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Doubt cast on savings from agency mergers

by Michael R. Wickline | February 20, 2021 at 6:00 p.m.
A front loader clears snow from a parking lot in front of the Arkansas State Capitol on Friday, Feb. 19, 2021. See more photos at arkansasonline.com/220snow/ (Arkansas Democrat-Gazette/Stephen Swofford)

Arkansas Legislative Audit is questioning a Department of Transformation and Shared Services report that says more than $57 million in cost savings resulted from the merger of 42 executive-branch state agencies into 15 departments.

The auditors also found that $6.4 million in transformation-related relocation and renovation expenses were not included in the department’s report.

However, department officials are defending their figures on cost savings and counter that legislative auditors discounted some savings in a narrowly focused review.

In November, department Secretary Amy Fecher told lawmakers that the 15 executive-branch departments have saved more than $57 million through transformation of their operations since July 1, 2019, under Republican Gov. Asa Hutchinson’s reorganization of state agencies.

In March, Fecher had estimated in a report required under Act 565 of 2019 that the overhaul had saved $26.7 million.

Arkansas Legislative Audit issued its report over a week ago, on Feb. 10.

The audit report focuses on Act 565’s reporting requirements concerning overall reductions in general-revenue expenditures.

“Certain items presented in the Act 565 report and the November presentation do not represent a reduction in general revenue expenditures, but are presented as savings by [the transformation department),” according to the audit report.

“Budget reductions in the performance fund, reallocation of general revenue/reinvestment savings and transformation transfers/efficiencies do not represent a decrease in expenses,” the audit report said.

The transformation department countered that the audit report “dismisses offhandedly” the budget reductions, reallocations and efficiencies “because they do not represent decreases in expenses.”

The transformation department said, “This is a fundamental misunderstanding on Legislative Audit’s part,” because Act 565 asks for a detailed statement of each Cabinet-level department’s plan to reduce general-revenue expenditures and create efficiency and identify other potential cost reductions.

In November, Fecher said state departments reinvested savings of more than $18 million, to do more without asking for more state money, and saved more than $12 million from 12 departments not needing to tap the state’s performance fund for pay raises. As a result, that fund was cut by $10 million.

The departments had 1,400 fewer filled positions since July 1, 2019, and six agencies saved $6 million by surrendering 166 positions, she said.

The departments saved $1.4 million by renting about 92,000 fewer square feet, she reported, and the departments had transformation-related efficiencies of more than $8 million.

In November, some lawmakers questioned Fecher’s figures and maintained that the numbers didn’t reflect bottom-line savings for the departments.

Arkansas Legislative Audit’s report said certain departments have moved various agencies, boards and commissions to central locations as part of the transformation process.

The cumulative transformation-related relocation and renovation expenses totaled $6.4 million — among them $3 million by the Department of Education; $1.4 million by the Department of Transformation and Services; and $1 million by the Commerce Department, the audit report states.

And these expenses weren’t included in the April or November reports by the Department of Transformation and Shared Services, according to Arkansas Legislative Audit.

Transformation department spokeswoman Alex Johnston said transformation wasn’t the reason for the $3 million in renovation expenses reported by the Department of Education.

Building costs

Legislative auditors reported that the departments’ leased facilities increased by 34,135 square feet with the overall annual lease expense decreasing by about $683,359, or about 49% of the reduction reported by the transformation department in November.

The transformation department said it stands by its figure of $1.4 million in reduced rental costs from transformation. Fiscal 2021 ends June 30 and more reductions are yet to be realized, the department contended.

The legislative auditors said the state issued bonded debt of $43.3 million to purchase and make renovations at the Verizon Building No. 4 in Little Rock and the former Timex building in North Little Rock. The departments will make the debt payments starting at $2.3 million annually and decreasing to $456,000 over the next 30 years, the auditors reported.

Arkansas Legislative Audit said, “Since economic development prospects for Verizon Building #4 did not materialize, the state holds excess space.”

Most of the Commerce Department’s divisions have moved there. The Department of Corrections has several offices at the former Timex building.

“Two state-owned buildings potentially could be sold or leased as agencies are relocated,” according to the audit report.

One of the buildings is at #2 Capitol Mall in Little Rock. It is owned and occupied by the Commerce Department’s Division of Workforce Services, according to auditors.

The division is expected to move into the Verizon building in June or July, Johnston said.

The other building is known as the Main Street Mall in Little Rock and has been primarily occupied by smaller boards and commissions before the consolidation of state agencies, according to the state auditors.

“With the consolidation of various boards and commissions within the 15 departments, the building could be offered for sale after all agencies have relocated,” the audit report states.

The Department of Transformation and Shared Services’ Division of Building Authority has no outstanding debt on the Main Street Mall and has not appraised the building’s value. Johnston said selling the Main Street Mall is a potential option several years from now.

The transformation department said the purchase of the Timex and Verizon buildings occurred in 2018 prior to transformation and, if they are to count, they should be listed as assets.

Fewer employees

Auditors said the number of people employed within the 15 executive-branch agencies has decreased by more than 1,400 from fiscal 2019 to fiscal 2020, but salary expenses increased by $13 million.

The transformation department replied that the departments’ salary expenses have grown at a much smaller percentage each year under Hutchinson’s administration and through transformation.

Auditors said 16 vacant senior executive-level positions have not been eliminated by the establishment of secretary-led departments and remain in the departments’ appropriation acts. Filling these positions would cost the state between $2.7 million and $3.4 million a year.

Sixty-three of the 166 positions that the Department of Transformation and Shared Services identified as “surrendered” remain in the departments’ appropriation acts for fiscal 2022 and eliminating these positions could potentially reduce expenses by $2.5 million to $3.7 million a year, legislative auditors reported.

The first chance to surrender positions post-transformation is this year’s ongoing regular session, the transformation department said. “Departments can do better to work with the Legislature on surrendering positions and explaining why certain positions are kept.”

Most departments were unable to document savings in information submitted to the transformation department for their Act 565 report in March, according to the auditors.

Some department personnel expressed differing definitions of “efficiencies and effectiveness improvements,” resulting in different responses on reports submitted to the transformation department and difficulty in identifying actual transformation-related expense reductions, the auditors said.

“Many of the changes could have been undertaken without transformation; however, in limited cases, departments have been able to identify some advantages due to inter-department discussion,” Arkansas Legislative Audit reported.

The transformation department countered that these improvements and changes may be considered intangibles when drafting a report with limited scope for lawmakers, but transformation resulted in changes that would not have otherwise taken place.

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