Legislative audit finds Department of Revenue discrepancies ‘unique to this administration’

Published: Apr. 2, 2020 at 7:39 PM AKDT
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An annual audit of state government found dozens of outstanding issues, particularly with the Department of Revenue and its refusal to share oil and gas tax information with the auditor.

The annual legislative audit, required under the Alaska Constitution, looks into each government department exhaustively, finding discrepancies with how funds are spent. Most discrepancies are eventually resolved through consultation with department heads.

Kris Curtis, the legislative auditor, ran into roadblocks at the Department of Revenue. “We were unable to obtain sufficient appropriate audit evidence to provide assurance over tax revenues,” Curtis wrote in the report.

The department refused access to information on oil and gas production tax settlements and tax credits paid to oil companies, saying they were confidential.

Curtis, writing by email, said that the legislative auditor should have access “at all times (to) the books, accounts, reports, or other records, whether confidential or not, of every state agency,” before continuing to say that the department’s “decision to limit auditor’s access is extremely troubling given that an auditor can only provide assurance if the auditor has sufficient appropriate evidence.”

Curtis, who has worked at the Division of Legislative Audit since 1992 and signed off on the annual audit since 2012, says that’s unprecedented. “I haven’t seen this type of behavior by a state agency and it is unique to this administration.”

“What are they hiding from?” Asked Anchorage Democratic Rep. Chris Tuck, the chair of the Legislative Budget and Audit Committee. Tuck said one unanswered question is whether oil companies improperly used state money paid in the form of tax credits to reduce their tax burden.

Without documentation from the department, that question essentially remains unknown to the auditor.

In early December, Mike Barnhill became acting revenue commissioner, replacing Bruce Tangeman. By phone, Barnhill said he knows the importance of the legislative audit and sought to have the confidential tax credit documents made available.

After months of back-and-forth with the department, Barnhill sent an email on Dec. 16 to Curtis, saying that auditor access would be provided. But there was a caveat, information deemed privileged by the Department of Law could not be accessed.

“I have two problems with this,” Curtis wrote by email. “First, it was way past the timeline for completing fieldwork – I had communicated the deadline in writing and verbally. With a formal letter, two in-person meetings and multiple emails. Secondly, having files scrubbed by management is not reliable evidence.”

The tax documents did not become part of the legislative audit for FY19.

A second problem emerged from the Department of Revenue. Former Commissioner Tangeman refused to sign a written representation, a document typically signed by all commissioners to attest to the accuracy and completeness of the information provided.

Without that written representation, Curtis published “a qualified opinion” for the general fund and certain government activities, essentially meaning they were incomplete.

“That is shocking,” said Sen. Bill Wielechowski, D-Anchorage. “And, in my understanding that has never happened before.”

For ratings agencies, seeing that the State of Alaska has a qualified opinion could eventually negatively impact its credit score on the bonds market. “Nobody wants to lend money to someone who might be fudging the numbers or not accurately keeping track of their own accounts,” Tuck said.

Constitutional Budget Reserve transfer opinions

The auditor also raised questions about the way some funds were transferred into state government accounts.

Following advice from Alaska Attorney General Kevin Clarkson, the department did not transfer millions of dollars from federal oil and gas settlements to the Constitutional Budget Reserve, which can only be spent by a three-quarter majority vote of both the House and Senate. Instead, those funds were placed in the state’s general fund which can be spent by a simple majority vote.

The result, according to the audit, is that the CBR was understated by hundreds of millions of dollars.

Curtis writes that the department was wrong to not transfer those funds to the CBR. “Legal analysis does not support the attorney general’s position,” Curtis writes, referring to an opinion from attorneys for the Legislature.

The State of Alaska also lost out financially from that decision. The state earns a higher rate of return by keeping funds in the CBR, meaning the government missed out on roughly $4 million, according to the legislative audit.

Tuck says the same opinion was held by the Department of Law during the Walker administration and the differing legal opinions will likely be settled by a friendly lawsuit.

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