1

1 COMMONWEALTH OF HOUSE OF REPRESENTATIVES 2 APPROPRIATIONS COMMITTEE HEARING

3 STATE CAPITOL HARRISBURG, PA 4 MAIN BUILDING 5 ROOM 140

6 TUESDAY, FEBRUARY 23, 2016 11:55 A.M. 7 BUDGET HEARING 8 OFFICE OF AUDITOR GENERAL

9 BEFORE: HONORABLE WILLIAM ADOLPH, 10 MAJORITY CHAIRMAN HONORABLE 11 HONORABLE JIM CHRISTIANA HONORABLE 12 HONORABLE GEORGE DUNBAR HONORABLE 13 HONORABLE HONORABLE 14 HONORABLE WARREN KAMPF HONORABLE FRED KELLER 15 HONORABLE TOM KILLION HONORABLE JIM MARSHALL 16 HONORABLE HONORABLE DAVE MILLARD 17 HONORABLE MARK MUSTIO HONORABLE MIKE PEIFER 18 HONORABLE JEFFREY PYLE HONORABLE MARGUERITE QUINN 19 HONORABLE HONORABLE MIKE VEREB 20 HONORABLE JOSEPH MARKOSEK, MINORITY CHAIRMAN 21 HONORABLE LESLIE ACOSTA HONORABLE 22 HONORABLE HONORABLE 23 HONORABLE HONORABLE MADELEINE DEAN 24 HONORABLE MARIA DONATUCCI HONORABLE JOHN GALLOWAY 25 2

1 BEFORE: (cont.) HONORABLE 2 HONORABLE MICHAEL O'BRIEN HONORABLE 3 HONORABLE KEVIN SCHREIBER HONORABLE PETER SCHWEYER 4 ALSO IN ATTENDANCE: 5 HONORABLE KRISTIN PHILLIPS-HILL HONORABLE 6 HONORABLE HONORABLE DAVID PARKER 7 HONORABLE HONORABLE 8 HONORABLE TODD STEPHENS HONORABLE 9 HONORABLE JOE PETRARCA

10 COMMITTEE STAFF PRESENT: DAVID DONLEY, MAJORITY EXECUTIVE DIRECTOR 11 RITCHIE LaFAVER, MAJORITY DEPUTY EXECUTIVE DIRECTOR CURT SCHRODER, MAJORITY CHIEF COUNSEL 12 MIRIAM FOX, MINORITY EXECUTIVE DIRECTOR TARA TREES, MINORITY CHIEF COUNSEL 13

14

15

16

17

18

19

20

21

22

23 * * * * * *

24 SUMMER A. MILLER, COURT REPORTER [email protected] 25 3

1 I N D E X

2 TESTIFIERS

3 NAME PAGE

4 EUGENE DePASQUALE 4 AUDITOR GENERAL 5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25 4

1 P R O C E E D I N G S

2 MAJORITY CHAIRMAN ADOLPH: Thank you. I

3 would like to reconvene the House Appropriations budget

4 hearings for the fiscal year '16-'17.

5 Our next testifier we have today is a

6 former member of the Pennsylvania House, Auditor General

7 Eugene DePasquale.

8 Good afternoon.

9 AUDITOR GENERAL DePASQUALE: Thank you,

10 Mr. Chairman. And always good to be back here and look

11 forward to the discussion. Thanks for the invitation.

12 MAJORITY CHAIRMAN ADOLPH: I want to

13 apologize for running late today, but as I mentioned to

14 the Treasurer as he was leaving, we are in unchartered

15 water here and sometimes these questions are longer than

16 usual and sometimes it requires a little bit more detail

17 from those that are answering the questions as well.

18 AUDITOR GENERAL DePASQUALE: Hopefully

19 the two protein bars I had this morning will get me

20 through till lunchtime, so that's the only concern I

21 have.

22 MAJORITY CHAIRMAN ADOLPH: I'm sure.

23 Would you like an opening statement in general?

24 AUDITOR GENERAL DePASQUALE: If I could,

25 yeah. 5

1 We submitted formal testimony. If it's

2 okay, I'll dispense with that and just go through a

3 couple brief highlights and then more than happy, as you

4 know, to take any questions.

5 MAJORITY CHAIRMAN ADOLPH: Thank you.

6 AUDITOR GENERAL DePASQUALE: First of

7 all, I want to thank my team for the tremendous hard

8 work they did in putting together this budget request

9 and all the work they've done on behalf of the people of

10 the state, and certainly commend the work of both

11 chairmen here and the hard work you've had to do over

12 the last year and what is certainly going to be another

13 very challenging year.

14 I'm proud that over the last three years

15 as the Auditor General, we have found over 100 million

16 in wasteful spending across our state, 25 million alone

17 just in school districts and charter schools. Our

18 audits have uncovered problems in DEP, the Department of

19 Environmental Protection; Labor and Industry; Department

20 of -- now, Human Services, was Department of Public

21 Welfare; Pennsylvania Department of Education, where

22 they tragically had identified 561 struggling schools

23 with no plan to do anything about it; recent audits came

24 out about the Pennsylvania Gaming Control Board; and

25 also the cost of the budget stalemate. We've had audits 6

1 that have had, you know, big findings in school

2 districts across our state.

3 For example, our audit of the Pittsburgh

4 Public School District found that they actually didn't

5 know that they had $129 million surplus. That audit

6 release came out on the day they were scheduled to have

7 a tax increase vote. Fortunately for the taxpayers of

8 Pittsburgh, they canceled that vote as a result of our

9 audit finding. We also have had audits that, you know,

10 maybe don't seem as big, but have impact.

11 Laceyville Borough in the northeastern

12 part of the state, in Representative Boback's district,

13 they had pulled over a thousand people for speeding and

14 allowed them to plead down to handicap parking

15 violation. How we discovered that was that there was

16 only one handicap spot in the entire borough, so the

17 idea that you had 1100 handicap parking violations in

18 one year seemed mathematically difficult, so we found

19 out through the magistrate. And that is the message

20 that has gone out over the state, that in a sense,

21 that's stealing from the state and also allowing

22 reckless behavior on our roads.

23 We've even done, through the advice of

24 people on this committee and Representative Pyle

25 specifically -- in my first testimony where -- trying to 7

1 be helpful in our audits as well. So we've put together

2 a video to try to help our volunteer fire relief

3 associations, make sure they are in compliance because

4 that is a volunteer organization and they are doing

5 tremendously important work for the people all over the

6 state. So that video is helping them be in compliance

7 with what they need to do to make sure that they are

8 financially sound.

9 Coming up we are going to have audits

10 coming up of the Philadelphia School District, the

11 Turnpike Commission, Pennsylvania -- our prescription

12 assistance program for our seniors, military and

13 veterans affairs to make sure that our veterans' homes

14 are taking care of our seniors, also nursing home

15 oversight, and what is sure to -- as some of you have

16 read it out in Pittsburgh, the debacle at the Penn Hills

17 School District.

18 Our staff level is at the lowest it has

19 been in over four decades while we are producing more

20 audits than the department has ever produced in

21 33-percent faster time. Per employee, we are now

22 65-percent more efficient per employee than we were the

23 day I took office. That is based on the number of

24 audits we're doing, the timeline they complete them, and

25 the number of personnel that we have. 8

1 We have reduced cost everywhere from

2 travel to paper. And a big part of that is the work of

3 this committee and the legislature including the House

4 and the Senate and both administrations in allowing us

5 to make the important investments in technology so that

6 we could become more efficient. And we are very proud

7 of the idea that we've done that in a way that is,

8 again, still producing quality work. And as of last

9 week, the auto fleet of the department has now been

10 reduced by 92 percent.

11 All of my expenses are online. There

12 seems to be bipartisan concern for me that I am not --

13 that maybe I am sleeping on sides of roads because the

14 hotel costs are so low for me. Please note that when

15 I'm in Pittsburgh, I sleep on my mom's couch and the

16 room service is significantly better than anything that

17 anybody could ever get.

18 And so, the only increase that I'm asking

19 for here today is basically to cover the increased cost

20 of health care and pensions. We are prepared to absorb

21 everything else through the savings that we've been able

22 to produce over the last couple years. Ninety-five

23 percent of our department expenditures are to personnel.

24 We are a very labor intensive operation meaning we do --

25 everything we do has to be done by another person. And 9

1 we have done very little of any contracting out of

2 auditing work. Again, that's all done in-house.

3 Again, I want to thank you for having me

4 here today and the tremendous cooperation from both

5 chambers and both sides of the aisle on the work we've

6 done and look forward to your questions and continuing

7 my work on behalf of the people of this state.

8 MAJORITY CHAIRMAN ADOLPH: Thank you,

9 General.

10 And we certainly appreciate the job that

11 you're doing and obviously, the cost reductions that

12 you've put into place, you know, certainly helps the

13 situation in these tough economic times. Unchartered

14 waters --

15 AUDITOR GENERAL DePASQUALE: Right.

16 MAJORITY CHAIRMAN ADOLPH: -- okay?

17 And you know, at the end of January -- I

18 guess it was actually January 26, myself and Senator

19 Brown sent a letter to you asking you to consider

20 reviewing the Commonwealth payments that were made from

21 July 1, 2015, to December 31, 2015 -- $50 billion, okay.

22 I can't thank you enough for your quick response that

23 you are looking into it.

24 I was wondering -- I think that was dated

25 February 8th, Auditor -- and I was wondering if your 10

1 staff would be able to take on that project?

2 AUDITOR GENERAL DePASQUALE: The short

3 answer is not right now, but we are open to doing it.

4 The bureau that we would have that would do that is our

5 Bureau of State Audits. And what we do is -- right now

6 we are doing two very important audits that are behind

7 schedule because of the budget impasse. One is called

8 the CAFR, one is called the Single Audit, and this is

9 making sure that from a 40,000-foot view that all of our

10 federal money has been spent appropriately. And we do

11 that in cooperation with the administration and they

12 have deadlines to meet to make sure that we don't

13 jeopardize the federal funding. That is the bureau that

14 I would need to do this audit. So they will become

15 available in the early part of April once these audits

16 are done and at that point if there isn't resolution to

17 this issue, we're certainly going to be willing to

18 entertain that.

19 Doing an audit of that magnitude would be

20 very challenging, so we would probably have to work in

21 cooperation with the general assembly and the

22 administration to find which areas we think are the most

23 important to look at because, again, from the sheer

24 dollar amount that would be a heavier lift than we have

25 the staff to handle. But again, come early April when 11

1 that bureau is open, we are more than happy to entertain

2 the possibility.

3 MAJORITY CHAIRMAN ADOLPH: I'm glad to

4 hear that. I think there's an awful lot of members of

5 the general assembly as well as the general public, that

6 would be interested in your findings.

7 AUDITOR GENERAL DePASQUALE: Right.

8 MAJORITY CHAIRMAN ADOLPH: Chairman

9 Markosek.

10 MINORITY CHAIRMAN MARKOSEK: Thank you,

11 Chairman Adolph.

12 And Mr. Auditor General, welcome again.

13 AUDITOR GENERAL DePASQUALE: Thank you.

14 MINORITY CHAIRMAN MARKOSEK: Welcome

15 back --

16 AUDITOR GENERAL DePASQUALE: Thank you,

17 Chairman.

18 MINORITY CHAIRMAN MARKOSEK: -- I should

19 say, a former House member yourself. And you know, we

20 certainly appreciate your hard work that you've --

21 you've made us all proud, quite frankly, those of us

22 that knew you when you were here and you did a great job

23 here and you're continuing that.

24 Very briefly, I have some questions --

25 and again, following up on the fact that the budget is 12

1 not passed. And we're in an area here that we're not

2 familiar with budget-wise.

3 The school districts that for the last

4 number of months now -- there is a partial budget in

5 place, but as we know there's quite a bit blue-lined and

6 a lot of school districts will be running out of money.

7 Many school district have already borrowed money and

8 there's a figure that I have in my mind and maybe it's

9 not correct of about 14 million, I believe, that these

10 school districts have paid out in interest payments for

11 these -- for the borrowing that's gone on.

12 Can you give me an update on that and

13 maybe just give us a little broader view? You mentioned

14 it, I think, but a little broader view of what your

15 department has discovered and some of the numbers

16 involved with all these school districts that have had

17 to go out and borrow money and --

18 AUDITOR GENERAL DePASQUALE: Thank you,

19 Mr. Chairman, for the question.

20 This is going to be hopefully a detailed

21 enough answer because it's an important question.

22 As most people -- you know, obviously

23 everyone in this committee knows, but for people that

24 are listening, every school district gets a different

25 amount of money from the Commonwealth based on a whole 13

1 series of factors. And in around mid-September of 2015,

2 I told my team we have to start to get a grasp on, as we

3 audit school districts all over the state, what the cost

4 of the impasse was. And to be blunt, it was to find if

5 it was leading to any financial deterioration of

6 districts and how long they could survive without the

7 state appropriation. And September, October, November,

8 we came out with updates. It was not 100-percent

9 precise, I want to be clear to everyone here. We were

10 reaching out to districts; many responded, some did not.

11 By the end of the calendar year, 2015,

12 the estimate of what was needed to be borrowed just to

13 keep school districts open was just shy of $1 billion.

14 The interest on that is -- again, an estimate based on a

15 formula we used because, again, some school districts

16 shared it, some did not -- but it would be between, you

17 know, the 35, 45 million in interest costs would be the

18 estimate on that. It could be higher if, you know, from

19 school districts that didn't respond to us. Although,

20 my gut tells me that the school districts that had to do

21 a lot of borrowing were the ones that -- were the ones

22 responding because they wanted to make sure that message

23 got out.

24 We're soon -- because of the, you know,

25 basically the half budget on the basic ed formula being 14

1 released, we're soon going to be entering into that

2 territory again. If you thought that was bad news,

3 here's in my view the really bad news, and I'm just

4 going to lay it out.

5 If you're a bank and you were loaning

6 money to school districts, prior to this year it would

7 be seen as an automatic that there would be a state

8 budget, so you just loan them the money and you do it at

9 a very competitive rate. Banks today cannot guarantee

10 that there's going to be a state budget, so school

11 districts that have depleted their fund balances and

12 already had one loan, I believe now the second go-round,

13 their interest rate will either be significantly higher

14 or they may not get the loan. Now I don't want to

15 be -- I think, again, most will get the loan, but their

16 interest rate will be higher. But it is now for a

17 bank -- the dynamics have shifted. They no longer think

18 it's automatic that there'll be a state budget.

19 So as we're heading into this unchartered

20 territory that we've been talking about, from a school

21 district perspective, they're in actually an even

22 tougher position because many of them depleted their

23 fund balances and their property tax rate is already set

24 and they've already taken out one loan. So when they go

25 back out to market for another loan, they are going to 15

1 be in a significantly compromised position. And if

2 there isn't a settlement to this soon, that will happen

3 and, again, we'll probably look at the time frame of

4 about beginning of April when we're going to have our

5 next update as to what the situation is from a broader

6 perspective of school districts across the state.

7 MINORITY CHAIRMAN MARKOSEK: Well, I hope

8 we can perhaps have a budget solved by that time because

9 what you just indicated was a very sobering situation, a

10 very sobering dynamic here that is being caused by the

11 fact that we simply do not have a full state budget

12 passed at this point in time.

13 And you know, just while you were

14 speaking there, it made me think of how this -- the

15 Commonwealth in general with Wall Street downgrading its

16 bond ratings and the cost of borrowing for the

17 Commonwealth has gotten more expensive the same dynamic

18 applies here --

19 AUDITOR GENERAL DePASQUALE: Absolutely.

20 MINORITY CHAIRMAN MARKOSEK: -- with

21 these school districts. When there's doubt that they

22 can pay back the money that they've borrowed, the banks,

23 the financial community does what they do. They start

24 looking in a different direction or they start refusing

25 or they raise the interest rates even more, so the 16

1 number that I originally threw out of 14 million being

2 paid in interest, from what you just said, it sounds

3 like it could be way higher than that. You talked about

4 40 million to pay for that billion dollars in borrowing

5 and perhaps even more if they have to even borrow more

6 than that.

7 AUDITOR GENERAL DePASQUALE: The number

8 is -- and the concern I would have, if you're a school

9 district, the biggest -- obviously, there is a host of

10 problems with this.

11 One is it makes it very difficult for

12 them to plan for the next school year, that's one. Two

13 is, you know, we as a state mandate when they have to

14 pass a budget and the whole parameters on that. So

15 they're basing this off of, you know, in a sense --

16 think about a jet fighter landing on an aircraft carrier

17 at night. I mean, it's a very difficult task and

18 they're being asked to make assumptions on what they

19 don't know. But also, you know, the interest costs

20 which is just lost money, but the biggest problem is

21 going to be school districts that are in the 60- to

22 75-percent range on state reimbursement. They're the

23 ones that are going to be the most compromised.

24 MINORITY CHAIRMAN MARKOSEK: Yeah. And

25 just one further thought, the Governor in his budget 17

1 proposal had some money available for school districts

2 to repay some of the loan money that they have taken.

3 Of course, now since we don't have a budget, that is not

4 available certainly right now either, so we'll have to

5 see where all this leads us, but it was very sobering.

6 And I appreciate your answer as difficult as it was.

7 AUDITOR GENERAL DePASQUALE: Thank you,

8 Chairman.

9 MAJORITY CHAIRMAN ADOLPH: Thank you,

10 Chairman Markosek. Thank you, Chairman Markosek.

11 I'm going to save my response to some of

12 those statements till final, but so in order to move on.

13 Representative Greiner.

14 REPRESENTATIVE GREINER: Thanks, Mr.

15 Chairman.

16 Good afternoon, General -- almost said

17 good morning.

18 AUDITOR GENERAL DePASQUALE: We are

19 there, yes.

20 REPRESENTATIVE GREINER: We're there.

21 I'm going to switch gears a little bit.

22 I know we talked about education, appreciate your

23 remarks on that. The issue I want to focus on is

24 pensions. And we certainly have a statewide problem,

25 but as you're well aware I spent a lot of my time 18

1 focusing on the municipal side and I know you have some

2 information concerning this.

3 I wanted to talk with you in regard to

4 the municipal pension system aid and whether you can

5 describe the process by which your office determines the

6 amount of funding to be disbursed to municipalities and

7 the source of such funds.

8 That's -- I have a number of questions,

9 that's the first one.

10 AUDITOR GENERAL DePASQUALE: Okay. First

11 of all, every municipality in the state just about has a

12 pension plan, many of them have three, there's a couple

13 that have four. It would be for fire, police, and

14 nonuniform. There is, by our estimation, at least an

15 $8 million unfunded municipal pension liability from

16 across Pennsylvania based on the work we've done in

17 auditing all of the municipal pension plans.

18 Every year, the state of Pennsylvania

19 helps cities, boroughs, and townships make their annual

20 pension payment. That amount is based on what is a

21 relatively complex formula that is done by people that

22 used to work at PERC. Now, obviously there's a

23 discussion about where to go from there. The

24 calculations are done by the employees at PERC. We then

25 get that information and we disperse that aid to the 19

1 cities, boroughs, and towns all over Pennsylvania to

2 make it possible for them to make their annual pension

3 payments. That can range in some cities, boroughs, and

4 towns to close to 100 percent or anywhere from 15 to

5 almost 100 percent of what their annual payment is.

6 If that pension calculation is not done

7 and the payments aren't able to be made, every municipal

8 government budget right now is actually out of balance.

9 That payment is made from what is known as a foreign

10 insurance tax, which is not foreign governments, but any

11 insurance premium sold in Pennsylvania by an

12 out-of-state insurance carrier, and that was established

13 in about 1984.

14 REPRESENTATIVE GREINER: Okay. Let's

15 follow up on PERC a little bit. With the Governor's

16 abolishment of PERC, Public Employment Retirement

17 Commission, are you confident today that the municipal

18 pension system aid payments will be made properly and on

19 time as they have in prior years?

20 AUDITOR GENERAL DePASQUALE: I am

21 hopeful, but there is a lot of work that would need to

22 be done between now and then to figure out who would be

23 doing the calculations, both in the short term and the

24 long term. So I'm hopeful that it can get done, but

25 there's a lot of work to be done and some mechanics to 20

1 figure out who would do it.

2 REPRESENTATIVE GREINER: Well, let me --

3 and then just following up on that line of questioning

4 because I do think it's a very serious situation. I

5 mean, it's something that I know we're going to have to

6 address and is going to continue to be addressed even as

7 we speak now.

8 Is it true that if the municipalities

9 don't make their minimum municipal obligation, which is

10 known as the MMO payments by mid-October, that the

11 interest on that must be paid and the calculation needs

12 to go back to the beginning of this year; is that a true

13 statement?

14 AUDITOR GENERAL DePASQUALE: How it

15 works -- the short answer is, yes. But let me walk

16 everyone through how this works. And I'm sure I'm going

17 to get some piece of paper thrown at me if this is not

18 technically correct, but I believe this is going to be

19 the most accurate way to describe it.

20 Cities, boroughs, and towns have a

21 projected rate of return, anywhere from four to nine.

22 Now for the record, I think allowing cities, boroughs,

23 and towns to anticipate up to nine is crazy, but we'll

24 move aside because they are technically allowed to do

25 that right now. We're trying to move more of them to 21

1 convince them to move at least closer down to the five,

2 six range.

3 Whenever they don't make their

4 appropriate payment, the money that they are owed, that

5 they owe is based on their projected rate of return. So

6 the interest that they have to pay is based on what

7 their own -- so one that is anticipating 1 or 2 percent

8 would have a lower interest rate return payment for the

9 money that they have to borrow the make the payment

10 versus one that is at the higher.

11 So it's all other the map is what I'm

12 getting at.

13 REPRESENTATIVE GREINER: But it would go

14 back to the beginning of the year --

15 AUDITOR GENERAL DePASQUALE: Oh, correct.

16 That's correct. I just wanted to walk everyone

17 through -- it's not simply as to how much they owe.

18 REPRESENTATIVE GREINER: That's fine.

19 One last question and it kind of goes to

20 the municipal pension, the legislation. Your office has

21 issued a number of reports on the status of municipal

22 pension systems and your report, which was a very good

23 one, included eight recommendations to address the

24 underfunding of the municipal pension plans and four

25 recommendations to address the systemic issues related 22

1 to those plans. We talked about this last year.

2 The House Republican Caucus -- and I know

3 I am -- are willing to work with you on these issues and

4 we have been. But that being said and going back to

5 PERC, with the Governor's abolishment of PERC, how can

6 the general assembly, how are we able to get an

7 independent assessment of any proposed statutory

8 changes, you know, so that we understand how to deal

9 with a multitude of Pennsylvania municipal pension laws

10 that we have? I mean, how are we going to move forward?

11 I mean --

12 AUDITOR GENERAL DePASQUALE: Right.

13 REPRESENTATIVE GREINER: -- like I said,

14 we're kind of in an area, just as we are with the

15 budget -- this is somewhat unique and maybe you can

16 provide some incite on that.

17 AUDITOR GENERAL DePASQUALE: What I have

18 said both to the media in interviews about this, what

19 I'll say here, and I would say to anybody that would

20 ever want to talk to me about this anywhere, the work of

21 PERC, regardless of who does it, whether it's PERC

22 recreated, a line-item veto is undone, or there's new

23 legislation -- I'm not making a judgment on any of

24 that -- but the work they do on the calculations and the

25 independent actuary work are critical for Pennsylvania 23

1 and the work must be independent. The last thing any

2 elected official would want in voting on any type of

3 pension legislation would be to be relying on numbers

4 that had your thumb on the scale from one political

5 party or one idealogy.

6 So any legislation that would move

7 forward on municipal pensions, for example, you would

8 want the actuarial work done to be independent of any

9 political party, so that's why I've said the work needs

10 to be done and it needs to be independent.

11 REPRESENTATIVE GREINER: Well, as a CPA

12 who's done some auditing in the past, I couldn't agree

13 with you more and I'm glad that you stress that and

14 emphasize that.

15 I will say that I appreciate your

16 leadership on this issue. I know that -- like I said, I

17 know the focus many times is on the statewide pension

18 crisis. We do have a municipal crisis. And I know

19 you're out front on that and I look forward to working

20 with you in the future on that and appreciate you taking

21 the time to be here today. Thank you.

22 AUDITOR GENERAL DePASQUALE: Thank you,

23 Representative.

24 MAJORITY CHAIRMAN ADOLPH: Thank you.

25 Representative Schreiber. 24

1 REPRESENTATIVE SCHREIBER: Morning --

2 afternoon, General.

3 AUDITOR GENERAL DePASQUALE: Good

4 afternoon.

5 REPRESENTATIVE SCHREIBER: Thank you for

6 being here.

7 Thank you, Mr. Chairman.

8 Thank you to the entire team.

9 You highlighted in your testimony that

10 you have helped identify about $111 million in state

11 savings and I was just wondering if you could elaborate

12 on that a little bit. And is there any reconciliation

13 in that number for what may go back to the state's

14 general fund for obvious reason?

15 You know, we had the IFO in yesterday

16 testifying that we face a $1.9 billion structural

17 deficit. I think there's at least a recognition from

18 most that we're going to have to look at that on expense

19 and revenue. And there's probably -- it would be a

20 significant challenge to find that amount of money in

21 savings and efficiencies alone.

22 AUDITOR GENERAL DePASQUALE: Thank you,

23 Representative.

24 Technically the estimate we have is

25 111.42 million. That is broken into several categories 25

1 we have. Here again, this is, you know, just rough

2 ballpark -- pension money return to the Commonwealth,

3 2.66 million; potential fraud that we have found in

4 volunteer fire relief associations is 1.3 million;

5 unpaid corporate tax returns, 43.85 million; school

6 districts wasted money, 25.93 million; liquid fuel,

7 18.2 million; children and youth services,

8 14.49 million; tobacco settlement funds, 4.99 million.

9 That is, again, just broad categories on where we have

10 found it.

11 Now, in the school districts issue for

12 example, many of that recouping of those funds would

13 fall on the Pennsylvania Department of Education. We

14 have found this issue in both our audit of traditional

15 public schools and public charter schools. On the

16 traditional public schools, a lot of times we have found

17 transportation cost issues that we have found. And on

18 the charter school side we have seen on the lease

19 reimbursement side. So those are two broad categories

20 where we continually see issues. It's up to the

21 Department of Education to recoup that money.

22 On the other ones, sometimes we're able

23 to do it and sometimes it's Department of Revenue.

24 REPRESENTATIVE SCHREIBER: So along the

25 lines of the amount of money that you've been able to 26

1 identify -- you know, and this is obviously -- I think I

2 can predict the answer to this one. But do you have the

3 resources necessary -- in that we have a Department of

4 Revenue that several years ago created an enhanced

5 collections department and has netted a positive

6 increase in tax returns and collection of delinquency.

7 Is there a point at which if you were afforded more

8 resources, you could be identifying more? And you know,

9 parallel to that is also bringing the office into the

10 21st century technologically.

11 AUDITOR GENERAL DePASQUALE: I don't know

12 what this says about my life, but it's hard for me to be

13 anywhere in public where people don't want me to audit

14 something. Now, I will tell you that's not what I

15 dreamed about when I was a little kid. I love the work,

16 but when I was six or seven that's not where, you know,

17 I had thought that that's -- when you go to a Pirate's

18 game, for example, people at the hot dog line wouldn't

19 be telling you, hey, have you ever thought about

20 auditing X? But it is where it is. I say that to be

21 somewhat funny in my own way, but also to point out

22 people want everything audited all the time.

23 Obviously, there is some limits on the

24 budget of what the general assembly can make available

25 to my department, but the more people we have, the more 27

1 stuff we can find. We are one of the few agencies that

2 I believe there's no question -- now, other agencies may

3 produce better services. We can actually find more in

4 savings. But I throw this out as a caveat and so I'm

5 arguing against my own budgetary interests on this.

6 Those savings can only be materialized if

7 we have school districts and agencies that are willing

8 to accept the recommendations. And you know, people

9 have talked about, for example, creating a mandate among

10 school districts to follow our recommendations, whether

11 that's a good or a bad idea, we can debate another time

12 or maybe debate here.

13 But to answer your question, we,

14 absolutely, with more people could find more, but the

15 only way it actually produces real savings are for

16 agencies and school districts to take our

17 recommendations to heart.

18 REPRESENTATIVE SCHREIBER: Got it. Thank

19 you. Thank you, General.

20 Thank you, Mr. Chairman.

21 MAJORITY CHAIRMAN ADOLPH: Thank you.

22 Representative Warren Kampf.

23 REPRESENTATIVE KAMPF: Good afternoon,

24 General.

25 AUDITOR GENERAL DePASQUALE: Good to see 28

1 you, Representative.

2 REPRESENTATIVE KAMPF: So staff had

3 indicated to me that there's an ongoing audit, maybe

4 even a couple of the Philadelphia School District and I

5 just wondered what the status of that was. One of my

6 constituents is very interested in that.

7 AUDITOR GENERAL DePASQUALE: Most people

8 in Pennsylvania will likely be interested in it. It is

9 an audit of the Philadelphia School District. We are

10 close to wrapping that up. It will be released in two

11 parts. It will be the oversight of the charter schools

12 of Philadelphia and then the administration in the

13 school district itself. So there will be two parts to

14 it and the reason why it is in two parts is --

15 Most people do not realize this but there

16 are more students in charter schools in the city of

17 Philadelphia then there are in the entire Pittsburgh

18 public school system. So both, in a sense, both sides

19 of this audit are going to be very large indeed. And my

20 anticipation is that between the middle of March and the

21 middle of April both will be released.

22 REPRESENTATIVE KAMPF: Thank you, Mr.

23 Chairman.

24 MAJORITY CHAIRMAN ADOLPH: Thank you.

25 Representative Mike O'Brien. 29

1 REPRESENTATIVE O'BRIEN: Thank you, Mr.

2 Chairman.

3 And hello again, General.

4 AUDITOR GENERAL DePASQUALE: Good to see

5 you, Representative.

6 REPRESENTATIVE O'BRIEN: Normally when a

7 question is asked in this committee, we move on to

8 another question, but nonetheless I think that part of

9 the questioning that Chairman Markosek posed to you is

10 so important that it requires further comment.

11 In the Republican Herald on February the

12 2nd, you were quoted as saying, through a bank, this

13 used to be automatic, the state's going to pass a budget

14 and we'll get our money back. Now can anybody really

15 say that we are guaranteed that there will be a budget

16 in the next year? It's become a much riskier loan. I'm

17 giving a nightmare scenario, but that scenario is not

18 beyond believe.

19 Could you flash that statement out a

20 little bit, General?

21 AUDITOR GENERAL DePASQUALE: Yes. If

22 you're a bank, you give a loan out to someone that you

23 think is going to repay the loan.

24 When you go in to buy a house, they do a

25 credit check on you and they find out what your income 30

1 is and can you meet the monthly payment. And that's why

2 there's always a question in there, do you anticipate in

3 the next year or five years or ten years -- usually

4 there's a question in that questionnaire -- do you

5 anticipate your income to go up or down? That's why

6 they ask for pay stubs, to make sure that you're telling

7 the truth when you say what you make, so they know that

8 you can repay the loan. If you're a bank, they do the

9 same type of process with a school district.

10 Banks read the newspaper. Maybe they

11 read it online on their iPad or their iPhone or on their

12 Android device or maybe they still get the paper copy,

13 but they're reading it. And it's not a secret that

14 there isn't a state budget.

15 We can go back and forth as to whether

16 there was and the veto, I mean forgetting all of those

17 dynamics, the realities are if you're a bank that is a

18 much more -- especially if it's a school district that

19 is on the higher end of the state reimbursement.

20 There's no way around it, it's a riskier loan today.

21 And if you look at the dynamic that's

22 going on right now -- and look, I say this just -- it's

23 a reality. If you're a bank, can you guarantee that if

24 you loan a school district $5 million and half of that

25 money is relying on a state reimbursement, can you 31

1 guarantee to your board today that that money is going

2 to get repaid?

3 REPRESENTATIVE O'BRIEN: Best guess,

4 General, can you foresee in the near future any district

5 being denied a loan?

6 AUDITOR GENERAL DePASQUALE: I would hope

7 the answer is no, but I do think it's possible.

8 REPRESENTATIVE O'BRIEN: Now, let's move

9 on to a happier topic. From our service together, I

10 knew you share my concern about the environment.

11 You recently issued a special report on

12 the importance of meeting Pennsylvania's Chesapeake Bay

13 nutrition reduction target. Now aside from our concern

14 with the environment, my son is also a marine biologist

15 who's been doing research in the Chesapeake for the last

16 five years. I like to take a little bit of information

17 back to him. Talk about that for a second, would you?

18 AUDITOR GENERAL DePASQUALE: The report

19 or the bay itself?

20 REPRESENTATIVE O'BRIEN: Wherever you

21 want to go, General.

22 AUDITOR GENERAL DePASQUALE: We have --

23 start off for some people that aren't maybe aware, there

24 is a compact between Pennsylvania, New York, Maryland,

25 Virginia, and Washington, D.C., on reducing nutrients 32

1 that go into the bay, in a sense to try to clean the bay

2 up for the betterment of everyone, and Pennsylvania is

3 behind many of its benchmarks on getting there. And we

4 put together that report in a way to try to help foster

5 some commonsense solutions to help Pennsylvania reduce

6 the nutrient flow into the bay, which every state has to

7 do and we are behind in what we need to do to meet it.

8 And if that is not met, the possibility of fines from

9 the federal government would be very likely.

10 REPRESENTATIVE O'BRIEN: Always a

11 pleasure to be with you, sir, always appreciate your

12 comments and insights. Thank for being here today.

13 And thank you, Mr. Chairman.

14 AUDITOR GENERAL DePASQUALE: Thank you,

15 Representative.

16 MAJORITY CHAIRMAN ADOLPH: Thank you,

17 Representative.

18 Representative Marguerite Quinn.

19 REPRESENTATIVE QUINN: Thanks, Mr.

20 Chairman.

21 It's a pleasure to be here with you

22 today, General. Thanks for joining us.

23 Just a follow-up, two points I want to

24 make here or ask about. One I wasn't intending to, but

25 I want to follow up on the questions that were mentioned 33

1 regarding the interest payments that the school

2 districts have.

3 I believe it was the fall, it could have

4 been August, I sent to you -- maybe it fell in your

5 hands, maybe on someone in your staff -- about

6 legislation that I proposed and I brought up recently

7 earlier today to the Treasurer. With the question and

8 the concern of schools being denied a loan to a bank --

9 you know, as you said, they've depleted their funds,

10 they've already had a loan. There's no certainty right

11 now that there's going to be a budget -- even though we

12 have a budget right now, correct?

13 AUDITOR GENERAL DePASQUALE: Right.

14 REPRESENTATIVE QUINN: Thanks. I've

15 heard it back and forth here today.

16 But with that, I do want to bring to your

17 attention again the fact that our Treasury Department,

18 under its investment authority, if legislation were

19 enacted, they could get money out to our political

20 subdivisions, we could control the cost. We don't have

21 to worry about sending these exorbitant fees and

22 interest rates out into the market. We could keep it

23 all here.

24 It reminds me of, like, trying to loan a

25 child some money. So today I will get that information 34

1 to you because I'd like you to endorse that.

2 And now I'll move on to my other

3 question.

4 AUDITOR GENERAL DePASQUALE: And by the

5 way, just on that point, there is no question that the

6 Treasury would at least have the ability to do that.

7 Now, it would not be, certainly, a long-term solution,

8 but at least in the short-term instance, the thing that

9 would most be the best benefit of that would be you

10 wouldn't have to worry about banks charging the high

11 interest rates.

12 REPRESENTATIVE QUINN: Absolutely, and

13 any fees that go with it.

14 And the benefit would be even meeting our

15 moral obligation to the kids and those who are working

16 for, as well as the human service agencies.

17 So switching gears here. I appreciate

18 what you came up with and what you're doing in your

19 agency to save money. With that in mind, I wanted to

20 get your thoughts on something.

21 In 2013, Bucks County followed by

22 Montgomery County had the commissioners conduct or had

23 conducted for them a benefits dependent care audit.

24 Okay, what the findings for both counties turned out was

25 significant savings, savings due to cost avoidance. In 35

1 Bucks County's case, there were approximately 10 percent

2 of those people being covered as dependents were

3 ineligible. So obviously, we'd like our health care --

4 the benefits to go to those eligible to be receiving

5 them. That for just a county the size of Bucks -- I

6 mean it's a large county, large operation -- but that

7 was about $610,000 of savings due to cost avoidance

8 going forward. Montgomery County, I believe it was

9 about $230,000, I'm not exact on that.

10 The last time that the Pennsylvania

11 Employees Benefit Trust Fund -- which was estimated in

12 1988 and they administer health-care benefits to

13 approximately 77,000 eligible Commonwealth Pennsylvania

14 employees and their dependents and an additional 63,000

15 retirees and their dependents. The last time that I'm

16 aware that they were audited was 2011. The audit shows

17 that in 2011, the total deductions for medical and

18 supplemental benefits paid, totaled $869.2 million. I

19 can only imagine with health-care costs going up that

20 we're now in the range of about a billion dollars based

21 on national averages that there's about 8 percent of

22 employee benefit plans that have -- about 8 percent of

23 ineligible dependents listed.

24 Now, in Bucks County, as I said, it was

25 about 10 percent. Would you consider a dependent care 36

1 audit on the Pennsylvania Employees Benefit Trust active

2 plan? Now this isn't a hot-dog-line question.

3 AUDITOR GENERAL DePASQUALE: The short

4 answer is yes.

5 Right now we are auditing the Department

6 of Human Services on their EBT cards and other items as

7 a follow-up to my predecessor, Jack Wagner's audit of

8 that agency that found -- at least a potential for

9 significant fraud there. We issued an internal report

10 last year that identified many people that were deceased

11 still getting what is commonly referred to as cash

12 assistance.

13 That audit will be completed sometime

14 late spring, early summer. So that is attacking that

15 issue from a different area and that would be on the

16 welfare side of it.

17 On that issue, more than happy to

18 entertain that and it's something that if you have

19 information to give to my team, we will certainly

20 discuss it. But seems like an absolutely great idea

21 because there's no question, health-care costs are a big

22 driver of the state budget.

23 REPRESENTATIVE QUINN: Yeah. And a lot

24 of these eligible -- it's just simply, you know, a

25 birth, a death, a divorce, and someone not thinking I've 37

1 got to report it.

2 AUDITOR GENERAL DePASQUALE: Well, that's

3 what happened with the EBT situation, and that is it was

4 the staff at the Department of Human Services not doing

5 a cross-check with the Social Security Administration

6 when someone had deceased. So if someone's number was

7 in the system and they had this thing where a red light

8 goes on and it's supposed to flag someone. Well, you

9 know, they just for whatever reason weren't flagging it

10 when they were getting the red beep or whatever from the

11 Social Security Administration.

12 REPRESENTATIVE QUINN: General, given the

13 confines of staff and you just -- you know, there's only

14 so how many people you have and how many audits could

15 happen at once, would you recommend hiring an outside

16 agency to accelerate the speed of some of these audits?

17 I ask because the states of Maine, Kentucky, Minnesota

18 have seen a return on investments up to 3500 percent for

19 conducting audits such as this.

20 AUDITOR GENERAL DePASQUALE: Well, I

21 believe that as long as it is under the supervision of

22 the department, making sure that as the Auditor General

23 that, you know, we're looking out for all the

24 Pennsylvania taxpayers, that I think it's something that

25 I'm certainly open to. 38

1 We have a tremendous staff, a tremendous

2 team. The thing that probably makes them the most

3 nervous is when I say, yes. I think that's a good idea

4 to audit because you know, again, there's only so many

5 people that can do it. But it is something that I'm

6 open to depending on how budget situations play out.

7 But I do believe it should happen under the supervision

8 of this department, but having said that, I'm certainly

9 open to it.

10 REPRESENTATIVE QUINN: Good point, and

11 just one final note on that.

12 CPERS, California Pension Employee

13 Retirement System, which is the largest public system in

14 the United States, when they conducted this, last I

15 looked, they were only 95-percent complete because they

16 had to segment. The numbers are so big and they had

17 10 percent ineligible dependents.

18 AUDITOR GENERAL DePASQUALE: And here's

19 something too, the reason I say it's important that it

20 be under -- whether it be myself or any future Auditor

21 General, a lot of great accounting firms do a lot of

22 great work, but the thing that allows us to really

23 hammer away at the savings is the bully pulpit of the

24 Auditor General being an elected official. So if you

25 have a great audit of something that can show you how to 39

1 save money, but it's not in a sense banged away at in

2 the public's sphere and the entity that has the audit

3 gets to stick it in a drawer, you may have great

4 information, but you don't drive the change that is

5 necessary.

6 And I think there's one thing that -- you

7 know, I'm sure that just like anyone else in elected

8 office, there's people that are your detractors, your

9 supporters, and anywhere in between, but I think it

10 would be hard to find anyone that thinks I'm shy about

11 talking about issues publicly.

12 REPRESENTATIVE QUINN: Thank you. And I

13 thank you for not being shy about that.

14 Thanks, Mr. Chairman.

15 MAJORITY CHAIRMAN ADOLPH: Thank you,

16 Representative.

17 Representative Galloway.

18 REPRESENTATIVE GALLOWAY: Thank you, Mr.

19 Chairman.

20 And good afternoon, General DePasquale.

21 AUDITOR GENERAL DePASQUALE: Good to see

22 you, Representative.

23 REPRESENTATIVE GALLOWAY: You too.

24 I have two questions.

25 You've done a lot of work on several 40

1 things, but two things in particular, school districts

2 and pensions, and the pension will be a separate

3 question. It's more of a broader opinion than I'm

4 looking for.

5 First of all as it relates to school

6 districts, you know, we've touched on a couple things

7 and drilled done on loans for example, but you've found

8 many things in your audits, I'm interested to hear from

9 you what you think were the most interesting.

10 AUDITOR GENERAL DePASQUALE: Well, from a

11 policy perspective, I'm going to start with something

12 that may not be the most interesting, but I think it's

13 important from a policy perspective. And that is we

14 find transportation reimbursements that are off all the

15 time. The system is clearly too complicated for school

16 districts and I don't mean that there aren't good people

17 that aren't talented that can't do complicated things,

18 but the system is clearly a mess because school

19 districts all over the state end up either submitting

20 too much back to the state or not getting enough from

21 the state. So that system needs to be revamped.

22 The most interesting item I ever found

23 was the Mill Creek Township School District in Erie

24 County. They allowed Canadian minor league hockey

25 players to go to their school district for free in 41

1 exchange for hockey tickets for their administrators.

2 Now, just to let you know -- sort of pierce the

3 corporate veil here -- one of my taglines now when I'm

4 out on the stump is I'm not getting in the middle of the

5 fight between Ted Cruz and Donald Trump or whether Cruz

6 is one of the Canadian hockey players. So people think

7 that -- sometimes they think it's funny, sometimes they

8 don't.

9 The actual player is a guy by the name of

10 McDavid who was the number one pick for Edmonton that

11 was actually -- he would sign autographs and stuff and

12 so my joke internally was I hope he doesn't play for the

13 Flyers or the Penguins because then I'm going to have a

14 problem.

15 But that happened in Mill Creek Township.

16 You know, the school district itself is very well run.

17 It's a good school district, but that's simply

18 outrageous, outrageous behavior.

19 But from a broader policy perspective, in

20 public schools I think the transportation reimbursement

21 system needs to be revamped. And from the charter

22 school side of it, the lease reimbursement process for

23 the buildings they're running, that system needs to be

24 revamped. Those are the two most important from a

25 policy perspective. 42

1 REPRESENTATIVE GALLOWAY: Thank you.

2 And my second question has to do with

3 policy. And you know, we've talked a lot about

4 pensions, we're going to keep on talking a lot about

5 pensions. You've done a lot of work with pensions, but

6 I want to talk about pensions, not so much about the

7 nuts and bolts, but about a discussion you and I had.

8 It's been almost 10 years since you and I

9 were sworn in together. We sat together, right next to

10 each other on the floor for many years and you had a lot

11 of interesting points. You spent a lot of time early in

12 your career talking about pensions, but in a broader

13 context and it took me a little while to understand

14 where you were going with it.

15 You talked consistently about the focus

16 of Harrisburg on the here and now and the problems that

17 that would cause later on. Looking at separating out a

18 fiscal budget from a structural budget, simply looking

19 at what was due today and crafting a budget for that,

20 and then separating out structural and how that would

21 cause serious problems later on down the line. In other

22 words, making a minimum payment on a credit card,

23 getting out of town and that was your budget. I mean

24 that process has been in place, it's being done by

25 Democrats and Republicans, House and Senate, Governors, 43

1 everyone is to blame.

2 And at that time, I remember your speech

3 on the floor because you were arguing for more money for

4 pensions, but there was a budget deal in place with the

5 Senate and the Senate would not go along with it. In

6 other words, they just simply wanted to make the minimum

7 payment on the credit card and use the rest of the money

8 to quote, unquote, balance the budget, which it's hard

9 to believe you could balance a budget when you have

10 structural debt. It's just the way we work around here.

11 And for instance just last year, we spent

12 months, months and months and months not negotiating a

13 budget, not trying to fix the problems of the deficit,

14 but arguing about how much was due at that time -- 1.3

15 billion. It was very, very important because that's all

16 we were going to look at.

17 Now my question to you is who's right? I

18 mean, this comes to the crux of the entire budget

19 impasse, which is we have a Governor on one hand saying

20 we have dire consequences, right, and we have the

21 Republican party on the other side specifically on this

22 committee.

23 All day yesterday we heard a vigorous

24 defense for the status quo, saying things are fine,

25 things are okay. One member even said, you know, 44

1 Armageddon hasn't hit yet. And that's where we're at,

2 you know, we're in a very, very serious situation.

3 You have a lot of experience in this

4 building. You have a tremendous reputation and I'm

5 asking you for your opinion on something that we talked

6 about a long time ago.

7 AUDITOR GENERAL DePASQUALE: I'm going to

8 get there, but I think it's important to start off with

9 a story that I think highlights this issue because I

10 think this is a critical debate and it also is a part

11 about -- we can all say what's right or what's wrong

12 depending on our personal perspective, our districts,

13 our ideology, and it also goes to the art of the

14 possible.

15 When I played college football at the

16 College of Western Ohio, which we would have never been

17 on TV because we were not -- you know, we are division

18 III. Our coach was a former defense coordinator at Ohio

19 State, Bob Tucker, and he would play on Friday night

20 these inspirational tapes. I wish it would have given

21 me more talent. But you know, you listen to these tapes

22 and it's supposed to get you fired up and motivated.

23 And Lou Holtz was this big motivator -- Lou Holtz was

24 half the tapes.

25 And one of the times he was talking about 45

1 this canoe ride that he was taking with his family. And

2 his canoe tipped over and his joke was when the canoe

3 tipped over, the last thing on his mind was who is going

4 to be the quarterback at the University of Notre Dame.

5 The point was you had to get the canoe back up. Like

6 all these other long-term issues of playbook -- you

7 know, if he didn't get the canoe back up, he was going

8 to die.

9 The reason I bring that up is there is a

10 constant tug between what needs to get right now to sort

11 of get the canoe back up and going down the stream

12 versus what needs to happen to make sure other people

13 get to ride a canoe on the stream.

14 On pensions for example, I'm talking on

15 the municipal side, every time -- and believe me, I do

16 it all the time. Municipalities are allowed to

17 anticipate up to 9 percent on a rate of return. Does

18 anybody here believe that any municipality anywhere in

19 Pennsylvania met that number last year -- if they were

20 above 5, let alone 9?

21 The answer is -- it's not a trick

22 question -- the answer is no. Nobody would of met it

23 and many did not. And so I will say, you've got to

24 lower your rate of return and I say this in a

25 nonideological sense. But I'd rather be conservative 46

1 than optimistic on this because I'd rather anticipate 4

2 and get 9, as opposed to anticipate 9 and get 4.

3 And so the point I'm getting to on this

4 is every time I say that everyone looks at me and

5 recoils and thinks, oh, but that means we're going to

6 have to put more money in. And I say yes. But if you

7 don't put it now, you're going to owe significantly more

8 later. And so the question isn't when -- you know, you

9 want call it Armageddon, whatever term you want to use.

10 But the question isn't when a municipality can't make

11 the payment, not if but when.

12 The city of Scranton's fire pension fund

13 right now is 16-percent funded. The city of Chester's

14 nonuniform pension plan is 10-percent funded. That is

15 based on their own rate of return. So when we audit

16 these, we can't just make up what we believe the rate of

17 return is going to be, we have to base that number based

18 on what they put in as the anticipated rate of return.

19 And if we think the credit rating for Pennsylvania is

20 bad now, wait what happens when some municipality can't

21 make their pension payment.

22 So to come back to your original thing,

23 who's right? Do we need to fix the situation now and

24 look forward to the future? The answer is both. You

25 have to do both. You have to get the canoe back up and 47

1 get it going down the stream, but also part of our

2 responsibility is also trying to make the future better

3 for everybody else. And if you do it all with

4 short-term decisions, then yeah, maybe we all survive

5 another couple years politically, but the long-term

6 future of the state is going to be less bright.

7 So part of the challenge in elected

8 office for all of us is to do the best job we can inside

9 the art of the possible to not only fix the current, but

10 make the future better as well.

11 REPRESENTATIVE GALLOWAY: Thank you,

12 General, and good seeing you again, Eugene.

13 Thank you, Mr. Chairman.

14 MAJORITY CHAIRMAN ADOLPH: Thank you,

15 Representative.

16 Representative Karen Boback.

17 REPRESENTATIVE BOBACK: Hello, General.

18 Welcome.

19 AUDITOR GENERAL DePASQUALE: Good to see

20 you.

21 REPRESENTATIVE BOBACK: Same here.

22 The budget request that you put in for

23 this fiscal year includes $3 million to finish the

24 information technology project that you have started, so

25 can you tell us what have you been doing with the IT 48

1 modernization project and where do you intend to go with

2 this?

3 AUDITOR GENERAL DePASQUALE: Yes. Thank

4 you, Representative.

5 My first request to this committee was

6 for during my term would be a $9 million infrastructure

7 IT upgrade. At the suggestion of both chairmen here, we

8 broke that into several years of requests as opposed to

9 a one-time $9 million. And what we've done since

10 then -- and I think Chairman Adolph himself was the most

11 concerned to find out that some of our employees were

12 going to the Wi-Fi in McDonald's to do their work,

13 obviously not very secure.

14 What we've done since then is we've

15 created our own internal network that is now secure.

16 Everybody has mobile devices so that they can do their

17 work, you know, from anywhere. We are now as close to

18 paperless as you can get. Our system itself has been

19 upgraded inside the building. We have upgraded our

20 infrastructure throughout the state as well, so that now

21 we are -- well, we're not Apple, we're not Google, but

22 we are, I believe, a much more progressive --

23 technologically speaking agency than we were three years

24 ago.

25 The next step I want to take with this 49

1 three million is to create, in a sense -- you want to

2 think about it like the stock market. When you see all

3 the numbers of where items are trading at that

4 particular moment.

5 I want to create basically an internal

6 database that we can see where every audit is at every

7 moment of every workday with that last remaining

8 three million, which would be the last segment of the

9 original nine that we requested; although, it's going to

10 turn out to be much less than that because every thing

11 we did, every single item that we did on that original

12 $9 million request came in under budget. So every

13 single bid we did, every single project we did came in

14 under budget.

15 And I would hope that this last

16 remaining, we would again, come in under budget, but it

17 would go to create a consistent monitoring and database

18 for every audit we're doing, so that myself and my team

19 would have the ability to go in and make sure everything

20 is moving. And if anybody had any questions about an

21 audit, we would know exactly where it is, where the

22 update was. And maybe if somebody wasn't -- you know,

23 falling a little bit behind or they needed additional

24 resources, that's what my -- that's what we would do

25 with that last three million. 50

1 And to me, it's the last phase of that

2 original request I had to make sure that our department

3 is as technologically savvy as I believe is necessary.

4 REPRESENTATIVE BOBACK: Money well spent

5 as far as I'm concerned. If I could to segue into

6 something else, General.

7 You've been around this state with a lot

8 of nonprofit organizations where there is stealing of

9 funds that these organizations worked so hard to

10 accumulate. And I'm always asked the question, how did

11 he know? How did he know?

12 So we're talking public funds because

13 that would implicate your office, it would have to be

14 public funds of some short, correct? And then how do

15 you find out? Is it somebody who's suspect that calls

16 and if you feel it's valid to come and do an audit?

17 AUDITOR GENERAL DePASQUALE: Yeah, I mean

18 this would be sort of probably the point where my wife

19 would get ready for the joke about my jedi powers.

20 The reality is it's by having a great

21 team, by me continually pushing us to do the most we

22 can, to look under every stone. We have great auditors

23 in the field.

24 I'm going to take the municipal pensions

25 for example. I don't know if anyone even knew we had a 51

1 Municipal Pension Bureau outside of the department

2 before I became Auditor General. Now my joke is to that

3 team now they're going to be able to write books about

4 it. Now I don't know how exciting those books are going

5 to be, it clearly will not have the same volume as the

6 Harry Potter series when it comes to book sales. But we

7 now have highlighted the issue.

8 And I think a lot of people in our

9 department, I think a big chunk of them take tremendous

10 pride that we're make a big difference with that work

11 and that only motivates them to do more.

12 And so, how do we do it? It's a lot of

13 hard work. I think the technology investments you have

14 helped us make have done that, hiring good competent

15 staff, and I can be a pain in the rump every now and

16 then as well.

17 REPRESENTATIVE BOBACK: But you find out

18 from somebody in that organization that is --

19 AUDITOR GENERAL DePASQUALE: Oh, we get

20 tips all the time, yeah. And this is the -- for those

21 of you that have ever contacted me -- and again, I guess

22 there's always an exception. But this is why, you know,

23 I'm probably the only statewide elected official in the

24 country that has my own personal number, cell number on

25 my Facebook page. People call me all the time, text, 52

1 e-mail. My rule is we respond to, even if it's verbal,

2 we respond to everything we get. Every e-mail, you

3 know, idea we get, every tip. Now, sometimes you meet

4 and you realize the tip is just that, it doesn't have

5 merit, but we follow up on everything.

6 REPRESENTATIVE BOBACK: And the last

7 question, so have you seen a continuum? How do you

8 prevent this from happening?

9 I mean, organizations say that they've

10 gone through -- they've vetted people who are honest and

11 good and they trust them. So is there some kind of

12 common denominator that you've been finding that's the

13 red flag? Don't have this person in place with your

14 money?

15 AUDITOR GENERAL DePASQUALE: Yeah, it's a

16 great question. How do you prevent it? And I do think

17 most organizations -- in fact, here's the part -- part

18 of what gets the most publicity for anything where I do

19 is when we find something bad. We do about 5,000 audits

20 a year. About 4,000 of those 5,000 are clean audits, so

21 the vast majority of people are trying to do the right

22 thing. And even the times where we find something, it's

23 a mistake, but it wasn't, you know, any malice of heart

24 so to speak.

25 What can people do? A lot of the 53

1 safeguards we've put out and our recommendations for our

2 volunteer fire relief associations and how they can

3 prevent it, you know, you probably carry a lot of those

4 same recommendations into any nonprofit. A lot of that

5 goes into making sure that it takes more than one person

6 to access the money, that there's an involved board.

7 You know, sometimes it's just the little things.

8 Because if there's just cash sitting around, that person

9 that never ever took the position of treasurer with any

10 bad intentions, it's kind of not that hard to take the

11 20 bucks. So you have to make it so that more than one

12 person has to be involved to get the money. Some little

13 things like that.

14 But yeah, it happens. It happens in

15 little leagues, it happens in volunteer fire relief

16 associations, it happens in shelters. Again, it's the

17 minority, but it does happen. And some of the steps

18 we've put out there to prevent this in volunteer fire

19 relief associations, I believe those same steps would be

20 helpful in any nonprofit agency.

21 REPRESENTATIVE BOBACK: And I'm sure

22 they're on your website.

23 AUDITOR GENERAL DePASQUALE: Yeah, it's a

24 DVD or video on the website.

25 REPRESENTATIVE BOBACK: Thank you. Thank 54

1 you very much for your time.

2 Thank you, Mr. Chairman.

3 MAJORITY CHAIRMAN ADOLPH: Thank you,

4 Representative.

5 Representative Dean.

6 REPRESENTATIVE DEAN: Thank you, Mr.

7 Chairman.

8 Good to see you, General.

9 AUDITOR GENERAL DePASQUALE: Good to see

10 you, Representative.

11 REPRESENTATIVE DEAN: We miss you on the

12 House floor, but we're proud of what you're doing.

13 AUDITOR GENERAL DePASQUALE: I don't miss

14 the late nights. I mean, I love the work I'm doing now,

15 but you know, I miss the comradery. But sometimes when

16 it's 11 o'clock and I miss six straight anniversaries

17 because we got married on June 27th when I didn't know I

18 was going to be a state legislator at the time, you

19 know, that -- it's easier to make the anniversary now,

20 which is obviously a helpful bonus.

21 REPRESENTATIVE DEAN: Something I wanted

22 to say to you is that I appreciate the thoughtfulness

23 with which you bring your answers, but also the clarity.

24 You're willing to say things in very plain terms. You

25 avoid euphuism and so I think you inform us well. 55

1 AUDITOR GENERAL DePASQUALE: Being born

2 and raised in Pittsburgh helps with that.

3 REPRESENTATIVE DEAN: Is that right?

4 AUDITOR GENERAL DePASQUALE: I would

5 think, and anyone from Pitt -- that's just blunt talk.

6 REPRESENTATIVE DEAN: You talked quite a

7 bit and quite the interestingly, sadly, about the

8 interest costs for school districts and your audit and

9 what that shows. And how over time, if we do it again

10 for the next six months, it's going to be more than

11 double because it will be acerbating.

12 Have you had the chance do you have the

13 authority to take a look at the exact same kinds of

14 numbers and interest costs, credit card costs,

15 mortgages, lines of credit for the nonprofit sector, the

16 human service providers?

17 AUDITOR GENERAL DePASQUALE: We do not

18 have the same jurisdiction we have with our school

19 districts, where we have jurisdiction to every aspect of

20 what they do. We have asked, you know, we have reached

21 out just for some random conversations at what's

22 happening at the county level to get a sense of what's

23 going on, but no, we don't have the jurisdiction.

24 We do think that if the situation

25 persists and the counties are running into the same 56

1 thing, not that we would have the authority, but we will

2 likely reach out to the county commissioners

3 associations and various counties across the city to see

4 what their human service departments have to borrow

5 because that's where the line and share -- this would

6 take place at the county level.

7 But we don't have the jurisdiction to

8 just go in and audit it the same way we do at the school

9 district level.

10 REPRESENTATIVE DEAN: I appreciate that.

11 And that's part of the price of our budget impasse.

12 Another part of the price of our budget impasse and

13 utter failure is economic development.

14 In today's Philadelphia Inquirer, there's

15 an article about economic development slow down in

16 Philadelphia, specifically due to the unreliability of

17 state funds. Does your department -- not that I want to

18 give you more work -- does your department have the

19 ability or the authority to look at the economic slow

20 down that is one of the victims of this budget impasse?

21 AUDITOR GENERAL DePASQUALE: We certainly

22 have the ability to audit and we have audited the state

23 economic development programs. In fact, we met with

24 Secretary Davin yesterday to have a discussion about,

25 you know, some follow-up work to that. 57

1 As far as the general economic outlook,

2 you know, we would be entitled to the same opinion as

3 other economists would on that. But there is no

4 question that if -- and look, there's two part of this

5 debate on economic development.

6 One side of this is states shouldn't be

7 giving out grants and loans and that stuff should just

8 flow through the free market. And I think that is --

9 it's an important debate to have and actually one that

10 has a lot of merit if the other 49 states would stop as

11 well.

12 If we're going to be doing it, I think we

13 need to do it right and be smart about it and I think

14 for a big chunk of time we haven't been. I think we've

15 put money in front of the fan and just see where it

16 would blow. So if you're having that mentality along

17 with it not even being reliable funding, you're not

18 going to drive quality job creation.

19 REPRESENTATIVE DEAN: I appreciate that.

20 It would be fun to think that maybe in a

21 year or two we could come back and at this hearing,

22 instead of your office use your precious resources

23 looking at the costs of our failures, we could talk

24 about the robust growth of Pennsylvania, the service to

25 our human service providers, and how they're providing 58

1 to the neediest among us, the robust education system.

2 It'd be fun to think maybe in a year or two we could

3 turn this around and I'm going to be optimistic that we

4 will.

5 AUDITOR GENERAL DePASQUALE: Absolutely.

6 REPRESENTATIVE DEAN: My final question

7 has to do with the really terrific findings that your

8 audits show for funds identified, you know, more than a

9 hundred million dollars over the course of the last

10 couple of years. What of those funds or how much of

11 those funds gets captured? You identify them as waste,

12 fraud, abuse, whatever you find them to be. Do you go

13 back and then, okay, say of the 111 what we've

14 identified here's what's coming back?

15 AUDITOR GENERAL DePASQUALE: The areas

16 where we know work gets done to try to recoup, that

17 would be on liquid fuels, certainly on the pension

18 payments, those are areas and on transportation costs in

19 school districts.

20 I have been incredibly disappointed to

21 date that -- and again, hopefully the changes are coming

22 at the department level in the Department of

23 Education -- but one of my biggest frustrations over my

24 first two-plus years in office was on the charter school

25 lease reimbursement issue that even many charter schools 59

1 know is -- some of the things that go on there are

2 wrong. The lack of the Department of Education

3 aggressively pursuing to recoup those funds has been a

4 major frustration for me.

5 And we do believe that the Department of

6 Revenue is trying to get better at their corporate tax

7 collection rate. It actually has seen improvement over

8 the last 10 years, it needs to get even better.

9 But those are areas where I've seen some

10 progress and some areas where I have not.

11 REPRESENTATIVE DEAN: Okay. Terrific.

12 Thanks for your work.

13 MAJORITY CHAIRMAN ADOLPH: Thank you.

14 I just want to mention because I've seen

15 a lot of folks coming into the room probably expecting

16 the judiciary.

17 AUDITOR GENERAL DePASQUALE: I am not a

18 judge.

19 MAJORITY CHAIRMAN ADOLPH: We understand.

20 It's supposed to start at 1 o'clock, we

21 have moved that back to 2 o'clock, okay? So those that

22 are walking into the room for the judiciary hearing, it

23 will not start till 2 o'clock. Thank you.

24 Representative Mark Mustio.

25 REPRESENTATIVE MUSTIO: Thank you, 60

1 Chairman.

2 General.

3 AUDITOR GENERAL DePASQUALE: Good to see

4 you.

5 REPRESENTATIVE MUSTIO: Good to see you

6 as well.

7 I talked with the Treasurer about public

8 confidence before any additional taxpayer money is spent

9 and I would like to talk with you about the broader

10 budget and your work, but then also get into your

11 specific budget which we really don't ask a lot of

12 questions about because we get on other topics.

13 I'm going to read you one of your quotes

14 recently on a fine. It's a good one, it's a good one.

15 And you can maybe expand upon that and I have some

16 follow-up questions.

17 We announced the audit that they have the

18 largest surplus in the state. A board member comes up

19 to me and says we have a tax increase vote tonight, but

20 we didn't know we had this surplus, DePasquale said. So

21 we saved that district a tax hike.

22 If you could talk a little bit about the

23 Pittsburgh School District audit and how on earth does

24 something like that happen?

25 AUDITOR GENERAL DePASQUALE: I'll walk 61

1 through a little bit of the history of that audit.

2 Soon after Mayor Peduto took office, he

3 called me up. I forget if it was a call or a text, but

4 he said, need to talk to you about the Pittsburgh School

5 District. And when we spoke he said, I'm being told

6 that they may go bankrupt by 2016 or 2017, I need you to

7 get in ASAP and do an audit. Now, they were on the

8 schedule, but we, at his request, we did move it up in

9 the schedule.

10 It was an exhaustive process. And we

11 went into it with knowing that their belief of the

12 administration was that they were looking at 2018 at the

13 latest of there being the financial wrecking ball,

14 meaning potential bankruptcy of the city or not able to

15 make their bills. If you want to say it's

16 nontechnical -- not technically bankruptcy.

17 We do the audit. And I say we, it's not

18 just me, it's the whole team. And we put a lot of work

19 into it, and it's obviously a very big district, and we

20 have our internal meeting about it. And it's like, wow,

21 they're going to be thrilled because not only are they

22 not going bankrupt, but they have the largest reserve

23 fund in the state, about 129 million give or take a

24 couple dollars. And we verified that those were the

25 exact numbers. 62

1 I am sure that when we picked the date

2 for when I was going to go out there for my press

3 conference with the superintendent, we -- first of all,

4 I did not know that they were scheduled to vote for a

5 tax increase. We picked a day when I was able to get

6 there. It happened to be on the day that the tax

7 increase was scheduled for a vote that evening by the

8 board. If we would have been a date later in the press

9 conference, that tax increase would have likely

10 happened.

11 The board members that were there at the

12 press conference literally came up and said, we were

13 told and have been getting told that this is much worse.

14 Are you sure of these numbers? Look, you can obviously

15 be off by a penny or two, but where we were showing the

16 district was -- very strong financial shape, relatively

17 speaking, because you can always do something better --

18 of the big city districts in Pennsylvania, they were in

19 the best financial shape of any audit we had found.

20 That night they tabled the resolution on

21 the tax increase and a month later they voted to not

22 raise them and keep the rate the milage rate as is.

23 How could you think that you're going

24 bankrupt in 2018 and have the largest reserve fund in

25 the state? I wish I had an answer for that, but I 63

1 don't. I'm just pleased that we were able to do the

2 work we did and make sure that the taxpayers didn't get

3 a higher bill and actually know that there's money that

4 the district now has that they can make some investments

5 in early education which is one of -- art, music -- one

6 of the programs that many people in the city of

7 Pittsburgh think they want to see back in the classroom.

8 REPRESENTATIVE MUSTIO: I saw, I think,

9 one of your other quotes, it was like a bookkeeping

10 error. They didn't put quotation marks around it, but

11 it said a lot of times it comes to poor bookkeeping. I

12 mean is that something that really should be audited

13 then also as processes? Because --

14 AUDITOR GENERAL DePASQUALE: Well, we

15 did, in our audit, show them how to make sure that

16 didn't happen again.

17 REPRESENTATIVE MUSTIO: And that's not

18 the only district in Allegheny County. I mean, three

19 years ago, there was another school district, a lot

20 smaller, 3,000 students, that found $28 million.

21 So again, it gets back to what I was

22 talking about earlier is, you know, we've made tax

23 increase votes in this body, but there needs to be

24 confidence that you have something to sell to your

25 constituents that this is the right thing to do. When 64

1 you're doing your job and are meeting, before this you

2 said, wait till some of the others ones come up, right?

3 So there's more to come.

4 AUDITOR GENERAL DePASQUALE: Right.

5 REPRESENTATIVE MUSTIO: And we're sitting

6 here debating about, you know, sending more money to a

7 system, at least administratively, that doesn't seem to

8 be working very well for the local constituents in at

9 least two cases and it sounds like there's more to come.

10 AUDITOR GENERAL DePASQUALE: Yeah, the

11 city of Harrisburg, for example, every student at the

12 high school is on free or assisted lunch. You know,

13 obviously, that's because of the economic challenges in

14 the city and many of the kids that are in the public

15 school system. We found in our audit that they -- you

16 know, the kids were going through the lunch line and

17 there was no tracking of what they had. Now, again,

18 obviously I want those kids to get a good healthy meal,

19 this isn't about that, it's about not tracking it. And

20 they lost millions of dollars in federal reimbursement

21 because they weren't even tracking the food the kids

22 were getting in the lunch line.

23 REPRESENTATIVE MUSTIO: Now if we could

24 get into your budget briefly.

25 Your request for the office this year is 65

1 $43,596,000. Of that number, roughly, do we know what

2 the salary is?

3 AUDITOR GENERAL DePASQUALE: The average

4 salary of the employees to break it out -- you know, our

5 compliment is about 475, 480. The average salary is

6 63,854 per person.

7 REPRESENTATIVE MUSTIO: Do you know what

8 the total salary is?

9 AUDITOR GENERAL DePASQUALE: Ninety-five

10 percent of that is a salary or health-care benefit

11 request -- so I'm sorry, pension, health care, salary,

12 95 percent of that is that.

13 REPRESENTATIVE MUSTIO: What I'm trying

14 to get to is, your staff had let our office know that

15 there was a $600,000 increase in your workers'

16 compensation line item. And this is weeds, this is

17 really weeds right now and it's something that we can

18 follow up on, but I would really like, you know, the

19 help of your office because it's titled the auditor of

20 finding out what the problem is here.

21 I'm assuming that most of your staff time

22 is either office or you have auditors that are out on

23 the road and they ultimately end up in an office

24 somewhere doing paperwork. They're not building

25 buildings or anything like that. So if you look at the 66

1 rates that are being charged for workers' compensation,

2 the $600,000 increase is probably, on my calculations,

3 about $500,000 more -- and that's just the increase --

4 than what somebody that has the same exposure would be

5 paying in the private sector, okay? So there's

6 something wrong here in this calculation.

7 I understand there's self-insurance and

8 you might be paying for other departments' losses, but

9 that's unfair, I think, for your budgeting process.

10 AUDITOR GENERAL DePASQUALE: That is a

11 number that we are told we have to pay, that's not one

12 we came up with. And it certainly, it was -- let's just

13 say, I might have said something along the lines of how

14 in the -- do we have to pay that?

15 REPRESENTATIVE MUSTIO: It's a 70-percent

16 increase, your rate was a 70-percent increase. So

17 either you're having a lot of injuries or there's some

18 issues here that need to be further investigated because

19 this is so outrageous. I mean, it is multiple times

20 what's being paid even by school districts, for example,

21 and they have a similar exposure to what you do.

22 AUDITOR GENERAL DePASQUALE: Our work is

23 very important, but nobody has ever, you know, said the

24 auditing line of work is inherently dangerous.

25 REPRESENTATIVE MUSTIO: Well, and I 67

1 understand somebody can get injured in an auto accident.

2 AUDITOR GENERAL DePASQUALE: And that

3 does happen from time to time.

4 REPRESENTATIVE MUSTIO: And that's fine.

5 But your increase was 70 percent, so something needs to

6 be audited from a risk management standpoint, and that's

7 not your area of expertise, but somebody in the state

8 that is passing these numbers along to you, those

9 figures need to be looked at.

10 AUDITOR GENERAL DePASQUALE: To me,

11 there's no way to get around it, we're covering for some

12 other work because we just don't tap into it that much.

13 REPRESENTATIVE MUSTIO: That's unfair to

14 your line item and it's hiding then the real problem and

15 symptoms of problems that are elsewhere in the state

16 which is ultimately costing taxpayers money, okay.

17 In your case, I think it's probably a

18 million dollars, but I would need the actual salary

19 without benefits. Thank you.

20 AUDITOR GENERAL DePASQUALE: Understood.

21 Thank you. Look forward to -- we can discuss that

22 further, look forward to it. Thank you.

23 MAJORITY CHAIRMAN ADOLPH: Thank you.

24 Representative Schweyer.

25 REPRESENTATIVE SCHWEYER: Thank you, 68

1 Chairman.

2 And, General, good evening. There's my

3 humor for the day. Thank you.

4 I'm going to just sort of skip through

5 some of my quick remarks in the beginning and kind of

6 get into the meat of what I wanted to chat with you

7 about very briefly.

8 I would actually argue that the single

9 most important or best report that you've released was

10 one on January 21st because it talks about Allentown,

11 and as someone who represents only the city, where you

12 talk about the city's pension funds now upwards of 89-

13 and 90-percent funded for the three major pension

14 systems. And that is different than what we hear from

15 the overwhelming majority of municipalities and

16 political subdivisions across the Commonwealth.

17 As you noted in that, we were able to

18 address our unfunded liabilities largely through a

19 lease, almost a sale of an asset, which I do understand

20 not everybody has the ability to do. However, the

21 single most important lesson that we took from all of

22 that is you can't have pension reform without funding

23 your unfunded liability. Those two things have to go

24 hand in hand. It's also fair to say you can't fund your

25 unfunded liability without looking at ways to change the 69

1 way you deliver your pension system as we made some

2 changes in Allentown.

3 And so I want to talk a little bit about

4 and get a little bit of your perspective of the

5 different ways that municipalities could move forward in

6 funding their unfunded liabilities that are realistic,

7 reasonable ways of getting to that inherent issue, which

8 is the unfunded liability.

9 AUDITOR GENERAL DePASQUALE: Thanks,

10 Representative.

11 Yes. And what happened in Allentown was

12 they were able to lease sale with the county, I believe

13 it was the water authority.

14 REPRESENTATIVE SCHWEYER: It was the

15 county authority, yes.

16 AUDITOR GENERAL DePASQUALE: And so that

17 was able to put an infusion of cash in. That ability is

18 limited to only a handful of cities, boroughs, and towns

19 across the state. So that's -- something like that

20 can't be used specifically or generally speaking to fix

21 the issue.

22 REPRESENTATIVE SCHWEYER: Understood.

23 AUDITOR GENERAL DePASQUALE: However, it

24 did, in that instance -- was able to infuse that cash

25 and get the pension liability percentage significantly 70

1 -- or the unfunded liability went significantly down.

2 We did, at the request of the

3 administration -- I put together -- the administration

4 put together a pension task force which I led. We put a

5 host of recommendations before the Governor, his team,

6 and we shared that with the general assembly.

7 We have more municipal pension plans in

8 Pennsylvania than the rest of the country combined. I

9 believe there is a huge amount of savings that we can

10 have by having more administrative consolidations of

11 those pension plans.

12 For example, the city of Harrisburg has

13 three pension plans. Two of the three that were put

14 into the Pennsylvania Municipal Retirement System are

15 now over 100-percent funded. The one that is still run

16 by the city is about 80-percent funded, which is better

17 than most, but the point is when you're in PMRS, it

18 forces that municipality to put the right amount of

19 money in, to not play around with the rate of return,

20 and the benefit levels freeze at that moment when you go

21 in.

22 REPRESENTATIVE SCHWEYER: What is the

23 rate of return for the PMRSs?

24 AUDITOR GENERAL DePASQUALE: Five.

25 REPRESENTATIVE SCHWEYER: Five, okay. 71

1 AUDITOR GENERAL DePASQUALE: Now,

2 understand that as cities go in, they have to phase into

3 going to the five. So basically our prescription was

4 any plan that was poorly funded -- and we can debate

5 what that percentage would be -- would move into being

6 administered by the Pennsylvania Municipal Retirement

7 System to lower the fee structure.

8 For example, the city of Reading -- and

9 they pay -- I mean this is, you know, unbelievable.

10 When you're in PMRS your average fee structure is

11 between 250 and 300 dollars per member per year. The

12 city of Reading's fee structure is $4,000 per member per

13 year. And no, by the way, not beating the market.

14 I'd love to have the explanation as to

15 how that's worthy of taxpayer dollars. And what's even

16 scarier about it is that no one in Reading seemed to

17 know they were the worst in the state on this until we

18 pointed it out.

19 So if you go into PMRS, that type of

20 nonsense goes away. But it doesn't fix the problem

21 because you would still need to have cash go in or some

22 level of financing go in to take care of the unfunded

23 liability as well. We believe our plan is a

24 comprehensive fix to the issue.

25 REPRESENTATIVE SCHWEYER: Okay. Just 72

1 real quick, when you talk about the administrative

2 consolidations -- and, Mr. Chairman, this will be my

3 last question -- one of the fears that you get from

4 places like Allentown that have a well-funded municipal

5 pension is that we are going to be covering the losses

6 and expenses of other municipalities. Would you like to

7 dispel that quickly?

8 AUDITOR GENERAL DePASQUALE: Yeah. First

9 of all, only plans that would be below a certain

10 percentage would go in under our idea. And two is the

11 plans would remain separate meaning if you're

12 municipality X, that plan is not merged with any other

13 municipality. That plan remains separate and it's still

14 the responsibility of that municipality to fund it. The

15 administration function of that would be consolidated,

16 but not the plan itself, meaning if you are a taxpayer

17 from another part of the state, you would not be on the

18 hook for one dime of their liability.

19 REPRESENTATIVE SCHWEYER: Very good,

20 that's an important distinction. I get that question at

21 home fairly frequently, so thank you, sir.

22 AUDITOR GENERAL DePASQUALE: Thank you.

23 REPRESENTATIVE SCHWEYER: Thank you, Mr.

24 Chairman.

25 MAJORITY CHAIRMAN ADOLPH: Thank you, 73

1 Representative.

2 Representative Mike Peifer.

3 REPRESENTATIVE PEIFER: Thank you,

4 Chairman.

5 Thank you, General, for being here.

6 AUDITOR GENERAL DePASQUALE: Good to see

7 you, Representative.

8 REPRESENTATIVE PEIFER: I, too, want to

9 applaud you, you know, for your great work with your

10 department. I know none of your department heads are

11 here today, but the efficiencies that you have in your

12 office, and I know you've outlined those today, but you

13 know, I, too, was a former auditor. I really didn't

14 imagine that at age seven, but it's just the way it

15 works.

16 AUDITOR GENERAL DePASQUALE: It is what

17 is, right?

18 REPRESENTATIVE PEIFER: It is what it is,

19 and I couldn't throw the ball 95, so I --

20 AUDITOR GENERAL DePASQUALE: Join the

21 club on that one, too.

22 REPRESENTATIVE PEIFER: So but we really

23 appreciate, you know, whenever you are here in front of

24 us, you come to us with ideas through invasion, through

25 modernization of your office, and it's savings. 74

1 I mean, your department here -- the total

2 cost savings last year in your department was

3 $2.8 million and we have a full list of items. You

4 know, your budget is $46 million, I mean that's a

5 6-percent savings just by initiatives that all of you

6 have taken to improve your office, so we thank you for

7 that. And then the second part of your presentation,

8 you talk about the line by line items where you did save

9 money.

10 And I guess, you know, my question to you

11 is how do we take some of these efficiencies that you

12 have enacted through your department over the last

13 couple years, how do we take some of these efficiencies

14 throughout our state agencies? Other state agencies, I

15 don't want to pick on any schools, but we're looking at

16 big numbers here. We're looking at big dollars, it's a

17 tough year. It's the last year of our pension spike,

18 we're trying to get to that number maybe through

19 one-time ways of getting there. But how do we take some

20 of this knowledge that you've proven -- cost savings,

21 how do we extrapolate that to the rest of the

22 Commonwealth through its agencies and through our

23 schools?

24 AUDITOR GENERAL DePASQUALE: In my view,

25 you have to create a culture in your agency that this is 75

1 a high priority. I've gotten the team so focused on

2 this that at one time, I had an overnight in Erie and

3 they were nervous about making a hotel reservation

4 thinking I might be upset that we were going to spend

5 $60 at the Days Inn in Meadville. And I said, at some

6 point you've got to go to bed, but the point on that

7 is -- was it 65 bucks, right? But the culture of the

8 agency that I would like to think that I've created and

9 many of the team has created is when this matters

10 throughout the agency. It's the taxpayers' money. It's

11 not -- you know, when you get your own salary at the end

12 of the day and if you want to buy a $40 steak with that

13 and go out with your spouse and have -- or whether you

14 go on vacation, that's your salary. But when it comes

15 to what we're doing during the workday, it's the

16 taxpayers' money, so to me the most important thing you

17 can do is establish a culture where this is a high

18 priority.

19 Now the reason why I say it's important

20 to establish the culture as opposed to take the specific

21 ideas is that I've reduced our auto fleet 92 percent.

22 I'm proud of that. It saves taxpayer money, it's a good

23 thing to do. We don't want the Pennsylvania State

24 Police to reduce their auto fleet by 92 percent because

25 that would be self-defeating. So that's why I point 76

1 out, it's important that the culture, not necessarily

2 take all the specific ideas and that's leadership.

3 REPRESENTATIVE PEIFER: So when you look

4 at these audits, are these audits -- when you say liquid

5 fuels, school districts -- are these performance audits

6 or are these just a regular, general audits where we're

7 checking the balances of accounts and inflows and

8 outflows?

9 AUDITOR GENERAL DePASQUALE: It's across

10 the board. Liquid fuels, you're talking about financial

11 audits. You're just checking, in a sense, the numbers.

12 When it comes to the Department of Education audit and

13 some of the school districts, those are going to be

14 performance and financial audits. It runs the gambit.

15 But our pension audits and our liquid fuels audits,

16 those are pure financial audits.

17 REPRESENTATIVE PEIFER: So how do we

18 get -- I mean, obviously at the end of an audit, you

19 have your findings and everyone sees those findings.

20 How do you take that expertise that you're learning at a

21 school where they're doing something really good, you

22 know, there's just -- they've got a business manager,

23 school board administrators that really have business

24 background, business knowledge, they're doing things

25 that are innovative. But how do we get that information 77

1 to other schools?

2 AUDITOR GENERAL DePASQUALE: It's a great

3 question. I have -- you know, it's why --

4 REPRESENTATIVE PEIFER: And you almost --

5 earlier you talked about forcing a mandate. I'm not

6 looking at forcing a mandate, but you were almost there

7 and then you were sidebarred with another question. But

8 how do we just share those cost savings or those

9 efficiencies with everyone throughout this Commonwealth?

10 AUDITOR GENERAL DePASQUALE: It's a great

11 question, Representative.

12 For starters, you know, I go out and

13 speak to a lot of school board associations and the

14 school administers association and try to help spread

15 that message that way. But I believe the real place to

16 make -- I'm just going to use schools for example. I

17 don't want to be unfair to the Department of Education

18 because they're not the only ones, but --

19 We share all of our audits, we get it to

20 the Governor's Office, Department of Education on

21 schools. Obviously, other audits go to different

22 locations. I believe the best place to get those

23 incorporated changes across the state would be to have

24 somebody in the Department of Education in a sense

25 that's tasked with reviewing each of the audits looking 78

1 for the consistent themes and then driving that change

2 at the departmental level. That would be the way that

3 that could happen in the most efficient way.

4 I joke around about making people follow

5 the audits. I actually don't support that because that

6 would be, in a sense, a dramatic shift in the balance of

7 power in Pennsylvania, getting everyone forced to follow

8 the Auditor General.

9 REPRESENTATIVE PEIFER: So you're saying

10 it's not your job, but there's someone in PDE that

11 really should be taking these audits and driving them

12 home?

13 AUDITOR GENERAL DePASQUALE: We are the

14 recommending agency. Their job is to then take what we

15 find and implement the change.

16 REPRESENTATIVE PEIFER: And my last

17 question, looking at hypotheticals, and I know that's

18 not what you do as an auditor. But on a macro basis, I

19 know we're caught on details here and your audits prove

20 detailed findings. The cost of savings to this

21 Commonwealth, we're sitting here talking to some of my

22 colleagues about the low energy costs. I mean that's

23 got to be saving our Commonwealth, I mean our schools, I

24 know it's saving our households money, but really the

25 price of gasoline is half. You know, the energy cost of 79

1 heating this building, heating our schools. I mean,

2 does anyone ever take a look at that? We've never heard

3 anyone come in here, the last several years and say we

4 saved a lot of money because we changed our heating

5 system or we have natural gas. We never hear that here

6 and it's got to be huge savings, especially in rural PA,

7 the area that I represent. I mean, diesel buses are

8 driving every day, you know, many, many lane miles, so

9 that savings has got to be pretty large.

10 AUDITOR GENERAL DePASQUALE: I can say

11 with 100-percent certainty that my team gets nervous

12 every time I'm asked to make a guess about finances, so

13 you can see there's probably a little bit of twitching

14 going on there.

15 We found 111 million in three years. I

16 can guarantee you the number is higher as to what could

17 actually be saved through better operations, more

18 effective reimbursement processes, a whole host of

19 things.

20 What does that actually get you to? It's

21 a great question. I don't really know, but I know it's

22 higher than 111 million.

23 REPRESENTATIVE PEIFER: Well, I think the

24 most important thing is -- my colleague, Mark Mustio,

25 talked about public confidence and that's probably what 80

1 we're here for. And that's what you said initially. I

2 mean, it's all about public confidence and if there's

3 another $100 million out there that needs to be saved or

4 sitting in the bank accounts before they vote for a tax

5 increase, you know, that doesn't give us all a warm,

6 comfortable feeling here.

7 Along those lines, I know Representative

8 Quinn talked about benefits. School consolidation, has

9 there been any -- you know, my schools consolidated in

10 the '60s so, you know, we've seen that. I mean, is

11 there any talk about that and is there any savings that

12 you know of within those parameters?

13 AUDITOR GENERAL DePASQUALE: When we

14 audit school districts, we look at the district itself.

15 The 40,000-foot view of can school consolidation save

16 any money, we've never undertaken that.

17 I am sure that there would be a way to

18 get some administrative savings by consolidating some

19 administrative functions.

20 I have personally never been a supporter

21 of combining districts, but I have been a supporter of

22 combining some administrative functions, whether it be,

23 you know, health-care contracts for benefits for

24 teachers or shared pulling of buying football equipment,

25 band equipment, items like that. That I do think that 81

1 there is merit to that. I have never personally been a

2 supporter of actually combining the districts, but

3 beyond that, it is a topic that, you know, comes up a

4 lot.

5 I just want to say that I, in my audits

6 of the districts, don't think you can automatically save

7 money just by going to a countywide system for example.

8 I think there would probably be a sweet spot as to what

9 the size of the district would be and also depends on

10 what part of the state you were in.

11 For example, in the more rural parts of

12 state, combining districts could balloon transportation

13 costs. You may make an argument that in some of our

14 urban districts, the districts are too big. So in

15 there, there's probably some districts that are in my

16 view -- would be certainly too small. But I think where

17 we can find the common ground is working on the

18 administrative waste that we can work on without

19 combining the districts and get into that political hot

20 potato that is almost a never-winning battle for

21 anybody.

22 REPRESENTATIVE PEIFER: You know, some of

23 these, like you say, these 10,000-foot ideas from a

24 macro level could really help us. You know, and like

25 you're doing the details and we appreciate what you're 82

1 doing, but there's got to be ideas and cost savings out

2 there through these efficiencies that we could do on

3 that level as well.

4 So, Mr. Chairman, thank you.

5 And, General, thank you for being here.

6 AUDITOR GENERAL DePASQUALE: Thank you.

7 MAJORITY CHAIRMAN ADOLPH: Thank you,

8 Representative.

9 Representative Rozzi.

10 REPRESENTATIVE ROZZI: Thank you, Mr.

11 Chairman.

12 Good afternoon, General.

13 AUDITOR GENERAL DePASQUALE: Good to see

14 you, Representative.

15 REPRESENTATIVE ROZZI: Absolutely. Thank

16 you for your leadership.

17 What I heard you talk about today was

18 cost saving measures, you were using your resources

19 wisely, everything that my constituents like to hear

20 about efficient government. But I also heard you talk

21 about the lease reimbursement payments for the charter

22 schools.

23 If you take that number and you take the

24 actual expense payments that we should be paying the

25 charter schools instead of what we are giving them, how 83

1 much money could we save our state?

2 AUDITOR GENERAL DePASQUALE: It

3 fluctuates district by district, charter school by

4 charter school, but what we have found in our audits is

5 about half of the charter schools have what we have been

6 referring to as improper lease reimbursements. If that

7 percentage were to play out among every charter school

8 in the state, you're talking up to tens of millions of

9 dollars, but statistically speaking, that's a

10 possibility that would exist. I'm not here to tell you

11 that because we haven't audited every charter school yet

12 that that's the actual situation. But about half the

13 charter schools we audit to this point in my term, we

14 have found improper lease reimbursements with no effort

15 by the Pennsylvania Department of Education to recoup

16 that money.

17 REPRESENTATIVE ROZZI: Thank you,

18 General.

19 MAJORITY CHAIRMAN ADOLPH: Thank you.

20 Representative Seth Grove.

21 REPRESENTATIVE GROVE: How are you this

22 afternoon?

23 AUDITOR GENERAL DePASQUALE: I'm doing

24 splendid.

25 REPRESENTATIVE GROVE: You're doing a 84

1 wonderful job.

2 So to kind of follow up on your potential

3 audit, looking at the Governor's impasse, looking at it,

4 some highlights of some areas you can start on. I would

5 start on the waivers. They provide a good financial

6 outlook at the administration's spending moving forward.

7 There are areas of PDE spending on furniture, new

8 furniture purchases during the impasse. Department of

9 Agriculture wanted to facilitate a study on domesticated

10 animals, you know, started it up. Just --

11 AUDITOR GENERAL DePASQUALE: By the way,

12 it's probably not on camera, but my team is writing

13 furiously. If you can't see that on camera here.

14 REPRESENTATIVE GROVE: I see that. Dan

15 is -- I'm very excited about this.

16 The Department of Revenue Secretary sat

17 there yesterday and when I asked her about the waiver

18 they applied that was supposed to implement the

19 Governor's tax increases of last budget, $10.2 million,

20 they weren't sure how much of that was spent. Obviously

21 there weren't any tax increases, so where's that money

22 going? So it's loaded with those kind of errors.

23 Especially when, you know, looking at the overall

24 spending compared to PennWATCH -- about $30 billion of

25 spending, $4 billion was on PennWATCH. 85

1 So trying to match up spending with

2 what's out there in financial transparency to try to

3 figure out where we're at with the budget, how much

4 money is being spent and try to reconcile the

5 expenditures with the budget that was passed and

6 everything that that entails. It's very difficult to

7 unwind that without a good financial picture of where

8 we're at.

9 AUDITOR GENERAL DePASQUALE: On the

10 PennWATCH, for example, that system needs to be

11 improved. I think they're trying to work to get the

12 kinks out. I don't think it's anything malicious, but

13 for example, there was one point where -- about two

14 months, it had our total spend number for the year in

15 our department was 29,000. Well, obviously somebody

16 just entered -- it wasn't intentional, they just entered

17 something wrong there because almost putting that in

18 makes it -- flags it. There's something wrong.

19 That system needs to get better. It's a

20 great tool. We use it ourselves a lot to try to gather

21 information. It's something that in today's day and

22 age, the taxpayers are demanding that level of

23 accountability, but it needs to get better. And

24 hopefully, I do believe they're trying to fix it. But

25 that's one example where I just know that it's often 86

1 time -- which defeats the purpose of having it.

2 REPRESENTATIVE GROVE: Yeah. So I

3 appreciate you looking at that.

4 One other thing I want to highlight, we

5 spent a lot of time today, both parties, you, talking

6 about cost savings, the Governor talks about cost

7 savings, the Senate talks about cost savings. If we're

8 looking to start closing out the '15-'16 budget, moving

9 forward with '16-'17, we're all talking about the same

10 thing, but it's not coming together. How do we get

11 everybody talking about cost savings on the same page to

12 maybe start working on those functions in a

13 bipartisan -- and continue building?

14 Like, there's a lot of trust between the

15 general assembly and your office. You're transparent,

16 you're honest, you're open, you're accountable, you're

17 accessible, you provide good data, and you back that up.

18 How does that translate moving into -- the Governor's

19 administration and the general assembly continue to try

20 to get that same relationship and something we are all

21 --

22 AUDITOR GENERAL DePASQUALE: Right.

23 REPRESENTATIVE GROVE: I mean, we're all

24 talking about it, but it's being missed.

25 AUDITOR GENERAL DePASQUALE: 87

1 Representative, it's a great question, as to how

2 everyone could be talking about the same thing and

3 nothing gets done on it. There are those moments where

4 you understand how the average person, whether they be

5 liberal, moderate, or conservative with very different

6 views of the world and social issues and priorities, can

7 get incredibly frustrated in Harrisburg and Washington,

8 D.C., and this would be one of them.

9 You know, look, there's some issues where

10 there's just going to be an agreement to disagree. We

11 know some social issues, there's just bridges there

12 that, you know, I'm not going to ask anyone to

13 compromise their philosophical or moral views and I

14 would ask that no one do that to me. We would just have

15 a fair discussion about that.

16 But on this issue in particular, I don't

17 think saving -- I don't know that anyone is ever morally

18 opposed to saving money. So this is incredibly

19 frustrating that there isn't at least a meeting of the

20 minds on this one.

21 As to why that doesn't happen, the best

22 thing I can throw on the table is, and I don't often

23 quote Newt Gingrich, but when he said if you don't worry

24 about who's going to get the credit, it's amazing what

25 can be accomplished. 88

1 REPRESENTATIVE GROVE: Amen. Thank you.

2 Thank you, Mr. Chairman.

3 MAJORITY CHAIRMAN ADOLPH: Thank you,

4 Representative.

5 Representative, Sue Helm.

6 REPRESENTATIVE HELM: Thank you.

7 And, General, it's great to see you here

8 today.

9 AUDITOR GENERAL DePASQUALE: Great to see

10 you, Representative.

11 REPRESENTATIVE HELM: My question has to

12 do with an Act 146 waiver that was approved for your

13 department on July 16, 2015. It was waiver 1510. The

14 waiver applied to all commitments and available balances

15 for the Auditor General's Office and your office's

16 information technology modernization for both 2013 and

17 '14-'15. Approximately what was the amount of money

18 that was not lapsed and what specifically were the funds

19 used for?

20 AUDITOR GENERAL DePASQUALE: We have

21 about -- right now it's roughly about seven million that

22 has been rolled over that in a sense has been waived to

23 allow us to use into the next fiscal year, which

24 obviously we are in now. We anticipate, at the end of

25 this fiscal year, that that number will go down to about 89

1 $6 million. And most of that money has been used for IT

2 upgrades because sometimes contracts extend out or when

3 the payments schedules are done, when the work gets

4 completed, and also for when people need new computers.

5 So there's a host of issues that go with that as to the

6 why, but that's the rough amount.

7 REPRESENTATIVE HELM: All right. Well,

8 thank you and I do appreciate your obvious dedication

9 and commitment to your job.

10 AUDITOR GENERAL DePASQUALE: Thank you.

11 Thank you, Representative.

12 MAJORITY CHAIRMAN ADOLPH: Thank you,

13 Representative.

14 Representative Jim Marshall.

15 REPRESENTATIVE MARSHALL: Thank you, Mr.

16 Chairman.

17 Good to see you, General.

18 AUDITOR GENERAL DePASQUALE: Always a

19 pleasure, Representative.

20 REPRESENTATIVE MARSHALL: Really just I

21 want to say thank you for your leadership and your work

22 ethics. I think you've done a great job.

23 AUDITOR GENERAL DePASQUALE: Thank you.

24 REPRESENTATIVE MARSHALL: I'm curious

25 about the scope of what your department can do. I know 90

1 you've talked today about the school districts,

2 municipalities, and nonprofits. My question is in

3 Pennsylvania, municipalities have created authorities --

4 water authority, sewer authority, airport authority --

5 do you have the authority to audit them?

6 AUDITOR GENERAL DePASQUALE: The short

7 answer, unless they receive state money, is no.

8 The number one complaint my department

9 gets that we can't do anything about are the sewer and

10 water authorities at the local level. There is not a

11 week that goes by that somebody isn't offering what --

12 again, because we don't have, no pun intended, authority

13 to look into it to know whether it's justified or it's a

14 real complaint or not -- it's a real complaint, but

15 whether there's merit to it or not. My sense from all

16 the complaints that have come in since I've been Auditor

17 General on this topic is that it's hard to imagine some

18 of them not having merit.

19 And so one of the things that I have

20 recommended. And I think Senator Ward is introducing

21 legislation in the Senate, certainly welcome to work

22 with the House on this issue -- is granting me the

23 authority to audit these local authorities. I do

24 believe it is important that somebody, whether it be

25 myself or some other independent elected office, have 91

1 the ability to do that and I can guarantee that if we

2 have that ability that we will begin those audits

3 immediately.

4 REPRESENTATIVE MARSHALL: Thank you.

5 I'd like to work with you on that. I

6 think it's essential that the taxpayers and rate payers

7 of Pennsylvania know that their hard-earned dollars are

8 going -- well spent.

9 AUDITOR GENERAL DePASQUALE: Absolutely.

10 REPRESENTATIVE MARSHALL: Thank you.

11 AUDITOR GENERAL DePASQUALE: I agree

12 100 percent.

13 REPRESENTATIVE MARSHALL: Thank you, Mr.

14 Chairman.

15 MAJORITY CHAIRMAN ADOLPH: Thank you,

16 Representative.

17 Auditor, thank you so much for appearing

18 before this committee today.

19 AUDITOR GENERAL DePASQUALE: Thank you,

20 Mr. Chairman.

21 MAJORITY CHAIRMAN ADOLPH: I'll just echo

22 many of the members statements, we do appreciate the job

23 that you and your entire staff is doing for the

24 Commonwealth of Pennsylvania. I will keep in mind your

25 quote. First thing you would do is, you would turn the 92

1 canoe back over and get back into it, okay. I will

2 remember that quote because I have said numerous times

3 during the budget impasse, the art of the possible,

4 okay, and I agree with that terminology 100 percent.

5 The Newt Gingrich quote was something

6 that I didn't expect from you, certainly --

7 AUDITOR GENERAL DePASQUALE: You weren't

8 the only one that didn't expect it.

9 MAJORITY CHAIRMAN ADOLPH: I do

10 appreciate your honesty and your hard work. And your

11 opening statement is you're doing more with less and,

12 you know, I think that does help the public trust and

13 because we do have some tough decisions to be made --

14 and I believe there is a middle road to this impasse.

15 And hopefully, maybe Newt Gingrich's quote will start to

16 resonate throughout this Capitol. Thank you.

17 The next hearing will be at 2:30 with the

18 judiciary.

19 AUDITOR GENERAL DePASQUALE: Thank you,

20 everyone.

21 MAJORITY CHAIRMAN ADOLPH: Thank you very

22 much. Thank you.

23 (The hearing concluded at 1:35 P.M.)

24

25 93

1 C E R T I F I C A T I O N

2 I hereby certify that I was present upon the

3 hearing of the above-entitled matter and there reported

4 stenographically the proceedings had and the testimony

5 produced; and I further certify that this copy is a

6 correct transcript of the same.

7

8 Dated in Lebanon, Pennsylvania this 22nd day

9 of March 2016.

10

11 ______12 Summer A. Miller, Court Reporter Notary Public 13

14

15

16

17

18

19

20

21

22

23

24

25