E20B
State Treasurer
Operating Budget Data
($ in Thousands)
FY 05 FY 06 FY 07 FY 06-07 % Change
Actual Working Allowance Change Prior Year
General Fund $5,445 $4,363 $4,956 $592 13.6%
Special Fund 921 785 808 23 3.0%
Reimbursable Fund 28,730 33,710 34,606 896 2.7%
Total Funds $35,095 $38,858 $40,370 $1,512 3.9%
! The fiscal 2007 general fund allowance provides additional funds for personnel costs
including four new positions. The general fund allowance also provides funds for information
technology systems replacement, consulting services associated with the planned replacement
of banking reconciliation system, and additional funds for banking contract costs.
! The increased cost of commercial insurance policies and greater use of the State Insurance
Trust Fund to cover operating costs accounts for changes in the reimbursable fund allowance.
Personnel Data
FY 05 FY 06 FY 07 FY 06-07
Actual Working Allowance Change
Regular Positions 54.00 55.00 59.00 4.00
Contractual FTEs 1.00 0.00 0.00 0.00
Total Personnel 55.00 55.00 59.00 4.00
Vacancy Data: Regular Positions
Turnover, Excluding New Positions 1.98 3.35%
Positions Vacant as of 12/31/05 10.00 18.18%
! The turnover rate applied to the Treasurer’s Office decreased from 4.49% for fiscal 2006 to
3.35% for existing positions in fiscal 2007, thus increasing the amount of funds available to
support personnel-related costs.
Note: Numbers may not sum to total due to rounding.
For further information contact: Matthew D. Klein Phone: (410) 946-5530
Analysis of the FY 2007 Maryland Executive Budget, 2006
1
E20B – State Treasurer
! The allowance includes funding for four new positions to maintain the daily reconciliation of
the depository and disbursement accounts.
Analysis in Brief
Major Trends
Reconciliation of the State’s Main Bank Accounts: In fiscal 2003 the average number of days it
took to reconcile accounts exceeded 60 days. However, in fiscal 2005 a combination of restructured
reconciliation procedures for additional staff resources has reduced the average number of days to
reconcile the State’s main depository and disbursement accounts to less than 10 days.
Investment Portfolio Continues to Outperform the 90-day U.S. Treasury T-bill: The Treasurer’s
Office investment portfolio outperformed the average 90-day U.S. Treasury T-bill rate in each of
fiscal 2002 through 2004. Although the State’s portfolio did not outperform the T-bill rate in
fiscal 2005, the average interest rate earned by the State in fiscal 2005 was 98 basis points higher than
the rate earned in fiscal 2004.
State Insurance Claims Processing: The number of new claims filed has increased substantially and
is expected to remain at current levels for the foreseeable future. The Managing for Results measures
submitted by the Treasurer’s Office only provides claims adjudication data. This analysis provides a
summary of claims loss data for several components of the State Insurance Trust Fund (SITF). The
fiscal 2007 allowance includes funds to purchase and install additional modules to a new risk
management information system purchased in fiscal 2006 intended to continue to improve claims
processing and risk management.
Issues
Bank Reconciliation Project Results in $37 Million Write-down: A $37 million discrepancy
between the cash balance reflected in the State’s records and the cash balance records of the
custodian bank resulted in the Comptroller reducing the fiscal 2005 general fund closing balance by
$37 million. The Department of Legislative Services (DLS) recommends that the Treasurer
brief the committees on the actions taken to ensure that such a discrepancy does not occur
again.
Unfunded Liability in State Insurance Trust Fund Continues: Despite increased appropriations
statewide for insurance premiums, the SITF still has an unfunded liability projected for the end of
fiscal 2006. DLS recommends that the Treasurer’s Office continue to seek full SITF funding
and comment on the loss prevention measures implemented to reduce the incidence of
insurance claims.
Analysis of the FY 2007 Maryland Executive Budget, 2006
2
E20B – State Treasurer
Recommended Actions
Funds
1. Delete funding and PINs for new positions. $ 171,944 4.0
Total Reductions $ 171,944 4.0
Analysis of the FY 2007 Maryland Executive Budget, 2006
3
E20B – State Treasurer
Analysis of the FY 2007 Maryland Executive Budget, 2006
4
E20B
State Treasurer
Operating Budget Analysis
Program Description
The State Treasurer is responsible for the management and protection of State funds and
property. To carry out these responsibilities, the State Treasurer selects and manages the depository
facilities for State funds, issues or authorizes agents to issue payments of State funds, invests excess
funds, safeguards all State securities and investments, and provides insurance protection against
damage to State property and liability of State employees. The State Treasurer also administers the
sale of Maryland general obligation bonds and serves as a member of the Board of Public Works
(BPW). The State Treasurer’s Office consists of four programs: treasury management; insurance
management; insurance coverage; and bond sale expenses.
The goals of the Treasurer’s Office are to:
• accurately reconcile all Treasury State bank accounts;
• maximize investment earnings for the State’s surplus funds in accordance with State law; and
• process all agency and third party claims submitted to the Insurance Division.
Performance Analysis: Managing for Results
The Treasurer’s Office fiscal 2007 Managing for Results (MFR) submission includes
measures for the reconciliation of the State’s main depository and disbursement accounts, rate of
return on the State’s investment portfolio, and claims adjudication rate for claims presented under the
State Insurance Trust Fund (SITF) and the Maryland Tort Claims Act. Exhibits 1 through 6 present
data on several performance measures, as well as SITF claims loss data not included in the MFR
submission.
• Objective: Reconcile the State’s main depository, main disbursement, and income tax refund
accounts within 30 days of receipt of the bank statement.
As shown in Exhibit 1, the number of account transactions processed increased steadily in
each of fiscal 2003 through 2005. What was once a deplorable reconciliation measure in fiscal 2003
with a reconciliation taking over 60 days to complete has improved dramatically in fiscal 2005 with
reconciliation taking less than 10 days to complete. While the 2005 measure is by no means
inadequate, further improvement in this measure is projected with the future implementation of a new
automated reconciliation system.
Analysis of the FY 2007 Maryland Executive Budget, 2006
5
E20B – State Treasurer
Exhibit 1
Total Receipt and Disbursement Transactions
Fiscal 2003 – 2007
FY 03 FY 04 FY 05 FY 06 FY 07
Actual Actual Actual Est. Est.
Total Number of Receipt and
Disbursement Transactions 9,670,000 11,455,000 12,350,000 12,750,000 13,000,000
Receipts and Disbursements
($ in Millions) $175,570 $180,834 $179,258 $183,250 $188,500
Avg. # Days to Reconcile >60 >30 >10 <7 <5
Source: Department of Budget and Management
The failure to properly reconcile the State’s main bank accounts on a timely basis can be
traced to accounting irregularities and omissions dating back to the early 1990s. Misunderstood
processes resulted in the continued utilization of a poor monthly reconciliation which, based on the
recent $37 million write-down in the State’s books (discussed in Issue 1 of this analysis), was
inadequate. In 2002 the Treasurer identified the implementation of a new automated system as a top
priority. After an extended procurement process, a contract was awarded to TrinTech, Inc., to deliver
an automated reconciliation package as one component of system reform. When it became apparent
that the existing reconciliation procedures were inadequate and did not provide accurate and reliable
daily cash reconciliation, the implementation of a new automated system was put on hold. The
Treasurer’s Office now reports that the implementation of a new automated reconciliation system is
under review, and the previously purchased TrinTech system is currently under evaluation. Initial
review indicates that the TrinTech system will not support the enhanced process and procedures
developed by the Treasurer’s Office during the reconciliation process overhaul conducted over the
last two years, although the review is not complete. The fiscal 2007 allowance includes funds for
consultant services to begin addressing the banking reconciliation automation project.
• Objective: Earn a rate of return on the investment portfolio that exceeds the average 90-day
U.S. Treasury bill rate by 25 basis points on an annual basis.
The Treasurer’s Office is also responsible for maximizing investment earnings for the State’s
surplus funds. Exhibit 2, which shows the rate of return on the investment portfolio as compared to
the average 90-day U.S. Treasury rate, indicates that the Treasurer’s investment portfolio
outperformed the average T-bill rate in each of fiscal 2002 through 2004. However, the 80 basis
points difference achieved in fiscal 2002 was reduced to 62 basis points in fiscal 2003 and 31 points
in fiscal 2004. In fiscal 2005 the Treasurer’s investment portfolio achieved the same rate of return as
the T-bill rate. The low interest rate environment has made it difficult to achieve better results.
Analysis of the FY 2007 Maryland Executive Budget, 2006
6
E20B – State Treasurer
Exhibit 2
Comparison of Investment Portfolio and 90-day U.S. Treasury Bill Rates
Fiscal 2002 – 2007
6% $300
5% $250
4% $200
($ in Millions)
Interest Rate
3% $150
2% $100
1% $50
0% $0
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Actual Actual Actual Actual Est. Est.
Avg. Rate of Return on Investment Avg. 90-day Treasury Bill Rate Interest Income
Source: State Treasurer’s Office
In its December 2005 report to the Legislative Policy Committee, the Treasurer conveyed that
interest rates continued to increase during the first three months of fiscal 2006 with an average rate of
return of 3.39%, and rates are expected to continue to climb as the Federal Reserve Board is expected
to continue raising short-term rates in early calendar 2006. Exhibit 2 also shows the gross interest
earned on the Treasurer’s investment portfolio. As one would expect, the sharp decline in interest
rates and reduced fund balances during fiscal 2003 and 2004 resulted in diminishing returns on
investments. As interest rates rise and fund balances grow – as they did in fiscal 2005 and are
expected to do in both fiscal 2006 and 2007 – interest on the Treasurer’s investment portfolio should
provide additional revenues to the State.
Analysis of the FY 2007 Maryland Executive Budget, 2006
7
E20B – State Treasurer
• Objective: Promptly and accurately investigate, analyze, and adjust all claims presented
under the State Insurance Trust Fund and the Maryland Tort Claim Act. Claims should be
adjudicated on a 1:1 ratio.
The Treasurer’s Office is also responsible for the efficient and cost-effective administration of
the State Insurance Program that includes self-insurance and procurement of commercial insurance.
Exhibit 3, which shows the rate at which new claims are received and processed by the Insurance
Division, indicates that the number of claims processed exceeds the rate at which new claims are
received thus reducing the number of open pending cases.
Exhibit 3
Insurance Division Third Party Claims Processing
Fiscal 2002 – 2007
5,000
4,000
3,000
2,000
1,000
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Est. Est.
New Claims Claims Closed
Source: State Treasurer’s Office
Analysis of the FY 2007 Maryland Executive Budget, 2006
8
E20B – State Treasurer
This measure, while it demonstrates that the Insurance Division is able to process claims
efficiently, does not provide information about the types of claims and the amount of claims losses, or
identify agencies with the highest claims rates. This information, however, is compiled by the
Insurance Division and provided in Exhibits 4 through 6.
Exhibit 4
State Insurance Trust Fund Incurred Property Claims
Fiscal 2000 – 2005 Total Combined Five-year Losses Above $500,000
$10,000
$9,000
$8,000
$7,000
($ in Millions)
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
MAA DNR UMBC MTA UM DGS DPSCS MPA UMCP
Balt.
MAA – Maryland Aviation Administration DGS – Department of General Services
DNR – Department of Natural Resources DPSCS – Department of Public Safety and Correctional
UMBC – University of Maryland Baltimore County Services
MTA – Maryland Transit Administration MPA – Maryland Port Administration
UM Baltimore – University of Maryland, Baltimore UMCP – University of Maryland, College Park
Source: State Treasurer’s Office
Analysis of the FY 2007 Maryland Executive Budget, 2006
9
E20B – State Treasurer
Exhibit 5
State Insurance Trust Fund Incurred Automobile Claims
Fiscal 2000 – 2005 Total Combined Five-year Losses Above $500,000
$6,000
$5,000
$4,000
($ in Millions)
$3,000
$2,000
$1,000
$0
DHMH DNR MTA DHR MES UMCP MdTA DPSCS SHA MSP
DHMH – Department of Health and Mental Hygiene DHR – Department of Human Resources
MES – Maryland Environmental Service MdTA – Maryland Transportation Authority
SHA – Maryland State Highway Administration MSP – Maryland State Police
Source: State Treasurer’s Office
Analysis of the FY 2007 Maryland Executive Budget, 2006
10
E20B – State Treasurer
Exhibit 6
State Insurance Trust Fund Incurred General Liability Claims
Fiscal 2000 – 2005 Total Combined Five-year Losses Above $100,000
$1,600
$1,400
$1,200
$1,000
($ in Millions)
$800
$600
$400
$200
$0
A
PA
A
C
R
R
JS
SP
CS
CD
A
H
e
CP
at
U
N
H
V
SH
M
dT
D
M
St
PS
M
M
D
H
D
M
M
H
M
D
U
in
U
D
D
pp
Co
MVA – Motor Vehicle Administration
UMUC – University of Maryland University College
DHCD – Department of Housing and Community Development
DJS – Department of Juvenile Services
Source: State Treasurer’s Office
Analysis of the FY 2007 Maryland Executive Budget, 2006
11
E20B – State Treasurer
Governor=s Proposed Budget
As shown in Exhibit 7, the fiscal 2007 allowance for the Treasurer’s Office is $40.4 million
in total funds which represents a $1.5 million, or 3.9% increase over the fiscal 2006 working
appropriation. Increased personnel expenditures, which accounts for a little over $500,000 of
additional planned spending, and additional excess commercial insurance costs in the amount of
$890,000, are the two biggest factors that contribute to the proposed budget increase. The fiscal 2007
proposed funding for each of the Treasurer’s Office’s programs is discussed in Exhibit 7.
Exhibit 7
Governor's Proposed Budget
State Treasurer
($ in Thousands)
General Special Reimb.
How Much It Grows: Fund Fund Fund Total
2006 Working Appropriation $4,363 $785 $33,710 $38,858
2007 Governor's Allowance 4,956 808 34,606 40,370
Amount Change $592 $23 $896 $1,512
Percent Change 13.6% 3.0% 2.7% 3.9%
Where It Goes:
Personnel Expenses
Salary and benefits for four new positions (includes turnover at 20.4%)........................ $172
Increments and position reclassification (includes five positions reclassified to the
Executive Pay Plan)......................................................................................................... 160
Employee and retiree health insurance ............................................................................ 81
Employee retirement and unemployment ........................................................................ 26
Reduced turnover rate for existing positions (from 4.49 to 3.35%) ................................ 53
Deferred compensation.................................................................................................... 9
Treasury Management Division Nonpersonnel Changes
Reduced funding for training and staff development, Department of Budget and
Management telecommunication costs, printing and advertising, and office supplies.... -82
Consultant costs for automation of disbursement reconciliation system......................... 80
Additional cost associated with software application maintenance – agency replaced
AS 400 operating system with IBM i5s due to system failure as an emergency
procurement during fiscal 2006 ....................................................................................... 38
Analysis of the FY 2007 Maryland Executive Budget, 2006
12
E20B – State Treasurer
Where It Goes:
Three-year capital lease – includes replacement of AS 400s with IBM i5s and
three-year planned replacement of PCs and accompanying software, printers, servers,
and network infrastructure upgrades ............................................................................... 94
Additional banking contract costs – banking contracts are based on fixed charges for
transactions with fluctuating volumes ............................................................................. 90
Insurance Division Nonpersonnel Changes
Replacement of PCs and file cabinets ............................................................................. 8
Provide enhancements to the new Risk Management System procured in fiscal 2006
and 2007, and provides funds for enhancements to the system including a virtual
filing system and Litigation Management System .......................................................... -125
Insurance coverage – mostly attributable to Maryland Transit Administration excess
liability policy.................................................................................................................. 890
Other ..................................................................................................................................... 18
Total $1,512
Note: Numbers may not sum to total due to rounding.
Treasury Management Division
The Treasury Management Division includes the administrative and operating functions for
the banking, investment, and information technology functions. Banking Services reconciles the
State’s principal depository and disbursement accounts, the Investment Division focuses on the
short-term investment of State funds and oversees securities lending operations, and the Information
Technology (IT) Division provides the data processing and technology infrastructure needed to
operate the State Treasurer’s Office.
The fiscal 2007 allowance for the Treasury Management Division is $6.1 million and is
comprised of $4.9 million in general funds, $507,000 in special funds derived primarily from
investment fees collected by the office, and $686,000 in reimbursable funds. Overall, the allowance
provides $617,820, or 11.2% more than what has been appropriated in fiscal 2006, most of which is
general funds and attributable to increased salary and fringe benefit expenditures. Personnel costs for
40 positions, including 4 new positions in the allowance, account for just over $3.0 million in
proposed funding and represents almost a $400,000 increase over the fiscal 2006 working
appropriation. As shown in Exhibit 8, the 4 new positions in the budget account for an additional
$172,000 in proposed expenditures.
Analysis of the FY 2007 Maryland Executive Budget, 2006
13
E20B – State Treasurer
Exhibit 8
Salary and Fringe Benefits Cost for New Positions
Position Salary Fringe Turnover Total
Treasury Specialist VI $38,578 $15,437 -$11,029 $42,986
Treasury Specialist V 38,578 15,437 -11,029 42,986
Treasury Specialist V 38,578 15,437 -11,029 42,986
Treasury Specialist V 38,578 15,437 -11,029 42,986
Total $154,312 $61,748 -$44,116 $171,944
Source: Fiscal 2007 Budget Bill, Section 12
The Treasurer’s Office indicates that these new positions are needed to maintain and keep
current the reconciliation function within the Banking Division. The Department of Legislative
Services (DLS) notes that the low salary level for these positions makes it difficult to fill the
positions. Moreover, the office is currently operating with 10 vacancies, 3 of which have been vacant
for more than a year, out of a staff of 50. DLS recommends that the funding and PINs for the 4
new positions be deleted; and instead, the Treasurer’s Office should work to have existing
long-term vacant positions reclassified and filled to meet the needs of the Banking Division’s
personnel requirements.
Significant nonpersonnel-related expenditures for the Treasury Management Division are as
follows:
• Consultant services for the planned future implementation of a new automated account
reconciliation system adds $80,000 in general funds to the budget.
• The master equipment lease for the replacement of IBM AS/400 computer system with a new
IBM i5 computer system was approved by BPW on February 1, 2006, on an emergency
procurement basis. Failure of the existing system necessitated immediate replacement in
order to ensure uninterrupted processing of the State’s disbursements. This lease and the
planned purchase of PCs and accompanying software, printers, servers, and network
infrastructure upgrades adds $94,000 to the budget.
• Banking contract fees, based on fixed charges for transactions with fluctuating volumes, as
well as new services needed as a result of the reconciliation project, account for a little over
$2.5 million in Treasury Management Division expenditures, second only to personnel
expenditures. These costs increase by $90,000 in the budget based on projected transaction
volume.
Analysis of the FY 2007 Maryland Executive Budget, 2006
14
E20B – State Treasurer
Insurance Management Division
The Insurance Management Division determines the insurance requirements to protect State
property and personnel, procures commercial insurance, and sets State agency premiums for
self-insurance.
Funded entirely with reimbursable funds from the SITF, the Insurance Management
Division’s fiscal 2007 budget allowance provides a little over $2.1 million of which $1.4 million goes
to support personnel expenditures for 19 positions. Personnel expenditures increase by $103,000 due
mostly to increments and increased employee and retiree health insurance. The most significant
nonpersonnel-related adjustment to the budget is a $125,000 reduction for computer maintenance
contracts. In fiscal 2006 the division began implementing a new risk management system designed to
provide a more efficient management of the State’s insurance claims process. The fiscal 2007
allowance provides $75,000 to implement enhancement to the system, which is a reduction from the
$200,000 appropriated in fiscal 2006.
Executive Pay Plan Position Changes
The fiscal 2007 budget includes the reclassification of five existing positions into the
Executive Pay Plan. Exhibit 9 shows the position classification, scale, and fiscal 2007 salary for
each position. The Treasurer’s Office reports that the positions were reclassified to the Executive Pay
Plan in June 2005. Since the reclassifications took place after enactment of the fiscal 2006 budget,
the positions first appear as reclassifications in the fiscal 2007 budget. The Treasurer’s Office has
been able to fund the additional salary and fringe benefit costs associated with the reclassifications
during fiscal 2006 using savings resulting from a vacancy rate the exceeds the office’s budgeted
turnover rate. DLS recommends that the Treasurer comment on the need and justification for
the position reclassifications, and any plans for additional reclassifications to the Executive Pay
Plan not already listed in the fiscal 2007 budget as introduced.
Exhibit 9
Positions Added to the Executive Pay Plan for Fiscal 2007
Positions Classification Scale Fiscal 2007 Salary
Executive VI 9906 $96,373
Executive V 9905 96,004
Executive V 9905 95,838
Executive V 9905 95,272
Executive V 9905 91,273
Source: Fiscal 2007 Budget Bill, Section 12
Analysis of the FY 2007 Maryland Executive Budget, 2006
15
E20B – State Treasurer
Issues
1. Bank Reconciliation Project Results in $37 Million Write-down
Over the past two years, the Treasurer’s Office has been working on reconciling the difference
between the State’s main bank accounts and the State’s accounting records in the RStars accounting
system. This process disclosed an unaccounted difference of $37 million in which the cash balance
reflected in the State’s records exceeded the cash balance in the records of the custodian banks.
To eliminate the difference, the $37 million was written off by the Comptroller after
consultation with the Department of Budget and Management (DBM), the Office of the Attorney
General, and legislative leadership. The Comptroller recorded an adjusted journal entry to reduce
the State’s general ledger cash balance as of June 30, 2005, and the fiscal 2005 general funds revenue
by $37 million.
According to the Treasurer’s Office, the $37 million cumulative difference is the result of
various accounting disparities and erroneous transactions dating back to at least 1995. No evidence
of wrongdoing or misappropriation of any State funds was uncovered during the reconciliation.
Moreover, the Treasurer’s Office indicates that the cash reconciliation is now prepared on a daily
basis.
Improved Banking Reconciliation Procedures
When the Treasurer’s Office first discovered discrepancies between the State’s main bank
accounts and the State’s accounting records in the RStars accounting system, the Treasurer
immediately called for the re-reconciliation of all bank transactions dating back to July 2003. This
included the implementation of a restructured deposit match reconciliation process which required
matching bank transactions made by over a hundred agencies generating several hundred million
transactions annually. To help with this task, the fiscal 2006 budget included a fiscal 2005 deficiency
appropriation in the amount of $975,000 to fund additional contractual auditors dedicated to the
reconciliation project. During this process, the Banking Division discovered that several
reconciliation functions were not being completed. As a result, the division reevaluated the entire
reconciliation process and implemented more thorough processing controls and numerous transaction
verification procedures to ensure a complete and accurate daily accounting. Furthermore, the
Treasurer’s Office is undertaking a detailed evaluation of its automation systems requirements for the
eventual implementation of a new automated bank reconciliation system. The fiscal 2007 allowance
provides funds to conduct a needs analysis for this system. Initial review of the current TrinTech
system indicates that it will not support the new reconciliation procedural requirements implemented
by the Treasurer’s Office.
Although the $37 million write-off raises questions about the integrity of State financial
management, the Treasurer’s Office has worked diligently to address the situation. DLS
recommends that the Treasurer brief the committees on the new banking reconciliation
procedures and processes that are intended to ensure that such a situation does not repeat itself.
Analysis of the FY 2007 Maryland Executive Budget, 2006
16
E20B – State Treasurer
Furthermore, the Treasurer should brief the committees on the timetable and estimated costs
for the planned implementation of a new automated banking reconciliation system.
2. Unfunded Liability in State Insurance Trust Fund Continues
The State provides insurance protection through the purchase of specific excess commercial
insurance policies and through self-insurance from the SITF. The SITF self-insurance program is
designed to cover State agencies and employees for claims related to property, motor vehicle, torts,
and officer and employee liability. Although the Insurance Division in the Treasurer’s Office’s
procures commercial insurance policies for certain risks, most of the coverage is provided through the
SITF. Premiums charged to State agency budgets on an annual basis provide the source of revenues
to the SITF.
Exhibit 10, which provides the SITF actual and estimated fund account for fiscal 2002
through 2007, shows SITF remains underfunded as determined by the actuarial analysis conducted by
an independent actuary. This situation, exacerbated by increased claims losses and rising costs for
excess commercial coverage, was somewhat mitigated by increased State budgeting for agency
premiums beginning in fiscal 2005. However, the gap between the actuarial recommended balance
and ending cash balance at the end of fiscal 2006 is still estimated at $19 million. Moreover, the
unfunded liability, which is the difference between the ending cash balance and the actuarially
recommended Generally Accepted Accounting Principles (GAAP) reserve, is estimated at $6 million
at the close of fiscal 2006 (the actuarially recommended fund balance uses the worst case assumption
that there will be no future loss payment recoveries of any type while the GAAP reserve includes a
loss funding reduction factor to include probable loss payment recoveries). This “unfunded liability,”
while small in comparison to the unfunded liability of the State’s pension system, is something the
bond rating agencies take into consideration when reviewing the State’s current AAA bond rating.
The Treasurer’s Office reports that it annually submits premium funding requests to DBM in the
amount necessary to maintain the SITF as the actuarially recommended balance. DBM has asked the
Treasurer’s Office to also submit a minimum premium budget request based on anticipated pay-outs
for the upcoming year that does not consider the actuarial liability. The amount DBM has budgeted
has been below even the minimum request submitted by the Treasurer’s Office.
Appendix 5 provides a fiscal summary of the individual insurance programs funded through
the SITF for fiscal 2002 through 2007.
Analysis of the FY 2007 Maryland Executive Budget, 2006
17
E20B – State Treasurer
Exhibit 10
Actual and Estimated SITF Fund Accounting
($ in Thousands)
FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Actual Actual Actual Actual Estimate Estimate
Beginning Balance $28,997 $19,884 $11,357 $5,247 $10,050 $10,623
Transfers and Recoveries 552 434 632 542 600 600
Agency Premiums 8,013 8,679 10,844 20,033 21,000 22,280
Excess Policy Coverage -1,140 -5,050 -4,787 -4,945 -6,008 -5,647
Losses -9,953 -11,068 -11,315 -9,111 -12,900 -12,900
Operating Costs -1,585 -1,504 -1,484 -1,716 -2,119 -2,123
Transfers to General Fund -5,000 0 0 0 0 0
Ending Cash Balance $19,884 $11,357 $5,247 $10,050 $10,623 $12,833
Actuary Recommended Balance 23,827 23,827 30,393 29,503 29,503 29,503
Actuarial Shortfall -$3,943 -$12,470 -$25,146 -$19,453 -$18,880 -$16,670
Actuary Recommended
GAAP Reserve 9,309 13,375 16,314 18,581 16,654 n/a
Unfunded GAAP Liability $0 -$2,018 -$11,067 -$8,531 -$6,031 n/a
Source: State Treasurer’s Office
Factors contributing to the declining fund balance:
• Costs to Procure Excess Commercial Insurance Blanket Coverage Increased Dramatically
in the Wake of the September 11, 2001, Terrorist Attacks: As shown in Exhibit 9, the State
paid just over $1.1 million for excess commercial insurance in fiscal 2002 compared to an
average of $4.9 million annually in fiscal 2003 through 2005 for the same coverage. These
costs are not expected to revert back to fiscal 2002 levels.
• Officers and Employee Liability Losses Increase Well in Excess of Agency Premiums:
Officer and employee liability losses totaled just under $500,000 in fiscal 2000 and 2001, well
under the amount of agency premiums collected, which averaged approximately $1.3 million.
Analysis of the FY 2007 Maryland Executive Budget, 2006
18
E20B – State Treasurer
However, losses incurred in fiscal 2003 and 2004 exceeded agency premiums drawing the
balance in the account down.
• Tort Claims and Losses Exceeded Premiums: In fiscal 2001 through 2003, tort claim losses
exceeded agency premiums. Adding to the cost was an increase in the tort claims cap from
$100,000 to $200,000, beginning October 1, 1999. Premiums have been increased in order to
keep pace with annual anticipated losses.
• Transfer of $5 Million for SITF in Fiscal 2002: Chapter 440, Acts of 2002 (the Budget
Reconciliation and Financing Act of 2002) transferred $5 million from the available fund
balance to the general fund. This was reduced from the proposed $11 million transfer.
• Use of SITF to Fund Operations: In each fiscal year, as represented in Appendix 5, the
amount of SITF funds used by the Treasurer’s Office to fund the operations of the Insurance
Management Division has generally increased.
Loss Prevention Program Implementation
Not wanting to rely solely on increased agency premiums to address the SITF fund balance,
the Treasurer’s Office has also implemented a loss prevention program designed to reduce claims
losses. This process was started with the hiring of a loss prevention manager – this position was
added during fiscal 2004 through the authority granted to BPW to add positions to the State budget
during the fiscal year – charged with implementing loss mitigation programs. Some of the early
highlights of the loss prevention program efforts include:
• the promotion of pipe leak detection methods in buildings with research and medical labs;
• the compilation of agency loss data – agencies with poorest lost history contacted for action
plan meetings;
• the joint meeting with the Maryland Emergency Management Agency and selected agencies
in flood prone areas to identify future flood mitigation action plans;
• the exchange of fire loss data and safety violation citation information from the State Fire
Marshal in order to increase corrective action plan compliance; and
• the promotion of infrared thermographic imaging of electrical systems to reduce fire and
mechanical breakdowns.
In fiscal 2006, the Insurance Division’s risk management efforts will concentrate on reducing
the high incidence of property loss claims resulting from fires, machinery breakdowns, water damage,
and property damaged caused by vehicle collisions. The Treasurer’s Office reports that some
Analysis of the FY 2007 Maryland Executive Budget, 2006
19
E20B – State Treasurer
State-owned facilities are failing to meet even minimum safety inspection requirements, especially in
the area of fire alarm system testing and maintenance. With almost 3,000 State buildings to inspect
and with budget and staffing cuts affecting the management of building maintenance, the Treasurer’s
Office reports that comprehensive State-level oversight is needed to reduce property losses resulting
from fire in State-owned buildings.
DLS recommends that the Treasurer’s Office continue to seek full SITF funding to the
level recommended by the actuary. DLS also recommends that the Treasurer continue to
implement risk management strategies to reduce the incidence of claim losses.
Analysis of the FY 2007 Maryland Executive Budget, 2006
20
E20B – State Treasurer
Recommended Actions
Amount Position
Reduction Reduction
1. Delete funding and PINs for 4 new positions. The $ 171,944 GF 4.0
Treasurer’s Office currently has 10 positions vacant,
3 of which have been vacant for more than a year.
The Treasurer’s Office should work with the
Department of Budget and Management to reclassify
existing vacant positions to assume the
responsibilities proposed for the 4 new positions in
the fiscal 2007 allowance.
Total General Fund Reductions $ 171,944 4.0
Analysis of the FY 2007 Maryland Executive Budget, 2006
21
E20B – State Treasurer
Appendix 1
Current and Prior Year Budgets
Current and Prior Year Budgets
State Treasurer
($ in Thousands)
General Special Federal Reimb.
Fund Fund Fund Fund Total
Fiscal 2005
Legislative
Appropriation $3,652 $621 $0 $29,428 $33,701
Deficiency
Appropriation 1,768 0 0 0 1,768
Budget
Amendments 25 300 0 0 325
Reversions and
Cancellations 0 0 0 -699 -699
Actual
Expenditures $5,445 $921 $0 $28,729 $35,095
Fiscal 2006
Legislative
Appropriation $4,339 $785 $0 $33,710 $38,834
Budget
Amendments 24 0 0 0 24
Working
Appropriation $4,363 $785 $0 $33,710 $38,858
Note: Numbers may not sum to total due to rounding.
Analysis of the FY 2007 Maryland Executive Budget, 2006
22
E20B – State Treasurer
Fiscal 2005
Significant adjustments to the fiscal 2005 budget included:
• $1.77 million general fund deficiency appropriation to provide additional funds necessary to
fund several of the State’s general banking contracts that were re-bid during fiscal 2005 and to
fund contractual services necessary to accurately reconcile the State’s depository and
disbursement accounts.
• General funds of $25,000 were added for the cost-of-living adjustment. Funds were budgeted
in DBM and subsequently transferred to each agency.
• $300,000 of additional special funds were appropriated to pay the expenses incurred in the
issuance of State bonds.
Analysis of the FY 2007 Maryland Executive Budget, 2006
23
E20B – State Treasurer
Appendix 2
Audit Findings
Audit Period for Last Audit: October 1, 2000 – October 31, 2002
Issue Date: December 2003
Number of Findings: 16
Number of Repeat Findings: 5
% of Repeat Findings: 31.2%
Rating: (if applicable)
Finding 1: The office did not adequately reconcile the cash balance in the State’s main bank
accounts with the corresponding balance recorded on the State’s accounting records.
Due to a number of significant problems DLS identified with regard to the office’s
purported reconciliations, the State’s cash balance could not be adequately determined.
Finding 2: An automated bank account reconciliation system, which cost $1.6 million, was not
successfully implemented due, in part, to inadequate contract specifications developed
by the office.
Finding 3: The office did not require the bank to provide State agencies with adequate deposit
documentation to help ensure that all collections were properly deposited.
Finding 4: The office did not ensure that the lockbox contractor transferred the available balance
to the State daily, as required.
Finding 5: The office did not ensure that all interest earned on funds in State agency bank
accounts was transferred to the State’s general fund, as required.
Finding 6: The office did not ensure that electronic fund deposits were recorded properly in the
Financial Management Information System in a timely manner.
Finding 7: Certain individuals had the ability to unilaterally modify disbursement and
investment account fund transfer agreements.
Finding 8: The office did not adequately ensure that all State agency bank accounts were properly
authorized.
Finding 9: The office did not ensure that check clearance patterns were reviewed and
certified in accordance with federal regulations.
Analysis of the FY 2007 Maryland Executive Budget, 2006
24
E20B – State Treasurer
Finding 10: The office did not adequately monitor State agency’s reporting of Federal Cash
Management Improvement Act activity.
Finding 11: Lack of supervisory review and approval of capital lease amortization schedules
contributed to collection and payment errors.
Finding 12: Certain fees for support services to State agencies were assessed by the office without
being authorized.
Finding 13: Security procedures for minicomputer production data and program files and the
program change process were inadequate.
Finding 14: The information systems disaster recovery plan was incomplete and not current.
Finding 15: Procedures and controls were not adequate over unpresented checks.
Finding 16: Unredeemed minibond funds were not properly transferred to the Unpresented Bond
and Coupon Fund or the Comptroller’s Abandoned Property Fund, as required.
*Bold denotes item repeated in full or part from preceding audit report.
Analysis of the FY 2007 Maryland Executive Budget, 2006
25
Object/Fund Difference Report
State Treasurer
FY06
FY05 Working FY07 FY06 - FY07 Percent
Object/Fund Actual Appropriation Allowance Amount Change Change
Positions
01 Regular 54.00 55.00 59.00 4.00 7.3%
Analysis of the FY 2007 Maryland Executive Budget, 2006
02 Contractual 1.00 0 0 0 0.0%
Total Positions 55.00 55.00 59.00 4.00 7.3%
Objects
E20B – State Treasurer
01 Salaries and Wages $ 3,561,916 $ 3,942,327 $ 4,443,354 $ 501,027 12.7%
02 Technical & Spec Fees 73,410 11,000 4,000 -7,000 -63.6%
03 Communication 100,767 101,490 88,229 -13,261 -13.1%
04 Travel 25,335 32,800 33,000 200 0.6%
07 Motor Vehicles 7,757 6,201 12,310 6,109 98.5%
08 Contractual Services 4,682,128 3,590,937 3,670,630 79,693 2.2%
26
09 Supplies & Materials 152,583 232,289 182,886 -49,403 -21.3%
10 Equip - Replacement 118,387 0 97,600 97,600 N/A
11 Equip - Additional 18,094 1,800 4,410 2,610 145.0%
13 Fixed Charges 26,353,675 30,939,154 31,833,083 893,929 2.9%
14 Land & Structures 1,216 0 0 0 0.0%
Total Objects $ 35,095,268 $ 38,857,998 $ 40,369,502 $ 1,511,504 3.9%
Funds
01 General Fund $ 5,444,826 $ 4,363,340 $ 4,955,746 $ 592,406 13.6%
03 Special Fund 920,742 784,524 807,678 23,154 3.0%
09 Reimbursable Fund 28,729,700 33,710,134 34,606,078 895,944 2.7%
Total Funds $ 35,095,268 $ 38,857,998 $ 40,369,502 $ 1,511,504 3.9%
Appendix 3
Note: The fiscal 2006 appropriation does not include deficiencies, and the fiscal 2007 allowance does not reflect contingent reductions.
Fiscal Summary
State Treasurer
FY05 FY06 FY07 FY06 - FY07
Program/Unit Actual Wrk Approp Allowance Change % Change
01 Treasury Management $ 6,479,507 $ 5,509,545 $ 6,127,365 $ 617,820 11.2%
01 Insurance Management 1,716,053 2,118,793 2,122,697 3,904 0.2%
02 Insurance Coverage 26,327,606 30,907,660 31,797,440 889,780 2.9%
Analysis of the FY 2007 Maryland Executive Budget, 2006
01 Bond Sale Expenses 572,102 322,000 322,000 0 0%
Total Expenditures $ 35,095,268 $ 38,857,998 $ 40,369,502 $ 1,511,504 3.9%
General Fund $ 5,444,826 $ 4,363,340 $ 4,955,746 $ 592,406 13.6%
E20B – State Treasurer
Special Fund 920,742 784,524 807,678 23,154 3.0%
Total Appropriations $ 6,365,568 $ 5,147,864 $ 5,763,424 $ 615,560 12.0%
Reimbursable Fund $ 28,729,700 $ 33,710,134 $ 34,606,078 $ 895,944 2.7%
27
Total Funds $ 35,095,268 $ 38,857,998 $ 40,369,502 $ 1,511,504 3.9%
Note: The fiscal 2006 appropriation does not include deficiencies, and the fiscal 2007 allowance does not reflect contingent reductions.
Appendix 4
State Insurance Trust Fund
Fiscal 2002 – 2007
2002 2003 2004 2005 2006 2007
Actual Actual Actual Actual Estimated Estimated
Units of Measurement
State Insurance Trust Fund
Analysis of the FY 2007 Maryland Executive Budget, 2006
Combined Beginning Balance $28,997,624 $19,884,565 $11,358,447 $5,248,591 $10,051,982 $10,625,069
Blanket Real and Personal Property
Beginning Balance $7,065,007 $4,727,980 -$733,672 -$5,972,242 -$4,221,870 -$4,329,990
Transfers and Recoveries 97,695 61,660 37,450 58,052 100,000 100,000
E20B – State Treasurer
Agency Premiums 3,540,242 3,221,043 3,474,268 10,062,815 10,000,000 11,280,016
Excess Policy Coverages -1,139,483 -5,049,427 -4,786,872 -4,945,267 -6,008,120 -5,646,540
Real Property Losses -4,835,482 -3,694,928 -3,963,415 -3,425,228 -4,200,000 -4,200,000
Insurance Administration 0
28
GAAP Adjustment
Ending Balance $4,727,980 -$733,672 -$5,972,242 -$4,221,870 -$4,329,990 -$2,796,514
Officers and Employees Liability
Beginning Balance $4,105,695 $4,047,733 $1,920,366 $1,624,939 $3,491,947 $3,991,947
Transfers and Recoveries
Agency Premiums 999,972 1,457,909 1,391,088 2,996,170 3,000,000 3,000,000
Liability Losses -1,057,934 -3,585,276 -1,686,515 -1,129,162 -2,500,000 -2,500,000
Ending Balance $4,047,733 $1,920,366 $1,624,939 $3,491,947 $3,991,947 $4,491,947
Appendix 5
2002 2003 2004 2005 2006 2007
Actual Actual Actual Actual Estimated Estimated
Tort Claims Act
Beginning Balance $4,913,350 $7,076,086 $6,281,063 $6,296,992 $6,896,876 $6,896,876
Transfers and Recoveries 14,233 100 94 7,242
Agency Premiums 1,470,038 2,000,003 3,984,223 3,975,080 4,500,000 4,500,000
Tort Losses -3,321,535 -2,795,126 -3,968,388 -3,382,438 -4,500,000 -4,500,000
Analysis of the FY 2007 Maryland Executive Budget, 2006
Transfer from Auto 4,000,000
Ending Balance $7,076,086 $6,281,063 $6,296,992 $6,896,876 $6,896,876 $6,896,876
Motor Vehicle Comprehensive and Liability
Beginning Balance $12,913,574 $4,032,765 $3,890,688 $3,298,901 $3,885,028 $4,066,235
Transfers and Recoveries 439,624 372,942 594,678 476,574 500,000 500,000
E20B – State Treasurer
Agency Premiums 2,002,464 2,000,005 1,994,236 2,999,900 3,500,000 3,500,000
Motor Vehicle Losses -738,049 -1,010,809 -1,696,766 -1,174,294 -1,700,000 -1,700,000
Insurance Administration -1,584,848 -1,504,215 -1,483,935 -1,716,053 -2,118,793 -2,206,029
29
Transfer to Tort -4,000,000
Transfer to GF – Budget Rec. Act -5,000,000
Ending Balance $4,032,765 $3,890,688 $3,298,901 $3,885,028 $4,066,235 $4,160,206
Combined Cash Fund Balance $19,884,565 $11,358,447 $5,248,591 $10,051,982 $10,625,069 $12,752,516
Recommended Actuary Balance
(Italics – Estimated) $23,827,000 $23,827,000 $30,393,000 $29,503,000 $29,503.000 $29,503,000
Difference -$3,942,435 -$12,468,553 -$25,144,409 -$19,451,018 -$18,877,931 -$16,750,484
Appendix 5 (Continued)