08-30039-07

Purpose of the Report

In accordance with Title 24 of the Alaska Statutes and a special request by the Legislative Budget and Audit Committee, we have conducted a performance audit of the Alaska Aerospace Development Corporation (AADC) administrative and financial controls in place to compensate for the centralized state government controls that were removed. Additionally, we were directed to review and assess (1) the reasonableness of the compensation of the AADC staff and governing board; (2) the validity of the corporation’s college scholarship program; (3) the adequacy of the corporation’s investment policy; and, (4) the feasibility of the corporation paying a dividend to the State.

Report Conclusions

The conclusions are as follows:

• AADC has adequate financial management controls in place;
• Administrative controls over personnel practices are weak primarily due to minimal documentation of the basis for employee compensation and job performance;
• AADC board member compensation is consistent with provisions of the corporation’s statute;
• AADC’s scholarship program is allowed under the corporation’s statutory authority;
• AADC’s investment policy should be improved to address important aspects of fiduciary care; and
• AADC’s current operations do not support payment of a significant dividend to the State.

Findings and Recommendations

1. The AADC Board of Directors (Board) should direct the President to establish a documented personnel management system that includes a formalized salary structure system and more formalized evaluation process.
2. AADC’s Board of Directors should direct the President to develop regulations or policy for the corporation’s education programs.
3. AADC’s Board of Directors should take action to improve the corporation’s investment policy and document that key precepts are understood and followed by corporate staff and outside investment managers.
4. To encourage AADC’s Board of Directors to actively consider distribution of a dividend to the State, the legislature should require the Board to formally evaluate such action each year, and report to the legislature.

There is now interest in directing AADC to distribute a dividend to the State from the earnings of the corporation. For an organization such as AADC, with a business model and a market that are not fully matured, the income and asset balances do not reflect the corporation’s capacity to pay a significant dividend to the state. Capacity to pay dividends is not clearly reflected in financial statement account balances.

Any assessment of dividends must consider using the “fees and profit” proceeds generated by the corporation’s primary operating contract. These proceeds are available to be spent on what are termed “non-billable” items. While these proceeds are reflected in the corporation’s financial statements, they are not specifically identified as revenues available for spending on discretionary items – such as bonuses and scholarships. Accordingly, trying to develop legislation that would require a certain amount or percentage of these funds be paid in dividends would be difficult to define and clearly set out in state law. Such action could not adequately account for such factors such as cash flow, other commercial prospects, and infrastructure needs.

Whether funds used to pay for such things as scholarships or bonus compensation could alternatively be used to fund a relatively small dividend to the state’s General Fund, is a valid policy question. Developing a specific language, however, that requires dividends be paid based on a formula applied to balance sheet accounts would be difficult.

Accordingly, we recommend the legislature amend state law related to AADC to require the Board to annually consider payment of a dividend to the state. The statute could require that the Board report to the legislature whether a dividend is available or not, and the basis used by the Board in making its determination.