LEGISLATIVE AUDIT AND FISCAL REVIEW COMMITTEE

The Legislative Audit and Fiscal Review Committee is a statutorily created committee of the Legislative Council. Pursuant to North Dakota Century Code (NDCC) Section 54-35-02.1, the committee is created as a division of the Budget Section and its members are appointed by the Legislative Council. The committee's purposes are to:

• Study and review the state's financial transactions to assure the collection of state revenues and the expenditure of state money is in compliance with law, legislative intent, and sound financial practices.
• To provide the Legislative Assembly with objective information on revenue collections and expenditures to improve the fiscal structure and transactions of the state.

Pursuant to NDCC Section 54-35-02.2, the committee is charged with the duty of studying and reviewing audit reports submitted by the State Auditor. The committee is authorized to make such audits, examinations, or studies of the fiscal transactions or governmental operations of state departments, agencies, or institutions as it may deem necessary.

Committee members were Representatives Francis J. Wald (Chairman), Ole Aarsvold, Larry Bellew, Al Carlson, Jeff Delzer, RaeAnn G. Kelsch, Andrew Maragos, Bob Skarphol, Blair Thoreson, Mike Timm, Amy Warnke, and Lonny Winrich and Senators John M. Andrist, Randel Christmann, Jerry Klein, and Aaron Krauter.

The committee 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.

During the 2003-04 interim, the State Auditor's office and independent accounting firms presented five performance audit and evaluation reports and 101 financial or information technology application audit reports. An additional 46 audit reports were filed with the committee but were not formally presented. The committee's policy is to hear only audit reports relating to major agencies and audit reports containing major recommendations. However, other audit reports are presented at the request of any committee member.

The committee was assigned the following duties and responsibilities for the 2003-04 interim:

1. Receive the annual audit report for the State Fair Association (NDCC Section 4-02.1-18).
2. Receive the annual audit report from any corporation, limited liability company, or limited partnership that produces agricultural ethyl alcohol or methanol in this state and which receives a production subsidy from the state (NDCC Sections 10-19.1-152, 10-32-156, and 45-10.1-71).
3. Receive annual reports on the writeoffs of accounts receivable at the Department of Human Services and Developmental Center at Westwood Park, Grafton (NDCC Sections 50-06.3-08 and 25-04-17).
4. Receive the annual audited financial statements and a report from the North Dakota low-risk incentive fund. (NDCC Section 26.1-50-05 provides for the financial statements and the report to be submitted to the Legislative Council. The Legislative Council assigned this responsibility to the Legislative Audit and Fiscal Review Committee.)
5. Receive the North Dakota Stockmen's Association audit report. (NDCC Section 36-22-09 provides for the audit report to be submitted to the Legislative Council. The Legislative Council assigned this responsibility to the Legislative Audit and Fiscal Review Committee.)
6. Receive the biennial performance audit report on Job Service North Dakota (NDCC Section 52-02-18).
7. Determine necessary performance audits. (NDCC Section 54-10-01(4) provides that the State Auditor is to perform or provide for performance audits of state agencies as determined necessary by the State Auditor or the Legislative Audit and Fiscal Review Committee.)
8. Determine the frequency of audits or reviews of state agencies (NDCC Section 54-10-01(2)).
9. Determine when the State Auditor is to perform audits of political subdivisions (NDCC Section 54-10-13).
10. Direct the State Auditor to audit or review the financial records and accounts of any political subdivision (NDCC Section 54-10-15).
11. Study and review audit reports submitted by the State Auditor (NDCC Section 54-35-02.2).
12. Receive reports from the Information Technology Department on state information technology projects and plans pursuant to NDCC Section 54-59-19.
13. Receive reports from the director of Workforce Safety and Insurance and the chairman of the Workforce Safety and Insurance Board of Directors, including a report on the biennial performance evaluation of Workforce Safety and Insurance (NDCC Sections 65-02-03.3 and 65-02-30).

SUGGESTED GUIDELINES FOR AUDITS OF STATE AGENCIES

The committee received information on and reviewed the guidelines, which were developed by prior Legislative Audit and Fiscal Review Committees, relating to state agency and institution audits performed by the State Auditor's office and independent certified public accountants. The guidelines require that audit reports address the following with respect to a particular agency:

1. Whether expenditures are made in accordance with legislative appropriations and other state fiscal requirements and restrictions.
2. Whether revenues are accounted for properly.
3. Whether financial controls and procedures are adequate.
4. Whether the system of internal control is adequate and functioning effectively.
5. Whether financial records and reports reconcile with those of state fiscal offices.
6. Whether there is compliance with statutes, laws, rules, and regulations under which the agency was created and is functioning.
7. Whether there is evidence of fraud or dishonesty.
8. Whether there are indications of lack of efficiency in financial operations and management of the agency.
9. Whether actions have been taken by agency officials with respect to findings and recommendations set forth in audit reports for preceding periods.
10. Whether all activities of the agency are encompassed within appropriations of specific amounts.
11. Whether the agency has implemented the statewide accounting and management information system, including the cost allocation system.
12. Whether the agency develops a budget of anticipated expenditures and revenues and compares, on at least a quarterly basis, budgeted expenditures and revenues to actual expenditures and revenues accounted for using the accrual basis of accounting.

State agency and institution audit reports presented to the committee during the 2003-04 interim addressed the 12 audit guidelines developed by the committee. Audits of boards and commissions are not required to address the 12 audit guidelines. The purpose of the guidelines is to aid auditors in the development of audit programs and reports, so the audit reports will be of maximum value to the appropriate authority and the taxpayers of North Dakota. The guidelines were developed to assist the committee in meeting its statutory responsibilities and to encourage state entities to improve fiscal practices. Auditors generally review the answers to the 12 areas in the presentation of the audit report and the areas are addressed in a positive manner, indicating agencies take the issues seriously and attempt to comply. Areas that are not addressed in a positive manner may alert the committee to areas needing additional review.

Consideration of Proposed Changes to the Guidelines

The committee received suggested changes from the State Auditor's office to revise the current 12 audit guidelines to the following 6:

1. What type of report has the auditor issued on the financial statements of the agency?
2. Was there compliance with statutes, laws, rules, and regulations under which the agency was created and is functioning?
3. Was internal control adequate and functioning effectively?
4. Were there any indications of lack of efficiency in financial operations and management of the agency?
5. Has action been taken on findings and recommendations included in prior audit reports?
6. Was a management letter issued? If so, provide a summary, including any recommendations.

A representative of the State Auditor's office indicated that some of the 12 audit guidelines are no longer applicable to state agencies. Other areas that auditors could address before the Legislative Audit and Fiscal Review Committee include significant changes in accounting policies, accounting estimates, audit adjustments, disagreements with management, consultation with other independent auditors, major issues discussed with management prior to retention, difficulties encountered in performing the audit, and high-risk information technology systems critical to the agency's operations.

A representative of the committee indicated that current guideline No. 7 (Whether there is evidence of fraud or dishonesty.) and No. 12 (Whether the agency develops a budget of anticipated expenditures and revenues and compares, on at least a quarterly basis, budgeted expenditures and revenues to actual expenditures and revenues accounted for using the accrual basis of accounting.) are not adequately answered with the State Auditor's office proposed list of guidelines.

The committee learned that the Government Performance and Accountability Committee has recommended a bill that will require the State Auditor's office to address performance measures when conducting audits of state agencies and institutions. If the bill draft is approved by the 59th Legislative Assembly (2005), the Legislative Audit and Fiscal Review Committee may want to adjust the guidelines to reflect the performance measures.

Conclusion

The committee makes no recommendation regarding the suggested changes to the 12 guidelines but indicated it may reconsider the suggested changes at a future meeting, possibly after the 59th Legislative Assembly.

AUDIT OF THE STATE AUDITOR'S OFFICE

North Dakota Century Code Section 54-10-04 requires the Legislative Assembly to provide for an audit of the State Auditor's office. The Legislative Council contracted with Eide Bailly LLP, Certified Public Accountants, for an audit of the State Auditor's office for the years ended June 30, 2003 and 2002. The firm presented its audit report at the committee's December 22, 2003, meeting. The audit report contained an unqualified opinion and did not include any findings or recommendations.

PERFORMANCE AUDITS AND EVALUATIONS

Driver and Vehicle Services

A representative of the State Auditor's office presented the performance audit report of Driver and Vehicle Services, Department of Transportation, for the period July 1, 2000, through December 31, 2002. The Motor Vehicle Division is responsible for all vehicle registration and titling activities. In addition to the Bismarck location, which is operated by state employees, the department has contracted with 13 private vendors and 3 county treasures' offices throughout the state to act on behalf of the division to register vehicles. These 16 locations are motor vehicle branch offices. North Dakota Century Code Section 39-02-03 provides that the director of the Department of Transportation, subject to the Governor's approval, may designate agencies and establish branch offices as necessary to carry out the laws applicable to motor vehicle registration.

The Department of Transportation has 44 driver's license sites across North Dakota, including 8 fully automated major sites (located in the eight major cities and primarily open five days a week, with the exception of two sites), 20 automated field sites (offer the same services as the major sites but are only open at various times during the month), and 16 nonautomated field sites (also open only at various times but the information from the nonautomated sites is manually documented and later entered into the driver's license master system at a major site). The resulting report included 36 recommendations, including:

• The Department of Transportation Motor Vehicle Division should review and analyze the benefits of utilizing a nonsufficient fund (NSF) check recovery service.
• The Department of Transportation should evaluate the process for awarding the motor vehicle branch office contracts, including the need to amend state law and consider the use of competitive contracts for branch office operations.
• The Department of Transportation's Motor Vehicle Division should evaluate the acceptability of a three-week maximum turnaround to its customers, rather than the current typical turnaround time of one and one-half weeks. If this is deemed acceptable, the division should redesign its business processes to reduce staffing while providing a three-week turnaround.

The committee learned that due to delays, the vehicle registration and titling system was not implemented until October 2000, rather than the original contract completion date of October 1997. The vehicle registration and titling system is an information technology system that supports all vehicle registration, titling, financial processing, dealer licensing, and handicap permit placards. A representative of the Department of Transportation indicated the vehicle registration and titling system provides the department and customers with a reliable system, salary savings, ability for customers to conduct business and "walkout" with registration and titling documentation, online registration, shorter "turnaround time," and increased customer satisfaction.

The committee learned that the Department of Transportation originally eliminated seven full-time equivalent (FTE) positions in 1998 related to anticipated staff savings as a result of implementing the vehicle registration and titling system. However, increases in the use of temporary employees and overtime have resulted in an effective net savings of only one FTE position. The Department of Transportation motor vehicle registration and titling system is increasing processing efficiencies and decreasing the use of temporary employees. The motor vehicle registration system used prior to the implementation of the vehicle registration and titling system was approximately 30 years old and difficult to maintain. The actual cost of the vehicle registration and titling system was approximately $3,320,000, or $120,000 more than the original cost estimate of the project.

The committee accepted the performance audit report of Driver and Vehicle Services.

Administrative Committee on Veterans Affairs and the Department of Veterans Affairs

A representative of the State Auditor's office presented the performance audit report of the Administrative Committee on Veterans Affairs and the Department of Veterans Affairs for the period July 1, 2001, through December 31, 2003. The committee learned that two employees of the Department of Veterans Affairs, including the former commissioner, were identified as conservators for veterans. The former commissioner retired in May 2004. A representative of the State Auditor's office indicated that the former commissioner's responses to questions regarding his conservatorship responsibilities and duties were contradicted by other information and sources. The resulting report included 27 recommendations, including:

• The Attorney General's office was requested by the State Auditor's office to determine if the former commissioner of the Department of Veterans Affairs is in noncompliance with NDCC Section 54-10-23 by obstructing or misleading the State Auditor's office or by hindering a thorough examination. In addition, the Attorney General's office may want to determine if department employees performed conservator duties on state time using state resources.
• The Administrative Committee on Veterans Affairs and the Department of Veterans Affairs should take appropriate action to add a conservator program to the department's responsibilities and duties.
• The Administrative Committee on Veterans Affairs should take appropriate action to modify NDCC Section 37-18.1-01 to reduce its current membership of 15 to a more manageable size of approximately 7 members.
• The Department of Veterans Affairs should take the necessary action to ensure proper appropriation authority is obtained for accepting and expending money the department receives from the veterans' postwar trust fund or take the necessary action to modify North Dakota Century Code provisions related to the veterans' postwar trust fund. The Administrative Committee on Veterans Affairs has continuing appropriation authority for the interest income of the veterans' postwar trust fund, but this continuing appropriation does not extend to the Department of Veterans Affairs.

The committee learned that 1996 initiated constitutional measure No. 4 provided for the veterans' postwar trust fund to be a permanent trust fund and for all income received from the fund's investments to be appropriated on a continuing basis to the Administrative Committee on Veterans Affairs for programs that are of benefit and service to veterans and dependents. The emergency hardship assistance grant program administered by the department uses interest income from the veterans' postwar trust fund to provide grants to individuals in need of dental work, eyeglasses, hearing aids, or other medical needs. Veterans' postwar trust fund money has also been used to pay other department expenses, including salaries and benefits, rent, and data processing costs. The Department of Veterans Affairs did not receive appropriation authority to receive and spend this money.

The committee learned that according to a 1992 Attorney General's opinion, the Administrative Committee on Veterans Affairs can spend the interest income of the veterans' postwar trust fund; however, if the committee granted such money to a state entity, the state entity must have a legislative appropriation before it can spend the money.

A representative of the Office of Management and Budget testified that the veterans' postwar trust fund money used to pay salaries and benefits and operating expenses of the Department of Veterans Affairs is not granted to the department but instead is paid directly by the Administrative Committee on Veterans Affairs. The audit report indicated that further research will be done by the Office of Management and Budget and the Attorney General's office to determine whether an Attorney General's opinion is required, sections of the North Dakota Century Code need to be modified, or another solution is available.

The committee learned that the Department of Veterans Affairs has six employees; however, because two employees have a percentage of their salaries paid from the veterans' postwar trust fund, only five FTE positions are identified in the department's budget documents. On October 5, 2004, the Budget Section received a report on all state agencies that have "off-budget" FTE positions including the Department of Veterans Affairs.

The committee received testimony from a representative of the Administrative Committee on Veterans Affairs that all the audit findings included in the performance audit will be addressed. The committee accepted the performance audit report on the Administrative Committee on Veterans Affairs and the Department of Veterans Affairs.

Workforce Safety and Insurance

Pursuant to NDCC Section 65-02-30, a biennial performance evaluation was conducted of Workforce Safety and Insurance. The purpose of the performance evaluation was to assess certain aspects of the functions and operations of Workforce Safety and Insurance to determine whether the divisions of Workforce Safety and Insurance are providing quality service in an efficient and cost-effective manner. The performance audit focused on the Special Investigations Unit, the claims department, fees paid to outside legal defense firms, pharmacy costs, and the extent to which the Office of Independent Review provides advocacy services in keeping with Section 65-02-27. The audit was conducted by Octagon Risk Services, Inc., Oakland, California. The resulting report included 59 recommendations, including:

• Workforce Safety and Insurance should hire and train additional Special Investigations Unit investigators to perform most if not all the work currently being provided by private investigation firms.
• Workforce Safety and Insurance should train claims unit analysts and support staff in the area of compensability determination, including procedures relating to evaluation of injury histories and limitation of liability for injuries not directly related to the injury claim.
• Workforce Safety and Insurance should send legal defense bills to an outside legal firm for an audit of services performed and associated fees.
• Workforce Safety and Insurance should assess the cost benefit of bringing in house the outside legal defense firm services.

The committee learned that 57 of 80 total prior audit recommendations included in the Workforce Safety and Insurance 2002 performance audit were fully implemented, 13 were partially implemented, 6 have not been implemented, and 4 recommendations are no longer applicable.

The committee learned that total pharmacy costs incurred by Workforce Safety and Insurance increased by over $1 million between calendar years 2002 and 2003, for a total cost of over $6 million in calendar year 2003. Increases were primarily attributed to higher pharmaceutical costs and greater utilization of medications.

The committee learned that an industry standard is that approximately 20 percent of workers' compensation claims account for 80 percent of the total cost of benefits paid. However, in fiscal years ended June 30, 1998 and 1999, 1 percent of the total number of claims accounted for approximately 50 percent of the total cost of benefits. Many of the high-cost claims are cases involving serious injuries or death, but some high-cost claims involve individuals with permanent total disability status.

The committee learned that Workforce Safety and Insurance had 968 open permanent total disability claims in North Dakota as of March 31, 2004, which accounts for more than one-third of all open time-loss claims. This unusually high percentage is partially due to unsuccessful vocational rehabilitation cases turning into lifelong benefit programs. North Dakota has a higher percentage of permanent total disability claims than most other states. Many states require individuals to have a more serious impairment, such as blindness, burn, or severe head injury to qualify for permanent total disability status.

The committee learned that Workforce Safety and Insurance has collaborated with Accident Fund Insurance Company of America to offer "all state" accident insurance coverage to companies for a flat annual fee of $600. This is a three-year pilot program that provides accident insurance coverage for employees who temporarily work out of state for a period of less than 30 days.

The committee received testimony from a representative of Workforce Safety and Insurance indicating that steps have been taken to implement the audit recommendations included in the audit report. Pursuant to NDCC Section 65-02-30, the director, chairman of the board, and a representative of Workforce Safety and Insurance are to present the performance audit report and any action taken to implement the recommendations to the House and Senate Industry, Business and Labor Committees during the 2005 legislative session. The committee accepted the performance audit report of Workforce Safety and Insurance.

Job Service North Dakota

Pursuant to NDCC Section 52-02-18, a biennial performance audit was conducted of Job Service North Dakota. The evaluation included an examination of the department's performance measures, the unemployment insurance trust fund, the Work Force 2000 monitoring system, the Centralized Unemployment Insurance Claims Center, and the effectiveness of reemployment policy in reducing the duration of benefits. The audit was conducted by Brady, Martz & Associates, P.C., Certified Public Accountants, Bismarck. The resulting report included 26 recommendations, including:

• Job Service North Dakota should consider conducting an independent review of the projections for the unemployment insurance trust fund by an expert, such as an actuary and/or an economist. Job Service North Dakota's response to the recommendation was that the unemployment benefits paid on an annual basis can be quite erratic and still stay within the statistical parameters.
• Job Service North Dakota and the Legislative Assembly should review current law to determine if amendments should be made to ensure that unemployment tax rates stay reasonably stable once the trust fund reserve reaches solvency.
• Job Service North Dakota should develop a verification function for claimants who indicate that they are temporarily unemployed and plan to return to work for their previous employer, thus not subject to work search requirements.

The committee learned that 9 of 16 prior audit recommendations included in the Job Service North Dakota 2002 performance audit were determined to be fully implemented, 2 were partially implemented, 4 have not been implemented (the department has plans to implement 2 of these recommendations), and 1 recommendation is no longer applicable.

North Dakota Century Code Section 52-04-05 requires a minimum balance in the unemployment compensation fund to be achieved over a seven-year period beginning January 1, 2000, sufficient to pay one year of unemployment benefits. The committee learned that the trust fund reserve balance as of June 30, 2004, is approximately $57.6 million, excluding Reed Act funds of approximately $15.2 million. The Reed Act funds are available for benefits or unemployment insurance administration through legislative appropriation. Because Job Service North Dakota anticipates using the Reed Act funds for administrative purposes, the funds are not included in determining the progress toward the solvency target. Based on the November 2003 calculation, the targeted January 1, 2007, reserve level is $69.3 million. It is anticipated that based on current trends the trust fund will reach targeted reserve levels by 2006. The actual balance of the reserve fund was approximately $31 million when 1999 House Bill No. 1135, the bill which provided for a required minimum trust fund solvency level, was approved.

The committee learned that determination of a claimant's work search requirement is initially established when the original claim is filed. If the claimant indicates that he or she will be returning to work within the next month and a half for the previous employer, that person will not be subject to work search requirements. For the fiscal year ended June 30, 2003, 57 percent of total claims had no work search requirement and 65 percent of the total benefits paid were to individuals with no work search requirement.

The committee learned that North Dakota has the lowest percentage subsidization of employers who are not fully covering benefits paid former employees. North Dakota's rate is 19 percent. For calendar year 2002, the rate was 28 percent for the best five states.

Pursuant to NDCC Section 52-02-18, the executive director of Job Service North Dakota is to present the performance audit report and any action taken to implement the recommendations to the House and Senate Industry, Business and Labor Committees during the 59th Legislative Assembly. The committee accepted the performance audit report of Job Service North Dakota.

Child Support Enforcement Performance Audit Followup Report

The Legislative Audit and Fiscal Review Committee accepted the followup report presented to the committee on the status of recommendations included in the Department of Human Services child support enforcement performance audit. The original performance audit report was presented to the Legislative Audit and Fiscal Review Committee in October 2000. The followup report indicated 8 of the original recommendations have been fully implemented, 16 of the original recommendations have been partially implemented, 25 of the original recommendations were determined to be not implemented, and 7 recommendations are no longer applicable. The report concluded that 13 of the 25 audit recommendations determined to be not implemented were not implemented because the child support program was not being "statized" or state-administered, rather than the current state-supervised, county-adminstered structure.

Requests for Performance Audit Consultant

Pursuant to NDCC Section 54-10-01(4), the State Auditor's office may not hire a consultant to assist with conducting a performance audit of a state agency without the prior approval of the Legislative Audit and Fiscal Review Committee. The State Auditor's office is required to notify the agency of the need for a consultant before requesting approval by the Legislative Audit and Fiscal Review Committee. The agency that is audited is responsible for paying the cost of any consultant approved.

The State Auditor's office requested approval from the committee to hire a consultant to assist with conducting the Department of Corrections and Rehabilitation performance audit. The consultant will assist in evaluating and provide recommendations relating to treatment programs, the medical program and contracted medical services, prison overcrowding, and the management and administrative structure of the Department of Corrections and Rehabilitation. The committee approved the State Auditor's office request to hire a consultant for the performance audit, provided that any consulting costs in excess of $50,000 be subject to prior approval from the Legislative Audit and Fiscal Review Committee.

The committee later learned that the State Auditor's office sent a request for proposal to 13 entities, of which 7 were returned to the State Auditor's office. The Department of Corrections and Rehabilitation was permitted to review and provide recommendations regarding each of the proposals. The cost of the proposals returned ranged from $50,000 to $109,000. Based on evaluations of each of the entities, the State Auditor's office selected Criminal Justice Institute, Inc., which submitted a bid of $52,475, as the consultant. The committee approved a motion to approve the additional $2,475 needed to hire Criminal Justice Institute, Inc., to assist with the Department of Corrections and Rehabilitation performance audit. The committee plans to receive this performance audit.

Future Performance Audits

The committee approved a motion requesting the State Auditor's office to conduct:

• A performance audit on state agency cell phone usage, including a review of the propriety of state cell phone usage, the types of cell phone plans purchased, the number of minimally used cell phones, and various alternative methods to reimburse state employees for cell phone usage.
• A performance audit of Fleet Services.
• A followup review on the Veterans Home and the service payments for elderly and disabled (SPED) and expanded SPED performance audits.

Regional Planning Councils

Background

Pursuant to NDCC Section 54-10-14, political subdivisions, which include regional planning councils, are allowed to select their auditors. The committee approved a motion asking the State Auditor's office to perform a desk review of the audit reports of the eight regional planning councils. The regional planning councils were created to address resource conservation and community development needs. The committee learned that six of the regional planning councils have a December 31 yearend, one has a fiscal yearend of March 31, and one has a fiscal yearend of June 30. A representative of the State Auditor's office indicated that there were inconsistencies in interpretations of accounting principles among the audit reports of the eight regional planning councils. Instances were noted in which it appeared the financial statements were not prepared in accordance with generally accepted accounting principles. The State Auditor's office suggested that in order to improve consistency in financial statement reporting, the Legislative Assembly could direct the regional planning councils to be audited by the State Auditor's office. The committee learned that the State Auditor's office currently completes one of the eight regional planning council audits.

The committee learned that seven of the eight regional planning councils have established a nonprofit corporation in order to receive federal funds and other grants that are available only to nonprofit corporations. The development of nonprofit corporations provides another source of funding to the regional planning councils. A representative of the State Auditor's office indicated that according to the Lake Agassiz Regional Council's audit report notes to the financial statements, a $100,000 grant was given to the Lake Agassiz Regional Development Corporation (a nonprofit corporation). The funds were used to receive additional matching funds, which together provided the equity needed to obtain debt financing for the construction of a $2.2 million 24-plex senior congregate living complex in Wahpeton.

Conclusion

The committee makes no recommendation regarding auditor requirements for the regional planning councils.

COMPREHENSIVE ANNUAL FINANCIAL REPORT

North Dakota Century Code Section 54-10-01 requires the State Auditor to provide for the audit of the state's general purpose financial statements and to conduct a review of the material included in the Comprehensive Annual Financial Report. The Comprehensive Annual Financial Report contains the audited financial statements for state agencies and institutions. The committee received and accepted the state's June 30, 2003, Comprehensive Annual Financial Report.

INFORMATION TECHNOLOGY AUDITS

Information technology audits are audits of computer systems used by state agencies. The State Auditor's office conducted a risk assessment audit dated May 15, 2002, of 379 state computer systems. A risk rating was assigned to each system based on the potential for errors in the system or operation and related effect to the State of North Dakota. The report identified 31 high-risk computer systems and 218 moderate-risk systems. The risk rating is used by the State Auditor's office to determine where to best direct its audit resources. The committee received and accepted the following information technology audits:

• Secretary of State's business entity and accounting systems (for the year ended December 31, 2002).
• Department of Human Services VISION - Temporary assistance for needy families (followup report).
• Department of Corrections and Rehabilitation subject tracking and reporting system (for the year ended December 31, 2003).
• Department of Human Services Medicaid management information system (for the period October 1, 2001, through September 30, 2002).

ADJUSTMENTS AND CORRECTIONS OF TAX DISTRIBUTION PAYMENTS TO POLITICAL SUBDIVISIONS

The committee learned that the audit reports for the State Treasurer's office and Tax Commissioner's office included findings related to incorrect allocations of tax distribution payments made to political subdivisions. The committee asked the State Auditor's office to conduct a more detailed review of the State Treasurer's office and Tax Commissioner's office tax distribution recalculations for accuracy and the agencies' plans for correction or adjustment of payments to affected cities, counties, and school districts.

State Treasurer's Office

The committee learned that the audit report for the State Treasurer's office for the years ended June 30, 2003 and 2002 included the following recommendations relating to errors discovered in the tax distribution calculations:

1. Coal conversion tax distributions - The State Treasurer use the current average daily enrollment numbers to calculate the distribution of coal conversion taxes in accordance with NDCC Section 57-60-15.
2. Coal severance tax distributions - The State Treasurer use current average daily enrollment numbers, current land assessment values, and correct percentages when calculating coal severance tax distributions in accordance with NDCC Section 57-62-02.
3. State aid distribution - The State Treasurer use the correct population figures in the calculation of the state aid distribution in accordance with NDCC Section 57-39.2-26.1 and maintain support for any changes made to population numbers.
4. Oil and gas production tax distribution - The State Treasurer compute Medora's population on an annual basis for purposes of determining the per capita limitation for oil and gas production tax distributions and work with Billings County and the city of Medora to correct any distributions that were made in error.
5. Highway tax distributions - The State Treasurer implement controls to ensure that the numbers used in the distribution of money in the highway tax distribution fund are proper.

A representative of the State Auditor's office indicated that there was a problem with the Department of Transportation's computer system during 2001 and 2002 that caused "uploaded data," used by the State Treasurer's office to calculate the highway tax distribution amounts, to be incorrect. The Department of Transportation corrected this computer system problem in January 2003.

The committee learned that the State Auditor's office prepared computer spreadsheets to verify the State Treasurer's office tax distribution recalculations and that the review identified numerous errors. A representative of the State Auditor's office indicated that some of the types of errors identified in the original audit findings were not corrected in the recalculations.

The committee learned that the audit report included a recommendation that the State Treasurer's office consult with the Attorney General's office regarding the proper remedy for correction of the erroneous payments. The plan approved by the Attorney General's office for redistribution of tax payments to cities, counties, and school districts provided for the correcting tax payments to be distributed or collected on a net basis, rather than by specific type of tax distribution. The total dollar amount of tax distribution payments issued by the State Treasurer's office was correct, but the errors occurred because of payments being misallocated to the political subdivisions. As each political subdivision's overpayment is refunded or corrected, the corresponding funds will be redirected to political subdivisions that were underpaid.

The committee received testimony from a representative of the Attorney General's office who indicated that based on controlling law, political subdivisions are not entitled to retain the overpayments and there is no legal impediment to the reallocation process.

The committee learned that payment forms were sent to the affected political subdivisions which provided a summary of adjustments made due to previous miscalculations and the corresponding funds affected by the adjustments. The redistribution plan developed by the State Treasurer's office provided for approximately 94 percent of the payments to be corrected by October 2004. A representative of the State Treasurer's office indicated that the department will cooperate with political subdivisions to develop extended repayment schedules if necessary. The State Treasurer's office has created computer spreadsheets to provide additional support for verifying future tax distribution totals generated from the mainframe computer.

The audit report also included a recommendation that the State Treasurer's office reclassify the controller position to an accounting manager or accounting budget specialist II or III classification. A representative of the State Treasurer's office indicated that the department's controller does not have an accounting degree, but does have 25 years of experience. The controller is accountable for the tax distributions and is supervised by the deputy state treasurer.

The committee learned that the State Treasurer's office, Tax Commissioner's office, Attorney General's office, Insurance Department, Department of Transportation, Highway Patrol, and Aeronautics Commission have responsibilities for collecting or distributing taxes. All of these state agencies employ an individual with an accounting degree with the exception of the State Treasurer's office and the Aeronautics Commission. The Aeronautics Commission is responsible for collecting aviation fuels taxes, which are deposited into a fund for grants to airports.

Tax Commissioner's Office

The committee learned that the audit report for the Tax Commissioner's office for the years ended June 30, 2003 and 2002 included a finding that the Tax Commissioner's office deposited incorrect amounts into the cigarette tax distribution fund for 18 of the 24 months of the audit period. The differences per month ranged from $4 to $10,000, with the net result of $6,378 being deposited into the general fund that should have been deposited into the cigarette tax distribution fund and distributed to the incorporated cities.

A representative of the State Auditor's office indicated that the Tax Commissioner's office corrected the tax distribution fund allocation error in November 2003 by depositing $6,378 of general fund receipts into the cigarette tax distribution fund, which was then distributed to the affected cities during that same month.

Conclusion

The committee considered, but did not recommend, a bill draft providing for statutory authority for the State Treasurer to make adjustments to ensure proper distributions to political subdivisions. The committee accepted the June 30, 2003 and 2002 audit reports for the State Treasurer's office and the Tax Commissioner's office.

STATUS OF RACING COMMISSION REVENUES

Background

The committee received a status report from the Racing Commission regarding the status of Racing Commission revenues. The committee learned that for every dollar wagered on horse racing in North Dakota, two and one-half cents goes to the general fund and one and one-half cents goes to the Racing Commission. Taxes are collected on the gross amount wagered, regardless of whether the wager won or lost.

The committee learned that the North Dakota simulcast system total annual "handle," or total amount wagered, began to increase significantly in 1998 due to a "whale," or an individual who wagers a large amount of money, using the North Dakota simulcast system. A representative of the Racing Commission indicated that the Office of Management and Budget was notified that horse racing gaming and excise tax collections for fiscal years ended 2000, 2001, and 2002 were significantly more than forecasts due to the parimutuel racing industry experiencing very unusual and substantive activity from a small group of "players" and that it was uncertain how long this extraordinary level of activity would continue. A single individual wagered $161 million through North Dakota simulcast racing in 2002. However, prior to the end of 2003, that individual began placing wagers through a simulcast system in another state.

The committee learned that the North Dakota simulcast system total "handle" for calendar year 2003 was approximately $153 million. A representative of the Racing Commission indicated that the North Dakota simulcast system 2003-05 biennium "handle" will be approximately $12 million, or $6 million per year, which will generate $300,000 in general fund revenues. The committee learned that with the opening of the racetrack in Fargo and an increase of interest in horse racing in North Dakota, the indigenous "handle" could increase to $10 million per year.

Conclusion

The committee learned that the director of the State Racing Commission resigned in September 2004. The committee approved a motion requesting the State Auditor's office to conduct an updated audit of the Racing Commission, including a detailed analysis of the racing promotion fund, while completing the next audit of the Attorney General's office.

COMMITTEE FOLLOWUP WITH AGENCIES THAT HAVE NOT COMPLIED WITH AUDIT RECOMMENDATIONS

Background

During the 2001-02 interim, the Legislative Audit and Fiscal Review Committee reviewed procedures for enhancing its followup efforts relating to the implementation of audit recommendations. Previous actions taken by the committee to make sure state agencies address audit findings included requiring agency responses in the initial audit reports, inviting agencies to comment, and requesting the State Auditor's office to do a six-month followup review. The committee approved the sending of correspondence to each agency that has not complied with previous audit recommendations requesting the agency to appear before the Legislative Audit and Fiscal Review Committee to explain the reason for noncompliance with audit recommendations or steps taken to address recommendations. The Legislative Council staff is to issue the followup request on a case-by-case basis as directed by the committee.

Committee Followup - State Historical Society

Pursuant to the procedures adopted during the 2001-02 interim, the committee requested by motion and received a followup report from the State Historical Society regarding the implementation of previous State Auditor's office audit recommendations. The State Auditor's office audit report included recommendations related to inventory control weaknesses, documentation controls, cash control weaknesses, and operational improvement. A representative of the State Historical Society indicated that steps have been taken to address each of the recommendations.

AGRICULTURE COMMODITY GROUP AUDIT REPORT ISSUES

North Dakota Wheat Commission

The committee received the audit report of the Wheat Commission for the years ended June 30, 2004 and 2003, which included information regarding the Wheat Commission's case against the Canadian Wheat Board involving unfair Canadian wheat trade. The case was started in 1999 and is still ongoing as of October 2004. The committee learned that the Wheat Commission was able to stay current with its legal fees until September 2002. However, outstanding liabilities for legal fees and other professional services associated with the case have since accumulated to $3,004,678 as of June 30, 2004. The commission's expenditures exceeded revenues by $1,069,311 and $1,527,726 for fiscal years ended June 30, 2004 and 2003, respectively. The Wheat Commission has incurred approximately $6.4 million in total legal and other professional fees relating to the case as of August 2004.

The Wheat Commission has continuing appropriation authority for use of its revenues, which are primarily from the wheat tax levy or "checkoff." Pursuant to NDCC Section 4-28-07, the Wheat Commission may use the amount raised by two mills of the levy provided to support the commission's involvement in trade issues throughout the world.

The audit report contained a recommendation that the Wheat Commission take the following actions relating to the outstanding obligations for legal fees and professional services:

• Obtain immediate advice and approval from appropriate legislative authority and the Attorney General's office on a plan to fund the outstanding liabilities. In addition, the Wheat Commission should not incur any additional legal fees without approval and the aforementioned plan being in place.
• Develop procedures and controls to insure that all activities are properly recorded and reported.
• Request an opinion from the Attorney General's office to determine the legality of the legal fees incurred in excess of available resources.
• Request an opinion from the Attorney General's office to determine if the commission is in violation of NDCC Section 4-28-07.

The committee learned that the law firm representing the Wheat Commission has agreed to accept a three-year repayment schedule. A representative of the Wheat Commission indicated that the commission will request approval from the Legislative Assembly for an increase in the wheat "checkoff" from the present one cent per bushel (10 mills) to one and one-half cent per bushel (15 mills). The increase in the mill levy would increase annual revenues by approximately $1 million. The additional funds would initially be used to retire the debt accumulated relating to the case against the Canadian Wheat Board but would eventually make additional dollars available for other priority programs. A representative of the Wheat Commission indicated that the commission would manage to pay all legal fees over the three-year period even if the increase in the "checkoff" is not approved.

The committee received information from a representative of the Wheat Commission indicating that in late 2002 and 2003 the United States International Trade Commission and the United States Department of Commerce both arrived at affirmative decisions on their respective determinations of preliminary injury and counter available subsidies, resulting in significant duties being assessed against Canadian spring wheat and durum imports. However in October 2003, the International Trade Commission released its final ruling, finding that injury could be established only in the case of spring wheat and the durum duty was rescinded. The process of appeals required to maintain the spring wheat duties continues and an attempt to overturn the durum decision has resulted in significant additional legal costs incurred throughout the fiscal years ended June 30, 2003 and 2004 and at more modest levels in the 2005 fiscal year. Since the start of the case there has been a dramatic reduction of imports of Canadian spring wheat and durum and the improvement in price and income opportunities continue to be very significant for North Dakota wheat producers and the economy of the state.

A representative of the Wheat Commission indicated that other states surrounding North Dakota have benefited from the case, but it is unlikely the wheat commissions from those states have the ability to financially support the case. They reported the North Dakota Wheat Commission is financially responsible for the legal fees.

The committee learned that Section 34 of 2003 Senate Bill No. 2015 provides for the head of each executive branch agency or institution to report during the budget presentation to the Appropriations Committees during the 2005 legislative session on statutory provisions authorizing the agency or institution to spend funds pursuant to a continuing appropriation. Boards and commissions are not directed to report on continuing appropriation authority. Agriculture commodity groups are required, pursuant to NDCC Section 4-24-10, to report to the House and Senate Agriculture Committees during the legislative session.

A representative of the Attorney General's office indicated that some preliminary work has been conducted regarding whether a board or commission or any state agency with continuing appropriation authority can incur expenditures in excess of revenues. North Dakota Century Code Section 54-27-12 prohibits an agency from spending more than the amount appropriated during a biennium, but the law is not clear when it involves a continuing appropriation. The committee plans to receive the Attorney General's opinion regarding the Wheat Commission's outstanding legal fees when it meets during the 59th Legislative Assembly.

Potato Council

The committee learned that the Potato Council incurred expenditures in excess of revenues by $43,397 and $185,785 for the two-year periods ended June 30, 2002 and 2004, respectively. The Potato Council's deposits and investments totaled $21,277 as of June 30, 2004. The deficit was attributed to some of the largest potato producers requesting "checkoff" refunds over the last two bienniums and a reduction in the total potato acreage in North Dakota. Pursuant to NDCC Section 4-10.1-09, the Potato Council has continuing appropriation authority from its "checkoff" revenues.

Conclusion

The committee accepted the audit reports of the Wheat Commission and the Potato Council. The committee approved a motion that the Legislative Council staff research agriculture commodity groups in South Dakota, Minnesota, Wisconsin, Iowa, Wyoming, Montana, and Idaho regarding whether the state legislatures control appropriations and rates charged or "checkoffs" by the agriculture commodity groups. The committee plans to receive the report when it meets during the 59th Legislative Assembly.

OTHER REPORTS

Ethanol Production Companies

North Dakota Century Code Section 45-10.1-71 provides that any limited liability partnership that produces agricultural ethyl alcohol or methanol and receives a production subsidy from the state must submit an annual audit report to the Legislative Audit and Fiscal Review Committee. Pursuant to this section, the audit report for Alchem, Ltd., LLP for the years ended December 31, 2002 and 2001 and December 31, 2003 and 2002 was filed with the committee and distributed to committee members.

North Dakota Century Code Section 10-19.1-152 provides that any corporation that produces agriculture ethyl alcohol or methanol and receives a production subsidy from the state must submit an annual audit report to the Legislative Audit and Fiscal Review Committee. Pursuant to this section, the audit report for Archer Daniels Midland Company for the year ended June 30, 2004, was filed with the committee.

Department of Human Services Accounts Receivable Writeoffs

Pursuant to NDCC Sections 25-04-17 and 50-06.3-08, the Department of Human Services is required to present a report to the Legislative Audit and Fiscal Review Committee regarding accounts receivable writeoffs at the State Hospital, Developmental Center, and human service centers as of June 30 of each fiscal year. The department's report for fiscal year 2003 was received and accepted by the committee. Accounts receivable writeoffs as of June 30, 2003, were $3,804,060 at the State Hospital, $19,558,973 at the Developmental Center, and $184,835 at the human service centers. The committee learned that during the 2001-03 biennium the Department of Human Services conducted a conversion of its accounts receivable system, which included an analysis of accounts receivable. From 1961 through 1989, parents and clients had varying responsibilities for costs incurred at the Development Center. The analysis included a bookkeeping adjustment in which the Developmental Center's uncollectible receivables, some dating back to 1961, were written off.

The department's report for fiscal year 2004 was also received and accepted by the committee. Accounts receivable writeoffs as of June 30, 2004, were $4,475,374 at the State Hospital, $455,141 at the Developmental Center, and $225,212 at the human service centers.

Department of Human Services Child Support Internal Control Procedures

The committee received a report from a representative of the Department of Human Services regarding the department's internal control procedures for child support. The department's audit report for the years ended June 30, 2003 and 2002 included a recommendation that controls be established over child support adjustments to ensure proper oversight and approval and ensure that adjustments are accurate and properly recorded. The state's official records of all child support amounts owed, collected, and distributed are maintained electronically on the fully automated child support enforcement system (FACSES). A payment ledger is maintained on FACSES by court order for each person involved with the child support enforcement program. Debt adjustments may be required for a number of reasons, and documentation is maintained to support each adjustment.

The Department of Human Services implemented the recommendation of the State Auditor's office and on a quarterly basis a number of child support cases are randomly selected and reviewed. A representative of the Department of Human Services indicated that the probability of loss from an employee inappropriately adjusting child support receivables is remote and that current controls are adequate.

Information Technology Department

The committee received reports from a representative of the Information Technology Department on the status of information technology projects, services, plans, and benefits pursuant to NDCC Section 54-59-19.

State Agency, Board, and Institution Auditors

The committee received information on audits of state agencies, boards, and institutions that are required by law to be audited by either the State Auditor's office or independent auditors. Pursuant to NDCC Sections 6-09-29, 10-30.5-08, and 4-02.1-18, independent certified public accounting firms are required to conduct the audits of the Bank of North Dakota, North Dakota Development Fund, Inc., and State Fair Association, respectively. The State Auditor's office is directed by statute to select the auditor for the Bank of North Dakota, whereas the North Dakota Development Fund, Inc., and the State Fair Association select their own auditor.

As of June 30, 2003, the audits for 18 other state agencies and programs were conducted by independent certified public accounting firms. Independent auditor services are used primarily because of the nature of these audits, several of which are closely related to the Bank of North Dakota. The Legislative Council is responsible for selecting the auditor for the Legislative Council, Legislative Assembly, and State Auditor's office. The State Auditor's office selects the auditor for the other 15 state agencies and programs. The majority of occupational and professional boards choose to be audited by independent auditors even though they may use the services of the State Auditor's office.

Summary of Accounts Within the North Dakota University System

The committee received a report from a representative of the North Dakota University System regarding accounts used at each institution, including information on the number, purposes, and balances of the accounts. The committee learned that the North Dakota University System uses nearly 15,000 accounts. These accounts are used to track and manage financial activity for a variety of programs, functions, and activities, many of which have external restrictions on the use of the money. Because the legacy system (Higher Education Computer Network) is unable to account for these activities in a more efficient way, it is necessary to have this large number of accounts to ensure the proper amount of control and accountability. The PeopleSoft system, or ConnectND, which will replace the legacy system, has project accounting system capabilities that will allow the North Dakota University System to reduce the total number of accounts maintained to approximately 10,000. The committee learned that separate accounts are required for accounting purposes to be maintained for each project. For example, when a play is performed at a college, an account is established and maintained until all revenue and expenses related to the play are processed.

Report on the Percentage of Tuition and Fees Used to Fund Academic Costs

The committee received information regarding the estimated percentage of tuition and fees that are used to fund academic costs of state institutions of higher education. The committee learned that tuition and fees (net of scholarship allowances) as a percentage of functional expenses, excluding physical plant functions, averaged 37 percent for the North Dakota University System. The percentages range from 23 percent at Minot State University - Bottineau to 49 percent at North Dakota State University. Tuition and fees (net of scholarship allowances) as a percentage of functional expenses, including physical plant functions, averaged 33 percent for the North Dakota University System. The percentages range from 20 percent at Minot State University - Bottineau to 42 percent at North Dakota State University. The percentage variances among the institutions are primarily due to enrollment sizes, types of programs offered, scholarship allowances, student mix, and differences in expense classifications.

"Blended" Component Units

The committee received information regarding component units that are "blended into" state-reporting entities. The committee learned the North Dakota Building Authority (component unit) is blended into the state's debt service and capital projects funds and the North Dakota University System Foundation, North Dakota State University Research Foundation, and Bismarck State College Mystic Athletic Club (component units) are blended into the North Dakota University System financial statements. "Blended" component units, even though they are legally separate entities, are so intertwined with the state or the North Dakota University System that they are, in substance, the same as the state or the North Dakota University System. Because of this close relationship, financial data relating to component units is included in the audited financial statements of the State of North Dakota and the North Dakota University System.

Status of the ConnectND Project

The committee received a status report on the ConnectND project. A representative of the State Auditor's office indicated that the new PeopleSoft system will provide additional background information on financial transactions and easier access to information. The PeopleSoft system, however, will initially require more audit effort. The financial and human resource components of the PeopleSoft system, except for the employee expense, budget, and strategic sourcing modules, are to be rolled out to state agencies beginning on October 1, 2004. As of January 2005 all State Board of Higher Education institutions are scheduled to be utilizing the financial, human resource, and student administration components of the PeopleSoft system.

Turnback of Unspent General Fund Appropriations - 2001-03 Biennium

The committee received a report from a representative of the Office of Management and Budget regarding the turnback of unspent general fund appropriations for the 2001-03 biennium, comparing the general fund appropriations, general fund expenditures, allowed carryover, and resulting turnback. The 2001-03 biennium general fund turnback was $10.5 million, which is based on:

Total general fund appropriations	$1,740,290,719
Less actual expenditures	1,721,881,358
Total unexpended	$18,409,361
Less
Capital construction carryovers	464,699
Other carryovers permitted by law	7,397,565
Total general fund turnback (.61% of total general fund appropriations)	$10,547,097

Appendix

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