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(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates Senate Bill 54

SOURCES OF INFORMATION

Public Defender Department

General Services Department

Administrative Office of the District Attorney

State Land Office

SUMMARY

Synopsis of Bill

House Bill 30 would amend certain sections of existing laws relating to the Department of Finance (DFA), Financial Control Division (FCD) and public money act by transferring the responsibility for determining legality and authority for expenditures and the determination that the expenditure does not exceed the appropriation or the periodic allotment made to the agency prior to issuance of a warrant from the Department of Finance and Administration, Financial Control Division to each state agency. The DFA FCD would have the responsibility to determine compliance on a sample basis.

The FCD would also be required to maintain a record that shows the particular fund appropriated by law from which the expenditure was paid, set standards for accounting methods, compile a comprehensive annual financial report, and as a condition of approval of payment of prior year expenditures ensure that sufficient funds in the agencies budget at the end of the fiscal year includes uncollected earned revenue if appropriate.

HB30 would also amend the Audit Act to require that the comprehensive annual financial report be audited through the state auditor's office. Current language regarding the contracting of independent public accountants to perform state audits would also be amended from requiring the state auditor approve audit contracts to requiring that audit contracts be between the state auditor and the independent contractor.

Significant Issues

The amendments contained in this bill resulted from recommendations made by the state-wide accounting systems task force assembled by the Legislative Finance Committee, except for the amendment stated in Section 11.

According to DFA, rather than pre-auditing each and every voucher, a stratified sample could be selected for compliance testing which would provide more coverage of high dollar transactions and more time could be devoted to monitoring and testing compliance. According to the Public Defender Department (PDD), allowing FCD to use sampling rather than inspection of all funding expenditure packages for pre-audit purposes should speed up the processing of PDD paperwork through their system.

Under the current law, if a transaction is processed by DFA, state agencies consider the transaction to have complied with all laws, rules and regulations and therefore may take no responsibility for non-compliance which may be identified through the course of an audit or other type of review. The bill would also authorize the FCD to establish documentation requirements and an itemized voucher form approved by the Secretary of DFA, including provisions for a certification requirements which may be in writing or done electronically. These changes from a paper format to allowing an electronic submission of vouchers and supporting documents, will revolutionize the way the state is processing documents which would result efficiency by eliminating data entry redundancy and reducing key entry errors. This change is necessary to plan for an integrated seamless accounting system for the state of New Mexico to take advantage of technology advances in data processing and communication industries.

Section 8-6-7, NMSA 1978 currently states "If the Secretary of finance and administration draws any warrant on the State Treasurer when he knows or, with the use of available accounting information, should reasonably know there is an insufficient unexpended and unencumbered balance available for the purpose for which the warrant is drawn, he shall be in violation of this section."

The attached schedule of cash overdraft as of November 30, 1998 shows that there were 18 accounts with a cash overdraft balance of $5.0 million on the State Treasurer's books. Of these approximately 10 accounts may not have any federal funds/programs. This schedule further provides cash balances at State Treasurer on June 30, 1997 and 1998 for information purposes only. However, at this time a definite determination could not be made of any violation of this section because it is not clear what the legislature meant by term "unexpended and unencumbered balance available." If "unexpended and unencumbered balance available" term is considered in context of issuing a warrant to mean cash balance then there is a probability that the DFA is in violation of the law. If the legislature meant unexpended and unencumbered in relation to budget then it may not be a direct violation; however, it may be indicative that there is a need to strengthen cash management requirements, and this section of the law needs to be clarified.

This bill would also provide exemption to the Secretary of DFA in certain cases, from violation of warrant issuing requirements of Section 8-6-7, NMSA 1978. The violation of Section 8-6-7, NMSA 1978, is punishable by a fine of not more than $1000.00 or by imprisonment of not more than one year or by both such fine and imprisonment in the discretion of the judge.

This bill would place the responsibility for ensuring compliance at the agency level where the transaction originated and where the expenditure actually was incurred.

The bill also places responsibility on the State Auditor to conduct the audit of the comprehensive annual financial report and also would hold the State Auditor accountable and responsible for obtaining quality audits on a timely basis.

The Governing Magazine gives New Mexico a grade C- for financial management and states "Agency books are audited, but the statewide financial report is not. New Mexico aims to present a complete set of audited books for inspection sometime in 2001. Even the unaudited financial statements sometimes take nine months or a year before the public gets a chance to see them.

FISCAL IMPLICATIONS

This bill contains no appropriation and theoretically should not result in additional costs to the agencies because agencies should already be ensuring that expenditures are legal and sufficient funds exist prior to incurring the expenditure.

According to the General Services Department (GSD), this act makes it clear than transactions are moving from paper to electronic data interchange, and it would cost GSD an amount that can't be determined without more information. However, in the long term, it should save the department money and staff time.

The fiscal impact of conducting the audit of comprehensive annual financial report is estimated at $400.0 in contractual services and on or two full time employees at least during the first year; thereafter this cost may go down.

ADMINISTRATIVE IMPLICATIONS

If this bill is enacted, the FCD could be more effective in its monitoring of expenditures and in fulfilling its oversight responsibility. This bill will make the receipting, purchasing, disbursing and reconciliation of public funds process more efficient and effective without increasing significant demands on additional administrative resources.

According to the State Land Office, it audits all expenditures before submitting to FCD, maintains daily cash records, and compiles financial statements on a monthly basis. Therefore, there is no administrative impact associated with the transfer of responsibility.

The Administrative Office of the District Attorneys (AODA) indicated that the financial impact would be great. The processing of financial documents would become more expedient, vendors would get paid on a more timely basis, and agencies would have to be more accountable for their decisions. The new Accounting Information Management System (AIMS) will allow AODA to handle most of these new responsibilities.

DUPLICATION of SB54

TECHNICAL ISSUES

The title of this bill includes "eliminating controls of the financial control division". This bill would not eliminate controls but rather allows DFA to perform its oversight responsibility for monitoring and compliance on a sample basis instead of reviewing all transactions.

There are three different Sections, 6 - 4 - 6, 6 - 5 - 6 and 8 - 6 - 7, NMSA 1978 currently dealing with issuance of warrants and cash flow issues, hence it is necessary to clarify these sections of the law.

OTHER SUBSTANTIVE ISSUES

State agencies with an internal audit function could implement a process whereby expenditures would be tested internally to ensure that they comply with existing laws, rules and regulations which should provide greater assurance of compliance.

The PDD stated that maintaining reasonable control over fiscal matters while not instituting oppressive expensive control methodologies should be the goal of all government agencies. This bill moves in the right direction.

MP/prr:njw

Attachment