenue is generated from 16 services.

2003-04 Annual Report

Pursuant to NDCC Section 54-59-19, the Budget Section received the Information Technology Department 2003-04 annual report. The annual report is composed of five sections:

• Section 1 - An executive summary that describes and quantifies benefits the state is realizing from investments in information technology.
• Section 2 - A status report on the costs and benefits of large information technology projects completed in the last 12 months.
• Section 3 - A summary of small information technology projects completed in the last 12 months.
• Section 4 - Information on the department's performance, including a rate comparison and an update on the department's performance measures.
• Section 5 - An overview of ongoing information technology initiatives.

The Information Technology Department reported that it tracks and monitors the cost and the revenue for each service to ensure that service is not subsidizing another service. The federal government does not allow the department to charge rates that generate revenues in excess of costs; therefore, the department monitors its cash balances and adjusts rates accordingly. The department also monitors what other entities are charging for similar services in an effort to maintain quality services at a fair price.

Information Technology Organizational and Management Studies

Pursuant to Section 13 of 2003 House Bill No. 1505, the Budget Section received information from representatives of Pacific Technologies, Inc., regarding the final report for the information technology organizational and management studies. The Budget Section learned the key information regarding the information technology organizational and management findings includes:

• North Dakota has a highly fragmented approach to workstation support and help desk services.
• There are inconsistent standards and policies surrounding workstation platforms, configurations, and replacement.
• The state can achieve additional savings and improve alignment with long-term goals through continued server consolidation efforts.
• The state lacks consistent methods, tools, and performance measures to assess information technology impacts on business operations, to prioritize requests for major information technology projects, and to evaluate information technology projects.

Major recommendations and corresponding primary benefits relating to the studies include:

Major Recommendations	Primary Benefits
Workstation support and help desk services - Consolidate all workstation support and help desk services within the Information Technology Department, including: Initial problem reporting and resolution Workstation environment maintenance and support Adds, moves, and changes Hardware replacement management Associated performance measurement and management	Positions the state's information technology environment for the long term Allows state agencies to focus on core business needs rather than technical infrastructure Leads to long-term labor cost-savings
Workstation standardization - Move to a highly standardized workstation environment on a statewide basis with the Information Technology Department managing a workstation replacement program	Improves the state's purchasing power and license management Enhances information sharing and staff productivity through common and current workstation tools Promotes the provisioning of basic information technology services as a "utility"
Server consolidation - Continue to consolidate all agency-managed servers into the Information Technology Department	Allows state agencies to focus on core business needs rather than technical infrastructure Promotes the provisioning of basic information technology services as a "utility" Leads to long-term labor and hardware cost-savings
Information technology governance - Improve the existing information technology governance processes by: Improving the processes and tools for information technology project evaluation Improving mechanisms to support cost-containment Developing meaningful statewide management and reporting views of information technology initiatives Implementing information technology performance measures Establishing an information technology innovation fund	Leads to better-informed decisionmaking Provides a more equitable, business-based, and consistent evaluation of information technology initiatives Provides the best opportunity to manage application portfolio costs

Information Technology Functional Consolidation

Pursuant to Section 30 of 2003 Senate Bill No. 2015 and Section 12 of 2003 House Bill No. 1505, the Information Technology Department presented information to the Budget Section regarding the delivery of consolidated services to agencies and the status of accumulated savings. House Bill No. 1505 provided for the consolidation of services, including e-mail, file and print server administration, storage, application server, and hosting services; a reduction of FTE positions and transfer of 24 FTE positions from various state agencies to the Information Technology Department; and the identification of $1.4 million in savings to be transferred to the general fund by the end of the 2003-05 biennium.

To accomplish the three directives of 2003 House Bill No. 1505, an Executive Steering Committee was formed, and the committee reviewed requests and granted exemptions to some state agencies from the information technology consolidation mandate. The Information Technology Department met with each state agency affected by the consolidation to analyze the impact of the consolidation on each agency. There were 15 state agencies identified in 2003 House Bill No. 1505 that were to transfer 24 FTE positions to the Information Technology Department and the savings generated through the consolidation to be transferred to the general fund. An additional 31 state agencies were identified which were to consolidate services and identify savings, without the transfer of any FTE positions to the Information Technology Department. A total of 15.5 of the 24 FTE positions identified in 2003 House Bill No. 1505 to be transferred to the Information Technology Department were exempted from the transfer and the remaining 8.5 FTE positions were transferred to the Information Technology Department on November 1, 2003.

Seven agencies had already consolidated information technology services with the Information Technology Department prior to the requirements of 2003 House Bill No. 1505. Five state agencies--State Treasurer's office, Indian Affairs Commission, Department of Veterans Affairs, Children's Services Coordinating Committee, and Council on the Arts--were not impacted by the consolidation because they did not have any services to transfer to the Information Technology Department. Five state entities--legislative branch, judicial branch, Public Employees Retirement System, Retirement and Investment Board, and Attorney General's office--were exempted from the consolidation by statute and nine other state agencies were exempted from the consolidation by the Executive Steering Committee. The agencies exempted from consolidation by the Executive Steering Committee will be analyzed each biennium for possible consolidation.

The Budget Section learned the entire savings of $1.4 million will not be realized because consolidation was originally projected to take place on July 1, 2003, with savings to be realized for the entire 2003-05 biennium, but implementation was not completed until the end of May 2004, or 11 months into the 2003-05 biennium. The amount of savings for the 2003-05 biennium has also been reduced as a result of fewer equipment credits given to agencies due to the inability to eliminate equipment still on lease. Another reason for a decrease in the amount of estimated savings for the 2003-05 biennium was due to the funding sources of savings, because not all the funding sources could be transferred to the general fund. The Information Technology Department anticipates cost-savings of the information technology functional consolidation to be $438,775 for all funds for the 2003-05 biennium.

Server and Operating System Infrastructure

The Budget Section received a report from the Information Technology Department regarding the future of the state's server and operating system infrastructure. The Information Technology Department presented the following four alternatives for addressing the future of the state's mainframe:

• Maintain the current mainframe environment.
• Outsource the mainframe environment.
• Rewrite the applications dependent upon the mainframe to operate on another platform.
• Migrate the applications dependent upon the mainframe to another platform.

The following cost analysis was provided relating to alternatives for addressing the future of the state's mainframe:

Alternatives	Ongoing Annual Costs
Maintain the current mainframe environment	$3,790,000
Maintain the current mainframe environment in the future	$4,030,0001
Outsource the mainframe environment	$5,100,0002
Migrate the applications to another platform	$1,865,0003
Rewrite the applications to another platform	Unknown
1Maintaining the current mainframe environment in the future is critically dependent on the availability of trained staff. The estimated ongoing annual costs associated with maintaining the current mainframe environment in the future includes $240,000 for three additional FTE positions and an associated training program. 2Outsourcing the mainframe environment involves utilizing an outside vendor to provide the mainframe environment. The vendor would be responsible for all software, hardware, and labor costs, and the state would be responsible for monitoring service levels. The estimated ongoing annual costs of $5,100,000 includes $4,500,000 for a contract with an outside vendor and $600,000 for expenses associated with network connectivity and service level administration. 3Migration involves moving the existing applications from the mainframe to another platform while performing as few changes as possible. One-time costs associated with migrating the state's applications dependent on the mainframe are $6,300,000, and the ongoing annual costs associated with migration are $1,865,000.

STATUS OF CONNECTND

The Budget Section received periodic reports from the Office of Management and Budget, North Dakota University System, and Information Technology Department regarding the status of the ConnectND project. ConnectND is an enterprise resource planning system that is a joint project between the state government and the North Dakota University System to implement a multimodule software system that includes a relational data base and applications for managing financial activities, purchasing, budgeting, human resources, payroll, asset management, and student information functions.

The Information Technology Department reported that the original contract agreement with PeopleSoft for the ConnectND project was for approximately $21.7 million but as of August 31, 2004, the cost of the project was $24,550,000. Reasons for the $2,850,000 increase in costs include changes due to higher education grants and contracts delay, the monthly payroll decision, and the delay in state implementation from September 1, 2004, to October 1, 2004.

The North Dakota University System reported that in June and July 2004 the North Dakota University System went into production with the PeopleSoft student, finance, and human resource modules at five additional campuses, including Bismarck State College, Lake Region State College, Williston State College, State College of Science, and Dickinson State University, which brought the total number of "live" sites to eight, including Mayville State University, Valley City State University, and the North Dakota University System. The University System also went "live" with the conversion to semimonthly payroll with a 15-day timelag for all campuses in July 2004.

At the end of July 2004, the State Board of Higher Education approved a delayed implementation plan for the grants and contracts module based on campus concerns regarding the readiness of the grants and contracts system. The delay provides an extended period for additional configuration and testing. The new implementation schedule for the remaining four campuses--University of North Dakota, North Dakota State University, Minot State University, and Minot State University - Bottineau--is to have the finance and human resource modules implemented by January 2005, with student records implementation beginning fall 2004 and completed by spring 2005. Student recruitment and admissions, which is part of the student system, was successfully implemented on the four remaining campuses in October 2004 as part of the phased implementation plan.

In July 2004 the State Board of Higher Education also approved a supplemental budget plan for the ConnectND project, which provides permanent support for the finance, student, and production environments and provides interim support for the student production environment until spring 2005 and finance and human resource until January 1, 2005, based on the delayed implementation schedule. The additional one-time and ongoing costs of approximately $4.1 million relating to higher education's implementation of the ConnectND system will be allocated as follows:

• $1.25 million in cost reductions from Maximus.
• $1.38 million from ConnectND budget funds.
• $600,000 from Higher Education Computer Network operating funds.
• $250,000 from State Board of Higher Education contingency funds.
• $480,000 from higher education institutions.
• $150,000 from the state contingency fund.

DEPARTMENT OF HUMAN SERVICES

Medical Assistance Program

The Budget Section received periodic reports from the Department of Human Services regarding the status of the medical assistance program. The Budget Section learned in May 2003 Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which provided $10 billion in additional federal money for Medicaid, of which North Dakota's share is approximately $19.6 million, with the intent the funds be used to ensure that needed care continue for low-income citizens. The $19.6 million the department estimates to receive is the result of the enhanced federal medical assistance percentage increasing from the originally estimated 68.31 to 71.31 percent through June 2004.

The Department of Human Services compared the appropriation approved by the 58th Legislative Assembly to the estimated funds necessary to maintain the Medicaid program as it was operated at the end of the 2001-03 biennium and determined an estimated shortfall of $8 million in general fund needs. When federal funds were factored in, the department estimated it would need to reduce the Medicaid program by approximately $26.2 million during the 2003-05 biennium. If $8 million of the $19.6 million of savings from the enhanced Medicaid funds was not utilized for the Medicaid program, the state would have to impose a combination of changes that would eliminate services, reduce the number of eligible Medicaid recipients, and reduce payments to providers. The department plans to use $8 million to fill the gaps that exist in the Medicaid program, including payments for inpatient hospital services, prescription drug expenditures, and payments for physician-related services. If the department uses $8 million of the $19.6 million, the remaining $11 million will be available for 2005-07 biennium appropriations. As of October 2004, $6.5 million has been deposited in the general fund.

The Legislative Council staff presented a memorandum to the committee relating to North Dakota's use of the federal funds made available to the state under the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Legislative Council staff reported that Section 9 of 2003 Senate Bill No. 2012 requires the Department of Human Services to make whatever programmatic changes are necessary to operate the medical services program within the funding levels appropriated for the 2003-05 biennium, and the department may transfer appropriation authority between line items and between subdivisions but may not expend more than the total amount of the 2003-05 biennium appropriation without an expenditure authorization as provided for in NDCC Chapter 54-16. Therefore, the receipt of the $19.6 million of federal funds by the Department of Human Services for the medical services program may be received by the department to the extent the funds may be accommodated within the department's 2003-05 biennium spending authority.

The Budget Section learned the 3 percent increase in the federal medical assistance percentage ended June 30, 2004. On July 1, 2004, the federal medical assistance percentage returned to the regular matching rate of 68.31 percent for the remaining three months of the federal fiscal year. To maximize the federal funds, the department's staff worked many hours of overtime to process suspended Medicaid claims and to reduce the claims backlog. On October 1, 2004, the federal medical assistance percentage dropped .82 percent to 67.49 percent, and calculations indicate the federal medical assistance percentage will be further reduced effective October 1, 2005, to 65.16 percent, and preliminary information for the 2007 federal fiscal year beginning on October 1, 2006, indicates the federal medical assistance percentage will decrease to 63.54 percent. This will result in a federal medical assistance percentage reduction of 7.77 percent in a three-year period. It is estimated that the reduction in the federal medical assistance percentage will require the state to contribute approximately $34 million more from the general fund for the 2005-07 biennium to maintain the 2003-05 biennium program levels.

The department reported that Medicaid caseload numbers continue to decline since the beginning of the 2003-05 biennium. As of June 29, 2004, the caseload totaled 52,646, excluding the elderly and disabled whose coverage is only for Medicare Part B premiums and in some instances Medicare coinsurance and deductible amounts, and as of the end of July 2004, a total of 52,024 individuals were eligible for full Medicaid benefits.

Changes Made to the Medicaid Program

The Budget Section received a report from the Department of Human Services regarding changes made by the department to the Medicaid program. In an effort to avoid future deficit appropriations, the 58th Legislative Assembly instructed the Department of Human Services to establish service copayments or limits and make programmatic changes within the medical services program to operate the program within the funding levels approved by the Legislative Assembly for the 2003-05 biennium. Based on the direction of the Legislative Assembly, the Department of Human Services implemented the following cost-savings measures during the 2003-05 biennium:

• Cost-sharing limitations - This implemented additional copayments and limitations on services. Federal regulations prevent the imposition of copayments on children, pregnant women, or individuals in institutions.
• Eligibility - As of September 1, 2003, the department changed the amount of income that is disregarded in the family coverage group to disregard the first $120 in earned income plus one-third of the remaining amount. Previously, families were allowed to disregard the first 27 percent of earned income plus 50 percent for the next three months and 25 percent thereafter. This change does not generally affect the eligibility of children since they can qualify under either the poverty level group or the Healthy Steps program.
• Prescription drugs - The department implemented some major changes in the prescription drug program in the 2001-03 biennium, including copayments on brand name drugs, tablet splitting, quantity limits, and implementing a maximum allowable cost-pricing policy for a substantial number of medications. The new initiative in the 2003-05 biennium implements the prior authorization program. As of April 28, 2004, the department implemented a prior authorization requirement for proton pump inhibitors (antiulcer) and antihistamines.

Child Care Assistance Program

The Budget Section received a report from the Department of Human Services regarding the status of the child care assistance program. The Budget Section learned that the increased usage of the child care assistance program with no change in the program rules created a situation in which projected spending was approximately $1.9 million more than the 2003-05 biennium appropriation. The $1.9 million increase in expenditures was the result of the following increases:

• $800,000 attributed to an increase in the number of children.
• $1,100,000 attributed to an increase in program costs.

As a result of contemplating a variety of cost-saving measures, the department decided to no longer pay child care for higher education students except for higher education students during their hours of employment. The department will also continue to pay child care for students in vocational education, students receiving certificates or a vocational training degree, or an associate of applied science degree. The committee learned this decision is consistent with child care services provided in many other states. As of April 2004 spending projections indicated the changes made to the child care assistance program will result in program spending within the amount appropriated by the 58th Legislative Assembly and available federal funds.

Transfers in Excess of $50,000

Pursuant to Section 7 of 2003 Senate Bill No. 2012, the Budget Section received a report from the Department of Human Services regarding transfers the department made between line items and between subdivisions in excess of $50,000. The transfers made by the department pursuant to this section are:

Description	General Fund	Federal/Other Funds	Transfer Total
Line item transfer - Long-term care budget1
Grants line item	($150,000)		($150,000)
Grants - Medical assistance line item	$150,000		$150,000
Transfer funds from program/policy management to administration2
Administration/support	$150,000		$150,000
Mental health and substance abuse	($150,000)		($150,000)
Move funding between human service centers3
Northwest Human Service Center	($22,900)	($40,100)	($63,000)
Southeast Human Service Center	$22,900	$40,100	$63,000
Move national family caregiver funds from central office to human service centers4
Aging services (grants line item)		($1,014,414)	($1,014,414)
Northwest Human Service Center		$56,695	$56,695
North Central Human Service Center		$158,891	$158,891
Lake Region Human Service Center		$68,913	$68,913
Northeast Human Service Center		$141,845	$141,845
Southeast Human Service Center		$183,941	$183,941
South Central Human Service Center		$149,422	$149,422
West Central Human Service Center		$198,812	$198,812
Badlands Human Service Center		$55,895	$55,895
Move funding from central office to South Central Human Service Center5
Disability Services Division (grants line item)		($60,759)	($60,759)
South Central Human Service Center		$60,759	$60,759
Move funding from human service centers to State Hospital6
State Hospital	$379,970		$379,970
Northwest Human Service Center	($75,929)		($75,929)
North Central Human Service Center	($50,000)		($50,000)
Lake Region Human Service Center	($90,539)		($90,539)
Northeast Human Service Center	($68,300)		($68,300)
South Central Human Service Center	($95,202)		($95,202)
Move funding from Developmental Center to State Hospital7
State Hospital	$100,000		$100,000
Developmental Center	($100,000)		($100,000)
1The conference committee added funds for an increase in case management payment to counties. The funds were inadvertently added to the Grants line item instead of the Grants - Medical assistance line item.
2The deputy director position was left vacant to absorb a portion of the $1.5 million general fund reduction to administration/support made by the 58th Legislative Assembly.
3Funding was moved along with a FTE position for developmental disabilities case manager based on client caseload.
4Funding was initially included in central office until a plan was formulated.
5Federal funding was moved to the region based on client need.
6Budget reduction plans enacted to assist the State Hospital with part of the $2 million reduction made by the 58th Legislative Assembly.
7Budget reduction plans enacted to assist the State Hospital with part of the $2 million reduction made by the 58th Legislative Assembly.

Sexual Predator Treatment

The Budget Section received reports from the State Hospital regarding the status of the sexual offender program. The State Hospital reported that in 1997, the Legislative Assembly passed House Bill No. 1047 creating NDCC Chapter 25-03.3, which provided for the civil commitment of dangerous sexual predators. This chapter provides that if a respondent is found to be a sexually dangerous individual, he or she is committed to the care, custody, and control of the executive director of the Department of Human Services and the confinement, evaluation, and treatment of dangerous sexual offenders are provided at the State Hospital.

The Budget Section learned the State Hospital opened a second sexual offender unit on June 1, 2004, consisting of 10 beds to deal with the growth in the sexual offender population. The capacity of the new unit is 25 beds, so the hospital has the option for further expansion, if needed. With the addition of the second unit, the hospital has two secure services units totaling 32 beds, of which 28 beds are for evaluation and treatment of sexual offenders and four beds are reserved for competency evaluations, county jail transfers, and individuals who are mentally ill and dangerous. As of June 29, 2004, the secure sexual offender unit had 18 of the 22 beds occupied and the new sexual offender unit had 7 of the 10 beds occupied.

The State Hospital anticipated opening the new sexual offender unit by May 1, 2004, but actually opened on June 1, 2004, as the result of referral delays. The original cost estimate for operating the second sexual offender unit for the 2003-05 biennium was $1.1 million; however, the actual cost is anticipated to be less than $1.1 million due to the unit opening one month later than anticipated. The hospital anticipates receiving an additional seven referrals for evaluation by the end of 2004.

DEPARTMENT OF COMMERCE

Annual Audits of Renaissance Fund Organizations

The Budget Section received reports from the Division of Community Services, Department of Commerce, on the annual audits of renaissance fund organizations pursuant to NDCC Section 40-63-07. The Budget Section learned there are 20 cities with a renaissance zone and only five of those cities--Fargo, West Fargo, Casselton, Valley City, and Jamestown--have chosen to establish a renaissance fund organization. None of the cities manage their own funds but instead contract with Renaissance Ventures LLC to manage their respective renaissance fund organization. The audit for Renaissance Ventures LLC indicated that four cities have received investments totaling $2,950,000, which equates to the use of $1,475,000 in tax credits, and the Valley City renaissance fund organization has not received any investments. Of the $2,950,000, $1,490,000 was invested in three Fargo businesses and $200,000 in one Jamestown business. The audit also showed that the four cities have paid management fees to Renaissance Ventures LLC totaling $111,750 in 2002 and $62,500 in 2003. There are $1,025,000 of tax credits still available from the 1999 legislative authorization as well as the $2.5 million from the 2001 legislative authorization.

Annual Report on Job Web Site

The Department of Commerce reported to the Budget Section on the money spent to administer an Internet web site that provides career guidance and job opportunity services pursuant to NDCC Section 54-60-10. The Budget Section learned the objective of the web site northdakotahasjobs.com is to provide information to youth and others who are making career decisions on premier employers in the state, career opportunities offered, and internships available. The web site is linked with career service offices on North Dakota college campuses and is promoted to high school students through the annual Career Outlook.

The Department of Commerce reported it is not responsible for costs associated with administration, development, or maintenance of the web site. The web site is owned and maintained by Applied Distribution Group in Omaha, Nebraska. The Department of Commerce provides a minimum of a .5 FTE effort in promotion and marketing the web site to North Dakota employers, for which the department receives a commission on each employer subscription to the site. A promotional effort offered employers a no-cost member subscription for a trial period. Commissions earned on subscriptions by the department were minimal, totaling $2,580 through December 31, 2003, and expenditures by the Department of Commerce to support the web site marketing were $14,677 through December 31, 2003. The goal of the Department of Commerce is to receive enough in commissions to cover all the expenses of the web site by the end of the 2003-05 biennium so the department will not have to request an additional appropriation from the 59th Legislative Assembly for the web site for the 2005-07 biennium. The Workforce Development Division of the Department of Commerce received an appropriation of $150,000 relating to the web site efforts for the 2003-05 biennium.

WORKFORCE SAFETY AND INSURANCE

Status of the Risk Management Workers' Compensation Program

Pursuant to NDCC Section 65-04-03.1, Workforce Safety and Insurance reported to the Budget Section regarding the status of the risk management workers' compensation program. The Budget Section learned that 2001 House Bill No. 1015 established a single workers' compensation account for all state entities and the Risk Management Division of the Office of Management and Budget administers the program. The Risk Management Division entered into deductible contracts with Workforce Safety and Insurance for 143 consolidated accounts for coverage periods beginning July 1, 2001, and the deductible amount selected was $100,000 per claim. The results for the three coverage years July 1, 2001, through June 30, 2004, are:

Nonconsolidated guaranteed cost program premium		$10,966,092
Risk Management Division deductible premium paid to Workforce Safety and Insurance	$4,361,449
Risk Management Division paid losses	3,272,159
Risk Management Division pending losses (reserves)	1,071,226
Less Risk Management Division combined premium and losses total		$8,704,834
Estimated savings for three-year period		$2,261,258
NOTE: Information as of August 31, 2004.

Building Maintenance Account

Pursuant to NDCC Section 65-02-05.1, the Budget Section received a report from Workforce Safety and Insurance regarding the building maintenance account. The Budget Section learned that fiscal year 2004 was the first full year of operations for the Workforce Safety and Insurance office building--the Century Center. In addition to Workforce Safety and Insurance, the four-story building, consisting of 116,000 square feet of office space, houses four other state agencies, including the Department of Commerce, Parks and Recreation Department, Council on the Arts, and the Risk Management Division of the Office of Management and Budget. Construction of the Century Center was completed within both the original construction schedule and the budgeted amount of $12 million. Rental fees of $13 per square foot for office space and $5 per square foot for storage space will remain the same for the 2005-07 biennium.

The Century Center's largest operating expense is the payment made in lieu of taxes to the city of Bismarck, which was $150,090 for fiscal year 2004 and is anticipated to be approximately $270,000 for fiscal year 2005. Activity in the Century Center building maintenance account is:

Century Center Building Maintenance Account
Fiscal year 2004
Tenant rent payments	$441,000
Workforce Safety and Insurance rent payment	186,000
Miscellaneous billings	2,369
Total revenue		$629,369
Operating expenses	$458,302
Building maintenance	37,609
Total expenses		$495,911
Account balance as of June 30, 2004		$133,458
Fiscal year 2005 (projected)
Tenant rent payments