Joint Appropriations Minutes 02/02/2005 8:00 AM

Jason Dilges, Commissioner of the Bureau of Finance and Management (BFM), presented the budget information. Document 1 was distributed.

Key responsibilities of BFM include four divisions: Division of Budget Analysis, the Division of Financial Compliance, the Division of Financial Systems, and the Executive Management Finance Office.

The Bureau is authorized for 26.5 FTEs in FY2005 and has requested a decrease of 1.5 FTE in FY06. The Bureau is also requesting a reduction of $633,197 of general funds that is comprised of state sales lease back agreement (the reduction is $619,278) and a reduction of $13,919 for the half time FTE reduction. The FY06 request also Includes a reduction of $80,629 in other funds that consists of $55,000 reduction realized from efficiencies in computerization and a reduction of $25,629 from other funds for a vacant senior clerk position. The total reduction is $713,826 from all funds.

Representative Putnam asked how the efficiencies came about? Most efficiencies are a result of functions that save the state money. Before the computerization, the Bureau printed numerous financial reports and sent them to all state agencies. The reports are now distributed electronically and has realized savings in both paper and mailing costs. Changes have also been made when writing warrants. All new employees must participate in direct deposit for their paychecks. Representative Putnam asked how this is actually measured? Mr. Keeler responded that the reduction in other funds is primarily due to transaction costs. There is a decrease in BIT billing as well as in printing costs.

Representative Hunhoff asked how long the FTE has been vacant. Mr. Dilges answered that one of the FTEs has been vacant about two years and the half time FTE has not ever been filled.

Representative Hunhoff asked if the Bureau's personal services spending was on track with their budget. Mr. Dilges said that it was and there should be some Personal Services funding remaining due to the vacant FTEs.Current year to date: the Bureau's personal services are right on track with respect to the budget.

The Bureau will probably have to add another analyst due to work load. Legislative audit is not helping out as much as they use to, so BFM has to take over. There is no one working full-time on the Comprehensive Annual Financial Report (CAFR).

Senator Apa asked for a definition of CAFR and GASB. Representative Peters explained that a CAFR is a comprehensive annual financial report - the governments annual report, in the private sector, it is simply called an annual report. GASB stands for the Governmental Accounting Standards Board and they adopt standards that make the entire industry uniform.

Representative Klaudt asked if contracts will be decreasing since the computer system is up and running. The reply was that in general, it is not expected to.

Representative Putnam asked at what point in the year does the Bureau realize there is a need to re- adjust the expenditure schedule, or adjust the revenue estimate. Mr. Dilges replied that the Bureau looks at the revenues monthly, to know when the schedule needs changing. The Bureau has fairly close communication with the other agencies, to make sure those budgets are not getting out of hand.

The committee recessed at 8:45
The committee reconvened at 9:05 to hear the Department of Revenue and Regulation's budget.

Secretary Gary Viken - Finance Officer and Joan Serfling. Document 2 was distributed.

The key goal is to position SD to collect sales tax on remote sales. Where is the DRR with regard to collecting sales tax? The department is doing well. Simplification standards have been put into practice. The most sensitive changes made, were passing statutes. Were able to work to get a 4% sales tax on farm machinery. In streamline taxes all cities sales tax rates are to be the same on the same items. SD is in good shape with being compliant with the simplification process. We are working to get SD to come into compliance with the standards and to become accredited which allow the state to become part of the multi-state compact. This is important because every transaction that is part of this will have all the taxes going back to the appropriate county. Getting to the point where we are just 8 months away from the model.
Representative Haverly asked about the streamlined Sales Tax and how industries are voluntarily paying into this. How is the voluntarily larger business paying going to effect the state revenues? If businesses from outside of our state will have collected revenues, how will this effect the future? The response was that the multi-state contract is important because for the first time, businesses will be testing a software system that will remit those taxes to the appropriate local; there have been large numbers talked about in the past. Currently the University of Tennessee, conservative estimate is that SD lost $22 - $33 million in tax on remote sales. By 2008, the estimate is that we will lose $36-$58 million in tax on remote sales. By 2010, the estimated internet sales will comprise 6-8% of the retail taxable sales for state in this country.

Representative Haverly asked why move forward with a federal streamline system when you can do it with a compact system? Secretary Viken said that we can not now impose a duty on out-of-state companies to collect our taxes. We could just go to court or we could just work as a group with the business community to demonstrate that the voluntary system works, without burdening private business. Senator Smidt commented that he is a member of the streamline tax system. One of the issues that came about this issue is that are the states serious about it. As far as our certificate of compliance, we will vote on in July. It is a work in progress and is highly political. We are within days of submitting our application for compliance. What is the amount of money collected from these voluntary payers. Representative Glenski asked. The response was revenue from the companies without nexus is about $4.9 million in sales/use tax. There are more than 30 companies involved, they are the larger companies.

Division of Secretariat
A recommended increase of $1500 in general fund authority and $26,500 in other fund authority for a total increase of $28,000. $21,500 of this increase is recommended for personal services to provide authority sufficient to fund the salary and benefit costs of the 34 FTE authorized in this division. An inflation of $6500 is requested to keep an updated version of WestLaw, which is legal reference material. There is a need to develop a system that will allow us to combine multiple databases.

Representative Putnam asked if the committee will see an increase in contract costs. The answer was that some time in the future, there will be. Senator Napoli asked for an example for businesses that are not "bearing fruit"? Mr. Secretary replied that the suggestion was to centralize our collection process. There are 8.5 people in the department that are focusing on collection. What we are talking about is freeing up our time to go and find those business that may be underpaying, as well as broadening our tax collection base. Representative Hunhoff asked about performance indicators, and how it is measured? The decision to consolidate was made after the indicators were published. Senator Apa asked if the collection agency was structured. An RFT was issued and allowed companies to bid with Progressive Financial Services, the company selected. We were paying 35% to Aman, the previously used collection agency, a sliding scale but are averaging at 14.5%.

Division of Business Tax
A recommended increase of $78,031 in other funds. An increase of $40,000 is recommended in personal services to provide authority sufficient for salary and benefit costs of the 55 FTE in Business Tax. An increase of $5,031 for contractual services. $40,000 has been eaten due to getting rid of higher price employees and not getting the lower priced employees. 42% of revenue filings are coming in electronically.

Representative Peters asked if there is some kind of incentive that can encourage these companies to do electronic filing. Mr. Secretary responded that one of the things that will be done is turning to a collection agency.

Department of Motor Vehicles
A recommended increase of $2,351,581 in other funds for license plate costs for FY06, an average of $2.50 per set. $1,581 is the recommended increase in personal services for longevity pay.

Division of Property and Special Taxes
The recommended increase in personal services is 3.0 FTE and $89,197 in expenditure authority. 2 FTEs will be assigned to work with the Attorney General's Office ensuring compliance with the Tobacco master Settlement Agreement and protecting the $20+ million received by the State on an annual basis. The other FTE will be a Revenue Agent employed to promote and ensure compliance of the special taxes collected by this division. An increase of $13,832 is recommended in operating expenses to provide travel authority for the MSA Unit employees to conduct audits and reviews on tobacco distributors.

Attorney General, Larry Long & Roxane Gede, Assitant
The Master Settlement Agreement, part of the agreement was the commitment that we would help them level the playing field for the participating companies and the non-participating so that the companies participating in the process would not be put to disadvantage. This is now a regular process. If the tobacco companies can establish that South Dakota is not complying with state law, they can sue us for the $22 million. We have good marks in terms of keeping SD in compliance.

Representative Putnam asked if it is required to have an additional FTE. Attorney General Long confirmed that this is the situation. Representative Putnam asked if the Department of R&R adds the extra FTE to the Attorney General's need for an FTE. Secretary Viken replied that our people will help his attorneys with the cases, so the Attorney General is needed. Why is the general funds used rather than some other kind of funds? Not really a lot of thought process that was involved in looking at a particular fund. Representative Glenski asked why there was a request for two people rather than one. Mr. Long said that it was a guesstimate and that we figure it will get worse rather than better. Mr. Viken responded that more work will be done. Mr. Long replied that the escrow accounts that are accumulated basically sit there and accumulate interest and are not expended. The non- participating manufacturers have to pay into these accounts that can be used for purposes of damages against the state.

Division of Audits
A recommended increase of $75,000 in other fund authority to provide personal services authority needed to adequately fund the 52 FTE authorized in the Audit Division.

Division of Financial Services
1 * Banking
A recommended increase of $104,754 in other fund authority. An increase of $22,754 is recommended in personal services for the bank examiner staff career enhancement plan. $82,000 is recommended in operating expenses. This recommendation provides authority of $78,000 for contracting with a legal consultant with expertise in the banking industry and $4,000 for expenses associated with the Governor's Task Force on Trust.

Representative Putnam asked about the rule change for these positions. Secretary Viken said that the rules have not yet changed.

2 * Securities
A recommended increase of $46 in other fund authority. This increase is in personal services for the continuation of the longevity plan. This department operates on fees.

3 * Insurance
A recommended net decrease to the FY06 budget of $37,146 in other fund authority. The budget recommendation includes a decrease of $45,000 in personal services to reflect actual salary and benefit costs for the 28.5 FTE authorized an increased of $7,854 in operating expenses for the 50% increase in costs for printing at the BIT Data Center.

4 *      Insurance Fraud Unit
There is no change. There is less work in this area.

5 *      Petroleum release compensation
A recommended decrease of $8,000 in other fund authority. This decrease in legal consultant services is recommended to reflect anticipated expenditures.

Senator Earley asked what the plan was for this department and when will there not be a need for this program? Secretary Viken replied that there will always be a need for this. There will always be some kind of leaky tanks due to aging. However, there is the potential to decrease FTEs is there.

Division of Lottery
6 * Instant and 0n-line operations informational
Status quo budget, no change for the budget for FY06.

7 * Video Lottery
A recommendation to decrease other funds of $15,000 in personal services. This personal services decrease reflects the authority needed for salary and benefit costs for the 11.5 FTE authorized.

Professional and Occupational Boards-informational
8 * Real Estate Commission-informational
A recommended increase of $182 in personal services is for longevity pay.

9 * Abstracters Board of examiners-informational
The recommendation includes an increase of $513 in personal services and a reduction of $3,300 in operating expenses to reflect actual expenditures. A net decrease of $2,787 in other fund authority.

10 * Commission on gaming-informational
No increase is recommended.

Representative Glenski wanted to know where the distribution went to from gaming, especially in terms of the racing tracks. Secretary Viken responded that there has been about $800,000 to $1 million split to the Aberdeen and Pierre tracks. The on-line services in Sioux Falls is working with the gaming people to make the existing money stretch.

MOTION:     ADJOURN

Moved by:    Peters
Second by:    Gant
Action:    Prevailed by voice vote.

Wendy Weinert

____________________________

Committee Secretary

J.E. "Jim" Putnam, Chair

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