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ARIZONA STATE LEGISLATURE
Forty-fifth Legislature – Second Regular Session
SENATE NATURAL RESOURCES AND TRANSPORTATION AND HOUSE TRANSPORTATION COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW HEARING OF THE MOTOR VEHICLE DIVISION,
ARIZONA DEPARTMENT OF TRANSPORTATION
Minutes of Meeting
Senate Hearing Room 1 -- 1:30 p.m.
Cochairman Allen called the meeting to order at 1:34 p.m. and attendance was noted by the secretary.
Senator Marsha Arzberger Representative Phil Lopes
Senator Robert Blendu Representative Lucy Mason
Senator Jack Brown Representative Mark Thompson
Senator Marilyn Jarrett Representative Clancy Jayne, Co-chairman
Senator Carolyn Allen, Co-chairman
Representative Meg Burton Cahill
Shan Hays, Performance Audit Manager, Office of the Auditor General
Dale Chapman, Manager, Auditor General’s Office
Victor Mendez, Director, Arizona Department of Transportation
Stacey Stanton, Director, Motor Vehicle Division
John McGee, Chief Financial Officer, Arizona Department of Transportation
Bobbi Sparrow, Lobbyist, Arizona Auto Dealers Association (AADA)
Rusty Bowers, Lobbyist, Arizona Rock Products
Presentation by the Office of the Auditor General
Shan Hays, Performance Audit Manager, Office of the Auditor General, addressed the committee. Ms. Hays offered background information on the Motor Vehicle Division (MVD), explaining it is one of six divisions of the Arizona Department of Transportation (ADOT). The MVD has a total full-time employee (FTE) count of 1,894 state-appropriated positions as of July 2004. Its mission is to support Arizona through licensing, vehicle credentialing, revenue collection, safety programs, and by promoting compliance with transportation laws.
Ms. Hays discussed the responsibilities of the MVD and stated it issued over one million driver licenses in fiscal year 2003. Additionally, it registered over 4.3 million vehicles as of June 20, 2004 and it collects fees and taxes. The MVD oversees third parties who perform some MVD functions, such as store-front businesses where the public can go to register their vehicles, as well as companies that administer driver’s license exams or perform vehicle inspections. She pointed out the largest third-party agreement is with IBM, which works with MVD to operate the division’s Service Arizona website. MVD also enforces compliance with statutes regarding vehicle registration, size and weight and it regulates transportation of hazardous materials.
Registration Renewal
Ms. Hays informed the committee that her office conducted two audits in MVD, and issued three reports, including a report on Sunset Factors for the Division. All three reports were issued in September 2004. The first audit focused on MVD’s revenue collection functions and had findings in the areas of vehicle registration enforcement, fuel tax processing, MVD’s fee structure and protection of mail-in registration fees. She explained that in fiscal year 2004, MVD collected over one-and-a-half billion dollars in revenues. Those revenues came from taxes and fees, such as vehicle license tax, gas and fuel taxes, motor carrier taxes, and motor vehicle registration fees. The first finding recommended ways to improve cost-effectiveness of the vehicle registration compliance program, which is important because it represents a significant source of revenue, nearly $700 million in fiscal year 2004. She pointed out that some residents may avoid paying vehicle registration taxes by driving with out-of-state license plates or using expired Arizona plates.
Ms. Hays explained that MVD uses three approaches to obtaining compliance with vehicle registration laws. First, it sends automated letters to new residents who have applied for driver’s licenses but not registered a vehicle. Second, it uses peace officers who pursue leads on violators and third, it uses tips from a citizen hotline to locate violators. She added the most cost effective method is the automated letter approach (Attachment 1). Therefore, the recommendation is that MVD build on the cost-effective automated letter approach. Currently, MVD uses automated letters to contact new residents. Further recommendation is that MVD expand the program to contact current residents who have not renewed their registrations.
Computer Programming Error
Ms. Hays explained that beginning in July 2002, the Legislature appropriated approximately $1.3 million to MVD to enhance its enforcement efforts. Fifty percent of the increased revenues resulting from these efforts were required to be returned to the General Fund. It was discovered that MVD overstated its revenue from the vehicle registration enforcement program by approximately $233,000, which was caused by faulty logic in a computer program. The recommendation was that MVD should correct the computer programming errors that led to the overstating of revenue from this program.
Fuel Tax Refund Processing
Ms. Hays informed the committee that some fuel tax refunds were either not correct or not supported by enough documentation.
It was recommended that the MVD should improve its refund procedures, strengthen requirements for the documentation taxpayers must submit with refund claims and develop more comprehensive claim forms with better instructions for taxpayers.
Dale Chapman, Manager, Auditor General’s Office, responded to inquiry from Senator Arzberger and explained that although MVD requires vendors of gas to maintain documentation, there is no requirement that the documentation be submitted as part of a refund claim, and in some cases it is difficult to verify accuracy. It was recommended that MVD request additional supporting documentation.
In response to inquiry from Chairman Allen, Mr. Chapman explained that there are cases where businesses eligible for refunds would submit the required documentation. However, they would not distinguish between the fuel used for highway purposes and fuel used for off-highway purposes.
Evaluation of Fees
Ms. Hays continued her presentation and explained the third finding addressed the MVD fee structure which has not previously been evaluated. As a result, some of its fees are outdated. It was recommended that the working group established in 2004 develop a process to systematically evaluate and review fees, and that MVD should recommend appropriate fee changes to the Legislature for those fees that are in statute.
Protection of Registration Renewal Fees
Ms. Hayes informed the committee that the division receives over $15.7 million each month in mail-in registration renewal payments. However, the area where the unendorsed checks were stored was accessible to all 29 renew-by-mail unit employees, as well as janitorial staff and employees who work in other MVD units. Therefore, it was recommended that new policies and procedures be established that would better protect registration renewal payments.
Information System Security
Ms. Hays pointed out it was discovered that Arizona Department of Transportation (ADOT), which controls user accounts on the MVD systems, had not reviewed the access levels for some user groups. Users should only be able to access programs and data they need for their jobs. MVD lacks some needed procedures to control modifications to computer programs. Additionally, ADOT and MVD do not have an entity-wide security program, and have not enforced some current policies regarding areas such as training and background checks. Finally, ADOT has not completed its business continuity and disaster recovery plan that would enable it to operate and bring its system back up in the event of a system failure. Therefore, it was recommended that ADOT and MVD collaboratively review the system access levels for user groups. MVD should establish policies and procedures for documenting all computer program changes and ADOT should develop a general security program which would address all aspects of system security. Finally, ADOT should implement a business continuity/disaster recovery plan and test it regularly.
Performance of Service Arizona
Ms. Hays referred to a chart reflecting the growth of Service Arizona (Attachment 2) and explained that Service Arizona now provides 26 MVD services via the Internet, including vehicle registration renewal, duplicate driver license, change of address and others. Because it is so important to MVD’s operations, it was recommended that MVD strengthen its oversight of IBM’s operation of Service Arizona in two ways. First, MVD should ensure the new third party agreement has provisions that require IBM to have an independent review of its controls over the Service Arizona agreement. It was also recommended that IBM should be required to provide the source code for the Service Arizona computer program if the agreement is terminated.
Sunset Factors
Ms. Hays pointed out that the Division has met its objective and purpose and has operated in the public interest. However, in addition to the areas for improvement noted in the other two reports, it was found that some MVD statutes on releasing driver motor vehicle records do not comply with the federal Driver’s Privacy Protection Act, or DPPA. The Legislature has asked MVD to work with it to prepare a bill for DPPA changes. She responded to inquiry from Senator Jarrett and explained that federal law requires that the driver has to fill out a form allowing MVD to release information. Ms. Hays concluded her presentation and offered to answer any questions from the committee.
In response to inquiry from Chairman Allen, Ms. Hays explained that MVD does contract with a private CPA firm to conduct its financial audits so this recent audit did not include any financial audit.
Mr. Chapman added that ADOT and MVD attempted to locate the missing funds and were unsuccessful in tracking it. It is believed it was over distributed to counties and cities.
Presentation by the Motor Vehicle Division
Victor Mendez, Director, Arizona Department of Transportation, addressed the committee in response to the performance audit and the sunset review of the Arizona Department of Transportation. Mr. Mendez explained that as a consequence of budget cuts, MVD was forced to continue managing through the reduction of its operating budget. He pointed out that MVD has made incredible progress in the areas of providing e-government services to the public and improving customer services to those that visit and transact business at the field offices. He commented on the recent MVD scandal that unfolded a few months ago and explained that because MVD was involved in initiating the majority of the investigation, both the Governor and MVD were prepared with an action plan, which was already being implemented at the time the scandal was made public. He assured the committee that ADOT employees are honest and hard-working.
In response to inquiry from Representative Jayne, Mr. Mendez explained he was aware of the investigation for about two years and that there was a plan in place. Many of the points in the plan were already implemented or in the process of being implemented to help solidify security issues.
Mr. Mendez offered a brief summary of the investigation and explained that some employees were taking money to provide a credential to people who did not qualify for that credential.
Stacey Stanton, Director, Motor Vehicle Division, addressed the committee. She offered a response to the audits and stated that regarding the findings of the revenue collections audit, the information security/e-government audit and the sunset factors, the recommendations would be implemented. She informed the committee that MVD has established cross divisional and cross functional teams, several of which were put into place during the course of the audits in an effort to be proactive rather than reactive to the audit process. She added the teams meet diligently in an effort to address the findings and recommendations. She offered to answer any questions from the committee.
In response to inquiry from Chairman Allen, Ms. Stanton referred to Chief Financial Officer John McGee to discuss the MVD cash account, the reconciliation process and the department’s accounting and auditing procedures.
John McGee, Chief Financial Officer, Arizona Department of Transportation (ADOT), addressed the committee and explained that the issue of the missing $9.5 million has a long history. He explained that the MVD cash account is essentially a clearing house and when MVD brings in money from the many different sources through license, tax, registration, etc., the money goes into the clearing house account and remains there until the necessary distribution paperwork is completed. There is analysis that occurs in determining how that money gets disbursed. She explained further there are four separate records that track how much cash is in the clearing account. The target system is a subsidiary account, the state’s financial information system, the advantage system or ADOT’s general ledger system and then there is the account that reflects the cash calculated by the state treasurer. Three of those four records were reconciled to the actual amount of cash determined by the state treasurer. However, the only account that was out of balance and could not be reconciled was the target system and that balance differential has been known for about 15 years. Several attempts have been made to trace the error to no avail. There is some evidence to suggest that the differential may have been there from the time the original detailed documents from the old accounting system were transferred over to the target system. It is believed that certain transactions that may have been double posted or not posted to one account or the other.
Mr. McGee pointed out that the state’s records and ADOT’s records agree and those records are audited. Therefore, the cash balance was adjusted on the subsidiary record so that the monthly reconciliation no longer reflects a $9.5 million balance. He informed the committee that over the last 18 months, much effort has gone into the way the subsidiary account is reconciled and for the last five months the account has been reconciled to the penny. He added that controls are in place to ensure that the error is not repeated.
In response to inquiry from Representative Thompson, Ms. Stanton explained that the relationship with IBM is a partnership. ADOT is in the process of making the contractual amendment but currently ADOT covers their own costs and IBM and does have certain fees that are assessed with transactions that allow them to recoup some of the money they put forward for programming.
Mr. Lopes inquired as to the estimated income. Ms. Stanton explained she was unsure if there was an actual anticipated amount but that she would research that issue.
Senator Jarrett inquired about the cost of the special license plates versus the fees received for them. Ms. Stanton explained there are 56 different types of plates such as government, organizations and special interests. At this point, it costs about $32,000 to put a new special license plate into production. In recent years, the Legislature has required any requesting organization come forward with the money prior to going into design and production. There is a $25 special plate fee that is assessed of which the agency retains $8 for administrative fee and $17 is directed to the organization for their use.
Bobbi Sparrow, Lobbyist, Arizona Auto Dealers Association (AADA), addressed the committee. She stated her support of the agency and explained the relationship between MVD and AADA. She informed the committee that AADA interacts with new car dealers on a regular basis. In June 1995, AADA started with a one person third party MVD office and currently over 25,000 transactions are conducted per month. As of July over one-half billion dollars has been added on behalf of MVD. In December 2002, a new system allowed for electronic transactions and in July 2003, AADA, through legislation, implemented an electronic temporary registration plate system, which costs about one-half million dollars. She noted that about 42,000 temporary registration plates are processed per month. She added that driver’s licenses investigations will take place online in the coming year. She offered to answer any questions from the committee.
Rusty Bowers, Lobbyist, Arizona Rock Products, addressed the committee in support of the continuation of MVD. He stated there were some concerns relative to using temporary scales for weighing but he was hopeful to facilitate discussion regarding those issues.
Chairman Jayne moved that the committee of reference recommend the continuation of the Motor Vehicle Division of the Arizona Department of Transportation for five years. The motion carried.
Without objection, the meeting adjourned at 2:39 p.m.
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Robyne Richards, Committee Secretary
January 3, 2005
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SENATE AND HOUSE COMMITTEE OF REFERENCE FOR THE SUNSET REVIEW HEARING
OF THE MOTOR VEHICLE DIVISION, ARIZONA DEPARTMENT OF TRANSPORTATION
2
December 15, 2004
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