Montana Single Audit Report for the Two Fiscal Years Ended June 30, 2021 (Legislative Audit Division 20-02)

Summary

Montana's Legislative Audit Division issued this federal Single Audit report for the two fiscal years ended June 30, 2021 in June 2022, signed by Legislative Auditor Angus Maciver. The state reported approximately $11.5 billion in federal funds for fiscal years 2020 and 2021, an increase of approximately $3.6 billion, or 46 percent, primarily attributed to funds provided in response to the COVID-19 public health emergency. That included approximately $1.23 billion from the Coronavirus Relief Fund, $1.07 billion in extended Unemployment Insurance benefits and $106.71 million from the Education Stabilization Relief Fund. Auditors tested 24 programs administered by 12 state agencies, and the report makes 76 recommendations with approximately $5.4 million of known questioned costs.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Full text

Text recognized from a scanned document; may contain errors. Pages 5, 11, 37, 41, 45, 48, 81, 83, 85, 107, 114, 116, 150, 177, 200–203, 205–213, 215, 217–243, 261, 284, 289, 293, 296, 326, 328, 409, 435, 455, 456, 458–460, 462–468, 471, 473–493, 495, 496, 498, 499, 517–519, 721–724, 729, 732–734, 736, 741–743, 745, and 748 of 748 are not shown because the text could not be recognized reliably.

A REPORT
TO THE
MONTANA
LEGISLATURE

FEDERAL SINGLE AUDIT

Montana Single Audit
Report

For the Two Fiscal Years Ended
June 30, 2021

JUNE 2022

LEGISLATIVE AUDIT
LEGISLATIVE AUDIT
COMMITTEE

REPRESENTATIVES
Kim ABBOTT
Kim.Abbott@mtleg.gov
DENISE HAYMAN, CHAIR
Denise. Hayman@mtleg.gov
EMMA KERR-CARPENTER
Emma.KC@mtleg.gov
TERRY MOORE
terry.moore@mtleg.gov
MArTT REGIER
Matt.Regier@mtleg.gov

JERRY SCHILLINGER
jerry.schillinger@mtleg.gov

SENATORS
JASON ELLSWORTH, VICE CHAIR
Jason.Ellsworth@mtleg.gov
JOHN Esp
Johnesp2001@yahoo.com
PAT FLOWERS
Pat.Flowers@mtleg.gov
TOM JACOBSON
Tom.Jacobson@mtleg.gov
ToM MCGILLVRAY
Tom.McGillvray@mtleg.gov

Mary McNALLY
McNally4MTLeg@gmail.com

MEMBERS SERVE UNTIL A
MEMBER'S LEGISLATIVE TERM
OF OFFICE ENDS OR UNTIL A
SUCCESSOR IS APPOINTED,
WHICHEVER OCCURS FIRST.

§5-13-202(2), MCA

FRAUD HOTLINE
(STATEWIDE)
(IN HELENA)
444-4446
LADHotline@mt.gov

www.montanafraud.gov

FEDERAL SINGLE AUDIT

Montana's federal Single Audit is a biennial audit that completes
the reporting requirements of the Single Audit Act Amendments
of 1996, and the Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for Federal Awards. The
Single Audit Report is compiled from work performed by
other annual or biennial individual agency audit engagements.
Individual agency audits are conducted by the Legislative Audit
Division to determine if an agency’s financial operations are
properly conducted, the financial reports are presented fairly, and
the agency has complied with applicable laws and regulations. In
performing these audits, the audit staff use standards set forth by
the American Institute of Certified Public Accountants and the
United States Government Accountability Office.

Government Auditing Standards, the Single Audit Act
Amendments of 1996, and the Uniform Administrative
Requirements, Cost Principles, and Audit Requirements for
Federal Awards require the auditor to issue certain financial,
internal control, and compliance reports. This Single Audit Report
complies with these reporting requirements and is intended for
distribution to federal grantor agencies. The individual agency
audit reports are not intended to comply with these reporting
requirements and are therefore not intended for distribution to
federal grantor agencies.

Audit staff members hold degrees with an emphasis in accounting
and many staff members hold Certified Public Accountant (CPA)
certificates.

AUDIT STAFE

STEVEN ALTHOFF KATIE MAJERUS
JEANE CARSTENSEN-GARRETT KAREN E. SIMPSON
COURTNEY P. JOHNSON FLorA M. WASKE

Reports can be found in electronic format at:
https://leg.mt.gov/lad/audit-reports
LEGISLATIVE AUDIT DIVISION

Deputy Legislative Auditors:
Cindy Jorgenson
William Soller

Angus Maciver, Legislative Auditor
Deborah F. Butler, Legal Counsel

June 2022

The Legislative Audit Committee
of the Montana State Legislature:

This is our Single Audit Report for the state of Montana for the two fiscal years ended June 30, 2021.
The Single Audit was conducted in accordance with Government Auditing Standards and Single Audit
Act Amendments of 1996 and the Uniform Administrative Requirements, Cost Principles, and Audit
Requirements for Federal Awards (Uniform Guidance). This document contains the Independent
Auditor’s Reports on the state of Montana’s basic financial statements for the fiscal years ended June 30,
2021 (page A- 5), and June 30, 2020 (page B- 5). The Independent Auditor’s Reports also address

the reasonableness of the schedules of expenditures of federal awards in relation to the basic financial
statements.

‘The audit disclosed certain questioned costs and deficiencies in internal control and compliance, which
are summarized in the Schedule of Findings and Questioned Costs (pages C-17 through C-194). The
Independent Auditor’s Reports on pages A-1 and B-1 summarize instances of material noncompliance
and control deficiencies over financial reporting we consider to be significant deficiencies or material
weaknesses. The Independent Auditor’s Report on page C-1 categorizes the disclosed control
deficiencies affecting compliance with federal regulations as significant deficiencies or material
weaknesses. The Independent Auditor’s Report on page C-1 also identifies compliance issues which
resulted in opinion modifications for various federal programs the state administered.

Management at administering agencies have responded to the audit findings, and the responses are
included in each finding and in the Corrective Action Plan compiled by the Governor's Office of
Budget and Program Planning (beginning on page D-1). The status of findings reported in previous
state of Montana Single Audit Reports, for which continued reporting is required under Uniform
Guidance, is included in the Summary Schedule of Prior Audit Findings (beginning on Page E-1). This
schedule was also prepared by the Governor’s Office of Budget and Program Planning.

Respectfully submitted,
// Angus Maciver

Angus Maciver
Legislative Auditor

Room 160 ¢ State Capitol Building * PO Box 201705 * Helena, MT * 59620-1705
Phone (406) 444-3122 * FAX (406) 444-9784 ¢ E-Mail lad@mt.gov
BaCKGROUND
Montana’s Federal Single
Audit is a biennial audit
that completes the audit
and reporting requirements
of the Single Audit

Act of 1996 and the
Uniform Administrative
Requirements, Cost
Principles, and Audit
Requirements for Federal
Awards (Uniform
Guidance).

‘The federal government
provides extensive
requirements for recipients
of federal grants. Our audits
of each state agency include

determining the effectiveness

of internal controls over

compliance, and compliance

with, these requirements
when the federal grant is
determined to be a major
federal program under
federal audit guidelines.

For the current audit period,
programs with expenditures
totaling at least $30 million
during the two fiscal years
ended June 30, 2021, that
were not determined to be
low risk were identified as
major federal programs.
Additionally, we identified
one high-risk program with
expenditures under this
threshold for testing. We
tested 24 programs for the
biennium, administered by
12 state agencies.

REPORT SUMMARY

JUNE 2022

S-1

FEDERAL SINGLE AUDIT 20-02

Mon TANA LEGISLATIVE AupitT DIvIsION

Montana Single Audit Report

For THE Two FIscAL YEARS ENDED JUNE 380, 2021

The state of Montana reported approximately

$11.5 billion in federal funds for fiscal years

2020 and 2021. This is an increase over the prior
biennium of approximately $3.6 billion, or 46 percent,
primarily attributed to funds provided in response

to the COVID-19 public health emergency. Multiple
state agencies expended these funds, including
approximately $1.23 billion from the Coronavirus
Relief Fund, $1.07 billion in extended Unemployment
Insurance benefits, and $106.71 million from the
Education Stabilization Relief Fund. Our report
includes 76 recommendations to the state of Montana
and has approximately $5.4 million of known
questioned costs.

Federal grantor agencies are the primary users of the Single Audit report,
and the form of this report is designed to meet their oversight needs.
Legislators and other users may also find the report useful. In particular,

the Schedules of Expenditures of Federal Awards for fiscal years 2021 and
2020, included in this report, provide an overview of the state’s federal grant
activity by federal awarding agency and assistance number. The report also
contains the state’s basic financial statements (BFS) for fiscal years 2021 and
2020, along with our office’s related opinions on these documents in the
#20-01A State of Montana and #20-01B State of Montana audit reports.

Federal audit regulations require the Single Audit to report whether each
major federal program complied with selected federal requirements and

to include information on known and likely questioned costs identified
over $25,000 for each program. We identified and have reported known
questioned costs of approximately $5.4 million, with additional likely
questioned costs over $3.1 million reported. Federal audit regulations also
define varying levels of deficiencies in internal controls and require us

to report on significant deficiencies and material weaknesses in internal
controls. Table 1 on the following page illustrates the programs we audited
and the opinion we issued on them, as well as provides information on the
reportable deficiencies in internal control identified through our work.

For the current audit period, we tested 24 programs and issued

76 recommendations to various state agencies and universities. In
comparison, for the prior audit period covering the two fiscal years ended
June 30, 2019, we tested 23 programs and issued 40 recommendations. ‘The
dollar threshold used to identify programs subject to audit, as determined

under federal regulations, increased from approximately $22 million for the
(continued on back)
For the full report or more
information, contact the
Legislative Audit Division.

leg.mt.gov/lad

Room 160, State Capitol
PO Box 201705
Helena, MT 59620-1705
(406) 444-3122

The mission of the
Legislative Audit Division

is to increase public trust

in state government by
reporting timely and accurate
information about agency
operations, technology, and
finances to the Legislature
and the citizens of Montana.

To report fraud, waste, or
abuse:

Online

Email
LADHotline@mt.gov

Call

(Statewide)

(800) 222-4446 or
(Helena)

(406) 444-4446

Text
(704) 430-3930

two fiscal years ended June 30, 2019, to $30 million, for the current
audit period. This increase directly results from the additional federal

funding the state received during the current audit period.

AUDITOR’S REPORT ON COMPLIANCE FOR EACH
MAJOR FEDERAL PROGRAM AND ON INTERNAL
CONTROL OVER COMPLIANCE (PAGE C-1):
The table below identifies each of the 24 programs tested, the type
of opinion issued over compliance for each, and whether our audit
procedures identified material weaknesses or significant deficiencies
over compliance. For the full context of the information in the table,
see the report beginning on page C-1.

Table 1

Summary of Audit Results for Each Tested Federal Program

For the Two Fiscal Years Ended June 30, 2021

Number and Type of Control

Compliance Deficiencies Identified
Program Name Opinion — ;
Rendered Significant Material
Deficiency Weakness
Medicaid Cluster * Qualified 0 4
noney Planning and Construction Qualified 0 1
cen Water State Revolving Fund Unmodified 0 0
Oke Water State Revolving Fund Unmodified 0 0
cent Financial Assistance Programs Qualified 3 8
SNAP Cluster * Qualified 1 1
Child Nutrition Cluster * Qualified 1 2
Special Education Cluster (IDEA) Qualified 1 1
CCDF Cluster * Qualified 1 2
Research & Development Cluster * Qualified 0 1
Unemployment Insurance * Qualified
Formula Grants for Rural Areas * Qualified
Coronavirus Relief Fund * Qualified
Agencies to Local Educational Qualified 0 4
Education Stabilization Fund * Qualified
Epidemiology * Adverse
Temporary Assistance to Needy Families Qualified
Prog incorne Home Energy Assistance Unmodified 1 0
Foster Care - Title IV-E Adverse 0
Children’s Health Insurance Program * Qualified 1
Disaster Grants - Public Assistance * Qualified 1
Presidentially Declared Disaster
Assistance to Individuals and Unmodified 0 1
Households - Other Needs *
Emergency Rental Assistance Program * Unmodified 0 0

SOURCE: Compiled by Legislative Audit Division.

* Received funding in response to the COVID-19 public health emergency.
A-1

Angus Maciver, Legislative Auditor
Deborah F. Butler, Legal Counsel

Deputy Legislative Auditors:
Cindy Jorgenson
William Soller

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT
OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH
GOVERNMENT AUDITING STANDARDS

The Legislative Audit Committee
of the Montana State Legislature:

We have audited, in accordance with the auditing standards generally accepted in the United States

of America and the standards applicable to the financial audits contained in Government Auditing
Standards issued by the Comptroller General of the United States, the financial statements of the
governmental activities, the business-type activities, the aggregate discretely presented component units,
each major fund, and the aggregate remaining fund information of the state of Montana, as of and

for the year ended June 30, 2021, and the related notes to the financial statements, which collectively
comprise the state of Montana’s basic financial statements, and have issued our report thereon dated
March 4, 2022. Our report includes a reference to other auditors who audited the financial statements
of the Montana State University component units and the University of Montana component units,

as described in our report on the State of Montana’s financial statements. The financial statements of
the Montana State University component units and the University of Montana component units were
not audited in accordance with Government Auditing Standards, and accordingly, this report does not
include reporting on internal control over financial reporting or instances of reportable noncompliance
associated with these component units.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered the state of Montana’s
internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances for the purpose of expressing our opinions on the financial statements, but not
for the purpose of expressing an opinion on the effectiveness of the state of Montana’s internal control.
Accordingly, we do not express an opinion on the effectiveness of the state of Montana’s internal
control.

Our consideration of internal control was for the limited purpose described in the preceding paragraph
and was not designed to identify all deficiencies in internal control that might be material weaknesses
or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that
were not identified. However, as described below, we identified certain deficiencies in internal control
that we consider to be material weaknesses and significant deficiencies.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or

Room 160 ¢ State Capitol Building * PO Box 201705 * Helena, MT * 59620-1705
Phone (406) 444-3122 * FAX (406) 444-9784 ¢ E-Mail lad@mt.gov
A-2

detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination
of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement
of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis.
We consider the deficiencies described below to be material weaknesses.

¢ The Department of Labor and Industry’s (DLI) internal controls over financial reporting were
not sufficient to detect and correct misstatements in relation to its Unemployment Insurance
activity prior to the books closing at fiscal year-end resulting in several multimillion-dollar
misstatements in the DLI’s accounting records in fiscal year 2021. This deficiency affects the
Business Type Activities Opinion Unit and the Unemployment Insurance opinion unit.

¢ Department of Administration State Financial Services Division’s (SFSD) procedures for
preparing the state’s basic financial statements did not prevent, or detect and correct, errors
in Unemployment Insurance enterprise fund activity. In attempting to correct the errors
in the BFS caused by the errors in DLI’s accounting records, SFSD personnel duplicated
adjustments for Unemployment Insurance fund activity and recorded adjustments at incorrect
amounts. Additionally, controls didn’t prevent, or detect and correct, errors in amounts
reported in the Statement of Cash Flows for the Unemployment Insurance enterprise fund.
‘This deficiency affects the Business Type Activities Opinion Unit and the Unemployment
Insurance Fund Opinion Unit.

¢ — Pandemic-Electronic Benefit Transfer (P-EBT) federal program expenditures were
co-mingled with Supplemental Nutrition Assistance Program (SNAP) federal program
expenditures in the Department of Public Health and Human Services financial records,
resulting in approximately $27 million of the Pandemic-EBT program expenditures initially
reported as SNAP program expenditures on the Schedule of Expenditures of Federal Awards
(SEFA). Reporting program expenditures in the incorrect federal assistance listing in the
SEFA increases the risk of improper identification of major federal programs requiring audit
attention under the Single Audit Act of 1996 and Uniform Guidance.

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less
severe than a material weakness, yet important enough to merit attention by those charged with
governance. We consider the deficiency described below to be a significant deficiency.

¢ — Internal controls over financial reporting at the University of Montana were not effective in
ensuring accurately reported capital asset classifications in the university’s financial statements
and note disclosures. Additionally, Montana State University does not have sufficient internal
controls in place to ensure the accuracy of capital asset-related information processed by
their asset management information system. Collectively, we consider these issues to be a
significant deficiency in internal controls affecting the Component Unit opinion unit.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the state of Montana’s financial statements

are free from material misstatement, we performed tests of its compliance with certain provisions of
laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and
material effect on the determination of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit, and accordingly, we do not express
such an opinion. The results of our tests disclosed an instance of noncompliance or other matters
A-3

that are required to be reported under Government Auditing Standards. The identified instance of
noncompliance is described below.

¢ The Montana Public Employees’ Retirement Board administers eight defined benefit
retirement plans. The Montana Constitution and state law require all retirement systems to
be actuarially sound, meaning the retirement system must amortize in 30 years or less. The
actuarial valuation as of June 30, 2021, indicates the Game Wardens’ and Peace Officers
Retirement System is not actuarially sound, as it amortizes in 35 years.

State of Montana’s Response to Findings

‘The state of Montana’s response to the findings identified in our audit are described in the separately
issued Public Employees’ Retirement Administration (#20-08B), the University of Montana (#21-10A),
and Montana State University (#21-11A) reports, the state of Montana financial audit report (#20-01B),
and are addressed in the Corrective Action Plan beginning on page D-1 of this report. The responses

in these reports were not subjected to the auditing procedures applied in the audit of the financial
statements and, accordingly, we express no opinion on them.

Purpose of this Report

‘The purpose of this report is solely to describe the scope of our testing of internal control and
compliance and the results of that testing, and not to provide an opinion on the effectiveness of

the state of Montana’s internal control or on compliance. This report is an integral part of an audit
performed in accordance with Government Auditing Standards in considering the state of Montana’s
internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Respectfully submitted,

/s/ Cindy Jorgenson
Cindy Jorgenson, CPA

Deputy Legislative Auditor
Helena, MT

March 4, 2022
A-5

Angus Maciver, Legislative Auditor
Deborah F. Butler, Legal Counsel

Deputy Legislative Auditors:
Cindy Jorgenson
William Soller

INDEPENDENT AUDITOR'S REPORT

The Legislative Audit Committee
of the Montana State Legislature:

Report on Financial Statements

We have audited the accompanying financial statements of the governmental activities, the
business-type activities, the aggregate discretely presented component units, each major fund, and

the aggregate remaining fund information of the state of Montana, as of and for the year ended

June 30, 2021, and the related notes to the financial statements which collectively comprise the state of
Montana’s basic financial statements, as follows:

¢ Statement of Net Position

¢ Statement of Activities

¢ Balance Sheet-Governmental Funds

¢ Reconciliation of the Balance Sheet-Governmental Funds to the Statement of Net Position

¢ Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental
Funds

¢ Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund
Balances—Governmental Funds to the Statement of Activities

¢ — Statement of Fund Net Position—Proprietary Funds

¢ Statement of Revenues, Expenses, and Changes in Fund Net Position—Proprietary Funds
¢ — Statement of Cash Flows—Proprietary Funds

¢ — Statement of Fiduciary Net Position—Fiduciary Funds

¢ — Statement of Changes in Fiduciary Net Position—Fiduciary Funds.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal controls relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or
error.

Our responsibility is to express opinions on these financial statements based on our audit. We did

not audit the financial statements of the Montana State University (MSU) component units and the
University of Montana (UM) component units, which represent 17.29 percent, 32.47 percent, and
10.06 percent, respectively, of the assets, net position, and revenues of the aggregate discretely presented

Room 160 ¢ State Capitol Building * PO Box 201705 * Helena, MT * 59620-1705
Phone (406) 444-3122 * FAX (406) 444-9784 ¢ E-Mail lad@mt.gov
A-6

component units. Those financial statements were audited by other auditors whose reports have been
furnished to us, and our opinions, insofar as they relate to the amounts included for the university
component units, are based solely on the reports of other auditors.

We conducted our audit in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. The financial statements of the MSU and UM component units were
not audited in accordance with Government Auditing Standards.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures

in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the state

of Montana’s preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the state of Montana’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as the overall presentation of the
financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinions.

Summary of Opinions
Opinion Unit Type of Opinion
Governmental Activities Unmodified
Business-Type Activities Unmodified
General Fund Unmodified
State Special Revenue Fund Unmodified
Federal Special Revenue Fund Unmodified
Land Grant Unmodified
Coal Severance Tax Unmodified
Unemployment Insurance Unmodified
Municipal Finance Programs Unmodified
Aggregate Discretely Presented Component Units Unmodified
Aggregate Remaining Fund Information Unmodified

Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects,

the financial position of the Governmental Activities and Business-Iype Activities, General Fund,

State Special Revenue Fund, Federal Special Revenue Fund, Land Grant, Coal Severance Tax,
Unemployment Insurance, and Municipal Finance Programs major funds, and the aggregate discretely
presented component units and aggregate remaining fund information of the state of Montana, as of
June 30, 2021, and the respective changes in financial position and, where applicable, cash flows thereof
for the fiscal year then ended in accordance with accounting principles generally accepted in the United
States of America.
A-7

Emphasis of Matter

As discussed in Note 1C to the basic financial statements, in fiscal year 2021, the Unemployment
Insurance Fund reported federal contributions to fund benefit claims related to the statewide
unemployment impact of the coronavirus public health emergency. These federal contributions

are reported as non-operating revenues. Additionally, the Federal Special Revenue Fund reports a
significant increase in revenue and expenditure activity in fiscal year 2021, as a result of spending funds
the state received from the Coronavirus Relief Fund, authorized by the federal Coronavirus Aid, Relief,
and Economic Security (CARES) Act and other federal acts passed in response to the public health
emergency. Lastly, the Federal Special Revenue Fund reports significant Cash & Cash Equivalent and
Unearned Revenue balances, associated with funds received but not yet spent under the American
Rescue Plan Act (ARPA). See Note 17 to the basic financial statements for more information on these
ARPA funds. Our opinions are not modified with respect to these matters.

As discussed in Note 6 to the basic financial statements, retirement system investment rates of return
were significantly higher in fiscal year 2021 than in fiscal year 2020. The Net Pension Liabilities
reported in the basic financial statements at June 30, 2021, were measured as of June 30, 2020, and
therefore do not reflect the strong investment performance from fiscal year 2021. The Net Pension
Liabilities are expected to decrease for financial reporting in fiscal year 2022. Our opinions are not
modified with respect to this matter.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that Management's
Discussion and Analysis, the Budgetary Comparison Schedule, the Pension Plan Information,

the Other Postemployment Benefits (OPEB) Plan Information, and the Risk Management Trend
Information, and the related notes, be presented to supplement the basic financial statements. Such
information, although not a part of the basic financial statements, is required by the Governmental
Accounting Standards Board who considers it to be an essential part of financial reporting for placing
the basic financial statements in an appropriate operational, economic, or historical context. We have
applied certain limited procedures to the required supplementary information in accordance with
auditing standards generally accepted in the United States of America, which consisted of inquiries
of management about the methods of preparing the information and comparing the information for
consistency with management's responses to our inquiries, the basic financial statements, and other
knowledge we obtained during our audit of the basic financial statements. We do not express an
opinion or provide any assurance on the information because the limited procedures do not provide us
with sufficient evidence to express an opinion or provide any assurance.

Supplementary Information

Our audit was conducted for the purpose of forming opinions on the financial statements that
collectively comprise the state of Montana’s basic financial statements as a whole. The Schedule of
Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations Part 200,
Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is
presented for purposes of additional analysis and is not a required part of the basic financial statements.
Such information is the responsibility of management and was derived from and relates directly

to the underlying accounting and other records used to prepare the basic financial statements. The
information has been subjected to the auditing procedures applied in the audit of the basic financial
statements and certain additional procedures, including comparing and reconciling such information
directly to the underlying accounting and other records used to prepare the basic financial statements
or to the basic financial statements themselves, and other additional procedures in accordance with
auditing standards generally accepted in the United States of America. In our opinion, the Schedule of
Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial
statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated March 4,
2022, on our consideration of the state of Montana’s internal control over financial reporting and on
our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements
and other matters. The purpose of that report is to describe the scope of our testing of internal

control over financial reporting and compliance and the results of that testing, and not to provide

an opinion on the effectiveness of the state of Montana’s internal control over financial reporting or

on compliance. That report is an integral part of an audit performed in accordance with Government
Auditing Standards in considering the state of Montana’s internal control over financial reporting and
compliance.

Respectfully submitted,

/s/ Cindy Jorgenson
Cindy Jorgenson, CPA

Deputy Legislative Auditor
Helena, MT

March 4, 2022
The State of Montana’s Basic Financial Statements,
Required Supplementary Information, and
Schedule of Expenditures of Federal Awards

A-9
MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

Management of the State of Montana (State) provides this Management’s Discussion and Analysis of the
State of Montana’s basic financial statements included in the Annual Comprehensive Financial Report
(ACFR). This is a narrative overview and analysis of the financial activities of the State of Montana for the
fiscal year ended June 30, 2021. We encourage readers to consider this information in conjunction with
the additional information that is furnished in the State’s financial statements, which follow.

In late 2019, a novel strain of coronavirus (“COVID-19”) started to spread throughout the world, including
to the United States, resulting in the World Health Organization proclaiming COVID-19 to be a pandemic
and the President of the United States declaring a national emergency. In response to the spread of
COVID-19, the United States government, state governments (including the State), local governments,
and private industries have taken measures to limit social interactions in an effort to limit the spread of
COVID-19. In March of 2020, Montana declared a state emergency, and a national emergency was
announced in the United States shortly after. The Coronavirus Aid, Relief, and Economic Security
(CARES) Act was passed by Congress and signed into law by the President of the United States on
March 27, 2020. On March 11, 2021, the American Rescue Plan Act of 2021 (ARPA) was signed into law
to provide additional funding for state and local governments. On June 30, 2021, Montana ended the
state emergency. In the following discussion and analysis, COVID-19 refers to this pandemic, CARES
refers to the CARES Act funding, and ARPA refers to the American Rescue Plan Act funding.

FINANCIAL HIGHLIGHTS

Government-wide

The assets and deferred outflows of resources of the State exceeded its liabilities and deferred inflows of
resources at the end of fiscal year 2021 by $11.0 billion compared with $10.2 billion at the end of fiscal
year 2020, representing a 7.5% increase in net position. Component units reported net position of $2.5
billion at the end of fiscal year 2021 compared to $2.2 billion at the end of fiscal year 2020, representing a
13.3% increase in net position. More detail is provided in the financial statement overview below.

Fund Level

As of the close of fiscal year 2021, the State’s governmental funds reported combined ending fund
balances of $5.7 billion compared with $5.0 billion at fiscal year 2020. This represents a $700.4 million
(14.1%) increase in total fund balance. Of the 2021 balance, $2.0 billion is not in spendable form,
primarily as permanent fund principal. Thus, $3.7 billion is available for spending. The fund balance in
spendable form is segregated by constraint as follows: $1.2 billion restricted, $1.7 billion committed, $97.6
million assigned, and $629.1 million unassigned. These changes are discussed in more detail in the
financial analysis of the State’s major funds presented below.

The State’s business-type activity funds reported net position at the close of fiscal year 2021 in the
amount of $566.7 million compared with fiscal year 2020 net position of $393.3 million. Of the 2021
business-type activity net position, $21.4 million was reported as net investment in capital assets. Net
position of $545.3 million was in spendable form with $24.6 million unrestricted and $520.7 million
restricted to expenditure for a specific purpose. This represents a $174.0 million (46.9%) increase in
spendable net position from the fiscal year 2020 balance of $371.3 million. These changes are discussed
in more detail in the financial analysis of the State’s major funds presented below.

Long-term Debt

The State’s total governmental activity bonds and notes payable for governmental activities increased by
$43.9 million, from $127.4 million in fiscal year 2020 to $171.3 million, a 34.5% increase in fiscal year
2021.

Further detail relating to the State’s long-term debt is provided in notes to the financial statements Note
11.
A-12

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the State of Montana’s basic
financial statements. The State’s basic financial statements include three components: (1) government-
wide financial statements, (2) fund financial statements, and (3) notes to the financial statements. The
report also contains additional required supplementary information, which includes budgetary schedules,
pension and other post employment benefits plan information, and risk management trends. These
components are described below:

Basic Financial Statements

The basic financial statements include two types of financial statements that present different views of the
State — the government-wide financial statements and the fund financial statements. These financial
statements also include the notes to the financial statements, which provide further detail and information
related to the balances of the financial statements.

Government-wide Financial Statements

The government-wide financial statements provide a broad view of the State’s operations in a manner
similar to a private-sector business. The statements provide both short-term and long-term information
about the State’s financial position, which assists in assessing the State’s economic condition at the end
of the fiscal year. These are prepared using the flow of economic resources measurement focus and the
accrual basis of accounting. In other words, they follow methods that are similar to those used by most
businesses, including all revenues and expenses connected with the fiscal year, even if cash involved has
not been received or paid. The government-wide financial statements include two statements: The
Statement of Net Position and the Statement of Activities, as defined below.

The Statement of Net Position presents all of the government's assets, deferred outflows of resources,
liabilities, deferred inflows of resources, and net position. Over time, increases or decreases in the State’s
net position may serve as a useful indicator of whether the financial position of the State is improving or
deteriorating.

The Statement of Activities presents information related to the government's net position changes during
the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving
rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses
are reported in this statement for some items that will not result in cash flows until future fiscal periods.
This statement also presents a comparison between direct expenses and program revenues for each
function of the State.

Both of the above financial statements have separate sections for three different types of state activities.
These three types of activities are as follows:

Governmental Activities — Activities mostly supported by taxes and intergovernmental revenues, including
federal grants. Most services normally associated with state government fall into this category, including
education (support for both K-12 public schools and higher education), general government, health and
human services, natural resources, public safety, and transportation.

Business-type Activities — Functions normally intended to recover all or a significant portion of their costs
through user fees and charges to external users of goods and services. The major business-type
activities of the State include the Unemployment Insurance Fund and the Municipal Finance Programs,
which assists Montana’s small businesses and local governments in obtaining long-term, fixed-rate
financing through private Montana lending institutions.

Discretely Presented Component Units — Operations for which the State has financial accountability, but
have certain independent qualities as well. In order to be considered component units, these entities must
be legally separate to the extent that they may sue, or be sued, in their own right. For the most part, these
entities operate similarly to private sector businesses and the business-type activities described above.
The State’s component units consist of one financing authority, one housing board, one nonprofit
independent public corporation, and two universities.

Fund Financial Statements - Reporting the State’s Major Funds

A fund is a grouping of related accounts that is used to maintain control over resources that have been
segregated for specific activities or objectives. The State, like other state and local governments, uses
fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

The fund financial statements focus on individual parts of the state government, reporting the State’s
operations in more detail than the government-wide statements. All of the funds can be divided into three
categories. It is important to note that these fund categories use different accounting approaches and
should be interpreted individually. The three categories of funds are as follows:

Governmental Funds — Most of the basic services provided by the State are financed through
governmental funds. Governmental funds are used to account for essentially the same functions reported
as governmental activities in the government-wide financial statements. However, unlike the government-
wide financial statements, the governmental fund financial statements focus on near-term inflows and
outflows of spendable resources. They also focus on the balances of spendable resources available at
the end of the fiscal year. Such information may be useful in evaluating the government’s near-term
financing requirements. This approach is known as using the flow of current financial resources
measurement focus and the modified accrual basis of accounting. These statements provide a detailed
short-term view of the State’s finances that assists in determining whether there will be adequate financial
resources available to meet the current needs of the State.

The State has five governmental funds that are considered major funds for presentation purposes. Each
major fund is presented in a separate column in the governmental fund balance sheet and in the
governmental fund statement of revenues, expenditures, and changes in fund balances. The State’s five
major governmental funds are the General Fund, the State Special Revenue Fund, the Federal Special
Revenue Fund, the Coal Severance Tax Fund, and the Land Grant Fund.

Proprietary Funds — When the State charges customers for the service it provides, whether to outside
customers or to other agencies within the State, these services are generally reported in proprietary
funds. Like the government-wide statements, proprietary fund statements utilize full accrual accounting,
the same method used by private sector businesses. Enterprise funds report activities that provide
supplies and services to the general public. Whereas internal service funds report activities that provide
supplies and services to the State’s other programs and activities.

Fiduciary Funds — Resources held for the benefit of parties outside state government are accounted for in
fiduciary funds. Fiduciary funds are not reflected in the government-wide financial statements because the
resources of these funds are not available to support the State’s own programs. Fiduciary fund
statements use the full accrual basis of accounting.

Notes to the Financial Statements

The notes to the financial statements provide additional information that is essential for a_ full
understanding of the government-wide and the fund financial statements. The notes to the financial
statements can be found immediately following the fiduciary fund financial statements.

Required Supplementary Information

The basic financial statements are followed by a section of required supplementary information. This
section contains a budgetary comparison schedule, which includes the reconciliation between the
statutory fund balance for budgetary purposes and the fund balance for the General Fund and major
special revenue funds as presented in the governmental fund financial statements. Required
supplementary information also includes pension and other post employment benefits plan information, as
well as additional risk management trend data.

A-13
A-14

GOVERNMENT-WIDE FINANCIAL ANALYSIS

Montana’s overall financial position increased from the last fiscal year, as reflected in the $768.5 million
increase (7.5%) in net position. This improvement resulted from the continued moderate growth, despite
the impacts of COVID-19, particularly in tax, tobacco settlement proceeds, and investment revenue.
However, growth is not expected to persevere in fiscal year 2022, as the associated financial and
economical affects of the pandemic continued to be realized.

Net Position

As noted earlier, net position may serve over time as a useful indicator of a government’s financial
position. The State’s combined net position (government and business-type activities) totaled $11.0 billion
at the end of fiscal year 2021. Net position of both governmental and business-type activities increased by
$595.1 million (6.1%) and increased by $173.4 million (44.1%), respectively. These changes are
explained in detail in the Financial Analysis of the State's Major Funds section.

A portion of the State’s net position reflects its investment in capital assets such as land, buildings,
equipment, and infrastructure (roads, bridges, and other immovable assets) less any related debt used to
acquire those assets that is still outstanding. The State uses these capital assets to provide services to
citizens; consequently, these assets are not available for future spending. Although the State’s investment
in its capital assets is reported net of related debt, it should be noted that the resources needed to repay
this debt must be provided from other sources since the capital assets themselves cannot be used to
liquidate these liabilities.

An additional portion of the State’s net position represents resources that are subject to external
restrictions on how they may be used. The remaining balance of unrestricted net position may be used to
meet the State’s ongoing obligations to citizens and creditors. Internally imposed designations of
resources are not presented as restricted net position.

At the end of the current fiscal year, the State reported positive balances in net investment in capital
assets and restricted net position categories, along with a negative balance in the unrestricted category of
net position, for both the governmental activities and the primary government as a whole. The negative
unrestricted net position is primarily due to the State's net pension liability. GASB Statements No. 68 and
71, related to pension liabilities and other balance sheet components, were implemented in fiscal year
2015 and are contributing factors to the negative net position. The State also reported positive balances
for all categories of net position for the business-type activities.
Current and other assets
Capital assets
Total assets

Deferred outflows of resources

Long-term liabilities
Due in more than one year

Other liabilities
Total liabilities

Deferred inflows of resources

Net investment in capital assets
Restricted
Unrestricted

Total net position

Net Position

June 30,

(expressed in thousands)

Governmental Business-type Total Primary
Activities Activities Government
2020 2021 2020 2021 2020 2021

$ 7,572,307 $ 7,849,347 $ 554,386 $ 746,786 $ 8,126,693 $ 8,596,133
6,823,046 7,067,035 22,052 21,377 6,845,098 7,088,412
14,395,353 14,916,382 576,438 768,163 14,971,791 15,684,545
613,249 1,031,934 2,423 5,792 615,672 1,037,726
2,707,169 3,535,117 18,302 23,131 2,725,471 3,558,248
2,251,217 1,823,324 163,594 181,844 2,414,811 2,005,168
4,958,386 5,358,441 181,896 204,975 5,140,282 5,563,416
219,243 163,799 3,645 2,299 222,888 166,098
6,743,003 6,962,944 22,035 21,360 6,765,038 6,984,304
3,452,344 3,574,995 350,309 520,696 3,802,653 4,095,691
(364,374) (111,863) 20,976 24,625 (343,398) (87,238)
$ 9,830,973 $ 10,426,076 $ 393,320 $ 566,681 $ 10,224,293 $ 10,992,757

A-15
A-16

The following condensed financial information was derived from the government-wide Statement
of Activities, and reflects how the State’s net position changed during the fiscal year:

Revenues:

Program revenues
Charges for services
Operating grants
Capital grants

General revenues
Taxes
Other

Total revenues

Expenses:
General government
Public safety
Transportation
Health and human service
Education
Natural resources
Interest on long-term debt
Unemployment Insurance
Liquor Stores
State Lottery
Municipal Finance Programs
Hail Insurance
Other Services
Prison Funds
MUS Group Insurance
MUS Workers Comp

Total expenses

Increase (decrease) in net
position before transfers

Transfers
Change in net position

Net position, beg of year
(as adjusted)

Net position, end of year

Changes in Net Position
For Fiscal Year Ended June 30,
(expressed in thousands)

Governmental Business-type Total Primary
Activities Activities Government
2020 2021 2020 2021 2020 2021
$ 686,335 $ 693,875 $ 443,048 $ 519,186 $ 1,129,383 $ 1,213,061
2,930,307 4,441,208 71,422 68,576 3,001,729 4,509,784
564,431 531,666 950 883 565,381 532,549
2,793,211 3,170,440 32,576 38,141 2,825,787 3,208,581
186,194 130,057 504,749 555,820 690,943 685,877
7,160,478 8,967,246 1,052,745 1,182,606 8,213,223 10,149,852
957,534 1,699,213 957,534 1,699,213
458,526 544,839 458,526 544,839
557,290 611,537 557,290 611,537
2,896,774 3,418,518 2,896,774 3,418,518
1,352,323 1,492,682 1,352,323 1,492,682
338,957 361,420 338,957 361,420
5,365 5,026 5,365 5,026
746,508 728,476 746,508 728,476
98,324 120,913 98,324 120,913
51,385 99,353 51,385 99,353
2,542 1,602 2,542 1,602
1,154 796 1,154 796
74,323 81,765 74,323 81,765
8,506 7,042 8,506 7,042
100,958 106,068 100,958 106,068
657 2,852 657 2,852
6,566,769 8,133,235 1,084,357 1,148,867 7,651,126 9,282,102
593,709 834,011 (31,612) 33,739 562,097 867,750
58,703 (138,881) (58,703) 138,881 _ _
652,412 695,130 (90,315) 172,620 562,097 867,750
9,178,561 9,730,946 483,635 394,061 9,662,196 10,125,007
$ 9,830,973 $ 10,426,076 $ 393,320 $ 566,681 $ 10,224.293 $ 10,992,757
A-17

Governmental Activities
The following chart depicts revenues of the governmental activities for the fiscal year:

Revenues - Governmental Activities
Fiscal Year Ended June 30, 2021

Other : 1.5% \

Charges for Services: 7.7% = ~~ ~~
> Grants: 49.5%

The following chart depicts expenses of the governmental activities for the fiscal year:

Taxes: 35.4% —

Capital Grants: 5.9%

Expense - Governmental Activities
Fiscal Year Ended June 30, 2021

Debt: 0.1%

General Government: 20.9%

Interest on Long-Term \ [ Natural Resources: 4.4%
Education: 18.4%

Public Safety: 6.7% —a—

Transportation: 7.5%

Health and Human
Services: 42.0%
A-18

Business-type Activities
The following chart depicts revenues of the business-type activities for the fiscal year:

Revenues - Business-type Activities
Fiscal Year Ended June 30, 2021

Operating Grants: 5.8%
f ~ Capital Grants: 0.1%

/ Taxes: 3.2%

Services: 43.9%

Other: 47.0%

The Other Revenue in the above table is primarily related to additional federal funding received for
Unemployment Insurance claims due to COVID-19.

The following chart depicts expenses of the business-type activities for the fiscal year:

Expenses - Business-type Activities
Fiscal Year Ended June 30, 2021

Gen Govt Services: 7.1% Prison Funds: 0.6%

rf MUS Group Insurance : 9.2%
/ ~~ MUS Workers Comp: 0.2%

Hail Insurance: 0.1%

Municipal Finance: 0.1% Zo

State Lottery: 8.7%

Liquor Stores: 10.5% ~~

Unemployment Insurance: 63.5%
FINANCIAL ANALYSIS OF THE STATE’S MAJOR FUNDS

As the State completed the year, its governmental funds reported fund balances of $5.7 billion. Of this
total, $3.7 billion (65.1%) constitutes spendable fund balance and $2.0 billion (34.9%) is classified as non-
spendable. The analysis of the following major funds, providing the majority of the fund balance for the
government, follows.

General Fund Revenues and Expenditures

The General Fund is the chief operating fund of the State. For fiscal year 2021, the total fund balance of
the General Fund was reported at approximately $856.3 million. Of this balance, $5.2 million is non-
spendable. The remaining $851.1 million is spendable with $114.2 million committed, $95.4 million
assigned, and $641.5 million unassigned. This spendable fund balance of the General Fund represents
23.1% of the $3.7 billion spendable governmental fund balances for all governmental funds. Of the
assigned fund balance, $75.0 million pertains to the projected general fund spend down of fund balance
in fiscal year 2022 and $20.4 million relates to outstanding encumbrances at the end of the fiscal year.
The committed fund balance of $114.2 million relates to the balance of the Budget Stabilization Reserve
Fund, which is combined with the General Fund for financial statement presentation. Further detail on the
breakdown of fund balance for the General Fund is provided in Note 14 — Major Purpose Presentation.

Total fund balance increased by $263.5 million when compared to the previously reported fund balance of
$592.8 million. Changes in both expenditures and revenues are discussed in detail below. The 2021
legislative session projected $408.6 million of unassigned fund balance for fiscal year 2021, without
regard to a fund balance spend down. The difference was primarily the result of a larger than anticipated
beginning fund balance and smaller than anticipated expenditures.

General Fund Revenues — Total General Fund revenues were $2.8 billion for fiscal year 2021 (higher than
legislative estimation), a 16.6% increase from the $2.4 billion reported in 2020 (which were lower than
legislative estimation). Fiscal year 2021 tax revenue increased by 18.3% in total over 2020, with corporate
income tax collections up 41.3% and individual income tax collections increased by 22.0%. The large tax
revenue gains were the result of the strong economic conditions of the state coming out of the COVID-19
restrictions last year. In addition, the large federal spending provisions implemented during fiscal year
2021 were also increasing disposable incomes for individuals, state governments, and businesses. Other
noted increases in revenues included charges for services/fines/forfeits/settlements and licenses/permits.

General Fund Expenditures — Total General Fund expenditures for fiscal year 2021 increased by $47.2
million (2.0%). This increase in expenditures occurred in the general government, transportation, health
and human services, education, and natural resources functions and the decrease in expenditures
occurred in the public safety function as follows:

* General government expenditures increased by $13.4 million (3.6%)

* Transportation expenditures increased by $174.0 thousand

¢ Health and human services expenditures increased by $10.1 million (2.1%)

¢ Education expenditures increased by $37.0 million (3.4%)

¢ Natural resources expenditure increased by $2.0 million (5.4%)

¢ Public safety expenditures decreased by $11.3 million (3.5%)

The expenditures in the public safety function decreased because some of the personal services were
eligible to be paid by the Federal Special Revenue Fund for COVID-19 relief.

The General Fund’s actual revenues and expenditures in comparison to budgeted revenues and
expenditures is provided in more depth on the Budgetary Comparison Schedule within the Required
Supplementary Information section of this report. The same level of detail used to report the actual
revenues and expenditures is not readily available for all budgetary revenues and expenditures, which
may cause some variances.

General Fund Expenditure Budget Reversions
Fund balances are not reserved for reverted appropriations. For fiscal year 2021, General Fund
appropriations that reverted to 2022 were $96.6 million.

A-19
A-20

The Department of Public Health and Human Services had unspent appropriations of $58.8 million related
to Medicaid savings and other operational costs.

The Department of Corrections had unspent appropriations of $14.8 million related to the costs
reimbursed by federal funding associated with COVID-19.

The Office of Public Instruction had unspent appropriations of $10.0 million related to K-12 distributions to
schools and participation or eligibility in some programs.

The Judicial Branch had unspent appropriations of $2.8 million related to vacancy savings and
operational costs.

The Legislative Branch had unspent appropriations of $2.0 million related to vacancy savings and
operational costs.

The Department of Revenue had unspent appropriations of $2.0 million related to funds available to local
governing bodies pursuant to Section 15-1-402 (6)(d), MCA, regarding protested property taxes, Section
15-1-120, MCA, regarding entitlement share payments, and other operational costs.

The Office of the Governor had unspent appropriations of $1.6 million related to personal services
contingency funding held in the office for the entire state, operating cost savings, and vacancy savings.

The Department of Natural Resources and Conservation had unspent appropriations of $1.5 million
related to unspent operation costs associated with reduction in travel, training and other various
expenditures due to COVID-19.

The remaining unspent appropriation of $3.2 million was attributable to miscellaneous reversions across
other agencies.

State Special Revenue Fund

The fund balance of the State Special Revenue Fund increased by $143.1 million to $2.0 billion.
Revenues increased by $59.3 million (5.6%) and expenditures increased $50.9 million (4.5%), for fiscal
year 2021. The largest increases in revenues are attributable to an increase in charges for services/fines/
forfeits/settlements, taxes collections, and licenses and permits. The largest increases in expenditures are
attributable to natural resources related expenditures. Other financing sources, such as refunding bond
issued, increased due to the General Obligation Bonds, Series 2010F refunded with 20201, Series 2015C
refunded with 2020J, the Special Revenue Bonds, Series 2010C refunded with 2020L, in fiscal year 2021.
Other financing sources, such as bond proceeds, increased due to the General Obligation Bonds, Series
2020E, 2020G, 2020H, 2020J, and 2020K, the Special Revenue Bonds, Series 2020L and 2020M, issued
in fiscal year 2021. Primarily, transfers into the State Special Revenue Fund from other governmental
funds resulted in an increase in fund balance.

Federal Special Revenue Fund

The fund balance of the Federal Special Revenue Fund decreased by $4.5 million (66.5%) to the balance
of negative $11.3 million. Revenues and expenditures increased by $1.5 billion (46.2%) and $1.3 billion
(41.7%) respectively, for the fiscal year 2021. Revenue increases are attributable to increases in federal
program revenue, including COVID-19 related federal funding. Expenditure increases are attributable to
increases in general government and health and human services related expenditures. The general
government and health and human services related expenditure increases are attributable to COVID-19.

Coal Severance Tax Permanent Fund

The fund balance of the Coal Severance Tax Permanent Fund increased by $7.3 million (0.6%) to $1.2
billion. Revenue decreased by $60.1 million (60.1%) to $39.9 million, primarily due to an decrease of
investment earnings. The excess of revenue over expenditures and transfers out helped lead to the
increase in fund balance.
Land Grant Permanent Fund

The fund balance of the Land Grant Permanent Fund increased by $25.9 million (3.1%) to $871.7 million.
Revenue decreased by $33.0 million to a total of $93.6 million, and the investment earnings were
attributable to the decrease. Primarily, income generated by the State's trust lands resulted in an increase
in fund balance.

The State's proprietary funds financial statements provided the same type of information founded in the
government-wide financial statements, but in more detail. As the State completed the year, the enterprise
funds reported fund balances of $566.7 million. Of this total, $545.3 million (96.2%) constitutes spendable
net position and $21.4 million (3.8%) is classified as net investment in capital assets. The analysis of the
following major enterprise funds, providing the majority of the net position for the business-type activities,
follows.

Unemployment Insurance Enterprise Fund

Net position restricted for unemployment compensation increased by $162.4 million (68.1%). The
increase in net position is attributable to the transfers into the Unemployment Insurance Enterprise Fund
from the Federal Special Revenue Fund for COVID-19 relief in fiscal year 2021.

Municipal Finance Programs Fund

Net position decreased by 8.2% to $4.9 million in fiscal year 2021. Financing income revenue decreased
$922.0 thousand, and investment earnings decreased $436.0 thousand, while expenses from interest
expense decreased $1.1 million. Overall revenues and expenditures decreased 53.2% and 37.0%, which
resulted in an decrease of $438.0 thousand to net position.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets

The State’s investment in capital assets for its governmental and business-type activities, as of June 30,
2021, amounted to $9.7 billion, with related accumulated depreciation of $2.6 billion, leaving a net book
value of $7.1 billion. This investment in capital assets includes land, buildings, improvements, equipment,
infrastructure, intangible assets, and construction in progress. Infrastructure assets are items that are
normally immovable and of value only to the State, such as roads, bridges, streets and sidewalks,
drainage systems, lighting systems, and similar items.

The total increase in the State’s investment in capital assets for the current fiscal year was $243.3 million
or 3.6% in terms of net book value. Most increases in capital expenditures were seen in construction, or
reconstruction, of roads and bridges. Additional information relating to the State’s capital assets can be
found in Note 5 of the notes to the financial statements.

Debt Administration

Montana continues to receive excellent general obligation bond ratings from Moody’s Investor Service
(Aa1), Standard and Poor’s Corporation (AA), and Fitch Ratings (AA+), which remain unchanged from
2020.

State debt may be authorized either by a two-thirds vote of the members of each house of the Legislature
or by a favorable vote of a majority of the State’s electors voting thereon. There is no constitutional limit
on the amount of debt that may be incurred by the State. The Montana Constitution does, however,
prohibit the incurring of debt to cover deficits caused by appropriations exceeding anticipated revenue.

The State of Montana’s general obligation debt increased from $90.3 million at June 30, 2020, to $127.6
million at June 30, 2021. There is cash available, of $6.7 million at the end of fiscal year 2021, in debt
service funds to service general obligation debt.

The below table contains the ratio of general obligation debt and total State debt to personal income and
to the amount of debt per capita:

A-21
A-22

Amount Percentage of State Debt
(in thousands) Personal Income ") Per Capita ”
General obligation debt $ 127,633 0.22% $ 118
Total State debt “ $ 172,555 0.30% $ 160

() Based on personal income for calendar year 2020.

®) Based on estimated 2020 Montana population.

®) Based on total of general obligation bonds, special revenue bonds, notes payable, and lease/installment purchase payable for the
percentage and state debt per capita.

More detailed information regarding the State’s long-term obligations is provided in Note 11 of the notes to
the financial statements and in the statistical tables.

ECONOMIC CONDITION AND OUTLOOK

On March 3, 2020, Governor Bullock formed a multi-agency task force to coordinate the State’s
preparations with respect to COVID-19. On March 12, 2020, Governor Bullock issued Executive Orders
No. 2-2020 and 3-2020 declaring a State of Emergency in the State in response to the COVID-19
pandemic. Montana residents were under a Stay at Home Directive from March 28, 2020 through April 24,
2020. On June 30, 2021, Governor Gianforte ended the State of Emergency in Montana.

Because Montana’s continued and effective response to the COVID-19 pandemic, the State has
determined that extending the State income tax filing deadline to July 15, 2020, did not have an adverse
effect on the State’s liquidity for fiscal years 2020 and 2021.

The State was allocated $1.6 billion from ARPA during fiscal year 2021. The legislature has appropriated
approximately $1.2 billion and enacted laws to allow appropriations to continue into the 2023 and 2025
bienniums. The programs designated by the legislature for ARPA funding are infrastructure,
communications, economic transformation and stabilization, workforce development, and health. ARPA
funds spent before June 30, 2021, totaled $58.4 million. Since June 30, 2021, another $116.0 million has
been spent. The State plans to spend all funds received by June 30, 2026.

The extent of the impact of COVID-19 on the State’s operational and financial performance, and on the
State’s general financial condition, will depend on future developments, many of which are out of the
State’s control, including the implementation of federal aid; the duration and spread of the COVID-19
pandemic; and associated restrictions and limitations.

The State cannot predict: (i) the duration or extent of the COVID-19 pandemic or any other outbreak or
pandemic; (ii) the duration or expansion of travel restrictions and warnings — both domestically and
internationally; (iii) whether additional countries or destinations will be added to the travel restriction or
warning; (iv) what effect any COVID-19 or any other outbreak/pandemic-related travel restrictions or
warnings may have on demand for travel; (v) whether and to what extent the COVID-19 pandemic or any
other outbreak or pandemic may disrupt the local or global economy, manufacturing or supply chain, or
whether any such disruption may adversely impact State-related operations and financial results; or (vi)
whether any of the foregoing may have a material adverse effect on the finances and operations of the
State.

Despite the economic effects of COVID-19, Montana’s primary economic base remains concentrated in
nonresident travel, agriculture, and mining, as well as service-providing industries. Per the 2021 Labor
Day Report issued by the Montana Department of Labor and Industry, Montana's economy is in the midst
of a strong recovery from the pandemic recession. Montana had real wage growth of 6.6% in calendar
year 2020, ranking 8"" among states for the fastest average annual wage growth over the last 10 years.
Montana’s unemployment rate dropped quickly after the pandemic recession, reaching 3.6% in July 2021,
with the national rate around 5.4%. Prior recessions took much longer for unemployment to return to
normal levels. In October 2021, the Montana's preliminary unemployment rate was 3.1% with the national
rate around 4.6%. Even with a strong recovery and rapid job growth, it is likely that the pandemic will have
continued impacts on Montana's economy, particularly labor shortages and the impacts of rising prices on
businesses and workers.
Montana had an estimated 1,080,577 population as of July 1, 2020. The Montana labor market has total
nonfarm workers of 481,800 in August 2021 as compared to 464,600 in August 2020. A more in-depth
analysis of the State’s overall financial position can be found in the transmittal letter of this report.

The Montana Constitution, Article VIII, Section 15, states that public retirement systems shall be funded
on an actuarially sound basis. Public pension plans are considered actuarially sound if the unfunded
accrued actuarial liability amortization period is within 30 years. As of June 30, 2021, the Game Warden &
Peace Officers’ Retirement System (GWPORS) was not in compliance and did not amortize within 30
years. The unfunded liabilities in the other state retirement systems amortize in 30 years or less as of the
fiscal year ended June 30, 2021.

The actuarial condition of these retirement plans is disclosed in greater detail in Note 6 of the financial
statements. The unfunded actuarial liability of these plans is long-term in nature and does not translate
into an inability of the plans to meet their current obligations in the near future.

REQUESTS FOR INFORMATION

This financial report is designed to provide a general overview of the State of Montana’s finances for all of
Montana’s citizens, taxpayers, customers, investors, and creditors. The financial report seeks to
demonstrate the State’s accountability for the money it receives. Questions concerning any of the
information provided in this report or requests for additional information should be addressed to the State
of Montana, Statewide Accounting Bureau, Room 255 Mitchell Building, PO Box 200102, Helena, MT
59620.

A-23
A-24

STATEMENT OF NET POSITION
JUNE 30, 2021
(amounts expressed in thousands)

ASSETS
Cash/cash equivalents (Note 3)
Receivables (net) (Note 4)

Due from primary government
Due from other governments
Due from component units

Internal balances
Inventories

Advances to component units
Long-term loans/notes receivable
Equity in pooled investments (Note 3)

Investments (Note 3)

Securities lending collateral (Note 3)
Net pension asset (Note 6)

Other assets

Depreciable capital assets and infrastructure, net (Note 5)
Land and nondepreciable capital assets (Note 5)

Total assets

DEFERRED OUTFLOWS OF RESOURCES (Note 4)

LIABILITIES
Accounts payable (Note 4)

Lottery prizes payable

Due to primary government

Due to other governments

Due to component units

Due to pension trust funds
Advances from primary government

Unearned revenue

Amounts held in custody for others
Securities lending liability (Note 3)

Other liabilities

Short-term debt (Note 11)
Long-term liabilities (Note 11):

Due within one year

Due in more than one year
Net pension liability (Note 6)
Total OPEB liability (Note 7)

Total liabilities

DEFERRED INFLOWS OF RESOURCES (Note 4)

PRIMARY GOVERNMENT

GOVERNMENTAL BUSINESS-TYPE COMPONENT
ACTIVITIES ACTIVITIES TOTAL UNITS

$ 3,401,680 $ 553,507 $ 3,955,187 619,427

530,038 74,659 604,697 130,533

— — — 2,319

355,220 792 356,012 36,473

553 1,445 1,998 289

6,415 (6,415) _ _

30,734 6,195 36,929 4,507

9,539 8,515 18,054 _

550,050 78,175 628,225 611,393

2,663,550 18,379 2,681,929 50,778

199,873 9,504 209,377 2,369,504

48,105 332 48,437 5,182

36,545 _ 36,545 _

17,045 1,698 18,743 19,122

4,545,872 16,061 4,561,933 877,316

2,521,163 5,316 2,526,479 143,081

14,916,382 768,163 15,684,545 4,869,924

1,031,934 5,792 1,037,726 140,462

749,171 65,304 814,475 75,884

_ 4,459 4,459 _

33,251 355 33,606 371

2,319 _ 2,319 289

35,825 _ 35,825 _

759,052 6,151 765,203 99,793

56,690 30 56,720 13,935

48,105 332 48,437 5,182

5,658 _ 5,658 26,935

_ 90,600 90,600 _

133,253 14,613 147,866 171,931

449,938 5,391 455,329 1,774,141

2,943,785 15,290 2,959,075 237,781

141,394 2,450 143,844 58,124

5,358,441 204,975 5,563,416 2,484,418

163,799 2,299 166,098 58,029
A-26

STATEMENT OF ACTIVITIES
FOR THE FISCAL YEAR ENDED JUNE 30, 2021
(amounts expressed in thousands)

PROGRAM REVENUES
OPERATING CAPITAL
CHARGES GRANTS GRANTS NET
FOR AND AND (EXPENSE)
FUNCTIONS/PROGRAMS EXPENSES SERVICES CONTRIBUTIONS CONTRIBUTIONS REVENUE
Primary government:
Governmental activities:

General government $ 1,699,213 $ 214,699 $ 1,451,597 $ 5,918 $ (26,999)

Public safety 544,839 198,475 29,095 — (317,269)

Transportation 611,537 35,802 83,533 505,281 13,079

Health and human services 3,418,518 39,781 2,476,116 245 (902,376)

Education 1,492,682 3,563 251,968 1,379 (1,235,772)

Natural resources 361,420 201,555 148,899 18,843 7,877

Interest on long-term debt 5,026 _— _— _— (5,026)

Total governmental activities 8,133,235 693,875 4,441 208 531,666 (2,466,486)
Business-type activities:

Unemployment Insurance 728,476 122,626 14,632 _— (591,218)

Liquor Stores 120,913 135,369 — — 14,456

State Lottery 99,353 112,327 — — 12,974

Municipal Finance Programs 1,602 40 1,124 _— (438)

Hail Insurance 796 1,152 4 _— 360

Other Service 81,765 31,401 52,387 883 2,906

Prison Funds 7,042 7,005 — — (37)

Mus" Group Insurance 106,068 105,336 339 _— (393)

MUS" Workers Compensation 2,852 3,930 90 _— 1,168

Total business-type activities 1,148,867 519,186 68,576 883 (560,222)

Total primary government $ 9,282,102 $ 1,213,061 $ 4,509,784 $ 532,549 $ (3,026,708)
Component units:

Montana Board of Housing $ 21,820 $ 2,612 $ 18,908 $ — $ (300)

Facility Finance Authority 538 821 112 _— 395

Montana State Fund 171,042 148,625 — — (22,417)

Montana State University 646,557 273,506 320,508 11,663 (40,880)

University of Montana 464,845 148,670 240,803 336 (75,036)
Total component units $ 1,304,802 $ 574,234 $ 580,331 $ 11,999 $ (138,238)

‘Montana University System
PRIMARY GOVERNMENT
ACTIVITIES ACTIVITIES TOTAL UNITS
Changes in net position:
Net (expense) revenue $ (2,466,486) $ (560,222) $ (3,026,708) $ (138,238)
General revenues:
Taxes:
Property 329,585 _— 329,585 _—
Fuel 274,417 _— 274,417 _—
Natural resource 160,987 _— 160,987 _—
Individual income 1,712,162 _— 1,712,162 _—
Corporate income 261,686 _— 261,686 _—
Other (Note 1) 431,603 38,141 469,744 _—
Unrestricted grants and contributions 447 549,317 549,764 4
Settlements 86,092 _— 86,092 _—
Unrestricted investment earnings 32,902 14 32,916 138,851
Transfers from primary government _— _— _— 256,944
Gain (loss) on sale of capital assets 4,750 84 4,834 (14)
Miscellaneous 5,866 6,405 12,271 2,002
Contributions to term and permanent endowments _— _— _— 29,507
Transfers between primary government (138,881) 138,881 _— _—
Total general revenues, contributions, and transfers 3,161,616 732,842 3,894,458 427,294
Change in net position 695,130 172,620 867,750 289,056
Total net position - July 1 - as previously reported 9,830,973 393,320 10,224 293 2,178,642
Adjustments to beginning net position (Note 2) (100,027) 741 (99,286) 241
Total net position - July 1 - as adjusted 9,730,946 394,061 10,125,007 2,178,883
Total net position - June 30 $ 10,426,076 $ 566,681 $ 10,992,757 $ 2,467,939

The notes to the financial statements are an integral part of this statement.

A-27
A-28

BALANCE SHEET
GOVERNMENTAL FUNDS

JUNE 30, 2021

(amounts expressed in thousands)

ASSETS

Cash/cash equivalents (Note 3)
Receivables (net)

Interfund loans receivable (Note 12)
Due from other governments

Due from other funds (Note 12)

Due from component units
Inventories

Equity in pooled investments (Note 3)
Long-term loans/notes receivable
Advances to other funds (Note 12)
Advances to component units
Investments (Note 3)

Securities lending collateral (Note 3)
Other assets

Total assets

LIABILITIES, DEFERRED INFLOWS OF RESOURCES,
AND FUND BALANCES

Liabilities:
Accounts payable
Interfund loans payable (Note 12)
Due to other governments
Due to other funds (Note 12)
Due to component units
Advances from other funds (Note 12)
Unearned revenue
Amounts held in custody for others
Securities lending liability (Note 3)
Other liabilities
Total liabilities

DEFERRED INFLOWS OF RESOURCES

Fund balances (Note 14):
Nonspendable
Restricted
Committed
Assigned
Unassigned

Total fund balances

Total liabilities, deferred inflows of resources, and fund balances

The notes to the financial statements are an integral part of this statement.

SPECIAL REVENUE
GENERAL STATE FEDERAL

910,776 $ 1,084,767 $ 792,458
314,579 108,104 72,886
98,139 78,337 5
12,534 1,459 341,207
34,585 16,247 2,289
4,087 21,669 —

— 524,607 5,480

355 38,123 —

10,907 1,734 —
3,322 10,058 208
1,389,284 $ 2,286,433 $ 1,214,533
324,199 § 169,734 $ 230,664
— 5,001 166,377
430 31,227 1,594
2,533 12,395 13,627
36,275 459 1,409
— 5,328 36,879

40 21,186 736,758
8,044 42,042 468

28 1,332 —
371,540 205,785 1,187,776
161,435 11,452 38,078
5,171 22,630 151
114,199 757,536 —
95,387 1,953 —
641,543 — (11,472)
856,300 1,979,198 (11,321)
1,389,284 $ 2,286,433 _$ 1,214,533
A-30

RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE
STATEMENT OF NET POSITION

JUNE 30, 2021

(amounts expressed in thousands)

Total fund balances - governmental funds

Amounts reported for governmental activities in the Statement of Net Position are different due to:

Capital assets used in governmental activities are not current financial resources and therefore not
reported in the governmental funds (Note 5):

Depreciable capital assets and infrastructure, net
Land and nondepreciable capital assets

Deferred outflows of resources represent a consumption of net assets that will be reported as an
outflow of resources in a future period and therefore are not reported in the governmental funds.

Other assets not available in the current period and therefore are not reported in the governmental
funds:

Net pension asset

Long-term receivables

Internal service funds are used by management to charge the costs of certain activities, such as
insurance and central computer services, to individual governmental funds. The assets and liabilities
of the internal service funds are included in the governmental activities in the Statement of Net
Position, excluding internal service funds' capital assets, deferred outflows of resources, deferred
inflows of resources and long-term liabilities reported in specific areas.

Other liabilities that are not due and payable in the current period and are not reported in the
governmental funds.

A portion of deferred inflows of resources represents an acquisition of net assets that will be
recognized as an inflow of resources in a future period, which differs than that reported in the
governmental funds.

Long-term liabilities and related accrued interest are not due and payable in the current period and
therefore are not reported in the governmental funds (Note 11):

Other long-term liabilities
Net pension liability
Total OPEB liability

Total net position - governmental activities

The notes to the financial statements are an integral part of this statement.

4,545,872
2,521,163 7,067,035
1,031,934
36,545
(286)
258,300
(16,330)
51,295
(583,191)
(2,943,785)
(141,394) (3,668,370)
$ 10,426,076
A-31

This page intentionally left blank.
A-32

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES
GOVERNMENTAL FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2021

(amounts expressed in thousands)

SPECIAL REVENUE
GENERAL STATE FEDERAL
REVENUES (Note 14)
Licenses/permits $ 142,810 $ 299,035 $ -
Taxes:
Natural resource 68,068 64,910 _
Individual income 1,734,627 _ _
Corporate income 263,869 11 _
Property 309,495 20,090 _
Fuel _ 274,417 _
Other 253,940 171,436 _
Charges for services/fines/forfeits/settlements 45,488 151,369 7,925
Investment earnings 5,093 9,744 572
Securities lending income 39 47 _
Sale of documents/merchandise/property 251 9,061 _
Rentals/leases/royalties 8 1,254 _
Contributions/premiums _ 35,092 _
Grants/contracts/donations 13,665 15,470 44
Federal 10,767 8,996 4,692,258
Federal indirect cost recoveries 164 56,549 98,207
Other revenues 379 3,763 1,335
Total revenues 2,848,663 1,121,244 4,800,341
EXPENDITURES
Current:
General government 385,619 196,146 834,438
Public safety 310,373 104,668 58,076
Transportation 174 254,873 129,320
Health and human services 490,805 221,921 2,710,755
Education 1,119,344 86,028 289,715
Natural resources 38,226 230,006 128,353
Debt service:
Principal retirement 295 2,996 135
Interest/fiscal charges 247 1,229 11
Capital outlay 7,436 90,291 427,568
Securities lending 10 10 _
Total expenditures 2,352,529 1,188,168 4,578,371
Excess of revenue over (under) expenditures 496,134 (66,924) 221,970
OTHER FINANCING SOURCES (USES)
Inception of lease/installment contract 193 4,137 57
Insurance proceeds _ 437 _
General capital asset sale proceeds 119 617 _
Refunding bond issued _ 24,896 _
Payment to refunding bond escrow agent _ (23,935) _
Bond premium _ 8,799 _
Bond proceeds _ 56,904 _
Energy conservation loans _ 149 _
Transfers in (Note 12) 85,086 212,201 2,059
Transfers out (Note 12) (330,993) (72,058) (229,172)
Total other financing sources (uses) (245,595) 212,147 (227,056)
Net change in fund balances 250,539 145,223 (5,086)
Fund balances - July 1 - as previously reported 592,812 1,836,115 (6,799)
Adjustments to beginning fund balance (Note 2) 13,335 (591) 564
Fund balances - July 1 - as adjusted 606,147 1,835,524 (6,235)
Increase (decrease) in inventories (386) (1,549) _
Fund balances - June 30 $ 856,300 $ 1,979,198 $ (11,321)

The notes to the financial statements are an integral part of this statement.
A-34

RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN
FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES

FOR THE FISCAL YEAR ENDED JUNE 30, 2021

(amounts expressed in thousands)

Net change in fund balances - total governmental funds $ 688,543
Amounts reported for governmental activities in the Statement of Activities are different due to:

Capital outlays are reported as expenditures in governmental funds. However, in the Statement of
Activities, these costs are allocated as depreciation expense over the useful life of the capital asset.
Capital outlays exceeded depreciation expense in the current year by the following amount (Note 5):

Capital outlay $ 588,326
Depreciation expense and amortization (270,682) 317,644

Miscellaneous transactions involving capital assets such as sales (gain/loss) and donations are
reported in the Statement of Activities, but only proceeds from sales are reported in the governmental
funds. 3,982

Revenues reported in the Statement of Activities that do not provide current financial resources are
not reported as revenues in the governmental funds. (8,142)

Bond proceeds provide current financial resources to governmental funds, but issuing debt increases
long-term liabilities in the statement of net assets. (65,703)

Internal service funds are used by management to charge the costs of certain activities, such as

insurance and central computer services, to individual governmental funds. Internal service funds are

reported separately from governmental funds in the fund financial statements. In the government-

wide statements, internal service funds are included with governmental activities. 22,481

Some expenses reported in the Statement of Activities do not require the use of current financial

resources and therefore are not reported as expenditures in the governmental funds. Some

expenditures reported in the governmental funds either increase or decrease items reported in the

Statement of Net Position. (263,675)

Change in net position - governmental activities $ 695,130

The notes to the financial statements are an integral part of this statement.
STATEMENT OF FUND NET POSITION
PROPRIETARY FUNDS

JUNE 30, 2021

(amounts expressed in thousands)

ASSETS

Current assets:
Cash/cash equivalents (Note 3)
Receivables (net) (Note 4)
Interfund loans receivable (Note 12)
Due from other governments
Due from other funds (Note 12)
Due from component units
Inventories
Short-term investments (Note 3)
Securities lending collateral (Note 3)
Other current assets

Total current assets

Noncurrent assets:
Advances to other funds (Note 12)
Advances to component units
Long-term investments (Note 3)
Long-term notes/loans receivable
Other long-term assets
Capital assets (Note 5):
Land
Land improvements
Buildings/improvements
Equipment
Infrastructure
Construction work in progress
Intangible assets
Other capital assets
Less accumulated depreciation
Total capital assets
Total noncurrent assets
Total assets

DEFERRED OUTFLOWS OF RESOURCES (Note 4)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES -
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
390,303 $ 16,055 $ 147,149 $ 553,507 $ 230,105
26,811 7,319 40,529 74,659 10,784
— — 215 215 —
406 — 386 792 20
— 3,730 38 3,768 43
— 1,445 — 1,445 _
— — 6,195 6,195 4,979
— 7,524 — 7,524 —
— — 332 332 614
— 1 335 336 3,341
417,520 36,074 195,179 648,773 249,886
— 7,189 — 7,189 —
— 8,515 — 8,515 —
— — 20,359 20,359 36,495
33,906 44,269 — 78,175 —
— — 1,362 1,362 —
— — 800 800 —
— — 3,830 3,830 95
— — 16,379 16,379 6,069
— 1 9,845 9,846 276,909
— — 1,175 1,175 —
— — 1,303 1,303 2,091
— — 3,432 3,432 426
— — 3,213 3,213 —
— — (18,601) (18,601) (181,123)
= 1 21,376 21,377 104,467
33,906 59,974 43,097 136,977 140,962
451,426 96,048 238,276 785,750 390,848
= 130 5,662 5,792 21,764

A-35
A-37

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION
PROPRIETARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2021

(amounts expressed in thousands)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES -
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
Operating revenues:
Charges for services $ 149 $ 40 273,552 $ 273,741 $ 172,949
Investment earnings 7,548 5 468 8,021 790
Securities lending income _ _ 2 2 4
Financing income — 1,119 _— 1,119 _—
Contributions/premiums 122,477 _ 122,396 244,873 230,212
Grants/contracts/donations 7,084 _ 52,300 59,384 4,518
Other operating revenues — _ 6,978 6,978 13,595
Total operating revenues 137,258 1,164 455,696 594,118 422,068
Operating expenses:
Personal services — 432 18,291 18,723 74,512
Contractual services — 38 31,163 31,201 40,511
Supplies/materials _— 40 116,095 116,135 20,525
Benefits/claims 714,367 _ 162,843 877,210 194,664
Depreciation — _ 1,119 1,119 14,251
Amortization _ _ 573 573 421
Utilities/rent _ 55 1,159 1,214 6,945
Communications — 9 1,113 1,122 13,583
Travel _ 1 113 114 150
Repairs/maintenance — 1 1,583 1,584 28,856
Grants _ _ _ _ 478
Lottery prize payments — _ 80,348 80,348 _—
Securities lending expense _ _ _ _ 1
Interest expense _ 866 8 874 403
Other operating expenses 14,109 160 4127 18,396 6,487
Total operating expenses 728,476 1,602 418,535 1,148,613 401,787
Operating income (loss) (591,218) (438) 37,161 (554,495) 20,281
Nonoperating revenues (expenses):
Tax revenues (Note 1) _— _ 38,141 38,141 —
Grant revenue 549,316 _ — 549,316 —
Insurance proceeds _ _ — _ 147
Gain (loss) on sale of capital assets _ _ (602) (602) 182
Federal indirect cost recoveries — _ 65 65 4,547
Increase (decrease) value of livestock _ _ 433 433 _
Total nonoperating revenues (expenses) 549,316 _ 38,037 587,353 4,876
Income (loss) before contributions and
transfers (41,902) (438) 75,198 32,858 25,157
Capital contributions _ _ 955 955 394
Transfers in (Note 12) 203,571 _ 26 203,597 2,020
Transfers out (Note 12) _ _ (64,788) (64,788) (5,088)
Change in net position 161,669 (438) 11,391 172,622 22,483
Total net position - July 1 - as previously reported 238,429 5,371 149,520 393,320 198,435
Adjustments to beginning net position (Note 2) 775 _ (36) 739 (48)
Total net position - July 1 - as adjusted 239,204 5,371 149,484 394,059 198,387
Total net position - June 30 $ 400,873 $ 4,933 $ 160,875 $ 566,681 $ 220,870

The notes to the financial statements are an integral part of this statement.
A-38

STATEMENT OF CASH FLOWS
PROPRIETARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2021
(amounts expressed in thousands)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES -
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
CASH FLOWS FROM OPERATING ACTIVITIES
Receipt from sales and service $ 123,601 $ 39 $ 389,811 $ 513,451 $ 401,217
Payments to suppliers for goods and services _ (234) (157,519) (157,753) (111,606)
Payments to employees _ (442) (18,233) (18,675) (73,605)
Grant receipts (expenses) 7,504 _— 51,913 59,417 4,030
Cash payments for claims (765,477) _ (161,605) (927,082) (198,245)
Cash payments for prizes _ _ (79,042) (79,042) _
Other operating revenues — — 7,041 7,041 18,252
Other operating payments _ _ (4,024) (4,024) (6,487)
Net cash provided by (used for)
operating activities (634,372) (637) 28,342 (606,667) 33,556
CASH FLOWS FROM NONCAPITAL
FINANCING ACTIVITIES
Collection of taxes _— _— 38,141 38,141 _
Transfer to other funds _ _ (63,420) (63,420) (5,087)
Transfer from other funds 203,571 _— 27 203,598 2,019
Proceeds from interfund loans/advances _— _— 2,761 2,761 2,081
Payment of interfund loans and advances (1,500) _ (295) (1,795) (49)
Payment of principal and interest on bonds and notes _ (1,193) (7) (1,200) (570)
Grant receipts and Federal indirect cost recoverable 566,990 — 65 567,055 _—
Net cash provided by (used for)
noncapital financing activities 769,061 (1,193) (22,728) 745,140 (1,606)
CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES
Proceeds from insurance _ _ _ _ 147
Acquisition of capital assets _ _ (1,437) (1,437) (13,051)
Proceeds from sale of capital assets _— _— 1,213 1,213 1
Net cash provided by (used for) capital and
related financing activities = = (224) (224) (12,903)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of investments _ (20,621) 300 (20,321) (12,780)
Proceeds (loss) on sales or maturities of investments _— 13,804 _ 13,804 _
Proceeds (loss) from securities lending transactions/
investments _ _ 3 3 4
Interest and dividends on investments 7,548 13 490 8,051 787
Payment of securities lending costs _ _ _ _ (1)
Collections of principal and interest on loans — 23,752 _ 23,752 _—
Cash payment for loans _ (25,609) _ (25,609) _
Net cash provided by (used for)
investing activities 7,548 (8,661) 793 (320) (11,990)
Net increase (decrease) in cash
and cash equivalents 142,237 (10,491) 6,183 137,929 7,057
Cash and cash equivalents, July 1 248,066 26,546 140,966 415,578 223,048
Cash and cash equivalents, June 30 $ 390,303 $ 16,055 $ 147,149 $ 553,507 $ 230,105

The notes to the financial statements are an integral part of this statement.
STATEMENT OF CASH FLOWS
PROPRIETARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2021
(amounts expressed in thousands)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
Reconciliation of operating income to net
cash provided by operating activities:
Operating income (loss) $ (591,218) $ (438) $ 37,161 $ (554,495) $ 20,281
Adjustments to reconcile operating income
to net cash provided for (used for)
operating activities:
Depreciation — _ 1,119 1,119 14,251
Amortization _ _ 573 573 421
Securities lending expense _ _ _ _ 1
Investment earnings (7,548) (5) (468) (8,021) (790)
Securities lending income _ _ (3) (3) (4)
Financing income _ (1,118) _ (1,118) _
Interest expense _ 866 7 873 403
Other revenue 776 _ — 776 4,551
Arbitrage rebate tax _ (22) _ (22) _
Change in assets, deferred outflows, liabilities and
deferred inflows:
Decr (Incr) in accounts receivable (53,975) _ (4,826) (58,801) 862
Decr (Incr) in due from other funds _ _ (38) (38) 67
Decr (Incr) in due from component units _ _ _ _ 9
Decr (Incr) in due from other governments (355) _ (386) (741) (10)
Decr (Incr) in inventories _ _ (1,773) (1,773) (45)
Decr (Incr) in other assets _ _ 35 35 (2,778)
Incr (Decr) in accounts payable 17,948 (6) (2,257) 15,685 (845)
Incr (Decr) in due to other funds _ _ (2,805) (2,805) 152
Incr (Decr) in due to other governments _ _ 107 107 _
Incr (Decr) in lottery prizes payable _ _ 1,306 1,306 _
Incr (Decr) in unearned revenue _ _ (209) (209) (192)
Incr (Decr) in amounts held in custody for others _ _ _ _ (45)
Incr (Decr) in compensated absences payable _ 31 54 85 593
Incr (Decr) in total OPEB liability _— _ 1,364 1,364 5,709
Incr (Decr) in estimated claims _ _ 120 120 (3,581)
Incr (Decr) in other payables _ (11) (6) (17) (2,343)
Incr (Decr) in net pension liability and related
accounts _ 66 (733) (667) (3,111)
Net cash provided by (used for)
operating activities $ (634,372) $ (637) $ 28,342 $ (606,667) $ 33,556
Schedule of noncash transactions:
Capital asset acquisitions from contributed capital $ — $ — $ 955 $ 955 $ 395
Incr (Decr) in fair value of investments _ 3 338 341 275
Total noncash transactions $ — $ 3 $ 1,293 $ 1,296 $ 670

The notes to the financial statements are an integral part of this statement.

A-39
A-40

STATEMENT OF FIDUCIARY NET POSITION
FIDUCIARY FUNDS

JUNE 30, 2021

(amounts expressed in thousands)

ASSETS
Cash/cash equivalents (Note 3)
Receivables (net):
Accounts receivable
Interest
Due from primary government
Due from other PERB plans
Long-term loans/notes receivable
Total receivables
Investments at fair value:
Equity in pooled investments (Note 3)
Other investments (Note 3)
Total investments
Securities lending collateral (Note 3)
Capital Assets:
Buildings/improvements
Equipment
Accumulated depreciation
Intangible assets
Total capital assets
Other assets
Total assets

DEFERRED OUTFLOWS OF RESOURCES

LIABILITIES
Accounts payable
Due to primary government
Due to other PERB plans
Unearned revenue
Securities lending liability (Note 3)
Compensated absences payable
Net pension liability (Note 6)
Total OPEB liability (Note 7)
Total liabilities

DEFERRED INFLOWS OF RESOURCES

NET POSITION
Restricted for:
Pensions
Postemployment benefits other than pensions
Pool participants
Individuals, organizations, and other governments
Total net position

The notes to the financial statements are an integral part of this statement.

PENSION
(AND OTHER
EMPLOYEE PRIVATE
BENEFIT) PURPOSE
TRUSTFUNDS TRUST FUNDS

INVESTMENT
TRUST
FUNDS

CUSTODIAL
FUNDS

$ 187,408 $ 39,493

25,716 —
14 —
35,825 —
1,734 —
8 _

1,854,550 $

187

8,165

621

63,297 —

187

14,397,166 —
1,091,293 206,088

12,953

15,488,459 206,088

12,953

83,372 —

316 —
133 —
(170) —
3,884 —

234

4,163 —

— 29,964

15,826,699 275,945

1,867,924

1,076 —

1,767 12
8 _
1,734 —
83 —
83,372 —
726 —
1,921 —
796 —

90,407 12

242 —

15,048,021 —
689,105 —

— 275,533

1,867,540

$ 15,737,126 $ 275,533

1,867,540 $
A-41

STATEMENT OF CHANGES IN FIDUCIARY NET POSITION
FIDUCIARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2021

(amounts expressed in thousands)

PENSION
(AND OTHER
EMPLOYEE PRIVATE INVESTMENT
BENEFIT) PURPOSE TRUST CUSTODIAL
TRUST FUNDS TRUST FUNDS FUNDS FUNDS
ADDITIONS
Contributions/premiums:
Employer $ 288,688 $ — $ — $ =
Employee 268,411 _— _— _—
Other contributions 121,465 21,468 1,536,607 _—
Investment earnings:
Net increase in fair value of investments 3,487,911 31,186 (186) —
Interest, dividends, and other 23,931 1 4,228 3
Securities lending income 1,011 _— 1 _—
Total investment earnings 3,512,853 31,187 4,043 3
Less investment costs:
Administrative investment expense 83,504 _— _— _—
Securities lending expense 200 _— _— _—
Net investment earnings 3,429,149 31,187 4,043 3
Charges for services 849 — — —
Other additions and miscellaneous 2,124 8,234 _— 61,651
Total additions 4,110,686 60,889 1,540,650 61,654
DEDUCTIONS
Benefits 1,039,868 — _ __
Refunds 32,147 — _ __
Distributions _— 31,274 1,392,012 62,674
Administrative expenses 15,316 883 _— 16
Transfers to MUS-RP 264 _— _— _—
Transfers to PERS-DCRP 2,328 — — —
Total deductions 1,089,936 32,157 1,392,012 62,690
Change in net position 3,020,750 28,732 148,638 (1,036)
Net position - July 1 - as previously reported 12,716,675 248,114 1,718,902 8,817
Adjustments to beginning net position (Note 2) (299) (1,313) — 1,313
Net position - July 1 - as adjusted 12,716,376 246,801 1,718,902 10,130
Net position - June 30 $ 15,737,126 $ 275,533 $ 1,867,540 $ 9,094

The notes to the financial statements are an integral part of this statement.
A-42

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements for the State of Montana (State) have been prepared in
accordance with Generally Accepted Accounting Principles (GAAP), as prescribed by the Governmental
Accounting Standards Board (GASB).

A. Reporting Entity

For financial reporting purposes, the State includes funds that comprise the primary government and its
component units. The component units are entities that the State is financially accountable for, or whose
relationship with the State is such that exclusion would cause the State's financial statements to be
misleading or incomplete. GASB has set forth criteria to be considered in determining financial
accountability. This criteria includes appointing a voting majority of an organization's governing body, and
(1) the ability of the State to impose its will on that organization or (2) the potential for the organization to
provide specific financial benefits to, or impose specific financial burdens on, the State.

Discretely Presented Component Units

These component units are entities that are legally separate from the State because they possess
corporate powers, but are financially accountable to the State, or whose relationships with the State are
such that exclusion would cause the State's financial statements to be misleading or incomplete. The
condensed financial statements, presented in Note 18, include the financial data of the entities listed
below.

Complete financial statements for each of the individual discretely presented component units, which are
separately issued and audited, may be obtained at the following addresses:

Montana Board of Housing Montana State Fund

301 South Park, Room 240 BO oto

PO Box 200528 Ox

Helena, MT 59620-0528 Helena, MT 59604-4759

Facility Finance Authority Universities and Colleges

2401 Colonial Drive, 3"? Floor Commissioner of Higher Education
PO Box 200506 560 North Park Ave, 4th Floor
Helena, MT 59620-0506 PO Box 203201

Helena, MT 59620-3201

Montana Board of Housing (MBOH) — MBOH, which is a legally separate entity, is governed by a quasi-
judicial board appointed by the Governor with the advice and consent of the Senate. The State of
Montana has the ability to modify or approve: the budget, the rate or fee changes affecting revenues, and
the ability to appoint, hire, reassign, or dismiss those responsible for the day-to-day operations of MBOH.
The board was created in 1975 to facilitate the availability of safe and affordable housing to persons and
families of lower-income. MBOH issues negotiable notes and bonds to fulfill its purposes. The total
amount of notes and bonds outstanding at any time may not exceed $1.5 billion. The discount price of
bonds sold, not the face amount of the bonds, counts against this statutory ceiling. Neither the faith and
credit nor taxing power of the State of Montana may be pledged for the amounts so issued. MBOH is
attached to the Department of Commerce for administrative purposes only. MBOH is audited annually by
the State’s Legislative Audit Division.

Facility Finance Authority (FFA) — FFA, which is a legally separate entity, is governed by a quasi-judicial
board appointed by the Governor with the advice and consent of the Senate. The State of Montana has
the ability to modify or approve: the budget, the rate or fee changes affecting revenues, and the ability to
appoint, hire, reassign, or dismiss those responsible for the day-to-day operations of FFA. FFA assists
eligible, nonprofit Montana health care and other community-based service providers to obtain and
maintain access to the broadest range of low-cost capital financing as possible. FFA issues revenue
bonds to fulfill its purposes. Neither the faith and credit or taxing power of the State of Montana may be
pledged for the amounts so issued. FFA is attached to the Department of Commerce for administrative
purposes only. Individual financial reports are issued every two years and are audited by the State’s
Legislative Audit Division.

Montana State Fund (MSF) — MSF is a nonprofit, independent public corporation established under Title
39, Chapter 71 of the Montana Code Annotated (MCA). MSF provides Montana employers with an option
for workers’ compensation and occupational disease insurance and guarantees available coverage for all
employers in Montana. MSF is governed by a seven-member Board of Directors appointed by the
Governor with the advice and consent of the Senate. This Board has full power, authority, and jurisdiction
in the administration of MSF. MSF's results are included in the State's Annual Comprehensive Financial
Report because of the significance of MSF's financial relationship with the State. MSF's board is allocated
to the Department of Administration for administrative purposes only. MSF is reported on a calendar year
basis and is audited annually by the State’s Legislative Audit Division and is also regulated by the
Montana State Auditor's Office as an authorized insurer that is subject to the provisions of Title 33,
Montana Insurance Code.

MSF functions as an autonomous insurance entity supported solely from its own revenues. All assets,
debts, and obligations of MSF are separate and distinct from assets, debts, and obligations of the State of
Montana. If MSF is dissolved by an act of law, the assets held by MSF are subject to the disposition
provided by the Legislature enacting the dissolution with due regard given to obligations incurred and
existing (Section 39-71-2322, MCA).

MSF handles the administration of the claims of Montana State Fund and State of Montana (Old Fund),
including determining who a claimant is; what, if any, claims will be paid; and the amount of claims
allowed to be paid. Old Fund covers workers’ compensation claims that were incurred before July 1,
1990, and is reported within the governmental activities of the primary government, on the government-
wide financial statements.

Universities and Colleges - The Montana Constitution, Article X, Section 9, grants governance authority
over the Montana University System (MUS) to the Board of Regents (Board), with seven members
appointed by the Governor and confirmed by the Senate. All state funds appropriated by the Legislature
to the Board for the support of the MUS are channeled through the Office of the Commissioner of Higher
Education (OCHE). The Constitution charges the Board with hiring a Commissioner of Higher Education
who serves as its executive staff. OCHE is the state-level administrative organization of the MUS.

The Board has responsibility for the following institutions: Montana State University - Bozeman and the
units under it including Montana State University - Billings, Montana State University - Northern, and
Great Falls College Montana State University; and University of Montana - Missoula and the units under it
including Montana Technological University, University of Montana - Western, and Helena College
University of Montana. All units are funded through state appropriations, tuition, federal grants, and
private donations and grants. The universities are audited annually by the State’s Legislative Audit
Division.

Though the following organizations perform functions related to the MUS, they are not considered part of
Montana's reporting entity: (1) Community Colleges which are considered part of local units of
government; (2) the Montana Higher Education Student Assistance Corporation, a private nonprofit
corporation; and (3) the Student Assistance Foundation of Montana, a private nonprofit corporation.
Entities such as local school districts and local authorities of various kinds are considered part of local
units of government and have not been included. The state and federal support of local public education
systems is reported in the General Fund, the State Special Revenue Fund, and the Federal Special
Revenue Fund.

A-43
A-44

Fiduciary Fund Component Units
Complete financial statements for each of the individual fiduciary fund component units may be obtained
at the following addresses:

Teachers’ Retirement System Public Employees’ Retirement Board
100 North Park Avenue, Suite 110 100 North Park Avenue, Suite 200
PO Box 200139 PO Box 200131

Helena, MT 59620-0139 Helena, MT 59620-0131

Teachers’ Retirement System (Pension Trust Fund) — This retirement plan is a legally separate entity with
a board appointed by the Governor. Its purpose is to provide retirement, disability, death, and lump-sum
payments to benefit recipients of Montana's public teaching profession. The plan is funded from employer
and employee contributions, investment earnings, and the State’s General Fund. The benefit payments
and administrative costs of the Teachers’ Retirement System are paid from the same funding sources.
The system is audited annually by the State’s Legislative Audit Division. Further detail related to the
Teachers’ Retirement System is provided in Note 6.

Public Employees’ Retirement Board (Pension and Other Employee Benefit Trust Funds) — The Public
Employees’ Retirement Board (PERB) is appointed by the Governor and administers ten separate plans
for the purpose of providing retirement, disability, death, and lump-sum payments to plan members.
These legally separate plans include the Public Employees’ Retirement Plan — Defined Benefit and
Defined Contribution and the associated education funds; the Judges’; the Highway Patrol Officers’; the
Sheriffs’; the Game Wardens’ and Peace Officers’; the Municipal Police Officers’; the Firefighters’ Unified
Retirement Systems; the Volunteer Firefighters’ Compensation Act; and the State of Montana Deferred
Compensation Program (457(b) Plan) retirement plans. The board also administers an Other Post
Employment Benefit (OPEB) disability plan on behalf of Public Employees’ Retirement Plan-Defined
Contribution members. The board is audited annually by the State’s Legislative Audit Division. Further
detail related to the PERB is provided in Note 6 and its OPEB plan information in Note 7.

B. Government-wide and Fund Financial Statements

The government-wide financial statements, Statement of Net Position and Statement of Activities, report
information on all of the non-fiduciary activities of the State of Montana and its component units. For the
most part, the impact of interfund activity has been removed from these statements. Governmental
activities, which are normally supported by fees, taxes, and intergovernmental revenues, are reported
separately from business-type activities, which rely to a significant extent on fees and charges for support.
Likewise, the State of Montana is reported separately from certain legally separate component units for
which the State is financially accountable.

The Statement of Activities demonstrates the degree to which program revenues offset the direct
expenses of a function. Direct expenses are those that are clearly identifiable with a specific function.
Certain indirect costs are included in the program expense reported for the individual functions and
activities. Program revenues include (1) charges to customers or applicants who purchase, use, or
directly benefit from goods, services, or privileges provided by a given function; and (2) grants and
contributions restricted to meeting the operational or capital requirements of a particular function. Taxes
and other revenues not meeting the definition of program revenues are reported as general revenues.
The State does not allocate indirect expenses to functions in the Statement of Activities.

Separate fund financial statements are provided for governmental, proprietary, and fiduciary funds. Major
individual governmental and enterprise funds are reported as separate columns in the fund financial
statements. Fiduciary fund statements are reported only in the fund financial statements.
C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation

Government-wide, Proprietary, and Fiduciary Fund Financial Statements

The government-wide, proprietary fund, and fiduciary fund financial statements are reported using the
economic resources measurement focus and the accrual basis of accounting. Revenues are reported
when earned; expenses are recorded when a liability is incurred regardless of the timing of the related
cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and
similar items are recognized as revenues as soon as all of the eligibility requirements imposed by the
provider are met.

As a general rule, material interfund revenues and expenses have been eliminated from the government-
wide financial statements. These have not been eliminated where their elimination would distort the direct
costs and program revenues of the functions involved.

Governmental Fund Financial Statements

Governmental fund financial statements are reported using the current financial resources measurement
focus and the modified accrual basis of accounting. Revenues are recognized when they are realizable,
measurable, earned, and available. Revenue is considered realizable when it is probable the amount will
be collected. Revenue is considered measurable and realizable if the precise amount is known because
the transaction is completed, or if there is enough information to provide a reasonable estimate of the net
realizable revenue to be received. Revenue is considered to have been earned when the exchange of
goods or services has taken place. Revenue is considered to be available if it is collectible within the
current period or soon enough thereafter, to pay liabilities of the current period. For this purpose, the State
considers revenue available if it is expected to be collected within 60 days of the end of the current fiscal
period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting.
However, debt service expenditures as well as expenditures relating to compensated absences, claims,
and judgments are recorded only when payment is due.

The major revenue sources considered susceptible to accrual are licenses and permits, natural resource
taxes, individual income taxes, corporate income taxes, property taxes, fuel taxes, and certain federal
revenues (reimbursable grants and U.S. mineral royalties). All other revenue is considered to be
measurable and available when the cash is received.

Fund Financial Statements

The State uses funds to report on its financial position and the results of its operations. A fund is a
separate accounting entity with a self-balancing set of accounts. Fund accounting is designed to
demonstrate legal compliance and to aid financial management by segregating transactions related to
certain government functions or activities.

The financial activities of the State of Montana are classified into fund categories as described below:

Governmental Funds
General Fund — To account for all governmental financial resources, except those required to be
accounted for in another fund.

Special Revenue Funds — To account for the proceeds of specific revenue sources restricted to
expenditure for specified purposes other than major capital projects. (1) The State Special Revenue Fund
accounts for activities funded from state resources used to account for and report the proceeds of specific
revenue sources that are restricted or committed to expenditure for specified purposes other than debt
service or capital projects. Several funds are defined in statute as Permanent Funds, however per GASB
Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54), these
funds should be reported within the State Special Revenue Fund. The respective effect on fund balance is
approximately a $96.0 million increase. One specific fund is defined in statute as a Federal Special
Revenue Fund; however, per GASB 54, this fund should be reported within the State Special Revenue
Fund. The respective effect on fund balance is approximately a $27.7 million increase. (2) The Federal

A-45
A-46

Special Revenue Fund accounts for activities funded from federal sources used in the operation of state
government.

Debt Service Funds — To account for resources accumulated for payment of principal and interest on
general long-term obligation debt.

Capital Projects Funds — To account for resources used for the acquisition or construction of major capital
facilities, other than those financed by proprietary or trust funds.

Permanent Funds — To account for resources that are permanently restricted to the extent that only
earnings, not principal, may be used to support the government’s programs. Several funds are defined in
statute as Permanent Funds, however per GASB 54 these funds should be reported within the State
Special Revenue Fund as noted above.

Proprietary Funds

Enterprise Funds — To account for operations: (1) financed and operated similar to private business
enterprises, where the intent of the Legislature is to finance or recover costs primarily through user
charges; (2) where the Legislature has decided periodic determination of revenue earned, expenses
incurred, or net income is appropriate; (3) where the activity is financed solely by a pledge of the net
revenues from fees and charges of the activity; or (4) when laws or regulations require that the activities’
costs of providing services, including capital costs, be recovered with fees and charges rather than with
taxes or similar revenues. The primary focus of fee revenues charged by enterprise funds is users outside
of the primary government. One specific fund is defined in statute as an Enterprise Fund, however, per
GASB 34, this fund should be reported within Internal Service Funds. The respective effect on net position
is approximately a $5.9 million increase.

Internal Service Funds — To account for the financing of goods and services provided by one department
or agency to other departments, agencies, or other governmental entities on a cost-reimbursement basis.

The State of Montana reports two employee group benefits funds. The MUS Group Insurance Fund
primarily charges its fees to Montana State University and the University of Montana. The universities are
reported as discretely presented component units, which the State considers to be external users, and as
such, reports the MUS Group Insurance Fund as an enterprise fund. The Employee Group Benefits Fund
charges its fees to funds of the primary government, and as such, is reported as an internal service fund.

Fiduciary Funds

Fiduciary Funds are used to account for assets held by the State in a trustee capacity or as an agent for
individuals, private organizations, or other governments. These assets cannot be used to support the
government's own programs.

Pension (and Other Employee Benefit) Trust Funds — To account for resources that are required to be
held in trust for the members and beneficiaries of the State’s defined benefit plans, defined contribution
plans, other retirement plans, and other post-employment benefit plan. Plan members receive retirement,
disability, death, and lump-sum payments from the fund. Further detail related to the individual plans is
provided in Note 6 and Note 7.

Private-Purpose Trust Funds —To account for assets held by the State in a trustee capacity, where both
the principal and earnings benefit individuals, private organizations, or other governments. For example,
unliquidated security bonds held on deposit from self-insured employers.

Investment Trust Fund — To account for the receipt of monies and the distribution of related investment
earnings to local government agencies by the Montana Board of Investments for investment in the Short
Term Investment Pool (STIP) and Trust Fund Investment Pool (TFIP).
A-47

Custodial Funds — To account for transactions related to assets held by the State as an agent for
individuals, private organizations, and other governments. For example, monies belonging to one parent
submitted by another, as is the case with child support payments.
A-48

Major Governmental Funds
The General Fund is the State’s primary operating fund, as previously defined.

The State Special Revenue Fund accounts for activities funded from state sources, which are restricted
either legally or administratively for particular costs of an agency, program, or function.

The Federal Special Revenue Fund accounts for activities funded from federal sources used in the
operation of state government.

The Coal Severance Tax Fund, created by Article IX, Section 5 of the Montana State Constitution,
receives 50% of all coal tax collections. The principal in this fund can be expended only upon an
affirmative vote of three-fourths of each house of the Legislature.

The Land Grant Permanent Fund accounts for lands granted to the State for support of public schools
and state institutions.

Major Enterprise Funds

The Unemployment Insurance Fund accounts for employer contributions deposited with the Secretary of
the Treasury of the United States to the credit of the State’s unemployment trust fund. Unemployment
benefits are paid from this fund to eligible recipients. For fiscal year 2021, federal contributions were also
made to this fund due to increased claims related to the statewide unemployment impact of COVID-19.

The Board of Investments (BOI) Municipal Finance Programs Fund accounts for the programs created
under the Municipal Finance Consolidation Act (MFCA) and the Economic Development Act. Primarily,
this involves a MFCA revolving loan program that provides variable low interest rate loans to eligible
Montana State agencies, universities, and local governments for a variety of projects statutorily defined.
The funding for the revolving loan program is from the issuance of put bonds. The MFCA program also
provides local government entities access to tax-exempt funds through the issuance of conduit (no-
commitment) debt. In previous years this activity was referred to as the Economic Development Bonds
Fund. Separately issued financial statements may be obtained by contacting the Montana Board of
Investments, 2401 Colonial Drive, 3rd Floor, PO Box 200126, Helena, MT 59620-0126.

D. Proprietary Activity Accounting and Financial Reporting

Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating
revenues generally result from providing services and delivering goods in connection with a proprietary
fund’s principal ongoing operations. Operating expenses for enterprise and internal service funds include
the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues
and expenses not meeting these definitions are reported as non-operating.

E. Cash/Cash Equivalents

For all funds, cash and cash equivalents consist of amounts deposited in the State Treasurer’s pooled
cash account, cash deposits in checking accounts, cash invested in the Short Term Investment Pool
(STIP), cash held by trustees, undeposited cash held by individual state agencies, and investments
categorized as cash equivalents, which are short-term, highly liquid investments with original maturities of
three months or less. Further detail related to cash and cash equivalents is provided in Note 3.

F. Receivables

This classification, net of estimated uncollectibles, consists primarily of receivables for goods sold and
services provided; short-term loans and notes; interest and dividends; taxes due within 60 days of fiscal
year-end; and income, withholding, and inheritance taxes that are past due. An allowance for uncollectible
taxes is provided based upon historical analysis. Further detail related to receivables is provided in Note
4.
G. Inventories

Inventories of materials and supplies are reported at cost. The State allows agencies to use any generally
accepted inventory pricing method but specifies the first-in, first-out method generally to be appropriate
for most agencies. Governmental funds use the "purchase method," meaning inventory purchases are
recorded as expenditures. At fiscal year-end, inventory balances are shown as nonspendable, indicating
they do not constitute available expendable resources. Proprietary and fiduciary funds report using the
"consumption method," meaning inventories are expensed as used.

H. Equity in Pooled Investments

To account for equity in pooled investments, BOI uses one internal investment pool and one external
investment pool. The internal investment pool is the Consolidated Asset Pension Pool (CAPP). The
State's nine defined benefit pension trust funds are the only participants in CAPP. The external investment
pool is the Trust Funds Investment Pool (TFIP). State agencies and qualifying local governments can
participate in TFIP. Current State agency TFIP participation is within the enterprise funds, internal service
funds, permanent funds, investment trust funds, Montana University System Units, and specific accounts
established within the State and Federal Special Revenue Funds. The participant investments in the
pools are reported at fair value in the assets within the individual funds. Further detail related to cash and
cash equivalents and investments is provided in Note 3.

l. Investments

For agencies whose investment needs are not met by BOI’s established investment pools, BOI provides
separate investments, which are combined and reported as Separately Managed Accounts (SMA). SMA
participants have direct fixed income, equity, and Montana mortgage and loan investments. SMA
investments are reported at fair value. Certain securities including asset-backed securities, variable-rate
instruments, zero-coupon bonds, preferred stocks, and mortgage-backed securities are purchased for
portfolio diversification and a competitive rate of return. Other State agencies, on a limited basis by
statute, may administer other long-term investments. Most investments are reported at fair value on the
Statement of Net Position. Further detail related to investments is provided in Note 3.

J. Capital Assets

Capital asset valuation is based on actual historical cost or, in the case of donations, acquisition value.
General government infrastructure capital assets are capitalized and reported on the government-wide
financial statements. Infrastructure assets of proprietary funds are capitalized on the fund financial
statements. Interest incurred during the construction of capital assets for proprietary funds is capitalized.
Interest incurred during the construction of capital assets for higher education component units is
expensed. The State has chosen to use the depreciation approach for infrastructure assets. The State is
reporting accumulated depreciation on the Statement of Net Position and depreciation expense on the
Statement of Activities for these assets. Further detail related to capital assets is provided in Note 5.

Capital assets in proprietary, private-purpose trust, and pension trust funds are accounted for within their
respective funds and are depreciated or amortized on their fund financial statements. Capital assets in
governmental funds are accounted for in the governmental activities of the government-wide financial
statements, as is the associated depreciation and amortization. Depreciation is on a straight-line basis
with estimated useful lives of 25 to 60 years for buildings, 10 to 50 years for infrastructure, 7 to 20 years
for building improvements, and 3 to 10 years for equipment. State agencies are also required to extend or
shorten the useful lives of capital assets to reflect their actual experience or industry standards when
appropriate. Amortization is on a straight-line basis with estimated useful lives of 4 years for software
(internally and externally generated), 30 years for land use rights, and 20 years for other intangibles.

The capitalization limit for buildings and building/land improvements is $25.0 thousand. The capitalization
threshold for infrastructure and internally-generated software is $500.0 thousand. The capitalization
threshold for intangible assets is $100.0 thousand. The capitalization limit for other capital assets is $5.0

A-49
A-50

thousand. Agencies are allowed to capitalize additions to collections and land acquisitions at any cost.
Purchases under these thresholds are recorded as expenditures/expenses in the current period.

K. Deferred Outflows, Deferred Inflows, and Unearned Revenue

A deferred outflow of resources is a consumption of net assets by the government that is applicable to a
future reporting period. A deferred inflow of resources is an acquisition of net assets by the government
that is applicable to a future reporting period. Deferred outflows and inflows of resources may include
financial transactions related to refunding debt, non-exchange transactions, derivative investments, and
OPEB, and pension related components; and are reported on the government-wide, proprietary fund, and
fiduciary fund financial statements. Additionally, deferred inflows of resources may include financial
transactions related to unavailable revenue on the governmental fund financial statements. Unavailable
revenue is reported when assets are recognized, but those assets are not considered available to pay
liabilities of the current period. Unearned revenue, which is neither a deferred outflow of resources nor a
deferred inflow of resources; is recognized as a liability on government-wide, governmental, and
proprietary fund financial statements. Further detail related to deferred outflows of resources and deferred
inflows of resources is provided in Note 4.

L. Long-term Obligations

Long-term obligations expected to be financed from governmental funds are reported on the government-
wide financial statements. Long-term debt is recognized as a liability of a governmental fund when due, or
when resources have been accumulated in the debt service fund for payment early in the following year.
For other long-term obligations, only that portion expected to be financed from current expendable
available financial resources is reported as a fund liability of a governmental fund on the fund financial
statements. The remaining portion of such obligations is reported on the government-wide financial
statements. Long-term liabilities expected to be financed from proprietary and fiduciary fund operations
are accounted for in those funds. Further detail related to leases/installment purchases payable and long-
term liabilities is provided in Note 10 and Note 11, respectively.

M. Capital Leases

A capital lease is a lease that transfers benefits and risks of ownership to the lessee. At the inception of a
capital lease, on the government-wide, proprietary fund, and fiduciary fund financial statements, a capital
asset and a capital lease liability are recorded at the present value of the future minimum lease payments.
On the governmental fund financial statements no asset or liability is recorded related to assets under
capital leases. Governmental funds record capital outlay expenditures and other financing sources
(inception of lease/installment contract), at the inception of a capital lease, at net present value of the
minimum lease payments. Further detail related to capital leases is provided in Note 10.

N. Bond Discounts/Premiums/Issuance Costs

Bond premiums and discounts, as well as issuance costs, are recognized in the period they are incurred.
Bond proceeds and bond premiums are reported as an other financing sources, and bond discounts are
reported as an other financing use. Issuance costs are reported as debt service expenditures whether or
not they are withheld from the bond proceeds. Bonds payable are recorded net of any applicable premium
or discount. Further detail related to long-term debt is provided in Note 11.

O. Compensated Absences

Full-time state employees earn vacation leave ranging from 15 to 24 days per year depending on the
individual's years of service. Teachers employed by the State do not receive vacation leave. Vacation
leave may be accumulated and carried over from one year to the next. The carryover is limited to two
times the maximum number of days earned annually. Sick leave is earned at the rate of 12 days per year
with no limit on accumulation. Each contribution year, an employee may contribute a maximum of 80
hours of sick or annual leave to a nonrefundable sick leave pool. Excess annual leave that is being
forfeited can also be contributed, with no maximum contribution. For fiscal year 2021, 1,352 sick leave
hours, 185 annual leave hours, and 4,818 excess annual leave hours were contributed to the sick leave
pool, and 5,608 hours were withdrawn, leaving a balance of 17,626 hours in the pool. The liability
associated with the pool is not reported in the accompanying financial statements because these hours
are nonrefundable to contributors, except by grants approved through an application process.

Vested or accumulated leave for proprietary and fiduciary funds is recorded as an expense and liability of
those funds in the fund financial statements. For governmental funds, the liability is not expected to be
liquidated with expendable financial resources. The expenditure and liability for the governmental funds is
reported only on the government-wide financial statements. Upon retirement or termination, an employee
is paid for 100% of unused vacation leave and 25% of unused sick leave. Further detail related to
compensated absences is provided in Note 11.

P. Nonexchange Financial Guarantee

BOI provides loan guarantees from the Coal Severance Tax Fund to the Facility Finance Authority (FFA),
a discretely presented component unit of the State. BOI exposure to bond issues, surety bonds, and
designated loans of the FFA totaled $100.2 million as of June 30, 2021. FFA guarantee requests are
submitted to BOI for review and approval. BOI’s participation, either duration or any other consideration,
to either purchase bonds or loans or to lend money for deposit into FFA’s statutorily allowed capital
reserve account is explicitly limited by statute which requires BOI to act prudently. The guarantee
requests from FFA pertain to bonds issued by FFA with a term of up to 40 years. BOI and FFA have
entered into an agreement detailing repayment to BOI. BOI has not had to perform on any loan guarantee
in the past.

Q. Fund Balance/Net Position

Fund Balance

The classifications for fund balance used for governmental funds are reported in two general
classifications, nonspendable and spendable. Nonspendable represents the portion of fund balance that
is legally or contractually required to remain intact or is not in spendable form such as inventories, and, in
the General Fund, long-term notes and loans receivable. Spendable fund balance is further categorized
as restricted, committed, assigned, and unassigned.

The restricted fund balance category includes amounts that can be spent only for the specific purposes
stipulated by the State Constitution or external parties, such as the federal government, or through
enabling legislation. For the purpose of determining restricted amounts, enabling legislation does not
include commitments resulting from State legislation if these constraints can be removed or changed by a
similar legislative action.

The committed fund balance classification includes amounts that can be used only for the specific
purposes determined by a formal action of the government’s highest level of decision-making authority,
the State’s Legislature, through legislation passed into law.

Amounts in the assigned fund balance classification are intended to be used by the government for
specific purposes. Still they do not meet the criteria to be classified as restricted or committed.
Assignments of fund balance are created by the executive branch. In governmental funds other than the
General Fund, assigned fund balance also represents the remaining amount that is not restricted or
committed. The assigned fund balance for the General Fund are encumbrances and assignments for the
portion of current General Fund balance that is projected to be used to fund expenditures and other cash
outflows in excess of the expected revenues and other cash inflows in fiscal years as needed. The
projected spend down for fiscal year 2022 is $75.0 million; thus, a related assignment of fund balance is
reported at 2021 fiscal year-end.

Unassigned fund balance is the residual classification for the General Fund and includes all spendable
amounts not contained in the other classifications. In other funds, the unassigned classification should be

A-51
A-52

used only to report a deficit balance resulting from overspending for specific purposes for which amounts
had been restricted, committed, or assigned.

The State generally segregates restricted, committed, and assigned resources by account (sub-fund)
within the governmental funds other than the General Fund. When resources meeting more than one of
these spendable classifications are commingled in an account on the State’s accounting system, the
assumed order of spending is restricted first, committed second, and finally assigned. State statute
requires non-General Fund money be spent first whenever possible so any related available unassigned
balance would be spent last.

General Fund - Fund Balance

As of June 30, 2021, the State maintains a Budget Stabilization Reserve Fund as required by statute. For
financial reporting purposes, this fund is combined with the General Fund as it does not meet the GASB
54 requirements to be a special revenue fund as the Legislature prescribed. The June 30, 2021,
committed fund balance in the General Fund of $114.2 million, represents the Budget Stabilization
Reserve Fund balance.

Additionally, statute provides a minimum fund balance amount as follows: Section 17-7-140, MCA,
defines minimum ending fund balance and specifies the procedures that must be followed to make
expenditure reductions or allow transfers from the Budget Stabilization Reserve Fund if a projected
ending fund balance drops below minimum statutory requirements.

If the Budget Director determines that a deficit exists, statute requires reductions that must be made to
assure that the projected ending fund balance complies with the minimum ending fund balance of General
Fund appropriations for the biennium. Under circumstances when a deficit of this level is projected during
a biennium, the Governor may direct reductions from any General Fund expenditure not exempted by
Section 17-7-140, MCA, including House Bill (HB) 2 (the State’s main appropriation bill), any other
appropriation bills, statutory appropriations, or language appropriations. Reductions may not exceed 10%
of General Fund appropriations for any single “program,” as defined in HB 2. If a program has more than
one appropriation, the reduction for one or more of the appropriations may exceed 10% as long as the
reduction for the program as a whole does not exceed 10%.

The Legislative and Judicial branches, the Montana School for the Deaf and Blind, principal and interest
on State debt, salaries of elected officials, and public school BASE funding are exempt, statutorily, from
reductions. These exemptions shield approximately one-third of General Fund appropriations from
reduction. Of the remaining expenditures, the Governor may not direct executive agencies headed by
elected officials or the Board of Regents to reduce their expenditures by more than the average reduction
percentage imposed upon all other executive branch agencies.

Net Position

In funds other than governmental, net position represents the difference between assets plus deferred
outflows of resources and liabilities plus deferred inflows of resources. The net investment in the capital
assets portion of net position consists of capital assets, net of accumulated depreciation, reduced by the
outstanding balances of any borrowing used for the acquisition, construction, or improvement of those
assets. Net position is reported as restricted when there are limitations imposed on their use either
through constitutional provisions, enabling legislation or through external restrictions imposed by
creditors, grantors, or laws or regulations of other governments. The government-wide Statement of Net
Position reported restricted net position of $4.1 billion.

Net position associated with the Unemployment Insurance Fund is classified as restricted. The majority of
the restricted net position for other purposes business-type activities amounting to $119.8 million is made
up of $97.4 million from MUS Group Insurance Fund and $12.9 million from MUS Workers Compensation
Fund. Certain investments of the Municipal Finance Programs Fund are also classified as restricted net
position for other purposes as business-type activities and on the Statement of Fund Net Position for
proprietary funds because applicable bond indenture agreements limit their use.
R. Property and Income Taxes

Real property taxes are normally levied in October and are usually payable in two installments on
November 30 and May 31. These taxes attach as an enforceable lien immediately if not paid when due.

Personal property tax levies are set each August, and notices are normally mailed the following March or
April. Half of mobile home taxes are due in 30 days and the remaining half on September 30. Taxes on all
other types of personal property are to be paid in full 30 days after receipt of the notice. Property tax
payments are recognized as deferred inflows of resources if received prior to levy or availability.

Personal property taxes attach as an enforceable lien immediately if not paid when due. Each of
Montana's 56 counties collect property taxes. The counties then remit the State's portion to the State
Treasury. The majority of these taxes help fund public school systems and higher education.

Calendar year 2020 State income tax filing deadline, normally April 15th of the subsequent year, was
delayed to May 17, 2021, due to COVID-19 pandemic. The State has determined that extending the
income tax filing deadline did not have a material adverse effect on the State's liquidity for fiscal year
2021, nor will it in fiscal year 2022.

S. Other Taxes

On the Statement of Activities, the revenue category “Other Taxes” consists of the following taxes (in
thousands):

Other
State Special Governmental Business-Type
General Fund Revenue Funds Funds Total
Accommodations $ 23,454 $ 33,175 $ 6,254 $ 5 $ 62,888
Agriculture — 11,734 — — 11,734
Car rental 3,624 1,208 _— _— 4,832
Cigarette/tobacco/etc. 33,477 49,031 1,604 _— 84,112
Contractors gross receipts 3,897 _— _— _— 3,897
Energy tax 6,350 _— _— _— 6,350
Fire protection _— 4,628 _— _— 4,628
Insurance premium 87,263 50,240 _— _— 137,503
Light vehicle registration _— 6,310 _— _— 6,310
Liquor tax 5,996 2,419 — 38,136 46,551
Livestock — 5,316 — — 5,316
Other taxes 164 1,102 — — 1,266
Public service commission _— 5,356 _— _— 5,356
Railroad car companies 5,194 _— _— _— 5,194
Telephone license 8,888 _— _— _— 8,888
Video gaming 74,917 2 _— _— 74,919
Total other taxes $ 253,224 $ 170,521 $ 7,858 $ 38,141 $ 469,744

T. Tax Abatement

In the Montana Board of Investment’s (BOI) Commercial Loan Program within the SMA, by statute, the
infrastructure loan program is funded by an $80.0 million allocation. Eligible local governments request a
loan for constructing or purchasing infrastructure to be used by a basic sector business. The basic sector
business will pay a user fee to the local government that is pledged to BOI for the loan repayment. BOI
reviews each loan, and only upon verification that the entities meet the loan requirements is the loan
approved by BOI. The local government entity must pass a resolution authorizing the acceptance of the
commitment agreement. BOI indemnifies the local government regarding repayment of the loan.

A-53
A-54

The basic sector business must create at least 15 full-time basic sector jobs to be eligible for the program.
The maximum loan size is $16.7 thousand times the number of full-time jobs created and the minimum
loan size is $250.0 thousand. The maximum loan term is 25 years. There is also up to a 2.5% interest rate
reduction for job creation. The reduction will be reflected in the user fee rate charged to the basic sector
business upon BOI review and approval. The basic sector business must create the required jobs within
four years of the agreement. If the basic sector business does not create the required jobs within the four-
year period, then the basic sector business must pay down the loan balance of the local government
entity until the loan balance matches the eligible amount per the jobs created. BOI may increase the
interest rate commensurate with the number of jobs eliminated if the borrower eliminates 10 or more
qualifying jobs. The basic sector business must annually provide payroll documentation to BOI.

Pursuant to statute, a business that is created or expanded as the result of an Infrastructure Loan is
entitled to a credit against either their State individual income taxes or corporate income taxes for the
portion of the fees attributable to the use of the infrastructure. The total amount of tax credit claimed may
not exceed the amount of the loan. The credit may be carried forward for seven years or carried back for
three years.

During the fiscal year ended June 30, 2021, basic sector business entities made total user fee payments
of $1.8 million, representing $1.3 million of principal and $0.5 million in interest. During the fiscal year
ended June 30, 2021, a total of $5.3 million was claimed as a credit against State individual and
corporation tax. The following table details the fiscal year 2021 credit claimed by tax type and the tax year
it was applied against (in thousands):

Infrastructure Credit Claimed

Tax Year Tax Year
2020 2019 Total
Corporate income tax $ — $ 265 $ 265
Individual income tax 34 4,965 4,999
Total amount claimed $ 34 $ 5,230 $ 5,264

U. Irrevocable Split Interest Agreements

Irrevocable split-interest agreements are used by donors to provide resources to two or more
beneficiaries, including governments. These agreements can be created through trusts or other legally
enforceable agreements with characteristics that are equivalent to irrevocable split-interest agreements.
The University of Montana campuses have three irrevocable split interest agreements during the fiscal
year ended June 30, 2021. Further detail related to these agreements is provided in Note 3.
NOTE 2. OTHER ACCOUNTING CHANGES
A. New Accounting Guidance Implemented

For the year ended June 30, 2021, the State of Montana early implemented the provisions of GASB
Statement No. 98, The Annual Comprehensive Financial Report (GASB 98). This Statement establishes
the term annual comprehensive financial report and its acronym ACFR. That new term and acronym
replace instances of comprehensive annual financial report and its acronym in generally accepted
accounting principles for state and local governments.

For the year ended June 30, 2021, the State of Montana implemented the provisions of GASB Statement
No. 92, Omnibus 2020 (GASB 92). The objectives of this Statement are to enhance comparability in
accounting and financial reporting and to improve the consistency of authoritative literature by addressing
practice issues that have been identified during implementation and application of certain GASB
Statements. This Statement addresses a variety of topics of which the following have implications for the
State of Montana: (1) Under GASB 10, amounts recoverable from reinsurances for paid claims were
required to be accounted for as assets and expense reductions. Under GASB 92, paid claims and claim
adjustments expenses may be reported as reductions of expenses but are not required to be. (2) The
terms derivative and derivatives in National Council on Governmental Accounting and GASB
pronouncements should be replaced with derivative instrument and derivative instruments, respectively.

For the calendar year ended December 31, 2020, Montana State Fund (MSF), a discretely presented
component unit of the State, early implemented the provisions of GASB Statement No. 87, Leases.
Accordingly, for all of its long-term leases, MSF will no longer be reporting leases as an operating lease
and has created an intangible right-to-use lease asset and lease liability. The assets are amortized over
the term of the lease, while the liabilities are reduced as scheduled lease payments are made. The State
did not early implement GASB 87 for the year ended June 30, 2021.

B. Adjustments to Beginning Net Position

Prior period adjustments reported in the accompanying financial statements relate to corrections of errors
from prior periods. The most significant of these adjustments affected the governmental activities and
related to long-term liability and natural resource expenditure understatement in the amount of $61.0
million.

A-55
A-56

NOTE 3. CASH/CASH EQUIVALENTS AND INVESTMENTS

This note details the following asset classifications (in thousands):

Cash/cash equivalents $ 6,678,033
Equity in pooled investments $ 17,142,801
Investments $ 3,865,333

Carrying amounts for the bank balance for cash deposits and fair values for the State's cash equivalents
and investments are presented in Tables 1 through 4.

A. General

Outside of statutory requirements, the State does not maintain a statewide risk policy for cash/cash
equivalents or investments held outside of the Montana Board of Investments (BOI). The investment risk
policy for State cash/cash equivalents and investments including the BOI Municipal Finance Programs
Fund deposits and investments managed by BOI, have been detailed below.

(1) BOI was created by the Legislature to manage the Unified Investment Program (UIP) established by
the State Constitution. The UIP is comprised of involuntary participating state funds, including pensions,
trusts, insurance, operating funds, and by statute voluntarily participating local government funds. BOI
manages the UIP pursuant to the “Prudent Expert Principle” mandated by State law, which requires an
investment manager to:

1. discharge the duties with the care, skill, prudence, and diligence, under the circumstances then
prevailing, that a prudent person acting in a like capacity with the same resources and familiar
with like matters exercises in the conduct of an enterprise of a like character with like aims;

2. diversify the holdings of each fund within the UIP to minimize the risk of loss and to maximize the
rate of return unless, under the circumstances, it is clearly prudent not to do so; and

3. discharge the duties solely in the interest of and for the benefit of the funds forming the UIP.

BOI is not registered with the U.S. Securities and Exchange Commission as an investment company.
BOl’s investment program is governed by Investment Policy Statements (IPS) approved by BOI.

State agencies and local government entities may participate in one or more pools. By investing in pools,
participants are provided broad diversification. State agencies may also have direct fixed income, equity,
or loan investments. These investments are combined and reported as Separately Managed Accounts
(SMA). Currently, only the nine retirement funds that participate in the Consolidated Asset Pension Pool
(CAPP), the Defined Contribution Disability Plan, and the Montana State Fund (MSF) may invest in public
corporate capital stock. Neither State law nor the State Constitution place restrictions on retirement fund
investments. BOI approves a separate IPS for each pool and SMA participant, which provides BOI staff
with a broad strategic framework under which the investments are managed. The IPS’s also reflect BOI
approved asset allocation ranges.

By statute, local government entities can voluntarily invest in the Short Term Investment Pool (STIP). By
statute, with a qualifying event, local government entities may also voluntarily invest in the Trust Funds
Investment Pool (TFIP).

Separately issued investment pool financial statements may be obtained by contacting:

Montana Board of Investments
2401 Colonial Drive, 3rd Floor
PO Box 200126

Helena, MT 59620-0126
BOl’s separately issued UIP financial statements include the activity for MSF within SMA on a June 30,
2021, basis. MSF, a discretely presented component of the State, by statute, prepares separately issued
financial statements on a calendar year-end basis. Due to the difference in reporting periods, there will be
a variance between the note disclosures and the financial statements for cash/cash equivalents and
investments.

(a) Cash and cash equivalents consist of funds deposited by individual funds in the State Treasurer’s
pooled cash account, cash deposits in checking accounts, cash invested in STIP, cash held by trustees,
undeposited cash held by individual state agencies, and investments categorized as cash equivalents.

Cash deposited with the State Treasurer’s pooled cash account is invested by BOI in short-term securities
and other investments. Because these funds are immediately available to the individual funds, their
investment in the pooled cash account is reported as a cash equivalent. BOI also manages STIP, which
provides individual State agencies and local governments an opportunity to invest excess cash in a pool
that is managed to preserve principal while providing 24-hour liquidity. Because these pooled funds are
invested in short-term, highly liquid investments, the individual fund investments in the STIP are reported
as acash equivalent.

(b) Investment securities are reported by investment portfolio and type in Table 2 — Cash Equivalents,
Table 3 —Equity in Pooled Investments, and Table 4 — Investments. Unrealized gains and losses are
included as a component of investment income. Unrealized gains and losses are computed based on
changes in the fair value of investments held from the beginning of the year, but unsold at the fiscal year-
end. The net change in fair value of investments also consists of the realized gains or losses. Interest
income is recognized when earned. Dividend income is recorded on the ex-dividend date.

Investments reported at fair value are on a trade date basis. Quoted market prices, when available, have
been used to value investments. The fair values for securities that have no quoted market price represent
estimated fair value. Alternative investment securities are valued using the most recent estimates of fair
value from the investment managers. Fair value measurements are reviewed monthly, and third-party
valuations are reviewed for reasonableness and compliance with approved price source authorization
policy. BOI categorizes its fair value measurements within the fair value hierarchy established by
generally accepted accounting principles as follows:

Level 1 — Quoted prices for identical assets or liabilities in active markets.

Level 2 — Prices determined using inputs, other than quoted prices included within Level 1, that are
observable for an asset or liability, either directly or indirectly. These inputs can include quoted prices for
similar assets or liabilities in active or inactive markets, or market-corroborated inputs.

Level 3 — Prices are determined using unobservable inputs, which generally results in BOI using the best
information available and may include BOI’s own data.

(c) Security Lending - BOI is authorized by law to lend its securities and has contracted with the
custodial bank, to lend BOIl’s securities to broker-dealers and other entities with a simultaneous
agreement to return the collateral for the same securities in the future. The custodial bank is required to
maintain collateral equal to 102% of the fair value of domestic securities and 105% of the fair value of
international securities while the securities are on loan. On any day, including June 30th, the markets may
move in a positive or negative direction resulting in under or over collateralization. The custodial bank
compensates for market movement by recalculating on the following business day to meet the
collateralization requirements. BOI and the custodial bank split the earnings 80% and 20% respectively,
on securities lending activities. BOI retains all rights and risks of ownership during the loan period. The
custodial bank indemnifies BOI’s credit risk exposure to the borrowers.

During fiscal year 2021, the custodial bank loaned BOl’s public securities and received as collateral
either: U.S. dollar cash; U.S. government and government sponsored agency securities; U.S. corporate
debt securities and structured securities rated AA- or Aa3 or higher; sovereign debt securities of the
Group of Ten nations; and debt securities issued by certain supranational agencies. The custodial bank
does not have the ability to sell collateral securities unless the borrower defaults.

A-57
A-58

BOI imposed no restrictions on the amount of securities available to lend during fiscal year 2021.
However, STIP assets are currently not available for securities lending. There were no failures by any
borrowers to return loaned securities or pay distributions thereon during the period that resulted in a
declaration and notice of default of the borrower. There were no losses during fiscal year 2021 resulting
from a borrower default. As of June 30, 2021, no securities were recalled and not yet returned.

The cash collateral received for each loan was invested, together with the cash collateral of other
qualified plan lenders, in an investment fund, the Navigator Securities Lending Government Money
Market (Navigator) portfolio.

BOI and the borrowers maintain the right to terminate all securities lending transactions on notice.
Because the securities lending transactions were terminable at will, their duration did not generally match
the duration of the investments made with the cash collateral received from the borrower. The Navigator
portfolio had an average duration of 24 days and the average weighted final maturity of 93 days.

(d) Investment Pools and Separately Managed Accounts (SMA) are described in the following
paragraphs.

Consolidated Asset Pension Pool (CAPP)

The CAPP IPS contain prescribed asset allocation ranges among the allowable asset classes and is
subject to change as BOI adopts modifications. BOI annually affirms or revises the asset allocation
ranges for the retirement plans. The CAPP IPS also contains investment objectives and guidelines for
each underlying asset class, with a purpose of providing diversified exposure within the asset class in a
prudent and cost-effective manner.

Due to a longer-term focus, CAPP's asset classes differ from other classes that are allowable for other
programs. CAPP's underlying asset classes are as follows:

« Domestic Equities

« — International Equities

« Private Investments

« Real Assets

« Real Estate

¢« Core Fixed Income

¢« _Non-Core Fixed Income
* Cash

The CAPP IPS is the only IPS that allows for investments that can be held in non-U.S. securities in a
foreign currency. Per the CAPP IPS, the Core Fixed Income Asset Class and Non-Core Fixed Income
Asset Class sections have maximum restrictions that can be held. Currency exposures may be hedged, in
a defensive manner, at the discretion of the active managers to preserve the U.S. dollar value of
investments made.

As part of the asset allocation approved by BOI in November 2020, the Natural Resource PAC was
renamed the Real Assets PAC. The Private Investments PAC holds Private Equity and Private Credit
portfolios. The Real Assets PAC holds Commodities, Infrastructure, and Treasury Inflation Protected
Securities (TIPS) portfolios. These changes were effective in January 2021. The changes did not have an
impact on the underlying values of the securities within CAPP.

Trust Funds Investment Pool (TFIP)

The TFIP IPS provides for a 10% portfolio limit for non-core fixed income securities. TFIP invests primarily
in investment grade, U.S. dollar denominated fixed income securities. The portfolio has high yield and
core real estate exposure.
Short Term Investment Pool (STIP)

The STIP IPS limits the concentration of credit risk exposure by limiting portfolio investment types to 3.0%
in any issuer except for U.S. Treasury and U.S. Agency securities as well as any repurchase agreements
with a financial institution.

STIP invests primarily in short-term, high quality, fixed income securities with a maximum maturity of 397
days or less. Variable securities shall have a maximum maturity of 2 years. STIP shall maintain a dollar-
weighted average portfolio maturity of 120 days or less. STIP is managed to preserve principal while
providing 24-hour liquidity for state agency and local government participants.

BOI maintains a reserve account that may be used to offset losses within the STIP portfolio. The STIP
reserve for the year ending June 30, 2021, is detailed as follows:

STIP Reserve Activity
(in thousands)

Beginning STIP Reserve $ 52,564
Additions
Investment Earnings:

Net increase (decrease) on fair value of investments 21

Interest income 12

Transfer of daily STIP income 760

Recoveries from write-offs 855
Total investment earnings 1,648
Total STIP Reserve activity 1,648
Ending STIP Reserve $ 54,212

Separately Managed Accounts (SMA)

SMA invests primarily in investment grade, U.S. dollar denominated, fixed income securities and custodial
bank interest bearing demand deposit account. However, one participant portfolio has exposure to core
real estate and high yield fixed income. The SMA portfolio also includes Veteran’s Home Loan mortgages
(VHLM) and loans funded by the Coal Severance Tax Trust Fund, as authorized by statute.

(e) Investment Risk Disclosures are described in the following paragraphs, with more detail provided in
later sections.

Custodial Credit Risk (Cash and Cash Equivalents and Investments Held at Custodial Bank)

Custodial credit risk is the risk that, in the event of the failure of the counterparty to a transaction, BOI will
not be able to recover the value of the investment or collateral securities that are in the possession of an
outside party. Per policy, BOI’s custodial bank must be rated at a minimum at the 6th highest investment
grade rating by at least two Nationally Recognized Statistical Rating Organizations (NRSROs) on an
annual basis.

As of June 30, 2021, all the public securities as well as securities held by the separate public equity
account managers were registered in the nominee name for BOI and held in the possession of BOI’s
custodial bank. The equity index funds, securities held at the State’s depository bank, real estate,
mortgage, and loan investments were purchased and recorded in BOI’s name. Commingled fund
investments are registered in the name of BOI. Therefore, BOI is not subject to custodial credit risk.

Concentration of Credit Risk

Concentration of credit risk is the risk of loss attributable to the magnitude of any single investment per
issuer name. Investments explicitly guaranteed by the U.S. government are excluded from the
concentration of credit risk requirements. Concentration of credit risk is addressed within all IPS as set by
BOI.

A-59
A-60

Credit Risk

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation.
Except for U.S. Government securities, the pools and SMA fixed income instruments have credit risk as
measured by NRSRO ratings. Credit risk is contemplated for each individual portfolio in the IPS. Credit
risk is managed by constraining portfolio purchases around investment grade NRSRO ratings as
appropriate. The U.S. Government guarantees its securities directly or indirectly. Obligations of the U.S.
Government or obligations explicitly guaranteed by the U.S. Government are not considered to have
credit risk and do not require disclosure of credit risk.

As of June 30, 2021, the CAPP's cash equivalents position held at its custodial bank, $163.1 million was
held in unrated money market funds.

As a matter of STIP investment policy, BOI can only purchase securities from a pre-approved “Approved
Issuer” list. By STIP policy, permitted money market investments include only SEC registered 2a-7
Institutional Money Market Funds that are considered “U.S. Treasury” or “U.S. Government” money
market mutual funds according to the SEC regulations or short-term investment vehicle available through
the custodial bank. As of June 30, 2021, all the STIP money market investments were in U.S.
Governmental money markets and $166.0 million was held on deposit in a short-term investment vehicle
available through the custodial bank.

Interest Rate Risk

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an
investment. BOI uses effective duration as a measure of interest rate risk for all fixed income portfolios.
CAPP, TFIP, and SMA at fair value investments are categorized to disclose credit and interest rate risk for
fixed income securities. Credit risk is disclosed using the weighted credit quality rating by investment type.
Interest rate risk is disclosed using the weighted effective duration. NRSRO provides the credit ratings.
According to the STIP investment policy, “The STIP portfolio will minimize interest rate risk by:

1. structuring the investment portfolio so securities mature to meet cash requirements for ongoing
operations thereby normally avoiding the need to sell securities on the open market prior to
maturity;

2. maintaining a dollar-weighted average portfolio maturity (WAM) of 120 days or less (for this
purpose, the date to the next coupon reset date will be used for all floating or variable rate
securities); and

3. STIP will maintain a reserve account.”

CAPP, TFIP, STIP, and SMA may hold fixed and variable rate securities. Interest payments on variable
securities are based on an underlying reference rate, for example, Secured Overnight Financing Rate
(SOFR).

STIP investments at fair value are categorized to disclose credit risk and weighted average maturity
(WAM). Credit risk reflects the weighted security quality rating by investment type as of the June 30 report
date. Although the STIP investments have been rated by investment security type, STIP, as an external
investment pool, has not been rated. STIP interest rate risk is determined using the WAM method. The
WAM measure expresses investment time horizons (the time when investments are due or reset and
payable in days, months, or years) weighted to reflect the dollar size of the individual investments within
an investment type. Inclusive of cash and cash equivalents, the WAM averages 115 days for the portfolio.
Based on their short weighted average maturity and the relative immaterial difference from their cost to
fair value, BOI determined the cash equivalents have little discernible interest rate risk.

Foreign Currency Risk

Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an
investment. BOI's foreign currency exposure by denomination and investment type are reported, in U.S.
dollars, at fair value and is limited to CAPP.
Other Policy Considerations

For other risk, BOI approves both the IPS and benchmark used for each portfolio. Per the CAPP IPS, the
Core Fixed average duration will be maintained in a range within 20% of the benchmark duration. The
Core Fixed Income PAC and Non-Core Fixed Income PAC average duration will be maintained in a range
within 25% of the index duration. Per the TFIP IPS, the average duration will be maintained in a range
within 20% of the benchmark duration. Interest rate risk for SMA is contemplated in each individual IPS
and is managed by limiting the maturity of individual securities and/or matching liabilities to maturities per
estimated cash flows.

Fair Value of Derivative Instruments

The UIP invests in, currency forward contracts, credit default swaps, interest rate swaps, index futures
(long and short duration), rights and warrants which are classified as investment derivative instruments.
The investment derivative instruments decreased in fair value for the fiscal year ended June 30, 2021, by
$4.0 million. The derivative instruments had a fair value of $420.0 thousand as of June 30, 2021. The
notional amount of the contracts was $52.0 million.

Investment Derivative Instruments as of June 30, 2021
(in thousands)

Changes in

Fair Value

Included in

Investment Notional

Security Investment Type Classification Income Fair Value Amount

Credit default swaps bought Investment $ 17 $ (31) $ 2,215
Credit default swaps written Investment 283 258 10,180
Currency Forward Contracts Investment (58) 84 39,051
Index Futures Short Investment 64 _— (2,600)
Index Futures Long Investment 3,602 _— 3
Receive fixed interest rate swaps Investment 10 10 3,126
Rights Investment 15 40 1
Warrants Investment 45 59 19
Totals $ 3,978 $ 420 $ 51,995

Counterparty Credit Risk - Derivative Instruments

Counterparty credit risk is the risk that the counterparty will not fulfill its obligations. The maximum amount
of loss to BOI in case of default of all counterparties as of June 30, 2021 was $577.0 thousand. The
following table reflects BOI's applicable counter party credit ratings and risk concentrations.

Risk Concentrations - Credit Default Swaps as of June 30, 2021

Percentage of Moody's
Counterparty Name NetExposure S&P Rating Fitch Rating Rating
Goldman Sachs ICE 45% BBB+ A A2
Barclays Bank PLC Wholesale 38% A At Al
BNP Paribas SA 16% At At Aa3

UBS LCH 1% At AA- Aa3

A-61
A-62

(2) The BOI Municipal Finance Programs Fund deposits and investments are restricted by the bond
trust indentures to the following: government and agency obligations, certificates of deposits, repurchase
agreements, and investment agreements. The bond trust indenture addresses custodial credit risk,
concentration of credit risk, credit risk, interest rate, and credit quality risk, by detailing the permitted
investments. BOI's STIP IPS details custodial credit risk, concentration of credit risk, and credit risk.
Deposits and investments must be made with Montana banks or in the STIP administered by BOI.

Custodial Credit Risk — Custodial credit risk is the risk that, in the event of the failure of the counterparty
to a transaction, BOI will not be able to recover the value of the investment or collateral securities that are
in the possession of an outside party. Per policy, BOI’s custodial bank must be rated at a minimum, at the
6th largest investment grade rating by at least two Nationally Registered Statistical Ratings Organizations
(NRSROs) and is reviewed on an annual basis.

Cash — Custodial risk for cash is the risk that, in the event of the failure of the custodial financial
institution, the cash or collateral securities may not be recovered from an outside party. The
securities used as collateral are held by the Trustee in the name of BOI.

Investments — As of June 30, 2021, the Municipal Finance Programs securities were recorded by
the trustee in the name of BOI by specific account.

Concentration of Credit Risk - Concentration of credit risk is the risk of loss attributed to the magnitude of
any single investment per issuer name. The Municipal Finance Programs investments directly issued or
explicitly guaranteed by the U.S. government and investments in mutual funds are excluded from the
concentration of credit risk requirement. The STIP investment policy limits the concentration of credit risk
by limiting portfolio investment types to 3.0% in any issuer with the exception of U.S. Treasury and U.S.
Agency securities, as well as, any repurchase agreements with a financial institution. As of June 30, 2021,
STIP concentration risk was within the policy as set by BOI.

Credit Risk - Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its
obligation. The Municipal Finance Programs U.S. government direct-backed securities, consisting of U.S.
Treasury notes and bills, are guaranteed directly by the U.S. government. Obligations of the U.S.
government or obligations explicitly guaranteed by the U.S. government are not considered to have credit
risk and do not require disclosure of credit quality. Permitted investments, as described in the indenture,
include, “Either (i) long term obligations of such bank, trust company or association are rated in one of the
three highest investment category of the Standard & Poor’s Corporation or Moody’s Investor Service Inc.,
which investment category shall not be less than the prevailing rate on the bonds or (ii) the deposits are
continuously secured as to principal, but only to the extent not insured by the Bank Insurance Fund or the
Savings Association Insurance Fund, or any successor to either, of the Federal Deposit Insurance
Corporation (FDIC).”

BOl’s STIP IPS specifies that STIP securities have a minimum of two credit ratings as provided by
nationally recognized statistical rating organizations, to assist in the monitoring and management of credit
risk. The purchase of STIP securities other than U.S. government or U.S. agency obligations is restricted
to those who are pre-approved. Although the STIP investments have been rated by investment security
type, STIP, as an external investment pool, has not been rated.

Interest Rate Risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair
value of an investment. Permitted investments, as described in the Indenture, details the allowable
investments, including those in STIP. STIP interest rate risk is determined using the WAM method.
According to the STIP IPS, “The STIP portfolio will minimize interest rate risk by:

1. structuring the investment portfolio so securities mature to meet cash requirements for ongoing
operations, thereby normally avoiding the need to sell securities on the open market prior to
maturity;
2. maintaining a dollar-weighted average portfolio maturity (WAM) of 120 days or less (for this
purpose, the date to the next coupon reset date will be used for all floating or variable rate
securities); and

3. STIP will maintain a reserve account.”

The Municipal Finance Program investments are categorized to disclose credit and interest rate risk as of
June 30, 2021. Credit risk is disclosed using the weighted credit quality rating by investment type. Interest
rate risk is disclosed using weighted effective duration as calculated by BOI. The credit quality ratings
have been calculated, excluding non-rated investment types. Both the credit quality ratings and duration
have been calculated excluding cash equivalents, as BOI determined that these securities did not contain
these risk elements. There were no derivative transactions during the 2021 fiscal year for investments
held by the trustee.

B. Cash/Cash Equivalents

(1) Cash Deposits — The State requires collateralization based on the average daily bank balance in the
depository bank holding the main state bank account. For other depository banks, state statutes require
collateralization at 50.0% of the bank balance. The cash deposits amount includes both primary
government and component unit deposits.

Table 1 - Cash Deposit Amounts
(in thousands)

Carrying

Amount

Cash held by State/State's agent $ 69,951
Uninsured and uncollateralized cash 4,274
Undeposited cash 2,062
Cash in U.S. Treasury 396,818
Cash in MSU component units 8,893
Cash in UM component units 16,445
Less: outstanding warrants (23,187)
$ 475,256

As of June 30, 2021, the carrying amount of deposits for component units was $217.7 million, as included in Table 1.

(2) Cash Equivalents — consists of cash in the State Treasury invested by individual funds in the Short-
term Investment Pool (STIP), the State Treasurer’s pooled cash account, and in identifiable securities and
investments considered to be cash equivalents. Cash equivalents, generally, are short-term, highly liquid
investments with original maturities of three months or less that are measured at cost. Cash equivalents
may be under the control of BOI or other agencies, as allowed by law.

A-63
A-64

Table 2 - Cash Equivalents
(in thousands)

Fair
Value
Treasuries $ 789,021
Corporate commercial paper ”) 913,481
Corporate notes @) 250,494
Certificates of deposit ”) 405,071
Agency or government related ”) 724,008
Money market fund unrated 214,805
Cash and cash equivalents @ 3,234,299
Less: STIP Adjustments (328,402)
Total cash equivalents $ 6,202,777

(1) A portion is also included in the Investments Measured at Fair Value and NAV table.
(2) Also included in the Investments Measured at Fair Value and NAV table.
(3) Includes adjustments for STIP Reserve, STIP included in pooled investments, and holding classification differences.

As of June 30, 2021, local governments had invested $1.9 billion, and component units of the State of Montana had invested $413.3
million in STIP.

STIP Cash Equivalent Credit Quality Ratings as of
June 30, 2021
(in thousands)

Total Cash
Equivalents Credit Quality Rating
Agency or government related $ 182,211 A-1+
Asset backed commercial paper 2,303,761 A-1+
Corporate commercial paper 531,325 A-1+
Certificates of deposit 51,002 A-1+
Interest Bearing Demand Deposit Account (IBDDA) 166,000 NR
Total cash equivalents $ 3,234,299
STIP
Credit Quality Rating and Weighted Average of Maturity as of
June 30, 2021
(in thousands)
Total Fixed
Income Credit
Investments Quality
Security Investment Type at Fair Value Rating | WAM (Days)
Treasuries $ 789,021 A-1+ 99
Agency or government related 724,008 A-1+ 87
Corporate:
Commercial paper 913,481 A-1+ 153
Notes 250,494 A-1 111
Certificates of deposit 405,071 A-1 142

Total STIP fixed income investments at fair value

$3,082,075
C. Equity in Pooled Investments

These securities consist of investments held by BOI in pooled investment funds. The Consolidated Asset
Pension Pool (CAPP) and Trust Funds Investment Pool (TFIP) were created to allow qualifying funds to
participate in diversified investment pools. Purchases are subject to the statutorily mandated “Prudent
Expert Principle” (see Table 3 — Equity in Pooled Investments).

Table 3 - Equity in Pooled Investments
(in thousands)

Fair Value ")

CAPP:

Consolidated asset pension pool $ 14,387,290

TFIP:

Trust funds investment pool 2,142,329
Total pooled investments 17,129,619
Pool adjustments (net) 13,182

Total equity in pooled investments $ 17,142,801

() Includes cash/cash equivalents and investments.

As of June 30, 2021, the fair value of the underlying securities on loan was $700.3 million. Collateral provided for the securities on
loan totaled $715.2 million, consisting of $133.0 million in cash and $582.2 million in securities.

As of June 30, 2021, local governments invested $13.0 million in TFIP.

State of Montana investments are categorized below to disclose credit and interest rate risk as of June
30, 2021, as required for applicable pools.

Credit Quality Rating and Effective Duration as of June 30, 2021
Fair Value (in thousands)

Total Fixed
Income Effective
Investments Credit Quality Duration
Security Investment Type CAPP TFIP SMA at Fair Value Ratings Range (Years)
Treasuries $ 763,348 $ 382,471 $ 303,140 $ 1,448,959 AAA 4.30-9.36
Agency or Government Related 260,341 127,004 79,046 466,391 Ato AAA 2.57-6.79
Asset-Backed Securities 93,892 59,885 37,243 191,020 AAA 1.38-2.59
Mortgage-Backed Securities:
Noncommercial 484 595 506,382 229,237 1,220,214 AAA 3.20-4.42
Commercial 135,266 131,495 30,830 297,591 AAA 3.79-6.26
Corporate:
Financial 454,371 307 952 221,401 983,724 BBB+ to A- 3.50-4.33
Industrial 817,833 669,766 341,299 1,828,898 BB to BBB+ 4.35-5.07
Industrial (Unrated) 697 264 — 961 NR 0.09
Utility 45,849 12,147 9,935 67,931 BB+ to BBB- 2.96-5.86

Total fixed income investments at fair value $ 3,056,192 $ 2,197,366 $ 1,252,131 $ 6,505,689

State of Montana investments are measured at fair value and categorized within the fair value hierarchy
established by GASB Statement No. 72 — Fair Value Measurement and Application, as defined below.

Fixed income and equity investments classified in Level 1 of the fair value hierarchy are valued using
prices quoted in active markets for those securities. Fixed income investments classified in Level 2 of the
fair value hierarchy are valued using a matrix pricing technique. Matrix pricing is used to value securities

A-65
A-66

based on the securities’ relationship to benchmark quoted prices. Residential Mortgages classified in
Level 3 of the fair value hierarchy are present value adjusted. Direct real estate classified in Level 3 of the
fair value hierarchy are based on the latest appraised value. In years with no updated appraisal the
Montana Department of Revenue calculated growth rate is used to determine the adjusted value. The
direct real estate was last appraised in fiscal year 2020. Investments measured at cost are included to
account for all investments within each pool and SMA. These assets represent cash equivalents and
Montana Mortgages and Loans.
Each of the investment pools and SMA has the following fair value measurements as of June 30, 2021:

Investments by fair value level

Fixed income investments:
Treasuries
Agency or Government Related
Asset Backed Securities
Mortgage Backed Securities:
Noncommercial
Commercial
Corporate:
Commercial Paper
Commercial Notes
Certificates of Deposit
Financial
Industrial
Industrial (Unrated)
Utility
Equity investments
International equity investments
Direct Real Estate
Residential Mortgages
Investment derivative instruments
Total investments by fair value level
Investments measured at the net asset value (NAV)

Private Investments
Core Real Estate
Non-Core Real Estate
Real Assets
Real Estate High Income Fund
Total investments measured at NAV
Total investments measured at fair value
Investments at cost
Cash and cash equivalents held at custodial bank
SMA Montana Mortgages and Loans
Total investments not categorized
Total investments

Investments Measured at Fair Value

(in thousands)

Fair Value Measurements Using

Quoted prices in

Active Markets for Significant Other Significant
Identical Assets Observable Inputs | Unobservable
June 30, 2021 (Level 1) (Level 2) (Level 3)
$ 2,237,980 $ 2,237,980 — —
1,190,399 — 1,190,399 —
191,020 — 191,020 —
1,220,214 — 1,220,214 —
297,591 — 297,591 —
913,481 — 913,481 —
250,494 — 250,494 —
405,071 — 405,071 —
983,724 — 983,724 —
1,828,898 — 1,828,898 —
961 — 961 —
67,931 — 67,931 —
5,064,422 5,064,422 — —
2,498,920 2,498,920 — —
21,104 — — 21,104
1,601 — — 1,601
420 — 420 —
17,174,231 9,801,322 7,350,204 22,705
2,063,108
780,811
742,686
341,822
208,135
4,136,562
21,310,793
3,421,675
192,235
3,613,910

$ 24,924,703

A-67
A-68

The investments measured at NAV for the year ended June 30, 2021, are detailed below:

Investments Measured at NAV (in thousands)

Redemption
Unfunded Frequency (If Redemption
Fair Value Commitments Currently Eligible) Notice Period
Private Investments $ 2,063,108 $ 1,005,805
Core Real Estate 780,811 — Monthly, quarterly 45-90 days
Non-Core Real Estate 742,686 789,773
Real Assets 341,822 340,045
Real Estate High Income Fund 208,135 _— Daily 1-3 days
Total investments measured at the NAV $ 4,136,562 $ 2,135,623

STIP and $1.8 billion of SMA are included, and also reported in Tables 2 and 4, respectively.

Private Investments — This type includes investments in limited partnerships. Typically, the types of
partnership strategies included in this portfolio: venture capital, growth equity, buyouts, special situations,
mezzanine, and distressed debt. These investments are considered long-term. Redemptions are
restricted over the life of the partnership. During the life of the partnerships, distributions are received as
underlying partnership investments are realized. It is expected that the underlying assets of the funds will
be liquidated over 10 years. It is probable all the investments in this type will be sold at an amount
different from the NAV per share (or its equivalent) of the BOI’s ownership interest in partners’ capital.

Core Real Estate — This type includes funds that invest primarily in core real estate, which makes equity
investments in operating and substantially leased institutional quality real estate in traditional property
types (apartments, office, retail, industrial and hotel) via commingled funds. The primary investment
objectives of these core real estate funds are to invest in real estate that will generate income from
predictable sources of revenue and not to realize gains on the underlying assets. This investment type
receives distributions of generated income and occasionally through the liquidation of the underlying
assets of the fund. The fair values of the investments in this category have been determined using the
NAV per share (or its equivalent) of the BOI’s ownership interest in the partners’ capital. Redemption of
these investments is restricted based on the availability of cash flow arising from investment transactions,
sales, and other fund operations occurring in the ordinary course of business. Therefore, requested
redemptions from a fund will be redeemed as funds become available.

Non-Core Real Estate — This type includes private partnership funds that primarily invest in value added
and opportunistic real estate funds. These funds assume more risk than the core real estate funds to
achieve a greater return on investment. Returns are driven both by current income and by expected
capital appreciation. This investment type receives distributions of generated income and occasionally
through the liquidation of the underlying assets of the fund. It is expected that the underlying assets of the
funds will be liquidated over 7 to 10 years. The fair values of the investments in this category have been
determined using the NAV per share (or its equivalent) of the BOI’s ownership interest in the fund.

Real Assets — This type includes private partnership funds that primarily invest in timber, energy, broad
natural resource funds, and infrastructure. This investment type receives distributions of generated
income and occasionally through the liquidation of the underlying assets of the fund. It is expected that
the underlying assets of the funds will be liquidated over 10 to 20 years. The fair values of the
investments in this category have been determined using the NAV per share (or its equivalent) of the
BOl’s ownership interest in the partners’ capital.

Real Estate High Income Fund -— This type consists of predominantly of real estate related instruments
with an emphasis in U.S. corporate credits, whether in the form of bonds or loans that are rated below
investment grade. These assets carry a higher risk of default than investment grade securities and
accordingly provide a higher level of income or yield commensurate with that risk. The fair values of the
A-70

make investments. These agreements will usually last for a minimum of 10 years. The following table
shows the remaining BOI commitments to alternative equity managers.

Commitments to Fund Managers
(in thousands)

Original Commitment

Pension Asset Class Commitment Remaining
Private Investments $ 3,429,448 $ 1,005,805
Real Assets 748,526 340,045
Real Estate 2,686,429 789,773
Total $ 6,864,403 $ 2,135,623

D. Investments
BOI was created by the State Legislature to manage the Unified Investment Program established by the

State Constitution. Long-term investments are administered by the following agencies, as allowed by
state law, Section 17-6-201, MCA:

Long-term Investments

Percent

Department Administered
Board of Investments 45.14 %
Universities 19.78
MPERA (Montana Public Employee Retirement Administration) 27.74
College Savings Plan 5.06
Montana Board of Housing 1.22

Total 100.00 %

() Other consists of the Commissioner of Higher Education, the Department of Administration, the Department of Commerce,
the Department of Natural Resources and Conservation, the Department of Revenue, and State Auditor.

BOI must employ the "Prudent Expert Rule" in managing the State's investment portfolio. Investments are
presented at fair value. Investment fair values for publicly traded securities are determined primarily by
reference to market prices supplied to BOI's custodial bank or trustee. State investments are categorized
within the fair value hierarchy established by GASB Statement No. 72.

The PERS Defined Contribution Retirement Plan (DCRP) and the Deferred Compensation Plan’s
Montana Fixed Fund is a stable value investment option administered and monitored by the Public
Employees’ Retirement Board (PERB) with input from the Employee Investment Advisory Committee and
the investment consultant. The PERB has established an investment policy for the Montana Fixed Fund
to identify objectives, investment guidelines, and outline the responsibility of the outside vendors. This
investment policy includes stable value manager Pacific Investment Management Company LLC
(PIMCO), custodial bank State Street Bank and Trust Company (State Street), and third-party synthetic
Guaranteed Interest Contract (GIC) providers, Transamerica Life Insurance Company (Transamerica),
Prudential Insurance Company of America (Prudential), and Voya Retirement Insurance and Annuity
Company (Voya). All money invested in the Montana Fixed Fund of the PERS-DCRP and Deferred
Compensation Plan is held in a Pooled Trust. The third party record keeper, Empower Retirement™,
tracks and reports the daily trading and valuations of all investment options, including the assets held by
the individual mutual fund companies.
A-72

(1) | The credit quality rating and duration are included in the above sections for the rated investments.

(2) For more detail, refer to component unit separately issued financial statements.

(3) The total for Montana Mortgages and Loans does not include Coal Severance Tax loans, which was included in SMA financial statements. This
amount of $7.5 million is considered advances to other funds/component units and amounts due from component units in the Coal Tax Severance column
of the governmental fund financial statements.

As of June 30, 2021, the fair value of the investments on loan was $82.6 million. Collateral provided for the investments on loan totaled $84.2 million
consisting of $15.6 million in cash and $68.6 million in securities.

$1.8 billion of SMA is included and also reported in the Investments Measured at Fair Value and NAV table.

Municipal Finance Programs — Rated Securities
Credit Quality Rating and Effective Duration as of

June 30, 2021
(in thousands)

Credit
Fair Quality Effective
Security Investment Type Value Rating" — Duration"
Short-term investments
U.S. Treasury obligations $ 7,523 AAt+ 0.26
Total investments $ 7,523

") Credit Quality Rating and Effective Duration are weighted.
A-74

B. Deferred Outflows of Resources

Governmental Activities

Nonmajor
Federal Special Internal Service Governmental State Special
Revenue General Fund Funds Funds Revenue
OPEB deferred outflows $ — $ 100,973 $ 6,461 $ — $ _
Pension deferred outflows “) 21 907,580 15,303 — 113
Refunding deferred outflows _— _— _— 1,483 _—
Total deferred outflows $ 21 $ 1,008,553 $ 21,764 $ 1,483 $ 113
Business-type Activities
Municipal
Finance Nonmajor
Programs Enterprise Funds
OPEB deferred outflows ” $ 35 $ 1,835
Pension deferred outflows 95 3,827
Total deferred outflows $ 130 $ 5,662
(Further detail regarding OPEB related deferred outflows of resources is provided in Note 7.
® Further detail regarding pension related deferred outflows of resources is provided in Note 6.
C. Accounts Payables
Governmental Activities
Nonmajor
Federal Special Internal Service Governmental State Special
Revenue General Fund Funds Funds Land Grant Revenue
Accrued interest $ 6 $ 425 $ 2 $ 1,986 $ — $ 54
Payroll 9,952 18,266 3,609 4 _ 17,567
Tax refunds _— 226,626 _— _— _— _—
Vendors/individuals 220,713 79,307 12,521 5,938 5 152,167
Payables, net $ 230,671 $ 324,624 §$ 16,155 $ 7,928 $ 5 $ 169,788
Business-type Activities
Municipal
Finance Nonmajor Unemployment
Programs Enterprise Funds Insurance
Accrued interest $ 45 $ 3 $ =
Payroll 22 826 —
Vendors/individuals 4 17,451 46,953
Payables, net $ 71 $ 18,280 $ 46,953
D. Deferred Inflows of Resources

OPEB deferred inflows "?

Pension deferred inflows ”

Refunding deferred inflows
Total deferred inflows

Governmental Activities

Nonmajor
Federal Special Internal Service Governmental State Special
Revenue General Fund Funds Funds Revenue
$ — $ 29,331 $ 1,876 $ — $ _
24 125,729 5,068 — 34
$ 24 $ 155,060_$ 6,944 $ 1,737_$ 34
Business-type Activities
Municipal
Finance Nonmajor
Programs Enterprise Funds
OPEB deferred inflows $ 10 $ 565
Pension deferred inflows 29 1,695
Total deferred inflows $ 39 $ 2,260

Further detail regarding OPEB related deferred inflows of resources is provided in Note 7.
Further detail regarding pension related deferred inflows of resources is provided in Note 6.

A-75
A-76

NOTE 5. CAPITAL ASSETS

Changes in capital asset balances for the fiscal year ended June 30, 2021, are reflected in the following
table (in thousands):

Beginning Ending
Governmental Activities Balance Increases") Decreases") — Balance
Capital assets not being depreciated:
Land $ 753,496 $ 23,648 $ (662) $ 776,482
Construction work in progress 1,222,251 503,529 (353,159) 1,372,621
Easements 236,872 18,555 _— 255,427
Museum and art 86,078 87 — 86,165
Other 30,196 272 — 30,468
Total capital assets not being depreciated 2,328,893 546,091 (353,821) 2,521,163
Capital assets being depreciated:
Infrastructure 5,758,967 500,676 (390,283) 5,869,360
Land improvements 76,995 1,707 (42) 78,660
Buildings/improvements 618,180 19,653 (296) 637,537
Equipment 430,618 34,174 (13,175) 451,617
Easements - amortized 1,304 _ (73) 1,231
Other 5,776 355 — 6,131
Total capital assets being depreciated 6,891,840 556,565 (403,869) 7,044,536
Less accumulated depreciation for:
Infrastructure (1,706,463) (216,956) 147,112 (1,776,307)
Land improvements (36,658) (3,547) 11 (40,194)
Buildings/improvements (417,897) (19,862) 193 (437,566)
Equipment (285,717) (24,460) 10,011 (300,166)
Other (4,562) (283) — (4,845)
Total accumulated depreciation (2,451,297) (265,108) 157,327 (2,559,078)
Total capital assets being depreciated, net 4,440,543 291,457 (246,542) 4,485,458
Intangible assets 53,610 28,250 (21,446) 60,414
Governmental activities capital assets, net $ 6,823,046 $ 865,798 $ (621,809) $ 7,067,035

") The increases and decreases noted above include adjustments related to prior periods and correction of errors.
(2)

Business-type Activities
Capital assets not being depreciated:
Land
Construction work in progress
Other
Total capital assets not being depreciated

Capital assets being depreciated:
Infrastructure
Land improvements
Buildings/improvements
Equipment
Total capital assets being depreciated

Less accumulated depreciation for:
Infrastructure
Land improvements
Buildings/improvements
Equipment
Total accumulated depreciation

Total capital assets being depreciated, net
Intangible assets

Business-type activities capital assets, net

Beginning

Balance __ Increases ")

Ending

Decreases") — Balance

$ 800 $ — §$ — $ 800
2,361 1,091 (2,149) 1,303

3,770 110 (667) 3,213

6,931 1,201 (2,816) 5,316

1,175 _ — 1,175

3,830 _ — 3,830
16,379 _ — 16,379
9,810 162 (126) 9,846
31,194 162 (126) 31,230
(765) (18) _ (783)

(2,213) (149) _ (2,362)
(7,116) (584) _ (7,700)
(7,500) (368) 112 (7,756)
(17,594) (1,119) 112 (18,601)
13,600 (957) (14) 12,629
1,521 2,484 (573) 3,432

The increases and decreases noted above include adjustments related to prior periods and corrections of errors.

Depreciation expense was charged to governmental functions as follows (in thousands):

General government
Public safety

Transportation, including depreciation of the highway system maintained by the State

Health and human services
Education

Natural resources, including depreciation of the state's dams
Depreciation on capital assets held by the internal service funds
Total depreciation expense — Governmental Activities

Depreciation expense was charged to business-type activities as follows (in thousands):

Liquor Stores

State Lottery

Prison Funds

West Yellowstone Airport
Other Enterprise Funds

Total depreciation expense — Business-type Activities

$ 9,013
9,136

218,671

3,293

178

10,567

14,250

$ 265,108

Depreciation ”)

$ 105
51

390

513

60

$ 1,119

Depreciation expenses noted above include adjustments related to prior periods and correction of errors.

A-77
A-78

NOTE 6. RETIREMENT PLANS

A. General

The funding policies for each plan provide for periodic employee, employer, and State nonemployer
contributions at rates specified by state law. An actuary determines the actuarial implications of the
funding requirement in an annual actuarial valuation. The actuarial method used to determine the
implications of the statutory funding level is the Entry Age Actuarial Cost Method, with both normal cost
and amortization of the unfunded actuarial liability determined as a level percentage of payroll expense.
Benefits are established by state law and can only be amended by the Legislature.

Montana State Fund (MSF), a discretely presented component unit of the State, by statute, prepares
separately issued financial statements on a calendar year-end basis. Due to the difference in the
reporting period, there will be a variance between the note disclosures and the financial statements for
some pension-related items.

Public Employees’ Retirement Board

The Public Employees’ Retirement Board (PERB) oversees eight defined benefit plans: Public
Employees’ Retirement System-Defined Benefit Retirement Plan (PERS-DBRP); Judges’ Retirement
System (JRS); Highway Patrol Officers’ Retirement System (HPORS); Sheriffs’ Retirement System (SRS);
Game Wardens’ and Peace Officers’ Retirement System (GWPORS); Municipal Police Officers’
Retirement System (MPORS); Firefighters’ Unified Retirement System (FURS); and Volunteer
Firefighters’ Compensation Act (VFCA). The PERB also oversees two defined contribution plans: Public
Employees’ Retirement System-Defined Contribution Retirement Plan (PERS-DCRP) and the 457(b)-
Deferred Compensation Plan (457(b) Plan). The PERB also oversees education funds related to the
pension plans. All of the benefit plans, defined benefit and defined contribution, are administered by the
Montana Public Employees’ Retirement Administration (MPERA). Separately issued financial statements
and actuarial reports can be obtained at 100 North Park, Suite 200, PO Box 200131, Helena, MT
59620-0131. The financial statements and the latest actuarial valuation may also be obtained here: http://
mpera.mt.gov/. The financial statements for the PERS-DBRP include activity for the defined benefit plan
and the associated education fund. The PERS-DCRP financial statements include activity for the defined
contribution plan and the associated education fund.

The PERB is an independent, seven-member board, appointed by the Governor. The members are
assigned five-year, staggered terms. The PERB consists of two members at large, two active defined
benefit public employees, one active defined contribution public employee, one member experienced in
investments, and one retired public employee. The PERB approves the annual operating budget,
developed by MPERA management, before the beginning of the fiscal year. As governed by statute, the
PERB’s defined benefit administrative expenses may not exceed 1.5% of the total defined benefit plan
retirement benefits paid. In addition, the PERB decides legislative policy and priorities, hires the executive
director, establishes the policies and procedures that govern operations at MPERA, and hears and rules
on appeal matters of disabilities, retirees, and members. PERB members do not receive compensation for
their service to the MPERA but are reimbursed for necessary expenses incurred while serving.

All defined benefit pension plans provide retirement, disability, and death benefits to the plan members
and their beneficiaries. The PERS-DCRP Disability OPEB Plan provides a defined benefit for disabled
members of the PERS-DCRP. Beneficiaries do not receive disability benefits but may attain retirement
benefits from the PERS-DCRP. A summary of the plan eligibility and benefits are found in the Summary of
Benefits sections throughout Note 6.

Teachers’ Retirement System

The Teachers’ Retirement System (TRS) is a defined benefit plan administered by the Teachers
Retirement Board (TRB). The plan prepares a publicly issued annual comprehensive financial report that
includes financial statements and required supplementary information for TRS. Separately issued
financial statements, actuarial valuations, and experience studies can be obtained at 100 N Park Avenue,
Suite 110, PO Box 200139, Helena, MT 59620-0139, or can be found online at https://trs.mt.gov/.
The TRB consists of six members, all of whom are appointed by the Governor. Three TRB members must
be teaching professionals who, when appointed, are active members of TRS; at least one of them must
be an active classroom teacher. One TRB member must be a retired teacher who was a member of TRS
at the time of retirement. Two TRB members are appointed from the public at large. TRB members serve
staggered, five-year terms. Three TRB members constitute a quorum.

A summary of the number of participating employer and nonemployer contributing entities as of June 30,
2021, follows:

PERS- __ PERS-
Classification of Participant GWPORS DBRP DCRP SRS MPORS — FURS VFCA TRS
Employer 7 553 340 57 34 27 220 363
Nonemployer
contributing entity _ 1 _ — 1 1 1 1
Total Participants 7 554 340 57 35 28 221 364

There are 647 State employees who are eligible to participate in defined benefit pension plans, other than
the plans listed above.

B. Summary of Significant Accounting Policies

The MPERA prepares its financial statements using fund accounting principles and the accrual basis of
accounting. The basis of accounting indicates the timing of transactions or events for recognition in the
financial statements. Plan member contributions, employer contributions, and related receivables are
recognized as revenues in the accounting period in which they are earned and become measurable,
pursuant to formal commitments and statutory requirements. Benefit payments and refunds/distributions
are recognized in the accounting period in which they are due and payable in accordance with the terms
of each plan. Administrative and other expenses, and the associated liabilities, are recognized in the
period the liability is incurred. Administrative expenses are financed through investment earnings on the
pension trust fund for the defined benefit plans. Interfund receivables and payables exist at year-end for
defined benefit administrative expenses that are accounted for within PERS-DBRP and allocated to the
other defined benefit plans at year-end. Costs specifically related to the computer system upgrades are
charged directly to the individual plans. The MPERA adheres to all applicable Governmental Accounting
Standards Board (GASB) statements.

The TRS prepares its financial statements using the accrual basis of accounting. For the purposes of
measuring the net pension liability, deferred inflows of resources, and deferred outflows of resources
related to pensions, pension expense, information about the fiduciary net position of the TRS, and
additions to/deductions from TRS’s fiduciary net position, the items have been determined on the same
accrual basis as they are reported by the TRS. For this purpose, plan contributions are recognized as of
employer payroll paid dates. Benefit payments and refunds are recognized when due and payable in
accordance with the benefit terms. Investments are reported at fair value. The TRS adheres to all
applicable GASB statements.

The pension trust fund financial statements presented in this report are prepared using the accrual basis
of accounting in the same manner as that described for the pension plan administrators above.

A-79
A-80

C. Summary of All Public Employee Retirement Plans

A summary of classes of members in JRS, HPORS, GWPORS, PERS-DBRP, SRS, MPORS, FURS,
VFCA, TRS, PERS-DCRP, and 457-Deferred Compensation covered by benefit terms at June 30, 2021,
follows:

Type of Plan for Reporting | Single-Employer Defined Multi-Employer

. Multi-Employer Defined Benefit Defined
Purposes Benefit Contribution
ar HPORS PERS- MPORS PERS- 457(b)-
Plan Designation JRS (1) GWPORS DBRP”) SRS (1) FURS VFCA_ TRS DCRP mt }

Classification of Member
Active 57 244 1,023] 29,028 1,495 823 734 2,031 19,658] 3,311 5,507

Inactive entitled to, but not yet
receiving, benefits or a

refund:
Vested 2 18 1487 4,390 178 107 43 890 1,955 776 =4,392
Non-vested 2 30 5244 21,760 805 199 81 — 7,869} 1,005 _—

Inactive members and
beneficiaries currently
receiving benefits:

Service retirements” 68 343 407} 23,742 752 857 -661.—s 1,525 16,315 152 —
Disability retirements _— 3 2 127 30 24 13 1 182 10 _—
Survivor benefits“) 5 10 11 534 23 29 18 6 488 _ _
Total membership 134 648 2,115} 79,581 3,283 2,039 1,550 4,453 46467] 5,254 9,899

‘) Includes Deferred Retirement Option Plan (DROP) in the Active count.
The inactive non-vested count includes dormant accounts that were previously not counted.

® Includes "Alternative Payees" and "Death After Retirement" benefit payments. As of Fiscal Year 2019, the TRS plan stopped reporting separate benefit
recipient categories.

Includes "Death Before Retirement" benefit payments.

The following table represents the aggregate proportional share of the pension amounts for all defined
benefit plans from the perspective of the State as the employer and/or nonemployer contributing entity for
primary government, discretely presented component units, and fiduciary component units reported as of
June 30, 2021, based on the actuarial valuation as of June 30, 2019 (amounts presented in thousands):

Aggregate Pension Amounts - All Defined Benefit Plans

Primary Government

Discretely

State as Presented Fiduciary
Employer Contributing ¢ overnanent Units “ Units
Entity

Net Pension Liabilities $ 1,483,274 $ 1,475,801 $ 2,959,075 $ 237,781 $ 1,921 $ 3,198,777
(Net Pension Assets) (36,545) _ (36,545) _ _ (36,545)
Pension Deferred Outflows of Resources 510,946 415,994 926,940 83,633 452 1,011,025
Pension Deferred Inflows of Resources 86,501 46,078 132,579 13,216 114 145,909
Pension Expense or Nonemployer 246,824 258,238 «505,062 50,850 344 «556,256

Contributing Entity Grant Expense

) MSF pension deferred outflows of resources difference of $936.9 thousand is due to MSF reporting on a calendar year-end basis on
financial statements with a 6-month subsequent contribution while a 12-month subsequent contribution is disclosed in Note 6.
D. Defined Benefit Retirement Plans
The information below includes all defined benefit retirement plans administered by MPERA and TRS.

(1) Plan Descriptions and Funding Policies

Judges’ Retirement System — The JRS, administered by the MPERA, is a single-employer defined
benefit plan established in 1967 and governed by Title 19, chapters 2 & 5, MCA (Montana Code
Annotated). This plan provides retirement benefits for all Montana judges of the district courts, justices of
the Supreme Court, the Chief Water Judge, and the Associate Water Judge. Benefits are established by
state law and can only be amended by the Legislature. The JRS provides retirement, disability, and death
benefits to plan members and their beneficiaries. Benefits are based on eligibility, years of service, and
compensation. Member rights are vested after five years of service.

Summary of Benefits
Member’s current salary’ or highest average compensation (HAC)?
‘Hired prior to July 1, 1997, and non-Guaranteed Annual Benefit Adjustment (GABA) —
monthly compensation at time of retirement;
*Hired on or after July 1, 1997, or electing GABA — HAC during any consecutive 36 months;
*Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s HAC.

Eligibility for benefit
Age 60, 5 years of membership service;
Any age with 5 years of membership service — involuntary termination, actuarially reduced.

Vesting
5 years of membership service.

Monthly benefit formula
3.33% of current salary’ (non-GABA) or HAC? (GABA) per year of service credit for the first
15 years of service credit, plus 1.785% per year for each year after 15 years.

Guaranteed Annual Benefit Adjustment (GABA)

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12
full months of retirement, the member’s benefit increases by a maximum of 3.0% each
January, inclusive of all other adjustments to the member’s benefit.

Minimum benefit adjustment (non-GABA)

If hired prior to July 1, 1997, and member did not elect GABA — current salary of an active
member in same position is used in the calculation of the monthly benefit each time the
Legislature increases salaries for active judges.

Contributions to the Plan
Rates are specified by state law for periodic employee and employer contributions. The Legislature has
the authority to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s
salary and remitted by the participating employer. An individual account is established for
each member’s contributions and interest allocations until a retirement or refund request is
processed. Plan members are required to contribute 7.0% of the member’s monthly
compensation.

Employer contributions to the system — As the employer, the State is required to contribute
25.81% of a member’s compensation.

A-81
A-82

Highway Patrol Officers’ Retirement System — The HPORS, administered by the MPERA, is a single-
employer defined benefit plan established on July 1, 1945, and governed by Title 19, chapters 2 & 6,
MCA. This plan provides retirement benefits to all members of the Montana Highway Patrol, including
supervisory personnel. Benefits are established by state law and can only be amended by the
Legislature. The HPORS provides retirement, disability, and death benefits to plan members and their
statutory beneficiaries. Benefits are based on eligibility, years of service, and highest average
compensation. Member rights for death and disability are vested immediately. All other member rights are
vested after 5 or 10 years of service.

Section 19-6-709, MCA provides eligible members retired prior to July 1, 1991, or their survivors, an
annual supplemental lump-sum payment distributed each September. This lump-sum payment is funded
by a statutory appropriation requested by the PERB from the General Fund. Factors impacting eligibility
include the number of years the recipient has received a service retirement or disability benefit, the
recipient’s age, and whether the recipient is employed in a position covered by a retirement system under
Title 19, MCA.

Deferred Retirement Option Plan (DROP)

Beginning October 1, 2015, eligible members of HPORS can participate in the DROP by filing a one-time
irrevocable election with the PERB. The DROP is governed by Title 19, Chapter 6, Part 10, MCA. A
member must have completed at least twenty years of membership service to be eligible. They may elect
to participate in the DROP for a minimum of one month and a maximum of 60 months and may only
participate in the DROP once. A participant remains a member of the HPORS, but will not receive
membership service or service credit in the system for the duration of the member’s DROP period. During
participation in the DROP, all mandatory employer contributions continue to the retirement system;
mandatory employee contributions are deposited to the member's DROP account. A monthly benefit is
calculated based on salary and years of service to date as of the beginning of the DROP period. The
monthly benefit is paid into the member’s DROP account until the end of the DROP period. At the end of
the DROP period, the participant may receive the balance of the DROP account in a lump-sum payment
or in a direct rollover to another eligible plan, as allowed by the Internal Revenue Service (IRS). If the
participant continues employment after the DROP period ends, they will again accrue membership
service and service credit. The DROP account cannot be distributed until employment is formally
terminated. As of June 30, 2021, the balance held by MPERA for HPORS DROP participants was
approximately $4.8 million.

Summary of Benefits
Member’s highest average compensation (HAC)
Hired prior to July 1, 2013 — HAC during any consecutive 36 months;
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s HAC.

Eligibility for benefit
20 years of membership service, regardless of age.

Early Retirement

Hired prior to July 1, 2013 — 5 years of membership service, actuarially reduced from age
60.

Hired on or after July 1, 2013 — 10 years of membership service, actuarially reduced from
age 60.

Second Retirement (applies to retirement system members who return on or after July 1,
2017, to active service covered by the system from which they retired):
a. If the member works more than 480 hours in a calendar year and accumulates
less than 5 years of service credit before terminating again, the member:
. is not awarded service credit for the period of reemployment;
° is refunded the accumulated contributions associated with the
period of reemployment;
A-83

° starting the first month following termination of service receives
the same retirement benefit previously paid to the member; and
. does not accrue post-retirement benefit adjustments during the

term of reemployment but receives a GABA in January
immediately following the second retirement.
b. If the member works more than 480 hours in a calendar year and accumulates
at least 5 years of service credit before terminating again, the member:
. is awarded service credit for the period of reemployment;
° starting the first month following termination of service, receives:
° the same retirement benefit previously paid to the
member; and
° a second retirement benefit for the period of
reemployment calculated based on the laws in effect as
of the member's rehire date; and
. does not accrue post-retirement benefit adjustments during the
term of reemployment but receives a GABA:
° on the initial retirement benefit starting January
immediately following second retirement; and
° on the second retirement benefit starting in January after
receiving that benefit for at least 12 months
c. Amember who returns to covered service is not eligible for a disability benefit.

Vesting
Hired prior to July 1, 2013 — 5 years of membership service.
Hired on or after July 1, 2013 — 10 years of membership service.

Monthly benefit formula
Retire prior to July 1, 2013 — 2.5% of HAC per year of service credit.
Retire on or after July 1, 2013 — 2.6% of HAC per year of service credit.

Guaranteed Annual Benefit Adjustment (GABA)

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12
full months of retirement, the member’s benefit increases by a maximum of 3.0% each
January, inclusive of all other adjustments to the member’s benefit.

Hired on or after July 1, 2013 — after the member has completed 36 full months of
retirement, the member’s benefit increase by a maximum of 1.5% each January, inclusive of
all other adjustments to the member’s benefit.

Minimum Monthly Benefit (non-GABA)

If hired prior to July 1, 1997, and member did not elect GABA — the minimum monthly
benefit is equal to 2% of the service credit multiplied by the current base compensation of a
probationary highway patrol officer. Any annual increase is limited to 5.0% over the current
benefit and may not exceed 60% of the current base salary of a probationary officer.

Contributions to the Plan
Rates are specified by state law for periodic employee and employer contributions. The Legislature has
the authority to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s
salary and remitted by participating employer.

Hired prior to July 1, 1997, and not electing GABA — Plan members are required to
contribute 13.00%.

Hired after June 30, 1997, and electing GABA — Plan members are required to contribute
13.05%.
A-84

Employer contributions to the system — As the employer, the State is required to contribute
38.33% of a member’s compensation. The first 28.15% is payable from the same sources
used to pay a member’s compensation. The remaining amount, equal to 10.18%, is payable
from the General Fund through a statutory appropriation.

Game Wardens’ & Peace Officers’ Retirement System — The GWPORS, administered by the MPERA,
is a multi-employer, cost-sharing defined benefit plan established in 1963, and governed by Title 19,
chapters 2 & 8, MCA. This plan provides retirement benefits to all persons employed as a game warden,
warden supervisory personnel, or state peace officer. Benefits are established by state law and can only
be amended by the Legislature. The GWPORS provides retirement, disability, and death benefits to plan
members and their beneficiaries. Benefits are based on eligibility, years of service, and highest average
compensation.

The State of Montana and its discretely presented component units are the only employers who
participate in the GWPORS. Therefore, while the plan is considered to be a multi-employer, cost-sharing
defined benefit plan for actuarial valuation purposes, in accordance with GASB 68, the plan is treated as if
it were a single-employer defined benefit pension plan type for financial reporting.

Summary of Benefits
Member’s highest average compensation (HAC)
Hired prior to July 1, 2011 — highest average compensation during any consecutive 36
months;
Hired on or after July 1, 2011 — highest average compensation during any consecutive 60
months;
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s HAC.

Eligibility for benefit
Service Retirement
Age 50, 20 years of membership service.

Early Retirement (reduced benefit)
Age 55, vested members who terminate employment prior to 20 years of membership
service.

Vesting
5 years of membership service.

Monthly benefit formula
2.5% of HAC per year of service credit.

Guaranteed Annual Benefit Adjustment (GABA)
After the member has completed 12 full months of retirement, the member’s benefit
increases by the applicable percentage (provided below) each January, inclusive of all other
adjustments to the member’s benefit:

° 3.0% for members hired prior to July 1, 2007

° 1.5% for members hired on or after July 1, 2007
Contributions to the Plan
Rates are specified by state law for periodic employee and employer contributions. The Legislature has
the authority to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s
salary and remitted by participating employers. Plan members are required to contribute
10.56% of member’s compensation.

Employer contributions to the system — State agency and university employers are required
to contribute 9.0% of a member’s compensation.

Public Employees’ Retirement System - Defined Benefit Retirement Plan — The PERS-DBRP,
administered by the MPERA, is a multiple-employer, cost-sharing plan established July 1, 1945, and
governed by Title 19, Chapters 2 & 3, MCA. This plan covers employees of the State and local
governments, and certain employees of the Montana University System and school districts.

All new members are initially members of the PERS-DBRP and have a 12-month window during which
they may choose to remain in the PERS-DBRP or join the Public Employees’ Retirement System-Defined
Contribution Retirement Plan (PERS-DCRP) by filing an irrevocable election. Members may not be
participants of both the defined contribution and defined benefit retirement plans. All new members from
the universities also have a third option to join the university system’s Montana University System-
Retirement Program (MUS-RP).

The PERS-DBRP provides retirement, disability, and death benefits to plan members and _ their
beneficiaries. Benefits are established by state law and can only be amended by the Legislature. Benefits
are based on eligibility, years of service, and highest average compensation.

Summary of Benefits
Member’s highest average compensation (HAC)
Hired prior to July 1, 2011 — HAC during any consecutive 36 months;
Hired on or after July 1, 2011 — HAC during any consecutive 60 months;
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s HAC.

Eligibility for benefit
Service retirement:
Hired prior to July 1, 2011 —
Age 60, 5 years of membership service;
Age 65, regardless of membership service; or
Any age, 30 years of membership service.

Hired on or after July 1, 2011 —
Age 65, 5 years of membership service;
Age 70, regardless of membership service.

Early retirement, actuarially reduced:
Hired prior to July 1, 2011 —
Age 50, 5 years of membership service; or
Any age, 25 years of membership service.
Hired on or after July 1, 2011 — Age 55, 5 years of membership service.

Second retirement (all require retuning to PERS-covered employment or PERS service):

A-85
A-86

Retire before January 1, 2016, and accumulate less than 2 years’ additional service
credit or retire on or after January 1, 2016, and accumulate less than 5 years’
additional service credit:

* A refund of member’s contributions from second employment plus regular

interest (0.77%);

« No service credit for second employment;

¢ Start the same benefit amount the month following termination; and

* GABA starts again in the January immediately following second retirement

Retire before January 1, 2016, and accumulate at least 2 years of additional service
credit:
* A recalculated retirement benefit based on laws in effect at second
retirement; and
* GABA starts the January after receiving recalculated benefit for 12 months

Retire on or after January 1, 2016, and accumulate 5 or more years of additional
service credit:
« The same retirement benefit as prior to their return to service;
« A-second retirement benefit for second period of service based on laws in
effect at second retirement;
¢« GABA starts on both benefits in the January after receiving the original and
new benefit for 12 months

Vesting
5 years of membership service

Monthly benefit formula

Members hired prior to July 1, 2011 —
Less than 25 years of membership service: 1.785% of HAC per year of service credit;
25 years of membership service or more: 2% of HAC per year of service credit.

Members hired on or after July 1, 2011 —
Less than 10 years of membership service: 1.5% of HAC per year of service credit;
10 years or more, but less than 30 years of membership service: 1.785% of HAC per
year of service credit;
30 years or more of membership service: 2% of HAC per year of service credit.

Guaranteed Annual Benefit Adjustment (GABA) — After the member has completed 12 full
months of retirement, the member’s benefit increases by the applicable percentage
(provided below) each January, inclusive of other adjustments to the member’s benefit:

¢ 3.0% for members hired prior to July 1, 2007

« 1.5% for members hired between July 1, 2007 and June 30, 2013

« Members hired on or after July 1, 2013

« 1.5% for each year PERS is funded at or above 90%;
* 1.5% is reduced by 0.1% for each 2% PERS is funded below 90%; and,
* 0% whenever the amortization period for PERS is 40 years or more.

Contributions to the Plan
Rates are specified by state law for periodic employee, employer, and nonemployer entity contributions.
The Legislature has the authority to establish and amend contribution rates to the plan.

Member contributions to the system: Contributions are deducted from each member’s
salary and remitted by participating Employers. Plan members are required to contribute
7.90% of member’s compensation. The 7.90% member contribution rate is temporary and
will be decreased to 6.9% on January 1 following actuary valuation results that show the
amortization period has dropped below 25 years and would remain below 25 years following
the reduction of both the additional Employer and additional member contribution rates.

Employer contributions to the system

State and University System employers are required to contribute 8.87% of member
compensation.

Local government entities are required to contribution 8.77% of member compensation.
School district employers contributed 8.50% of member compensation.

Per the 2013 Legislative Session’s House Bill 454, section 4, effective July 1, 2013, PERS
employer contributions temporarily increased 1%. Beginning July 1, 2014, employer
contributions will increase an additional 0.1% a year over 10 years, through 2024. The
Employer additional contributions, including the 0.27% added in 2007 and 2009, terminates
on January 1 following actuary valuation results that show the amortization period of the
PERS-DBRP has dropped below 25 years and would remain below 25 years following the
reductions of both the additional employer and member contributions rates. As of January 1,
2021, the additional contributions will not be terminated.

Effective July 1, 2013, employers are required to make contributions on working retirees’
compensation. Member contributions for working retirees are not required.

The portion of employer contributions allocated to the Plan Choice Rate (PCR) are included
in the employer's reporting. The PCR was paid off effective March 2016 and the
contributions previously directed to the PCR are now directed to member accounts.

Non-Employer Entity Contributions

Special Funding
The State contributes 0.1% of member compensation on behalf of local government
entities.
The State contributes 0.37% of member compensation on behalf of school district
entities.
The State contributes a statutory appropriation from the General Fund. Funding
provided for the year ended June 30, 2021, totaled $34.0 million.

Sheriffs’ Retirement System — The SRS, administered by the MPERA, is a multiple-employer, cost-
sharing defined benefit plan established July 1, 1974, and governed by Title 19, chapters 2 & 7, MCA.
This plan provides retirement benefits to all Department of Justice criminal and gambling investigators
hired after July 1, 1993, all detention officers hired after July 1, 2005, and to all Montana sheriffs. Benefits
are established by state law and can only be amended by the Legislature. The SRS provides retirement,
disability, and death benefits to plan members and their beneficiaries. Benefits are based on eligibility,
years of service, and highest average compensation.

Summary of Benefits

Member’s highest average compensation (HAC)

Hired prior to July 1, 2011 — highest average compensation during any consecutive 36
months;

Hired on or after July 1, 2011 — highest average compensation during any consecutive 60
months.

Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s HAC.

A-87
A-88

Eligibility for benefit
Service Retirement: 20 years of membership service, regardless of age.
Early Retirement: Age 50, 5 years of membership service, actuarially reduced.

Second Retirement (applies to retirement system members re-employed in a SRS position
on or after July 1, 2017):
a. If the member works more than 480 hours in a calendar year and accumulates
less than 5 years of service credit before terminating again, the member:

. is not awarded service credit for the period of reemployment;

. is refunded the accumulated contributions associated with the
period of reemployment;

° starting the first month following termination of service receives
the same retirement benefit previously paid to the member; and

. does not accrue post-retirement benefit adjustments during the

term of reemployment but receives a GABA in January
immediately following the second retirement.
b. If the member works more than 480 hours in a calendar year and accumulates at
least 5 years of service credit before terminating again, the member:
. is awarded service credit for the period of reemployment;
° starting the first month following termination of service receives:
° the same retirement benefit previously paid to the
member; and
° a second retirement benefit for the period of
reemployment calculated based on the laws in effect as
of the member's rehire date; and
. does not accrue post-retirement benefit adjustments during the
term of reemployment but receives a GABA:
° on the initial retirement benefit starting in January
immediately following second retirement; and
° on the second retirement benefit starting in January after
receiving that benefit for at least 12 months
c. Amember who returns to covered service is not eligible for a disability benefit.

Vesting
5 years of membership service

Monthly benefit formula
2.5% of HAC per year of service

Guaranteed Annual Benefit Adjustment (GABA)
After the member has completed 12 full months of retirement, the member’s benefit
increases by the applicable percentage (provided below) each January, inclusive of all other
adjustments to the member’s benefit.

° 3.0% for members hired prior to July 1, 2007

° 1.5% for members hired on or after July 1, 2007

Contributions to the Plan

Rates are specified by state law for periodic employee and employer contributions and are a percentage
of the member’s compensation. The Legislature has the authority to establish and amend contribution
rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s
salary and remitted by participating employers. Plan members are required to contribute
10.495% of member’s compensation.
Employer contributions to the system — The employers are required to contribute 13.115%
of member compensation. Employer contributions are required to be paid on working retiree
compensation. Member contributions are not required for working retirees.

Municipal Police Officers’ Retirement System — The MPORS, administered by the MPERA, is a
multiple-employer, cost-sharing defined benefit plan that was established in 1974 and is governed by Title
19, chapters 2 & 9, MCA. This plan covers all municipal police officers employed by first- and second-
class cities and other cities that adopt the plan. Benefits are established by state law and can only be
amended by the Legislature. The MPORS provides retirement, disability, and death benefits to plan
members and their beneficiaries. Benefits are based on eligibility, years of service, and final average
compensation.

Deferred Retirement Option Plan (DROP)

Beginning July 2002, eligible members of the MPORS can participate in the DROP by filing a one-time
irrevocable election with the PERB. The DROP is governed by Title 19, Chapter 9, Part 10, MCA. A
member must have completed at least twenty years of membership service to be eligible. They may elect
to participate in the DROP for a minimum of one month and a maximum of 60 months and may only
participate in the DROP once. A participant remains a member of the MPORS, but will not receive
membership service or service credit in the system for the duration of the member’s DROP period. During
participation in the DROP, all mandatory contributions continue to the retirement system. A monthly
benefit is calculated based on salary and years of service to the date of the beginning of the DROP
period. The monthly benefit is paid into the member’s DROP account until the end of the DROP period. At
the end of the DROP period, the participant may receive the balance of the DROP account in a lump-sum
payment or a direct rollover to another eligible plan, as allowed by the IRS. If the participant continues
employment after the DROP period ends, they will again accrue membership service and service credit.
The DROP account cannot be distributed until employment is formally terminated. As of June 30, 2021,
the balance held by MPERA for MPORS DROP participants was approximately $8.7 million.

The State is not an employer participant in the MPORS plan. However, because the PERB is a fiduciary
component unit of the State, this ACFR presents certain information to help ensure compliance with
GASB 67. In addition, the State provides nonemployer entity contributions classified as special funding in
accordance with GASB 68. Disclosures made in this financial report for MPORS are meant to reflect the
aforementioned relationships.

Summary of Benefits

Member's final average compensation (FAC)

Hired prior to July 1, 1977 — average monthly compensation of final year of service;

Hired on or after July 1, 1977 — final average compensation (FAC) for last consecutive 36
months.

Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s FAC.

Eligibility for benefit

Service Retirement: Age 50, with 5 years of membership service, or 20 years of
membership service, regardless of age.

Second Retirement: Age 50, reemployed ina MPORS position

Vesting
Death and disability rights are vested immediately.
5 years of membership service.

Monthly benefit formula
2.5% of FAC per year of service credit.

A-89
A-90

Second retirement benefit formula for members re-employed in a MPORS position after July
1, 2017:
(1) If the member works more than 480 hours in a calendar year and accumulates
less than 5 years of service credit before terminating again, the member:
a. Is not awarded service credit for the period of reemployment;
b. Is refunded the accumulated contributions associated with the period of
reemployment;
c. Starting the first month following termination of service receives the same
retirement benefit previously paid to the member; and
d. Does not accrue post-retirement benefit adjustments during the term of
reemployment but receives a Guaranteed Annual Benefit Adjustment (GABA)
in January immediately following second retirement.
(2) If the member works more than 480 hours in a calendar year and accumulates
at least 5 years of service credit before terminating again, the member:
a. ls awarded service credit for the period of reemployment;
b. Starting the first month following termination of service receives:
i. The same retirement benefit previously paid to the member, and
ii. A second retirement benefit for the period of reemployment calculated
based on the laws in effect as of the member's rehire date; and
c. Does not accrue post-retirement benefit adjustments during the term of
reemployment but receives a GABA:
i. On the initial retirement benefit in January immediately following second
retirement, and
ii. On the second retirement benefit starting in January after receiving that
benefit for at least 12 months.
(3)A member who returns to covered service is not eligible for a disability benefit.

Guaranteed Annual Benefit Adjustment (GABA)

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12
full months of retirement, the member’s benefit increases by a maximum of 3% each
January, inclusive of all other adjustments to the member’s benefit.

Minimum benefit adjustment (non-GABA) If hired before July 1, 1997, and member did not
elect GABA — the monthly retirement, disability, or survivor's benefit may not be less than
50% of the compensation of a newly confirmed officer of the employer where the member
was last employed.

Contributions to the Plan
Rates are specified by state law for periodic employee, employer, and nonemployer entity contributions.
The Legislature has the authority to establish and amend contribution rates to the plan.

Member contributions — Contribution rates are dependent upon the date of hire as a police
officer. Contributions are deducted from each member’s salary and remitted by the
participating Employer. For fiscal year 2021:

¢ If hired prior to July 1, 1975, member contributions as a percentage of salary are 5.80%

¢ If hired after June 30, 1975, and prior to July 1, 1979, member contributions as a
percentage of salary are 7.00%;

¢ If hired after June 30, 1979, and prior to July 1, 1997, member contributions as a
percentage of salary are 8.50%; and,

¢ If hired on or after July 1, 1997, and for members electing GABA, member contributions
as a percentage of salary are 9.00%.

Employer Contributions — Employers are required to contribute 14.41% of a member’s
compensation.
Nonemployer Entity Contributions — The State contributes 29.37% of a member’s
compensation from the General Fund. These amounts are considered a special funding
situation in accordance with GASB 68.

Firefighters’ Unified Retirement System — The FURS, administered by the MPERA, is a multiple-
employer, cost-sharing defined benefit plan established in 1981, and governed by Title 19, chapters 2 &
13, MCA. This system provides retirement benefits to firefighters employed by first- and second-class
cities, other cities and rural fire district departments that adopt the plan, and to firefighters hired by the
Montana Air National Guard on or after October 1, 2001. Benefits are established by state law and can
only be amended by the Legislature. The FURS provides retirement, disability, and death benefits to plan
members and their beneficiaries. Benefits are based on eligibility, years of service, and compensation.

Summary of Benefits
Member’s compensation
Hired prior to July 1, 1981, and not electing GABA — highest monthly compensation (HMC);
Hired after June 30, 1981, and those electing GABA — highest average compensation (HAC)
during any consecutive 36 months.
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of
a member’s highest average compensation.
Part-time firefighter — 15% of regular compensation of a newly confirmed full-time firefighter.

Eligibility for benefit
Service retirement: 20 years of membership service, regardless of age.
Early Retirement: Age 50, 5 years of membership service.

Vesting
Death and disability rights are vested immediately
5 years of membership service.

Monthly benefit formula
Members hired prior to July 1, 1981, and not electing GABA are entitled to the greater of:
2.5% of HMC per year of service; or
¢ if less than 20 years of service — 2% of HMC for each year of service;

¢ if more than 20 years of service — 50% of the member’s HMC plus 2% of

the member’s HMC for each year of service over 20 years.

Members hired on or after July 1, 1981, and those electing GABA: 2.5% of HAC per year of
membership service.

Guaranteed Annual Benefit Adjustment (GABA)

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12
full months of retirement, the member’s benefit increases by a maximum of 3% each
January, inclusive of all other adjustments to the member’s benefit.

Minimum Benefit Adjustment (non-GABA)

If hired before July 1, 1997, and the member did not elect GABA, the monthly retirement,
disability, or survivor’s benefit may not be less than 50% of the compensation of a newly
confirmed active firefighter of the employer that last employed the member.

Contributions to the Plan

Rates are specified by state law for periodic employee, employer, and nonemployer entity contributions.
The Legislature has the authority to establish and amend contribution rates to the plan. Effective July 1,
2013, employer and state contributions are required to be paid on working retiree compensation. Member
contributions are not required for working retirees.

A-91
A-92

Member contributions to the system — Contributions are deducted from each member’s
salary and remitted by the participating employer. For members:
Hired prior to July 1, 1997, and not electing GABA, member contributions as a
percentage of salary are 9.50%;
Hired on or after July 1, 1997, and electing GABA, member contributions as a
percentage of salary are 10.70%.

Employer contributions to the system — Employers are required to contribute 14.36% of
member’s compensation.

Nonemployer entity contributions to the system — The State contributes 32.61% of a
member’s compensation from the General Fund.

Volunteer Firefighters’ Compensation Act — The VFCA, administered by the MPERA, is a multiple-
employer, cost-sharing defined benefit plan that was established in 1965, and governed by Title 19,
chapter 17, MCA. All members are unpaid volunteers and the State is the only contributor to the plan.
Benefits are established by state law and can only be amended by the Legislature. The VFCA provides
pension, disability, and survivorship benefits for all eligible volunteer firefighters who are members of
qualified volunteer fire companies in unincorporated areas, towns or villages, and includes volunteer fire
departments, fire districts, and fire service areas under the laws of the State. Benefits are based on
eligibility and years of service. Member rights are vested after ten years of credited service. The VFCA
also provides limited benefits for death or injuries incurred in the line of duty. A member who chooses to
retire and draw a pension benefit may return to service with a volunteer fire department without loss of
benefits. However, a returning retired member may not be considered an active member accruing credit
for service.

Summary of Benefits
Eligibility for benefit
Age 55, 20 years of credited service;
Age 60, 10 years of credited service.

Effective July 1, 2011, members who retire on or after July 1, 2011, and have greater than
30 years of credited service will receive $7.50 per month for each additional year of credited
service over 30 years if the pension trust fund is actuarially sound, amortizing any unfunded
liabilities in 20 years or less. This determination will be made annually and a member’s
benefit will be capped at $250 a month (30 years of credited service) if the amortization
period grows to greater than 20 years.

Vesting
10 years of credited service.

Monthly benefit formula (effective January 1, 2016)
$8.75 per year of credited service up to 20 years;
$7.50 per year of credited service after 20 years

Contributions to the Plan

The State, as a nonemployer contributing entity, is the only contributor to the VFCA. Contributions are 5%
of fire insurance premium taxes collected on certain fire risks. This requires the plan to be treated as a
special funding situation in accordance with GASB 68. The State Auditor makes annual payments from
the General Fund to the VFCA fund. Rates are specified by state law for contributions to the VFCA plan.
The State legislature has the authority to establish and amend contribution rates to the plan.

Teachers’ Retirement System — The TRS is administered by the Teachers’ Retirement Board (TRB),
which is the governing body of a mandatory multiple-employer cost-sharing defined benefit pension plan
that provides retirement services to persons in Montana employed as teachers or professional staff of any
public elementary or secondary school, community college, or unit of the university system. The TRS, as
an employer, does not participate in the plan and acts only as the administrator of the plan.

The TRB is the governing body of the TRS, and the TRS’s staff administer the TRS in conformity with the
laws set forth in Title 19, chapter 20, MCA, and administrative rules set forth in Title 2, chapter 44 of the
Administrative Rules of Montana.

Summary of Benefits

Through June 30, 2013, all members enrolled in TRS participated in a single-tiered plan ("Tier One").
Employees with a minimum of 25 years of service or who have reached age 60 with 5 years of service are
eligible to receive an annual retirement benefit equal to creditable service years divided by 60 times the
average final compensation. Final compensation is the average of the highest three consecutive years of
earned compensation. Benefits fully vest after 5 years of creditable service. Vested employees may retire
at or after age 50 and receive reduced retirement benefits. Benefits are established by state law and can
only be amended by the Legislature.

Beginning July 1, 2013, new members in TRS participate in a second benefit tier ("Tier Two"), which
differs from Tier One as follows:

« Tier Two uses a 5-year average final compensation (AFC) (as opposed to 3-year AFC in Tier
One)

¢ Tier Two provides for unreduced service retirement benefits at age 60 with 5 years of creditable
service or at age 55 with at least 30 years of creditable service (rather than at age 60 with 5 years
of service or at any age with creditable service in 25 years in Tier One)

¢ Tier Two provides for early retirement benefits with 5 years of creditable service at age 55 (rather
than age 50 in Tier One)

* Tier Two has one percent higher normal employee contribution rate (though a temporary 1%
supplemental employee contribution rate is also currently in place for Tier One members), and

¢ Tier Two provides for an enhanced benefit calculation—1.85% of the AFC multiplied by the years
of creditable service—for members retiring with at least 30 years of creditable service and at least
60 years of age (rather than 1.6667 x AFC x years of creditable service)

A guaranteed annual benefit adjustment (GABA) is payable on January 1 of each calendar year for each
retiree who has received at least 36 monthly retirement benefit payments prior to that date. The GABA is
applicable to both Tier One and Tier Two members. The GABA for Tier One members is 1.5% of the
benefit payable as of January 1. For Tier Two members, the GABA each year may vary from 0.5% to
1.5% based on the retirement system’s funding status and the period required to amortize any unfunded
accrued actuarial liability as determined in the prior actuarial valuation.

Contributions to the System
All active employees in the TRS, regardless of employer type, are required to provide a contribution equal
to 8.15% of their compensation.

All State and University employers are required to contribute 11.55% of compensation provided to an
active, non-reemployed member. All school districts and other employers are required to contribute 9.17%
of an active, non-reemployed, member's compensation to the System.

Section 19-20-605, MCA, requires each employer to contribute 9.85% of total compensation paid to all
reemployed TRS retirees employed in a TRS reportable position. Pursuant to Section 19-20-609, MCA,
this amount shall increase by 1.00% for fiscal year 2014 and increase by 0.10% each fiscal year through
2024 until the total employer contribution is equal to 11.85% of reemployed retiree compensation.

The TRS receives a portion of the total required statutory contributions directly from the State for all
employers. The employers are considered to be in a special funding situation, and the State is treated as
a nonemployer contributing entity in the TRS. The System receives 0.11% of earned compensation from
the General Fund for all TRS members. The TRS also receives 2.38% of earned compensation from the

A-93
A-94

General Fund for TRS members employed at school districts, community colleges, educational
cooperatives, and counties in Montana. Finally, the State is also required to contribute $25.0 million in
perpetuity payable July 1 of each year. The Legislature has the authority to establish and amend
contribution rates to the plan.

(2) Actuarial Assumptions

For all plans administered by MPERA, the total pension liability used to calculate the net pension liability/
(asset) for each plan was determined by an actuarial valuation date indicated in the table below using the
following actuarial assumptions, applied to all periods included in the measurement, with update
procedures used to roll forward the total pension liability to June 30, 2020. For the TRS plan, the total
pension liability used to calculate the net pension liability as of June 30, 2020, is based on the results of
an actuarial valuation as of July 1, 2020. Therefore, no update procedures were used for TRS to roll
forward the total pension liability to the measurement date. The significant assumptions and other inputs
used to measure the total pension liability were the following:

Plan JRS | HPORS | Gwpors| FERS | srs | MPORS | FURS | VFCA TRS
Administrator MPERA TRS
Valuation June 30, 2019 July 1, 2020
Date
Actuarial
Experience May 2017 May 2018
Study
Inflation 2.40% 2.40 %
Total Wage 3.25% to 7.76% for

non-university
Increases, 3.50% 3.50% to 3.50% to 3.50% to 3.50% to 3.50% to 3.50% to NIA members
including me 10.02% 10.02% 8.47% 10.02% 10.33% 10.02% an
og 4.25% for university
inflation members
General
3.509 N/A 3.25 9

0 to 4.51% for non-
Mert None 0 106.30% |0t06.30% |0104.80% |0t06.30% |0106.60% |0to6.30% |NIA university members
Increase 1.00% for university

members

Investment 734% 7.34 %
Return
Administrativ $202.0
e Expense as | 0.08% 0.18% 0.16% 0.30% 0.16% 0.15% 0.13% thousand 0.45 %|
a % of Payroll
A-96

Mortality among
contributing
members, service
retired members, and
beneficiaries are
based on RP-2000
Healthy Combined
Mortality Table
projected to 2022
adjusted for partial
credibility setback for
two years. The tables
include margins for

mortality
Mortality assumptions among contributing members, terminated vested members, service retired members, and is expected to occur
beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to 2020 using in the future.
Mortality Scale BB, set back one year for males. Mortality among
Mortality assumptions among disabled retirees are based on RP-2000 Combined Employee and Annuitant Mortality | disabled members
Tables. are based on
RP-2000 Disabled

Mortality Table for
Males, set back three
years, with mortality
improvements
projected by Scale
BB to 2022, and
RP-2000 Disabled
Mortality Table for
Females, set forward
two years, with
mortality
improvements
projected by Scale
BB to 2022.

Changes in actuarial assumptions and methods: For JRS, PERS-DBRP, SRS, MPORS, FURS, and
VEFCA, the discount rate was lowered from 7.65% to 7.34%. For HPORS, the discount rate was lowered
from 7.65% to 4.43%. For GWPORS, the discount rate was lowered from 7.65% to 5.65%. For TRS, the
discount rate was lowered from 7.50% to 7.34%. For JRS, HPORS, GWPORS, PERS-DBRP, SRS,
MPORS, FURS, VFCA, the investment rate of return was lowered from 7.65% to 7.34%. For TRS, the
investment rate of return was lowered from 7.50% to 7.34%. For JRS, HRORS, GWPORS, PERS-DBRP,
SRS, MPORS, FURS, VFCA, the inflation rate was reduced from 2.75% to 2.40%. For TRS, the inflation
rate was reduced from 2.50% to 2.40%.

Changes in benefit terms: There have been no changes in benefit terms since the previous measurement
date, for JRS, HPORS, GWPORS, PERS-DBRP, SRS, MPORS, FURS, VFCA, and TRS.

Changes in proportionate share: Because the State is the single employer for JRS and HPORS, there
were no changes in proportion of the net pension assets for JRS plan and the net pension liability for
HPORS plan. Between the measurement date of the net pension liability (asset) and the State’s reporting
date, the investment rates of return of JRS and HPORS were substantially higher than the investment
rates of return assumption. Therefore, the State's net pension assets for JRS are expected to increase
and the State's net pension liability for HPORS are expected to decrease.

Changes in proportionate share: Between the measurement date of the collective net pension liability and
the State’s reporting date, the investment rate of return of GWPORS was substantially higher than the
investment rate of return assumption. Therefore, the State’s proportionate share of the collective net
pension liability as the State’s primary government employer, and the State’s discretely presented
component units are expected to change. The State still reports 100.0% GWPORS plan, and the total
plan net pension liability are expected to decrease.
Changes in proportionate share: Between the measurement date of the collective net pension liability and
the State’s reporting date, the investment rates of return of PERS-DBRP, SRS, MPORS, FURS, and TRS
plans were substantially higher than the investment rates of return assumption. Therefore, the State’s
proportionate share amounts of the collective net pension liability as the State’s employer and non-
employer contributing entity in applicable plans are expected to decrease.

Changes in proportionate share: Because the State is the only contributing entity, there were no changes
in proportion of the net pension liability for VFCA plan. The State reports 100.0% VFCA plan. Between the
measurement date of the collective net pension liability and the non-employer’s reporting date, the
investment rate of return of VFCA was substantially higher than the investment rate of return assumption.
Therefore, the State's non-employer proportionate share of the collective net pension liability is expected
to decrease.

(3) Discount Rate

The discount rate used to measure the total pension liability was 7.34% for JRS, 4.43% for HPORS,
5.65% for GWPORS, and 7.34% for SRS. The projection of cash flows used to determine the discount
rate assumed that contributions from participating plan members and employers will be made based on
the PERB’s funding policy, which establishes the contractually required rates under MCA. Based on those
assumptions, each pension plan’s fiduciary net position was projected to be adequate to make all the
projected future benefit payments of current plan members through the year 2106 for JRS, 2129 for
HPORS, 2120 for GWPORS, and 2121 for SRS. Therefore, the long-term expected rate of return on
pension plan investments was applied to all periods of projected benefit payments to determine the total
pension liability. A municipal bond rate was not incorporated in the discount rate for JRS and SRS. A
municipal bond rate of 2.19% was incorporated in the discount rate for HRORS and GWPORS.

The discount rate used to measure the total pension liability for PERS-DBRP, MPORS, and FURS was
7.34%. The projection of cash flows used to determine the discount rate assumed that contributions from
participating plan members, employers, and nonemployer contributing entity will be made based on the
PERB’s funding policy, which establishes the contractually required rates under MCA. Based on those
assumptions, each pension plan’s fiduciary net position was projected to be adequate to make all the
projected future benefit payments of current plan members through the year 2123 for PERS-DBRP, 2134
for MPORS, and 2133 for FURS. Therefore, the long-term expected rate of return on pension plan
investments was applied to all periods of projected benefit payments to determine the total pension
liability. A municipal bond rate was not incorporated in the discount rate.

The discount rate used for VFCA to measure the total pension liability was 7.34%. The projection of cash
flows used to determine the discount rate assumed that contributions from the nonemployer contributing
entity will be made based on the PERB’s funding policy, which establishes the contractually required rates
under MCA. Based on those assumptions, the VFCA’s fiduciary net position was projected to be adequate
to make all the projected future benefit payments of current plan members through the year 2112. A
municipal bond rate was not incorporated in the discount rate.

The discount rate used to measure the total pension liability for TRS was 7.34%. The projection of cash
flows used to determine the discount rate assumed that contributions from participating plan members,
employers, and nonemployer contributing entity will be made based on the TRB’s funding policy, which
establishes the contractually required rates under MCA. Based on those assumptions, the TRS’s fiduciary
net position was projected to be adequate to make all the projected future benefit payments of current
plan members through the year 2124. Therefore, the long-term expected rate of return on pension plan
investments was applied to all periods of projected benefit payments to determine the total pension
liability. A municipal bond rate was not incorporated in the discount rate.

A-97
A-98

(4) Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study
prepared for the JRS, HPORS, GWPORS, PERS-DBRP, SRS, MPORS, FURS, and VFCA plans
administered by MPERA. The most recent analysis of each plan, performed for the six-year period ended
June 30, 2016, is outlined in a report dated May 2017, and can be located on the MPERA website. The
assumed long-term expected return on pension plan assets is reviewed as part of the regular experience
studies prepared for the TRS. The most recent analysis, performed for the period covering fiscal years
2013 through 2017, is outlined in a report dated May 3, 2018. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including
historical rates of return, rate of return assumptions adopted by similar public pension systems, and by
using a building-block method in which best-estimate ranges of expected future real rates of return
(expected returns, net of pension plan investment expense and inflation) are developed for each major
asset class. These ranges were combined to produce the long-term expected rate of return by weighing
the expected future real rates of return by the target asset allocation percentage and by adding expected
inflation. The average long term capital market assumptions published in the Survey of Capital Market
Assumptions 2020 Edition by Horizon Actuarial Service, LLC, yield a median real return of 4.94%.
Assumed inflation is based on the intermediate inflation assumption of 2.40% in the 2020 OASDI Trustees
Report used by the Chief Actuary for Social Security to produce 75 year cost projections. Combining
these two results yields a nominal return of 7.34%. All the plans administered by MPERA and TRS have
the same target allocation and long-term expected real rate of return. The target allocation and best
estimates of the arithmetic real rates of return for each major asset class as of June 30, 2020, are
summarized in the table below:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Domestic Equity 30.00% 6.19%
International Equity 16.00% 6.92%
Private Investments 14.00% 10.37%
Natural Resources 4.00% 3.43%
Real Estate 9.00% 5.74%
Core Fixed Income 20.00% 1.57%
Non-Core Fixed Income 5.00% 3.97%
Cash 2.00% 0.11%

Total 100.00%
A-99

(5) Change in Net Pension Liability (Asset)

A schedule of changes in the net pension liability (asset) is presented for each of the single-employer
defined benefit plans (amounts expressed in thousands). The date in the schedules is a measurement
date, which is one year earlier than the financial reporting date.

JRS
Total Pension —_ Plan Fiduciary Net Pension
Liability Net Position Liability/(Asset)
Balances at 6/30/2019 $ 65,319 §$ 104,886 $ (39,567)
Service costs 1,748 _— 1,748
Interest 4,842 _— 4,842
Difference between expected and actual experience (262) _— (262)
Changes of assumptions 1,912 _— 1,912
Contributions — employer _— 1,988 (1,988)
Contributions — member _— 560 (560)
Net investment income _— 2,827 (2,827)
Refunds of contributions _ _ _
Benefit payments (4,038) (4,038) _—
Plan administrative expense _— (157) 157
Other changes _— _— _—
Net changes 4,202 1,180 3,022
Balances at 6/30/2020 $ 69,521 $ 106,066 $ (36,545)
HPORS
Total Pension _— Plan Fiduciary Net Pension
Liability Net Position Liability

Balances at 6/30/2019 $ 237,728 $ 152,778 $ 84,950

Service costs 3,337 _— 3,337

Interest 17,688 _— 17,688

Difference expected and actual experience (993) _ (993)

Changes in assumptions 141,055 _— 141,055

Contributions — employer _— 6,003 (6,003)

Contributions — non-employer (State) _— 226 (226)

Contributions — member _— 2,170 (2,170)

Net investment income _— 4,101 (4,101)

Refund of contributions (331) (331) —

Benefit payments (12,685) (12,685) _—

Plan administrative expense _ (163) 163

Other changes _— (131) 131

Net changes 148,071 (810) 148,881

Balances at 6/30/2020 $ 385,799 $ 151,968 $ 233,831
Balances at 6/30/2019
Service costs
Interest

Difference between expected
and actual experience

Changes in assumptions
Contributions — employer
Contributions — member
Net investment income
Refunds of contributions
Benefit payments

Plan administrative expense
Other changes “”

Net changes

Balances at 6/30/2020

GWPORS

State as Primary Government State’s Discretely Presented Total State (Plan)
Employer Component Units
Plan Plan Plan

pension Fidbciary Pension pension Fidhciary Pension pension Fidhciary Pension

Liability Position Liability | Liability Position Liability | Liability Position Liability
$ 234,679 $ 196,044 $ 38,635]$ 12,334 $ 10,304 $ 2,0301$ 247,013 $ 206,348 $ 40,665
7,622 — 7,622 407 — 407 8,029 — 8,029
17,595 — 17,595 940 — 940 18,535 — 18,535
(1,924) — (1,924) (103) — (103) (2,027) — (2,027)
81,606 — 81,606 4,361 — 4361 85,967 — 85,967
— 4,622 (4,622) — 246 (246) — 4,868 (4,868)
— 5,509 (5,509) — 294 (294) — 5,803 (5,803)
— 5,300 (5,300) — 283 (283) — 5,583 (5,583)
(1,139) (1,139) — (61) (61) — (1,200) (1,200) —
(7,829) (7,829) — (418) (418) — (8,247) (8,247) —

— (228) 228 — (13) 13 — (241) 241

(200) (171) (29) 200 167 33 — (4) 4
95,731 6,064 89,667 5,326 498 4,828] 101,057 6,562 94,495

$ 330,410 $ 202,108 $ 128,302}$ 17,660 $ 10,802 $ 6,858]$ 348,070 $ 212,910 $ 135,160

) The Changes in Net Pension Liability table is only provided at the system level. The ending balances and the components of the changes
are derived from the primary government's proportionate share of the total plan balances and the discretely presented component unit's
proportionate share of the total plan balances. Due to the change in proportionate share in each year, the other changes line item includes
the difference between the proportionate share of the balances and the preliminary calculated balances.
(6) Sensitivity Analysis

In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability/(asset)
to changes in the discount rate, the table below presents the net pension liability/(asset), of the plans
administered by MPERA and TRS, calculated using the discount rate of 7.34% for JRS, PERS-DBRP,
SRS, MPORS, FURS, VFCA, and TRS; 4.43% for HPORS; and 5.65% for GWPORS; as well as what the
net pension liability/(asset) would be if it were calculated using a discount rate that is 1.00% lower (6.34%
for JRS, PERS-DBRP, SRS, MPORS, FURS, VFCA, and TRS; 3.43% for HPORS, and 4.65% for
GWPORS) or 1.00% higher (8.34% for JRS, PERS-DBRP, SRS, MPORS, FURS, VFCA, and TRS; 5.43%
for HPORS, and 6.65% for GWPORS) than the current rate.

Sensitivity of the Plan Participating Employer and Nonemployer Contributing Entities
Net Pension Liability (Asset) to Changes in the Discount Rate
(amounts expressed in thousands)

Plan JRS HPORS GWPORS PERS-DBRP = SRS MPORS — FURS VFCA TRS
on 35 | 10% Decrease $ (29,733) $306,955 $ 184,487 $ 1,498,548 $ 9,226 $ — $ 6,020 $ — $ 30,499
2 ge Current (36,545) 233,831 128,302 1,088,713 5,800 _— 3,722 — 22,906
$ ui 1.0% Increase (42,413) 177,819 83,222 744,453 2,998 _— 1,876 — 16,553
re « | 1.0% Decrease _— _— _— 516,210 — 233,100 171,222 13,962 1,094,843
oO wo
= 2 Current _— _— _— 375,032 — 163,514 105,867 9,106 822,282
° 1.0% Increase _— _— _— 256,444 — 108,001 53,353 5,002 594,239
>35 1.0% Decrease _— _— 9,861 278,065 _— _— _— — 38,488
8 5 as Current — — 6,858 202,017 — — — — 28,906
Aa |1.0% increase _— _— 4,448 138,138 _— _— _— — 20,890
S Bic Current — — — 1,921 — — — — —
2s
1.0% Decrease (29,733) 306,955 194,348 2,295,467 9,226 233,100 177,242 13,962 1,163,830
3S Current (36,545) 233,831 135,160 1,667,683 5,800 163,514 109,589 9,106 874,094
1.0% Increase $ (42,413) $177,819 $ 87,670 $ 1,140,349 $ 2,998 $108,001 $ 55,229 $ 5,002 $631,682

(7) Net Pension Liability (Asset), Pension Expense, and Deferred Outflows of Resources and
Deferred Inflows of Resources Related to Pensions

In accordance with GASB 68, the employer is required to recognize and report certain amounts
associated with its participation in the JRS, HPORS, and GWPORS, the plans the State participates in as
a single-employer. GASB 68 became effective June 30, 2015, and includes requirements for participant to
record and report its net pension liability (NPL) or net pension asset (NPA), pension expense, deferred
inflows of resources, and deferred outflows of resources associated with pensions. In accordance with
GASB 68, employers and the nonemployer contributing entities are required to recognize and report
certain amounts associated with their participation in the PERS-DBRP, SRS, MPORS, FURS, VFCA, and
TRS. GASB 68 became effective June 30, 2015, and includes requirements for participants to record and
report their proportionate share of the collective net pension liability, pension expense, deferred inflows of
resources, and deferred outflows of resources associated with pensions. The proportionate shares were
determined based on contributions made to the plan by employers and the nonemployer contributing
entity in a special funding situation, when a plan has the nonemployer contributing entity, during the
measurement period July 1, 2019, through June 30, 2020, relative to the total contributions received from
all participating employers and the nonemployer contributing entity. Due to the existence of the special
funding situation in the PERS-DBRP, FURS, MPORS, VFCA, and TRS, the State is required to report a
proportionate share of the collective net pension liability that is associated with the non-State employers
in these plans, respectively.

A-101
Pension Expense

The State recognized the following pension expenses for the State as the primary government employer,
the State's discretely presented component units, and the State's fiduciary component units, and pension
grant expenses for the State as nonemployer contributing entity, for the year ended June 30, 2021

(amounts presented in thousands):

Primary Government

Plan State as Nonemployer Presented caduciary
Employer Contributing Component Donen Total
Entity Units

JRS $ 1,243 $ — $ — $ —$ 1,243
HPORS 48,232 _ _ _ 48,232
GWPORS 25,886 _ 1,355 _ 27,241
PERS-DBRP ") 167,295 115,099 34,829 344 317,567
SRS 354 _ _ _ 354
MPors ” _ 29,464 _ _ 29,464
FURS ") 832 21,039 _ _ 21,871
VECA “4 — 1,844 — _— 1,844
TRs ©) 2,982 90,792 14,666 _ 108,440

(") Of the total pension expense for the State as a nonemployer contributing entity, $1.1 million is the grant
expense for special funding support provided by the General Fund to local government and school district
participants, $34.0 million is the grant expense for special funding support provided by the General Fund as
a statutory appropriation for all participating employers; $80.1 million is the pension expense that is
actuarially allocated to the State as a nonemployer contributing entity.

®) The grant expense for the State as a nonemployer contributing entity is for special funding support
provided by the General Fund for its proportionate share of the collective MPORS pension expense that is
associated with other employer participants in the plan.

®) The grant expense for the State as a nonemployer contributing entity is for special funding support
provided by the General Fund for its proportionate share of the collective FURS pension expense that is
associated with other employer participants in the plan.

The grant expense for the State as a nonemployer contributing entity is for special funding support
provided by a portion of fire tax premiums paid to the State and transferred to MPERA for its proportionate
share of the collective VFCA pension expense that is associated with other employer participants in the
plan.

© The grant expense for the State as a nonemployer contributing entity is for special funding support
provided by the General Fund for its proportionate share of the collective TRS pension expense that is
associated with other employer participants in the plan.

Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions
As of the fiscal year ended June 30, 2021, the State reported deferred outflows of resources and deferred
inflows of resources related to pensions from the following sources (amounts presented in thousands):

JRS Deferred Outflows Deferred Inflows
of Resources of Resources

Differences between expected and actual
experience $ 1,372 $ 921
Changes of assumptions 1,434 _—
Net difference between projected and actual 4135 _
earnings on pension plan investments ,
Contributions subsequent to the measurement 2 138 _

date
Totals $ 9,079 $ 921

A-103
A-105

SRS Deferred Outflows Deferred Inflows
of Resources of Resources
Difference between expected and actual
experience $ 263 § 2
Changes of assumptions 1,193 903
Net difference between projected and actual 713 _

earnings on pension plan investments
Changes in proportion and differences between

employer contributions and proportionate share of — 252

contributions

Contributions subsequent to the measurement 607 _

date

Totals $ 2,776 $ 1,157

Deferred Outflows Deferred Inflows

MPORS of Resources of Resources

Difference between expected and actual

experience $ 7,838 $ 516

Change of assumptions 13,895 _—

Net difference between projected and actual 12.716 _

earnings on pension plan investments
Changes in proportion and differences between

employer contributions and proportionate share of 954 1,265
contributions

Contributions subsequent to the measurement 17,395 _
Totals $ 52,798 $ 1,781

Primary Government

State as Nonemployer
State as Employer Contributing Entity
FURS
Deferred Deferred
Outlows of Inflows Outlows of Inflows
Resources Resources Resources Resources
Difference between expected and actual
experience $ 253 $ 19/$ 7,206 $ 551
Change of assumptions 661 _— 18,807 _—
Net difference between projected and actual
earnings on pension plan investments 478 ~~ 13,591 ~~
Changes in proportion and differences between
employer contributions and proportionate share of 120 12 2,330 2,671
contributions
Contributions subsequent to the measurement 665 _ 17,897 _
Totals $ 2,177 $ 31 |$ 59,831 $ 3,222
A-106

VFCA Deferred Outflows Deferred Inflows
of Resources of Resources
Difference between expected and actual
experience $ 250 $ 58
Change of assumptions 897 _—
Net difference between projected and actual 4.690 _
earnings on pension plan investments ,
Contributions subsequent to the measurement 2.578 _
date ,
Totals $ 5415 $ 58
Primary Government .
Stat N , Discretely Presented
ate as Nonemployer Component Units
TRS State as Employer Contributing Entity P
Deferred Deferred Deferred Deferred Deferred Deferred

Outflows of Inflows of | Outflowsof Inflows of | Outflows of Inflows of
Resources Resources | Resources Resources | Resources Resources

Difference between expected and actual

experience $ 222 $ —|$ 7,971 $ —|$ 281 §$ —
Change of assumptions 1,200 26 43,066 945 1,514 33
Net difference between projected and actual 4.605 _ 57 604 _ 2.025 _

earnings on pension plan investments

Changes in proportion and differences
between employer contributions and 863 526 5,295 29,257 12,983 48
proportionate share of contributions

Contributions subsequent to the
measurement date

Totals $ 5,345 $ 552}$ 160,637 $ 30,202 | $ 31,451 $ 81

1,455 _ 46,701 _ 14,648 _

The amounts reported in the tables above as deferred outflows of resources related to pensions resulting
from the contributions made subsequent to the June 30, 2020, measurement date will be recognized as a
reduction of the net pension liability (asset) in the fiscal year ended June 30, 2022.

Other amounts reported as deferred outflows of resources and deferred inflows of resources related to
pensions will be recognized in pension expense as follows (amounts presented in thousands):

Year ended June 30: JRS HPORS SRS MPORS VFCA

2022 $ 849 $ 36,457 $ (272) $ 10,251 $ 157
2023 2,298 37,357 467 11,881 1,065
2024 1,846 37,088 456 8,552 564
2025 1,027 1,480 361 2,938 393
A-107

GWPORS
Year ended June 30: Primary Discretely Total
Government Component
Units
2022 $ 19,360 $ 1,006 $ 20,366
2023 18,220 968 19,188
2024 17,696 944 18,640
2025 17,874 961 18,835
Thereafter _— _— _—
PERS-DBRP
Primary Government Discretely —
Year ended June 30: State as Presented Fiduciary
Stateas Nonemployer Component Component
Employer Contributing Units Units
Entity
2022 $ 29,644 $ 67,311 $ (584) $ _
2023 58,576 18,547 12,004 117
2024 32,940 11,347 6,112 58
2025 23,553 8,113 4,370 42
Thereafter _— _— _— _—
FURS
Primary Government
Year ended June 30: State as
State as Nonemployer
Employer Contributing
Entity
2022 $ 279 $ 8,463
2023 372 10,335
2024 325 8,840
2025 209 5,855
Thereafter 296 5,219
TRS
Primary Government Discretely
Year ended June 30: State as Presented
State as Nonemployer Component
Employer _—_ Contributing Units
Entity
2022 $ 1,120 $ 22,432 $ 8,512
2023 1,017 22,679 5,326
2024 798 24,166 2,376
2025 403 14,457 508
A-108

E. Legal Actuarial Status of Plans

The Montana Constitution, Article VIII, Section 15, and Section 19-2-409, MCA state that public retirement
systems shall be funded on an actuarially sound basis. To maintain a fund on an actuarially sound basis,
the rate of contributions should fund the normal cost, in addition to amortizing the unfunded liability over a
period not to exceed 30 years.

A traditional funding actuarial valuation of each of the defined benefit plans is performed annually. The
purpose of the traditional funding actuarial valuation is to measure funding progress and to determine the
actuarial determined contribution, contribution sufficiency or deficiency, and other actuarial information
necessary for monitoring funding position. The most recent actuarial valuation was performed for fiscal
year ended June 30, 2021. The statutory funding rate is tested in the valuation of each public retirement
plan to determine if it is sufficient to cover the normal cost rate plus an amortization payment of the
unfunded actuarial liability, if any, within 30 years. As of June 30, 2021, the Game Warden & Peace
Officers’ Retirement System (GWPORS) was not in compliance and did not amortize within 30 years.

F. Public Employee Defined Contribution Retirement Plans

Public Employees’ Retirement System-Defined Contribution Retirement Plan -— The Public
Employees’ Retirement System - Defined Contribution Retirement Plan (PERS-DCRP) is a multiple
Employer plan established July 1, 2002, and governed by Title 19, Chapters 2 & 3, MCA. This plan is
available to eligible employees of the State, Montana University System, local governments, and school
districts. All new PERS members are initially members of the PERS-DBRP and have a 12-month window
during which they may choose to transfer to the PERS-DCRP, or remain in the PERS-DBRP, by filing an
irrevocable election. If an election is not filed, the member remains in the PERS-DBRP. Members may not
be members of both the defined contribution and defined benefit retirement plans. The PERS-DCRP
provides retirement, disability, and death benefits to plan members and their beneficiaries.

Member and employer contribution rates are established by state law and may be amended only by the
Legislature. Employees contribute at a rate of 7.90% of their compensation. Contributions made to the
plan by an employee remain 100% vested in their interest. Members who achieve 5 years of employment
are vested in the plan. Should they terminate prior to this 5-year period, all employer contributions are
forfeited to the plan. Amounts forfeited are held in a separate plan forfeiture account and can only be used
to pay the administrative expenses, including startup costs, of the plan. Total pension expense for the
State as a PERS-DCRP employer for the year ended June 30, 2021, is $9.7 million and, contribution
forfeitures were $643.0 thousand.

Local government entities contribute 8.77% of member compensation. School district employers
contributed 8.50% of member compensation. The State contributes 0.10% of member compensation on
behalf of local government entities and 0.37% of member compensation on behalf of school district
entities. Each State agency and University employer contributed 8.87% of member compensation.

The total contribution rate of 8.87%, referenced in the preceding paragraph, is allocated as follows: 8.53%
to the member’s retirement account; 0.04% to the defined contribution education fund; and 0.30% to the
defined contribution Other Post Employment Benefit (OPEB) disability plan.

The PERS-DCRP also administers an OPEB disability plan. Refer to PERB's annual financial report for
additional information related to this portion of the plan.

457(b)-Deferred Compensation Plan — The 457(b)-Deferred Compensation Plan (457(b)-Plan) is a
voluntary supplemental retirement savings plan established in 1974. The Deferred Compensation Plan is
governed by Title 19, Chapter 50, MCA, in accordance with Internal Revenue Code (IRC) Section 457.
This plan is available to all employees of the State, Montana University System, and contracting political
subdivisions. The State and 62 non-state entity employers participate in the 457(b)-Plan.
Assets of the Deferred Compensation Plan are required to be held in trusts, custodial accounts, or
insurance company contracts for the exclusive benefit of participants and their beneficiaries. Empower
Retirement™ is the record keeper for the plan. Participants elect to defer a portion of their salary, within
IRC limits. The deferred salary is not available to employees until separation from service, retirement,
death, or upon an unforeseeable emergency while still employed, provided IRS-specified criteria are met.

G. Montana University System Retirement Program

Montana University System-Retirement Program (MUS-RP) — This system was established in January
1988 and is underwritten by the Teachers Insurance and Annuity Association (TIAA). Effective July 1,
1993, MUS-RP was made the mandatory retirement plan for new faculty and administrative staff with
contracts under the authority of the Board of Regents, previously referred to as the Optional Retirement
Program (ORP). The MUS-RP is a defined contribution retirement plan governed by Title 19, Chapter 21,
MCA. Combined contributions to the faculty and professional staff plan cannot exceed 13% of the
participant’s compensation per Section 19-21-203, MCA. Combined contributions to the classified staff
plan are 16.77% per Section 19-3-316, MCA and Section 19-3-315, MCA.

The benefits at retirement depend upon the amount of contributions, amount of investment gains and
losses, and investment allocations by the participant. Individuals are immediately vested for both
employee and employer contributions. The Montana University System records employee/employer
contributions, and remits monies to TIAA. Total contributions made to the plan by the employer were
$17.4 million, and the total employee contributions were $20.0 million for the fiscal year ended June 30,
2021.

H. Method Used to Value Investments

The Montana Board of Investments (BOI) manages the investments, as authorized by state law, for the
defined benefit retirement plans in two investment pools, the Consolidated Asset Pension Pool (CAPP)
and the Short-Term Investment Pool (STIP). CAPP is an internal investment pool and STIP is an external
investment pool. Each retirement plan’s ownership in the pools is based on the funds contributed.
Individual investments in the pools are not specifically identified to the respective retirement plan.
Investments are reported at either fair value or cost, depending on the underlying investment type. Fixed
income and equity investments classified in Level 1 of the fair value hierarchy are valued using prices
quoted in active markets for those securities. Fixed income investments classified in Level 2 of the fair
value hierarchy are valued using a matrix pricing technique. Matrix pricing is used to value securities
based on the securities’ relationship to benchmark quoted prices. Mortgages are present value adjusted.
Investment valuation not classified within the fair value measurement levels are reported at Net Asset
Value. Further detail related to investments is provided in Note 3.

I. Long-term Contracts for Contributions

Per Section 19-2-706, MCA, the Montana Legislature enacted a provision of the Employee Protection Act
(EPA) allowing state and university system employees who are eligible for a service retirement and whose
positions have been eliminated, to have their employer pay a portion of the total cost of purchasing up to
three years of “1-for-5” additional service. In fiscal year 2021, 269 employees participated in the program.

The Employer has up to ten years to complete payment for the service purchases and is charged the
actuarially required rate of return as established by MPERA on the unpaid balance. Total contributions
received (including interest) during fiscal year 2021 totaled $171.4 thousand. The outstanding balance at
June 30, 2021, totaled $7.6 thousand.

J. Litigation

Tadman, et al. v. State. A retired member of the Sheriffs' Retirement System filed a class action in the
Eighth Judicial District of Montana against the State of Montana on October 6, 2015, alleging the
inappropriate advising, reporting, and withholding of state and federal income taxes on certain line-of-duty
disability benefits before conversion to a normal retirement benefit. The State was served with the

A-109
A-110

Complaint on November 25, 2015, and is represented by Jean Faure and Jason Holden of the Faure
Holden law firm in Great Falls, Montana. On June 11, 2019, the Court issued an Order granting Plaintiff's
Motion to Certify Class. The Court has defined the prospective class of plaintiffs in this matter and the
parties were instructed by the Court to meet and confer to agree on the class form of notice and notice
plan concerning the matter. Counsel representing the class are Lawrence A. Anderson from Great Falls,
Montana and Tom and Sean Morrison from Helena, Montana. This matter was settled between the parties
and approved by the Court as of March 22, 2021. Below is the detail of litigation settlements with amounts
presented in thousands.

Tadman, et al. v. State JRS HPORS SRS GWPORS Totals
Benefits $ 3.2 § 420.6 $ 1,549.3 $ 26.9 $ 2,000.0
Administrative expense (legal costs) 16 210.3 774.7 13.4 1,000.0
Totals $ 4.8 $ 630.9 $ 2,324.0 $ 40.3 $ 3,000.0

PERB v. Lewis and Clark County. On May 1, 2020, the PERB filed a Complaint for Declaratory Relief in
the First Judicial District of Montana against Lewis and Clark County. This complaint asked the Court to
rule that the Montana Constitution, Article VIII, Section 15, vests the PERB with the authority to actuarially
determine the amount of the unfunded pension liabilities attributable to a component unit of Lewis and
Clark County that has terminated its participation in a PERB administered defined benefit plan, and
compel the payment of and collect this unfunded pension liability upon this component unit's termination.
On May 13, 2020, Lewis and Clark County filed a motion to dismiss the Complaint. This motion has been
fully briefed by both parties and the PERB awaits a ruling from the Court. On June1, 2020, the PERB filed
its First Amended Complaint amending its original pleading to add a claim for breach of contract against
Lewis and Clark County. On June 18, 2020, Lewis and Clark County filed a motion to dismiss PERB's
First Amended Complaint. This motion has been fully briefed and the PERB awaits a ruling from the
Court. This matter was consolidated with Montana Association of Counties, Lewis and Clark County, and

Cascade County v. PERB and MPERA by the Court on February 22, 2021.

Montana Association of Counties (MACo), Lewis and Clark County, and Cascade County v. PERB
and MPERA. On May 1, 2020, the MACo filed a Complaint for Declaratory Judgement, Injunctive Relief,
and a Writ of Prohibition against the PERB and MPERA in the First Judicial District Court of Lewis and
Clark County. This Complaint asked the Court to rule that the Montana Constitution, Article VIII, Section
15, does not vest the PERB with the authority to determine and collect unfunded pension liabilities owed
to the PERS-DBRP trust as a result of partial withdrawals of employees or reductions in force, and that
the 1947 Contract between the PERB and Lewis and Clark County and Cascade County, as well as other
similar agreements between the PERB and all other Montana counties, does not vest the PERB with the
authority to determine and collect unfunded pension liabilities owed to the PERS-DBRP trust as a result of
partial withdrawals of employees or reductions in force, and that MACo is entitled to a preliminary and
permanent injunction enjoining PERB from assessing withdrawal penalties against Montana counties, and
that MACo is entitled to a Writ of Prohibition arresting the PERB from assessing withdrawal penalties
against Montana counties. On May 15, 2020, MACo amended its original pleading by filing its First
Amended Complaint. This amendment added the additional parties of Lewis and Clark County and
Cascade County to this action as plaintiffs as well as the additional claims for breach of express and
implied contract. On June 25, 2020, the PERB filed a Motion to Dismiss, or in the Alternative, Partial
Summary Judgement with regard to the Plaintiffs' Count Il, IV, V, and VI. This motion has been fully
briefed by all parties and the PERB awaits a ruling from the Court. This matter was consolidated with
PERB v. Lewis and Clark County by the Court on February 22, 2021.
NOTE 7. OTHER POSTEMPLOYMENT BENEFITS (OPEB)

A. General Information Non-trust Plans

The State of Montana (State) and the Montana University System (MUS) provide optional
postemployment healthcare benefits in accordance with Section 2-18-704, MCA to the following
employees and dependents who elect to continue coverage and pay administratively established
contributions: (1) employees and dependents who retire under applicable retirement provisions and (2)
surviving dependents of deceased employees. Medical, dental, and vision benefits are available through
this plan. The State and MUS offer OPEB plans that are not administered through trusts; as such, there
are no plan assets accumulated to offset the total OPEB liability.

In accordance with Section 2-18-704, MCA, the State provides post-retirement health insurance benefits
to eligible employees who receive retirement benefits from the Public Employees’ Retirement System
(PERS) or various other State retirement systems, and elect to start medical coverage within 60 days of
leaving employment. Retirement eligibility criteria differ by state retirement plan. Further detail on state
retirement plans is provided in Note 6. MUS provides post-retirement health insurance benefits to eligible
employees who receive retirement benefits from their plan, or an annuity under the MUS-RP, and have
been employed by MUS for at least five years, are age 50, or have worked 25 years with MUS. They must
elect to start medical coverage within 60 days of leaving employment. Spouses, unmarried dependent
children, and surviving spouses are also eligible for both plans.

Montana State Fund, a discretely presented component of the State and participant in the State OPEB
plan, by statute, prepares separately issued financial statements on a calendar year-end basis. Due to the
difference in reporting period, there will be a variance between the note disclosures and the financial
statements for OPEB related information.

B. Plan Descriptions

Both healthcare OPEB plans for the State and MUS are reported as single-employer plans. In addition to
the primary government, the participating employers under the State OPEB plan are Facility Finance
Authority, Montana Board of Housing, Public Employees’ Retirement System, Montana State Fund, and
Teachers’ Retirement System. The participating employers under the MUS OPEB plan are Office of
Commissioner of Higher Education (OCHE), Montana State University - Billings (MSU-Billings), Montana
State University - Bozeman (MSU-Bozeman), Great Falls College MSU, Montana State University -
Northern (MSU-Northern), Montana Technological University, Helena College UM, University of Montana -
Missoula (UM-Missoula), and University of Montana - Western (UM-Western). Participating employers
under MUS, but excluded from the total OPEB liability due to not qualifying as component units, are
Dawson Community College (Dawson CC), Flathead Valley Community College (Flathead CC), and Miles
Community College (Miles CC). Each participating employer is required to disclose additional information
as required per GASB Statement No. 75, Accounting and Financial Reporting for Postemployment
Benefits Other than Pensions (GASB 75).

The State and MUS pay for post-employment healthcare benefits on a pay-as-you-go basis. Section
2-18-812, MCA gives authority for establishing and amending the funding policy to the Department of
Administration for the State group health insurance plan. Section 20-25-1310, MCA gives authority for
establishing and amending the funding policy to the Board of Regents for the MUS group health
insurance plan. The healthcare OPEB plans allow retirees to participate, as a group, at a rate that does
not cover all of the related costs. This results in reporting the total OPEB liability in the related financial
statements and note disclosures. Reported contributions are not a result of direct funding to the plans or
for associated liabilities, but are a measure of the difference in retiree payments into the plans and actual
medical costs associated with those individuals paid for by the plans.

As of December 31, 2020, the State OPEB plan’s administratively established retiree medical premiums
vary between $457.00 and $2,172.00 per month, depending on the medical plan selected, family
coverage, and Medicare eligibility. Administratively established dental premiums vary between $41.10 and
A-112

$70.00 per month and vision hardware premiums vary between $7.64 and $22.26 per month, depending
on the coverage selected. The plan provides different coinsurance amounts and deductibles depending
on whether members use participating or non-participating providers. Once retiree members become
Medicare eligible, the plan automatically processes claim reimbursement as the secondary insurer, even if
the member is not enrolled in Medicare. A basic life insurance plan on the life of the retiree is also
included with a retiree’s core benefits until the retiree reaches age 65 or is eligible for Medicare.

As of June 30, 2021, the MUS OPEB plan’s administratively established retiree medical premiums vary
between $368.00 and $2,452.00 per month. Retiree dental premiums vary between $52.00 and $156.00
per month, while vision premiums vary from $10.70 to $31.18, depending on the types and number of
dependents enrolled and which medical Third Party Administrator (TPA) was selected. The plan provides
different coinsurance amounts and deductibles depending on whether members use in-network or out-of-
network providers. The plan automatically reduces claim reimbursement for members eligible for
Medicare, even if the member is not enrolled in Medicare. The premium changes were based on actual
claims experience and actuarial projections based on the experience and trends.

C. Basis of Accounting

Total OPEB liability is reported on an accrual basis on the proprietary and fiduciary fund financial
statements, the government-wide financial statements, and the component unit financial statements. Total
OPEB liability is not reported on the governmental fund financial statements, as it is considered a long-
term liability. Plan member contributions are recognized in the period in which the contributions are made.
Benefits and refunds are recognized when due and payable in accordance with the terms of each plan.

Both OPEB plans state, that an employee enrolled in the OPEB plan, who (a) at least meets the early
retirement criteria defined by Montana Public Employees’ Retirement Administration (MPERA); and (b)
makes arrangements with their respective benefit office, within 60 days of the date active employee
coverage ends, to continue post-retirement coverage, may continue with the OPEB plan on a self-pay
basis, retroactive back to the date active employee coverage was lost, and adhere to these provisions.
Therefore, each plan does not include terminated employees who have accumulated benefits but are not
yet receiving them. There have been no significant changes in the number covered or the type of
coverage as of June 30, 2021.

The number of State Plan participants as of March 31, 2021, follows:

State Plan Participants

Facility Montana Public Employee Montana = Teachers
Finance Board Retirement State —_ Retirement
Enrollment State Authority? — of Housing ”) Board ®) Fund”) = System®) Total
Active employees 12,210 3 36 51 285 21 12,606
Retired employees,
spouses, and
surviving spouses 2,178 2 3 1 17 4 2,205
Total 14,388 5 39 52 302 25 14,811
The number of MUS Plan participants as of March 31, 2021, follows:
MUS Plan Participants
MSU- UM- MSU- MSU- MSU- UM- UM-MT UM-
Enrollment GFC” HC Billings” Bozeman” Northern” OCHE" Missoula” Tech” Western” Total
Active employees 103 11 427 3,026 171 46 1,856 382 179 6,261
Retired employees,
spouses, and
surviving spouses 8 14 109 459 35 16 475 97 52 1,265
Total 111 85 536 3,485 206 62 2,331 479 231 7,526

) Primary Government
®) Discrete Component Units of Primary Government
‘) Fiduciary Component Units of Primary Government
D. Schedule of Changes in Total OPEB Liability

The following table presents the other items related to and changes in the total OPEB liability:

Annual OPEB Cost & Changes in Total OPEB liability
(in thousands)

State Plan MUS Plan
Discrete
Component
Unit and
Fiduciary Discrete
Primary | Component Primary Component
Government Unit Total Government Unit Total
Total OPEB OPEB Total State | Total OPEB OPEB Total MUS
Liability Liability Plan Liability Liability Plan
Balances at 6/30/2020 $ 46,129 $ 1,213 $ 47,342 1$ 283 $ 26,566 $ 26,849
Changes for the year:
Service cost 1,684 50 1,734 16 1,396 1,412
Interest 1,299 34 1,333 8 769 TTT
Difference between expected and
actual experience (6,389) 252 (6,137) (207) (17,181) (17,388)
irpate of assumptions or other 101,723 2716 104,439 461 45,213 45,674
Benefit payments (1,165) (31) (1,196) — (13) (13)
Net changes 97,152 3,021 100,173 278 30,184 30,462
Balances at 6/30/2021 $ 143,281 $ 4,234 $ 147,515] $ 561 $ 56,750 $ 57,311

{") State, fiduciary component units, and discretely presented component units proportion of the collective total OPEB liability as of the measurement
date for fiscal years 2020 and 2021 for the State Plan was 100% both years and for the MUS Plan is 94.92% and 95.18%, respectively.

E. Actuarial Methods and Assumptions

The total OPEB liability (TOL) measured under GASB 75 is based upon service cost and more
standardized reporting assumptions than prior GASB Statements. As a pay-as-you-go public entity, GASB
75 requires a 20-year current municipal bond discount rate to establish an Actuarially Determined
Contribution (ADC). The GASB 75 valuation is further required to show both historical and projected
future net changes in TOL, as well as sensitivity to changes in key underlying assumptions. Actuarially
determined amounts are subject to continual revisions, meaning actual results are compared with past
expectations and new estimates are made about the future. Actuarial calculations reflect a long-term
perspective. The projection of benefits for financial reporting purposes does not explicitly incorporate the
potential effects of legal or contractual funding limitations on the pattern of cost-sharing between the
employer and plan members in the future.

The schedule of changes in the State’s and MUS's TOL and related ratios, presented as required
supplementary information following the notes to the financial statements is designed to present multi-
year trend information about whether the actuarial value of plan TOL is increasing or decreasing over time
relative to the actuarial liabilities for benefits. The schedule of changes in the State’s and MUS's TOL and
related ratios are based on the substantive plan (the plan as understood by the employer and the plan
members). This includes the types of benefits provided at the time of each valuation and the historical
pattern of sharing of benefit costs between the employer and plan members to that point.

A-113
A-114

The State's OPEB Plan TOL on December 31, 2020, rolled forward to March 31, 2021, actuarial valuation
was determined using the following actuarial assumptions and other inputs, applied to all periods included
in the measurement, unless otherwise specified:

Other Postemployment Benefits
State Single Employer Plan

Retiree/Surviving

Spouse Spouse

Contributions (weighted average):

Before Medicare eligibility $ 15,072 $ 6,908

After Medicare eligibility 5,484 4,820
Actuarial valuation date December 31, 2020
Experience study period January 1, 2018 through December 31, 2020
Actuarial measurement date March 31, 2021
Actuarial cost method Entry age normal funding method
Amortization method Level percent of payroll, open basis
Asset valuation method Not applicable since no assets meet the definition

of plan assets under GASB 75

Actuarial assumptions:

Discount rate 2.23%
Projected payroll increases 2.50%
Participation:
Future retirees 40.00%
Future eligible spouses 70.00%
Marital status at retirement 70.00%

) Updated procedures were used to roll forward the total OPEB liability to the measurement date.

Mortality - Health: For TRS, healthy mortality is assumed to follow the RP-2000 Healthy Annuitant
Mortality Table for ages 50 and above and the RP-2000 Combined Healthy Annuitant Mortality
Table for ages below 50, set back four years for males, set back two years for females, with
mortality improvements projected by Scale BB to 2018. For all other groups, healthy mortality is
assumed to follow the RP-2000 Combined Mortality Table with improvements projected by Scale
BB to 2020, set back one year for males.

Mortality - Disabled: For TRS, disabled mortality is assumed to follow the RP-2000 Disabled
Mortality Table, set forward one year for males and set forward five years for females, with
mortality improvements projected by Scale BB to 2018. For all other groups, disabled mortality is
assumed to follow the RP-2000 Combined Mortality Table with no projections.

Changes in actuarial assumptions and methods since last measurement date: Changes in
assumptions for 2021 were due to no retiree contribution increase and a decrease in the discount
rate from 2.75% to 2.23%

Changes in benefit terms since last measurement date: None
A-115
Additional information as of the latest actuarial valuation for MUS OPEB plan follows:
Other Postemployment Benefits

MUS Single Employer Plan

Retiree/Surviving

Spouse Spouse

Contributions (in thousands):

Before Medicare eligibility $ 11,772 $ 9,637

After Medicare eligibility 4416 5,205
Actuarial valuation date December 31, 2020
Actuarial measurement date) — March 31, 2021
Experience study period January 1, 2018, through December 31, 2020
Actuarial cost method Entry age normal funding method
Amortization method Level percent of payroll, open basis
Asset valuation method Not applicable since no assets meet the definition of

plan assets under GASB 75

Actuarial assumptions:

Discount rate 2.23%

Projected payroll increases 2.50%

Participation:

Future retirees 40.00%

Future eligible spouses 70.00%
Marital status at retirement 70.00%

") Updated procedures were used to roll forward the total OPEB liability to the measurement date.

Mortality - Healthy: For TRS and MUS-RP, healthy mortality is assumed to follow the RP-2000
Healthy Annuitant Mortality Table for ages 50 and above and the RP-2000 Combined Healthy
Annuitant Mortality Table for ages below 50, set back four years for males, set back two years for
females, with mortality improvements projected by Scale BB to 2018. For all other groups, healthy
mortality is assumed to follow the RP-2000 Combined Mortality Table with improvements
projected by Scale BB to 2020, set back one year for males.

Mortality - Disabled: For TRS and MUS-RP, disabled mortality is assumed to follow the RP-2000
Disabled Mortality Table, set forward one year for males and set forward five years for females,
with mortality improvements projected by Scale BB to 2018. For all other groups, disabled
mortality is assumed to follow the RP-2000 Combined Mortality Table with no projections.

Changes in actuarial assumptions and methods since last measurement date: Changes in
assumptions for 2021 were due to no retiree contribution increase and a decrease in the discount
rate from 2.75% to 2.23%

Changes in benefit terms since last measurement date: Carrier options reduced to one.
A-116

Sensitivity of the TOL to changes in the discount rate

The following presents the TOL of the State and MUS OPEB plans, as well as what they would be if
calculated using a discount rate that is 1-percentage-point lower (1.23 percent) or 1-percentage-point

higher (3.23 percent) than the current discount rate:

State OPEB plan (in thousands)

Current Discount Rate

1.0% Decrease (1.23%) (2.23%) 1.0% Increase (3.23%)
Primary Government $ 180,880 $ 143,281 $ 115,098
Discrete Component Units and
Fiduciary Component Units 5,394 4,234 3,360
Total OPEB liability $ 186,274 $ 147,515 $ 118,458

MUS OPEB plan (in thousands)

Current Discount Rate

1.0% Decrease (1.23%) (2.23%) 1.0% Increase (3.23%)
Primary Government $ 731 $ 561 $ 436
Discrete Component Units 73,839 56,750 44,195
Total OPEB liability $ 74,570 $ 57,311 $ 44,631

Sensitivity of the TOL to changes in the healthcare cost trend rates

The following presents the TOL of the State and MUS OPEB plans, as well as what they would be if
calculated using healthcare cost trend rates that are 1-percentage-point lower (5.0 percent) or 1-
percentage-point higher (7.0 percent) than the current healthcare cost trend rates:

State Plan (in thousands)

Current Healthcare Cost

1.0% Decrease (5.0%) Trend Rate (6.0%) 1.0% Increase (7.0%)
Primary Government $ 113,213 $ 143,281 $ 184,813
Discrete Component Unit and
Fiduciary Component Units 3,293 4,234 5,528
Total OPEB liability $ 116,506 $ 147,515 $ 190,341
MUS Plan (in thousands)
Current Healthcare Cost
1.0% Decrease (5.0%) Trend Rate (6.0%) 1.0% Increase (7.0%)
Primary Government $ 434 $ 561 $ 737
Discrete Component Unit 44,022 56,750 74,588
Total OPEB liability $ 44,456 $ 57,311 $ 75,325
OPEB Expense and Deferred Outflows and Deferred Inflows of Resources Related to OPEB
For the year ended June 30, 2021, the State OPEB plan's OPEB expense is $9.4 million and the MUS

OPEB plan's OPEB expense is $3.1 million.

At June 30, 2021, the State OPEB plan deferred outflows and inflows of resources are from the following

sources:

At June 30, 2021, MUS OPEB plan deferred outflows and inflows of resources are from the following

sources:

Primary Government

Difference between expected and actual experience
Changes of assumptions or other inputs

Amounts associated with transactions subsequent to the
measurement date of the total OPEB liability

Total

Discrete Component Units and Fiduciary Component Units

State Plan (in thousands)

Deferred Outflows of

Deferred Inflows of

Difference between expected and actual experience

Changes of assumptions or other inputs

Amounts associated with transactions subsequent to the
measurement date of the total OPEB liability

Total

Primary Government

Difference between expected and actual experience

Changes of assumptions or other inputs

Amounts associated with transactions subsequent to the
measurement date of the total OPEB liability

Total

Discrete Component Units

Difference between expected and actual experience
Changes of assumptions or other inputs

Amounts associated with transactions subsequent to the
measurement date of the total OPEB liability

Total

Resources Resources

— $ 16,982

108,754 14,370

29 _—

108,783 $ 31,352

395 §$ 165

2,904 384

21 _—

3,320 $ 549

MUS Plan (in thousands)
Deferred Outflows of Deferred Inflows of
Resources Resources
$ — $ 336
521 103
3 _
$ 524 $ 439
$ — $ 29,206
51,079 10,120
197 _—
$ 51,276 $ 39,326

A-117
A-118

Deferred outflows of resources and deferred inflows of resources related to TOL will be recognized as
OPEB expense as follows:

Amount recognized in OPEB expense as an increase or (decrease) to OPEB
expense

State Plan (in thousands)

Discrete Component
Units and Fiduciary
Year ended June 30 Primary Government Component Units State Plan Total
2022 $ 6,149 §$ 224 $ 6,373
2023 6,149 224 6,373
2024 6,149 224 6,373
2025 6,149 224 6,373
2026 6,149 224 6,373
Thereafter 46,657 1,630 48,287

Amount recognized in OPEB expense as an increase or (decrease) to OPEB

expense
MUS Plan (in thousands)
Discrete Component

Year ended June 30 Primary Government Units MUS Plan Total
2022 $ 6 $ 897 $ 903
2023 6 897 903
2024 6 897 903
2025 6 897 903
2026 6 897 903

Thereafter 52 7,268 7,320
F. General Information Trust Plan

General Information

Section 19-3-2141, MCA, establishes a long-term disability plan trust fund (PERS-DCRP Disability) for all
State of Montana employees that participate in the Public Employee Retirement System-Defined
Contribution Retirement Plan (PERS-DCRP). All new PERS members are initially members of the Public
Employee Retirement System-Defined Benefit Retirement Plan (PERS-DBRP) and have a 12-month
window during which they may choose to transfer to the PERS-DCRP or remain in the PERS-DBRP by
filing an irrevocable election. If an election is not filed, the member remains in the PERS-DBRP. Members
may not be members of both the defined contribution and defined benefit retirement plans. Only those
participants that choose the PERS-DCRP are covered by the PERS-DCRP Disability plan.

Plan Description

The PERS-DCRP Disability is a multiple-employer cost-sharing plan that covers employees of the State,
local governments, and certain employees of the university system and school districts, who are not
covered by a separate retirement system governed by Title 19, MCA. The PERS-DCRP Disability plan
provides disability benefits to PERS-DCRP plan members who are vested in the plan and are currently
ineligible for retirement.

A separate trust has been established for purposes of providing disability benefits to PERS-DCRP
Disability plan members, and it is accounted for as a fiduciary fund. The assets are held in a trust
capacity for the beneficiaries. The Public Employee Retirement System issues publicly available annual
reports, which include financial statements and required supplemental information for the plan. Those
reports may be obtained online (http://mpera.mt.gov) or by contacting the following:

Public Employees’ Retirement Board
100 North Park, Suite 200

P.O. Box 200131

Helena, MT 59620-0131

G. Termination Benefits

During the year ended June 30, 2021, the State made the following termination benefit arrangements:
continued coverage of group health insurance benefits for one employee provided for up to six months,
one-time lump-sum incentive payments for 12 employees, and paid administrative leave for 30
employees.

During the year ended June 30, 2021, component units of the State made the following termination
benefit arrangements: continued coverage of health insurance benefits and/or one-time incentive
payments for 7 employees.

During the year ended June 30, 2021, the cost of termination benefits for the fiscal year was $229.5
thousand and $184.7 thousand for the State and its component units, respectively.

A-119
A-120

NOTE 8. RISK MANAGEMENT

There are three primary government public entity risk pools and one claims-servicing pool that are
reported within the enterprise funds. These pools include Hail Insurance, the Montana University System
(MUS) Group Insurance Plan, the MUS Workers Compensation Program, and the Subsequent Injury
claims-servicing pool. The State of Montana (Old Fund) provides risk financing as an entity other than a
public entity risk pool. The liability and payment of the workers' compensation claims for incidents
occurring before July 1, 1990, are reported in the government-wide financial statements within the primary
government. Unpaid claims and claim adjustment expenses are estimated based on the ultimate cost of
settling the claims, including the effects of inflation and other societal/economic factors. Additionally, the
primary government reports its own risk management activity within two internal service funds:
Employees Group Benefits Plans and Administration Insurance Plans. In all of these funds, there are no
significant reductions in insurance coverage from the prior year. These funds use the accrual basis of
accounting. By statute, these funds cannot invest in common stock. Investments are recorded at fair
value. Premiums and discounts are amortized using the straight-line method over the life of the securities.

A. Public Entity Risk Pools

(1) Hail Insurance — Any Montana producer engaged in growing crops subject to destruction or damage
by hail may participate in the Hail Insurance program. The Hail Insurance program issued 318 policies
during the 2021 growing season. This fund accounts for premium assessments paid by producers for crop
acreage insured, investment and interest earnings, administrative costs, and claims paid for hail damage.
Depending upon the reserve fund's actuarial soundness and the damage in a season, producers may
receive a premium refund. Anticipated investment income is considered in computing a premium
deficiency, of which there is none.

A claim must be submitted to the State Board of Hail Insurance within 14 days of a loss occurrence. The
claim must indicate whether the grain is stemming, in the boot, heading out, in the milk, in the stiff dough,
ready to bind, or combine. If beans, peas, or other crops are damaged, the growth-stage must also be
indicated. Inspection of a crop will occur as promptly as possible after claim receipt. The liability on all
insured crops expires after October 1. The insurance only covers loss or damage to growing grain that
exceeds 5.0% destruction by hail.

To reduce its exposure to large losses, the fund purchased Crop Hail Quota Share Reinsurance for the
2021 growing season, with a 70.0% share of premiums and losses allotted to the Reinsurer and a 30.0%
share of each allotted to the State Hail Insurance. The fund recorded a liability of $76.0 thousand, which
is 30.0% of the estimated claims ($247.1 thousand) plus adjustment expenses through June 30, 2021.
The amount deducted from the estimated claims as of June 30, 2021, for reinsurance was $172.9
thousand (70.0% of estimated claims). The premiums ceded to the Reinsurer through June 30, 2021,
were $499.8 thousand, which was 70.0% of total premiums of $714.0 thousand.

Any crop insurance liability is paid to the producers within one year of occurrence; therefore, liabilities are
not discounted. The fund has no excess insurance or annuity contracts.

(2) Montana University System (MUS) Group Insurance Plan — This plan is authorized by the Board of
Regents and in Section 20-25-13, MCA. The Plan's purpose is to provide medical, dental, prescription
drug, and related group benefits coverage to employees of the Montana University System and affiliates,
and their dependents, retirees, and COBRA members. The MUS Group Benefits Plan is fully self-insured,
except for life insurance, long-term care, long-term disability, and accidental death and dismemberment
insurance. Delta Dental administers the dental plan, Blue Cross and Blue Shield of Montana administers
the vision plan, and Navitus is the administrator for the prescription drug program. Blue Cross and Blue
Shield of Montana is the third-party claims administrators for the self-insured managed care plan and also
has a contract for utilization management. The utilization management program consists of hospital pre-
authorization and medical necessity review, as well as large case management. Premiums are collected
from employees through payroll deductions and recorded in the MUS Group Insurance enterprise fund.
The claims liability is calculated by Actuaries Northwest and estimated to be $10.7 million as of June 30,
2021, based on prior year experience. A liability is reported in the accompanying financial statements for
these estimated claims.

(3) Montana University System (MUS) Workers’ Compensation Program — This plan was formed to
provide self-insured workers compensation coverage for MUS employees. The MUS Board of Regents
provides workers’ compensation coverage under Compensation Plan Number One (Section 39-7-2101,
MCA). The program is self-insured for workers’ compensation claims with losses in excess of $750.0
thousand per occurrence ($500.0 thousand for claims occurring prior to July 1, 2013) and $1.0 million per
aircraft occurrence covered by reinsurance with a commercial carrier. Employer’s liability claims are
covered to a maximum of $1.0 million above the self-insured amount of $750.0 thousand ($500.0
thousand for claims occurring prior to July 1, 2013). During fiscal year 2021, the program ceded $344.4
thousand in premiums to reinsurers.

The MUS Workers' Compensation Program Committee establishes premium rates for all participating
campuses based on actuarial calculations of premium need and composite premium rate. Premium rates
are adjusted periodically based on inflation, claims experience, and other factors. Premiums are recorded
as revenue in the MUS Workers’ Compensation Program in the period for which coverage is provided.
Members may be subject to supplemental assessments in the event of deficiencies. The program
considers anticipated investment income in determining if a premium deficiency exists.

The fund recorded a liability of $5.2 million for estimated claims at June 30, 2021. The liability is based on
the estimated ultimate cost of settling the reported and unreported claims, claims reserve development,
including the effects of inflation, and other societal and economic factors. Estimated amounts of
subrogation and reinsurance recoverable on unpaid claims are deducted from the liability for unpaid
claims. Estimated claims liabilities are recomputed periodically based on a current review of claims
information, experience with similar claims, and other factors. Adjustments to estimated claims liabilities
are recorded as an increase or decrease in claims expense in the period the adjustments are made.

(4) Subsequent Injury — The purpose of the Subsequent Injury Fund (SIF) is to assist individuals with a
permanent impairment that may create an obstacle to employment by limiting workers' compensation
exposure for employers who hire SlF-certified individuals. The program is funded through an annual
assessment for Montana self-insured employers and a surcharge on premium for private insured and
Montana State Fund policyholders.

The Employment Relations Division sets the assessment and surcharge rates annually. The amount
assessed is calculated by adding the amount of paid losses reimbursed by SIF from April 1 of the
previous calendar year through March 31 of the current calendar year, plus administration expenses, less
other income earned. Employers share in the reimbursement in two ways: (1) if self-insured, the
reimbursement is based on their share of overall paid losses in the previous calendar year, (2) if insured
through a private carrier or Montana State Fund, the reimbursement is based on both overall paid losses
in the previous calendar year, and the amount of the employer's premium paid for their business.

The SIF program reduces the liability of the employer (if self-insured) or insurer by placing a limit of 104
weeks on the amount an employer (if self-insured), or the employer’s insurer, will have to pay for medical
and wage loss benefits in the event a worker who is SIF-certified becomes injured or re-injured on the job.
SIF will assume liability for the claim when the 104 weeks is reached. For an insured employer, since the
insurer's liability is limited to 104 weeks on the claim, this can favorably impact the employer’s
modification factor, which in turn could keep premiums lower than would otherwise be the case without
SIF. For a self-insured employer, it provides a direct recovery of expenses paid for a workers’
compensation claim. If a certified worker does become injured on the job, the worker remains entitled to
all benefits due under the Workers’ Compensation Act.

An estimated liability is recorded based on a projected cost analysis and total population of registered SIF
participants. As of June 30, 2021, this liability amount was estimated to be $1.7 million.

A-121
A-122

(5) Changes in Claims Liabilities for the Past Two Years — As indicated above, these funds establish
liabilities for both reported and unreported insured events, including estimates of future payments of
losses and related claim adjustment expenses. The following tables present changes (in thousands) in
those aggregate liabilities during the past two years. All information in these tables is presented at face
value and has not been discounted.

MUS Group MUS Workers
Hail Insurance Insurance Plan Compensation
2021 2020 2021 2020 2021 2020
Unpaid claims and claim adjustment
expenses at beginning of year $ 11 $ 17 $ 10,300 $ 10,000 $ 4,837 $ 6,789
Incurred claims and claim
adjustment expenses:
provision for insured events
of the current year 520 793 97,018 92,564 2,363 1,992
Increase (decrease) in provision for
insured events of prior years 12 (5) _— _— (550) (2,485)
Total incurred claims and claim
adjustment expenses 532 788 97,018 92,564 1,813 (493)
Payments:
Claims and claim adjustment
expenses attributable to insured
events of the current year (444) (782) (96,655) (92,264) (376) (539)
Claims and claim adjustment
expenses attributable to
insured events of prior years (23) (12) _— _— (1,040) (920)
Total payments (467) (794) (96,655) (92,264) (1,416) (1,459)
Total unpaid claims and claim
adjustment expenses at end of year $ 76 $ 1 $ 10,663 $ 10,300 $ 5,234 $ 4,837

B. Entities Other Than Pools

(1) Administration Insurance Plans — This self-insurance plan provides coverage for general liability,
automobile liability, automobile physical damage, foster care liability, and State-administered foreclosure
of housing units. The State self-insures the $2.0 million deductible per occurrence for most property
insurance, as well as various deductible amounts for other State property. The State also self-insures
against property losses below $2.0 million of value, with State agencies paying the first $1.0 thousand.
Commercial property insurance protects approximately $6.0 billion of State-owned buildings and contents.
The State’s property insurance includes separate earthquake and flood protection coverage, with
deductibles of $2.0 million for earthquake and $2.0 million for flood per occurrence. Premiums are
collected from all state agencies, including component units, and recorded as revenue in the
Administration Insurance Fund.

An annual actuarial study prepared by Willis Towers Watson Company, and issued for the accident period
July 1, 2011, through June 30, 2021, is the basis for estimating the liability for unpaid claims and is
supported by historical loss data. As of June 30, 2021, the estimated claims liability was $49.6 million. Of
the $49.6 million estimated claims liability, $32.4 million is related to a catastrophic property loss for which
the insurance proceeds were received prior to the incurred expenses.

(2) Employee Group Benefits Plans — The medical and dental health plans provided by the State are
fully self-insured with the State assuming the risk for claims incurred by employees of the State, elected
Officials, retirees, former employees covered by COBRA benefits, and their dependents. The State
contracted with Allegiance as the third-party administrator for medical coverage. Delta Dental is the
administrator for dental coverage. Navitus is the administrator for the pharmacy program. Contributions
are collected through payroll deductions, deductions through the Public Employees Retirement
Administration, the Legislative Branch, and self-payments. The contributions are recorded as revenue in
the Employee Group Benefits internal service fund. As of June 30, 2021, estimates for claims liabilities,
which include both incurred but not reported claims and grandfathered claims resulting from a 1998
change in period for which the benefit coverage is available, as well as other actuarially determined
liabilities, were $19.7 million as provided by Actuaries Northwest, a consulting actuarial firm. In fiscal year
2022, $19.5 million of these claims liabilities are estimated to be paid.

(3) State of Montana (Old Fund) — State of Montana (Old Fund) covers workers’ compensation claims
that were incurred before July 1, 1990. Old Fund was originally a risk financing insurance entity, but upon
depletion of all of its assets, is now financed by the General Fund. The participants within the pool are
individuals outside of governmental entities.

An actuarial study prepared by Willis Towers Watson, as of June 30, 2021, estimated the cost of settling
claims that have been reported but not settled and claims that have been incurred but not reported. At
June 30, 2021, $43.7 million of unpaid claims and claim adjustment expenses were reported at face
value.

(4) Changes in Claims Liabilities for the Past Two Years — These funds establish liabilities for both
reported and incurred but not reported claims. Grandfathered claims are not included as they relate to
future claims not yet incurred. The following table presents changes in the balances of claims liabilities
during the past two fiscal years (in thousands).
Administration

Employers Group State of Montana

Insurance Plans Benefits Plan Old Fund
2021 2020 2021 2020 2021 2020
Amount of claims liabilities at the
beginning of each fiscal year $ 17,431 $ 16157 $ 18982 $ 18,896 $ 48,280 $ 44266
Incurred claims:
Provision for insured events
of the current year 5,555 7,091 181,363 170,812 _— _—
Increase (decrease) in provision for
insured events of prior years 6,867 1,120 (3,267) (4,377) 1,769 12,616
Total incurred claims 12,422 8,211 178,096 166,435 1,769 12,616
Payments:
Claims attributable to insured
events of the current year (1,574) (3,063) (161,870) (151,950) _— _—
Claims attributable to
insured events of prior years (11,133) (3,874) (15,543) (14,399) (6,345) (8,602)
Total payments (12,707) (6,937) (177,413) (166,349) (6,345) (8,602)
Total claims liability at end of
each fiscal year $ 17,146 $ 17,431 $ 19665 $ 18,982 $ 43,704 $ 48,280

($32.4 million of additional claims for the Administration Insurance Plans not included in the table above, are related to a catastrophic

property loss for which the insurance proceeds were received prior to the incurred expenses.

A-123
A-124

A. Highway Construction

At June 30, 2021, the Department of Transportation had contractual commitments of approximately
$463.2 million for construction of various highway projects. Funding for these highway projects is to be
provided by federal grants and matched with state special revenue funds.

B. Capital Assets and/or Other Construction

At June 30, 2021, the Department of Administration, Architecture & Engineering Division, had
commitments of approximately $31.7 million for capital projects construction. The primary government will
fund $17.4 million of these projects, with the remaining $14.3 million funded by the Montana University
System.

At June 30, 2021, the Department of Fish, Wildlife, and Parks had contractual commitments of
approximately $2.1 million for engineering and construction of various capital projects and $5.9 million to
build a new licensing software called Explore Montana. The majority of funding for these commitments will
be provided by federal grants and state special revenue funds.

At June 30, 2021, the Department of Labor and Industry had $1.9 million contractual commitments for
Montana State AmeriCorps Programs and a $4.4 million commitment for information technology
contracts. The funding for these programs is to be provided by federal grants and state special revenue
funds.

At June 30, 2021, the Office of the Secretary of State had a contractual commitment of approximately
$1.5 million for developing and implementing the ElectMT system to replace the existing statewide Voter
Registration and Election Management system (MT Votes). The majority of the funding for this project is
to be provided by a federal grant from the U.S. Election Assistance Commission.

At June 30, 2021, the Department of Transportation, had a $2.0 million contractual commitment for three,
55 passenger coach buses. The funding for this purchase is to be provided by the Coronavirus Aid, Relief,
and Economic Security (CARES) Act funding through the Federal Transit Administration. The Department
also had contractual commitments of approximately $8.7 million for development and implementation of
various IT projects. Funding for these projects is to be provided by federal grants, matched with state
special revenue funds and unrestricted state revenue funds. Included within the department’s
commitments are $4.4 million dedicated to the purchase and upgrade of PeopleSoft modules.

C. Loan and Mortgage Commitments

The Montana Board of Investments (BOI) makes firm commitments to fund commercial loans, residential
mortgages, and Veterans' Home Loan Mortgages (VHLM) from the Coal Severance Tax Permanent Trust
Fund. These commitments have expiration dates and may be extended according to BOI policies. As of
June 30, 2021, BOI had committed, but not yet purchased, $18.1 million in loans from Montana lenders.
Additionally, lenders had reserved $18.7 million for loans as of June 30, 2021. As of June 30, 2021,
another $2.0 million represented lender reservations for the VHLM residential mortgage purchases with
no purchase commitments.

The BOI makes reservations to fund mortgages from the State’s pension funds. As of June 30, 2021,
there were no mortgage reservations. All BOI residential mortgage purchases are processed by the
Montana Board of Housing (MBOH). The MBOH does not differentiate between a mortgage reservation
and a funding commitment.

The BOI makes firm commitments to fund loans from the INTERCAP loan program. The BOl’s
outstanding commitments to eligible Montana governments, as of June 30, 2021, totaled $23.8 million.
D. Bond Commitments

At June 30, 2021, the outstanding tax-exempt bonds distributed by the Facility Finance Authority were
issued in the amount of $8.5 million of which $1.4 million in principal payments are scheduled to be paid
by June 30, 2022. These bonds have been issued to facilities operating treatment and prerelease centers.
The Department of Corrections agrees to provide payment on behalf of the contractors for the total
principle and interest due regarding these outstanding bonds. These costs are then recovered through the
center’s monthly billing for inmate room and board.

E. Proprietary Fund Commitments

Budgets are administratively established in the enterprise and internal service funds, excluding
depreciation, compensated absences, and bad debt expense. Appropriations may be committed for
goods/services that are not received as of fiscal year-end. These executory commitments are included in
unrestricted net position in the accompanying financial statements as follows (in thousands):

Enterprise Funds Amount

Liquor Warehouse $ 155
State Lottery Fund 14
Other Enterprise Funds 12
Subtotal - Enterprise funds $ 181

Internal Service Funds

Prison Industry $ 189
Labor Central Services 1,537
Subtotal - Internal Service funds $ 1,726

F. Encumbrances

As of June 30, 2021, the State of Montana encumbered expenditures as presented in the table below (in
thousands):

Nonmajor
Federal Special Governmental State Special
Revenue Fund General Fund Funds Revenue Fund Total

Encumbrances $ 43,953 $ 20,387 $ 78 $ 90,023 $ 154,441

A-125
A-126

NOTE 10. LEASES/INSTALLMENT PURCHASES PAYABLE

The State has entered into various capital and operating leases for land, buildings, equipment, and
computer software. Lease contracts are required by law to contain a clause indicating if the continuation
of the lease is subject to funding by the Legislature. It is expected, in the normal course of operations, that
most of these leases will be replaced by similar leases.

A. Capital Leases/Installment Purchases

Obligations under capital leases/installment purchases at June 30, 2021, were as follows (in thousands):

Governmental Business-Type
Fiscal Year Ending June 30: Activities Activities

2022 $ 4,773 $ 16
2023 3,242 6
2024 2,294

2025 1,703 —
2026 1,441 —
2027 - 2031 4,112 —
Total minimum payments 17,565 23
Less: interest (1,522) (2)

Present value of minimum payments $ 16,043 $ 21

Assets acquired under capital leases for the primary government by asset class were as follows (in

thousands):
Asset Class
Buildings $ 1,596
Equipment 34,654
Less: Accum Depreciation (13,258)
Net Book Value $ 22,992

B. Operating Leases

Primary government rental payments for operating leases in fiscal year 2021 totaled $28.9 million. Future
rental payments under operating leases are as follows (in thousands):

Governmental Business-Type
Fiscal Year Ending June 30: Activities Activities
2022 $ 27,584 $ 665
2023 23,980 617
2024 20,831 616
2025 17,833 586
2026 15,205 581
2027 - 2031 49,127 1,104
2032 - 2036 26,281 747
Thereafter 8,682 487

Total future rental payments $ 189,523 $ 5,403
NOTE 11. STATE SHORT-TERM DEBT AND LONG-TERM LIABILITIES

A. General Information

The State has no constitutional limit on its power to issue obligations or incur debt, other than a provision
that no debt may be created to cover deficits incurred because appropriations exceeded anticipated
revenues. No State debt shall be created unless authorized by a two-thirds vote of the members of each
house of the Legislature or a majority of the electors voting thereon. The Board of Examiners (consisting
of the Governor, Secretary of State, and Attorney General) is authorized, pursuant to various enabling
acts, to issue bonds and notes of the State.

B. Short-term Debt

The Board of Examiners, upon recommendation of the Department of Administration, may issue notes in
anticipation of the receipt of taxes and revenues. Notes may not be issued to refund outstanding notes.

The State issues bond anticipation notes to finance the State Revolving Fund Programs that improve and
rehabilitate wastewater and drinking water systems. The following schedule summarizes the activity for
the year ended June 30, 2021 (in thousands):

Bond Anticipation Notes Beginning Balance Additions Reductions Balance

Drinking Water - 2019A 600 _— 600 _—
Drinking Water - 2019D 1,300 2,100 3,251 149
Water/Wastewater — 2020D 1,100 2,900 4,000 _—
Drinking Water - 2020N — 1,663 — 1,663

The State's Board of Investments (BOI) is authorized to issue Intermediate-Term Capital (INTERCAP)
bonds under the Municipal Finance Consolidation Act. These bonds may not aggregate more than $190.0
million, as amended by the 2007 Legislature. The purpose of the bonds is to provide funds for BOI to
make loans to eligible government units. The bonds are not a debt or liability of the State. The bonds are
limited obligations of BOI, payable solely from:

1. Repayments of principal and interest on loans made by BOI to participating eligible governmental
units.

2. Investment income under the indenture.

3. An irrevocable pledge by BOI.

BOI has no taxing power. At the bondholder's option, the bonds may be redeemed any March 1, before
maturity. BOI did not enter into an arms-length financing agreement to convert the bonds "put" or tender
and did not resell the bonds into some other form of long-term obligation. Accordingly, these bonds,
considered demand bonds, are included in short-term debt.

The Board annually remarkets the bonds and annually adjusts the interest in accordance with the Bonds’
Indenture of Trust. Interest is paid semi-annually on September 1 and on March 1. Interest is computed
based on a year of 360 days. The interest rate paid to bondholders on September 1, 2020 and March 1,
2021 was 1.00%. The interest rate effective for March 1, 2021 — February 28, 2022 is 0.15%.

In accordance with the Indenture, BOI can issue additional bonds at any time that would bear the interest
rate determined at the time of issuance until the next remarketing date. No new bonds were issued in the
fiscal year ending June 30.

The INTERCAP program does not have principal payments except in the instance of an optional
redemption by BOI. There was a change in outflow in 2021 that occurred primarily due to the optional
redemption of outstanding bonds by the Board in the amount of $70.0 thousand. The bonds are

A-127
A-128

remarketed each February and are treated as a new issuance. Interest expense attributable to the current
year was $649.8 thousand.

The amounts issued and outstanding for the year ended June 30, 2021, were as follows (in thousands):

Amount Balance

Series Issued June 30, 2021
2003 $ 15,000 $ 14,305
2004 18,500 17,935
2007 15,000 14,615
2010 12,000 11,860
2013 12,000 11,960
2017 20,000 19,925

$ 90,600

The following schedule summarizes the activity relating to the demand bonds during the year ended June
30, 2021 (in thousands):

Beginning os . Ending
Balance Additions Reductions Balance

Demand bonds $ 90,670 $ — $ 70 $ 90,600

C. Long-term Debt

The full faith, credit, and taxing powers of the State are pledged for the payment of all general obligation
debt. Revenue and mortgage bonds are secured by a pledge from the facilities to which they relate and
by certain other revenues, fees, and assets of the State and the various colleges and universities. Primary
government bonds and notes outstanding at June 30, 2021, were as follows (in thousands):

Principal Payments

Amount Interest Fiscal Year _In Year of Balance

Governmental Activities Series Issued Range (%) 2022 Maturity? June 30, 2021
General obligation bonds

Hard Rock Mining Reclamation 2002C 2,500 3.5-4.7 190 200 (2023) 390
CERCLA Program ”) 2005D ~—-2,000 3.25-4.3 120 140 (2026) 650
Energy Conservation Program 2006B 3,750 4.0-6.0 330 330 (2022) 330
Long-Range Bldg Program 2008D 3,100 3.375-4.35 165 220 (2028) 1,335
Long-Range Bldg Program Refunding 2011D 5,755 3.0-3.25 695 720 (2023) 1,415
Long-Range Bldg Program Refunding 2013C 6,780 2.0-4.0 705 115 (2025) 2,325
Long-Range Bldg Program Refunding 2014 28,810 1.5-5.0 2,195 820 (2028) 15,470
Long-Range Bldg Program 2020C 28,900 2.0-5.0 2,470 3,465 (2030) 26,295
St. Mary Water Project (Taxable) 2020E 2,658 1.62 276 315 (2030) 2,658
2019 Session House Bill 652 2020G = 32,505 5.0 2,570 4,030 (2031) 32,505
Long-Range Bldg Program 2020H 5,900 1.75-5.0 210 390 (2041) 5,900
Trust Lands Refunding (Taxable) 20201 = 12,510 0.225-1.316 1,245 1,265 (2031) 12,510
Water Pollution Control Revolving Fund Program ®) 2020J 24,865 0.225-2.456 1,620 305 (2041) 24,865
St. Mary Water Project (Taxable) 2020K 985 1.5 105 115 (2030) 985

Total general obligation bonds $161,018 $ 12,896 $ 127,633
Principal Payments

Amount Interest Fiscal Year _In Year of Balance
Governmental Activities Series Issued Range (%) "” 2022 Maturity” June 30, 2021
Special revenue bonds
U.S. Highway 93 GARVEE Refunding” 2016 22,540 0.74-1.86 3,555 3,740 (2023) 7,295
State Hospital Project ©) 2018 = 4,575 4.0-5.05 1,165 1,165 (2022) 1,165
Coal Severance Tax Refunding (Taxable) ‘” 2020L 11,965 1.62 1,570 55 (2031) 11,170
Coal Severance Tax ( Taxable) ‘” 2020M _—2,680 1.94 230 —- 130 (2031) 2,300
Total special revenue bonds $ 41,760 $ 6,520 $ 21,930
Notes Payable
Middle Creek Dam Project ®) 3,272 8.125 100 226 (2034) 1,759
Tongue River Dam Project © 11,300 — 290 290 (2038) 4,926
ITSD IBM Professional Services 758 0.19 170 72 (2023) 243
Total notes payable $ 15,330 $ 560 $ 6,928
Subtotal governmental activities,
before unamortized balances 218,108 19,976 156,491
Unamortized premium 14,846
Total governmental activities $218,108 $ 19,976 $ 171,337

8S

The interest range is over the life of the obligation.

Year of maturity refers to fiscal year.

The CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) Program Bonds were issued for the purpose of financing the
costs of State of Montana participation in the remedial actions under Section 104 of the CERCLA 42 United States Code Sections 9601-9657, and State of
Montana costs for maintenance of sites under CERCLA. The CERCLA Bonds are secured additionally by a pledge of monies received by the State as cost
recovery payments and revenues derived from the resource indemnity and groundwater assessment tax in the event cost recovery payments are
insufficient.

Bonds issued for financing the design, construction, and installation of energy conservation projects at various state buildings.

Bonds were issued to refund the State's General Obligation Bonds (Water Pollution Control State Revolving Fund Program), Series 2015C, maturing on
and after July 15, 2021; provide matching funds to enable the State to obtain capitalization grants from the U.S. Environmental Protection Agency for water
pollution control facilities or other authorized improvements, to state political subdivisions; and pay costs of issuance of the Series 2020J Bonds and of the
refunding.

Facility Finance Authority loan to the Department of Public Health and Human Services for the Montana State Hospital Project.

The U.S. Highway 93 GARVEES (Grant Anticipation Revenue Vehicles) Bonds were issued for the purpose of improving a 44.8-mile stretch of U.S.
Highway 93. Repayment of the bonds is secured by a pledge of certain federal aid revenues.

U.S. Bureau of Reclamation loan to the Department of Natural Resources & Conservation.

Northern Cheyenne Tribe loan to the Department of Natural Resources & Conservation. The loan will not accrue interest and will be repaid over 39 years.
Loan repayment is secured by the issuance of a coal severance tax bond to the tribe.

Bonds were private sales.

Debt Service Requirements

Primary government debt service requirements at June 30, 2021, were as follows (in thousands):

Governmental Activities

General Obligation Bonds Special Revenue Bonds Notes Payable

Year Ended June 30: Principal Interest Principal Interest Principal Interest
2022 $ 12,896 $ 4,161 $ 6,520 $ 618 §$ 560 $ 45
2023 12,911 3,693 5,565 375 466 41
2024 12,396 3,277 1,850 158 398 41
2025 12,115 2,867 1,885 127 403 41
2026 12,410 2,453 1,635 96 408 41
2027 - 2031 52,240 5,993 4,475 156 2,125 204
2032 - 2036 9,335 921 — — 1,988 122
2037 - 2041 3,330 188 — — 580 —

Total $127,633 $ 23,553 $ 21,930 $ 1,530 $ 6,928 $ 535

A-129
A-130

E. Summary of Changes in Long-term Liabilities

Primary government long-term liability activities for the year ended June 30, 2021, were as follows (in

thousands):
Amounts
Amounts Dueln More
Beginning Ending DueWithin Than One
Balance Additions Reductions Balance One Year Year
Governmental activities
Bonds/notes payable
General obligation bonds $ 90,250 $ 79,423 $ 42,040 $ 127633 $ 12,896 $ 114,737
Special revenue bonds 19,330 14,645 12,045 21,930 6,520 15,410
Notes payable 7,478 — 550 6,928 560 6,368
117,058 94,068 54,635 156,491 19,976 136,515
Unamortized premium 10,348 4,498 — 14,846 _— 14,846
Total bonds/notes payable ”) 127,406 98,566 54,635 171,337 19,976 151,361
Other liabilities
Lease/installment purchase payable 20,617 1,381 5,955 16,043 4,344 11,699
Compensated absences payable ) 109,293 53,778 47,716 115,355 47,641 67,714
Estimated insurance claims "® 121,098 190,517 198,674 112,941 39,989 72,952
Pollution remediation 173,492 806 6,783 167,515 21,303 146,212
Net pension liability 2,243,084 700,884 183 2,943,785 — 2,943,785
Total OPEB liability 45,593 95,801 — 141,394 — 141,394
Total other liabilities 2,713,177 1,043,167 259,311 3,497,033 113,277 3,383,756
Total governmental activities long-term
liabilities $ 2,840,583 $1,141,733 $ 313,946 $ 3,668,370 $ 133,253 $ 3,535,117
Business-type activities
Lease/installment purchase payable $ 26 $ 5 $ 10 $ 21 $ 14 $ 7
Compensated absences payable 2,217 879 197 2,299 795 1,504
Arbitrage rebate tax payable 22 _ 22 — — —
Estimated insurance claims 17,523 99,363 99,202 17,684 13,804 3,880
Net pension liability 11,510 3,848 68 15,290 — 15,290
Total OPEB liability 817 1,641 8 2,450 — 2,450
Total business-type activities long-term
liabilities $ 32,115 $ 105,736 $ 100,107 $ 37,744 $ 14613 $ 23,131

The compensated absences liability attributable to the governmental activities will be liquidated by several of the governmental and internal service funds.
The Employee Group Benefits and Administration Insurance internal service funds will liquidate the estimated insurance claims liability.

$32.4 million Administration Insurance Plans included in the table above, are related to a catastrophic property loss for which the insurance proceeds were
received prior to the incurred expenses.

Deferred outflows, including those related to bonds payable, are reported separately on the Statement of Net Position based on GASB Statement No. 65.
F. Refunded and Early Retired Debt

Prepayments
The Department of Natural Resources and Conservation (DNRC) used current available resources to

make a prepayment of special revenue bond series 2020M in the amount of $270.0 thousand, resulting in
the reduction of the outstanding balance.

Refundings
On September 29, 2020, the State issued general obligation refunding bonds series 20201 in the amount

of $12.5 million to prepay series 2010F bonds in the amount of $12.3 million resulting in a payoff. The
balance of the proceeds was used to pay the cost of issuance of 2020!. The refunding resulted in an
economic gain of $2.2 million and s difference in cash flows of $2.2 million.

On October 20, 2020, the State issued general obligation bonds series 2020J in the amount of $24.9
million. New bond issuances consisted of $5.0 million, while $19.8 million was to prepay series 2015C
resulting in a payoff. The refunding resulted in an economic gain of $1.5 million and a difference in cash
flows of $4.8 million.

On December 23, 2020, the State issued special revenue refunding bonds series 2020L in the amount of
$12.0 million, using $4.3 million of the proceeds to refund series 2010C and 2013B, resulting in payoffs.
This refunding resulted in an economic gain of $548.0 thousand and a difference in cash flows of $747.6
thousand.

G. No-Commitment Debt

Information is presented below for financing authorities participating in debt issues. The related debt
issued does not constitute a debt, liability, obligation, or pledge of faith and credit of the State.
Accordingly, these bonds and notes are not reflected on the accompanying financial statements.

Montana Board of Investments (BOI)

BOI is authorized to issue Qualified Zone Academy Bonds (QZAB) under the Municipal Finance
Consolidation Act as conduit (no-commitment) debt. The revenues, and in some cases, the taxing power
of the borrower, are pledged to repay the bonds. At June 30, 2021, QZAB debt outstanding aggregated
$5.0 million.

BOI is also authorized to issue Qualified School Construction Bonds (QSCB) under the Municipal Finance
Consolidation Act as conduit (no-commitment) debt. The revenues of the borrower are pledged to repay
the bonds. At June 30, 2021, QSCB debt outstanding aggregated $3.2 million.

H. Estimated Pollution Remediation Obligation

Estimated pollution remediation obligations are obligations to address the current or potential detrimental
effects of existing pollution by participating in pollution remediation activities such as site assessments
and cleanups. The estimates are derived using the expected cash flows method as well as technical
estimates from record of decisions, consent decrees, and/or settlement agreements. There may be
factors influencing the estimates that are not known at this time. Prospective recoveries from other
responsible parties may reduce the State’s obligation.

The State’s estimated pollution remediation liability as of June 30, 2021, was $167.5 million. Of this
liability, $3.7 million resulted in settlement agreements to provide restoration of natural resources, water
supplies, and natural resource-based recreational opportunities up to the settlement amount; $163.8
million is based on decrees or settlements for remediation activities. Other estimated liabilities have been
recorded for soil and Polychlorinated Biphenyls (PCB) contamination, as well as removal of asbestos
contamination. The estimated pollution remediation liability was recorded in compliance with accounting
and reporting standards and does not constitute the State’s total acceptance of the liability or
responsibility on these matters.

A-131
A-132

I. Non-Exchange Financial Guarantee

BOI provides loan guarantees from the Coal Severance Tax Fund to the Facility Finance Authority (FFA).
BOI exposure to bond issues, surety bonds, and designated loans of the FFA totaled $100.2 million as of
June 30, 2021. FFA is a discretely presented component unit of the State of Montana. FFA guarantee
requests are submitted to BOI for review and approval. BOI’s participation, either duration or any other
consideration, to either purchase bonds or loans or to lend money for deposit into FFA’s statutorily
allowed capital reserve account is explicitly limited by statute, which requires BOI to act prudently. The
guarantee requests from FFA pertain to bonds issued by FFA with a term of up to 40 years. BOI receives
a credit enhancement fee at FFA bond closing based on the term of the financing, the type of bond, the
rating of the borrower, and the type of reserve fund. BOI and FFA have entered into an agreement
detailing repayment to BOI. The credit enhancement fee received during the fiscal year was $385.0
thousand. BOI has not had to perform on any loan guarantee in the past.

The following schedule summarizes the activity related to the non-exchange financial guarantee during
the year ended June 30, 2021 (in thousands):
Beginning Ending
Balance Additions Reductions —_ Balance
$ 88,346 $ 33,465 $ 21,563 $ 100,248
A-133

NOTE 12. INTERFUND BALANCES AND TRANSFERS

A. Balances Due From/To Other Funds

Balances due from/to other funds arise when there is a timing difference between the dates that
reimbursable expenditures and interfund services provided/used are recorded in the accounting system
and the dates on which payments are made. Balances also arise when there is a timing difference
between the dates transfers between funds are recorded and the dates on which payments are made.
Balances due from/to other funds also include the current portion of balances related to amounts loaned
by the Municipal Finance Programs to other funds, under the Board of Investments' INTERCAP loan
program. Balances due from/to other funds are expected to be repaid within one year from origination.

Balances due from/to other funds at June 30, 2021, consisted of the following (in thousands):

Due to Other Funds
Coal Federal Intemal — Nonmajor + Nonmajor State
Severance Special General Service Enterprise Governmental Special

Tax Revenue Fund Funds — Funds” Funds Revenue _Total
Due from Other Funds
Federal Special Revenue $ — $ — $ 2,040 $ — $ — $ — $ 249 $ 2,289
General Fund — 8,844 — — 14,386 — 11,355 34,585
Internal Service Funds 40 1 _— _— _— _— 2 43
Municipal Finance Programs _— _— _— 2,076 _— 1,654 _— 3,730
Nonmajor Enterprise Funds _— _— _— _— _— _— 38 38
Nonmajor Governmental Funds _— 4,155 29 _— _— _— 751 4,935
State Special Revenue “” 4,340 627 464 — 280 754 — 6,465

Total $ 4,380 $ 13,627 $ 2,533 $ 2,076 $ 14,666 $ 2,408 $ 12,395 $ 52,085

Total due from other funds to the state special revenue fund on the fund financial statement is reported as $16.2 million. The difference of $9.8 million
between the amount reported above and the amount reported in the fund financial statement relates to long-term receivables. The receivables are
reported on the fund financial statement, and the long-term liabilities are reported on the government-wide statement.

Total due to other funds from the nonmajor enterprise funds on the fund financial statement is reported as $14.9 million. The difference of $221.0
thousand between the amount reported above and the amount reported on the fund financial statement relates to loans payable. The receivables are
reported on the government-wide statement, and the liabilities are reported on the fund financial statement.

B. Interfund Loans Receivable/Payable

Montana statutes include a provision for interfund loans when the expenditure of an appropriation is
necessary, and the cash balance in the account from which the appropriation was made is insufficient to
pay the expenditure. Interfund loans receivable/payable are expected to be repaid within one year from
the date of origination.
A-134

Interfund loans receivable/payable at June 30, 2021, consisted of the following (in thousands):

Interfund Loans Payable

Coal Federal —_Internal Nonmajor Nonmajor State
Severance Special Service © Governmental Enterprise Special Land

Tax Revenue Funds Funds Funds Revenue Grant Total
Interfund Loans
Receivable
General Fund $ 1,593 $ 87,928 $ 662 $ 335 $ 2,700 $ 4,921 $ — $ 98,139
Nonmajor Enterprise
Funds — 140 — — — 75 — 215
State Special Revenue _— 78,309 26 _— _— _— 2 78,337

Total $ 1,593 $ 166,377 $ 688 $ 335 $ 2,700 $ 5,001 $ 2 $ 176,696

C. Advances To/From Other Funds

Advances to/from other funds represent the portion of interfund loans that are not expected to be repaid
within one year from the date of origination. Advances to/from other funds also include the noncurrent
portion of balances related to amounts loaned by the Municipal Finance Programs to other funds, under
the Board of Investments’ INTERCAP loan program. For more information on the INTERCAP loan
program, refer to Note 11.

Advances to/from other funds at June 30, 2021, consisted of the following (in thousands):

Advances from Other Funds

Federal Internal Nonmajor State

Special Service Governmental Special

Revenue Funds Funds Revenue Total
Advances to Other Funds
General Fund $ 355 § — $ — $ — $ 355
Municipal Finance Programs _— 7,027 162 _— 7,189
Nonmajor Governmental Funds _— _— _— 5,328 5,328
State Special Revenue 36,524 _— 1,599 _— 38,123

Total $ 36,879 $ 7,027 $ 1,761 $ 5,328 $ 50,995

Additional detail for certain advance balances at June 30, 2021, follows (in thousands):

Advances from the Municipal Finance Programs
under the INTERCAP Loan Program

Departmental Function Balance
Natural Resources and Conservation $ 1,465
Public Safety 309
Transportation 5,415
Total $ 7,189

D. Interfund Transfers

Routine transfers between funds are recorded to (1) transfer revenues from the fund legally required to
receive the revenue to the fund authorized to expend the revenue, (2) transfer resources from the
General Fund and special revenue funds to debt service funds to support principal and interest payments,
(3) transfer resources from enterprise funds to the General Fund to finance general government
expenditures, and (4) provide operating subsidies.

Interfund transfers for the year ended June 30, 2021, consisted of the following (in thousands):

Transfers Out

Coal Federal Internal Nonmajor — Nonmajor State
Severance Special General Service Land Enterprise Governmental Special
Tax Revenue Fund" Funds” Grant Funds”) Funds Revenue _Total
Transfers In
Coal Severance Tax $ — $ — $ — $ —$ —$ — $ 167 $ —$ 167
General Fund " 15,967 147 — — 6 54,087 — 14,879 85,086
Land Grant _— _— _— _— _— _— _— 94 94
Nonmajor Enterprise Funds _— _— _— _— _— _— _— 26 26
Nonmajor Governmental Funds 471 16,290 246,538 160 1,570 — 735 54,195 319,959
State Special Revenue 16,772 9,164 83,240 86 65,264 10,633 27,042 — 212,201
Total $ 33,210 $ 229,172 $330,993 $ 246 $66,840 $ 64,720 $ 27,944 $ 72,058 $825,183

$1.1 million was transferred from the General Fund to the Budget Stabilization Reserve Fund; however, those funds are combined for reporting
purposes. Therefore the transfer is not accounted for in the above table as both the transfer-in and the respective transfer-out have been eliminated
as required for proper financial reporting.

Total transfers-out for internal service funds on the fund financial statements is reported as $5.1 million. The difference of $4.8 million between the
amount reported above of $246.5 thousand and the amount reported on the fund financial statements relates to the transfer of capital assets
between a governmental fund type and the internal service fund type. When capital assets are transferred between these fund types, the transferring
fund reports the net book value of the capital asset as a transfer-out, and the receiving fund reports the net book value of the capital asset as a
capital contribution.

Total transfers-out for nonmajor enterprise funds on the fund financial statements is reported as $64.8 million. The difference of $67.8 thousand
between the amount reported above of $64.7 million and the amount reported on the fund financial statements relates to the transfer of capital assets
between a governmental fund type and the nonmajor enterprise fund type. When capital assets are transferred between these fund types, the
transferring fund reports the net book value of the capital asset as a transfer-out, and the receiving fund reports the net book value of the capital
asset as a capital contribution.
A-136

NOTE 13. FUND EQUITY DEFICITS

The following funds have a deficit net position remaining at June 30, 2021, as follows (in thousands):

Fund Type/Fund Deficit
Governmental Funds

Federal Special Revenue ” $ (11,321)
Federal/Private Construction Grants °) (1,012)

Internal Service Funds

Information Tech Services $ (15,267)
Building and Grounds (1,010)
Admin Central Services (1,841)
Labor Central Services (6,763)
Commerce Central Services (1,559)
OPI Central Services (2,257)
DEQ Indirect Cost Pool (3,730)
Payroll Processing (1,509)
Investment Division (2,080)
Aircraft Operation (552)
Justice Legal Services (977)
Personnel Training (173)
Other Internal Services (244)
SABHRS Finance & Budget Bureau (535)
Enterprise Fund “)

State Lottery $ (2,219)
Subsequent Injury (791)

{) The allocation of net pension liability and total OPEB liability

is a significant factor in creating these deficits. For more detail
related to these liabilities, see Notes 6 and 7, respectively.
Delayed fire season federally reimbursable costs, which are
currently reported as unavailable revenues within deferred
inflow of resources, is a significant factor creating this deficit.
A nonmajor capital projects fund.

(2)

(3)
NOTE 14. MAJOR PURPOSE PRESENTATION

Special Revenue and Fund Balances Classifications by Purpose — In the governmental fund financial
statements, classifications of special revenue fund revenues and fund balances are presented in the
aggregate. The tables presented below further display the special revenue fund revenues and fund

balances by major purpose for the year ending June 30, 2021.

Licenses/permits

Taxes

Charges for services
Investment earnings
Securities lending income

Sale of documents/
merchandise/property

Rentals/leases/royalties
Contributions/premiums
Grants/contracts/donations
Federal

Federal indirect cost
recoveries

Other revenues

Transfers in

Total State Special
Revenue

Charges for services
Investment earnings
Grants/contracts/donations
Federal

Federal indirect cost
recoveries

Other revenues
Transfers in

Total Federal Special
Revenue

State Special Revenue By Source (in thousands)

Health and
General Public Human Natural

Government Safety Transportation Services Education Resources Total
$ 122,053 $ 51,533 §$ 25,824 §$ 2,514 $ 165 $ 96,946 $ 299,035
231,006 6,313 274,431 — — 19,114 530,864
27,193 20,953 9,183 58,004 3,179 32,857 151,369
368 2,292 82 86 302 6,614 9,744
— 17 — — 2 28 47
530 4,237 118 52 1 4,123 9,061
256 17 667 48 5 261 1,254
29,602 10 — 4,871 — 609 35,092
1,303 2,845 590 3,693 2,311 4,728 15,470
3,479 — — 5,504 3 10 8,996
1 — 51,830 47 — 4,671 56,549
1,814 543 257 358 84 707 3,763
42,103 8,801 1,683 16,113 1,958 141,543 212,201
$459,708 $ 97,561 $ 364,665 $ 91,290 $ 8,010 $ 312,211 $ 1,333,445

Federal Special Revenue By Source (in thousands)
Health and
General Public Human Natural

Government Safety Transportation Services Education Resources Total
$ 852 $ 59 § — $ 6,805 $ 209 $ — $ 7,925
544 7 — — 5 16 572
= — — 9 35 — 44
1,428,286 18,183 535,970 2,363,474 249,852 96,493 4,692,258
— — — 96,740 113 1,354 98,207
— 6 — 1,326 1 2 1,335
2 1,591 — 466 — — 2,059
$_1,429684 $ 19846 $ 535,970 $ 2,468,820 $ 250,215 $ 97,865 $ 4,802,400

A-137
NOTE 15. RELATED PARTY TRANSACTIONS

The Montana School for the Deaf and Blind is associated with a foundation, which is a nonprofit
organization outside of state government. The school’s foundation is governed by a board of directors that
annually approves a budget for the financial support to be provided to the school. This budget defines the
allowable expense categories for the year. Aschool employee is the person approving the expenses to be
paid by the foundation based on its budget. The employee submits the approved invoices to the
foundation’s bookkeeper, who then prepares the checks and submits them to a board member who
reviews backup documentation and signs the checks.

The Department of Labor and Industry Workforce Services Division rents space in Libby, MT from Mineral
Plaza, LLC, in which one of the owners is a local job service manager. The term of the lease is July 1,
2013, and ending June 30, 2022. The annual lease amount is currently set at $21.3 thousand.

The Department of Labor and Industry Workforce Services Division rents space in Cut Bank, MT from
Glacier Community Health Center, Inc., in which one of the active board members is a local job service
manager. The term of the lease is July 1, 2019, and ending June 30, 2022. The annual lease amount is
currently set at $35.0 thousand.

The relative of a member of Montana Department of Transportation’s (MDT) management team is part
owner of a business that holds a State term contract for supplies. A term contract is a contract in which a
source for supplies is established for a specific period of time at a predetermined unit price. The term
contracts are issued by the State Procurement Bureau of the Department of Administration (DOA) and
state agencies are required to use the DOA issued term contracts for such supplies. MDT purchased
supplies from this business in the amount of $98.4 thousand for the fiscal year ended June 30, 2021.

A relative of a member of MDT's Management Team is part owner of a business which has been granted
the right by the local airport to operate and provide related services. There is only one such operator at
this airport. Given this exclusivity, MDT had transactions with this business. MDT purchased services in
the amount of $100.9 thousand for the fiscal year ended June 30, 2021.

Per Section 85-1-617 and 85-1-624, MCA, Renewable Resource Grant and Loan Program, the
Department of Natural Resources and Conservation (DNRC) is eligible to issue General Obligation (GO)
bonds for the purpose of making private sale loans. DNRC has applied and received “recycled loan funds”
from the State Revolving Fund (SRF) program for the non-point source private loan program. The loans
are GO private sale bonds. The balances for loans in repayment for fiscal year 2021 was $1.6 million. The
loans have interest rates of 2.5% and are repaid over 15 years. These loans are presented as Advances
to Other Funds on the balance sheets.

Per Administrative Rules of Montana 17.58.101, the Montana Petroleum Tank Release Compensation
Board (Board) is an independent board that is attached to Department of Environmental Quality (DEQ) for
administrative purposes only. Board members are required to follow Montana's code of ethics, which
includes recusing oneself in matters related to a conflict of interest. DEQ is required to go through a
competitive bidding process to ensure this State law is followed. Four Board members were identified as
having related party transactions with DEQ. These relationships include members who are: 1) an
employee of a company that had a release and is receiving funds; 2) an agent for an insurer that covered
a station tank release and is receiving funds; 3) an officer in a bank that receives funds; and 4) a
contractor for DEQ, that is responsible for clean-up oversight, and is also a shareholder of a separate
company that receives funds. ADEQ employee's spouse is an elected City Commissioner for the City of
Helena which was awarded $25.5 thousand in VW Settlement funds for three electric charging stations by
DEQ. Total payments to all related parties were direct payments to the contractors in the amount of
$312.6 thousand and indirect payments to the bank and the insurance company in the amount of $402.0
thousand and $42.1 thousand, respectively, for the fiscal year ended June 30, 2021.

All lotteries that offer multi-state games transact with the Multi-State Lottery Association (MUSL), which
requires the lottery directors from each of the states to be on the MUSL board of directors. The former

A-139
A-140

Director of the Montana Lottery was on the MUSL board until January 1, 2021, and served as the
Secretary of its board of directors. As such, the former Director of the Montana Lottery was in a
management position for both MUSL and the Montana Lottery, which have significant transactions
between each other. The Montana Lottery has prize reserves with MUSL in the amounts of $1.1 million for
the fiscal year ended June 30, 2021. The prize reserve monies are assets of the Montana Lottery and
would be returned if the Montana Lottery were to quit any of the multi-state games. Weekly, MUSL
collects each state’s share of prize expenses to go towards respective jackpots. If a state has a large
enough prize amount or number of winners for any particular draw, MUSL would then reimburse any state
for the excess prize payments. The Montana Lottery paid MUSL $7.7 million for its share of prizes and
received reimbursements for prizes in the amount of $750.0 thousand for the fiscal year ended June 30,
2021.

There are campus-affiliated foundations within the Montana University System (MUS) identified in the
Montana Board of Regents of Higher Education Policy 901.9 - Campus-Affiliated Foundations; Montana
University System Foundation. The private foundations affiliated with campuses of the MUS provide
support to their respective campuses, consistent with the mission and priorities of such campuses.
Transactions occur between the Commissioner of Higher Education and said foundations as
reimbursements for hosting MUS constituents and other related events and gatherings. These
transactions do not affect the financial statements in any way; however, the total such transactions were
$1.7 thousand for the fiscal year ended June 30, 2021.

In addition, the MUS Group Insurance Program offers insurance coverage and receives insurance
premiums from other related parties such as the campus-affiliated foundations and the community
colleges. This premium revenue for campus-affiliated foundations and community colleges approximately
amounts to $6.7 million for the fiscal year ended June 30, 2021. Beginning January 1, 2022, campus-
affiliated foundations will cease to be covered by the MUS Group Insurance Program.

Montana Higher Education Student Assistance Corporation (MHESAC) has no employees, and the
Student Assistance Foundation (SAF) manages its business operations. A Board of Regents board
member is also an MHESAC Board of Directors member, an Office of the Commissioner of Higher
Education OCHE staff member is an MHESAC officer, and the Commissioner of Higher Education is an
Ex-officio member of the board.
NOTE 16. CONTINGENCIES

Litigation

The State is party to legal proceedings, which normally occur in government operations. The legal
proceedings are not, in the opinion of the State's legal counsel and the Department of Administration,
likely to have a material adverse impact on the State's financial position, except where listed below.

PPL v. Montana involves ownership of sections of riverbed on the Missouri, Clark Fork, and Madison
rivers. The case originated in 2003, when a group of parents of school-age children sued Petitioner PPL
Montana, LLC (PPL), in Federal Court, alleging that the company must pay rent for the use of state-
owned riverbeds to generate hydroelectric power. After the Federal Court dismissed the case for lack of
jurisdiction, PPL filed an action in state district court seeking a declaration that the state could not charge
them rent for the use of the riverbeds at issue. The State intervened in the case and counterclaimed for a
declaration that PPL and its co-plaintiffs unlawfully occupied state lands and must compensate the State
Land Trust on behalf of its public beneficiaries for the use of those lands. The legal test for ownership of
the riverbeds is whether the rivers at issue were navigable at the time of statehood. Based upon the
historical record, the District Court granted the State summary judgment on the question of navigability,
and the case proceeded to trial on the issue of compensation for the use of trust lands. In June of 2008,
the Court issued its ruling and ordered that PPL owed the State almost $41.0 million for past use of the
riverbeds.

PPL appealed the decision to the Montana Supreme Court. The case was briefed and argued before the
Court. In March of 2010, the Montana Supreme Court issued a decision upholding the district court's
finding of navigability and determination of compensation.

PPL appealed the case to the United States Supreme Court. The case was briefed and argued, and in
February of 2012, the Court reversed the Montana Supreme Court’s decision. The United States
Supreme Court concluded that the Montana courts had applied an incorrect legal standard for
determining a river’s navigability. The Court clarified that navigability had to be determined on a segment-
by-segment basis. The Court remanded the case for further proceedings, and the case currently is
pending in the Montana First Judicial District, Lewis and Clark County, Judge Michael McMahon
presiding. The cause number is CDV 2004-846. Additional detail is provided below as the case has been
remanded to the United States District Court, District of Montana, Helena Division.

The most obvious impact of the Supreme Court’s decision is that the State is no longer entitled to the
$41.0 million judgment. The monetary amount that the State may be entitled to depends on the
navigability of the rivers, which will have to be determined under the Supreme Court’s segment-by-
segment approach. Going forward, the litigation will focus on applying the Supreme Court’s segmentation
approach to determine the navigable reaches of the Madison, Clark Fork, and Missouri Rivers. At this
stage, it is difficult to predict an outcome of this litigation.

A less obvious financial impact is the bill of costs that PPL submitted to the district court following the
remand. PPL requested that the district court tax the State of Montana with $1.2 million for PPL’s costs
relating to the appellate proceedings. All, but approximately $31.0 thousand, relate to premiums that PPL
paid for a supersedeas bond in support of staying the $41.0 million judgment. In May 2012, the State filed
its response to PPL's bill of costs and agreed to costs for $31.3 thousand. However, the State moved the
court to deny PPL’s request for costs related to the supersedeas bond. The parties stipulated to hold this
issue in abeyance until the court rules on all remaining matters in the case. Counsel for the State has
agreed to release the supersedeas bond. In the opinion of counsel, there are good legal arguments that
support the State’s position that it should not be required to pay the supersedeas bond premiums;
however, legal and procedural uncertainties exist that make an adverse determination reasonably
possible.

This case, now known as State of Montana v. Talen Montana, LLC et al. (Cause No. CV 16-35-H-DLC-
JCL), was scheduled for a bench trial without a jury from January 3 through January 19, 2022. No
decision was made by the Judge. Rather, the parties are required to submit amended proposed findings

A-141
A-142

of fact and conclusions of law by mid-April 2022. Thereafter the Court will render a decision, probably no
earlier than July 2022. All Defendants have answered the State's amended complaint, including the
recently added Defendant United States. The State's expert witnesses have been disclosed and
Defendants' expert witnesses were required to be disclosed in February 2021. Discovery closed May 21,
2021. The State's claims against the utilities remain unchanged and the State still holds the opinion that
no further potential liability to the State is expected relative to this action and no additional updates are
necessary in regard to the outstanding litigation.

Diaz et al. v. Blue Cross and Blue Shield of Montana et al. (Diaz) was a lawsuit filed in the Montana First
Judicial District Court, Lewis and Clark County, Cause No. BVD-2008-956, in October 2008, by plaintiffs
Jeanette Diaz, Leah Hoffman-Bernhardt, and Rachel Laudon, individually, and on behalf of others
similarly situated, naming Blue Cross and Blue Shield of Montana (BCBS), New West Health Services
(New West), Montana Comprehensive Health Association, and the State of Montana (State) as
defendants. The complaint alleges that the defendants have violated the made-whole laws of Montana
and illegally given themselves subrogation rights.

On June 12, 2009, the Plaintiffs filed with the District Court a motion for class certification. The District
Court Judge denied the Plaintiffs’ motion for class certification on December 16, 2009. The Plaintiffs
appealed this decision to the Montana Supreme Court. As part of the review of the underlying decision
denying class certification, the Montana Supreme Court remanded the case to the District Court to
determine the question of whether the made-whole laws, codified in Section 2-18-902 and Section
33-30-1102, MCA, apply to the various types of third-party administrators (TPAs) at issue in Diaz. The
District Court held that these laws do not apply to TPAs. The Plaintiffs appealed this decision.

On December 21, 2011, the Supreme Court issued its decision, holding that the District Court abused its
discretion in denying a class action and that BCBS and New West, as TPAs of the State’s health plan, are
not subject to the made-whole laws as “insurers” under Section 2-18-901 to 902, MCA, or under a third-
party beneficiary theory.

On June 20, 2012, the District Court ruled on the State’s summary judgment motion seeking an order
from the court that the State has not violated the made-whole laws in the administration of its health plan.
The court denied the State’s motion, ruling that the State is an insurer for the purposes of the made-whole
laws and that it must conduct a made-whole analysis before exercising and subrogation/coordination of
benefits rights. The State filed with the District Court a motion requesting that the court certify its decision
to the Montana Supreme Court. The District Court granted the motion, and the Montana Supreme Court,
over Plaintiffs’ objection, ultimately agreed in a November 27, 2012, Order to hear this issue. The Plaintiffs
also appealed to the Montana Supreme Court, the District Court’s definition of the class action.

On August 6, 2013, the Montana Supreme Court issued its opinion, affirming the Montana First Judicial
District Court’s decision defining the class action to include only those State benefit plan members who
had timely filed claims for covered benefits for services that took place no earlier than eight years before
the filing of the Plaintiffs’ complaint, which was October 23, 2008.

On November 6, 2013, the Montana Supreme Court issued its opinion, affirming the District Court’s June
20, 2012 Decision that the applicable made-whole laws apply to the State benefit plan.

On September 8, 2014, the District Court issued an order ruling on several motions that the parties had
filed. The principal rulings were: (i) the Court authorized Plaintiffs to proceed with additional discovery to
determine if the class definition should be altered or amended; (ii) given its order to allow additional
discovery, the Court held in abeyance its decision on the State’s Motion for Summary Judgment
requesting that the class be limited to those who timely filed claims within the one-year filing restriction
contained in the State’s policy; (iii) the Court granted the Plaintiffs’ motions asking the Court to require the
State to conform its health plans, procedures, notices, and practices to comply with the Montana
Supreme Court’s rulings in this case and to pay covered medical expenses, await the resolution of claims
against liability carriers, and then conduct a made-whole determination before it can exercise subrogation
or accept reimbursements from its members or providers; and (iv) the Court ordered the parties to
develop a class notice to be sent to past and current plan members dated back to eight years before this
suit was filed. The State and Plaintiffs’ counsel developed the notice that has been sent to class
members.

On April 13, 2015, the District Court issued an Order on Interest to Be Paid, requiring the State to include
in the payments ultimately made to class members' interest at the rate of 10.0% per annum. For claims
arising before December 24, 2009, interest would begin 30 days following the Montana Supreme Court’s
decision in Blue Cross and Blue Shield of Montana, Inc. v. Montana State Auditor. For any claims arising
after December 24, 2009, interest would begin starting on the day the underlying medical expenses were
incurred.

On October 5, 2015, the Plaintiffs filed with the District Court a motion directing the State to pay attorney
fees arising from the class action suit. On November 9, 2015, the District Court issued an order denying
Plaintiffs’ motion for attorney fees.

On December 14, 2015, the District Court issued an order certifying that its orders concerning interest
and attorney fees were final for purposes of an appeal to the Montana Supreme Court. On January 12,
2016, the Plaintiffs filed a Notice of Appeal with the Montana Supreme Court, appealing the interest and
attorney fee orders.

Pursuant to the Montana Supreme Court’s mandatory mediation process, the parties reached a
settlement on attorney fee payments; however, the parties did not reach agreement on the interest issue.
On October 25, 2016, the Montana Supreme Court issued its ruling on the interest issue, finding that
November 14, 2009, is the date that interest commences; and, for claims arising after November 14,
2009, interest will begin starting on the day the underlying medical expenses were incurred.

On April 28, 2017, the District Court appointed a Special Master to consider and resolve issues regarding
expanding the class to persons with unsubmitted claims; whether to include claims after 2009; whether
the State must identify members from third party administrators other than Blue Cross/Blue Shield;
whether, if at all, the State must reform its systematic practices; supervising the payment and notice
process; which party or parties should pay the Special Master for her time and expenses; whether the
District Court should approve a partial payment of attorney fees; setting a time frame for making claims;
setting a time for ending the class action; determining payment of residual funds; and any other issues as
necessary to facilitate the swift and equitable resolution of the case.

As of June 30, 2017, the State paid Plaintiffs $1.4 million in based payments plus interest.

On June 21, 2017, the Special Master issued a report and recommended order regarding the partial
payment of the Plaintiffs’ counsels’ attorney fees. This recommendation was based on a stipulation the
State and the Plaintiffs’ counsel had reached, agreeing that the State would pay counsel $400.8 thousand
for claims made by individuals that could be documented. The State has paid this amount to class
counsel.

The Special Master issued a second report and recommended order expanding the class on August 8,
2018. The principal findings of this recommendation were to expand the class definition to include those
individuals who did not submit claims to the State for processing; to expand the class to end June 30,
2016; and to redefine the class as (a) employees, employee dependents, retirees, and retiree dependents
who participate or participated in the State of Montana’s health benefit plan(s), administered or operated
by the State and/or the third party administrators whose claims for covered benefits took place no earlier
than eight years prior to the filing of the complaint in this action, which was October 23, 2008; (b) who
were injured through the legal fault of persons who have legal obligations to compensate them for all
damages sustained; and (c) who have not been made whole for their damages (or for whom the State
and TPAs conducted no made-whole analysis) because the State and the third party administrators
programmatically failed to pay benefits for their covered medical costs. On October 29, 2018, the District
Court Judge issued an Order Adopting the Special Master's Report Expanding the Class.

A-143
A-144

As of June 30, 2018, the State paid Plaintiffs $1.7 million in based payments plus interest.

On April 23, 2019, the District Court Judge approved the parties' motion for a process to identify and
distribute residual funds for known class members on the master list for Blue Cross Blue Shield of
Montana claims. On May 2, 2019, the State issued payment of $122.0 thousand to the Hunt Law Firm for
the residual funds and interest thereon.

On May 1, 2019, the parties filed the Notice to Special Master of Agreement on Notice Procedure.
Pursuant to that notice, the State distributed notices to all former and current State employees enrolled in
the State health plan between January 1, 2010, through June 30, 2016. Notice was distributed through
email and first-class mail. The initial distribution of notices was May 23, 2019. The deadline for a claimant
to return a claim to the State was November 30, 2019.

As of June 30, 2019, the State paid Plaintiffs $2.0 million, including the payment for residual funds and
interest.

As of June 30, 2020, the State paid Plaintiffs $2.9 million for claim payments, interest, and attorney fees
for Plaintiffs’ counsel.

As of February 28, 2021, the state paid Plaintiffs a cumulative $3.0 million for claim payments, interest,
and Plaintiffs’ attorney fees.

On March 23, 2021, Plaintiffs filed a motion to enforce an October 29, 2018 Order to address first party
medical payments coverage in casualty insurance policies (the “Med-pay Claims”). Plaintiffs contend that
the Med-pay Claims should be paid. On July 23, 2021, Special Master held a hearing on Plaintiffs’ motion.

As of June 30, 2021, the amount State paid Plaintiffs for claim payments, interest, and attorney fees for
Plaintiffs’ counsel was unchanged from February 28, 2021.

Since the case is ongoing, the State does not have sufficient information to determine the ultimate cost to
the State.

Disability Rights Montana v. Gootkin and Salmonsen (Cause # CV-15-22) is a civil rights case filed by the
ACLU of Montana on behalf of Plaintiff, alleging deliberate indifference in the provision of mental health
care to seriously mentally ill inmates at Montana State Prison. Plaintiff sought only declaratory and
injunctive relief and later amended its complaint, seeking similar relief under Section 1983 of Title 42 of
the United States Code, the Civil Action for Deprivation of Rights. The District Court had dismissed the
case for failure to state a claim, which order was appealed by Plaintiffs to the Ninth Circuit Court of
Appeals. The Ninth Circuit Court of Appeals overturned the district court’s ruling and remanded the case
back to the district court in front of a new judge. As a result, the Department of Corrections (Department)
has participated in on-going discovery, with the aid of outside expert witnesses and the defense of the
case through outside legal counsel. The parties had previously exchanged settlement proposals without
success. Because of legislation enacted during the 2019 legislative session, the Department implemented
significant changes in the use of restrictive housing, especially as related to seriously mentally ill inmates.
The Plaintiff seeks only prospective injunctive and declaratory relief, as well as reasonable attorneys fees,
litigation expenses and costs, which could likely exceed $1.0 million. At this time, the Department
continues to be unable to specify an anticipated amount of financial obligation imposed either by
settlement or by judgment. It is reasonably possible that there could be an unfavorable outcome in this
case.

Cascade County v. State of Montana, Montana and Department of Corrections (Department) (Cause #
CDV-2019-1181) is a case filed by Cascade County, suing for breach of contract, unjust enrichment and
breach of implied covenant of good faith and fair dealing, seeking over $766.0 thousand in unpaid jail
reimbursement costs plus interest at 10.0% per annum. This case involved interpretation of contract and
statutory language. This matter was referred to the Department of Justice Agency Legal Services for
representation of the Department. The matter was resolved prior to June 30, 2021, by settlement and
dismissal at no cost to the State or Department.
Vincent, Benner, and Hoch v. DPHHS (CDV-19-0314, Eighth Judicial District Court, Cascade County) was
filed on May 17, 2019, by Montana Optometric Association members seeking class certification of all
licensed Montana optometrists who are participating providers in Montana Medicaid. The named plaintiffs
claim the Department’s Medicaid rate structure discriminates against them because they are paid less
than physicians (doctors of medicine or doctors of osteopathy) for performing the same services. They
cite Section 37-10-104, MCA, as the basis of the discrimination claim. They seek declaratory relief and
permanent injunctive relief in their claims of discrimination, violations of MAPA, breach of contract, and
implied covenant of good faith. They request damages, interests, costs, and attorney fees, which would
amount to more than $1 million. A motion for class certification has been fully briefed, but remains
pending.

William and Ellen Solem v. State of Montana (CDV-10-073 (D)) is a case that the Solems filed a motion
for class certification in the Eleventh Judicial District Court, Flathead County, challenging their land value,
primarily arguing that the water influence used by the Department leads to improperly inflated values. The
District Court granted class certification. The class certified is “all lakefront property owners in
Neighborhood 800 who have timely paid under protest any portion of their property taxes since the last
assessment cycle beginning in 2009”. Neighborhood 800 is the Lakeside-Somers area in which the
Solems’ property is located. Between 2009 and 2015, approximately 200 taxpayers in Neighborhood 800
paid property taxes under protest. A four-day trial on liability was held in March 2019. On October 15,
2019, the District Court issued its Findings of Fact, Conclusions of Law, and Order finding the Department
liable. The District Court concluded that the Department employed a non-uniform method of appraisal,
failed to value similar properties in a like manner, and failed to appraise the subject properties in a
manner that is fair to all taxpayers. The matter has now moved to the damages phase. Motions relating to
damages were filed and the District Court granted Solems’ motions on the calculation of damages and
whether Solems are entitled to attorney fees and costs. The District Court denied Solems’ motion to
expand the class definition to include taxpayers who did not pay under protest. The District Court denied
the Department’s motion to decertify the class. The Department recently received invoices of Solems’
legal fees and costs (between $400.0 thousand and $600.0 thousand) and is reviewing them. The
Department intends to appeal this matter to the Montana Supreme Court upon issuance of a final
judgment.

S.W v. State of Montana (DDV-13-813, Eighth Judicial District Court, Cascade County) is a case filed in
2013 by the guardian of a minor against the State Department of Public Health and Human Services (the
Department). The Plaintiff contended that the Department was negligent per se as a matter of law
involving a child abuse incident caused by the birth father’s girlfriend that permanently harmed SW. The
perpetrator was subsequently convicted and imprisoned for thirty years. On February 18, 2020, the
District Court judge issued an order granting partial summary judgment to plaintiff, determining that the
Department had a duty to SW, that a violation of the statutory and administrative regulations constitutes
negligence per se, that the Department is not entitled to immunity, and that the statutory damages cap in
Section 2-9-108(1), MCA does not apply. A jury trial, limited to the issue of damages, was held on
November 16-17, 2021. The jury awarded damages of $16.7 million which included damages for loss of
future earning capacity, past personal care assistance, future care costs, mental and emotional suffering,
and impairment of capacity to pursue an established course of life. A judgment was issued on November
18, 2021. The Department will be appealing the matter to the Montana Supreme Court and expects a
decision sometime in late 2022. As the matter will be on appeal, the Department is unable to assess the
degree of probability of an unfavorable final outcome or the associated loss until the Montana Supreme
Court issues a decision.

The Public Employee Retirement Board (PERB) has three items of outstanding litigation in relation to the
Sheriffs’ Retirement System (SRS) and the Montana Public Employee's Retirement Administration
(MPERA). Refer to Note 6, section J, for additional disclosure in relation to this legal proceeding.

The Montana State Fund, a discretely presented component unit of the State. Refer to Note 18, section
O, for additional disclosure in relation to these legal proceedings.

Federal Contingencies
Federal Grants - The State receives significant financial assistance from the Federal government in the
form of grants and entitlements, including several non-cash programs (which are not included in the basic

A-145
A-146

financial statements). Receipt of grants is generally conditioned upon compliance with terms and
conditions of the grant agreements and applicable Federal regulations, including the expenditure of
resources for eligible purposes. Substantially all grants are subject to either the Federal Single Audit Act
or financial and compliance audits by the granter agencies of the Federal government or their designees.
Disallowances and sanctions as a result of these audits may become liabilities of the State. The State is
currently involved in administrative and legal proceedings, with certain federal agencies, contesting
various disallowances and sanctions related to federal assistance programs for $131.7 thousand at June
30, 2021. The State's management believes ultimate disallowances and sanctions, if any, will not have a
material effect on the basic financial statements.

Food Distribution Program — The amount reported for Food Distribution programs (ALN #10.555, #10.565,
#10.567, #10.569, and #93.053) represents the dollar value of food commodities distributed to eligible
recipients during the year. The U.S. Department of Agriculture provides the current value of the
commodities used by the State to compute the amount reported. The amount of funds received to
administer the program is also included in the reported amount. The State also distributes food
commodities to other states in the western region of the United States, the value of which is excluded
from the reported amounts. During fiscal year 2021, the State distributed $479.8 thousand of food
commodities under ALN #10.567 to other states.

The State distributed $10.8 million in commodities in fiscal year 2021. The value at June 30, 2021, of
commodities stored at the State’s warehouse, is $5.8 million, for which the State is liable in the event of
loss. The State has insurance to cover this liability.

Miscellaneous Contingencies

Loan Enhancements — As of June 30, 2021, the Board of Investments (BOI) had provided loan
guarantees from the Coal Severance Tax Permanent Fund to the Municipal Finance Programs and the
Facility Finance Authority (a component unit of the State of Montana), totaling $190.8 million. The BOI’s
exposure to bond issues of the Municipal Finance Programs was $90.6 million, while exposure to bond
issues, surety bonds, and designated loans of the Facility Finance Authority were $100.2 million. The BOI
has not been held responsible for any loan guarantee in the past.

Gain Contingencies — Certain natural resource and corporate tax assessments are not reported on the
State's financial statements because they are being protested administratively. As of June 30, 2021, the
following assessments (by fund type) were outstanding (in thousands):

Taxes General Fund
Corporate Tax $ 14,668

The collectability of these contingencies is dependent upon the decisions of the court, other authorities, or
agreed upon settlements. The corporate tax assessments include material estimates that could result in a
significant reduction of the tax assessed once actual numbers are provided. Interest related to corporate
tax assessments is distributed to the General Fund and is included in the assessment total above.

Loss Contingencies — Certain corporations have requested refunds that are not reported on the State’s
financial statements as of June 30, 2021. The corporations have appealed the Department of Revenue's
decision to deny or adjust the refund. As of June 30, 2021, these include $11.7 million of General Fund
corporate tax refunds. It is estimated that most of these corporation tax refunds would consist primarily of
tax and could be significantly reduced or eliminated due to audits and appeals currently in process.

Certain companies have protested property taxes that have been included as revenue on the State’s
financial statements as of June 30, 2021. As of June 30, 2021, these include $19.2 thousand of protested
property taxes recorded in the General Fund and $21.8 thousand recorded in the State Special Revenue
Fund.
NOTE 17. SUBSEQUENT EVENTS

Investment Related Issues
Since June 30, 2021, the Board of Investments (BOI) made additional commitments to fund loans from
the INTERCAP loan program in the amount of over $16.1 million.

Since June 30, 2021, BOI has committed an additional $109.0 million within the Real Estate Pension
Asset Class and $100.0 million within the Real Assets Pension Asset Class, and $210.0 million within the
Private Investments Pension Asset Class of Consolidated Asset Pension Plan (CAPP), and $50.0 million
within Real Estate of the Trust Fund.

Since June 30, 2021, BOI has reserved $5.5 million, committed $1.7 million, and funded $7.4 million of
additional funds to Montana lenders from the Coal Severance Tax Permanent Fund’s In-State Loan
Program. Of the commitments in effect as of June 30, 2021, $10.0 million have since expired. Additional
reservations in the amount of $4.9 million were made for the Veterans' Home Loan Program (VHLM)
residential mortgage purchases.

On November 30, 2021, BOI adopted Resolution No. 249 entitled: “Resolution of the Board of
Investments of the State of Montana relating to its annual adjustable rate Municipal Finance Consolidation
Act Extendable Bond (INTERCAP Loan Program), Taxable Series 2022, fixing the terms and conditions of
the INTERCAP Bond, and authorizing the sale and issuance of the INTERCAP Bond to the Unified
Investment Program.” All outstanding tax-exempt series bonds were defeased on January 25, 2022, in the
amount of $90.6 million and were redeemed on March 1, 2022. The Taxable Series 2022 bonds were
issued on January 25, 2022, in the amount of $68.7 million.

Other Subsequent Events
On November 17, 2021, Department of Natural Resources & Conversation (DNRC) paid off the Coal
Severance Tax series 2020M bond in full for $2.3 million principal and $20.5 thousand in interest.

On November 19, 2021, DNRC withdrew an additional $1.5 million in proceeds from the previously
authorized Drinking Water series 2020N bond anticipation note (BAN); drawing the entire authorized
amount of $3.2 million.

On December 1, 2021, DNRC prepaid $700.0 thousand in principal to the Coal Severance Tax series
2020L bond.

On December 14, 2021, the Board of Examiners authorized the following:
* $3.9 million series 2021A general obligation bond anticipation notes, and
* $3.8 million series 2021B general obligation bond anticipation notes.

On December 17, 2021, DNRC issued new general obligation BANs from BOI. The Drinking Water State
Revolving Fund issued series 2021A for $3.9 million, and the Water Pollution Control State Revolving
Fund issued series 2021B for $3.8 million. Both bonds will be used for new loans within the programs.

The Montana Department of Transportation (MDT) was issued notice from the Federal Motor Carrier
Safety Administration (FMCSA) of possible sanctions regarding the Entry Level Driver Training (ELDT)
requirements for commercial driver’s licenses (CDL). These new training standards must be implemented
by the compliance date of February 7, 2022. House Bill 608 (HB608) was introduced to the 2021
legislature to implement ELDT regulations. HB608 did not pass. States that are not compliant with the
ELDT requirements by the compliance date will be subject to decertification of their CDL programs and/or
withholding of up to 4 percent of the National Highway Performance Program and the Motor Carrier
Safety Assistance Program (MCSAP) funding that would otherwise be apportioned. The potential for
sanctions is high since HB608 did not pass. The consequences of the State’s non-compliance with CDL
regulations may result in up to 4 percent of the State’s Federal Aid Highway apportionment for fiscal year
2022, or $15.0 million; and 8 percent in fiscal year 2023 and subsequent years of approximately $31.0
million per year. MDT could lose MCSAP grant eligibility resulting in FMCSA withholding up to $6.5 million
annually.

A-147
A-148

The State of Montana was allocated $1.6 billion from the American Rescue Plan Act (ARPA) during fiscal
year 2021. The legislature has appropriated approximately $1.2 billion and enacted laws to allow
appropriations to continue into the 2023 and 2025 bienniums. The programs designated by the legislature
for ARPA funding are infrastructure, communications, economic transformation and_ stabilization,
workforce development, and health. ARPA funds spent before June 30, 2021, totaled $58.4 million, and
since June 30, 2021, another $116.0 million has been spent. Montana plans to spend all funds received
by June 30, 2026.

In January 2022, the State received $78.6 million from National Indemnity Company as the result of
asbestos litigation.

On February 25, 2022, Montana Attorney General announced that the State will receive $80.0 million in
the final approval of the multi-state settlement holding the nation’s three major pharmaceutical distributors
accountable for their roles in fueling the national opioid epidemic and the harm it has caused. The
settlement will be used to combat the opioid crisis. The settlement will be paid incrementally over several
years. The first disbursement of the settlement is unknown.
A-149

NOTE 18. COMPONENT UNITS

A. Condensed Financial Statements

Below are the condensed financial statements of the component units for the State of Montana as of June
30, 2021 (in thousands):

Condensed Statement of Net Position

Component Units

Montana Facility Montana Montana University Total
Board of Finance State State of Component
Housing Authority Fund (1) University Montana Units
Assets:
Cash, investments and other assets $ 667,494 $ 8988 $ 1,743,509 $ 743495 $ 683433 $ 3,846,919
Due from primary government _— _— _— 636 1,683 2,319
Due from component units — — — — 289 289
Capital assets (net) (Note 18C) 11 1 49 379 587 258 383,748 1,020,397
Total assets 667,505 8,989 1,792,888 1,331,389 1,069,153 4,869,924
Deferred Outflows of Resources 1,073 141 6,360 74,982 57,906 140,462
Liabilities:
Accounts payable and other liabilities 10,238 22 79,831 66,684 65,325 222,100
Due to primary government _— _— _— 1,953 45 1,998
Due to component units — — — 289 — 289
Advances from primary government (2) (3) _— _— _— 15,108 2,946 18,054
Long-term liabilities (Note 181) 498,028 403 1,044,845 376,962 321,739 2,241 977
Total liabilities 508,266 425 1,124,676 460,996 390,055 2,484,418
Deferred Inflows of Resources 204 25 2,753 25,152 29,895 58,029
Net Position:
Net investment in capital assets 3 1 49,379 402,916 259,661 711,960
Restricted 160,105 — — 394,375 413,041 967,521
Unrestricted — 8,679 622,440 122,932 34,407 788,458
Total net position $160,108 $ 8680 $ 671,819 $ 920,223 $ 707,109 $ 2,467,939

‘Montana State Fund reports their financial statements on a calendar-year basis. The information provided is for the year ended December 31, 2020.

® Loans from the Coal Severance Tax Permanent Fund make up $4.4 million and $2.9 million of these balances for Montana State University and
University of Montana, respectively.

® Loans from the Board of Investment's INTERCAP and the Department of Environmental Quality's energy conversation loan programs make up $8.5
million and $2.2 million, respectively, of the balance for Montana State University.
A-150

Condensed Statement of Activities
Component Units

Montana Facility Montana Montana University Total
Board of Finance State State of Component
Housing Authority Fund") University Montana Units
Expenses $ 21,820 $ 538 $ 171,042 $ 646,557 $ 464,845 $ 1,304,802
Program Revenues:
Charges for services 2,612 821 148 625 273,506 148 670 574,234
Operating grants and contributions 18,908 112 _— 320,508 240,803 580,331
Capital grants and contributions _— _— _— 11,663 336 11,999
Total program revenues 21,520 933 148,625 605,677 389,809 1,166,564
Net (expense) program revenues (300) 395 (22,417) (40,880) (75,036) (138,238)
General Revenues:
Unrestricted grants and contributions _— _— _— 4 _— 4
Unrestricted investment earnings _— _— 113,980 14,585 10,286 138,851
Transfer from primary government (2) 501 _— _— 147,703 108,740 256 944
Gain (loss) on sale of capital assets _— _— (55) 41 _— (14)
Miscellaneous _— _— 2,002 _— _— 2,002
Contributions to term and permanent
endowments _— _— _— 30 29,477 29,507
Total general revenues and contributions 501 _— 115,927 162,363 148,503 427 294
Change in net position 201 395 93,510 121,483 73,467 289,056
Total net position - July 1 — as previously
reported 159,914 8,285 578,092 798,709 633,642 2,178,642
Adjustments to beginning net position (7) _— 217 31 _— 241
Total net position - July 1 - as restated 159,907 8,285 578,309 798,740 633,642 2,178,883
Total net position - June 30 $ 160,108 $ 8680 $ 671,819 $ 920,223 $ 707,109 $ 2,467,939

‘) Montana State Fund reports their financial statements on a calendar-year basis. The information provided is for the year ended December 31, 2020.
Transfers to both Montana State University and the University of Montana are appropriated by the State legislature to assist with higher education
related costs.

B. Cash/Cash Equivalents and Investments

Due to the integration of funds and combined financial information, component unit cash and cash
equivalents, equity in pooled investments, and investments are included with the primary government in
Note 3. For more detail on investments held outside of the Montana Board of Investments, refer to the
entity's respective separately issued financial statements.
C. Capital Assets

The following table summarizes net capital assets reported by the discretely presented component units
(in thousands). All component units, other than higher education units, are included under the “Other”
caption for this schedule:

Montana
State University of
University Montana Other Total
Capital assets not being depreciated:
Land $ 8,203 $ 8,306 $ 1,139 $ 17,648
Construction work in progress 52,951 11,018 19,176 83,145
Capitalized collections 9,931 28,108 _— 38,039
Livestock for educational purposes 4,249 _— _— 4,249
Total capital assets not being depreciated 75,334 47,432 20,315 143,081
Capital assets being depreciated:
Infrastructure 45,122 9,904 _— 55,026
Land improvements 35,109 16,468 _— 51,577
Buildings/Improvements 804,575 669,670 27,942 1,502,187
Equipment 178,153 110,786 7,358 296,297
Livestock _— 255 _— 255
Library books 67,412 62,731 — 130,143
Leasehold improvements 8,668 _— _— 8,668
Right-to-use leased buildings “” — — 5,261 5,261
Right-to-use leased equipment ‘” _ _ 78 78
Total capital assets being depreciated 1,139,039 869,814 40,639 2,049,492
Total accumulated depreciation (652,850) (537,071) (11,663) (1,201,584)
Total capital assets being depreciated, net 486,189 332,743 28,976 847,908
Intangible assets 614 1,139 100 1,853
MSU Component Unit capital assets, net 25,121 _— _— 25,121
UM Component Unit capital assets, net _— 2,434 _— 2,434
Discretely Presented Component Units
capital assets, net $ 587,258 $ 383,748 $ 49391 $ 1,020,397

‘) Montana State Fund early implemented GASB Statement No. 87, for the calendar year ended December 31, 2020, and
created the right-to-use lease assets.

D. Other Postemployment Benefits (OPEB)

Non-university component units are included in the State of Montana benefit plan, whereas the Office of
the Commissioner of Higher Education (included in the primary government otherwise) is included in the
Montana University System benefit plan. For these reasons, component unit OPEB information is
included in Note 7.

E. Risk Management

Montana State Fund (MSF or New Fund) is the only component unit risk pool. Unpaid claims and claim
adjustment expenses are estimated based on the ultimate cost of settling the claims, including the effects
of inflation and other societal/economic factors. There are no significant reductions in insurance coverage
from the prior year, nor any insurance settlements exceeding insurance coverage for the last three years
for MSF. This fund uses the accrual basis of accounting. Montana State Fund investments are recorded at

A-151
A-152

fair value, and the premiums and discounts are amortized using the scientific interest method over the life
of the securities.

(1) Montana State Fund (MSF) — This fund provides liability coverage to employers for injured
employees who are insured under the Workers Compensation and Occupational Disease Acts of
Montana and workers compensation claims occurring on or after July 1, 1990. MSF is a self-supporting,
competitive State fund, and functions as the guaranteed market. At December 31, 2020, approximately
23,300 employers were insured with MSF. Anticipated investment income is considered for computing a
premium deficiency, and employers must pay premiums to MSF within specified time frames.

An actuarial study prepared by Willis Towers Watson, as of December 31, 2020, estimated the cost of
settling claims that have been reported but not settled and claims that have been incurred but not
reported. Due to the fact that actual claim costs depend on complex factors such as inflation and changes
in the law, claim liabilities are recomputed periodically using a variety of actuarial and _ statistical
techniques. These techniques are used to produce current estimates that reflect recent settlements, claim
frequency, and other economic and societal factors.

A provision for inflation is implicit in the calculation of estimated future claim costs because reliance is
placed both on actual historical data that reflect past inflation and on other factors that are considered to
be appropriate modifiers of past experience. As of December 31, 2020, $940.2 million of unpaid claims
and claim adjustment expenses were presented at face value.

Section 39-71-2311, MCA, requires MSF to set premiums, at least annually, at a level sufficient to ensure
adequate funding of the insurance program during the period the rates will be in effect. It also requires
MSF to establish a minimum surplus above risk-based capital requirements to support MSF against risks
inherent in the business of insurance.

For the year ended December 31, 2020, MSF ceded premiums to other reinsurance companies to limit
the exposure arising from large losses. These arrangements consist of excess of loss contracts that
protect against individual occurrences over stipulated amounts, and an aggregate stop-loss contract
which protects MSF against the potential that aggregate losses will exceed expected levels expressed as
a percentage of premium. The excess of loss contract provides coverage for occurrences up to $100.0
million; however, MSF retains the first $10.0 million of coverage. The excess of loss protection applies to
an individual occurrence with a maximum of $10.0 million on any one life.

The aggregate stop-loss contract provides coverage based on MSF’s premium levels not to exceed
15.0% of the subject net earned premium. In the event reinsurers are unable to meet their obligations,
under either the excess of loss contracts or the aggregate stop loss contract, MSF would remain liable for
all losses, as the reinsurance agreements do not discharge MSF from its primary liability to the
policyholders.

Premium revenue was reduced by premiums paid for reinsurance coverage of $8.9 million during the year
ended December 31, 2020.

Estimated claim reserves were reduced by $290.4 thousand as of December 31, 2020, for the amount of
reinsurance estimated to be ultimately recoverable on incurred losses due to the excess of loss
reinsurance contract. There were no estimated recoverables due to the aggregate stop-loss contract.

(2) Changes in Claims Liabilities for the Past Two Years — As indicated above, this fund establishes
liabilities for both reported and unreported insured events, including estimates of future payments of
losses and related claim adjustment expenses. The following table presents changes (in thousands) in
the aggregate liabilities for Montana State Fund net of estimated reinsurance recoverable. The
information presented is at face value and has not been discounted.
Unpaid claims and claim adjustments expenses

Year Ended

December 31, 2020

Year Ended

December 31, 2019

at beginning of year $ 956,594 $ 941,638
Incurred claims and claim adjustment expenses:
Provision for insured event of the current year 125,599 129,455
Increase (decrease) in provision for insured
events of prior years (27,224) (9,466)
Total incurred claims and claim adjustment
expenses 98,375 119,989
Payments:
Claims and claim adjustment expenses
attributable to insured events of the
current year (23,890) (24,965)
Claims and claim adjustment expenses
attributable to insured events of prior years (90,918) (80,068)
Total payments (114,808) (105,033)
Total unpaid claims and claim adjustment
expenses at end of year $ 940,161 $ 956,594

F. Capital Leases/Installment Purchases/Right-To-Use Leases

Obligations under capital leases/installment purchases at June 30, 2021, were as follows (in thousands):

Capital Leases/Installment Purchases

Fiscal Year Ending June 30:

Discretely Presented
Component Units"

2022 $ 145

2023 105

2024 55

2025 47

2026 17

Thereafter _

Total minimum payments 369

Less: interest (29)

Present value of minimum payments $ 340

Right-To-Use Leases
Fiscal Year Ending June 30: Principal Interest Total"

2022 $ 265 $ 112 §$ 377
2023 250 105 355
2024 222 99 321
2025 221 94 315
2026 226 89 315
2027-2031 1,208 367 1,575
2032-2036 1,349 226 1,575
2037-2041 1,192 68 1,260
Total $ 4,933 $ 1,160 $ 6,093

For the calender year 2020, Montana State Fund early-adopted GASB Statement No. 87, Leases. Accordingly, for all of its long-term leases, a intangible
right-to-use lease asset and lease liability were created. The assets are amortized over the term of the lease, while the liabilities are reduced as scheduled
lease payments are made. Montana State Fund's total amount of lease assets and accumulated amortization is disclosed in Note 18, section C. Capital
Assets as right-to-use lease assets.

A-153
A-154

G. Operating Leases

Future rental payments under operating leases at June 30, 2021, are as follows (in thousands):

Discretely Presented
Fiscal Year Ending June 30: © Component Units

2022 $ 4,607
2023 4,283
2024 3,502
2025 3,484
2026 2,684
Thereafter 11,961

Total future rental payments $ 30,521

For the calender year 2020, MSF early-adopted GASB Statement No. 87, Leases. Accordingly, for all of its long-term leases, MSF will no longer be
reporting leases as a operating lease and instead has created a intangible right-to-use lease asset.

H. Debt Service Requirements

Debt service requirements of discretely presented component units at June 30, 2021, were as follows (in

thousands):
Montana State University
Montana Board of Housing Montana State University Direct Placement University of Montana
Ended

June 30: Principal Interest Principal Interest Principal Interest Principal Interest
2022 16,820 15,299 10,360 6,908 433 442 3,010 5,466
2023 17,745 14,937 6,275 6,570 446 429 3,130 5,348
2024 18,510 14,525 6,580 6,286 459 416 3,255 5,224
2025 18,590 14,085 6,770 5,981 472 402 3,380 5,096
2026 21,775 13,619 7,155 7,299 486 388 3,515 4,962
2027 - 2031 104,065 58,732 29,465 22,301 2,654 1,718 20,195 22,189
2032 - 2036 101,050 41,375 30,970 15,152 3,069 1,304 25,000 17,383
2037 - 2041 84,458 25,340 23,325 9,434 3,547 826 29,345 13,048
2042 - 2046 65,305 11,619 22,225 3,315 3,663 273 34,400 7,974
2047 - 2051 35,520 2,613 5,700 194 31,810 2,093

Total $ 483,838 $ 212,144 $ 148825 $ 83,440 $ 15,229 $ 6,198 $ 157,040 $ 88,783
A-155

I. Summary of Changes in Long-term Liabilities Payable

Long-term liability activity of discretely presented component units for the year ended June 30, 2021, was
as follows (in thousands):

Amounts
Amounts Due In More
Beginning Ending Due Within Than One
Balance” Additions Reductions Balance One Year Year
Discretely presented component units
Bonds/notes payable
Montana Board of Housing 531,282 73,710 111,030 493,962 16,820 477,142
Montana State University (MSU) 167,355 98 11,617 155,836 10,478 145,358
MSU Direct Placement 15,649 — 420 15,229 433 14,796
University of Montana (UM) 168,235 — 3,370 164,865 3,010 161,855
Total bonds/notes payable “” 882,521 73,808 126,437 829,892 30,741 799,151
Other liabilities
Capital lease/installment purchase/right-
to-use lease payable 426 5,050 203 5,273 398 4,875
Compensated absences payable 69,640 26,430 23,310 72,760 27,876 44,884
Arbitrage rebate tax payable 1,121 234 594 761 521 240
Estimated insurance claims 956,594 98,375 114,808 940,161 111,878 828,283
Due to federal government 27,257 17,267 20,615 23,909 — 23,909
Derivative instrument liability 5,499 _— 3,580 1,919 — 1,919
Reinsurance funds withheld 56,754 8,524 _— 65,278 — 65,278
Unearned compensation 391 136 39 488 _ 488
Net pension liability 186,395 70,046 18,660 237,781 — 237,781
Total OPEB liability 27,460 47,907 17,243 58,124 — 58,124
Total other liabilities 1,331,537 273,969 199,052 1,406,454 140,673 1,265,781
2,214,058 347,777 325,489 2,236,346 171,414 2,064,932
Long-term liabilities of Montana University System component units ® 517 5,114
Total discretely presented component units’ long-term liabilities $ 171,931 $ 2,070,046

(1)
)
(3)

When applicable, this amount includes unamortized discounts and unamortized premiums.

Beginning balances are taken from component unit financial statements, which may have been adjusted from the prior year's ending balances.

Inter-entity transaction eliminations between Montana University System component units for debt shown in the component unit information can cause
negative balances in component unit information.
A-156

J. Refunded and Early Retired Debt

Refunded Debt

On March 31, 2021, the Montana Board of Housing issued $43.4 million of Single Family Mortgage
Bonds, Series 2021A (1977 Single Family | Indenture, amended and restated as of May 1, 1997). Bond
proceeds of $13.4 million were used as a replacement refunding of the 2011B/2009C Series to reduce
debt service payments over the remaining life of the original series. The refunding was a current
refunding, thus no economic gain or loss has been calculated.

Defeased Debt Outstanding

The University of Montana has defeased certain bond issues by placing the proceeds of new bonds in an
irrevocable trust. The proceeds, together with interest earned thereon, will be sufficient for future debt
service payments on the refunded issues. Accordingly, the trust account assets and the liability for the
defeased bonds are not included in the University's consolidated financial statements. As of June 30,
2021, $111.5 million of bonds outstanding were considered defeased.

K. No-Commitment Debt

Information is presented below for financing authorities participating in debt issues. The State has no
obligation for this debt. Accordingly, these bonds and notes are not reflected in the accompanying
financial statements.

Facility Finance Authority (FFA)

FFA is authorized to issue bonds and notes to finance projects for qualifying health care and other
community-based service providers. The revenue bonds are payable solely from loan repayments to be
made by eligible facilities pursuant to loan agreements, and further, from the funds created by the
indentures and investment earnings thereon. The notes are payable solely from loan repayments
pursuant to loan agreements. The revenue bonds and notes payable issued by FFA do not constitute a
debt, liability, obligation, or pledge of faith and credit of the State of Montana, with the exception of the
Montana State Hospital Project included in Note 11. At June 30, 2021, revenue bonds and notes
outstanding aggregated $1.1 billion.

The Board of Investments and FFA have entered into a capital reserve account agreement for certain
bond issues. See Note 11 for more information.

Montana Board of Housing (MBOH)

MBOH is authorized to issue bonds and make mortgage loans in order to finance affordable housing for
Montana residents. The bonds are special limited obligations, payable solely from pledged revenues and
assets of the borrower, not general obligations of MBOH. These bonds issued by MBOH do not constitute
a debt, liability, obligation, or pledge of faith and credit of the State of Montana. At June 30, 2021, bonds
outstanding aggregated $177.6 million.

L. Non-Exchange Financial Guarantee

BOI provides loan guarantees from the Coal Severance Tax Fund to the Facility Finance Authority (FFA).
BOI exposure to bond issues, surety bonds, and designated loans of the FFA totaled $100.2 million as of
June 30, 2021. FFA is a discretely presented component unit of the State of Montana. FFA guarantee
requests are submitted to BOI for review and approval. BOI’s participation, either duration or any other
consideration, to either purchase bonds or loans or to lend money for deposit into FFA’s statutorily
allowed capital reserve account is explicitly limited by statute, which requires BOI to act prudently. The
guarantee requests from FFA pertain to bonds issued by FFA with a term of up to 40 years. BOI and FFA
have entered into an agreement detailing repayment to BOI. BOI has not had to perform on any loan
guarantee in the past.
The following schedule summarizes the activity related to the non-exchange financial guarantee during
the year ended June 30, 2021 (in thousands):

Beginning Ending
Balance Additions Reductions Balance
$ 88,346 $ 33,465 $ 21,563 $ 100,248

M. Derivative Instrument Transactions Related to Long-term Debt

Montana State University (MSU) has two interest rate swaps as of June 30, 2021. Interest rate swaps are
classified as hedging derivative instruments if the instruments meet the criteria of paragraphs 27 (a) and
(b) of GASB Statement No. 53 — Accounting and Financial Reporting for Derivative Instruments (GASB
53), or as investment derivative instruments if they do not. The following table summarizes the interest
rate swaps outstanding as of June 30, 2021:

Derivative Instrument Trade Effective Termination
Description Date Date Date Terms Counterparty
25.75 million fixed payer swap 3/10/2005 = 7/21/2005 11/15/2035 Pay 3.953%, Receive Deutsche Bank AG
SIFMA
25.25 million basis swap 12/19/2006 11/15/2007 11/15/2035 Pay SIFMA, Receive Morgan Stanley Capital
86.8% of 10-year SIFMA Services Inc.

1 Securities Industry and Financial Markets Association (SIFMA)

As of June 30, 2021, the fixed payer swap is classified as a hedging derivative instrument under GASB
53, whereas the basis swap is an investment derivative instrument because there is no identified financial
risk being hedged by the basis swap that can be expressed in terms of exposure to adverse changes in
cash flows or fair values. GASB 53 includes four methods for evaluating hedge effectiveness; a
governmental entity may use any of the evaluation methods outlined in GASB 53 and is not limited to
using the same method from period to period. The four methods described in GASB 53 are: consistent
critical terms, synthetic instrument, dollar-offset, and regression analysis. In addition, GASB 53 permits a
governmental entity to use other quantitative methods that are based on “established principles of
financial economic theory.” The fixed payer swap passes the established criteria using the regression
analysis methodology.

The fair values of the interest rate swaps were estimated using the zero-coupon method. This method
calculates the future net settlement payments required by the swap, assuming that the current forward
rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then
discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due
on the date of each future net settlement on the swaps. To measure non-performance risk for a derivative
instrument liability, credit spreads implied by the credit rating for debt issues by entities with similar credit
characteristics were used. This is the best method available under current market conditions since MSU
has no credit default swaps that actively trade in the marketplace. For a derivative instrument asset, the
adjustment for non-performance risk of counterparties was determined by analyzing counterparty-specific
credit default swaps, if available. If not available, credit default swaps in the market for entities of similar
type and rating were used, along with information found in various public and private information services.
This analysis is used to construct a credit curve that is applied to the discount curve on the net settlement
payments of the derivative instrument.

The counterparty to the fixed payer swap had the right to terminate the swap at $0 on December 14, 2016
(a European option); this option was not exercised. As of the trade date, the option’s value included
intrinsic value and time value. The option’s intrinsic value (calculated as the difference between the at-
market rate of 4.11% and the off-market rate of 3.953%) is accounted for as a loan receivable and is
repaid by the off-market portion of each swap payment. On September 10, 2010, the Series J bonds were
converted to index bonds. On September 4, 2018, the original Series J bonds were refunded in full with
proceeds from the Series F 2018 bonds, which were issued in a "SIFMA Index Rate" mode. While in the
SIFMA Index Rate, and through the Index Interest Rate Period, which spans from September 4, 2018,
through and including September 1, 2023, the interest rate is reset weekly at a rate of the SIFMA rate plus

A-157
A-158

a fixed spread. The spread is based on the long-term, unenhanced rating assigned to MSU with the
current spread as of June 30, 2021, was 0.45%. The dependent variable in the regression is the interest
rates of the hedged cash flows; the independent variable is the floating rates due under the hedging
derivative instrument.

The fair value of the fixed payer swap liability as of June 30, 2021, is at fair value level 2 and was based
on forward SIFMA rates using the three-month Libor Zero Curve, and the BMA Swaption Volatility on the
AA Rated Muni Revenue Curve. The fair value of the nonhedging derivative instrument investment is also
at level 2 and was based on forward SIFMA rates using the 10-year forward BMA constant maturity swap,
the three-month Libor Zero Curve, and the BMA Swaption Volatility on the counterparty’s credit default
swap.

The following table summarizes the reported balances as of, and the derivative instrument activity during,
the year ended June 30, 2021, (in thousands):

Activity During 2021 Fair Values at June 30, 2021
Cash flow hedges: Notional Classification Amount Classification Amount
Cash flow hedge -
Pay fixed interest rate swap 17,450 Interest expense 19 Loan receivable 175
Derivative instrument
Investment income — liability 1,919
Derivative instrument
Deferred outflow 1,125 borrowing 2,196
Investment derivative instrument-
Basis swap 17,450 ‘evens 19 Mnietoet avetued) © {

The objective and terms of MSU’s hedging derivative instrument outstanding as of June 30, 2021, is as
follows (in thousands):

Notional Termination Cash (Paid)/
Type Objective amount Effective Date Date Received Terms
Pay fixed, cancelable Hedge interest rate risk Pay 3.953%
interest rate swap on Series F 2018 Bonds $ 17,450 7/21/2005 11/15/2035 = $ — Receive SIFMA

Credit Risk

It is MSU’s policy to enter into derivative instrument agreements with highly rated counterparties. As of
June 30, 2021, counterparty ratings were A2 by Moody’s and BBB+ by Standard and Poor’s (S&P). MSU
manages credit risk by requiring its counterparties to post collateral in certain events. MSU is entitled to
collateral from its fixed payer swap counterparty if the interest rate swap’s fair value is greater than $5.0
million, and the counterparty is rated A+ or A by S&P, or A1 or A2 by Moody’s. If the counterparty to the
fixed payer swap is rated A- or below, by S&P, or A3 or below by Moody’s, MSU is entitled to collateral up
to 100% of the swap’s fair value. MSU is not required to post collateral. MSU will continue to monitor
counterparty credit risk.

MSU enters into derivative instrument agreements with multiple counterparties to limit the concentration
of credit risk. Currently, MSU has interest rate swaps with two different counterparties, and each
counterparty accounts for approximately 50% of outstanding notional. MSU monitors counterparty credit
risk on an ongoing basis.

Interest Rate Risk
Interest payments on variable rate debt will typically increase as interest rates increase. MSU believes it
has significantly reduced interest rate risk by entering into a pay-fixed, receive floating interest rate swap.
As interest rates increase, net swap payments decrease so that changes in hedged variable-rate debt
interest payments, attributable to SIFMA, are largely offset by the net swap payments.

Basis Risk

The variable-rate cash flows being hedged by the pay-fixed swap will increase or decrease as SIFMA
rates increase or decrease. Because the hedged cash flows are SIFMA based and the floating receipts of
the pay-fixed swap are SIFMA based, there is no basis risk.

Termination Risk

MSU or its counterparties may terminate a derivative instrument if the other party fails to perform under
the terms of the contract. In addition, MSU’s fixed payer swap counterparty has the right to terminate the
derivative instrument if the credit rating of MSU’s unenhanced long-term revenue bond rating is
withdrawn, suspended, or reduced below BBB-, in the case of S&P, or below Baa3 in the case of
Moody’s. If such an event occurs, MSU could be forced to terminate the fixed payer swap in a liability
position. As of June 30, 2021, MSU’s unenhanced long-term revenue bond rating was Aa3 by Moody’s
and A+ by S&P.

Foreign Currency Risk
All hedging derivative instruments are denominated in U.S. Dollars, and therefore MSU is not exposed to
foreign currency risk.

Market Access Risk

Market access risk is the risk that MSU will not be able to enter credit markets or that credit will become
more costly. For example, to complete a derivative instrument’s objective, an issuance of refunding bonds
may be planned in the future. If at that time MSU is unable to enter credit market, expected cost savings
may not be realized.

N. Related Party Transactions

Private nonprofit organizations with relations to the University of Montana (UM) include the Alumni
Association, the Montana Technology Enterprise Center (MonTEC), the Montana Tech Booster Club, and
the Montana Tech Alumni Association. The associations and booster club operate exclusively to
encourage, promote, and support educational programs, research, scholarly pursuits, and athletics at, or
in connection with, UM. No transfers for scholarships and construction projects were made by the
Montana Tech Booster Club for the year ended June 30, 2021. In exchange, UM provides the
associations and booster club with office space, staff, and some related office expenses.

MonTEC was established as a nonprofit 501(c)3 corporation in fiscal year 2001 as a result of an
agreement between UM and the Missoula Area Economic Development Foundation (MAEDF). MonTEC
provides low-cost lease space and business consulting to local “start-up” companies. The corporation’s
board of directors is comprised of four members. Two members of the board of directors are UM
employees, and two are non-UM employees. UM does not provide office space or other services to
MonTEC.

Private nonprofit organizations affiliated with Montana State University (MSU) include the MSU-Bozeman
Bookstore, Friends of KUSM, and Friends of KEMC. MSU-Bozeman leased certain office space from the
MSU Foundation’s wholly owned subsidiary, Advanced Technology Inc. (ATI). Rental and other payments
to ATI totaled $429.2 thousand. Friends of Montana Public Television provided $1.8 million and Friends of
KEMC Public Radio provided $1.2 million in support of the University’s television and radio stations.

O. Litigation Contingencies

As of June 30, 2021, there are no matters that will have a material adverse financial impact.

A-159
A-160

P. Subsequent Events

On July 1, 2021, Stockman Bank transferred the servicing of 589 loans to the Montana Board of Housing
(MBOH), with a total outstanding balance at the time of transfer of $54.0 million.

On August 1, 2021, MBOH issued direction for a full optional redemption of the series 1999A-1 multifamily
bonds in the amount of $4.1 million.

On August 31, 2021, MBOH closed on 2021 series B single family mortgage bonds in the amount of
$32.0 million.

On November 22, 2021, the MBOH closed on a multifamily housing revenue series 2021 conduit bond for
the Castlebar Apartment Development in the amount of $13.5 million.

The American Rescue Plan Act (ARPA) has provided funds to be used for a homeowner assistance fund
(HAF) to prevent mortgage delinquencies and defaults, foreclosures, loss of utilities or home energy
services, displacement of homeowner's insurance, utility payments, and for other specified purposes.

On February 17, 2022, the MBOH closed on single family mortgage bonds Series 2022A, in the amount
of $32.0 million.

On July 14, 2021, the Montana Facility Finance Authority (FFA) issued bonds Series 2021A of $56.8
million and bonds Series 2021B of $36.2 million to the Bozeman Deaconess Hospital to create new tax-
exempt debt for buildings and equipment and create new taxable debt to purchase the EPIC electronic
health records information system.

On July 27, 2021, the FFA issued bonds Series 2021B of $100.0 million to Benefis Health System to fund
construction of a new Helena Ambulatory Center, a new osteopathic medical school facility, and
equipment upgrades across the campus.

On August 12, 2021, the FFA issued bonds Series 2021A of $8.0 million and Series 2021B of $18.6
million to Community Hospital of Anaconda to finance the Hospital’s Infusion/Oncology Center project and
to refinance existing taxable debt incurred to expand and renovate the facility.

On August 31, 2021, the FFA issued bonds of $15.1 million to Beartooth Billings Clinic to refinance a
direct loan from USDA Rural Development, the Series 2009A bonds USDA Guarantee and Series 2009B
bonds unsecured. The original purpose of the 2009AB Series bonds was for the costs of design and
construction of the new hospital in the Red Lodge, Montana.

On September 1, 2021, the FFA issued a trust fund loan of $1.5 million to Rimrock Foundation to
reimburse the purchase of land in Billings to consolidate services and create a central campus.

On October 20, 2021, the FFA issued Series 2021 A bonds of $27.0 million and Series B bonds of $10.0
million to Marcus Daly Memorial Hospital in Hamilton to fund renovation and expansion projects as well
as refinance existing taxable and tax-exempt debt.

On November 15, 2021, the FFA issued Series 2021 A bonds to Billings Clinics of $150.0 million to be
used as a Capital expansion to broaden the clinic's service lines and market reach.

On August 30, 2021, Montana State University (MSU) announced a $101.0 million philanthropic gift to the
College of Nursing from Mark and Robyn Jones to address healthcare access to rural communities. This
gift, the largest in MSU history, will provide funding for new nursing education facilities across Montana in
addition to scholarships and endowed professorships.

On October 19, 2021, MSU issued new debt and restructured portions of existing debt, non-taxable series
G 2021 ($45.6 million) and taxable series H 2021 ($72.2 million). With the proceeds, $40.3 million of new
debt will go towards the construction of the upcoming Student Wellness Center and the remainder being a
refunding of series' 2012N, 20120, 2013A, and 2016C. This transaction also enabled MSU to adopt and
to operate under an Amended and Restated Indenture of Trust, 2021, that modernizes and broadens the
MSU revenue pledge to include auxiliary facility gross pledged revenues, land grant income, indirect cost
recovery payments, and all other unrestricted revenues of the University except tuition, student
association-controlled activity fees, ad valor em property taxes, and State grants and appropriations.

On December 31, 2021, the MSU-Northern Foundation received a charitable gift of 42.969 acres of real
property valued at $1.9 million. The gift is for the Foundation to leverage the property to assist MSU-
Northern in executing the build out of a proposed equine center.

On February 25, 2022, MSU announced a $50 million philanthropic gift from the Gianforte Family
Foundation. The gift is dedicated to constructing a new building to house the Gianforte School of
Computing and computing-related fields such as cybersecurity, optics and photonics, electrical and
computer engineering, and creative industries. The gift ties for the second largest in the university’s
history and is one of the largest philanthropic gifts in the history of Montana.

On March 12, 2021, Montana State Fund's board declared $20.0 million dividend to be distributed in May
2021 to eligible policyholders for the 2018 policy year.

In March 2020 when the COVID-19 outbreak was declared a global pandemic, the University of Montana
(UM) responded to the health crisis by moving to remote deliver of its courses. Remote delivery was
continued in fiscal year 2021. This contributed to a decline in tuition and fees revenue of $8.1 million, or
approximately 8.0 percent, and a decline in excess of $12.9 million in sales and service and auxiliary
revenues, or over 23.0 percent. While UM received funding through the Coronavirus Aid, Relief, and
Economic Security (CARES) Act, it was not sufficient to offset all mitigation costs and loss of operation
revenues. At the start of fiscal year 2022, UM returned to delivery of courses face-to-face and resumed
normal operations for a majority of operating activities.

Q. Commitments

Montana State Fund (MSF or New Fund) is in a multi-year project to replace its legacy policy
management system. Implementation of the core policy management and billing transaction systems, as
well as the supporting digital portals, is expected to begin in 2021 and total expenditures are estimated to
be $39.2M. The total project cost through December 31, 2020 was $33.3M. The next phase to develop
remaining enhancement features will be planned and arranged with consulting services towards the end
of 2021. Costs during the application development phase are being capitalized and recorded as
construction work in process until the system is deployed.

As of June 30, 2021, Montana State University (MSU) had issued purchase orders committing the
expenditure of approximately $23.1 million for equipment, supplies, and services which had not yet been
received.

As of June 30, 2021, MSU had remaining budget authority on significant capital construction and
renovation projects underway of approximately $41.1 million. These projects include projects that are
administered by the State Architecture and Engineering Division (A & E) and nonA & E managed projects.
Select projects are funded wholly or partially by the State’s Long Range Building Program, and do not
represent a commitment of funds on the part of MSU.

As of June 30, 2021, the University of Montana (UM) has spent $16.1 million of $48.6 million in budget
authorizations for capital and maintenance projects.

A-161
A-162

NOTE 19. MATERIAL VIOLATIONS OF FINANCE-RELATED LEGAL PROVISIONS
Constitutionality of Retirement Plan Funding

The Montana Constitution, Article VIII, Section 15, states that public retirement systems shall be funded
on an actuarially sound basis. Public pension plans are considered actuarially sound if the unfunded
accrued actuarial liability amortization period is within 30 years. As of June 30, 2021, the Game Warden &
Peace Officers’ Retirement System (GWPORS) was not in compliance and did not amortize within 30
years. The unfunded liabilities in the other state retirement systems amortized in 30 years or less as of
the fiscal year ended June 30, 2021.
A-163

This page was intentionally left blank.
A-164

BUDGETARY COMPARISON SCHEDULE

GENERAL AND MAJOR SPECIAL REVENUE FUNDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2021
(amounts expressed in thousands)

REVENUES
Licenses/permits
Taxes:

Natural resource

Individual income

Corporate income

Property

Fuel

Other
Charges for services/fines/forfeits/settlements
Investment earnings
Sale of documents/merchandise/property
Rentals/leases/royalties
Contributions/premiums
Grants/contracts/donations
Federal
Federal indirect cost recoveries
Other revenues

Total revenues

EXPENDITURES
Current:
General government
Public safety
Transportation
Health and human services
Education
Natural resources
Debt service (Note RSI-1):
Principal retirement
Interest/fiscal charges
Capital outlay (Note RSI-1)
Total expenditures
Excess of revenue over (under) expenditures

OTHER FINANCING SOURCES (USES)
Insurance proceeds
General capital asset sale proceeds
Refunding bond issued
Payment to refunding bond escrow agent
Bond premium
Bond proceeds
Energy conservation loans
Transfers in (Note 12)
Transfers out (Note 12)
Total other financing sources (uses)

Net change in fund balances

(Budgetary basis)

RECONCILIATION OF BUDGETARY/GAAP REPORTING
1. Securities lending income

2. Securities lending costs

3. Inception of lease/installment contract

4. Adjustments for nonbudgeted activity

(GAAP basis)

Fund balance - July 1

Prior period adjustments

Increase (decrease) in inventories
Fund balances - June 30

The notes to the required supplementary information are an integral part of this schedule.

GENERAL FUND
—CRIGINAL FINAL
BUDGET BUDGET ACTUAL VARIANCE

$ 142,964 $ 142,964 $ 142,810 $ (154)
73,910 73,910 68,068 (5,842)
1,464,438 1,464,438 1,734,627 270,189
167,209 167,209 263,869 96,660
310,394 310,394 309,495 (899)
255,740 255,740 253,940 (1,800)
46,638 46,638 45,488 (1,150)
_ _ 5,093 5,093
302 302 251 (61)
10 10 8 (2)
(274) (274) — 274
Pa 24 13,665 13,644
21,117 21,117 10,767 (10,350)
38 38 164 126
127 127 379 252
2,482,034 2,482,604 2,848,624 365,090
409,511 409,511 385,619 23,892
346,427 346,427 310,373 36,054
213 213 174 39
566,288 566,288 490,805 75,483
1,132,486 1,132,486 1,119,344 13,142
43,782 43,782 38,226 5,556
_ _ 295 (295)
_ _ 247 (247)
_ _ 7,436 (7,436)
2,498,707 2,498,107 2,352,519 146,188
(16,073) (16,073) 496,105 512,178
107 107 119 12
81,943 81,943 85,085 3,142
(279,411) (279,411) (330,993) (51,582)
(197,361) (197,301) (245,789) (48,428)
(213,434) (213,434) 250,316 463,750
_ _ 39 39
_ _ (10) (10)
_ _ 193 193
(213,434) (213,434) 250,538 463,972
_ _ 592,810 592,810
_ _ 13,335 13,335
_ _ (384) (384)
$ (213,434) $ (213,434) $ 856,299 $ 1,069,733

Budgetary data is not broken down to the same account level as actual financial statement data, which accounts for some of the larger variances.
The original and final budget figures reflect adjustments to the original budget for various reasons, including legislative and executive changes.
A-166

NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION

NOTE RSI - 1. BUDGETARY REPORTING
A. State Budget Process

The Montana Legislature meets in the odd-numbered years to prepare annual budgets for the next
biennium. The Constitution requires that legislative appropriations not exceed available revenues. The
Legislature uses revenue estimates in the budgetary process to establish appropriation levels.
Expenditures may not legally exceed budget appropriations at the fund level. In addition, the State
Constitution prohibits borrowing to cover deficits incurred because appropriations exceeded anticipated
revenues. State law requires an appropriation for disbursements from the general, special revenue and
capital projects funds, except for those special revenue funds from non-state and non-federal sources
restricted by law or by the terms of an agreement. The level of budgetary control is established by fund
type, except capital project funds, which are at project level. Budgets may be established in other funds
for administrative purposes.

Agency budget requests are submitted to the Governor, and the Legislative Fiscal Division receives a
copy. The Office of Budget and Program Planning (OBPP) and the Governor analyze the requests,
establish priorities, and develop the requests into the executive budget request submitted to the
Legislature. Joint appropriations subcommittee hearings are held, and an omnibus appropriation bill is
reported in the House and subsequently sent to the Senate. The Legislature generally enacts one bill to
establish the majority of appropriations for the next two fiscal years. OBPP establishes appropriations for
each program by accounting entity (fund) within an agency. The Legislature enacts other appropriations,
but only within the available revenue. Agencies must prepare and submit to the budget director
operational plans showing the allocation of operating budgets by expenditure category (i.e., personal
services, operating expenses, equipment, etc.). The budget director or other statutorily designated
approving authority may authorize changes among expenditure categories and transfers between
program appropriations.

Appropriations may not be increased by amendment in the General Fund. However, a department,
institution, or agency of the executive branch desiring authorization to make expenditures from the
General Fund during the first fiscal year of the biennium from appropriations for the second fiscal year of
the biennium may apply for authorization from the Governor through the budget director. In the second
year of the biennium, during the legislative session, the Legislature may authorize supplemental
appropriations. The Governor, or designee, may approve budget amendments for non-general fund
monies not available for consideration by the Legislature and for emergencies. In the accompanying
financial schedule, original and final budget amounts are reported. There were no expenditures in excess
of total authorized appropriations in the State's budgeted funds for the fiscal year.

Appropriations for debt service activities are continuing through statutory authority until the obligation is
extinguished. Because these non-operating budgets primarily serve a management control purpose, and
related appropriations are continuing in nature, no comparison between budgeted and actual amounts for
funds budgeted on this basis is provided. Appropriations for capital projects funds are not made on an
annual basis, but are adopted on a project-length basis. Because these non-operating budgets primarily
serve a management control purpose, and related appropriations are continuing in nature, no comparison
between budgeted and actual amounts for funds budgeted on this basis is provided.

Appropriations may be continued into the next fiscal year when authorized by the Legislature or the
Governor's Office. After fiscal year-end, appropriations that are not continued are reverted. The reverted
appropriations remain available for one fiscal year for expenditures that exceed the amount accrued or
encumbered. Fund balances are not reserved for reverted appropriations. For fiscal year 2021, reverted
governmental fund appropriations were as follows: $96.6 million in the General Fund, $260.7 million in the
State Special Revenue Fund, and $332.0 million in the Federal Special Revenue Fund. Agencies are
allowed to carry forward 30.0% of their reverted operating appropriations into the next two fiscal years.
This amount can be used for new expenditures at the request of the agency and upon approval of OBPP.

B. Budget Basis

The Legislature's legal authorization ("appropriations") to incur obligations is enacted on a basis
inconsistent with Generally Accepted Accounting Principles (GAAP). The budget basis differs from GAAP
A-167

for encumbrances outstanding at fiscal year-end, compensated absences, capital assets and inventories
purchased in proprietary funds, certain loans from governmental funds, and other miscellaneous n on-
budgeted activity.
A-168

REQUIRED SUPPLEMENTARY INFORMATION

NOTE RSI - 2. PENSION PLAN INFORMATION

Required Supplementary Information
State of Montana as an Employer Entity

Judges’ Retirement System
Schedule of Changes in Net Pension Liability/(Asset) and Related Ratios !
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015

Total Pension Liability (TPL)
Service costs $ 1,748 $ 1,772 $ 1,664 $ 1,28 $ 1,578 $ 1,653 $ 1,594
Interest 4,842 4,458 4,503 4,044 3,986 3,934 3,824
Differences between expected and actual experience (262) 2,743 (2,901) 862 (1,341) (1,032) —
Refunds of contributions — — (149) — — — —
Benefit payments (4,038) (3,846) (3,723) (3,554) (3,416) (3,041) (3,023)

Net change in total pension liability 4,202 5,127 (606) 6,845 807 1,514 2,395
Total pension liability - beginning 65,319 60,192 60,798 53,953 53,146 51,632 49,237
Total pension liability - ending $ 69,521 $ 65319 $ 60,192 $ 60,798 $ 53953 $ 53146 $ 51,632
Plan Fiduciary Net Position
Contributions — employer $ 1,988 $ — $ 108 $ 1,800 $ 1806 $ 1684 $ 1,651
Contributions - member 560 517 575 488 129 534 481
Net investment income 2,827 5,687 8,467 10,368 1,779 3,843 12,421
Refunds of contributions — — (149) — — — —
Benefit payments (4,038) (3,846) (3,723) (3,554) (3,416) (3,041) (3,023)
Administrative expense (157) (123) (264) (254) (197) (136) (100)
Other — — 7 — (3) — —

Net change in plan fiduciary net position 1,180 2,235 5,998 8,848 698 2,884 11,430
Plan fiduciary net position - beginning 104,886 102,651 96,653 87,805 87,107 84,223 72,793
Plan fiduciary net position - ending $ 106,066 $ 104,886 $ 102,651 $ 96653 $ 87,805 $ 87,107 $ 84,223
Net Pension (Asset) - Beginning $ (39,567) $ (42,459) $ (35,855) $ (33,852) $ (33,961) $ (32,591) $ (23,556)
Net Pension (Asset) - Ending $ (36,545) $ (39,567) $ (42,459) $ (35,855) $ (33,852) $ (33,961) $ (32,591)
Plan fiduciary net position as a percentage of TPL 152.57% 160.58% 170.54% 158.97% 162.74% 163.90% 163.12%
Covered payroll $ 8001 $ 7,382 $ 7,291 $ 6974 $ 6920 $ 6525 §$ 6,355

Net pension (asset) as a percentage of covered payroll (456.76)% (535.99)% (582.35)% (514.12)% (489.19)% — (521.00)% (513.00)%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.
A-169

Schedule of Employer Contributions '

For the Fiscal Year Ended June 30

(in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ $ 1,988 $ — $ 1,085 $ 1,800 $ 1,786 $ 1,684
Contributions made in relation to the
contractually required contributions 1,988 _— 1,085 1,800 1,786 1,684
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ =
Covered payroll $ $ 8001 $ 7,382 $ 7,291 $ 6974 $ 6920 $ 6,525

Contributions as a percentage of
covered payroll

25.82% 24.85% 0.00% 14.88% 25.81% 26.00% 26.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Judges’ Retirement System

Notes to Required Supplementary Information

For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020.

The following key methods and assumptions were used to determine the contractual contribution rates

reported in that schedule:

Actuarial cost method
Amortization method
Asset valuation method
Wage inflation

Merit increases

Total salary increases
Inflation

Investment rate of return

Mortality (healthy)

Mortality (disabled)
Admin expense as a % of payroll

Entry age normal

Level percentage of pay, open

4-year smoothed market

3.50%

0%

3.50%, including inflation

2.40%

7.34%, net of pension plan investment expense, including
inflation

RP-2000 Combined employee and annuitant mortality table
projected to 2020 using scale BB, males set back 1 year
RP-2000 Combined employee and annuitant mortality table
0.08%

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-170

Required Supplementary Information
State of Montana as an Employer Entity

Highway Patrol Officers’ Retirement System

Schedule of Changes in Net Pension Liability and Related Ratios '

For the Fiscal Year Ended June 30
(dollars in thousands)

Total Pension Liability (TPL)
Service costs
Interest
Changes in benefits
Difference between expected and actual experience
Changes of assumptions
Benefit payments
Refunds of contributions

Net change in total pension liability
Total pension liability — beginning
Total pension liability - ending
Plan Fiduciary Net Position
Contributions - employer
Contributions - non-employer
Contributions - member
Net investment income
Benefit payments
Administrative expense
Refunds of contributions
Other

Net change in plan fiduciary net position
Plan fiduciary net position — beginning

Plan fiduciary net position - ending

Net Pension Liability - Beginning

Net Pension Liability - Ending

Plan fiduciary net position as a percentage of TPL
Covered payroll

Net pension liability as a percentage of covered payroll

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

2021 2020 2019 2018 2017 2016 2015
$ 3,337 $ 3453 $ 3643 $ 3665 $ 3,799 $ 3598 $ 3,464
17,688 16,926 16,294 15,121 14,545 14,113 13,518

(993) 2,413 590 2,774 18 267 —
141,055 — — 7,892 — — —
(331) (582) (322) (245) (94) — —
148,071 10,147 8,659 18,170 7,786 9,833 7,539
$ 385,799 $ 237,728 $ 227,581 $ 218922 $ 200,752 $ 192,966 $ 183,133
$ 6003 $ 5845 $ 5858 $ 5782 $ 5916 $ 5840 $ 5,736
226 233 250 263 243 — —
2,170 2,002 2,387 1,950 1,917 1,624 1,458
4,101 8,269 12,283 15,099 2,605 5,738 18,677
(163) (127) (256) (248) (197) (144) (109)
(331) (582) (322) (245) (94) — —
(131) 2 8 — (2) — —
(810) 3,579 8,662 11,564 (94) 3,057 16,319
$ 151,968 $ 152,778 $ 149,199 $ 140,537 $ 128,973 $ 129,067 $ 126,010
84,950 $ 78,382 $ 78385 $ 71,779 $ 63899 $ 57,123 $ 65,903

$ 233,831 $ 84,950 $ 78,382 $ 78,385 $ 71,779 $ 63,899 $ 57,123
39.39% 64.27% 65.56% 64.20% 64.24% 67.00% 69.00%

$ 15,608 $ 15,178 $ 15,251 $ 14779 $ 15,276 $ 14,549 $ 14,149
A-171

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30

(dollars in thousands)

2020 2019 2018 2017 2016 2015

Contractually required contributions $
Contributions in relation to the

$ 6209 $ 6051 $ 5843 $ 5706 $ 6161 $ 5,782

contractually required contributions 6,209 6,051 5,843 5,706 6,161 5,782
Contribution deficiency/(excess) $ $ — $ — $ — $ — $ — $ _
Covered payroll $ $ 15,608 $ 15,178 $ 15,251 $ 14,779 $ 15,276 $ 14,549

Contributions as a percentage of
covered payroll

39.68% 39.78% 39.87% 38.31% 38.61% 40.00% 40.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
Highway Patrol Officers’ Retirement System

For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020.

The following key methods and assumptions were used to determine the contractual contribution rates

reported in that schedule:

Actuarial cost method
Amortization method
Asset valuation method
Wage inflation

Merit increases

Total salary increases
Inflation

Investment rate of return

Mortality (healthy)

Mortality (disabled)
Admin expense as a % of payroll

Entry age normal

Level percentage of pay, open

4-year smoothed market

3.50%

0% to 6.30%

3.50% to 10.02%, including inflation

2.40%

7.34%, net of pension plan investment expense, including
inflation

RP-2000 Combined employee and annuitant mortality table
projected to 2020 using scale BB, males set back 1 year
RP-2000 Combined employee and annuitant mortality table
0.18%

Changes of assumptions: The discount rate was lowered from 7.65% to 4.43%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-172

Required Supplementary Information
State of Montana as an Employer Entity

Game Wardens’ and Peace Officers’ Retirement System

Schedule of Changes in Net Pension Liability and Related Ratios '

For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Total Pension Liability (TPL)
Service costs $ 8029 $ 8004 $ 8098 $ 8623 $ 8403 $ 8008 $ 7,850
Interest 18,535 17,618 16,018 14,269 12,911 12,398 11,258
Difference between expected and actual experience (2,027) (4,728) 4,781 3,743 2,705 731 —
Benefit payments (8,247) (7,350) (6,523) (5,810) (5,068) (5,352) (5,229)
Refunds of contributions (1,200) (1,001) (1,105) (1,036) (1,066) — —
Net change in total pension liability 101,057 12,543 21,269 25,667 17,885 15,785 13,879
Total pension liability - beginning 247,013 234,470 213,201 187,534 169,649 153,864 139,985
Total pension liability - ending $ 348,070 $ 247,013 $ 234,470 $ 213,201 $ 187,534 $ 169,649 $ 153,864
Plan Fiduciary Net Position
Contributions - employer $ 4868 $ 468 $ 4613 $ 4464 $ 4,278 $ 4,088 $ 3,762
Contributions - member 5,803 5,566 5,512 5,278 5,036 4,924 4,462
Net investment income 5,583 11,125 15,573 18,590 3,167 6,435 20,069
Benefit payments (8,247) (7,350) (6,523) (5,810) (5,068) (5,352) (5,229)
Administrative expense (241) (202) (369) (329) (269) (200) (162)
Refunds of contributions (1,200) (1,001) (1,105) (1,036) (1,066) — —
Other (4) 1 (19) (1) (31) _ _
Net change in plan fiduciary net position 6,562 12,825 17,682 21,156 6,047 9,895 22,902
Plan fiduciary net position - beginning 206,348 193,523 175,841 154,685 148,638 138,743 115,841
Plan fiduciary net position - ending $ 212,910 $ 206,348 $ 193,523 $ 175,841 $ 154,685 $ 148638 $ 138,743
Net Pension Liability - Beginning $ 40,665 $ 40947 $ 37,360 $ 32,849 $ 21,011 $ 15121 $ 24,144
Net Pension Liability - Ending $ 135,160 $ 40665 $ 40,947 $ 37,360 $ 32849 $ 21,011 $ 15,121
Plan fiduciary net position as a percentage of TPL 61.17% 83.54% 82.54% 82.48% 82.48% 87.00% 90.00%
Covered payroll $ 53,825 $ 51,677 $ 50823 $ 49381 $ 47,108 $ 44885 $ 41,637
Net pension liability as a percentage of covered payroll 251.11% 78.69% 80.57% 75.66% 69.73% 47.00% 36.00%
Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)
2021 2020 2019 2018 2017 2016 2015

Contractually required contributions $ 5,394 $ 4837 $ 4644 $ 4574 $ 4447 $ 4,240 $ 4,040

Contributions in relation to the

contractually required contributions 5,394 4,837 4,644 4,574 4,447 4,240 4,040

Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =

Covered payroll $ 60,023 $ 53825 $ 51,677 $ 50823 $ 49,381 $ 47,108 $ 44,885

Contributions as a percentage of

covered payroll 8.99% 8.99% 8.99% 9.00% 9.01% 9.00% 9.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.
A-173

Notes to Required Supplementary Information
Game Wardens’ and Peace Officers’ Retirement System

For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020.

The following key methods and assumptions were used to determine the contractual contribution rates

reported in that schedule:

Actuarial cost method
Amortization method
Asset valuation method
Wage inflation

Merit increases

Total salary increases
Inflation

Investment rate of return

Mortality (healthy)

Mortality (disabled)
Admin expense as a % of payroll

Entry age normal

Level percentage of pay, open

4-year smoothed market

3.50%

0% to 6.30%

3.50% to 10.02%, including inflation

2.40%

7.34%, net of pension plan investment expense, including
inflation

RP-2000 Combined employee and annuitant mortality table
projected to 2020 using scale BB, males set back 1 year
RP-2000 Combined employee and annuitant mortality table
0.16%

Changes of assumptions: The discount rate was lowered from 7.65% to 5.65%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-174

Required Supplementary Information
State of Montana as an Employer Entity

Public Employees’ Retirement System-Defined Benefit Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 48.997235% 39.140686% 39.546272% 53.049189% 53.241100% 53.611080% 53.223780%
Employer's proportionate share of the net pension
liability $ 1,292,651 $ 818,162 $ 825,387 $ 1,033,200 $ 906,880 $ 749,414 $ 663,174
Employer's covered payroll $ 654,193 $ 638,674 $ 640,177 $ 648,671 $ 621,755 $ 620,286 $ 597,083
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 197.59% 128.10% 128.93% 159.28% 145.86% 120.82% 111.07%
Plan fiduciary net position as a percentage of the total
pension liability 68.90% 73.85% 73.47% 74.00% 75.00% 78.00% 80.00%
Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)
2021 2020 2019 2018 2017 2016 2015

Contractually required contributions $ 78878 $ 58504 $ 56183 $ 54844 $ 56256 $ 59073 $ 58575

Contributions in relation to the contractually required

contributions 78,878 58,504 56,183 54,844 56,256 59,073 58,575

Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =

Covered payroll $ 715,875 $ 654,193 $ 638674 $ 640,177 $ 648671 $ 621,755 $ 620,286

Contributions as a percentage of covered payroll 11.02% 8.94% 8.80% 8.57% 8.67% 9.50% 9.44%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020.

The following actuarial methods and assumptions were used to determine contractual contribution rates
reported in that schedule:

Actuarial cost method Entry age normal

Amortization method Level percentage of payroll, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%

Merit increases 0% to 4.80%

Total salary increases 3.50% to 8.47%, including inflation

Inflation 2.40%

Investment rate of return 7.34%, includes inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table
projected to 2020 using scale BB, males set back 1 year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.30%

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-175

Required Supplementary Information
State of Montana as a Nonemployer Entity

Public Employees’ Retirement System-Defined Benefit Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Nonemployer’s proportion of the net pension liability 14.215404% 24.411533% 24.917247% 1.007464% 0.956169% 0.956090% 0.961287%
Nonemployer’s proportionate share of the net pension

liability $ 375,032 $ 510,277 $ 520,058 $ 19622 $ 16,287 $ 13,365 $ 11,978
Plan fiduciary net position as a percentage of the total
pension liability 68.90% 73.85% 73.47% 74.00% 75.00% 78.00% 80.00%

Schedule of Nonemployer Contributions |
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 21,180 $ 35008 $ 34642 $ 34,706 $ 28763 $ 30,800 $ 32,397
Contributions in relation to the contractually required
contributions 21,180 35,008 34,642 34,706 28,763 30,800 32,397
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually determined contribution rates are set forth by the Legislature and are contained within the
Montana Code Annotated (MCA). The amounts used for the valuation as of the year ended June 30,
2020, are as follows:

Special Funding
The State contributes 0.1% of member compensation on behalf of local government entities per
Section 19-3-319, MCA.
The State contributes 0.37% of member compensation on behalf of school district entities per
Section 19-3-319, MCA.
The State contributes a statutory appropriation from General Fund per Section 19-3-320, MCA.

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-176

Required Supplementary Information
State of Montana as an Employer Entity

Sheriffs’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 4.758893% 4.876949% 4.872800% 4.856692% 5.454386% 5.637055% 5.535000%
Employer's proportionate share of the net pension
liability $ 5800 $ 4067 $ 3663 $ 3696 $ 9,582 $ 5434 $ 2,304
Employer's covered payroll $ 4041 $ 3915 $ 3781 $ 3634 $ 3850 $ 3836 $ 3,580
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 143.53% 103.88% 96.88% 101.71% 248.88% 141.66% 64.36%
Plan fiduciary net position as a percentage of the total
pension liability 75.92% 81.89% 82.68% 81.00% 63.00% 75.00% 87.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 607 $ 530 $ 513 $ 496 $ 368 $ 389 $ 388
Contributions in relation to the contractually required
contributions 607 530 513 496 368 389 388
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =
Covered payroll $ 4628 $ 4041 $ 3915 $ 3781 $ 3634 $ 3850 $ 3,836
Contributions as a percentage of covered payroll 13.12% 13.12% 13.10% 13.12% 10.13% 10.10% 10.11%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020. The following actuarial methods and assumptions were
used to determine contractual contribution rates reported in that schedule:

Actuarial cost method Entry age normal

Amortization method Level percentage of payroll, open

Asset valuation method 4-year smoothed market

Wage Inflation 3.50%

Merit increases 0% to 6.30%

Total salary increases 3.50% to 10.02%, including inflation

Inflation 2.40%

Investment rate of return 7.34%, includes inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table
projected to 2020 using scale BB, set back 1 year for males

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.16%

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-177

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Municipal Peace Officers’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Nonemployer’s proportion of the net pension liability 66.853347% 67.063878% 67.124706% 67.085433% 66.499650% 66.954111% 66.888728%
Nonemployer’s proportionate share of the net pension

liability $ 163,514 $ 133487 $ 114956 $ 119,354 $ 119,708 $ 110,756 $ 105,106
Plan fiduciary net position as a percentage of the total
pension liability 64.84% 68.84% 70.95% 68.00% 66.00% 67.00% 67.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 17395 $ 16677 $ 15941 $ 15283 $ 13215 $ 13,752 $ 13,433
Contributions in relation to the contractually required
contributions 17,395 16,677 15,941 15,283 13,215 13,752 13,433
Contribution deficiency/(excess) $ — $ — $ — $ — $ —$ —$ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually determined contribution rates are set forth by the Legislature and are contained within the
Montana Code Annotated (MCA). The amounts used for the valuation as of the year ended June 30,
2020, are as follows:

The State contributes 29.37% of member compensation on behalf of all employer entities per
Section 19-9-702, MCA.

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-178

Required Supplementary Information
State of Montana as an Employer Entity

Firefighters’ Unified Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 2.378643% 2.013129% 2.300917% 2.233929% 2.261523% 2.399255% 1.850026%
Employer's proportionate share of the net pension
liability $ 3,722 $ 2309 $ 2650 $ 2525 $ 2,583 $ 2,454 $ 1,806
Employer's covered payroll $ 1,276 $ 1,051 $ 1,103 $ 1,022 $ 974 $ 986 $ 735
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 291.69% 219.70% 240.25% 247.06% 265.20% 249.00% 245.00%
Plan fiduciary net position as a percentage of the total
pension liability 75.34% 80.08% 79.03% 78.00% 75.00% 77.00% 77.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 665 $ 599 $ 494 $ 518 $ 472 $ 475 §$ 142
Contributions in relation to the contractually required
contributions 665 599 494 518 472 475 142
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =
Covered payroll $ 1,415 $ 1,276 $ 1,051 $ 1,103 $ 1,022 $ 974 §$ 986
Contributions as a percentage of covered payroll 47.00% 46.94% 47.00% 46.96% 46.18% 49.00% 14.40%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020. The following actuarial methods and assumptions were
used to determine contractual contribution rates reported in that schedule:

Actuarial cost method Entry age normal

Amortization method Level percentage of payroll, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%

Merit increases 0% to 6.30%

Total salary increases 3.50% to 10.02%, including inflation

Inflation 2.40%

Investment rate of return 7.34%, including inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table
projected to 2020 using scale BB, males set back 1 year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin as a % of payroll 0.13%

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-179

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Firefighters’ Unified Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015

Nonemployer’s proportion of the net pension liability 67.656380% 69.323577% 67.972164% 67.876338% 67.809541% 67.358196% 68.005182%
Nonemployer’s proportionate share of the net pension

liability $ 105,867 $ 79,524 $ 78,285 $ 76,724 $ 77448 $ 68,892 $ 66,384
Plan fiduciary net position as a percentage of the total
pension liability 75.34% 80.08% 79.03% 78.00% 75.00% 77.00% 77.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 17,897 $ 17,147 $ 16209 $ 15,272 $ 14042 $ 13635 $ 13,573
Contributions in relation to the contractually required
contributions 17,897 17,147 16,209 15,272 14,042 13,635 13,573
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of statutorily determined contributions: The
statutorily determined contribution rates are set forth by the Legislature and are contained within the
Montana Code Annotated (MCA). The amounts used for the valuation as of the year ended June 30,
2020, are as follows:

The State contributes 32.61% of member compensation on behalf of all employer entities per
Section 19-13-604, MCA.

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-180

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Volunteer Firefighters’ Compensation Act
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Nonemployer’s proportion of the net pension liability 100% 100% 100% 100% 100% 100% 100%
Nonemployer’s proportionate share of the net pension
liability $ 9106 $ 6907 $ 7,667 $ 10,087 $ 10,599 $ 10,504 $ 5,089
Plan fiduciary net position as a percentage of the total
pension liability 81.42% 85.23% 83.48% 78.00% 76.00% 76.00% 87.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 2,578 $ 2,475 $ 2,361 $ 2,207 $ 2,054 $ 2,024 $ 1,913
Contributions in relation to the contractually required
contributions 2,078 2,475 2,361 2,207 2,054 2,024 1,913
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of actuarially determined contributions: The
statutorily determined contribution rates are set forth by the Legislature and are contained within the
Montana Code Annotated (MCA). The amounts used for the valuation as of the year ended June 30,

2020, are as follows:
The State contributes 5% of certain fire tax insurance premiums paid per Section 19-17-301,
MCA.

Changes of assumptions: The discount rate was lowered from 7.65% to 7.34%. The investment rate of
return was lowered from 7.65% to 7.34%. The inflation rate was reduced from 2.75% to 2.40%.
A-181

Required Supplementary Information
State of Montana as an Employer Entity

Teachers’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 2.303331% 2.411113% 2.554088% 2.860298% 3.121008% 3.422388% 4.689747%
Employer's proportionate share of the net pension
liability $ 51,812 $ 46493 $ 47407 $ 48,227 $ 57,016 $ 56,230 $ 72,168
Employer's covered payroll $ 22,384 $ 23,250 $ 24,275 $ 26944 $ 28,915 $ 31,252 $ 32,937
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 231.47% 199.97% 195.29% 178.99% 197.18% 179.00% 219.00%
Plan fiduciary net position as a percentage of the total
pension liability 64.95% 68.64% 69.09% 70.00% 67.00% 69.00% 70.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 16103 $ 16686 $ 16538 $ 17,298 $ 17,396 $ 16946 $ 16,234
Contributions in relation to the contractually required
contributions 16,103 16,686 16,538 17,298 17,396 16,946 16,234
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ =
Covered payroll $ 21,776 $ 22,384 $ 23,250 $ 24275 $ 26,944 $ 28915 $ 31,252
Contributions as a percentage of covered payroll 73.95% 74.54% 71.13% 71.26% 64.56% 58.00% 52.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of actuarially determined contributions: The
actuarially determined contribution rates are determined on an annual basis for the fiscal year beginning
July 1, 2020, determined as of June 30, 2020. The following actuarial methods and assumptions were
used to determine actuarial contribution rates reported in that schedule:

Actuarial cost method Entry age

Amortization method Level percentage of pay, open

Asset valuation method 4-year smoothed market

Wage inflation 3.25%

Merit increase 0 to 4.51% for non-university members and
1.00% for university members

Total salary increases 3.25% to 7.76% for non-university members and
4.25% for university members, including inflation

Inflation 2.40%

Investment rate of return 7.34%, net of pension plan investment expense, and
including inflation

Mortality (healthy) RP-2000 Healthy Combined mortality table projected to 2022
adjusted for partial credibility setback for 2 years

Mortality (disabled) RP-2000 Disabled mortality table for males set back 3 years, for

females set forward 2 years
Admin as a % of payroll 0.45%
A-182

Changes of assumptions: The discount rate was lowered from 7.50% to 7.34%. The investment rate of
return was lowered from 7.50% to 7.34%. The inflation rate was reduced from 2.50% to 2.40%.

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Teachers’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015

Nonemployer's proportion of the net pension liability 36 5546499 37.112880% 37.735743% 38.133267% 38.729473% 39.384625% 38.777294%
Nonemployer’s proportionate share of the net pension

liability $ 822,282 $ 715,637 $ 700,417 $ 642,958 $ 707,527 $ 647,092 $ 596,724
Plan fiduciary net position as a percentage of the total
pension liability 64.95% 68.64% 69.09% 70.00% 67.00% 69.00% 70.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2021 2020 2019 2018 2017 2016 2015
Contractually required contributions $ 46,701 $ 44841 $ 44333 $ 43,718 $ 43028 $ 42,400 $ 42,806
Contributions in relation to the contractually required
contributions 46,701 44,841 44/333 43,718 43,028 42,400 42,806
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ — $ _

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2021

Method and assumptions used in calculations of contractually determined contributions: The
contractually required contribution rates are set forth by the Legislature and are contained within the
Montana Code Annotated (MCA). The amounts used for the valuation as of the year ended June 30,
2020, are as follows:

The State contributes 0.11% of the compensation of members participating per Section
19-20-604, MCA.

The State contributes 2.38% of member compensation on behalf of school district and community
college entities per Section 19-20-607, MCA.

The State contributes a $25.0 million payment from the General Fund per Section 19-20-607,
MCA.

Changes of assumptions: The discount rate was lowered from 7.50% to 7.34%. The investment rate of
return was lowered from 7.50% to 7.34%. The inflation rate was reduced from 2.50% to 2.40%.
A-183

REQUIRED SUPPLEMENTARY INFORMATION
NOTE RSI - 3. OTHER POSTEMPLOYMENT BENEFITS PLAN INFORMATION (OPEB)

The State of Montana and MUS OPEB plans allow retirees to participate, as a group, at a rate that does
not cover all of the related costs. This results in the reporting of the Total OPEB Liability in the related
financial statements and note disclosures.

In accordance with GASB 75, the following information is presented to reflect the funding progress of the
Other Postemployment Benefits Plans for the State of Montana OPEB plan.

Total OPEB Liability and Related Ratios
Last 10 Fiscal Years "’
(in thousands)

Total
OPEB
Liability 2021 2020 2019 2018

Service cost 1,734 $ 1946 $ 2,062 1,889
Interest 1,333 1,586 1,990 2,014
Difference between expected (6,137) (9,409) — (4,723)
and actual experience
Changes of assumptions or other 104,439 (1,877) 2,895 (295)
inputs
Benefit payments (1,196) (601) (1,709) 1,705

Net change in Total OPEB 100,173 (8,355) 5,238 590

Liability

Total OPEB Liability -

Beginning 47,342 55,697 50,459 49,869

Total OPEB Liability -
Ending 147,515 $ 47,342 $ 55,697 50,459

State and discretely presented
component units’ proportion of
the collective Total OPEB
Liability 100 % 100 % 100 % 100 %
Covered employee payroll 689,871 $ 690,563 $ 702,688 675,661
Total OPEB Liability as a
percentage of covered employee 21.38 % 6.86 % 7.93 % TAT%

payroll

") Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Note to Schedule: No assets are accumulated in a trust that meets the criteria of GASB 75.

Factors that significantly affect trends in the amounts reported:
A-184

Changes in Actuarial Assumptions and Methods

June 30, 2021: Changes in assumptions for 2021 were due to no retiree contribution increase
and a decrease in the discount rate from 2.75% to 2.23%.

June 30, 2020: Changes in actuarial assumptions include a participation rate reduction from 55%
to 40% based on recent experience study, a revision to rates per the Retirement System pension
valuations as of July 1, 2019, and the interest/discount rate was based on the average of multiple
March 31, 2020 municipal bond rate sources.

June 30, 2019: Changes in actuarial assumptions include interest rate based upon March 31,
2019, 20-year municipal bond index per GASB 75 requirements.

June 30, 2018: Changes in actuarial methods include adjustments to the amortization period and
actuarial cost method to conform with GASB 75 requirements. Changes in actuarial assumptions
include revised rates per the retirement system pension valuations as of July 1, 2017 and interest
rate based upon the March 31, 2018, 20-year municipal bond index per GASB 75 requirements.
Other changes include revised rates based on actual data and projected trend and updated
projected healthcare trend rates to follow the Getzen model.

Changes in Benefit Terms

June 30, 2021: None
June 30, 2020: None
June 30, 2019: None
June 30, 2018: Medical plans moved from Cigna to Allegiance as of January 1, 2016, the State
implemented reference-based pricing hospital contracts effective July 1, 2016 and pharmacy

moved from URx to Navitus as of January 1, 2017. The State implemented an Employer Group
Waiver Program for Medicare retirees effective January 1, 2017.
A-185

In accordance with GASB 75, the following information is presented to reflect the funding progress of the
Other Postemployment Benefits Plans for MUS plan.
Total OPEB Liability and Related Ratios
Last 10 Fiscal Years ")
(in thousands)

Total
OPEB
Liability 2021 2020 2019 2018
Service cost $ 1412 $ 1,736 $ 1,952 ¢ 1,954
Interest 717 1,130 1,495 1,410
Difference between expected and (17,388) (15,015) — (1,323)

actual experience

Changes of assumptions or other 45,674 (1,791) 1,351 (182)
inputs
Benefit payments (13) 1,441 (888) (679)
Net change in Total OPEB 30,462 (12,499) 3,910
Total OPEB Liability - 26,849 39,348 35,438 34,258
Beginning
Total OPEB Liability - Ending
$ 57,311 $ 26,849 $ 39,348 $ 35,438
State and discretely presented
component units’ proportion of the
collective Total OPEB Liability
95.18 % 94.92 % 95.59 % 95.62 %
Covered employee payroll ® $ 415,074 §$ 418,193 $ 451,613 $ 434,243
Total OPEB Liability as a
percentage of covered employee 13.81 % 6.42 % 9.11 % 8.53 %

payroll

) Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.
® Amount reported is for the whole MUS plan for 2018 and 2019. Community Colleges were included due to lack of ability to separate covered
employee payroll for those years.

Note to Schedule: No assets are accumulated in a trust that meets the criteria of GASB 75.
A-186

Factors that significantly affect trends in the amounts reported:

Changes in Actuarial Assumptions and Methods

June 30, 2021: Changes in assumptions for 2021 were due to no retiree contribution increase
and a decrease in the discount rate from 2.75% to 2.23%.

June 30, 2020: Changes in actuarial assumptions include a participation rate reduction from 55%
to 40% based on recent experience study, a revision to rates per the Retirement System pension
valuations as of July 1, 2019, and the interest/discount rate was based on the average of multiple
March 31, 2020 municipal bond rate sources.

June 30, 2019: Changes in actuarial assumptions include interest rate based upon March 31,
2019, 20-year municipal bond index per GASB 75 requirements.

June 30, 2018: Changes in actuarial methods include adjustments to the amortization period and
actuarial cost method to conform with GASB 75 requirements. Changes in actuarial assumptions
include revised rates per the retirement system pension valuations as of July 1, 2017 and interest
rate based upon the March 31, 2018, 20-year municipal bond index per GASB 75 requirements,
lapse rates were removed to reflect a return to standard retiree contribution levels, added
employees covered by the MUS-RP, changes in revised rates based on actual data and projected
trend and updated projected healthcare trend rates to follow the Getzen model.

Changes of Benefit Terms

June 30, 2021: Carrier options reduced to one.

June 30, 2020: Changes in benefit terms include increased annual deductible and out-of-pocket
maximums.

June 30, 2019: None

June 30, 2018: Increased deductible, increased out-of-pocket limits for Medica and RX, increased
visit copays, pharmacy moved from URx to Navitus as of July 1, 2017, employer group waiver
program for Medicare retirees became effective July 1, 2017, adopted combined annual visit max
of 30 for multiple therapy services and massage therapy moved into rehabilitation benefit.
REQUIRED SUPPLEMENTARY INFORMATION
NOTE RSI - 4. RISK MANAGEMENT TREND INFORMATION

The following tables present risk management trend information for the Hail Insurance Fund and the MUS
Group Benefits Fund. The Hail Insurance Fund pays claims within a calendar year cycle that parallels the
growing season from spring planting to fall harvesting; therefore, it has no development cycle. The MUS
Group Benefits Fund has a three to five-year development cycle.

The tables illustrate how the earned revenues (net of reinsurance) of the funds and their investment
income compare to related costs of loss (net of loss assumed by reinsurers) and other expenses
assumed by the funds as of the end of the fiscal year (in thousands). Section 3 shows the funds’ incurred
claims and allocated claim adjustment expense (both paid and accrued) as originally reported at the end
of the first year in which the event that triggered coverage under the contract occurred. Section 4 shows
the cumulative amounts paid as of the end of successive years for each policy year. Section 6 shows how
each policy year's incurred claims increased or decreased as of the end of successive years. This annual
re-estimation results from new information received on known claims, reevaluation of existing information
on known claims, as well as emergence of new claims not previously known. Section 7 compares the
latest re-estimated incurred claims amount to the amount originally established (Section 3) and shows
whether this latest estimate of claims cost is greater or less than originally thought. As data for individual
policy years mature, the correlation between original estimates and re-estimated amounts is commonly
used to evaluate the accuracy of incurred claims currently recognized in less mature policy years. This
table will be revised as data for successive policy years develops.

A-187
A-232

STATE OF MONTANA
NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2021

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Schedule of Expenditures of Federal Awards includes the federal
award activity of the state of Montana under programs of the federal government for the
fiscal year ended June 30, 2021. The information in this schedule is presented in
accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200,
Uniform Administrative Requirements, Cost Principles, and Audit Requirements for
Federal Awards (referred to as the “Uniform Guidance”).

Because this schedule presents only a selected portion of the operations of the state of
Montana, it is not intended to, and does not present, the financial positions, change in net
position, or, where applicable, its cash flows for the fiscal year ended June 30, 2021.

Significant Accounting Policies

Expenditures shown on the Schedule of Expenditures of Federal Awards are reported on
the modified accrual basis of accounting, except as noted below. Under the modified
accrual basis of accounting, expenditures are generally recorded in the accounting period
in which the liability is incurred. However, there are some payments, such as
compensated absences, that are only recorded when the payment is due.

Such expenditures are recognized following the cost principles contained in the Uniform
Guidance wherein certain types of expenditures are not allowed or are limited as to
reimbursement. Negative amounts shown on the schedule represent adjustments or
credits made in the normal course of business to amounts reported as expenditures in
prior years.

The Montana University System uses full accrual accounting to report campus federal
expenditure activity such as the Student Financial Assistance, Education and Stabilization
Funds, and Research and Development programs. Certain other programs of the state,
such as the Unemployment Insurance, Section 8 Voucher, and Section 8 Project-Based
programs, also use the full accrual basis of accounting. Under the full accrual basis of
accounting, expenditures are recorded when a liability is incurred, regardless of the timing
of the related cash flows.

Loan and Loan Guarantee Programs (Note 2), Federal Excess Personal Property (Note
7), and the Department of Defense Firefighting Property (Note 8) are presented using the
basis of accounting described in each note. The Books for the Blind and Physically
Handicapped Program (Note 9) is not presented on the Schedule of Expenditures of
Federal Awards but is provided as additional information regarding the types of donations
received by the state as part of this federal program.

The state of Montana did not elect to use the 10% de minimis indirect cost rate allowed
under the Uniform Guidance.

Coronavirus Relief Programs

The state of Montana expended $2,124,534,188 under the various Coronavirus relief
programs in fiscal year 2021. These programs are indicated by a “COVID-19” reference
in front of the federal program name on the fiscal year 2021 Schedule of Expenditures of
Federal Awards.

A summary of the federal programs that received funding under the various Coronavirus
relief programs is shown on the following page:

A-233
A-234

ALN# Coronavirus Relief Programs FY 2021
Expenditures
10.250 Agricultural and Rural Economic Research, Cooperative Agreements and $4,725
Collaborations
10.542 Pandemic EBT Food Benefits $27,514,501
10.557 WIC Special Supplemental Nutrition Program for Women, Infants, and $1,240,105
Children
10.558 Child and Adult Care Food Program $468,657
10.559 Summer Food Service Program for Children $29,000,000
10.561 State Administrative Matching Grants for the Supplemental Nutrition $155,412
Assistance Program
10.568 Emergency Food Assistance Program (Administrative Costs) $81,032
11.611 Manufacturing Extension Partnership $175,013
14.228 Community Development Block Grants/State's program and Non- $4,291
Entitlement Grants in Hawaii
14.231 Emergency Solutions Grant Program $2,551,796
14.241 Housing Opportunities for Persons with AIDS $160,592
14.871 Section 8 Housing Choice Vouchers $100,342
16.034 Coronavirus Emergency Supplemental Funding Program $2,108,937
17.225 Unemployment Insurance $565,892,687
17.277 WIOA National Dislocated Worker Grants / WIA National Emergency Grants $154,227
20.106 Airport Improvement Program $396,524
20.509 Formula Grants for Rural Areas $17,448,893
21.019 Coronavirus Relief Fund $1,136,109,048
21.023 Emergency Rental Assistance Program $10,442,585
21.027 Coronavirus State Fiscal Recovery Fund (CSFRF) $15,053,295
45.025 Promotion of the Arts Partnership Agreements $424,400
45.310 Grants to States $3,121
47.076 Education and Human Resources $135,490
59.037 Small Business Development Centers $655,569
64.015 Veterans State Nursing Home Care $213,048
84.007 Federal Supplemental Educational Opportunity Grants $2,000
84.425 Education Stabilization Fund $94,522,394
90.404 2018 HAVA Election Security Grants $222,373
Special Programs for the Aging, Title VIl, Chapter 2, Long Term Care
93.042 Ombudsman Services for Older Individuals $19,243
93.044 spec Programs for the Aging, Title Ill, Part B, Grants for Supportive $699,571
ervices and Senior Centers
93.045 Special Programs for the Aging, Title Ill, Part C, Nutrition Services $1,943,566
93.048 Special Programs for the Aging, Title IV, and Title Il, Discretionary Projects $1,454
93.052 National Family Caregiver Support, Title Ill, Part E $358,170
93.107 Area Health Education Centers $89,488
93.136 Injury Prevention and Control Research and State and Community Based $473,957
Programs
93.268 Immunization Cooperative Agreements $3,942,598
93.301 Small Rural Hospital Improvement Grant Program $927,478
93.310 Trans-NIH Research Support $381,056
93.323 Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) $35,848,347
Public Health Emergency Response: Cooperative Agreement for
93.354 Emergency Response: Public Health Crisis Response $1,648,162
93.359 Nurse Education, Practice Quality and Retention Grants $58,840
93.498 Provider Relief Fund $3,583,539
93.568 Low-Income Home Energy Assistance $355,126
93.569 Community Services Block Grant $583,981
93.575 Child Care and Development Block Grant $3,455,686
93.665 Emergency Grants to Address Mental and Substance Use Disorders During $652,798
COVID-19
93.671 Family Violence Prevention and Services/Domestic Violence Shelter and $94,613
Supportive Services
93.747 Elder Abuse Prevention Interventions Program $1,761
93.767 Children's Health Insurance Program $4,190,112
93.777 State Survey and Certification of Health Care Providers and Suppliers (Title $342,493
XVIII) Medicare
93.778 Medical Assistance Program $69,994,744
93.859 Biomedical Research and Research Training $13
93.889 National Bioterrorism Hospital Preparedness Program $988,721
93.917 HIV Care Formula Grants $40,156
97.036 Disaster Grants - Public Assistance (Presidentially Declared Disasters) $42,045,221
97.050 Presidential Declared Disaster Assistance to Individuals and Households - $46,572,237

Other Needs

Total Cornavirus Relief Programs

$2,124,534,188
The state also received $6,936,454 in donated supplies and equipment under Assistance
Listing Number (ALN - formerly CFDA Number) #97.036, Disaster Grants - Public
Assistance (Presidentially Declared Disasters). Of this amount, $4,087,031 was
distributed to non-state entities. These amounts are not shown on the Schedule of
Expenditures of Federal Awards.

Families First Coronavirus Response Act

Section 6008 of the Families First Coronavirus Response Act provided a temporary 6.2
percentage point increase to each qualifying state and territory's Federal Medical
Assistance Percentage (FMAP) under section 1905(b) of the Social Security Act. In fiscal
year 2021, the state paid an additional $69,994,744 for the Medical Assistance Program
(ALN #93.778).

Food Distribution Program

The amount reported for Food Distribution programs (ALN #10.555, #10.565, #10.567,
#10.569, and #93.053) represents the dollar value of food commodities distributed to
eligible recipients during the year. The U.S. Department of Agriculture provides the
current value of the commodities used by the state to compute the amount reported. The
amount of funds received to administer the program is also included in the reported
amount. Montana also distributes food commodities to other states in the western region
of the United States. During fiscal year 2021, Montana distributed $479,752 of food
commodities under ALN #10.567 to other states.

The state of Montana distributed $10,754,862 in commodities in fiscal year 2021. The
June 30, 2021 value of commodities stored at the state’s warehouse is $5,752,070, for
which the state is liable in the event of loss. The state has insurance to cover this liability.

Minority Health and Health Disparities Research

The amount reported for the Minority Health and Health Disparities Research Program
(ALN #93.307) includes endowment funds of $9,375,000, along with interest earned on
the endowment. The entire endowment amount is reported as expended each year, as
the funds are restricted for the life of the endowment.

Immunization Cooperative Agreements

The amount reported for the Immunization Cooperative Agreements (ALN #93.268)
includes the dollar value of vaccine doses received during fiscal year 2021. The state
used the Centers for Disease Control's price list to calculate the value of doses received.
During fiscal year 2021, Montana received 188,102 vaccine doses valued at $10,680,679.

A-235
A-236

Note 2. Loan and Loan Guarantee Programs

The following loan and loan guarantee programs are reported on the Schedule of
Expenditures of Federal Awards at their July 1, 2020 beginning loan balance plus the
amount of any interest subsidy, cash, or administrative cost allowance received during
fiscal year 2021:

Federal Loan/Loan Guarantee Program FY 2021 Ending

ALN # State Revolving Loans Balance

66.458 Capitalization Grants for Clean Water State Revolving Funds $ 319,274,382

66.468 Capitalization Grants for Drinking Water State Revolving Funds $ 182,779,058

Total State Revolving Loan Programs $ 502,053,440
ALN# Federal Loan/Loan Guarantee Program FY 2021 Ending
Student Financial Assistance Balance
University Loans
84.038 Federal Perkins Loan Program_Federal Capital Contributions $19,262,938
93.264 Nurse Faculty Loan Program (NFLP) $3,331
Health Professions Student Loans, Including Primary Care
93.342 Loans/Loans for Disadvantaged Students $258,273
93.364 Nursing Student Loans $2,350,002

Total Student Financial Assistance Programs $21,874,544

Perkins Loan Programs

Under the Perkins Loan Extension Act of 2015, universities participating in this program
are no longer permitted to make Perkins Loan disbursements after June 30, 2018.
Institutions may choose to continue servicing their existing Perkins Loans until such time
the institution’s outstanding loans have been paid in full or otherwise retired. Both
Montana State University and the University of Montana have chosen to continue to
service their current loans.

Economic Adjustment Assistance Program

The Economic Adjustment Assistance Program (ALN #11.307) consists of two separate
awards, which are reported on the Schedule of Expenditures of Federal Awards at the
June 30, 2021 ending loan balances.
A-237

The amount of loans outstanding as of June 30, 2021 is $318,254 for award number 05-
19-02445 and $3,082,439 for award number 05-79-73005. The calculation for each of
these loan balances is as follows:

Award Number: 05-19-02445

State Name = EDA Revolving Loan

Federal Grantor = US Department of Commerce

Federal Program Name = Title IX SSED Revolving Loan Fund
Federal Catalog Number = 11.307

RLF Loan Balance FYE 2021 $ 262,407
Cash & Investments FYE 2021 $ 185,838
FY 2020 Admin paid out of RLF Income $ -
Unpaid Principal of loans written of during FY $ -

$ 448,245
Federal Percentage 71%
Federal Share of Revolving Loan Fund $ 318,254

Award Number: 05-79-73005

State Name = EDA Revolving Loan

Federal Grantor = US Department of Commerce

Federal Program Name = Economic Adjustment Assistance
Federal Catalog Number = 11.307

RLF Loan Balance FYE 2021 $ 5,050,071
Cash & Investments FYE 2021 $ 1,089,475
FY 2021 Admin paid out of RLF Income $ 25,332
Unpaid Principal of loans written of during FY $ -

$ 6,164,878
Federal Percentage 50%
Federal Share of Revolving Loan Fund $ 3,082,439

Other Federal Loans

The following loans, originally funded through federal programs, do not have any
continuing federal compliance requirements imposed on the state, other than the loan
A-238

repayments. These loans are not reported on the Schedule of Expenditures of Federal
Awards:

Tonque River —Northern Cheyenne Tribal Loan

The Northern Cheyenne Tribe and the Department of Natural Resources and
Conservation entered into an agreement on July 1, 1994 in which the tribe agreed to loan
the state of Montana $11,300,000 of federal funds appropriated as part of the Northern
Cheyenne Indian Reserved Water Rights Settlement. The loan is to assist the state in
financing costs of the Tongue River Dam project. No expenditures of tribal loan funds
were incurred on project costs during fiscal year 2021. The amount of the loan
outstanding as of June 30, 2021 is $4,925,641.

Middle Creek Dam Rehabilitation Project Loan

The Department of Natural Resources and Conservation and the U.S Department of the
Interior, Bureau of Reclamation (BOR), entered into an agreement on September 21,
1990. The BOR agreed to loan the state of Montana “...a sum of money not to exceed
the lesser of (1) $3,023,925 plus reimbursable interest during construction, or (2) the
actual cost of the project, including reimbursable interest during construction...” The total
loan repayable is $2,990,129, and reimbursable interest during construction is $281,857.
As of June 30, 2021, the loan outstanding is $1,600,735, and reimbursable interest during
construction is $158,293.

Note 3. Type A Federal Programs

The state of Montana issues a biennial single audit report. The Montana Single Audit
report for the two fiscal years ended June 30, 2021 will be issued by May 31, 2022.

The Type A program threshold will be determined based on actual expenditures incurred
during the two fiscal years ended June 30, 2021.

Note 4. Assistance Listing Number

The Assistance Listing Number (formerly CFDA number) is a unique number assigned to
identify a federal assistance listing.

The complete Assistance Listing Number is a five-digit number, where the first two digits
represent the federal agency and the second three digits represent the program.
Programs with an unknown ALN number were assigned a number in the format **.UXX or
**- RD. Also refer to Note 13.
A-239

Note 5. Program Clusters

As defined by 2 CFR section 200.1, a cluster of programs is a grouping of closely related
programs that share common compliance requirements. Except for the Student
Financial Assistance Cluster, clusters of programs are presented on the Schedule of
Expenditures of Federal Awards either within their respective federal agency (for non-
research and development programs) or by federal agency and major subdivision (for
research and development programs.

Student Financial Assistance Cluster

Amounts reported for the Student Financial Assistance Cluster include programs
administered by both the Department of Education and the Department of Health and
Human Services. These clusters are shown separately, within their respective federal
agencies, on the Schedule of Expenditures of Federal Awards.

The combined Student Financial Assistance Cluster includes the following programs:

ALN # Student Financial Assistance Cluster FY 21
Expenditures
84.007 Federal Supplemental Educational Opportunity Grants $1,721,057
84.033 Federal Work-Study Program $1,634,018
84.038 Federal Perkins Loan Program_Federal Capital Contributions $23,678,953
84.063 Federal Pell Grant Program $36,026,968
84.268 Federal Direct Student Loans $141 ,309,606
Teacher Education Assistance for College and Higher Education Grants
84.379 (TEACH Grants) $3,962
93.264 Nurse Faculty Loan Program (NFLP) $6,062
93.342 Health Professions Student Loans, Including Primary Care Loans/Loans for $276,427

Disadvantaged Students
93.364 Nursing Student Loans $2,767,378
93.925 Scholarships for Health Professions Students From Disadvantaged $325,318
Backgrounds - Scholarships for Disadvantaged Students (SDS)

Total Student Financial Assistance Cluster $207,749,749

Note 6. Research and Development Grants

Research and Development includes all research activities, both basic and applied, and
all development activities that are performed by a non-federal entity. Research is defined
as a systematic study directed toward fuller scientific knowledge or understanding of the
subject studied. The term research also includes activities involving the training of
individuals in research techniques, where such activities utilize the same facilities as other
research and development activities, and where such activities are not included in the
instruction function.
A-240

Development is the systematic use of knowledge and understanding gained from
research directed toward the production of useful materials, devices, systems, or
methods, including design and development of prototypes and processes. Federal
awards that meet the research and development criteria are listed in the Research and
Development Cluster.

Note 7. Federal Excess Personal Property

The state of Montana receives Federal Excess Personal Property (FEPP). The title to
this property remains with the federal agency. In accordance with General Services
Administration guidelines, the amounts are presented at fair market value at the time of
receipt by the state, which is determined to be 23.34% of the original acquisition cost of
the property.

Property received under ALN #81.UXX, Miscellaneous Non-major Grants, is shown at its
fair market value at the time of receipt.

The following is a list of the FEPP received by the state of Montana during fiscal year
2021. The negative amount reflects property sold (title transferred at public sale) or other
disposition.

ALN # Program FY 21 FY 21 Ending
Amount Inventory
10.203 Payments to Agricultural Experiment Stations $5,415 $129,993
Under the Hatch Act
10.500 Cooperative Extension Service $0 $3,157
10.664 Cooperative Forestry Assistance ($4,517) $4,483,019
10.UXX Miscellaneous — Non-major Grants $0 $136,426
15.UXX Miscellaneous — Non-major Grants $0 $3,553
39.003 Donation of Federal Surplus Personal Property $164,080 $357,884
81.UXX_ Miscellaneous — Non-major Grants $0 $2,370
43.UXX Miscellaneous — Non-major Grants ($4,376) $660,814
47.UXX__ Miscellaneous — Non-major Grants ($7,877) $114,737

Note 8. Department of Defense Firefighting Property

The Department of Natural Resources and Conservation (DNRC) receives Department of
Defense Firefighting Property (FFP). The title to this property is transferred to the DNRC.
In accordance with General Services Administration guidelines, the amounts are
presented at fair market value at the time of receipt by DNRC, which is determined to be
23.34% of the original acquisition cost of the property. The following is the value of FFP
received by the state of Montana during fiscal year 2021:

ALN # Program FY 21 FY 21 Ending
Amount Inventory
12.UXX Miscellaneous — Non-major Grants $140,212 $3,360,350
A-241

Note 9. Books for the Blind and Physically Handicapped

The Montana State Library receives “talking book” machines, cassette books,
accessories, and magazines from the federal government under the Books for the Blind
and Physically Handicapped Program (ALN #42.001). These items are then distributed to
provide library services to blind and physically handicapped individuals. The federal
government retains title to these items. The approximate value of the items in inventory
(not distributed to individuals) on June 30, 2021 was $929,210.

Since this program is considered a federal “use of equipment’ agreement, the
accompanying Schedule of Expenditures of Federal Awards does not include this
amount.

Note 10. Unemployment Benefits

The unemployment compensation system is a_ federal-state partnership. State
unemployment insurance laws must conform to certain provisions of the federal law.
Federal funds are expended for administrative costs. State unemployment taxes must be
deposited into a state account in the Federal Unemployment Trust Fund and are used
only to pay benefits. State Unemployment Insurance (UI) funds, as well as federal funds,
are included on the Schedule of Expenditures of Federal Awards.

The following schedule provides a breakdown of the state and federal portions of the total
expenditures recorded for the Unemployment Insurance Program (ALN #17.225).

State UI Expenditures $ 180,116,013
Federal Ul Expenditures 578,239,171
Total $ 758,355,184

Note 11. Subgrants to State Agencies

Federal assistance transferred from one Montana state agency to another Montana state
agency is shown only once on the Schedule of Expenditures of Federal Awards.

Federal assistance received from non-state sources, which are considered subgrants by
the awarding agency, are treated as pass-through grants to the state. These pass-
through awards are listed below the direct federal awards reported on the Schedule of
Expenditures of Federal Awards. Pass-through grant numbers are included for those
awards that were assigned an identifying number.

Note 12. Subgrants to Non-State Agencies

Federal assistance transferred from a Montana state agency or university to a non-state
agency, such as a city, county, tribal government, or nonprofit organization, is identified in
the Amount to Subrecipients column shown in the Schedule of Expenditures of Federal
Awards. These amounts are included in the expenditure totals shown on the report.
A-242

The Amounts to Subrecipients includes federal assistance transferred from a Montana
state agency or university that was originally received as a subgrant from another
Montana state agency or university. These amounts are not included in the expenditure
totals shown on the report, since the original award is only shown once on the Schedule
of Expenditures of Federal Awards, as described in Note 11 above.

A summary of amounts that were subgranted to a non-state agency, such as a city,
county, tribal government, or nonprofit organization, which were made from awards

originally received from another Montana state agency or university, is shown below:

ALN#

Federal Program

Amount to

Subrecipients

Non Research and Development

10.170 Specialty Crop Block Grant Program - Farm Bill $9,615
16.833 National Sexual Assault Kit Initiative $8,881
21.019 Coronavirus Relief Fund $719,734,982
84.048 Career and Technical Education -- Basic Grants to States $3,140,770
93.667 Social Services Block Grant $156,504
93.788 Opioid STR $317,970
97.036 Disaster Grants - Public Assistance (Presidentially Declared $332,918

Disasters)

Total - Non Research and Development

Research and Development Cluster

$723,701,640

15.611 Wildlife Restoration and Basic Hunter Education $18,469
20.205 — Highway Planning and Construction $22,000
93.859 Medical Assistance Program $2,700

Total Research and Development Cluster $43,169

Note 13. Federal Awards Not Having an Assistance Listing Number

The following schedules contain contract or grant numbers associated with awards that
did not have an Assistance Listing Number and were assigned either a **.UXX or **.RD
number in the Schedule of Expenditures of Federal Awards. Not all **.UXX or **.RD
awards reported on the SEFA had a grant or contract number. Also refer to Note 4.
Schedule of Unknown Federal Assistance Listing Numbers for Research and Development Awards (XX.RD)

Federal Agency

DEPARTMENT OF AGRICULTURE

10.RD
DEPARTMENT OF DEFENSE

12.RD
DEPARTMENT OF ENERGY

81.RD

DEPARTMENT OF HEALTH AND HUMAN SERVICES
93.RD

DEPARTMENT OF THE INTERIOR
15.RD

Department of Public Health and Human Services

State Agency Contract or Grant Number

17-CS-11010200-019
17-CS-11011100-012
17-JV-11221636-068
18-CS-11011800-017
19-CS-11011100-031
2021-21031900002
31236-Z8409102
313-0873
59-0206-5-003
59-0206-5-004
669618
7ORSAT19TPIAO0001 / CPO#0001
7ORSAT19TPIAO0001 / CPO#0002
7ORSAT19TPIAO0001 / CPO#0003
75N91019P00691
A17-0837-S001
AG-3151-C-17-0012
ARM212-MSU/ PO# EP0166321
FA701418C5000
FA701418C5004
G19AC00047
M67854-18-3-1330
MSU-ARF ORBC MOU
SUBCONTRACT NUMBER 313-0742
SUBK-MSU-VDHWFS2-01-012720
W912HZ-18-2-0010
Unknown

Montana State University - Bozeman

N62473-19-2-0005
$C1812501
W911KB-19-2-1500
W911KB-19-2-1501
W9126G-19-2-0035
W9126G-20-2-0016
W9128F20F0402
W9128F20P0030
FA701420C0048
FA701420C0045

University of Montana - Missoula

Montana State University - Bozeman

Montana Technological University 1663302
1922244
2151826
2183707

University of Montana - Missoula LMCP7514

75N3019C00045 Mod #4
75N93019C00045 COVID
75N93019C0045
75N93020C00039
GENFD0001583403
HHSN272201400050C
HHSN272201800048C
HHS283201600001C

University of Montana - Missoula

University of Montana - Missoula 100006
100130
100145

1361 100182
1362
140B0619F0343
140F0619C0021
140F0619P0068
140F0619P0069
140L0618F0380
140L0619F0248
140L0619F0249

A-243

Amount

$870
$5,525
$264
$5,446
$2,983
$31,911
$23
$48,465
$7

($70)
$200,000
$1,837,607
$975,685
$285,843
$6,509
$14,031
$76,132
$5,479
$200,813
$193,831
$27,726
$2,163,509
$5,010
$52,367
$259,657
$151,635
$13,298
$55,841

$146,206
$85,090
$750,344
$3,918
$18,901
$146,346
$516,999
$81,277
$216,964
$107,651

$1,726
$23,786
$29,563
$51,420
$14,986

$480,490
$85,173
$1,743,497
$1,128,244
$663,544
$1,442,521
$3,595,434
$123,993

($1,460)
$189,347
$161,908

$48,256
$108,056

$4,704

($1,014)

$26,315

($878)

($1,328)
$43,009

$195,859
A-244

Schedule of Unknown Federal Assistance Listing Numbers for Research and Development Awards (XX.RD)

Federal Agency State Agency Contract or Grant Number Amount
140L0619F0291 $6,742
140L0619F0292 $256,525
140L0619F0301 $418,065
140L0619F0302 $6,237
140L0619F0342 $6,170
140L0619F0359 $48,942
140L0619F0360 $11,506
140L0619F0361 $7,252
140L0619F0378 $12,320
140L0620F0263 $104,769
140L0620F0364 $28,217
140L0620F0399 $71,484
140L0620F0500 $44,839
140L0620F0505 $159
140L0620F0519 $2,643
140L0620F0527 $17,650
140L619F0285 $115,047

33172.002 $34,464
33172.003 $31,896
33172.005 $11,403
33172.007 $39,775
33172.01 $19,095
50002.001 ($1,434)
50002.006 TO 4 $44,755
50002/001 $162,898
50002/001 140L0620F0455 $41,074
G-63747-01 $60,935
LO205A-A $880
LO212A-A $550,899
LO2226A-A $24,862
LO2312A-A $22,371
LO233A-A $288,222
MT-026-FY19 $20,000
Unknown $1,562

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
43.RD University of Montana - Missoula 1422120 $178,744
Schedule of Unknown Federal Assistance Listing Numbers (**.UXX)

Federal Agency State Agency

DEPARTMENT OF AGRICULTURE

10.U03 Department of Natural Resources and Conservation

10.U06

10.U07

10.U08

10.U09

10.U10

10.U12

10.U13 Montana State University - Bozeman

10.U14 Montana Technological University

10.U15 Department of Fish, Wildlife and Parks
DEPARTMENT OF DEFENSE

12.U02 University of Montana - Missoula

12.U05 Department of Fish, Wildlife and Parks

12.U06

12.U08

12.U11 Department of Natural Resources and Conservation

12.U12 Department of Fish, Wildlife and Parks

12.U13

12.U14
DEPARTMENT OF EDUCATION

84.U01 Office of Public Instruction
DEPARTMENT OF ENERGY

81.U02 Department of Fish, Wildlife and Parks

81.U03

81.U05

81.U06 Department of Natural Resources and Conservation

DEPARTMENT OF HEALTH AND HUMAN SERVICES

93.U02 Department of Public Health and Human Services
93.U03 University of Montana - Missoula
DEPARTMENT OF THE INTERIOR
15.U01 Department of Fish, Wildlife and Parks
15.U02
15.U03
DEPARTMENT OF TREASURY
21.U01 Department of Administration

LIBRARY OF CONGRESS
42.U02 Montana Historical Society

Contract or Grant Number

16-Fl-11010200-019
16-Fl-11011500-026
17-Fl-11011600-013
17-Fl-11015200-003
18-Fl-11011600-026
18-Fl-11015200-008
DNRC-BLM-18-001
19-CS-11015600-018
17-CS-11015600-005
12034320P0030

W9128F-17-2-0028
20-105P
20-144P

W9128F-20-D-0025

Unknown
21-129P
21-179P

W9128D-20-D-0025

Contract # ED-IES-14-C-0086

20-18G
00-UGPR-34
21-066G
0201.20.068676

HHSF223201810079C
Unknown

140G0219P0131
140L3620P0006
140P1321P0027

Unknown

FED 19-016

A-245

Amount

$5,231
$362
$6,774
$21,875
$12,775
$14,746
$393
$258
$2,500
$9,000

$5,947
$1,334,112
$177,685
$186,775
$140,212
$558,736
$40,847
$93,447

$97,230

$25,917
$152,134
$67,557
$33,771

$171,714
$7,239

$89,950
$5,000
$2,989

$4,465

$8,273
B-1

Angus Maciver, Legislative Auditor
Deborah F. Butler, Legal Counsel

Deputy Legislative Auditors:
Cindy Jorgenson
William Soller

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT
OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH

GOVERNMENT AUDITING STANDARDS

The Legislative Audit Committee
of the Montana State Legislature:

We have audited, in accordance with the auditing standards generally accepted in the United States
of America and the standards applicable to the financial audits contained in Government Auditing
Standards issued by the Comptroller General of the United States, the financial statements of the
governmental activities, the business-type activities, the aggregate discretely presented component units,
each major fund, and the aggregate remaining fund information of the state of Montana, as of and
for the year ended June 30, 2020, and the related notes to the financial statements, which collectively
comprise the state of Montana’s basic financial statements, and have issued our report thereon dated
January 22, 2021. Our report includes a reference to other auditors who audited the financial statements
of the Montana State University component units and the University of Montana component units,
as described in our report on the state of Montana’s financial statements. The financial statements of
the Montana State University component units and the University of Montana component units were
not audited in accordance with Government Auditing Standards, and accordingly, this report does not
include reporting on internal control over financial reporting or instances of reportable noncompliance
associated with these component units.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered the state of Montana’s
internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances for the purpose of expressing our opinions on the financial statements, but not
for the purpose of expressing an opinion on the effectiveness of the state of Montana’s internal control.
Accordingly, we do not express an opinion on the effectiveness of the state of Montana’s internal

control.

A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent,
or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control, such that there is a reasonable possibility that a material

Room 160 ¢ State Capitol Building * PO Box 201705 * Helena, MT * 59620-1705
Phone (406) 444-3122 * FAX (406) 444-9784 ¢ E-Mail lad@mt.gov
misstatement of the entity’s financial statements will not be prevented or detected and corrected on a
timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness, yet important enough to merit attention by those charged

with governance.

Our consideration of internal controls was for the limited purpose described in the first paragraph of
this section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies
may exist that have not been identified. Given these limitations, during our audit we did not identify
any deficiencies in internal control that we consider to be material weaknesses. We did identify certain
deficiencies in internal control, described below, that we consider to be a significant deficiency.

The Department of Public Health and Human Services internal controls over Medicaid and Children’s
Health Insurance Program eligibility determinations did not consistently operate as designed in fiscal
year 2020. When these controls do not operate as designed, the state of Montana is at risk of misapplying
match requirements between the General Fund and Federal Special Revenue Fund sources, or of not
identifying ineligible participants. Collectively, these two programs incur over $2 billion in benefit and
claims expenditures annually.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the State of Montana’s financial statements
are free from material misstatement, we performed tests of its compliance with certain provisions of
laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and
material effect on the determination of financial statement amounts. However, providing an opinion
on compliance with those provisions was not an objective of our audit, and accordingly, we do not
express such an opinion. The results of our tests disclosed instances of noncompliance or other matters
that are required to be reported under Government Auditing Standards. The identified instances of
noncompliance are described below.

The Montana Public Employees’ Retirement Board administers eight defined benefit retirement plans.
The Montana Constitution and state law require all retirement systems to be actuarially sound. The
actuarial valuations as of June 30, 2020, indicate the Game Wardens’ and Peace Officers, Highway
Patrol Officers, and Public Employees’ retirement systems are not actuarially sound as they amortize
in 40, 39, and 35 years, respectively. The maximum allowable amortization period is 30 years, as
defined by state law.

State of Montana’s Response to Findings

‘The state of Montana’s response to the findings identified in our audit are described in the separately
issued Public Employees’ Retirement Administration report (20-08A), and in the state of Montana
financial audit report (#20-01A), and are addressed in the Corrective Action Plan beginning on
page D-1 of this report. The responses in these reports were not subjected to the auditing procedures
applied in the audit of the financial statements and, accordingly, we express no opinion on them.

Purpose of this Report

‘The purpose of this report is solely to describe the scope of our testing of internal control and compliance
and the results of that testing, and not to provide an opinion on the effectiveness of the state of
Montana’s internal control or on compliance. This report is an integral part of an audit performed in
accordance with Government Auditing Standards in considering the state of Montana’s internal control
and compliance. Accordingly, this communication is not suitable for any other purpose.

Respectfully submitted,

/s/ Cindy Jorgenson
Cindy Jorgenson, CPA

Deputy Legislative Auditor
Helena, MT

January 22, 2021
B-5

Angus Maciver, Legislative Auditor
Deborah F. Butler, Legal Counsel

Deputy Legislative Auditors:
Cindy Jorgenson
William Soller

INDEPENDENT AUDITOR'S REPORT

The Legislative Audit Committee
of the Montana State Legislature:

Report on Financial Statements

We have audited the accompanying financial statements of the governmental activities, the business-type
activities, the aggregate discretely presented component units, each major fund, and the aggregate
remaining fund information of the state of Montana, as of and for the year ended June 30, 2020, and
the related notes to the financial statements which collectively comprise the state of Montana’s basic
financial statements, as follows:

¢ Statement of Net Position

¢ Statement of Activities

¢ Balance Sheet—Governmental Funds

¢ Reconciliation of the Balance Sheet—Governmental Funds to the Statement of Net Position
¢ — Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental Funds

¢ Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances—
Governmental Funds to the Statement of Activities

¢ — Statement of Fund Net Position—Proprietary Funds

¢ Statement of Revenues, Expenses, and Changes in Fund Net Position—Proprietary Funds
¢ — Statement of Cash Flows—Proprietary Funds

¢ — Statement of Fiduciary Net Position—Fiduciary Funds

¢ — Statement of Changes in Fiduciary Net Position—Fiduciary Funds.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements
in accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal controls relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether due to

fraud or error.

Our responsibility is to express opinions on these financial statements based on our audit. We did
not audit the financial statements of the Montana State University (MSU) component units and the

Room 160 ¢ State Capitol Building * PO Box 201705 * Helena, MT * 59620-1705
Phone (406) 444-3122 * FAX (406) 444-9784 ¢ E-Mail lad@mt.gov
B-6

University of Montana (UM) component units, which represent 14.93 percent, 30.30 percent, and
2.25 percent, respectively of the assets, net position, and revenues of the aggregate discretely presented
component units. Those financial statements were audited by other auditors whose reports have been
furnished to us, and our opinions, insofar as they relate to the amounts included for the university
component units, are based solely on the reports of other auditors.

We conducted our audit in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free from material misstatement. The financial statements of the MSU and UM component units were
not audited in accordance with Government Auditing Standards.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the
state of Montana’s preparation and fair presentation of the financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the state of Montana’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as the overall
presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinions.

Summary of Opinions
Opinion Unit Type of Opinion
Governmental Activities Unmodified
Business-Iype Activities Unmodified
General Fund Unmodified
State Special Revenue Fund Unmodified
Federal Special Revenue Fund Unmodified
Land Grant Unmodified
Coal Severance Tax Unmodified
Unemployment Insurance Unmodified
Municipal Finance Programs Unmodified
Aggregate Discretely Presented Component Units Unmodified
Aggregate Remaining Fund Information Unmodified
Opinions

In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the governmental activities and business-type activities, General Fund, State Special
Revenue Fund, Federal Special Revenue Fund, Land Grant, Coal Severance Tax, Unemployment
Insurance, and Municipal Finance Programs major funds, and the aggregate discretely presented
component units and aggregate remaining fund information of the state of Montana, as of June 30,
2020, and the respective changes in financial position and, where applicable, cash flows thereof for the
fiscal year then ended in accordance with accounting principles generally accepted in the United States
of America.

Emphasis of Matter

As discussed in Note 2 to the basic financial statements, in fiscal year 2020, the state adopted
Governmental Accounting Standards Board Statement No. 84—Fiduciary Activities. This clarified how
fiduciary activity is identified and reported. As a result, the types of activities reported in the fiduciary
fund type have changed, and the Fiduciary Fund financial statements now report the Custodial Fund
type instead of the Agency Fund Type. Our opinion is not modified with respect to this matter.

As discussed in Note 1C to the financial statements, in fiscal year 2020, the Unemployment Insurance
Fund reports federal contributions to fund benefit claims related to the statewide unemployment
impact of COVID-19. These federal contributions are reported as non-operating revenues. Additionally,
the Federal Special Revenue Fund reports significant cash & cash equivalent and unearned revenue
balances, associated with the unspent portion of the $1.25 billion the state received from the
Coronavirus Relief Fund, authorized by the federal Coronavirus Aid, Relief; and Economic Security
(CARES) Act. As discussed in Note 17 to the basic financial statements, the unspent portion will be
expended during fiscal year 2021. Our opinions are not modified with respect to these matters.

Other Matters

Required Supplementary Information

Accounting principles generally accepted in the United States of America require that Management’s
Discussion and Analysis, the Budgetary Comparison Schedule, the Pension Plan Information, the
Other Postemployment Benefits Plan Information, and the Risk Management Trend Information,
and the related notes, be presented to supplement the basic financial statements. Such information,
although not a part of the basic financial statements, is required by the Governmental Accounting
Standards Board who considers it to be an essential part of financial reporting for placing the
basic financial statements in an appropriate operational, economic, or historical context. We have
applied certain limited procedures to the required supplementary information in accordance with
auditing standards generally accepted in the United States of America, which consisted of inquiries
of management about the methods of preparing the information and comparing the information for
consistency with management's responses to our inquiries, the basic financial statements, and other
knowledge we obtained during our audit of the basic financial statements. We do not express an
B-8

opinion or provide any assurance on the information because the limited procedures do not provide us
with sufficient evidence to express an opinion or provide any assurance.

Supplementary Information

Our audit was conducted for the purpose of forming opinions on the financial statements that
collectively comprise the state of Montana’s basic financial statements as a whole. The Schedule of
Expenditures of Federal Awards, as required by Title 2 U.S. Code of Federal Regulations Part 200,
Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,
is presented for purposes of additional analysis and is not a required part of the basic financial
statements. Such information is the responsibility of management and was derived from and relates
directly to the underlying accounting and other records used to prepare the basic financial statements.
‘The information has been subjected to the auditing procedures applied in the audit of the basic financial
statements and certain additional procedures, including comparing and reconciling such information
directly to the underlying accounting and other records used to prepare the basic financial statements
or to the basic financial statements themselves, and other additional procedures in accordance with
auditing standards generally accepted in the United States of America. In our opinion, the Schedule of
Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial
statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated January 22,
2021, on our consideration of the state of Montana’s internal control over financial reporting and on
our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements
and other matters. The purpose of that report is to describe the scope of our testing of internal
control over financial reporting and compliance and the results of that testing, and not to provide
an opinion on the effectiveness of the state of Montana’s internal control over financial reporting or
on compliance. That report is an integral part of an audit performed in accordance with Government
Auditing Standards in considering the state of Montana’s internal control over financial reporting and

compliance.
Respectfully submitted,

/s/ Cindy Jorgenson

Cindy Jorgenson, CPA
Deputy Legislative Auditor
Helena, MT

January 22, 2021
MANAGEMENT?’S DISCUSSION AND ANALYSIS

INTRODUCTION

Management of the State of Montana (State) provides this Management’s Discussion and Analysis of the State of
Montana’s basic financial statements included in the Comprehensive Annual Financial Report (CAFR). This is a
narrative overview and analysis of the financial activities of the State of Montana for the fiscal year ended June 30,
2020. We encourage readers to consider this information in conjunction with the additional information that is
furnished in the State’s financial statements, which follow.

In late 2019, a novel strain of coronavirus (““COVID-19”’) started to spread throughout the world, including to the
United States, resulting in the World Health Organization proclaiming COVID-19 to be a pandemic and the
President of the United States declaring a national emergency. In response to the spread of COVID-19, the United
States government, state governments (including the State), local governments, and private industries have taken
measures to limit social interactions in an effort to limit the spread of COVID-19. In March of 2020, Montana
declared a state emergency, and a national emergency was announced in the United States shortly after. The
Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by the
President of the United States on March 27, 2020. In the following discussion and analysis, COVID-19 refers to this
pandemic and CARES refers to the CARES Act funding.

FINANCIAL HIGHLIGHTS

Government-wide

The assets and deferred outflows of resources of the State exceeded its liabilities and deferred inflows of resources at
the end of fiscal year 2020 by $10.2 billion compared with $9.7 billion at the end of fiscal year 2019, representing a
5.6% increase in net position. Component units reported net position of $2.2 billion at the end of fiscal year 2020
compared to $2.1 billion at the end of fiscal year 2019, representing a 5.2% increase in net position. More detail is
provided in the financial statement overview below.

Fund Level

As of the close of fiscal year 2020, the State’s governmental funds reported combined ending fund balances of $5.0
billion compared with $4.5 billion at fiscal year 2019. This represents a $434.9 million (9.6%) increase in total fund
balance. Of the 2020 balance, $1.9 billion is not in spendable form, primarily as permanent fund principal. Thus,
$3.1 billion is available for spending. The fund balance in spendable form is segregated by constraint as follows:
$1.2 billion restricted, $1.4 billion committed, $90.5 million assigned, and $372.9 million unassigned. These
changes are discussed in more detail in the financial analysis of the State’s major funds presented below.

The State’s business-type activity funds reported net position at the close of fiscal year 2020 in the amount of $393.3
million compared with fiscal year 2019 net position of $482.6 million. Of the 2020 business-type activity net
position, $22.0 million was reported as net investment in capital assets. Net position of $371.3 million was in
spendable form with $21.0 million unrestricted and $350.3 million restricted to expenditure for a specific purpose.
This represents a $90.0 million (19.5%) decrease in spendable net position from the fiscal year 2019 balance of
$461.3 million. These changes are discussed in more detail in the financial analysis of the State’s major funds
presented below.

Long-term Debt
The State’s total governmental activity bonds and notes payable for governmental activities increased by $287.0
thousand, from $127.1 million in fiscal year 2019 to $127.4 million, a 0.2% increase in fiscal year 2020.

Further detail relating to the State’s long-term debt is provided in notes to the financial statement’s Note 11.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is intended to serve as an introduction to the State of Montana’s basic financial
statements. The State’s basic financial statements include three components: (1) government-wide financial
statements, (2) fund financial statements, and (3) notes to the financial statements. The report also contains

B-9
B-10

additional required supplementary information, which includes budgetary schedules, pension and other post
employment benefits plan information, and risk management trends. These components are described below:

Basic Financial Statements

The basic financial statements include two types of financial statements that present different views of the State —
the government-wide financial statements and the fund financial statements. These financial statements also include
the notes to the financial statements, which provide further detail and information related to the balances of the
financial statements.

Government-wide Financial Statements

The government-wide financial statements provide a broad view of the State’s operations in a manner similar to a
private-sector business. The statements provide both short-term and long-term information about the State’s
financial position, which assists in assessing the State’s economic condition at the end of the fiscal year. These are
prepared using the flow of economic resources measurement focus and the accrual basis of accounting. In other
words, they follow methods that are similar to those used by most businesses, including all revenues and expenses
connected with the fiscal year, even if cash involved has not been received or paid. The government-wide financial
statements include two statements: The Statement of Net Position and the Statement of Activities, as defined below.

The Statement of Net Position presents all of the government’s assets, deferred outflows of resources, liabilities,
deferred inflows of resources, and net position. Over time, increases or decreases in the State’s net position may
serve as a useful indicator of whether the financial position of the State is improving or deteriorating.

The Statement of Activities presents information related to the government’s net position changes during the most
recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change
occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for
some items that will not result in cash flows until future fiscal periods. This statement also presents a comparison
between direct expenses and program revenues for each function of the State.

Both of the above financial statements have separate sections for three different types of state activities. These three
types of activities are as follows:

Governmental Activities — Activities mostly supported by taxes and intergovernmental revenues, including federal
grants. Most services normally associated with state government fall into this category, including education (support
for both K-12 public schools and higher education), general government, health and human services, natural
resources, public safety, and transportation.

Business-type Activities — Functions normally intended to recover all or a significant portion of their costs through
user fees and charges to external users of goods and services. The major business-type activities of the State include
the Unemployment Insurance Fund and the Municipal Finance Programs, which assists Montana’s small businesses
and local governments in obtaining long-term, fixed-rate financing through private Montana lending institutions.

Discretely Presented Component Units — Operations for which the State has financial accountability, but have
certain independent qualities as well. In order to be considered component units, these entities must be legally
separate to the extent that they may sue, or be sued, in their own right. For the most part, these entities operate
similarly to private sector businesses and the business-type activities described above. The State’s component units
consist of one financing authority, one housing board, one nonprofit independent public corporation, and two
universities.

Fund Financial Statements - Reporting the State’s Major Funds
A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for
specific activities or objectives. The State, like other state and local governments, uses fund accounting to ensure
and demonstrate compliance with finance-related legal requirements.

The fund financial statements focus on individual parts of the state government, reporting the State’s operations in
more detail than the government-wide statements. All of the funds can be divided into three categories. It is
important to note that these fund categories use different accounting approaches and should be interpreted
individually. The three categories of funds are as follows:

Governmental Funds — Most of the basic services provided by the State are financed through governmental funds.
Governmental funds are used to account for essentially the same functions reported as governmental activities in the
government-wide financial statements. However, unlike the government-wide financial statements, the
governmental fund financial statements focus on near-term inflows and outflows of spendable resources. They also
focus on the balances of spendable resources available at the end of the fiscal year. Such information may be useful
in evaluating the government’s near-term financing requirements. This approach is known as using the flow of
current financial resources measurement focus and the modified accrual basis of accounting. These statements
provide a detailed short-term view of the State’s finances that assists in determining whether there will be adequate
financial resources available to meet the current needs of the State.

The State has five governmental funds that are considered major funds for presentation purposes. Each major fund is
presented in a separate column in the governmental fund balance sheet and in the governmental fund statement of
revenues, expenditures, and changes in fund balances. The State’s five major governmental funds are the General
Fund, the State Special Revenue Fund, the Federal Special Revenue Fund, the Coal Severance Tax Fund, and the
Land Grant Fund.

Proprietary Funds — When the State charges customers for the service it provides, whether to outside customers or
to other agencies within the State, these services are generally reported in proprietary funds. Like the government-
wide statements, proprietary fund statements utilize full accrual accounting, the same method used by private sector
businesses. Enterprise funds report activities that provide supplies and services to the general public. Whereas
internal service funds report activities that provide supplies and services to the State’s other programs and activities.

Fiduciary Funds — Resources held for the benefit of parties outside state government are accounted for in fiduciary
funds. Fiduciary funds are not reflected in the government-wide financial statements because the resources of these
funds are not available to support the State’s own programs. Fiduciary fund statements use the full accrual basis of
accounting.

Notes to the Financial Statements

The notes to the financial statements provide additional information that is essential for a full understanding of the
government-wide and the fund financial statements. The notes to the financial statements can be found immediately
following the fiduciary fund financial statements.

Required Supplementary Information

The basic financial statements are followed by a section of required supplementary information. This section
contains a budgetary comparison schedule, which includes the reconciliation between the statutory fund balance for
budgetary purposes and the fund balance for the General Fund and major special revenue funds as presented in the
governmental fund financial statements. Required supplementary information also includes pension and other post
employment benefits plan information, as well as additional risk management trend data.

GOVERNMENT-WIDE FINANCIAL ANALYSIS

Montana’s overall financial position increased from the last fiscal year, as reflected in the $545.8 million increase
(5.6%) in net position. This improvement resulted from the continued moderate growth, despite the initial impacts of
COVID-19, particularly in tax and investment revenue. However, growth is not expected to persevere in fiscal year
2021, as the associated financial and economical affects of the pandemic are realized.

Net Position

As noted earlier, net position may serve over time as a useful indicator of a government’s financial position. The
State’s combined net position (government and business-type activities) totaled $10.2 billion at the end of fiscal year
2020. Net position of both governmental and business-type activities increased by $635.0 million (6.9%) and
decreased by $89.2 million (18.5%), respectively. These changes are explained in detail in the major fund analysis
below.

B-11
A portion of the State’s net position reflects its investment in capital assets such as land, buildings, equipment, and
infrastructure (roads, bridges, and other immovable assets) less any related debt used to acquire those assets that is
still outstanding. The State uses these capital assets to provide services to citizens; consequently, these assets are not
available for future spending. Although the State’s investment in its capital assets is reported net of related debt, it
should be noted that the resources needed to repay this debt must be provided from other sources since the capital
assets themselves cannot be used to liquidate these liabilities.

An additional portion of the State’s net position represents resources that are subject to external restrictions on how
they may be used. The remaining balance of unrestricted net position may be used to meet the State’s ongoing
obligations to citizens and creditors. Internally imposed designations of resources are not presented as restricted net
position.

At the end of the current fiscal year, the State reported positive balances in net investment in capital assets and
restricted net position categories, along with a negative balance in the unrestricted category of net position, for both
the governmental activities and the primary government as a whole. The negative unrestricted net position is
primarily due to the State's net pension liability. GASB Statements No. 68 and 71, related to pension liabilities and
other balance sheet components, were implemented in fiscal year 2015 and are contributing factors to the negative
net position. The State also reported positive balances for all categories of net position for the business-type
activities.

Net Position
June 30,
(expressed in thousands)

Governmental Business-type Total Primary
Activities Activities Government
2019 2020 2019 2020 2019 2020
Current and other assets $ 5,762,815 $ 7,572,307 $ 629,612 $ 554,386 $ 6,392,427 $ 8,126,693
Capital assets 6,480,485 6,823,046 21,283 22,052 6,501,768 6,845,098
Total assets 12,243,300 14,395,353 650,895 576,438 12,894,195 14,971,791
Deferred outflows of resources 779,931 613,249 2,919 2,423 782,850 615,672
Long-term liabilities

Due in more than one year 2,639,113 2,707,169 20,277 18,302 2,659,390 2,125,471
Other liabilities 976,135 2,251,217 147,328 163,594 1,123,463 2,414,811
Total liabilities 3,615,248 4,958,386 167,605 181,896 3,782,853 5,140,282
Deferred inflows of resources 212,056 219,243 3,641 3,645 215,697 222,888
Net investment in capital assets 6,402,612 6,743,003 21,266 22,035 6,423,878 6,765,038
Restricted 3,216,332 3,452,344 442,306 350,309 3,658,638 3,802,653
Unrestricted (423,017) (364,374) 18,996 20,976 (404,021) (343,398)

Total net position $ 9,195,927 $ 9,830,973 $ 482,568 $ —_ 393,320 $ 9,678,495 $ 10,224,293
The following condensed financial information was derived from the government-wide Statement of
Activities, and reflects how the State’s net position changed during the fiscal year:

Revenues:

Program revenues
Charges for services
Operating grants
Capital grants

General revenues
Taxes
Other

Total revenues

Expenses:
General government
Public safety
Transportation
Health and human service
Education
Natural resources
Interest on long-term debt
Unemployment Insurance
Liquor Stores
State Lottery
Municipal Finance Programs
Hail Insurance
Other Services
Prison Funds
MUS Group Insurance
MUS Workers Comp

Total expenses

Increase (decrease) in net
position before transfers

Transfers
Change in net position

Net position, beg of year
(as adjusted)

Net position, end of year

Changes in Net Position
For Fiscal Year Ended June 30,
(expressed in thousands)

Governmental Business-type Total Primary
Activities Activities Government

2019 2020 2019 2020 2019 2020
623,732 $ 686,335 $ 426,701 $ 443,048 $ 1,050,433 $ 1,129,383
2,611,941 2,930,307 68,243 71,422 2,680,184 3,001,729
527,900 564,431 512 950 528,412 565,381
2,762,972 2,793,211 30,094 32,576 2,793,066 2,825,787
248,070 186,194 2,398 504,749 250,468 690,943
6,774,615 7,160,478 527,948 1,052,745 7,302,563 8,213,223
829,657 957,534 829,657 957,534
428,514 458,526 428,514 458,526
547,907 557,290 547,907 557,290
2,680,251 2,896,774 2,680,251 2,896,774
1,314,785 1,352,323 1,314,785 1,352,323
302,680 338,957 302,680 338,957
5,454 5,365 5,454 5,365
108,507 746,508 108,507 746,508
89,971 98,324 89,971 98,324
48,061 51,385 48,061 51,385
2,937 2,542 2,937 2,542
933 1,154 933 1,154
70,154 74,323 70,154 74,323
9,307 8,506 9,307 8,506
88,330 100,958 88,330 100,958
3,887 657 3,887 657
6,109,248 6,566,769 422,087 1,084,357 6,531,335 7,651,126
665,367 593,709 105,861 (31,612) 771,228 562,097
55,786 58,703 (55,786) (58,703) _ _
721,153 652,412 50,075 (90,315) 771 228 562,097
8,474,774 9,178,561 432,493 483,635 8,907,267 9,662,196
9,195,927 $ 9,830,973 $ 482,568 $ 393,320 $ 9,678,495 $ 10,224,293

B-13
Governmental Activities
The following chart depicts revenues of the governmental activities for the fiscal year:

Revenues - Govermental Activities
Fiscal Year Ended June 30, 2020

Other : 2.6%

Charges for Services: 9.6%
( Grants: 40.9%
Taxes: 39.0%

Capital Grants: 7.9%

The following chart depicts expenses of the governmental activities for the fiscal year:

Expense - Governmental Activities
Fiscal Year Ended June 30, 2020

Debt: 0.1%

General Government: 14.6%
Public Safety: 7.0% = — =
Transportation: 8.5% ad

Health and Human
Services: 44.1%

Interest on Long-Term Natural Resources: 5.2%

Education: 20.6%
Business-type Activities
The following chart depicts revenues of the business-type activities for the fiscal year:

Revenues - Business-type Activities
Fiscal Year Ended June 30, 2020

Operating Grants: 6.8%

Taxes: 3.1%

Services: 42.1%

Capital Grants: 0.1%

Other: 47.9%

The Other Revenue in the above table is primarily related to additional federal funding received for Unemployment

Insurance claims due to COVID-19.

The following chart depicts expenses of the business-type activities for the fiscal year:

Expenses - Business-type Activities
Fiscal Year Ended June 30, 2020

Gen Govt Services: 6.9% Prison Funds: 0.8%

Hail Insurance: 0.1%
Municipal Finance: 0.2%
State Lottery: 4.7%
Liquor Stores: 9.1%

MUS Group Insurance : 9.3%
77 MUS Workers Comp: 0.1%

Unemployment Insurance: 68.8%

B-15
B-16

FINANCIAL ANALYSIS OF THE STATE’S MAJOR FUNDS

As the State completed the year, its governmental funds reported fund balances of $5.0 billion. Of this total, $3.1
billion (61.5%) constitutes spendable fund balance and $1.9 billion (38.5%) is classified as non-spendable. The
analysis of the following major funds, providing the majority of the fund balance for the government, follows.

General Fund Revenues and Expenditures

The General Fund is the chief operating fund of the State. For fiscal year 2020, the total fund balance of the General
Fund was reported at approximately $592.8 million. Of this balance, $4.9 million is non-spendable. The remaining
$587.9 million is spendable with $117.8 million committed, $89.5 million assigned, and $380.7 million unassigned.
This spendable fund balance of the General Fund represents 19.3% of the $3.1 billion spendable governmental fund
balances for all governmental funds. Of the assigned fund balance, $72.7 million pertains to the projected general
fund spend down of fund balance in fiscal year 2021 and $16.8 million relates to outstanding encumbrances at the
end of the fiscal year. The committed fund balance of $117.8 million relates to the balance of the Budget
Stabilization Reserve Fund, which is combined with the General Fund for financial statement presentation. Further
detail on the breakdown of fund balance for the General Fund is provided in Note 14 — Major Purpose Presentation.

Total fund balance increased by $149.4 million when compared to the previously reported fund balance of $443.4
million. Changes in both expenditures and revenues are discussed in detail below. The 2019 legislative session
projected $226.4 million of unassigned fund balance for fiscal year 2020, without regard to a fund balance spend
down. The difference was primarily the result of a larger than anticipated beginning fund balance.

General Fund Revenues — Total General Fund revenues were $2.4 billion for fiscal year 2020 (lower than legislative
estimation), a 0.3% decrease from the $2.5 billion reported in 2019 (which were lower than legislative estimation).
Fiscal year 2020 tax revenue increased by 0.1% in total over 2019, with corporate income tax collections up 0.4%
and individual income tax collections increased by 0.1%. Other noted decreases in revenues included investment
earnings.

General Fund Expenditures — Total General Fund expenditures for fiscal year 2020 increased by $31.7 million
(1.4%). This increase in expenditures occurred in the general government, public safety, education, and natural
resources functions and the decrease in expenditures occurred in the health and human services function as follows:

* General government expenditures increased by $11.6 million (3.2%)

¢ Public safety expenditures increased by $7.7 million (2.4%)

¢ Education expenditures increased by $45.8 million (4.4%)

* Natural resources expenditure increased by $4.3 million (13.3%)

¢ Health and human services expenditures decreased by $46.0 million (8.7%)

The expenditures in the health and human services function decreased for two reasons. The Montana HELP Act
account was moved to the State Special Revenue Fund. The Centers for Medicare & Medicaid Services provided the
Department of Public Health and Human Services an additional 6.2% federal funding for COVID-19, so the General
Fund share of Medicaid expenditures went down.

The General Fund’s actual revenues and expenditures in comparison to budgeted revenues and expenditures is
provided in more depth on the Budgetary Comparison Schedule within the Required Supplementary Information
section of this report. The same level of detail used to report the actual revenues and expenditures is not readily
available for all budgetary revenues and expenditures, which may cause some variances.

General Fund Expenditure Budget Reversions
Fund balances are not reserved for reverted appropriations. For fiscal year 2020, general fund appropriations that
reverted to 2021 were $64.9 million.

The Department of Public Health and Human Services had unspent appropriations of $54.0 million related to
Medicaid savings and other operational costs.

The Department of Revenue had unspent appropriations of $3.0 million related to the funds available to local
governing bodies pursuant to Section 15-1-402 (6)(d), MCA, regarding protested property taxes and other
operational costs.
The Judicial Branch had unspent appropriations of $1.7 million related to vacancy savings and operational costs.

The Department of Administration had unspent appropriations of $1.4 million, and these were attributable to the
cybersecurity enhancement project, state contributions to retirement funds, and other operational costs.

The Department of Natural Resources and Conservation had unspent appropriations of $1.3 million related to
operational costs.

The Department of Justice had unspent appropriations of $1.0 million related to operational costs, statutory
retirement transfers, and restricted State IT costs.

The remaining unspent appropriation of $2.4 million was attributable to miscellaneous reversions across other
agencies.

State Special Revenue Fund

The fund balance of the State Special Revenue Fund increased by $122.3 million to $1.8 billion. Revenues increased
by $7.5 million (0.7%) and expenditures increased $84.6 million (8.0%), for fiscal year 2020. The largest increases
in revenues are attributable to an increase in licenses and permits, other taxes collections, and contributions and
premiums. The largest increases in expenditures are attributable to health and human services related expenditures
and capital outlay expenditures for infrastructure. Other financing sources, such as bond proceeds, increased due to
the General Obligation Bonds, Series 2020C was issued in fiscal year 2020. Primarily, transfers into the State
Special Revenue Fund from other governmental funds resulted in an increase in fund balance.

During the COVID-19 pandemic, the State Emergency Coordination Center (SECC) received donated personal
protective equipment (PPE) and directed to the Department of Public Health and Human Services to distribute to
hospitals, long-term care facilities, EMS, and local DES. The value of the donated PPE was $90.7 thousand. SECC
also received a donation of $20.0 thousand from an individual and directed to the Department of Public Health and
Human Services to purchase hand sanitizer for local distribution.

Federal Special Revenue Fund

The fund balance of the Federal Special Revenue Fund increased by $5.8 million (46.1%) to the balance of negative
$6.8 million. Revenues and expenditures increased by $344.4 million (11.7%) and $321.0 million (11.0%)
respectively, for the fiscal year 2020. Revenue increases are attributable to increases in federal program revenue,
including COVID-19 related federal funding. Expenditure increases are attributable to increases in health and human
services, general government, and capital outlay related expenditures. The health and human services and general
government related expenditure increase is attributable to COVID-19. The capital outlay expenditure increase of
15.6% is attributable to infrastructure expenditure increases by transportation.

Coal Severance Tax Permanent Fund

The fund balance of the Coal Severance Tax Permanent Fund increased by $66.0 million (5.7%) to $1.2 billion.
Revenue decreased by $5.7 million (5.4%) to $99.9 million, primarily due to an decrease of natural resource tax
revenue. Transfers out, which decreased by $6.2 million (15.5%), and the increase in investment earnings helped
lead to the increase in fund balance.

Land Grant Permanent Fund

The fund balance of the Land Grant Permanent Fund increased by $71.6 million (9.2%) to $845.7 million. Revenue
decreased by $3.1 million to a total of $126.6 million, and the rentals, leases, and royalties were attributable to the
decrease. The general capital asset sale proceeds increased by $4.0 million to a total of $11.0 million. Transfers out
were $61.6 million, which was a decrease of $4.8 million compared to fiscal year 2019. Primarily, investment
earnings and income generated by the State's trust lands resulted in an increase in fund balance.

Unemployment Insurance Enterprise Fund

Net position restricted for unemployment compensation decreased by $113.1 million (32.2%). The decrease in net
position is attributable to the substantially high volume of benefit claims due to COVID-19 in fiscal year 2020,
accompanied by an increase in the federal funding through the Federal Pandemic Unemployment Compensation and
Pandemic Unemployment Assistance in fiscal year 2020.

B-17
B-18

Municipal Finance Programs Fund

Net position decreased by 0.8% to $5.4 million in fiscal year 2020. Financing income revenue decreased $475.0
thousand, and investment earnings decreased $242.0 thousand, while expenses from interest expense decreased
$247.0 thousand. Overall revenues and expenditures decreased (23.2)% and (13.4)%, which resulted in an decrease
of $43.0 thousand to net position.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets

The State’s investment in capital assets for its governmental and business-type activities, as of June 30, 2020,
amounted to $9.3 billion, with related accumulated depreciation of $2.5 billion, leaving a net book value of $6.8
billion. This investment in capital assets includes land, buildings, improvements, equipment, infrastructure,
intangible assets, and construction in progress. Infrastructure assets are items that are normally immovable and of
value only to the State, such as roads, bridges, streets and sidewalks, drainage systems, lighting systems, and similar
items.

The total increase in the State’s investment in capital assets for the current fiscal year was $343.3 million or 5.3% in
terms of net book value. Most increases in capital expenditures were seen in construction, or reconstruction, of roads
and bridges. Additional information relating to the State’s capital assets can be found in Note 5 of the notes to the
financial statements.

Debt Administration
Montana continues to receive excellent general obligation bond ratings from Moody’s Investor Service (Aal),
Standard and Poor’s Corporation (AA), and Fitch Ratings (AA+), which remain unchanged from 2019.

State debt may be authorized either by a two-thirds vote of the members of each house of the Legislature or by a
favorable vote of a majority of the State’s electors voting thereon. There is no constitutional limit on the amount of
debt that may be incurred by the State. The Montana Constitution does, however, prohibit the incurring of debt to
cover deficits caused by appropriations exceeding anticipated revenue.

The State of Montana’s general obligation debt increased from $73.1 million at June 30, 2019, to $90.3 million at
June 30, 2020. There is cash available, of $7.4 million at the end of fiscal year 2020, in debt service funds to service
general obligation debt.

The below table contains the ratio of general obligation debt and total State debt to personal income and to the
amount of debt per capita:

Amount Percentage of State Debt
(in thousands) Personal Income Per Capita
General obligation debt $ 90,250 0.17% $ 84
Total State debt $ 137,701 0.30% $ 129
) Based on personal income for calendar year 2019.
@ Based on estimated 2019 Montana population.

®) Based on total of general obligation bonds, special revenue bonds, notes payable, and lease/installment purchase payable for the
percentage and state debt per capita.

More detailed information regarding the State’s long-term obligations is provided in Note 11 of the notes to the
financial statements and in the statistical tables.

ECONOMIC CONDITION AND OUTLOOK

On March 3, 2020, Governor Bullock formed a multi-agency task force to coordinate the State’s preparations with
respect to COVID-19. On March 12, 2020, Governor Bullock issued Executive Orders No. 2-2020 and 3-2020
declaring a State of Emergency in the State in response to the COVID-19 pandemic. Montana residents were under a
Stay at Home Directive from March 28, 2020 through April 24, 2020. The State is now in a phased-in reopening.

Concerns stemming from COVID-19 have caused significant volatility in the United States financial markets, and in
financial markets world-wide. Economic activity has been reduced in the near term as a result of actions required in
response to the COVID-19 pandemic. The State expects that the economic repercussions associated with COVID-19
are likely to negatively affect the State’s receipt of revenues in fiscal year 2021 from individual income tax,
corporate income tax and alternative corporate income tax, gaming taxes, vehicle taxes, accommodations taxes,
interest earnings, and other smaller sources. Current estimates project a total general fund revenue decline in fiscal
year 2021 when compared to official pre-pandemic estimates, with, assuming that the prevalence and adverse effects
of COVID-19 are diminished and/or more effectively contained, an estimated rebound in state revenue collections
beginning in fiscal year 2022 and beyond. In addition, the volatility and loss of value in the investment markets may
negatively affect the value of the State’s investments and the valuations of the State’s pension plans.

COVID-19 has significantly affected Montana’s economy. Most business and service sectors in the State, including,
without limitation, tourism and hospitality services, agriculture and natural resource extraction, are expected to
experience decreases in operations and revenues, which are expected to result in decreased taxes, fees, assessments
and other revenue to the State. The long-term effects of the pandemic on the economy and demographics are
unknown, but there will likely be lasting impacts on Montana residents and businesses and the ways that people
travel to, from, and within Montana. Montana has pronounced exposure to downturns in tourism, hospitality and the
service industry, and those industries were most impacted at the onset of the pandemic. However, the State believes
meaningful recovery is already taking place in those and other Montana industries.

As Montana works to respond to and recover from the unprecedented economic strain caused by COVID-19, the
State is allocating emergency financing relief available from the federal government to those who have been hardest-
hit by impacts of COVID-19. The financial assistance is funded through $1.25 billion in federal emergency relief
made available under the federal Coronavirus Aid, Relief and Economic Security (CARES) Act.

The State cannot predict: (i) the duration or extent of the COVID-19 outbreak or any other outbreak or pandemic;
(ii) the duration or expansion of travel restrictions and warnings — both domestically and internationally; (iii)
whether additional countries or destinations will be added to the travel restrictions or warnings; (iv) what effect any
COVID-19 or any other outbreak/pandemic-related travel restrictions or warnings may have on demand for travel;
(v) whether and to what extent the COVID-19 outbreak or any other outbreak or pandemic may disrupt the local or
global economy, manufacturing or supply chain, or whether any such disruption may adversely impact State-related
operations and financial results; or (vi) whether any of the foregoing may have a material adverse effect on the
finances and operations of the State.

The extent of the impact of the COVID-19 on the State’s operational and financial performance, and on State’s
general financial condition, will depend on future developments, many of which are out of the State’s control,
including without limitation the implementation of federal aid; the duration and spread of the COVID-19 pandemic;
restrictions, limitations and changes on school and university attendance, public gatherings and other public events;
restrictions in operations of public and private businesses and organizations nationwide and internationally; and
travel restrictions and other restrictions and measures taken in response to the COVID-19 pandemic. The State
believes it may be months and perhaps years before the State is able to accurately determine the full impact that the
various events surrounding COVID-19 have on the State’s economy and financial condition.

Despite the economic effects of COVID-19, Montana’s primary economic base remains concentrated in nonresident
travel, agriculture, and mining, as well as service-providing industries. Per the 2020 Labor Day Report issued by the
Montana Department of Labor and Industry, Montana experienced the longest economic expansion in history from
July 2009 to February 2020. Montana had real wage growth of 1.6% in calendar year 2019. Montana’s
unemployment rate was as low as 3.5% in February 2020. In March 2020, the COVID-19 pandemic-induced
recession appears to have been quite short, with employment levels quickly rebounding after the phased reopening
of the economy. Unemployment claims hit a peak in April and continue to decrease steadily. Jobs have been quick
to return with roughly 40,000 payroll positions added in May and June. Montana had the 16th smallest job loss
among states, giving the state a smaller hurdle to overcome in the recovery. In July 2020, the Montana's
unemployment rate was 6.4% with the national rate around 10.2%. Even with a strong recovery and rapid job
growth, it is likely that the pandemic will have continued impacts on Montana's economy.

Montana had an estimated 1,068,778 population as of July 1, 2019. The Montana labor market has total nonfarm
workers of 464,600 in August 2020 as compared to 484,700 in August 2019. A more in-depth analysis of the State’s
overall financial position can be found in the transmittal letter of this report.

B-19
B-20

The Montana Constitution, Article VIII, Section 15, states that public retirement systems shall be funded on an
actuarially sound basis. Public pension plans are considered actuarially sound if the unfunded accrued actuarial
liability amortization period is within 30 years. As of June 30, 2020, the Game Warden & Peace Officers’
Retirement System (GWPORS), the Highway Patrol Officers’ Retirement System (HPORS), and the Public
Employees’ Retirement System - Defined Benefit Retirement Plan (PERS-DBRP) were not in compliance and did
not amortize within 30 years. The unfunded liabilities in the other state retirement systems amortize in 30 years or
less as of the fiscal year ended June 30, 2020.

The actuarial condition of these retirement plans is disclosed in greater detail in Note 6 of the financial statements.
The unfunded actuarial liability of these plans is long-term in nature and does not translate into an inability of the
plans to meet their current obligations in the near future.

REQUESTS FOR INFORMATION

This financial report is designed to provide a general overview of the State of Montana’s finances for all of
Montana’s citizens, taxpayers, customers, investors, and creditors. The financial report seeks to demonstrate the
State’s accountability for the money it receives. Questions concerning any of the information provided in this report
or requests for additional information should be addressed to the State of Montana, Statewide Accounting Bureau,
Room 255 Mitchell Building, PO Box 200102, Helena, MT 59620.
B-21

STATEMENT OF NET POSITION
JUNE 30, 2020
(amounts expressed in thousands)

PRIMARY GOVERNMENT
GOVERNMENTAL BUSINESS-TYPE COMPONENT
ACTIVITIES ACTIVITIES TOTAL UNITS
ASSETS
Cash/cash equivalents (Note 3) $ 3,152,853 $ 415,578 $ 3,568,431 $ 613,423
Receivables (net) (Note 4) 630,026 48,277 678,303 149,152
Due from primary government _— _— _— 1,325
Due from other governments 335,261 16,745 352,006 34,539
Due from component units 560 1,525 2,085 176
Internal balances 7,497 (7,497) _— _—
Inventories 28,754 4,424 33,178 5,058
Advances to component units 10,092 9,892 19,984 _—
Long-term loans/notes receivable 525,184 41,969 567,153 597,356
Equity in pooled investments (Note 3) 2,565,490 18,641 2,584,131 51,492
Investments (Note 3) 215,456 2,728 218,184 2,142,283
Securities lending collateral (Note 3) 46,893 339 47,232 6,798
Net pension asset (Note 6) 39,567 _— 39,567 _—
Other assets 14,674 1,765 16,439 77,523
Depreciable capital assets and infrastructure, net (Note 5) 4,494 153 15,121 4,509,274 835,952
Land and nondepreciable capital assets (Note 5) 2,328,893 6,931 2,335,824 154,696
Total assets 14,395,353 576,438 14,971,791 4,669,773
DEFERRED OUTFLOWS OF RESOURCES (Note 4) 613,249 2,423 615,672 77,561
LIABILITIES
Accounts payable (Note 4) 743,939 49,961 793,900 127,328
Lottery prizes payable _— 3,152 3,152 _—
Due to primary government _— _— _— 2,085
Due to other governments 20,694 248 20,942 4,648
Due to component units 1,325 _— 1,325 176
Due to pension trust funds 34,357 _— 34,357 _—
Advances from primary government _— _— _— 19,984
Unearned revenue 1,214,220 5,380 1,219,600 92,837
Amounts held in custody for others 51,871 31 51,902 16,152
Securities lending liability (Note 3) 46,893 339 47,232 6,798
Other liabilities 4,504 _— 4,504 22,862
Short-term debt (Note 11) — 90,670 90,670 _—
Long-term liabilities (Note 11):
Due within one year 133,414 13,813 147,227 173,596
Due in more than one year 418,492 5,975 424,467 1,832,149
Net pension liability (Note 6) 2,243,084 11,510 2,254,594 186,395
Total OPEB liability (Note 7) 45,593 817 46,410 27,460
Total liabilities 4,958,386 181,896 5,140,282 2,512,470

DEFERRED INFLOWS OF RESOURCES (Note 4) 219,243 3,645 222,888 56,222
STATEMENT OF ACTIVITIES

FOR THE FISCAL YEAR ENDED JUNE 30, 2020

(amounts expressed in thousands)

PROGRAM REVENUES
OPERATING CAPITAL
CHARGES GRANTS GRANTS NET
FOR AND AND (EXPENSE)
FUNCTIONS/PROGRAMS EXPENSES SERVICES CONTRIBUTIONS CONTRIBUTIONS REVENUE
Primary government:
Governmental activities:

General government $ 957,534 $ 249,885 $ 245,338 $ 668 $ (461,643)

Public safety 458,526 182,773 34,960 — (240,793)

Transportation 557,290 32,555 70,444 548,110 93,819

Health and human services 2,896,774 39,945 2,179,408 — (677,421)

Education 1,352,323 2,531 196,537 683 (1,152,572)

Natural resources 338,957 178,646 203,620 14,970 58,279

Interest on long-term debt 5,365 _— _— _— (5,365)

Total governmental activities 6,566,769 686,335 2,930,307 564,431 (2,385,696)
Business-type activities:

Unemployment Insurance 746,508 119,523 16,388 _— (610,597)

Liquor Stores 98,324 116,583 — — 18,259

State Lottery 51,385 59,892 — — 8,507

Municipal Finance Programs 2,542 7 2,482 _— (53)

Hail Insurance 1,154 1,182 33 _— 61

Other Service 74,323 26,080 49,632 950 2,339

Prison Funds 8,506 7,532 — — (974)

MUS' Group Insurance 100,958 108,624 2,384 — 10,050

MUS’ Workers Compensation 657 3,625 503 _— 3,471

Total business-type activities 1,084,357 443,048 71,422 950 (568,937)

Total primary government $ 7,651,126 $ 1,129,383 $ 3,001,729 $ 565,381 $ (2,954,633)
Component units:

Montana Board of Housing $ 24,455 $ 1,742 $ 25,151 $ — $ 2,438

Facility Finance Authority 705 741 155 _— 191

Montana State Fund 201,034 156,871 — — (44,163)

Montana State University 630,487 287,201 213,150 5,972 (124,164)

University of Montana 452,417 169,686 126,758 1,875 (154,098)
Total component units $ 1,309,098 $ 616,241 $ 365,214 § 7,847 $ (319,796)

‘Montana University System

B-23
B-24

PRIMARY GOVERNMENT
ACTIVITIES ACTIVITIES TOTAL UNITS
Changes in net position:
Net (expense) revenue $ (2,385,696) $ (568,937) $ (2,954,633) $ (319,796)
General revenues:
Taxes:
Property 327,629 _— 327,629 _—
Fuel 260,553 _— 260,553 _—
Natural resource 171,055 _— 171,055 _—
Individual income 1,455,150 _— 1,455,150 _—
Corporate income 185,358 _— 185,358 _—
Other (Note 1) 393,466 32,576 426,042 _—
Unrestricted grants and contributions 740 496,499 497,239 _—
Settlements 27,906 _— 27,906 _—
Unrestricted investment earnings 138,435 106 138,541 143,101
Transfers from primary government _— _— _— 244,663
Gain (loss) on sale of capital assets 11,070 134 11,204 156
Miscellaneous 8,043 8,012 16,055 1,036
Contributions to term and permanent endowments _— _— _— 37,057
Transfers between primary government 58,703 (58,703) _— _—
Total general revenues, contributions, and transfers 3,038,108 478,624 3,516,732 426,013
Change in net position 652,412 (90,313) 562,099 106,217
Total net position - July 1 - as previously reported 9,195,927 482,568 9,678,495 2,070,862
Adjustments to beginning net position (Note 2) (17,366) 1,065 (16,301) 1,563
Total net position - July 1 - as adjusted 9,178,561 483,633 9,662,194 2,072,425
Total net position - June 30 $ 9,830,973 $ 393,320 $ 10,224,293 $ 2,178,642

The notes to the financial statements are an integral part of this statement.
B-25

This page was intentionally left blank.
B-26

BALANCE SHEET
GOVERNMENTAL FUNDS

JUNE 30, 2020

(amounts expressed in thousands)

ASSETS

Cash/cash equivalents (Note 3)
Receivables (net)

Interfund loans receivable (Note 12)
Due from other governments

Due from other funds (Note 12)

Due from component units
Inventories

Equity in pooled investments (Note 3)
Long-term loans/notes receivable
Advances to other funds (Note 12)
Advances to component units
Investments (Note 3)

Securities lending collateral (Note 3)
Other assets

Total assets

LIABILITIES, DEFERRED INFLOWS OF RESOURCES,
AND FUND BALANCES

Liabilities:
Accounts payable
Interfund loans payable (Note 12)
Due to other governments
Due to other funds (Note 12)
Due to component units
Advances from other funds (Note 12)
Unearned revenue
Amounts held in custody for others
Securities lending liability (Note 3)
Other liabilities

Total liabilities

DEFERRED INFLOWS OF RESOURCES

Fund balances (Note 14):
Nonspendable
Restricted
Committed
Assigned
Unassigned
Total fund balances
Total liabilities, deferred inflows of resources, and fund balances

The notes to the financial statements are an integral part of this statement.

SPECIAL REVENUE
GENERAL STATE FEDERAL

528,914 $ 989,208 $ 1,264,153
434,693 86,629 75,438
95,979 101,954 —
12,849 892 321,510
26,471 13,737 2,882
— 304 17
3,704 20,117 —

— 498,389 6,214

355 28,348 —

6,834 12,600 —
3,384 10,174 308
1,113,183 $ 2,142,583 $ 1,670,522
289,190 $ 188,550 $ 237,358
— 5,288 189,055

170 19,336 1,188
3,070 10,182 1,851
34,442 498 742
— 6,065 25,486

798 21,971 1,194,737
7,060 40,003 125

— 304 —
334,730 209, 154 7,650,542
185,641 7,314 26,779
4,903 21,310 252
117,773 668,401 —
380,667 — (7,051)
502,812 1,836,115 (6,799)
1,113,183 $ 2,142,583 $ 1,670,522
B-28

RECONCILIATION OF THE BALANCE SHEET OF GOVERNMENTAL FUNDS TO THE
STATEMENT OF NET POSITION

JUNE 30, 2020

(amounts expressed in thousands)

Total fund balances - governmental funds

Amounts reported for governmental activities in the Statement of Net Position are different due to:

Capital assets used in governmental activities are not current financial resources and therefore not
reported in the governmental funds (Note 5):

Depreciable capital assets and infrastructure, net

Land and nondepreciable capital assets

Deferred outflows of resources represent a consumption of net assets that will be reported as an
outflow of resources in a future period and therefore are not reported in the governmental funds.

Other assets not available in the current period and therefore are not reported in the governmental
funds:

Net pension asset

Long-term receivables

Internal service funds are used by management to charge the costs of certain activities, such as
insurance and central computer services, to individual governmental funds. The assets and liabilities
and of the internal service funds are included in the governmental activities in the Statement of Net
Position, excluding internal service funds' capital assets, deferred outflows of resources, deferred
inflows of resources and long-term liabilities reported in specific areas.

Other liabilities that are not due and payable in the current period and are not reported in the
governmental funds.

A portion of deferred inflows of resources represents an acquisition of net assets that will be
recognized as an inflow of resources in a future period, which differs than that reported in the
governmental funds.

Long-term liabilities and related accrued interest are not due and payable in the current period and
therefore are not reported in the governmental funds (Note 11):

Other long-term liabilities
Net pension liability
Total OPEB liability

Total net position - governmental activities

The notes to the financial statements are an integral part of this statement.

4,494,153
2,328,893 6,823,046
613,249
39,567
(444)
237,715
(12,149)
5,021
(551,906)
(2,243,084)
(45,593) (2,840,583)
B-29

This page was intentionally left blank.
B-30

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES
GOVERNMENTAL FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2020

(amounts expressed in thousands)

SPECIAL REVENUE
GENERAL STATE FEDERAL
REVENUES (Note 14)
Licenses/permits $ 132,654 $ 285,639 $ —
Taxes:
Natural resource 69,726 64,110 —
Individual income 1,421,934 _— _—
Corporate income 186,680 — —
Property 308,093 19,536 _
Fuel _ 260,324 _
Other 237,274 151,174 _
Charges for services/fines/forfeits/settlements 33,453 106,641 7,358
Investment earnings 20,243 39,163 668
Securities lending income _ 15 37
Sale of documents/merchandise/property 273 12,536 _
Rentals/leases/royalties 8 1,346 —
Grants/contracts/donations 11,315 19,503 72
Federal 18,889 6,642 3,180,500
Federal indirect cost recoveries 178 57,509 93,287
Other revenues 2,414 3,949 1,289
Total revenues 2,443,134 1,061,956 3,283,211
EXPENDITURES
Current:
General government 372,209 193,199 172,137
Public safety 321,661 96,834 25,892
Transportation — 248,620 106,199
Health and human services 480,752 231,632 2,181,889
Education 1,082,324 76,644 193,684
Natural resources 36,263 195,389 90,770
Debt service:
Principal retirement 208 3,603 103
Interest/fiscal charges 256 645 1
Capital outlay 11,681 90,705 460,057
Securities lending _ 46 7
Total expenditures 2,305,354 1,137,317 3,230,749
Excess of revenue over (under) expenditures 137,780 (75,361) 52,462
OTHER FINANCING SOURCES (USES)
Inception of lease/installment contract 433 15,290 257
Insurance proceeds 48 34,366 _—
General capital asset sale proceeds 76 892 —
Bond premium _— 4,361 _—
Bond proceeds _— 28,900 _—
Energy conservation loans _ 632 _
Transfers in (Note 12) 86,773 176,213 1,485
Transfers out (Note 12) (76,949) (64,180) (48,633)
Total other financing sources (uses) 10,381 196,474 (46,891)
Net change in fund balances 148,161 121,113 5,571
Fund balances - July 1 - as previously reported 443,409 1,713,834 (12,614)
Adjustments to beginning fund balance (Note 2) 1,445 1,378 244
Fund balances - July 1 - as adjusted 444 (854 1,715,212 (12,370)
Increase (decrease) in inventories (203) (210) _
Fund balances - June 30 $ 592,812 $ 1,836,115 $ (6,799)

The notes to the financial statements are an integral part of this statement.
B-32

RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN
FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES

FOR THE FISCAL YEAR ENDED JUNE 30, 2020
(amounts expressed in thousands)

Net change in fund balances - total governmental funds $
Amounts reported for governmental activities in the Statement of Activities are different due to:

Capital outlays are reported as expenditures in governmental funds. However, in the Statement of
Activities, these costs are allocated as depreciation expense over the useful life of the capital asset.
Capital outlays exceeded depreciation expense in the current year by the following amount (Note 5):

Capital outlay $ 611,539

Depreciation expense and amortization (254,930)

Miscellaneous transactions involving capital assets such as sales (gain/loss) and donations are
reported in the Statement of Activities, but only proceeds from sales are reported in the governmental
funds.

Revenues reported in the Statement of Activities that do not provide current financial resources are
not reported as revenues in the governmental funds.

Bond proceeds provide current financial resources to governmental funds, but issuing debt increases
long-term liabilities in the statement of net assets.

Internal service funds are used by management to charge the costs of certain activities, such as
insurance and central computer services, to individual governmental funds. Internal service funds are
reported separately from governmental funds in the fund financial statements. In the government-
wide statements, internal service funds are included with governmental activities.

Some expenses reported in the Statement of Activities do not require the use of current financial
resources and therefore are not reported as expenditures in the governmental funds. Some
expenditures reported in the governmental funds either increase or decrease items reported in the
Statement of Net Position.

Change in net position - governmental activities $

The notes to the financial statements are an integral part of this statement.

432,420

356,609

(542)

34,712

(33,261)

32,892

(170,418)

652,412
STATEMENT OF FUND NET POSITION
PROPRIETARY FUNDS

JUNE 30, 2020

(amounts expressed in thousands)

ASSETS

Current assets:
Cash/cash equivalents (Note 3)
Receivables (net) (Note 4)
Interfund loans receivable (Note 12)
Due from other governments
Due from other funds (Note 12)
Due from component units
Inventories
Short-term investments (Note 3)
Securities lending collateral (Note 3)
Other current assets

Total current assets

Noncurrent assets:
Advances to other funds (Note 12)
Advances to component units
Long-term investments (Note 3)
Long-term notes/loans receivable
Other long-term assets
Capital assets (Note 5):
Land
Land improvements
Buildings/improvements
Equipment
Infrastructure
Construction work in progress
Intangible assets
Other capital assets
Less accumulated depreciation
Total capital assets
Total noncurrent assets
Total assets

DEFERRED OUTFLOWS OF RESOURCES (Note 4)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES -
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE

INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS

248,066 $ 26,546 $ 140,966 $ 415,578 223,048

4,478 8,029 35,770 48,277 11,691

— — 61 61 —

16,745 — — 16,745 10

— 3,338 — 3,338 109

— 1,525 — 1,525 9

— — 4,424 4,424 4,933

— 146 — 146 —

— — 339 339 386

— — 370 370 565

269,289 39,584 181,930 490,803 240,751

— 7,008 — 7,008 —

— 9,892 — 9,892 —

— 564 20,659 21,223 23,715

2,266 39,703 — 41,969 —

— — 1,395 1,395 —

— — 800 800 —

— — 3,830 3,830 95

— — 16,379 16,379 6,069

— 4 9,806 9,810 264,670

— — 1,175 1,175 —

— — 2,361 2,361 4,397

— — 1,521 1,521 551

— — 3,770 3,770 —

— (3) (17,591) (17,594) (170,266)

= 1 22,051 22,052 105,516

2,266 57,168 44,105 103,539 129,231

271,555 96,752 226,035 594,342 369,982

— 51 2,372 2,423 9,975

B-33
B-35

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION
PROPRIETARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2020

(amounts expressed in thousands)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES -
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
Operating revenues:
Charges for services $ 126 $ 7 $ 196,619 $ 196,752 $ 160,006
Investment earnings 8,549 441 3,210 12,200 3,421
Securities lending income _ _ 4 4 6
Financing income _ 2,041 _— 2,041 _—
Contributions/premiums 119,397 — 125,820 245,217 227,049
Grants/contracts/donations 7,839 _— 49,221 57,060 5,504
Other operating revenues _ — 9,088 9,088 12,023
Total operating revenues 135,911 2,489 383,962 522,362 408,009
Operating expenses:
Personal services _ 282 17,653 17,935 71,822
Contractual services _ 54 22,834 22,888 39,424
Supplies/materials _ 7 99,872 99,879 21,301
Benefits/claims 745,250 _ 149,459 894,709 222,488
Depreciation _ — 875 875 14,672
Amortization _ _ 541 541 541
Utilities/rent _ 53 1,119 1,172 7,608
Communications _ 8 971 979 11,376
Travel _ 2 249 251 469
Repairs/maintenance _ — 1,437 1,437 27,904
Grants _ _ _ _ 230
Lottery prize payments _ — 36,766 36,766 _—
Securities lending expense _ _ 2 2 3
Arbitrage rebate tax _ 72 _ 72 _
Interest expense _ 2,008 8 2,016 433
Other operating expenses 1,258 56 3,078 4,392 5,830
Total operating expenses 746,508 2,542 334,864 1,083,914 424,101
Operating income (loss) (610,597) (53) 49,098 (561,552) (16,092)
Nonoperating revenues (expenses):
Tax revenues (Note 1) _ _— 32,576 32,576 _
Grant revenue 496,499 — _— 496,499 _—
Insurance proceeds _ _ _ — 261
Gain (loss) on sale of capital assets _ _ 44 44 (48)
Federal indirect cost recoveries _ — 225 225 13,478
Increase (decrease) value of livestock _ _ (353) (353) _
Total nonoperating revenues (expenses) 496,499 — 32,492 528,991 13,691
Income (loss) before contributions and
transfers (114,098) (53) 81,590 (32,561) (2,401)
Capital contributions _ — 1,184 1,184 107
Transfers in (Note 12) _ _ 458 458 36,137
Transfers out (Note 12) _ _ (59,394) (59,394) (944)
Change in net position (114,098) (53) 23,838 (90,313) 32,899
Total net position - July 1 - as previously reported 351,527 5,413 125,628 482,568 165,979
Adjustments to beginning net position (Note 2) 1,000 11 54 1,065 (443)
Total net position - July 1 - as adjusted 352,527 5,424 125,682 483,633 165,536
Total net position - June 30 $ 238,429 $ 5,371 $ 149,520 $ 393,320 $ 198,435

The notes to the financial statements are an integral part of this statement.
B-36

STATEMENT OF CASH FLOWS
PROPRIETARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2020
(amounts expressed in thousands)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES -
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
CASH FLOWS FROM OPERATING ACTIVITIES
Receipt from sales and service $ 149,412 $ 7 $ 315,932 $ 465,351 $ 385,267
Payments to suppliers for goods and services (3,499) (248) (120,966) (124,713) (111,093)
Payments to employees _ (384) (17,385) (17,769) (70,040)
Grant receipts (expenses) 7,830 _ 49,381 57,211 5,261
Cash payments for claims (744,996) _ (149,826) (894,822) (184,467)
Cash payments for prizes _ _ (37,048) (37,048) _
Other operating revenues — _— 9,311 9,311 25,499
Other operating payments (1,258) _ (2,894) (4,152) (5,830)
Net cash provided by (used for)
operating activities (592,511) (625) 46,505 (546,631) 44,597
CASH FLOWS FROM NONCAPITAL
FINANCING ACTIVITIES
Collection of taxes _— _ 32,576 32,576 _
Transfer to other funds _ _ (62,239) (62,239) (944)
Transfer from other funds _— _ 457 457 36,142
Proceeds from interfund loans/advances 1,485 _ 102 1,587 2,342
Payment of interfund loans and advances _ _ (61) (61) _
Payment of principal and interest on bonds and notes _ (16,756) (8) (16,764) (728)
Grant receipt 479,806 _— _ 479,806 _—
Net cash provided by (used for)
noncapital financing activities 481,291 (16,756) (29,173) 435,362 36,812
CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES
Proceeds from insurance _ _ _ _ 262
Acquisition of capital assets _ _ (2,238) (2,238) (12,656)
Proceeds from sale of capital assets _ _ 927 927 916
Net cash provided by (used for) capital and
related financing activities = = (1,311) (1,311) (11,478)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale (purchase) of investments _ (5,546) 2,581 (2,965) 10,998
Proceeds (loss) on sales or maturities of investments _— 8,218 _ 8,218 _
Proceeds (loss) from securities lending transactions/
investments _ _ 4 4 6
Interest and dividends on investments 11,306 455 3,230 14,991 3,421
Payment of securities lending costs _ _ (3) (3) (3)
Collections of principal and interest on loans — 42,169 _ 42,169 _—
Cash payment for loans _ (29,093) _ (29,093) _
Net cash provided by (used for)
investing activities 11,306 16,203 5,812 33,321 14,422
Net increase (decrease) in cash
and cash equivalents (99,914) (1,178) 21,833 (79,259) 84,353
Cash and cash equivalents, July 1 347,980 27,724 119,133 494,837 138,695
Cash and cash equivalents, June 30 $ 248,066 $ 26,546 $ 140,966 $ 415,578 $ 223,048

The notes to the financial statements are an integral part of this statement.
STATEMENT OF CASH FLOWS
PROPRIETARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2020
(amounts expressed in thousands)

GOVERNMENTAL
BUSINESS-TYPE ACTIVITIES - ENTERPRISE FUNDS ACTIVITIES
MUNICIPAL INTERNAL
UNEMPLOYMENT FINANCE SERVICE
INSURANCE PROGRAMS NONMAJOR TOTAL FUNDS
Reconciliation of operating income to net
cash provided by operating activities:
Operating income (loss) $ (610,597) $ (53) $ 49,098 $ (561,552) $ (16,092)
Adjustments to reconcile operating income
to net cash provided for (used for)
operating activities:
Depreciation — _ 875 875 14,672
Amortization _ _ 541 541 541
Securities lending expense _ _ 3 3 3
Investment earnings (8,549) (441) (3,184) (12,174) (3,421)
Securities lending income _ _ (4) (4) (6)
Financing income _ (2,041) _ (2,041) _
Interest expense — 2,008 8 2,016 432
Other revenue — _ 225 225 13,476
Arbitrage rebate tax _ (23) _ (23) _
Change in assets, deferred outflows, liabilities and
deferred inflows:
Decr (Incr) in accounts receivable (1,498) _ (5,165) (6,663) (2,637)
Decr (Incr) in due from other funds _ _ 2 2 (29)
Decr (Incr) in due from component units _ _ _ _ 54
Decr (Incr) in due from other governments (9) _ 166 157 (7)
Decr (Incr) in inventories _ _ 599 599 (602)
Decr (Incr) in other assets _ _ (2) (2) 355
Incr (Decr) in accounts payable 25,521 16 2,807 28,344 2,651
Incr (Decr) in due to other funds _— _ 1,476 1,476 82
Incr (Decr) in due to other governments _ _ 135 135 _
Incr (Decr) in lottery prizes payable _ _ (281) (281) _
Incr (Decr) in unearned revenue 2,621 _ 555 3,176 (115)
Incr (Decr) in amounts held in custody for others _ _ _ _ 494
Incr (Decr) in compensated absences payable _ (16) 210 194 580
Incr (Decr) in total OPEB liability _ 1 (155) (154) (394)
Incr (Decr) in estimated claims _ _ (1,546) (1,546) 37,760
Incr (Decr) in other payables _ _ 7 7 (4,419)
Incr (Decr) in net pension liability and related
accounts _ (76) 135 59 1,219
Net cash provided by (used for)
operating activities $ (592,511) $ (625) $ 46,505 $ (546,631) $ 44,597
Schedule of noncash transactions:
Capital asset acquisitions from contributed capital $ — $ — $ 1,184 $ 1,184 $ 108
Incr (Decr) in fair value of investments _ (9) (905) (914) (1,050)
Total noncash transactions $ — $ (9) $ 279 $ 270 $ (942)

The notes to the financial statements are an integral part of this statement.

B-37
B-38

STATEMENT OF FIDUCIARY NET POSITION
FIDUCIARY FUNDS

JUNE 30, 2020

(amounts expressed in thousands)

ASSETS
Cash/cash equivalents (Note 3)
Receivables (net):
Accounts receivable
Interest
Due from primary government
Due from other PERB plans
Long-term loans/notes receivable
Total receivables
Investments at fair value:
Equity in pooled investments (Note 3)
Other investments (Note 3)
Total investments
Securities lending collateral (Note 3)
Capital Assets:
Land
Buildings/improvements
Equipment
Accumulated depreciation
Intangible assets
Total capital assets
Other assets
Total assets

DEFERRED OUTFLOWS OF RESOURCES

LIABILITIES

Accounts payable
Due to other PERB plans
Unearned revenue
Securities lending liability (Note 3)
Compensated absences payable
Net pension liability (Note 6)
Total OPEB liability (Note 7)

Total liabilities

DEFERRED INFLOWS OF RESOURCES

NET POSITION
Restricted for:
Pensions
Postemployment benefits other than pensions
Pool participants
Individuals, organizations, and other governments
Total net position

The notes to the financial statements are an integral part of this statement.

PENSION
(AND OTHER
EMPLOYEE PRIVATE
BENEFIT) PURPOSE
TRUST FUNDS TRUST FUNDS

INVESTMENT
TRUST
FUNDS

CUSTODIAL
FUNDS

$ 130,602 $ 45,741

22,235 —
65 —
34,357 —
197 —

9 _

$ 1,705,734 $

809

6,281

668

57,463 —

809

11,658,386 —
868,852 167,559

13,139

12,527 238 167,559

13,139

62,203 —

35 —
973 —
96 —
(281) —
5,309 —

239

6,132 —

— 34,835

12,783,638 248,135

1,719,921

359 —

1,247 21
197 —
369 —

62,203 —
635 —

1,488 —

213 —

66,952 21

370 —

12,136,708 —
579,967 —

— 248,114

1,718,902

$ 12,716,675 $ 248,114

$ 1,718,902 $
B-39

STATEMENT OF CHANGES IN FIDUCIARY NET POSITION
FIDUCIARY FUNDS

FOR THE FISCAL YEAR ENDED JUNE 30, 2020

(amounts expressed in thousands)

PENSION
(AND OTHER
EMPLOYEE PRIVATE INVESTMENT
BENEFIT) PURPOSE TRUST CUSTODIAL
TRUST FUNDS TRUST FUNDS FUNDS FUNDS
ADDITIONS
Contributions/premiums:
Employer $ 273,930 $ — $ — $ =
Employee 260,267 _— _— _—
Other contributions 118,680 18,278 1,615,814 _—
Investment earnings:
Net increase in fair value of investments 405,201 (926) 1,304 —
Interest, dividends, and other 24,836 1 23,686 17
Securities lending income 1,349 _— 3 _—
Total investment earnings 431,386 (925) 24,993 17
Less investment costs:
Administrative investment expense 64,071 _— _— _—
Securities lending expense 719 _— 2 _—
Net investment earnings 366,596 (925) 24,991 17
Charges for services 786 — — —
Other additions and miscellaneous 905 9,160 _— 51,943
Total additions 1,021,164 26,513 1,640,805 51,960
DEDUCTIONS
Benefits 986,936 — _ __
Distributions _— 38,336 1,310,284 47,848
Administrative expenses 13,286 758 _— _—
Transfers to MUS-RP 268 _— _— _—
Transfers to PERS-DCRP 1,984 — — —
Total deductions 1,025,364 39,094 1,310,284 47,848
Change in net position (4,200) (12,581) 330,521 4,112
Net position - July 1 - as previously reported 12,720,859 287 ,288 1,388,381 —_
Adjustments to beginning net position (Note 2) 16 (26,593) — 4,705
Net position - July 1 - as adjusted 12,720,875 260,695 1,388,381 4,705
Net position - June 30 $ 12,716,675 $ 248,114 $ 1,718,902 $ 8,817

The notes to the financial statements are an integral part of this statement.
B-40

This page was intentionally left blank.
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements for the State of Montana (State) have been prepared in accordance with
Generally Accepted Accounting Principles (GAAP), as prescribed by the Governmental Accounting Standards
Board (GASB).

A. Reporting Entity

For financial reporting purposes, the State includes funds that comprise the primary government and its component
units. The component units are entities that the State is financially accountable for, or whose relationship with the
State is such that exclusion would cause the State's financial statements to be misleading or incomplete. GASB has
set forth criteria to be considered in determining financial accountability. This criterion includes appointing a voting
majority of an organization's governing body, and (1) the ability of the State to impose its will on that organization
or (2) the potential for the organization to provide specific financial benefits to, or impose specific financial burdens
on, the State.

Discretely Presented Component Units

These component units are entities that are legally separate from the State because they possess corporate powers,
but are financially accountable to the State, or whose relationships with the State are such that exclusion would
cause the State's financial statements to be misleading or incomplete. Complete financial statements of the individual
component units, which issue separate financial statements, can be obtained from their respective administrative
offices. The condensed financial statements, presented in Note 18, include the financial data of the entities listed
below.

Complete financial statements for each of the individual discretely presented component units may be obtained at
the following addresses:

Montana Board of Housing Montana State Fund

301 South Park, Room 240 855 Front Street

PO Box 200528 PO Box 4759

Helena, MT 59620-0528 Helena, MT 59604-4759

Facility Finance Authority Universities and Colleges

2401 Colonial Drive, 3" Floor Commissioner of Higher Education
PO Box 200506 560 North Park Ave, 4th Floor
Helena, MT 59620-0506 PO Box 203201

Helena, MT 59620-3201

Montana Board of Housing (MBOH) — MBOH, which is a legally separate entity, is governed by a quasi-judicial
board appointed by the Governor with the advice and consent of the Senate. The State of Montana has the ability to
modify or approve: the budget, the rate or fee changes affecting revenues, and the ability to appoint, hire, reassign,
or dismiss those responsible for the day-to-day operations of MBOH. It was created in 1975 to facilitate the
availability of safe and affordable housing to persons and families of lower-income. MBOH issues negotiable notes
and bonds to fulfill its purposes. The total amount of notes and bonds outstanding at any time may not exceed $1.5
billion. The discount price of bonds sold, not the face amount of the bonds, counts against this statutory ceiling.
Neither the faith and credit nor taxing power of the State of Montana may be pledged for the amounts so issued.
MBOH is attached to the Department of Commerce for administrative purposes only. MBOH is audited annually by
the State’s Legislative Audit Division.

Facility Finance Authority (FFA) — FFA, which is a legally separate entity, is governed by a quasi-judicial board
appointed by the Governor with the advice and consent of the Senate. The State of Montana has the ability to modify
or approve: the budget, the rate or fee changes affecting revenues, and the ability to appoint, hire, reassign, or
dismiss those responsible for the day-to-day operations of FFA. FFA assists eligible, nonprofit Montana health care
and other community-based service providers to obtain and maintain access to the broadest range of low-cost capital

B-41
B-42

financing as possible. FFA issues revenue bonds to fulfill its purposes. Neither the faith and credit or taxing power
of the State of Montana may be pledged for the amounts so issued. FFA is attached to the Department of Commerce
for administrative purposes only. Individual financial reports are issued every two years and are audited by the
State’s Legislative Audit Division.

Montana State Fund (MSF) — MSF is a nonprofit, independent public corporation established under Title 39,
Chapter 71 of the Montana Code Annotated (MCA). MSF provides Montana employers with an option for workers’
compensation and occupational disease insurance and guarantees available coverage for all employers in Montana.
MSF is governed by a seven-member Board of Directors appointed by the Governor with the advice and consent of
the Senate. This Board has full power, authority, and jurisdiction in the administration of MSF. MSF's results are
included in the State's Comprehensive Annual Financial Report because of the significance of MSF's financial
relationship with the State. MSF's board is allocated to the Department of Administration for administrative
purposes only. MSF is reported on a calendar year basis and is audited annually by the State’s Legislative Audit
Division and is also regulated by the Montana State Auditor's Office as an authorized insurer that is subject to the
provisions of Title 33, Montana Insurance Code.

MSF functions as an autonomous insurance entity supported solely from its own revenues. All assets, debts, and
obligations of MSF are separate and distinct from assets, debts, and obligations of the State of Montana. If MSF is
dissolved by an act of law, the assets held by MSF are subject to the disposition provided by the Legislature enacting
the dissolution with due regard given to obligations incurred and existing (Section 39-71-2322, MCA).

MSF handles the administration of the claims of Montana State Fund and State of Montana (Old Fund), including
determining who a claimant is; what, if any, claims will be paid; and the amount of claims allowed to be paid. Old
Fund covers workers’ compensation claims that were incurred before July 1, 1990, and is reported within the
governmental activities of the primary government, on the government-wide financial statements.

Universities and Colleges — The Montana Constitution, Article X, Section 9, grants governance authority over the
Montana University System (MUS) to the Board of Regents (Board), with seven members appointed by the
Governor and confirmed by the Senate. All state funds appropriated by the Legislature to the Board for the support
of the MUS are channeled through the Office of the Commissioner of Higher Education (OCHE). The Constitution
charges the Board with hiring a Commissioner of Higher Education who serves as its executive staff. OCHE is the
state-level administrative organization of the MUS.

The Board has responsibility for the following institutions: Montana State University - Bozeman and the units under
it including Montana State University - Billings, Montana State University - Northern, and Great Falls College
Montana State University; and University of Montana - Missoula and the units under it including Montana
Technological University, University of Montana - Western, and Helena College University of Montana. All units
are funded through state appropriations, tuition, federal grants, and private donations and grants. The universities are
audited annually by the State’s Legislative Audit Division.

Though the following organizations perform functions related to the MUS, they are not considered part of Montana's
reporting entity: (1) Community Colleges which are considered part of local units of government; (2) the Montana
Higher Education Student Assistance Corporation, a private nonprofit corporation; and (3) the Student Assistance
Foundation of Montana, a private nonprofit corporation. Entities such as local school districts and local authorities
of various kinds are considered part of local units of government and have not been included. The state and federal
support of local public education systems is reported in the General Fund, the State Special Revenue Fund, and the
Federal Special Revenue Fund.

Fiduciary Fund Component Units
Complete financial statements for each of the individual fiduciary fund component units may be obtained at the
following addresses:

Teachers’ Retirement System Public Employees’ Retirement Board
100 North Park Avenue, Suite 110 100 North Park Avenue, Suite 200
PO Box 200139 PO Box 200131

Helena, MT 59620-0139 Helena, MT 59620-0131
Teachers’ Retirement System (Pension Trust Fund) — This retirement plan is a legally separate entity with a board
appointed by the Governor. Its purpose is to provide retirement, disability, death, and lump-sum payments to benefit
recipients of Montana's public teaching profession. The plan is funded from employer and employee contributions,
investment earnings, and the State’s General Fund. The benefit payments and administrative costs of the Teachers’
Retirement System are paid from the same funding sources. The system is audited annually by the State’s
Legislative Audit Division. Further detail related to the Teachers’ Retirement System is provided in Note 6.

Public Employees’ Retirement Board (Pension and Other Employee Benefit Trust Funds) — The Public Employees’
Retirement Board (PERB) is appointed by the Governor and administers ten separate plans for the purpose of
providing retirement, disability, death, and lump-sum payments to plan members. These legally separate plans
include the Public Employees’ Retirement Plan — Defined Benefit and Defined Contribution and the associated
education funds; the Judges’; the Highway Patrol Officers’; the Sheriffs’; the Game Wardens’ and Peace Officers’;
the Municipal Police Officers’; the Firefighters’ Unified Retirement Systems; the Volunteer Firefighters’
Compensation Act; and the State of Montana Deferred Compensation Program (457 Plan) retirement plans. The
board also administers an Other Post Employment Benefit (OPEB) disability plan on behalf of Public Employees’
Retirement Plan-Defined Contribution members.

PERB is responsible for the ten separate public employee plans, which includes the Deferred Compensation
Program, and a separate Other Post Employment Benefit plan. These are reported as pension and other employee
benefit trust funds. The board is audited annually by the State’s Legislative Audit Division. Further detail related to
the PERB is provided in Note 6 and its OPEB plan information in Note 7.

B. Government-wide and Fund Financial Statements

The government-wide financial statements, Statement of Net Position and Statement of Activities, report
information on all of the non-fiduciary activities of the State of Montana and its component units. For the most part,
the impact of interfund activity has been removed from these statements. Governmental activities, which are
normally supported by fees, taxes, and intergovernmental revenues, are reported separately from business-type
activities, which rely to a significant extent on fees and charges for support. Likewise, the State of Montana is
reported separately from certain legally separate component units for which the State is financially accountable.

The Statement of Activities demonstrates the degree to which program revenues offset the direct expenses of a
function. Direct expenses are those that are clearly identifiable with a specific function. Certain indirect costs are
included in the program expense reported for the individual functions and activities. Program revenues include (1)
charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges
provided by a given function; and (2) grants and contributions restricted to meeting the operational or capital
requirements of a particular function. Taxes and other revenues not meeting the definition of program revenues are
reported as general revenues. The State does not allocate indirect expenses to functions in the Statement of
Activities.

Separate fund financial statements are provided for governmental, proprietary, and fiduciary funds. Major individual
governmental and major individual enterprise funds are reported as separate columns in the fund financial
statements. Fiduciary fund statements are reported only in the fund financial statements.

C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation

Government-wide, Proprietary, and Fiduciary Fund Financial Statements

The government-wide, proprietary fund, and fiduciary fund financial statements are reported using the economic
resources measurement focus and the accrual basis of accounting. Revenues are reported when earned; expenses are
recorded when a liability is incurred regardless of the timing of the related cash flows. Property taxes are recognized
as revenues in the year for which they are levied. Grants and similar items are recognized as revenues as soon as all
of the eligibility requirements imposed by the provider are met.

As a general rule, material interfund revenues and expenses have been eliminated from the government-wide
financial statements. These have not been eliminated where their elimination would distort the direct costs and
program revenues of the functions involved.

B-43
B-44

Governmental Fund Financial Statements

Governmental fund financial statements are reported using the current financial resources measurement focus and
the modified accrual basis of accounting. Revenues are recognized when they are realizable, measurable, earned, and
available. Revenue is considered realizable when it is probable the amount will be collected. Revenue is considered
measurable and realizable if the precise amount is known because the transaction is completed, or if there is enough
information to provide a reasonable estimate of the net realizable revenue to be received. Revenue is considered to
have been earned when the exchange of goods or services has taken place. Revenue is considered to be available if it
is collectible within the current period or soon enough thereafter, to pay liabilities of the current period. For this
purpose, the State considers revenue available if it is expected to be collected within 60 days of the end of the
current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting.
However, debt service expenditures as well as expenditures relating to compensated absences, claims, and
judgments are recorded only when payment is due.

The major revenue sources considered susceptible to accrual are licenses and permits, natural resource taxes,
individual income taxes, corporate income taxes, property taxes, fuel taxes, and certain federal revenues
(reimbursable grants and U.S. mineral royalties). All other revenue is considered to be measurable and available
when the cash is received.

Fund Financial Statements

The State uses funds to report on its financial position and the results of its operations. A fund is a separate
accounting entity with a self-balancing set of accounts. Fund accounting is designed to demonstrate legal
compliance and to aid financial management by segregating transactions related to certain government functions or
activities.

The financial activities of the State of Montana are classified into fund categories as described below:

Governmental Funds
General Fund — To account for all governmental financial resources, except those required to be accounted for in
another fund.

Special Revenue Funds — To account for the proceeds of specific revenue sources restricted to expenditure for
specified purposes other than major capital projects. (1) The State Special Revenue Fund accounts for activities
funded from state resources used to account for and report the proceeds of specific revenue sources that are
restricted or committed to expenditure for specified purposes other than debt service or capital projects. Several
funds are defined in statute as Permanent Funds, however per GASB Statement No. 54, Fund Balance Reporting
and Governmental Fund Type Definitions (GASB 54), these funds should be reported within the State Special
Revenue Fund. The respective effect on fund balance is approximately a $95.8 million increase. One specific fund is
defined in statute as a Federal Special Revenue Fund; however, per GASB 54, this fund should be reported within
the State Special Revenue Fund. The respective effect on fund balance is approximately a $27.2 million increase. (2)
The Federal Special Revenue Fund accounts for activities funded from federal sources used in the operation of state
government.

Debt Service Funds — To account for resources accumulated for payment of principal and interest on general long-
term obligation debt.

Capital Projects Funds — To account for resources used for the acquisition or construction of major capital facilities,
other than those financed by proprietary or trust funds.

Permanent Funds — To account for resources that are permanently restricted to the extent that only earnings, not
principal, may be used to support the government’s programs. Several funds are defined in statute as Permanent
Funds, however per GASB 54 these funds should be reported within the State Special Revenue Fund.

Proprietary Funds

Enterprise Funds — To account for operations: (1) financed and operated similar to private business enterprises,
where the intent of the Legislature is to finance or recover costs primarily through user charges; (2) where the
Legislature has decided periodic determination of revenue earned, expenses incurred, or net income is appropriate;
(3) where the activity is financed solely by a pledge of the net revenues from fees and charges of the activity; or (4)
when laws or regulations require that the activities’ costs of providing services, including capital costs, be recovered
with fees and charges rather than with taxes or similar revenues. The primary focus of fee revenues charged by
enterprise funds is users outside of the primary government. One specific fund is defined in statute as an Enterprise
Fund, however, per GASB 34, this fund should be reported within Internal Service Funds. The respective effect on
net position is approximately a $5.2 million increase.

Internal Service Funds — To account for the financing of goods and services provided by one department or agency
to other departments, agencies, or other governmental entities on a cost-reimbursement basis.

The State of Montana reports two employee group benefits funds. The MUS Group Insurance Fund primarily
charges its fees to Montana State University and the University of Montana. The universities are reported as
discretely presented component units, which the State considers to be external users, and as such, reports the MUS
Group Insurance Fund as an enterprise fund. The Employee Group Benefits Fund charges its fees to funds of the
primary government, and as such, is reported as an internal service fund.

Fiduciary Funds

Fiduciary Funds are used to account for assets held by the State in a trustee capacity or as an agent for individuals,
private organizations, or other governments. These assets cannot be used to support the government’s own
programs.

Pension (and Other Employee Benefit) Trust Funds — To account for resources that are required to be held in trust
for the members and beneficiaries of the State’s defined benefit plans, defined contribution plans, other retirement
plans, and other post-employment benefit plan. Plan members receive retirement, disability, death, and lump-sum
payments from the fund. Further detail related to the individual plans is provided in Note 6 and Note 7.

Private-Purpose Trust Funds —To account for assets held by the State in a trustee capacity, where both the principal
and earnings benefit individuals, private organizations, or other governments. For example, unliquidated security
bonds held on deposit from self-insured employers.

Investment Trust Fund — To account for the receipt of monies and the distribution of related investment earnings to
local government agencies by the Montana Board of Investments for investment in the Short Term Investment Pool
(STIP) and Trust Fund Investment Pool (TFIP).

Custodial Funds — To account for transactions related to assets held by the State as an agent for individuals, private
organizations, and other governments. For example, monies belonging to one parent submitted by another as is the
case with child support payments.

Major Governmental Funds
The General Fund is the State’s primary operating fund, as previously defined.

The State Special Revenue Fund accounts for activities funded from state sources, which are restricted either legally
or administratively for particular costs of an agency, program, or function.

The Federal Special Revenue Fund accounts for activities funded from federal sources used in the operation of state
government.

The Coal Severance Tax Fund, created by Article IX, Section 5 of the Montana State Constitution, receives 50% of
all coal tax collections. The principal in this fund can be expended only upon an affirmative vote of three-fourths of
each house of the Legislature.

The Land Grant Permanent Fund accounts for lands granted to the State for support of public schools and state
institutions.

Major Enterprise Funds

The Unemployment Insurance Fund accounts for employer contributions deposited with the Secretary of the
Treasury of the United States to the credit of the State’s unemployment trust fund. Unemployment benefits are paid
from this fund to eligible recipients. For fiscal year 2020, federal and state contributions were also made to this fund
due to increased claims related to the statewide unemployment impact of COVID-19.

B-45
B-46

The Board of Investments (BOI) Municipal Finance Programs Fund accounts for the programs created under the
Municipal Finance Consolidation Act (MFCA) and the Economic Development Act. Primarily, this involves a
MFCA revolving loan program that provides variable low interest rate loans to eligible Montana State agencies,
universities, and local governments for a variety of projects statutorily defined. The funding for the revolving loan
program is from the issuance of put bonds. The MFCA program also provides local government entities access to
tax-exempt funds through the issuance of conduit (no-commitment) debt. In previous years this activity was
referred to as the Economic Development Bonds Fund. Separately issued financial statements may be obtained by
contacting the Montana Board of Investments, 2401 Colonial Drive, 3rd Floor, PO Box 200126, Helena, MT
59620-0126.

D. Proprietary Activity Accounting and Financial Reporting

Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues
generally result from providing services and delivering goods in connection with a proprietary fund’s principal
ongoing operations. Operating expenses for enterprise and internal service funds include the cost of sales and
services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting these
definitions are reported as non-operating.

E. Cash/Cash Equivalents

For all funds, cash and cash equivalents consist of amounts deposited in the State Treasurer’s pooled cash account,
cash deposits in checking accounts, cash invested in the Short Term Investment Pool (STIP), cash held by trustees,
undeposited cash held by individual state agencies, and investments categorized as cash equivalents, which are
short-term, highly liquid investments with original maturities of three months or less. Further detail related to cash
and cash equivalents is provided in Note 3.

F. Receivables

This classification, net of estimated uncollectibles, consists primarily of receivables for goods sold and services
provided, short-term loans and notes, interest and dividends, taxes due within 60 days of fiscal year-end, and
income, withholding, and inheritance taxes that are past due. An allowance for uncollectible taxes is provided based
upon historical analysis. Further detail related to receivables is provided in Note 4.

G. Inventories

Inventories of materials and supplies are reported at cost. The State allows agencies to use any generally accepted
inventory pricing method but specifies the first-in, first-out method generally to be appropriate for most agencies.
Governmental funds use the "purchase method," meaning inventory purchases are recorded as expenditures. At
fiscal year-end, inventory balances are shown as nonspendable, indicating they do not constitute available
expendable resources. Proprietary and fiduciary funds report using the "consumption method," meaning inventories
are expensed as used.

H. Equity in Pooled Investments

To account for equity in pooled investments, BOI uses one internal investment pool and one external investment
pool. The internal investment pool is the Consolidated Asset Pension Pool (CAPP). The State's nine defined benefit
pension trust funds are the only participants in CAPP. The external investment pool is the Trust Funds Investment
Pool (TFIP). State agencies and qualifying local governments can participate in TFIP. Current State agency TFIP
participation is within the enterprise funds, internal service funds, permanent funds, investment trust funds, Montana
University System Units, and specific accounts established within the State and Federal Special Revenue Funds. The
participant investments in the pools are reported at fair value in the assets within the individual funds. Further detail
related to cash and cash equivalents and investments is provided in Note 3.

I. Investments

For agencies whose investment needs are not met by BOI’s established investment pools, BOI provides separate
investments, which are combined and reported as Separately Managed Accounts (SMA). SMA participants have
direct fixed income, equity, and Montana mortgage and loan investments. SMA investments are reported at fair
value. Certain securities including asset-backed securities, variable-rate instruments, zero-coupon bonds, preferred
stocks, and mortgage-backed securities are purchased for portfolio diversification and a competitive rate of return.
Other State agencies, on a limited basis by statute, may administer other long-term investments. Most investments
are reported at fair value on the Statement of Net Position. Further detail related to investments is provided in Note
3.

J. Capital Assets

Capital asset valuation is based on actual historical cost or, in the case of donations, acquisition value. General
government infrastructure capital assets are capitalized and reported on the government-wide financial statements.
Infrastructure assets of proprietary funds are capitalized on the fund financial statements. Interest incurred during the
construction of capital assets for proprietary funds is capitalized. Interest incurred during the construction of capital
assets for higher education component units is expensed. The State has chosen to use the depreciation approach for
infrastructure assets. The State is reporting accumulated depreciation on the Statement of Net Position and
depreciation expense on the Statement of Activities for these assets. Further detail related to capital assets is
provided in Note 5.

Capital assets in proprietary, private-purpose trust, and pension trust funds are accounted for within their respective
funds and are depreciated or amortized on their fund financial statements. Capital assets in governmental funds are
accounted for in the governmental activities of the government-wide financial statements, as is the associated
depreciation and amortization. Depreciation is on a straight-line basis with estimated useful lives of 25 to 60 years
for buildings, 10 to 50 years for infrastructure, 7 to 20 years for building improvements, and 3 to 10 years for
equipment. State agencies are also required to extend or shorten the useful lives of capital assets to reflect their
actual experience or industry standards when appropriate. Amortization is on a straight-line basis with estimated
useful lives of 4 years for software (internally and externally generated), 30 years for land use rights, and 20 years
for other intangibles.

The capitalization limit for buildings and building/land improvements is $25,000. The capitalization threshold for
infrastructure and internally-generated software is $500,000. The capitalization threshold for intangible assets is
$100,000. The capitalization limit for other capital assets is $5,000. Agencies are allowed to capitalize additions to
collections and land acquisitions at any cost. Purchases under these thresholds are recorded as expenditures/expenses
in the current period.

K. Deferred Outflows, Deferred Inflows, and Unearned Revenue

A deferred outflow of resources is a consumption of net assets by the government that is applicable to a future
reporting period. A deferred inflow of resources is an acquisition of net assets by the government that is applicable
to a future reporting period. Deferred outflows and inflows of resources may include financial transactions related to
refunding debt, non-exchange transactions, derivative investment, OPEB, and pension related components and are
reported on the government-wide, proprietary fund, and fiduciary fund financial statements. Additionally, deferred
inflows of resources may include financial transactions related to unavailable revenue on the governmental fund
financial statements. Unavailable revenue is reported when assets are recognized, but those assets are not considered
available to pay liabilities of the current period. Unearned revenue, which is neither a deferred outflow of resources
nor a deferred inflow of resources, is recognized as a liability on government-wide, governmental and proprietary
fund financial statements. Further detail related to deferred outflows of resources and deferred inflows of resources
is provided in Note 4.

L. Long-term Obligations

Long-term obligations expected to be financed from governmental funds are reported on the government-wide
financial statements. Long-term debt is recognized as a liability of a governmental fund when due, or when
resources have been accumulated in the debt service fund for payment early in the following year. For other long-
term obligations, only that portion expected to be financed from current expendable available financial resources is
reported as a fund liability of a governmental fund on the fund financial statements. The remaining portion of such
obligations is reported on the government-wide financial statements. Long-term liabilities expected to be financed
from proprietary and fiduciary fund operations are accounted for in those funds. Further detail related to leases/
installment purchases payable and long-term liabilities is provided in Note 10 and Note 11, respectively.

B-47
B-48

M. Capital Leases

A capital lease is a lease that transfers benefits and risks of ownership to the lessee. At the inception of a capital
lease, on the government-wide, proprietary fund, and fiduciary fund financial statements, a capital asset and a capital
lease liability are recorded at the present value of the future minimum lease payments. On the governmental fund
financial statements no asset or liability is recorded related to assets under capital leases. Rather, on the
governmental fund financial statements, at the inception of a capital lease, capital outlay expenditures, and other
financing sources (inception of lease/installment contract) are recorded at the net present value of the minimum lease
payments. Further detail related to capital leases is provided in Note 10.

N. Bond Discounts/Premiums/Issuance Costs

Bond premiums and discounts, as well as issuance costs, are recognized in the period they are incurred. Bond
proceeds and bond premiums are reported as an other financing source, and bond discounts are reported as an other
financing use. Issuance costs are reported as debt service expenditures whether or not they are withheld from the
bond proceeds. Bonds payable are recorded net of any applicable premium or discount. Further detail related to
long-term debt is provided in Note 11.

O. Compensated Absences

Full-time state employees earn vacation leave ranging from 15 to 24 days per year depending on the individual's
years of service. Teachers employed by the State do not receive vacation leave. Vacation leave may be accumulated
and carried over from one year to the next. The carryover is limited to two times the maximum number of days
earned annually. Sick leave is earned at the rate of 12 days per year with no limit on accumulation. Each
contribution year, an employee may contribute a maximum of 80 hours of sick or annual leave to a nonrefundable
sick leave pool. Excess annual leave that is being forfeited can also be contributed, with no maximum contribution.
The adjusted ending balance of the pool for June 30, 2019, was 17,412 hours. For fiscal year 2020, 1,562 sick leave
hours, 703 annual leave hours, and 2,428 excess annual leave hours were contributed to the sick leave pool, and
5,227 hours were withdrawn, leaving a balance of 16,879 hours in the pool. The liability associated with the pool is
not reported in the accompanying financial statements because these hours are nonrefundable to contributors, except
by grants approved through an application process.

Vested or accumulated leave for proprietary and fiduciary funds is recorded as an expense and liability of those
funds in the fund financial statements. For governmental funds, the liability is not expected to be liquidated with
expendable financial resources. The expenditure and liability for the governmental funds is reported only on the
government-wide financial statements. Upon retirement or termination, an employee is paid for 100% of unused
vacation leave and 25% of unused sick leave. Further detail related to compensated absences is provided in Note 11.

P. Nonexchange Financial Guarantee

BOI provides loan guarantees from the Coal Severance Tax Fund to the Facility Finance Authority (FFA), a
discretely presented component unit of the State. BOI exposure to bond issues, surety bonds, and designated loans
of the FFA totaled $88.3 million as of June 30, 2020. FFA guarantee requests are submitted to BOI for review and
approval. BOI’s participation, either duration or any other consideration, to either purchase bonds or loans or to lend
money for deposit into FFA’s statutorily allowed capital reserve account is explicitly limited by statute which
requires BOI to act prudently. The guarantee requests from FFA pertain to bonds issued by FFA with a term of up
to 40 years. BOI and FFA have entered into an agreement detailing repayment to BOI. BOI has not had to perform
on any loan guarantee in the past.

Q. Fund Balance/Net Position

Fund Balance

The classifications for fund balance used for governmental funds are reported in two general classifications,
nonspendable and spendable. Nonspendable represents the portion of fund balance that is legally or contractually
required to remain intact or is not in spendable form such as inventories, and, in the General Fund, long-term notes
and loans receivable. Spendable fund balance is further categorized as restricted, committed, assigned, and
unassigned.
The restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by
the State Constitution or external parties, such as the federal government, or through enabling legislation. For the
purpose of determining restricted amounts, enabling legislation does not include commitments resulting from State
legislation if these constraints can be removed or changed by a similar legislative action.

The committed fund balance classification includes amounts that can be used only for the specific purposes
determined by a formal action of the government’s highest level of decision-making authority, the State’s
Legislature, through legislation passed into law.

Amounts, in the assigned fund balance classification, are intended to be used by the government for specific
purposes. Still they do not meet the criteria to be classified as restricted or committed. Assignments of fund balance
are created by the executive branch. In governmental funds other than the General Fund, assigned fund balance also
represents the remaining amount that is not restricted or committed. The assigned fund balance for the General Fund
are encumbrances and assignments for the portion of current General Fund balance that is projected to be used to
fund expenditures and other cash outflows in excess of the expected revenues and other cash inflows in fiscal years
as needed. The projected spend down for fiscal year 2021 is $72.7 million; thus, a related assignment of fund
balance is reported at 2020 fiscal year-end.

Unassigned fund balance is the residual classification for the General Fund and includes all spendable amounts not
contained in the other classifications. In other funds, the unassigned classification should be used only to report a
deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed,
or assigned.

The State generally segregates restricted, committed, and assigned resources by account (sub-fund) within the
governmental funds other than the General Fund. When resources meeting more than one of these spendable
classifications are commingled in an account on the State’s accounting system, the assumed order of spending is
restricted first, committed second, and finally assigned. State statute requires non-General Fund money be spent first
whenever possible so any related available unassigned balance would be spent last.

General Fund - Fund Balance

As of June 30, 2020, the State maintains a Budget Stabilization Reserve Fund as required by statute. For financial
reporting purposes, this fund is combined with the General Fund as it does not meet the GASB 54 requirements to
be a special revenue fund as the Legislature prescribed. The June 30, 2020, committed fund balance in the General
Fund of $117.8 million, represents the Budget Stabilization Reserve Fund balance.

Additionally, statute provides a minimum fund balance amount as follows: Section 17-7-140, MCA, defines
minimum ending fund balance and specifies the procedures that must be followed to make expenditure reductions or
allow transfers from the Budget Stabilization Reserve Fund if a projected ending fund balance drops below
minimum statutory requirements.

If the Budget Director determines that a deficit exists, statute requires reductions that must be made to assure that the
projected ending fund balance complies with the minimum ending fund balance of General Fund appropriations for
the biennium. Under circumstances when a deficit of this level is projected during a biennium, the Governor may
direct reductions from any General Fund expenditure not exempted by Section 17-7-140, MCA, including House
Bill (HB) 2 (the State’s main appropriation bill), any other appropriation bills, statutory appropriations, or language
appropriations. Reductions may not exceed 10% of General Fund appropriations for any single “program,” as
defined in HB 2. If a program has more than one appropriation, the reduction for one or more of the appropriations
may exceed 10% as long as the reduction for the program as a whole does not exceed 10%.

The Legislative and Judicial branches, the Montana School for the Deaf and Blind, principal and interest on State
debt, salaries of elected officials, and public school BASE funding are exempt, statutorily, from reductions. These
exemptions shield approximately one-third of General Fund appropriations from reduction. Of the remaining
expenditures, the Governor may not direct executive agencies headed by elected officials or the Board of Regents to
reduce their expenditures by more than the average reduction percentage imposed upon all other executive branch
agencies.

B-49
B-50

Net Position

In funds other than governmental, net position represents the difference between assets plus deferred outflows of
resources and liabilities plus deferred inflows of resources. The net investment in the capital assets portion of net
position consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any
borrowing used for the acquisition, construction, or improvement of those assets. Net position is reported as
restricted when there are limitations imposed on their use either through constitutional provisions, enabling
legislation or through external restrictions imposed by creditors, grantors, or laws or regulations of other
governments. The government-wide Statement of Net Position reported restricted net position of $3.8 billion.

Certain investments of the Municipal Finance Programs Fund are classified as restricted net position on the
Statement of Fund Net Position for proprietary funds because applicable bond indenture agreements limit their use.
Net position associated with the Unemployment Insurance Fund is also classified as restricted.

R. Property and Income Taxes

Real property taxes are normally levied in October and are usually payable in two installments on November 30 and
May 31. These taxes attach as an enforceable lien immediately if not paid when due.

Personal property tax levies are set each August, and notices are normally mailed the following March or April. Half
of mobile home taxes are due in 30 days and the remaining half on September 30. Taxes on all other types of
personal property are to be paid in full 30 days after receipt of the notice. Property tax payments are recognized as
deferred inflows of resources if received prior to levy or availability.

Personal property taxes attach as an enforceable lien immediately if not paid when due. Each of Montana's 56
counties collect property taxes. The counties then remit the State's portion to the State Treasury. The majority of
these taxes help fund public school systems and higher education.

Calendar year 2019 State income tax filing deadline, normally April 15th of the subsequent year, was delayed to
July 15, 2020 due to COVID-19. The State has determined that extending the income tax filing deadline did not
have a material adverse effect on the State's liquidity for fiscal year 2020, nor will it in fiscal year 2021.

S. Other Taxes

On the Statement of Activities, the revenue category “Other Taxes” consists of the following taxes (in thousands):

Other
State Special Governmental Business-Type
General Fund Revenue Funds Funds Total
Accommodations $ 24,637 $ 34,417 $ 2,930 $ 19 §$ 62,003
Agriculture — 10,625 — — 10,625
Car rental 4,113 1,371 — — 5,484
Cigarette/tobacco/etc. 32,745 45,158 1,556 — 79,459
Contractors gross receipts 6,729 — — — 6,729
Energy tax 7,235 40 — — 7,275
Fire protection _ 3,686 _ _ 3,686
Insurance premium 82,452 37,221 — — 119,673
Light vehicle registration 44 5,085 — — 5,129
Liquor tax 5,686 2,282 _— 32,557 40,525
Livestock — 4,991 — — 4,991
Other taxes 143 1,744 _— _— 1,887
Public service commission — 5,249 — — 5,249
Railroad car companies 4,293 — — — 4,293
Telephone license 11,581 — — — 11,581
Video gaming 57,447 6 — — 57,453

Total other taxes $ 237,105 $ 151,875 $ 4,486 $ 32,576 $ 426,042
T. Tax Abatement

In the Montana Board of Investment’s (BOI) Commercial Loan Program within the SMA, by statute, the
infrastructure loan program is funded by an $80.0 million allocation. Eligible local governments request a loan for
constructing or purchasing infrastructure to be used by a basic sector business. The basic sector business will pay a
user fee to the local government that is pledged to BOI for the loan repayment. BOI reviews each loan, and only
upon verification that the entities meet the loan requirements is the loan approved by BOI. The local government
entity must pass a resolution authorizing the acceptance of the commitment agreement. BOI indemnifies the local
government regarding repayment of the loan.

The basic sector business must create at least 15 full-time basic sector jobs to be eligible for the program. The
maximum loan size is $16.7 thousand times the number of full-time jobs created and the minimum loan size is
$250.0 thousand. The maximum loan term is 25 years. There is also up to a 2.5% interest rate reduction for job
creation. The reduction will be reflected in the user fee rate charged to the basic sector business upon BOI review
and approval. The basic sector business must create the required jobs within four years of the agreement. If the basic
sector business does not create the required jobs within the four-year period, then the basic sector business must pay
down the loan balance of the local government entity until the loan balance matches the eligible amount per the jobs
created. BOI may increase the interest rate commensurate with the number of jobs eliminated if the borrower
eliminates 10 or more qualifying jobs. The basic sector business must annually provide payroll documentation to
BOI.

Pursuant to statute, a business that is created or expanded as the result of an Infrastructure Loan is entitled to a credit
against either their State individual income taxes or corporate income taxes for the portion of the fees attributable to
the use of the infrastructure. The total amount of tax credit claimed may not exceed the amount of the loan. The
credit may be carried forward for seven years or carried back for three years.

During the fiscal year ended June 30, 2020, basic sector business entities made total user fee payments of $8.9
million, representing $7.5 million of principal and $1.4 million in interest. During the fiscal year ended June 30,
2020, a total of $14.0 million was claimed as a credit against State individual and corporation tax. The following
table details the fiscal year 2020 credit claimed by tax type and the tax year it was applied against (in thousands):

Infrastructure Credit Claimed

Tax Year Tax Year
2019 2018 Total
Corporate income tax $ — $ 1,159 $ 1,159
Individual income tax 6,476 6,320 12,796
Total amount claimed $ 6,476 $ 7,479 $ 13,955

U. Irrevocable Split Interest Agreements

Irrevocable split-interest agreements are used by donors to provide resources to two or more beneficiaries, including
governments. These agreements can be created through trusts or other legally enforceable agreements with
characteristics that are equivalent to irrevocable split-interest agreements. The University of Montana campuses
have three irrevocable split interest agreements during the fiscal year ended June 30, 2020. Further detail related to
these agreements is provided in Note 3.

B-51
B-52

NOTE2. OTHER ACCOUNTING CHANGES
A. New Accounting Guidance Implemented

For the year ended June 30, 2020, the State of Montana implemented the provisions of GASB Statement No. 84,
Fiduciary Activities (GASB 84). The objective of this Statement is to improve guidance regarding the identification
of fiduciary activities for accounting and financial reporting purposes. This Statement establishes criteria for
identifying fiduciary activities, while outlining reporting responsibilities of fiduciary funds in state and local
governmental accounting. This Statement is designed to enhance consistency and comparability of information
reported in financial statements for assessing government accountability and stewardship.

For the year ended June 30, 2020, the State of Montana implemented the provisions of GASB Statement No. 90,
Majority Equity Interests — an amendment of GASB Statements No.14 and No. 60 (GASB 90). The objectives of this
Statement are to improve the consistency and comparability of reporting a government’s majority equity interest in a
legally separate organization and to improve the relevance of financial statement information for certain component
units. It defines a majority equity interest and specifies that a majority equity interest in a legally separate
organization should be reported as an investment if a government is holding of the equity interest meets the
definition of an investment. A majority equity interest that meets the definition of an investment should be measured
using the equity method, unless it is held by a special-purpose government engaged only in fiduciary activities, a
fiduciary fund, or an endowment or permanent fund. This Statement will improve financial reporting by providing
users of financial statements with essential information related to presentation of majority equity interests in legally
separate organizations.

For the year ended June 30, 2020, the State of Montana implemented the provisions of GASB Statement No. 95,
Postponement of the Effective Dates of Certain Authoritative Guidance (GASB 95). The objective of this Statement
is to provide temporary relief in the form of delayed effective reporting periods for upcoming GASB
pronouncements known to affect governmental financial statements. Guidance addressed in this Statement will help
to safeguard the reliability of financial statements, which in turn will benefit the users of the financial statements.

For the year ended June 30, 2020, the State of Montana implemented the provisions of GASB Statement No. 97,
Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457
Deferred Compensation Plans—an amendment of GASB Statements No. 14 and No. 84, and a supersession of GASB
Statement No. 32 (GASB 97). The primary objectives of this Statement are to increase consistency and
comparability related to the reporting of fiduciary component units; mitigate costs associated with financial
reporting; enhance relevance, consistency, and comparability of financial reporting. The requirements of this
Statement will result in more consistent financial reporting of defined contribution pension plans, defined
contribution OPEB plans, and other employee benefit plans.

B. Adjustments to Beginning Net Position

GASB Statement No. 84, Fiduciary Activities (GASB 84), requires a retroactive restatement of financial statements
for all prior periods presented, though primarily affects the Fiduciary Fund Financial Statements. If restatement for
prior periods is not practicable, the cumulative effect of applying GASB 84 is presented as a restatement of
beginning net position for the earliest period restated. In accordance with GASB 84, the State of Montana
reclassified various fund activities and restated the beginning net position as follows. Some enterprise funds,
previous private-purpose trust funds, and agency funds were reclassified as custodial funds, creating an increase to
beginning net position in the amount of $4.7 million. Some agency funds were reclassified to private-purpose trust
funds, creating an increase to beginning net position in the amount of $2.4 million. Some previous private-purpose
trust funds were reclassified to governmental funds and custodial funds, creating a decrease to beginning net
position in the amount of $29.0 million.
NOTE 3. CASH/CASH EQUIVALENTS AND INVESTMENTS

This note details the following asset classifications (in thousands):

Cash/cash equivalents $ 6,051,526
Equity in pooled investments $ 14,307,148
Investments $ 3,427,444

Carrying amounts for the bank balance for cash deposits and fair values for the State's cash equivalents and
investments are presented in Tables | through 4.

A. General

Outside of statutory requirements, the State does not maintain a statewide risk policy for cash/cash equivalents or
investments, held outside of the Montana Board of Investments (BOI). The investment risk policy for State cash/
cash equivalents and investments including the BOI Municipal Finance Programs Fund deposits and investments
managed by BOI, have been detailed below.

(1) BOI was created by the Legislature to manage the Unified Investment Program (UIP) established by the State
Constitution. The UIP is comprised of involuntary participating state funds, including pensions, trusts, insurance,
operating funds, and by statute voluntarily participating local government funds. BOI manages the UIP pursuant to
the “Prudent Expert Principle” mandated by State law, which requires an investment manager to:

1. discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing,
that a prudent person acting in a like capacity with the same resources and familiar with like matters
exercises in the conduct of an enterprise of a like character with like aims;

2. diversify the holdings of each fund within the UIP to minimize the risk of loss and to maximize the rate of
return unless, under the circumstances, it is clearly prudent not to do so; and

3. discharge the duties solely in the interest of and for the benefit of the funds forming the UIP.

BOI is not registered with the US Securities and Exchange Commission as an investment company. BOI’s
investment program is governed by Investment Policy Statements (IPS) approved by BOI.

Currently, only the nine retirement funds that participate in the Consolidated Asset Pension Pool (CAPP), the
Defined Contribution Disability Plan, and the Montana State Fund (MSF) may invest in public corporate capital
stock. Neither State law nor the State Constitution place restrictions on retirement fund investments. BOI approves a
separate IPS for each pool and Separately Managed Accounts (SMA) participant, which provides BOI staff with a
broad strategic framework under which the investments are managed. The IPS’s also reflect BOI approved asset
allocation ranges.

By statute, local government entities can voluntarily invest in the Short Term Investment Pool (STIP). By statute,
with a qualifying event, local government entities may also voluntarily invest in the Trust Funds Investment Pool
(TFIP).

As of June 30, 2020, BOI separately managed investments outside of the pools on behalf of participants. The
investments are combined for reporting purposes in the SMA portion of the UIP. In prior years, the SMA portion of
the UIP was referred to as Separately Managed Investments (SMI). SMA participants include the State Treasurer's
Cash Fund, State agency insurance reserves, and other State agencies. SMA participation is at the discretion of BOI
staff for State agencies allowed to participate in the UIP.

State agencies and local government entities may participate in one or more pools. By investing in pools,
participants are provided broad diversification. State agencies may also have direct fixed income, equity, or loan
investments. These investments are combined and reported as SMA.

B-53
B-54

Separately issued investment pool financial statements may be obtained by contacting:

Montana Board of Investments
2401 Colonial Drive, 3rd Floor
PO Box 200126

Helena, MT 59620-0126

BOI’s separately issued UIP financial statements include the activity for MSF within SMA on a June 30, 2020,
basis. MSF, a discretely presented component of the State, by statute, prepares separately issued financial statements
on a calendar year-end basis. Due to the difference in reporting periods, there will be a variance between the note
disclosures and the financial statements for cash/cash equivalents and investments.

(a) Cash and cash equivalents consist of funds deposited by individual funds in the State Treasurer’s pooled cash
account, cash deposits in checking accounts, cash invested in STIP, cash held by trustees, undeposited cash held by
individual state agencies, and investments categorized as cash equivalents.

Cash deposited with the State Treasurer’s pooled cash account is invested by BOI in short-term securities and other
investments. Because these funds are immediately available to the individual funds, their investment in the pooled
cash account is reported as a cash equivalent. BOI also manages STIP, which provides individual State agencies and
local governments an opportunity to invest excess cash in a pool that is managed to preserve principal while
providing 24-hour liquidity. Because these pooled funds are invested in short-term, highly liquid investments, the
individual fund investments in the STIP are reported as a cash equivalent.

(b) Investment securities are reported by investment portfolio and type in Table 2 — Cash Equivalents, Table 3 —
Equity in Pooled Investments, and Table 4 — Investments. Unrealized gains and losses are included as a component
of investment income. Unrealized gains and losses are computed based on changes in the fair value of investments
held from the beginning of the year, but unsold at the fiscal year-end. The net change in fair value of investments
also consists of the realized gains or losses. Interest income is recognized when earned. Dividend income is recorded
on the ex-dividend date.

Investments reported at fair value are on a trade date basis. Quoted market prices, when available, have been used to
value investments. The fair values for securities that have no quoted market price represent estimated fair value.
Alternative investment securities are valued using the most recent estimates of fair value from the investment
managers. Fair value measurements are reviewed monthly, and third-party valuations are reviewed for
reasonableness and compliance with approved price source authorization policy. BOI categorizes its fair value
measurements within the fair value hierarchy established by generally accepted accounting principles as follows:

Level 1 — Quoted prices for identical assets or liabilities in active markets.

Level 2 — Prices determined using inputs, other than quoted prices included within Level 1, that are observable for
an asset or liability, either directly or indirectly. These inputs can include quoted prices for similar assets or
liabilities in active or inactive markets, or market-corroborated inputs.

Level 3 — Prices are determined using unobservable inputs, which generally results in BOI using the best
information available and may include BOI’s own data.

(c) Security Lending - BOI is authorized by law to lend its securities and has contracted with the custodial bank, to
lend BOI’s securities to broker-dealers and other entities with a simultaneous agreement to return the collateral for
the same securities in the future. The custodial bank is required to maintain collateral equal to 102% of the fair value
of domestic securities and 105% of the fair value of international securities while the securities are on loan. On any
day, including June 30th, the markets may move in a positive or negative direction resulting in under or over
collateralization. The custodial bank compensates for market movement by recalculating on the following business
day to meet the collateralization requirements. BOI and the custodial bank split the earnings 80% and 20%
respectively, on securities lending activities. BOI retains all rights and risks of ownership during the loan period.
The custodial bank indemnifies BOI’s credit risk exposure to the borrowers.

During fiscal year 2020, the custodial bank loaned BOI’s public securities and received as collateral either: US
dollar cash; US government and government sponsored agency securities; US corporate debt securities and
structured securities rated AA-/Aa3 or higher; sovereign debt securities of the Group of Ten nations; and debt
securities issued by certain supranational agencies. The custodial bank does not have the ability to sell collateral
securities unless the borrower defaults.

BOI imposed no restrictions on the amount of securities available to lend during fiscal year 2020. However, STIP
assets are currently not available for securities lending. There were no failures by any borrowers to return loaned
securities or pay distributions thereon during the period that resulted in a declaration and notice of default of the
borrower. There were no losses during fiscal year 2020 resulting from a borrower default. As of June 30, 2020, no
securities were recalled and not yet returned.

The cash collateral received for each loan was invested, together with the cash collateral of other qualified plan
lenders, in an investment fund, the Navigator Securities Lending Government Money Market (Navigator) portfolio.

BOI and the borrowers maintain the right to terminate all securities lending transactions on notice. Because the
securities lending transactions were terminable at will, their duration did not generally match the duration of the
investments made with the cash collateral received from the borrower. The Navigator portfolio had an average
duration of 28 days and the average weighted final maturity of 91 days.

(d) Investment Pools and Separately Managed Accounts (SMA) are described in the following paragraphs.

Consolidated Asset Pension Pool (CAPP)

The CAPP IPS contain prescribed asset allocation ranges among the allowable asset classes and is subject to change
as BOI adopts modifications. BOI annually affirms or revises the asset allocation ranges for the retirement plans.
The CAPP IPS also contains investment objectives and guidelines for each underlying asset class, with a purpose of
providing diversified exposure within the asset class in a prudent and cost-effective manner.

Due to a longer-term focus, CAPP's asset classes differ from other classes that are allowable for other programs.
CAPP's underlying asset classes are as follows:

¢ Domestic Equities

¢ International Equities

¢ Private Investments

¢« Natural Resources

¢ Real Estate

* Core Fixed Income

* Non-Core Fixed Income
* Cash

The CAPP IPS is the only IPS that allows for investments that can be held in non-US securities in a foreign
currency. Per the CAPP IPS, the Core Fixed Income Asset Class and Non-Core Asset Class sections have maximum
restrictions that can be held. Currency exposures may be hedged, in a defensive manner, at the discretion of the
active managers to preserve the U.S. dollar value of investments made.

As part of the asset allocation approved by the Board in November 2019, the Private Equity Pension Asset Class
(PAC) is now referred to as the Private Investments PAC and the High Yield PAC is referred to as the Non-Core
Fixed Income PAC. The assets within the U.S. Treasury Inflation Protected Securities (TIPS) PAC, Investment
Grade PAC, Agency Mortgage Backed Securities PAC, U.S. Treasury and Agency PAC, Diversifying Strategies
PAC, and Broad Fixed Income PAC were combined into the Core Fixed Income PAC. These changes were effective
in December 2019. These changes did not have an impact on the underlying value of the securities within the
impacted PAC’s.

Trust Funds Investment Pool (TFIP)

The TFIP IPS provides for a 10% portfolio limit for non-core fixed income securities. TFIP invests primarily in
investment grade, U.S. dollar denominated fixed income securities. The portfolio has high yield and core real estate
exposure.

B-55
B-56

Short Term Investment Pool (STIP)

The STIP IPS limits the concentration of credit risk exposure by limiting portfolio investment types to 3.0% in any
issuer except for US Treasury and US Agency securities as well as any repurchase agreements with a financial
institution.

STIP invests primarily in short-term, high quality, fixed income securities with a maximum maturity of 397 days or
less. Variable securities shall have a maximum maturity of 2 years. STIP shall maintain a dollar-weighted average
portfolio maturity of 60 days or less. STIP is managed to preserve principal while providing 24-hour liquidity for
state agency and local government participants.

BOI maintains a reserve account that may be used to offset losses within the STIP portfolio. The STIP reserve for
the year ending June 30, 2020, is detailed as follows:

STIP Reserve
(in thousands)
Beginning STIP Reserve $ 47,528
STIP Reserve activity
Investment Earnings:
Interest income 650
Transfer of daily STIP income 3,510
Recoveries from write-offs 846
Credit enhancement fees 157
Total STIP Reserve activity 5,163
Transfers to STIP (127)
Total STIP Reserve activity 5,036
Ending STIP Reserve $ 52,564

Separately Managed Accounts (SMA)

SMA invests primarily in investment grade, U.S. dollar denominated fixed income securities and custodial bank
interest bearing demand deposit account. However, one participant portfolio has exposure to core real estate and
high yield fixed income. The SMA portfolio also includes Veteran’s Home Loan mortgages (VHLM) and loans
funded by the Coal Severance Tax Trust Fund, as authorized by statute.

(e) Investment Risk Disclosures are described in the following paragraphs, with more detail provided in later
sections.

Custodial Credit Risk (Cash and Cash Equivalents and Investments Held at Custodial Bank)

Custodial credit risk is the risk that, in the event of the failure of the counterparty to a transaction, BOI will not be
able to recover the value of the investment or collateral securities that are in the possession of an outside party. Per
policy, BOI’s custodial bank must have bank ratings from at least two Nationally Recognized Statistical Rating
Organizations (NRSROs) on an annual basis.

As of June 30, 2020, all the public securities as well as securities held by the separate public equity account
managers were registered in the nominee name for BOI and held in the possession of BOI’s custodial bank. The
equity index funds, securities held at the State’s depository bank, real estate, mortgage and loan investments were
purchased and recorded in BOI’s name. Commingled fund investments are registered in the name of BOI. Therefore,
BOL is not subject to custodial credit risk.

Concentration of Credit Risk

Concentration of credit risk is the risk of loss attributable to the magnitude of any single investment per issuer name.
Investments explicitly guaranteed by the US government are excluded from the concentration of credit risk
requirements. Concentration of credit risk for 2020 is addressed within all IPS as set by BOI.
Credit Risk and Interest Rate Risk

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. Except for
U.S. Government securities, the pools and SMA fixed income instruments have credit risk as measured by NRSRO
ratings. Credit risk is contemplated for each individual portfolio in the IPS. Credit risk is managed by constraining
portfolio purchases around investment grade NRSRO ratings as appropriate. The U.S. Government guarantees its
securities directly or indirectly. Obligations of the U.S. Government or obligations explicitly guaranteed by the U.S.
Government are not considered to have credit risk and do not require disclosure of credit risk.

As of June 30, 2020, the CAPP's cash equivalents position held at its custodial bank, $193.5 million was held in
unrated money market funds.

As a matter of STIP investment policy, BOI can only purchase securities from a pre-approved “Approved Issuer”
list. By STIP policy, permitted money market investments include only SEC registered 2a-7 Institutional Money
Market Funds that are considered “US Treasury” or “US Government” money market mutual funds according to the
SEC regulations or short-term investment vehicle available through the custodial bank. As of June 30, 2020, all the
STIP money market investments were in US Governmental money markets and $50 million was held on deposit in a
short-term investment vehicle available through the custodial bank.

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. BOI
uses effective duration as a measure of interest rate risk for all fixed income portfolios. CAPP, TFIP, and SMA at
fair value investments are categorized to disclose credit and interest rate risk for fixed income securities. Credit risk
is disclosed using the weighted credit quality rating by investment type. Interest rate risk is disclosed using the
weighted effective duration. NRSRO provides the credit ratings. According to the STIP investment policy, “The
STIP portfolio will minimize interest rate risk by:

1. structuring the investment portfolio so securities mature to meet cash requirements for ongoing operations
thereby normally avoiding the need to sell securities on the open market prior to maturity;

2. maintaining a dollar-weighted average portfolio maturity (WAM) of 60 days or less (for this purpose, the
date to the next coupon reset date will be used for all floating or variable rate securities); and

3. STIP will maintain a reserve account.”

CAPP, TFIP, STIP, and SMA may hold fixed and variable rate securities. Interest payments on variable securities
are based on an underlying reference rate, for example, Secured Overnight Financing Rate (SOFR).

STIP investments at fair value are categorized to disclose credit risk and weighted average maturity (WAM) as of
June 30, 2020. Credit risk reflects the weighted security quality rating by investment type as of the June 30 report
date. Although the STIP investments have been rated by investment security type, STIP, as an external investment
pool, has not been rated. STIP interest rate risk is determined using the WAM method. The WAM measure
expresses investment time horizons (the time when investments are due or reset and payable in days, months, or
years) weighted to reflect the dollar size of the individual investments within an investment type. Inclusive of cash
and cash equivalents, the WAM averages 46 days for the portfolio. Based on their short weighted average maturity
and the relative immaterial difference from their cost to fair value, BOI determined the cash equivalents have little
discernible interest rate risk.

Foreign Currency Risk

Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment.
BOI's foreign currency exposure by denomination and investment type are reported, in US dollars, at fair value and
is limited to CAPP.

Other Policy Considerations

For other risk, BOI approves both the IPS and benchmark used for each portfolio. Per the CAPP IPS, the Core Fixed
average duration will be maintained in a range within 20% of the benchmark duration. The Core Fixed Income PAC
and Non-Core Fixed Income PAC average duration will be maintained in a range within 25% of the index duration.
Per the TFIP IPS, the average duration will be maintained in a range within 20% of the benchmark duration. Interest
rate risk for SMA is contemplated in each individual IPS and is managed by limiting the maturity of individual
securities and/or matching liabilities to maturities per estimated cash flows.

B-57
B-58

Fair Value of Derivative Instruments

The UIP invests in, currency forward contracts, credit default swaps, index futures (long duration), rights and
warrants which are classified as investment derivative instruments. The investment derivative instruments decreased
in fair value for the fiscal year ended June 30, 2020, by $2.1 million. The contracts had a fair value of $152 thousand
as of June 30, 2020. The notional amount of the contracts was $10.3 million.

(2) The BOI Municipal Finance Programs Fund deposits and investments are restricted by the bond trust
indentures to the following: government and agency obligations, certificates of deposits, repurchase agreements, and
investment agreements. The bond trust indenture addresses custodial credit risk, the concentration of credit risk,
credit risk, interest rate, and credit quality risk, by detailing the permitted investments. BOI's STIP IPS details
custodial credit risk, the concentration of credit risk, and credit risk. Deposits and investments must be made with
Montana banks or in the STIP administered by BOI.

Custodial Credit Risk — Custodial credit risk is the risk that, in the event of the failure of the counterparty to a
transaction, BOI will not be able to recover the value of the investment or collateral securities that are in the
possession of an outside party. Per policy, BOI’s custodial bank’s rating from at least two Nationally Registered
Statistical Ratings Organizations (NRSROs) is reviewed on an annual basis.

Cash — Custodial risk for cash is the risk that, in the event of the failure of the custodial bank, the cash or
collateral securities may not be recovered from an outside party. The securities used as collateral are held by
the trustee in the name of BOI.

Investments — As of June 30, 2020, the Municipal Finance Programs securities were recorded by the trustee
in the name of BOI by specific account.

Concentration of Credit Risk - Concentration of credit risk is the risk of loss attributed to the magnitude of any
single investment per issuer name. The Municipal Finance Programs investments directly issued or explicitly
guaranteed by the US government and investments in mutual funds are excluded from the concentration of credit
risk requirement. The STIP investment policy limits the concentration of credit risk by limiting portfolio investment
types to 3.0% in any issuer with the exception of US Treasury and US Agency securities, as well as, any repurchase
agreements with a financial institution. As of June 30, 2020, STIP concentration risk was within the policy as set by
BOI.

Credit Risk - Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation.
The Municipal Finance Programs US government direct-backed securities, consisting of US Treasury notes and
bills, are guaranteed directly by the US government. Obligations of the US government or obligations explicitly
guaranteed by the US government are not considered to have credit risk and do not require disclosure of credit
quality. Permitted investments, as described in the indenture, include, “Either (i) long term obligations of such bank,
trust company or association are rated in one of the three highest investment category of the Standard & Poor’s
Corporation or Moody’s Investor Service Inc., which investment category shall not be less than the prevailing rate
on the bonds or (ii) the deposits are continuously secured as to principal, but only to the extent not insured by the
Bank Insurance Fund or the Savings Association Insurance Fund, or any successor to either, of the Federal Deposit
Insurance Corporation (FDIC).”

BOI’s STIP IPS specifies that STIP securities have a minimum of two credit ratings as provided by nationally
recognized statistical rating organizations, to assist in the monitoring and management of credit risk. The purchase
of STIP securities other than US government or US agency obligations is restricted to those who are pre-approved.
Although the STIP investments have been rated by investment security type, STIP, as an external investment pool,
has not been rated.

Interest Rate Risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an
investment. Permitted investments, as described in the Indenture, details the allowable investments, including those
in STIP. STIP interest rate risk is determined using the WAM method. According to the STIP IPS, “The STIP
portfolio will minimize interest rate risk by:
1. structuring the investment portfolio so securities mature to meet cash requirements for ongoing operations,
thereby normally avoiding the need to sell securities on the open market prior to maturity;

2. maintaining a dollar-weighted average portfolio maturity (WAM) of 60 days or less (for this purpose, the
date to the next coupon reset date will be used for all floating or variable rate securities); and

3. STIP will maintain a reserve account.”

The Municipal Finance Program investments are categorized to disclose credit and interest rate risk as of June 30,
2020. Credit risk is disclosed using the weighted credit quality rating by investment type. Interest rate risk is
disclosed using weighted effective duration as calculated by BOI. The credit quality ratings have been calculated,
excluding non-rated investment types. Both the credit quality ratings and duration have been calculated excluding
cash equivalents, as BOI determined that these securities did not contain these risk elements. There were no
derivative transactions during the 2020 fiscal year for investments held by the trustee.

B. Cash/Cash Equivalents

(1) Cash Deposits — The State requires collateralization based on the average daily bank balance in the depository
bank holding the main state bank account. For other depository banks, state statutes require collateralization at
50.0% of the bank balance. The cash deposits amount includes both primary government and component unit
deposits.

Table 1 - Cash Deposit Amounts
(in thousands)

Carrying

Amount

Cash held by State/State's agent $ 17,974
Uninsured and uncollateralized cash 2,705
Undeposited cash 1,305
Cash in US Treasury 254,942
Cash in MSU component units 6,543
Cash in UM component units 12,195
Less: outstanding warrants (27,368)

As of June 30, 2020, the carrying amount of deposits for component units was $186.7 million, as included in Table 1.

(2) Cash Equivalents — consists of cash in the State Treasury invested by individual funds in the Short-term
Investment Pool (STIP), the State Treasurer’s pooled cash account, and in identifiable securities and investments
considered to be cash equivalents. Cash equivalents, generally, are short-term, highly liquid investments with
original maturities of three months or less that are measured at cost. Cash equivalents may be under the control of
BOI or other agencies, as allowed by law.

B-59
B-60

Table 2 - Cash Equivalents
(in thousands)

Fair
Value

Treasuries “” $ 430,142
Corporate commercial paper ”) 398,071
Corporate notes @ 115,311
Certificates of deposit ” 300,206
Agency or government related ”) 1,182,828
Money market fund unrated 261,528
Cash and cash equivalents @ 3,305,016
Less: STIP Adjustments (269,872)

Total cash equivalents $ 5,723,230

(1) A portion is also included in the Investments Measured at Fair Value and NAV table.
(2) Also included in the Investments Measured at Fair Value and NAV table.
(3) Includes adjustments for STIP Reserve, STIP included in pooled investments, and holding classification differences.

As of June 30, 2020, local governments had invested $1.7 billion, and component units of the State of Montana had invested $331.5

million in STIP.
STIP Cash Equivalent Credit Quality Ratings as of
June 30, 2020
(in thousands)
Total Cash
Equivalents Credit Quality Rating
Agency or government related $ 121,655 A-1+
Asset backed commercial paper 1,508,483 A-1+
Corporate commercial paper 385,100 A-1+
Certificates of deposit 43,029 A-1+
Total cash equivalents $ 2,058,267
STIP
Credit Quality Rating and Weighted Average of Maturity as of
June 30, 2020
(in thousands)
Total Fixed
Income Credit
Investments Quality
Security Investment Type at Fair Value Rating | WAM (Days)
Treasuries $ 430,142 A-1+ 56
Agency or government related 1,182,828 A-1+ 52
Corporate:
Commercial paper 398,071 A-1+ 72
Notes 115,311 A-1+ 57
Certificates of deposit 300,206 A-1 56

Total STIP fixed income investments at fair value $ 2,426,558
B-61
C. Equity in Pooled Investments

These securities consist of investments held by BOI in pooled investment funds. The Consolidated Asset Pension
Pool (CAPP) and Trust Funds Investment Pool (TFIP) were created to allow qualifying funds to participate in
diversified investment pools. Purchases are subject to the statutorily mandated “Prudent Expert Principle” (see Table
3 — Equity in Pooled Investments).

Table 3 - Equity in Pooled Investments
(in thousands)

Fair Value “

CAPP:

Consolidated asset pension pool $ 11,673,887

TFIP:

Trust funds investment pool 2,644,510
Total pooled investments 14,318,397
Pool adjustments (net) (11,249)

Total equity in pooled investments $ 14,307,148

‘) Includes cash/cash equivalents and investments.

As of June 30, 2020, the fair value of the underlying securities on loan was $608.0 million. Collateral provided for the securities on
loan totaled $620.1 million, consisting of $110.4 million in cash and $509.7 million in securities.

As of June 30, 2020, local governments invested $13.1 million in TFIP.

State of Montana investments are categorized below to disclose credit and interest rate risk as of June 30, 2020, as
required for applicable pools.

Credit Quality Rating and Effective Duration as of June 30, 2020
Fair Value (in thousands)

Total Fixed
Income Effective
Investments Credit Quality Duration
Security Investment Type CAPP TFIP SMA at Fair Value Ratings Range (Years)
Treasuries $ 643,374 $ 348,714 $ 282,470 $ 1,274,558 AAA 3.24-12.52
Agency or Government Related 163,568 142,612 113,999 420,179 AAA 3.01-5.29
Asset-Backed Securities 88,048 83,281 57,768 229,097 AAt+ to AAA 1.69-2.72
Mortgage-Backed Securities:
Noncommercial 697,867 588,024 129,577 1,415,468 AAA 1.86-2.56
Commercial 144,057 149,106 33,534 326,697 AAA 4.60-6.97
Corporate:
Financial 322,656 311,131 238,394 872,181 BBB+ toA- 3.84-4.65
Industrial 726,975 625,164 366,556 1,718,695 BB+ to A- 4.55-5.91
Industrial (Unrated) 444 1,382 505 2,331 NR 0.40-3.06
Utility 22,041 16,429 9,625 48,095 BBB- to BBB 3.48-6.04

Total fixed income investments at fair value $ 2,809,030 $ 2,265,843 $ 1,232,428 $ 6,307,301

State of Montana investments are measured at fair value and categorized within the fair value hierarchy established
by GASB Statement No. 72 — Fair Value Measurement and Application, as defined below.

Fixed income and equity investments classified in Level | of the fair value hierarchy are valued using prices quoted
in active markets for those securities. Fixed income investments classified in Level 2 of the fair value hierarchy are
valued using a matrix pricing technique. Matrix pricing is used to value securities based on the securities’
B-62

relationship to benchmark quoted prices. Residential Mortgages classified in Level 3 of the fair value hierarchy are
present value adjusted. Direct real estate classified in Level 3 of the fair value hierarchy is based on the latest
appraisal value. Investments measured at cost are included to account for all investments within each pool and SMA.
These assets represent cash equivalents and Montana Mortgages and Loans.

Each of the investment pools and SMA has the following fair value measurements as of June 30, 2020:

Investments Measured at Fair Value
(in thousands)

Fair Value Measurements Using

Quoted prices in
Active Markets for Significant Other Significant
Identical Assets Observable Inputs §Unobservable

June 30, 2020 (Level 1) (Level 2) (Level 3)
Investments by fair value level
Fixed income investments:
Treasuries $ 1,704,700 $ 1,704,700 $ — $ —
Agency or Government Related 1,603,007 — 1,603,007 —
Asset Backed Securities 229,097 — 229,097 _—
Mortgage Backed Securities:
Noncommercial 1,415,468 _— 1,415,468 _—
Commercial 326,697 — 326,697 —
Corporate:
Commercial Paper 398,071 — 398,071 —
Commercial Notes 115,311 — 115,311 —
Certificates of Deposit 300,206 — 300,206
Financial 872,181 — 872,181 —
Industrial 1,718,695 — 1,718,695 —
Industrial (Unrated) 2,331 _ 2,331 _
Utility 48,095 — 48,095 —
Equity investments 3,997,407 3,997,407 — —
International equity investments 1,974,031 1,974,031 — —
Direct Real Estate 19,215 _— _— 19,215
Residential Mortgages 2,167 _— _— 2,167
Total investments by fair value level 14,726,679 7,676,138 7,029,159 21,382
Investments measured at the net asset value (NAV)
Private Equity Partnerships 1,531,566
Core Real Estate 711,902
Non-Core Real Estate 484,230
Natural Resources 261,683
Real Estate High Income Fund 131,764
Total investments measured at NAV 3,121,145
Total investments measured at fair value 17,847,824
Investments at cost
Cash and cash equivalents held at custodial bank 3,520,543
SMA Montana Mortgages and Loans 203,601
Total investments not categorized 3,724,144

Total investments $ 21,571,968
The investments measured at NAV for the year ended June 30, 2020, are detailed below.

Investments Measured at NAV (in thousands)

Redemption
Unfunded Frequency (If Redemption
Fair Value Commitments Currently Eligible) Notice Period
Private Equity Partnerships $ 1,531,566 $ 1,038,167
Core Real Estate 711,902 157,793 Monthly, quarterly 45-90 days
Non-Core Real Estate 484,230 502,567
Natural Resources 261,683 265,305
High Yield Bond Fund 131,764 — Daily 1-3 days
Total investments measured at the NAV $ 3,121,145 $ 1,963,832

STIP and $2.9 billion of SMA are included, and also reported in Tables 2 and 4, respectively.

Private Equity Partnerships — This type includes investments in limited partnerships. Generally speaking, the types
of partnership strategies included in this portfolio: venture capital, growth equity, buyouts, special situations,
mezzanine and distressed debt. These investments are considered long-term. Redemptions are restricted over the life
of the partnership. During the life of the partnerships, distributions are received as underlying partnership
investments are realized. It is expected that the underlying assets of the funds will be liquidated over 10 years. It is
probable all the investments in this type will be sold at an amount different from the NAV per share (or its
equivalent) of BOI’s ownership interest in partners’ capital.

Core Real Estate — This type includes funds that invest primarily in core real estate, which makes equity investments
in operating and substantially-leased institutional quality real estate in traditional property types (apartments, office,
retail, industrial and hotel) via commingled funds. The primary investment objectives of these core real estate funds
are to invest in real estate that will generate income from predictable sources of revenue and not to realize gains on
the underlying assets. This investment type receives distributions of generated income and occasionally through the
liquidation of the underlying assets of the fund. The fair values of the investments in this category have been
determined using the NAV per share (or its equivalent) of BOI’s ownership interest in the partners’ capital.
Redemption of these investments is restricted based on the availability of cash flow arising from investment
transactions, sales, and other fund operations occurring in the ordinary course of business. Therefore, requested
redemptions from a fund will be redeemed as funds become available.

Non-Core Real Estate — This type includes private partnership funds that primarily invest in value added and
opportunistic real estate funds. These funds assume more risk than the core real estate funds to achieve a greater
return on investment. Returns are driven both by current income and by expected capital appreciation. This
investment type receives distributions of generated income and occasionally through the liquidation of the
underlying assets of the fund. It is expected that the underlying assets of the funds will be liquidated over 7 to 10
years. These investments can never be redeemed. The fair values of the investments in this category have been
determined using the NAV per share (or its equivalent) of the Board’s ownership interest in the partners’ capital.

Natural Resources — This type includes private partnership funds that primarily invest in timber, energy and broad
natural resource funds. This investment type receives distributions of generated income and occasionally through the
liquidation of the underlying assets of the fund. It is expected that the underlying assets of the funds will be
liquidated over 10 to 20 years. The fair values of the investments in this category have been determined using the
NAV per share (or its equivalent) of the Board’s ownership interest in the partners’ capital.

Real Estate High Income Fund — This type consists of predominantly of real estate related instruments with an
emphasis in U.S. corporate credits, whether in the form of bonds or loans that are rated below investment grade.
These assets carry a higher risk of default than investment grade securities and accordingly provide a higher level of
income or yield commensurate with that risk. The fair values of the investments of this type have been determined
using the NAV per share (or its equivalent) of the investments.

B-63
Commitments to Fund Managers
(in thousands)

Original Commitment
Pension Asset Class Commitment Remaining
Private Equities PAC $ 3,045,722 $ 1,038,167
Real Estate PAC 2,060,130 660,360
Natural Resources PAC 584,412 265,305
Total $ 5,690,264 $ 1,963,832

D. Investments

Article VII of Montana's Constitution, with supporting statutes, authorizes BOI to manage the State's Unified
Investment Program. Long-term investments are administered by the following agencies, as allowed by state law,
Section 17-6-201, MCA:

Long-term Investments

Percent

Department Administered
Board of Investments 50.39 %
Universities 17.83
MPERA (Montana Public Employee Retirement Administration) 24.96
College Savings Plan 4.58
Montana Board of Housing 1.16
Other “ 1.08

Total 100.00 %

‘) Other consists of the Commissioner of Higher Education, the Department of Administration, the Department of Commerce,
the Department of Natural Resources and Conservation, the Department of Revenue, and State Auditor.

BOI must employ the "Prudent Expert Rule" in managing the State's investment portfolio. Investments are presented
at fair value. Investment fair values for publicly traded securities are determined primarily by reference to market
prices supplied to BOI's custodial bank or trustee. State investments are categorized within the fair value hierarchy
established by GASB Statement No. 72.

The PERS Defined Contribution Retirement Plan (DCRP) and the Deferred Compensation Plan’s Montana Fixed
Fund is a stable value investment option administered and monitored by the Public Employees’ Retirement Board
(PERB) with input from the Employee Investment Advisory Committee and the investment consultant. The PERB
has established an investment policy for the Montana Fixed Fund to identify objectives, investment guidelines, and
outline the responsibility of the outside vendors. This investment policy includes stable value manager Pacific
Investment Management Company LLC (PIMCO), custodial bank State Street Bank and Trust Company (State
Street), and third-party synthetic Guaranteed Interest Contract (GIC) providers, Transamerica Life Insurance
Company (Transamerica), Prudential Insurance Company of America (Prudential), and Voya Retirement Insurance
and Annuity Company (Voya). All money invested in the Montana Fixed Fund of the PERS-DCRP and Deferred
Compensation Plan is held in a Pooled Trust. The third party record keeper, Empower ™ Retirement, tracks and
reports the daily trading and valuations of all investment options, including the assets held by the individual mutual
fund companies.

B-65
B-67

(1) The credit quality rating and duration are included in the above sections for the rated investments.

(2) For more detail, refer to component unit separately issued financial statements.

(3) | The total for Montana Mortgages and Loans does not include Coal Severance Tax loans, which was included in SMA financial statements. This
amount of $10.1 million is considered advances to other funds/component units and amounts due from component units in the Coal Tax Severance column
of the governmental fund financial statements.

As of June 30, 2020, the fair value of the investments on loan was $133.7 million. Collateral provided for the investments on loan totaled $136.5 million
consisting of $42.7 million in cash and $93.8 million in securities.

$1.7 billion of SMA is included and also reported in the Investments Measured at Fair Value and NAV table.

Municipal Finance Programs — Rated Securities
Credit Quality Rating and Effective Duration as of

June 30, 2020
(in thousands)

Credit
Fair Quality Effective

Security Investment Type Value Rating" — Duration"
Short-term investments

US Treasury obligations $ 146 AAt 0.46
Restricted investments

US Treasury obligations 564 AAt 0.46

Total investments $ 710

") Credit Quality Rating and Effective Duration are weighted.
B-68

NOTE 4.

OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES

DISAGGREGATION OF ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, DEFERRED

Accounts receivable, accounts payable, deferred outflows of resources, and deferred inflows of resources on the
Statement of Net Position as of June 30, 2020, consisted of the following (in thousands):

A. Accounts Receivables

Governmental Activities

Coal Federal Internal Nonmajor .
Severance Special © General Service © Land Governmental State Special
Tax Revenue Fund Funds Grant Funds Revenue
Charges for services/fines/forfeitures $ — $ 4,681 $ 2,469 $ 375 $ — $ — $ 12,094
Grants/contracts/donations _ _ _ _ _ 16 258
Investment income 2,199 — 509 118 1,794 6,005 3,126
License and permits _ _ _ _ _ _ 8,538
Other receivables — 71,178 8,503 958 — — 636
Reimbursements/overpayments _ 304 18,503 18 _ _ 13,881
Taxes 8,426 _ 530,391 _ _ 3,003 65,748
Total receivables 11,225 76,163 560,375 12,669 1,794 9,024 105,476
Less: allowance for doubtful accounts —_ (726) (125,682) (978) —_ (24) (19,290)
Receivables, net $11,225 $ 75,437 $ 434693 $ 11,691 $ 1,794 $ 9,000 $ 86,186
Business-type Activities
Municipal
Finance Nonmajor Unemployment
Programs Enterprise Funds Insurance

Charges for services $ — $ 31,671 $ _—

Contributions/premiums — 4,588 6,068

Loans/investment income 8,029 95 —

Other receivables _ 62 _

Reimbursements/overpayments _ _ 2,129

Total receivables 8,029 36,416 8,197

Less: allowance for doubtful accounts —_ (646) (3,719)

Receivables, net $ 8,029 $ 35,770 $ 4,478
B-69

B. Deferred Outflows of Resources

Governmental Activities

Nonmajor
Federal Special Internal Service Governmental State Special
Revenue General Fund Funds Funds Revenue
OPEB deferred outflows $ — $ 14,999 $ 979 $ — $ _
Pension deferred outflows ”) 13 586,392 8,996 — 65
Refunding deferred outflows _— _— _— 1,805 _—
Total deferred outflows $ 13 $ 601,391 $ 9975 $ 1,805 $ 65
Business-type Activities
Municipal
Finance Nonmajor

Programs Enterprise Funds

OPEB deferred outflows $ 5 $ 282

Pension deferred outflows 46 2,090

Total deferred outflows $ 511 $ 2,372

‘) Further detail regarding OPEB related deferred outflows of resources is provided in Note 7.
® Further detail regarding pension related deferred outflows of resources is provided in Note 6.

C. Accounts Payables

Governmental Activities

Nonmajor
Federal Special Internal Service Governmental State Special
Revenue General Fund Funds Funds Revenue
Accrued interest $ 6 $ 431 $ 27 $ 1,655 $ 50
Payroll 10,922 35,566 4,839 6 25,600
Tax refunds _— 188,354 _— _— _—
Vendors/individuals 226,436 65,270 12,133 9,693 162,951
Payables, net $ 237,364 $ 289,621 $ 16,999 $ 11,354 $ 188,601
Business-type Activities
Municipal
Finance Nonmajor Unemployment
Programs Enterprise Funds Insurance
Accrued interest $ 302 $ 3 $ _
Payroll 30 1,276 _—
Vendors/individuals 11 19,334 29,005

Payables, net $ 343 $ 20,613 $ 29,005
B-70

D. Deferred Inflows of Resources

Governmental Activities

Federal Special Internal Service State Special
Revenue General Fund Funds Revenue
OPEB deferred inflows “” 5 — $ 26,005 $ 1,698 $ _
Pension deferred inflows ”) 37 181,999 9,444 60
Total deferred inflows $ 37 $ 208,004 $ 11,142 $ 60

Business-type Activities

Municipal
Finance Nonmajor
Programs Enterprise Funds
OPEB deferred inflows “” 5 8 $ 503
Pension deferred inflows ”) 49 3,085
Total deferred inflows $ 57 $ 3,588

Further detail regarding OPEB related deferred inflows of resources is provided in Note 7.
Further detail regarding pension related deferred inflows of resources is provided in Note 6.
NOTE 5.

Changes in capital asset balances for the fiscal year ended June 30, 2020, are reflected in the following table (in

thousands):

CAPITAL ASSETS

Governmental Activities
Capital assets not being depreciated:
Land
Construction work in progress
Easements
Museum and art
Other
Total capital assets not being depreciated

Capital assets being depreciated:
Infrastructure
Land improvements
Buildings/improvements
Equipment
Easements - amortized
Other
Total capital assets being depreciated

Less accumulated depreciation for:
Infrastructure
Land improvements
Buildings/improvements
Equipment
Other
Total accumulated depreciation

Total capital assets being depreciated, net

Intangible assets

Governmental activities capital assets, net

Beginning Ending

$ 737,025 $ 16,546 $ (75) $ 753,496
1,105,818 543,097 (426,664) 1,222,251
218,813 18,059 — 236,872
85,670 408 — 86,078
29,842 354 — 30,196
2,177,168 578,464 (426,739) 2,328,893
5,573,558 386,946 (201,537) 5,758,967
69,251 7,144 — 76,995
605,637 17,788 (5,245) 618,180
410,261 33,823 (13,466) 430,618
1,377 — (73) 1,304
5,566 210 — 5,776
6,665,650 446,511 (220,321) 6,891,840
(1,700,168) (195,227) 188,932 (1,706,463)
(33,438) (3,220) _ (36,658)
(399,024) (19,418) 545 (417,897)
(270,662) (24,236) 9,181 (285,717)
(4,308) (254) _ (4,562)
(2,407,600) (242,355) 198,658 (2,451,297)
4,258,050 204,156 (21,663) 4,440,543
45,267 35,421 (27,078) 53,610
$ 6,480,485 $ 818041 $ (475,480) $ 6,823,046

(") The increases and decreases noted above include adjustments related to prior periods and correction of errors.

B-71
B-72

(2)

Business-type Activities
Capital assets not being depreciated:
Land
Construction work in progress
Other
Total capital assets not being depreciated

Capital assets being depreciated:
Infrastructure
Land improvements
Buildings/improvements
Equipment
Total capital assets being depreciated

Less accumulated depreciation for:
Infrastructure
Land improvements
Buildings/improvements
Equipment
Total accumulated depreciation

Total capital assets being depreciated, net

Intangible assets

Business-type activities capital assets, net

Beginning Ending
Balance _ Increases) Decreases" — Balance
$ 800 $ — $ — $ 800
6,887 2,361 (6,887) 2,361
3,640 205 (75) 3,770
11,327 2,566 (6,962) 6,931
1,175 — — 1,175
3,830 — — 3,830
10,199 6,180 — 16,379
9,573 419 (182) 9,810
24,777 6,599 (182) 31,194
(746) (19) _ (765)
(2,064) (149) _ (2,213)
(6,799) (317) _ (7,116)
(7,274) (390) 164 (7,500)
(16,883) (875) 164 (17,594)
7,894 5,724 (18) 13,600
2,062 _ (541) 1,521
$ 21,283 $ 8,290 $ (7,521) $ 22,052

The increases and decreases noted above include adjustments related to prior periods and corrections of errors.

Depreciation expense was charged to governmental functions as follows (in thousands):

General government
Public safety

Transportation, including depreciation of the highway system maintained by the State

Health and human services
Education

Natural resources, including depreciation of the state's dams
Depreciation on capital assets held by the internal service funds
Total depreciation expense — Governmental Activities

Depreciation expense was charged to business-type activities as follows (in thousands):

Liquor Stores

State Lottery

Prison Funds

West Yellowstone Airport
Other Enterprise Funds

Total depreciation expense — Business-type Activities

$ 8,222
8,043

197,267

2,952

179

11,020

14,672

$ 242,355

Depreciation ”)

$ 110
56

403

257

49

$ 875

Depreciation expenses noted above include adjustments related to prior periods and correction of errors.
A. General

The funding policies for each plan provide for periodic employee, employer, and State nonemployer contributions at
rates specified by state law. An actuary determines the actuarial implications of the funding requirement in an annual
actuarial valuation. The actuarial method used to determine the implications of the statutory funding level is the
Entry Age Actuarial Cost Method, with both normal cost and amortization of the unfunded actuarial liability
determined as a level percentage of payroll expense. Benefits are established by state law and can only be amended
by the Legislature.

Montana State Fund, a discretely presented component unit of the State, by statute, prepares separately issued
financial statements on a calendar year-end basis. Due to the difference in reporting period, there will be a variance
between the note disclosures and the financial statements for some pension-related items.

Public Employees’ Retirement Board

The Public Employees’ Retirement Board (PERB) oversees eight defined benefit plans: Public Employees’
Retirement System-Defined Benefit Retirement Plan (PERS-DBRP); Judges’ Retirement System (JRS); Highway
Patrol Officers’ Retirement System (HPORS); Sheriffs’ Retirement System (SRS); Game Wardens’ and Peace
Officers’ Retirement System (GWPORS); Municipal Police Officers’ Retirement System (MPORS); Firefighters’
Unified Retirement System (FURS); and Volunteer Firefighters’ Compensation Act (VFCA). The PERB also
oversees two defined contribution plans: Public Employees’ Retirement System-Defined Contribution Retirement
Plan (PERS-DCRP) and the 457-Deferred Compensation Plan (457 Plan). The PERB also oversees education funds
related to the pension plans. All of the benefit plans, defined benefit and defined contribution, are administered by
the Montana Public Employees’ Retirement Administration (MPERA). Separately issued financial statements and
actuarial reports can be obtained at 100 North Park, Suite 200, PO Box 200131, Helena, MT 59620-0131. The
financial statements and the latest actuarial valuation may also be obtained here: http://mpera.mt.gov/, The
financial statements for the PERS-DBRP include activity for the defined benefit plan and the associated education
fund. The PERS-DCRP financial statements include activity for the defined contribution plan and the associated
education fund.

The PERB is an independent, seven-member board, appointed by the Governor. The members are assigned five-
year, staggered terms. The PERB consists of two members at large, two active defined benefit public employees,
one active defined contribution public employee, one member experienced in investments, and one retired public
employee. The PERB approves the annual operating budget, developed by MPERA management, before the
beginning of the fiscal year. As governed by statute, the PERB’s defined benefit administrative expenses may not
exceed 1.5% of the total defined benefit plan retirement benefits paid. In addition, the PERB decides legislative
policy and priorities, hires the executive director, establishes the policies and procedures that govern operations at
MPERA, and hears and rule on appeal matters of disabilities, retirees, and members. PERB members do not receive
compensation for their service to the MPERA but are reimbursed for necessary expenses incurred while serving.

All defined benefit pension plans provide retirement, disability, and death benefits to the plan members and their
beneficiaries. The PERS-DCRP Disability OPEB Plan provides a defined benefit for disabled members of the
PERS-DCRP. Beneficiaries do not receive disability benefits but may attain retirement benefits from the PERS-
DCRP. A summary of the plan eligibility and benefits are found in the Summary of Benefits sections throughout
Note 6.

Teachers’ Retirement System

The Teachers’ Retirement System (TRS) is a defined benefit plan administered by the Teachers Retirement Board
(TRB). The plan prepares a publicly issued comprehensive annual financial report that includes financial statements
and required supplementary information for TRS. Separately issued financial statements, actuarial valuations, and
experience studies can be obtained at 100 N Park Avenue, Suite 110, PO Box 200139, Helena, MT 59620-0319, or
can be found online at https://trs.mt.gov/.

The TRB consists of six members, all of whom are appointed by the Governor. Three TRB members must be
teaching professionals who, when appointed, are active members of TRS; at least one of them must be an active
classroom teacher. One TRB member must be a retired teacher who was a member of TRS at the time of retirement.

B-73
B-74

Two TRB members are appointed from the public at large. TRB members serve staggered, five-year terms. Three
TRB members constitute a quorum.

A summary of the number of participating employer and nonemployer contributing entities as of June 30, 2020,
follows:

Classification of Participant GWPORS DBRP DCRP SRS MPORS — FURS VFCA TRS
Employer 7 548 329 57 33 27 221 364
Nonemployer
contributing entity _ 1 _ — 1 1 1 1
Total Participants 7 549 329 57 34 28 222 365

There are 688 State employees who are eligible to participate in defined benefit pension plans, other than the plans
listed above.

B. Summary of Significant Accounting Policies

The MPERA prepares its financial statements using fund accounting principles and the accrual basis of accounting.
The basis of accounting indicates the timing of transactions or events for recognition in the financial statements.
Plan member contributions, employer contributions, and related receivables are recognized as revenues in the
accounting period in which they are earned and become measurable, pursuant to formal commitments and statutory
requirements. Benefit payments and refunds/distributions are recognized in the accounting period in which they are
due and payable in accordance with the terms of each plan. Administrative and other expenses, and the associated
liabilities, are recognized in the period the liability is incurred. Administrative expenses are financed through
investment earnings on the pension trust fund for the defined benefit plans. Interfund receivables and payables exist
at year-end for defined benefit administrative expenses that are accounted for within PERS-DBRP and allocated to
the other defined benefit plans at year-end. Costs specifically related to the computer system upgrades are charged
directly to the individual plans. The MPERA adheres to all applicable Governmental Accounting Standards Board
(GASB) statements.

The TRS prepares its financial statements using the accrual basis of accounting. For the purposes of measuring the
net pension liability, deferred inflows of resources, and deferred outflows of resources related to pensions, pension
expense, information about the fiduciary net position of the TRS, and additions to/deductions from TRS’s fiduciary
net position, the items have been determined on the same accrual basis as they are reported by the TRS. For this
purpose, plan contributions are recognized as of employer payroll paid dates. Benefit payments and refunds are
recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. The
TRS adheres to all applicable GASB statements.

The pension trust fund financial statements presented in this report are prepared using the accrual basis of
accounting in the same manner as that described for the pension plan administrators above.
C. Public Employee Defined Benefit Retirement Plan

A summary of classes of members in JRS, HPORS, GWPORS, PERS-DBRP, SRS, MPORS, FURS, VFCA, TRS,
PERS-DCRP, and 457-Deferred Compensation covered by benefit terms at June 30, 2020, follows:

Type of Plan for Reporting —_ Single-Employer Defined Multi-Employer Defined Benefit Mulremployer
Purposes Benefit Contribution
. . HPORS PERS- MPORS PERS-
Plan Designation JRS (1) GWPORS DBRP®) SRS (1) FURS VFCA’~ TRS DCRP 457-DC
Classification of Member
Active 58 233 1,033} 29,039 1,502 829 735 2,401 19,7517 3,100 5,601
Inactive entitled to, but not yet
receiving, benefits or a
refund:
Vested 2 17 135] 4,070 146 95 39 766 = 1,828 639 4,293
Non-vested 1 31 495} 20,548 696 181 72 14,941 790 _—
Inactive members and
beneficiaries currently
receiving benefits:
Service retirements” 67 335 371] 23,195 711 811 648 1,519 16605} 106 _
Disability retirements _— 4 2 138 28 27 12 192 9 _—
Survivor benefits 5 11 11 523 24 32 18 480 1 —
Total membership 133 631 2,047] 77,513 3,107 1,975 1,524 4691 53,797] 4645 9,894

") Includes DROP in the Active count.
@) The inactive Non-vested count includes dormant accounts that were previously not counted.
® Includes "Alternative Payees" and "Death After Retirement" benefit payments. As of Fiscal Year 2019, the TRS plan stopped reporting separate benefit

recipient categories.

Includes "Death Before Retirement" benefit payments.

A summary of pension liability, pension assets, net pension liability/(asset), pension expense, deferred outflows of
resources, and deferred inflows of resources by plan and total for the State as an employer entity for primary
government and component units reported as of June 30, 2020, based on a June 30, 2019, actuarial valuation,
follows with amounts presented in thousands:

Aggregate Pension Amounts - All Plans (State as employer)

Employer's
Employer's Net Employer's Deferred Employer's

Employer's Total Employer’s Pension Pension Outflows of Deferred Inflows

System Pension Liability Pension Assets _Liability/(Asset) Expense Resources of Resources
JRS $ 65,319 $ 104,886 $ (39,567) $ (114) $ 5,690 $ 1,450
HPORS 237,728 152,778 84,950 12,145 11,713 _
GWPORS 247,013 206,348 40,665 9,501 13,748 4,003
PERS-DBRP 3,128,757 2,310,595 818,162 87,976 141,953 155,410
SRS 22,464 18,397 4,067 63 2,144 2,513
FURS 11,593 9,284 2,309 530 1,084 195
TRS 148,249 101,756 46,493 15,181 32,800 919
Totals $ 3,861,123 $ 2,904,044 $ 957,079 $ 125,282 $ 209,132 $ 164,490

(1) State as the Single Employer

Judges’ Retirement System — The JRS, administered by the MPERA, is a single-employer defined benefit plan

established in 1967 and governed by Title 19, chapters 2 & 5, MCA (Montana Code Annotated). This plan provides
retirement benefits for all Montana judges of the district courts, justices of the Supreme Court, the Chief Water

B-75
B-76

Judge, and the Associate Water Judge. Benefits are established by state law and can only be amended by the
Legislature. The JRS provides retirement, disability, and death benefits to plan members and their beneficiaries.
Benefits are based on eligibility, years of service, and compensation. Member rights are vested after five years of
service.

Summary of Benefits
Member’s current salary’ or highest average compensation (HAC)?
'Hired prior to July 1, 1997, and non-Guaranteed Annual Benefit Adjustment (GABA) — monthly
compensation at time of retirement;
"Hired on or after July 1, 1997, or electing GABA — HAC during any consecutive 36 months;
"Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s HAC.

Eligibility for benefit
Age 60, 5 years of membership service;
Any age with 5 years of membership service — involuntary termination, actuarially reduced.

Vesting
5 years of membership service.

Monthly benefit formula
3.33% of current salary! (non-GABA) or HAC’ (GABA) per year of service credit for the first 15
years of service credit, plus 1.785% per year for each year after 15 years.

Guaranteed Annual Benefit Adjustment (GABA)
Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12 full
months of retirement, the member’s benefit increases by a maximum of 3.0% each January, inclusive
of all other adjustments to the member’s benefit.

Minimum benefit adjustment (non-GABA)

If hired prior to July 1, 1997, and member did not elect GABA — current salary of an active member
in same position is used in the calculation of the monthly benefit each time the Legislature increases
salaries for active judges.

Contributions to the Plan
Rates are specified by state law for periodic employee and employer contributions. The Legislature has the authority
to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s salary and
remitted by the participating employer. An individual account is established for each member’s
contributions and interest allocations until a retirement or refund request is processed. Plan members
are required to contribute 7.0% of the member’s monthly compensation.

Employer contributions to the system — As the employer, the State is required to contribute 25.81% of
a member’s compensation.

Actuarial Assumptions

The total pension liability/(asset) used to calculate the net pension liability/(asset) was determined by an actuarial
valuation as of June 30, 2018, with update procedures used to roll forward the total pension liability/(asset) to June
30, 2019. The actuarial assumptions used in the June 30, 2019, valuation were based on the results of the last
actuarial experience study dated May 2017 for the six-year period ended June 30, 2016. There were several
significant assumptions and other inputs used to measure the total pension liability/(asset). Among those
assumptions were the following:

¢ Investment Return 7.65%
¢« Admin Expense as a % of Payroll 0.17%
« General Wage Growth 3.50%
¢ Inflation at 2.75%
¢ Merit Increases None

¢ Postretirement Benefit Increases — After the member has completed 12 full months of retirement, the
member’s benefit increases by the applicable percentage (provided below) each January, inclusive of other
adjustments to the member’s benefit:
° 3% for members electing GABA or hired on or after July 1, 1997
° Current salary of an active member in the same position, if hired prior to July 1, 1997,
and not electing GABA
¢ Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.
¢« Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant
Mortality Tables.

Discount Rate

The discount rate used to measure the total pension asset was 7.65%. The projection of cash flows used to determine
the discount rate assumed that contributions from participating plan members and employers will be made based on
the PERB’s funding policy, which establishes the contractually required rates under MCA. Based on those
assumptions, the JRS’s fiduciary net position was projected to be adequate to make all the projected future benefit
payments of current plan members through the year 2105. Therefore, the long-term expected rate of return on
pension plan investments was applied to all periods of projected benefit payments to determine the total pension
asset. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the JRS. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a report
dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on pension plan
investments was determined by considering information from various sources, including historical rates of return,
rate of return assumptions adopted by similar public pension systems, and by using a building-block method in
which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment
and inflation) are developed for each major asset class. These ranges were combined to produce the long-term
expected rate of return by weighing the expected future real rates of return by the target asset allocation percentage
and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major asset class
included in the JRS’s target asset allocation as of June 30, 2019, is summarized in the table that follows:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis
In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability/(asset) to changes
in the discount rate, the table below presents the net pension liability/(asset) calculated using the discount rate of

B-77
B-78

7.65%, as well as what the net pension liability/(asset) would be if it were calculated using a discount rate that is
1.00% lower (6.65%) or 1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)
JRS net pension (asset) $ (33,242) $ (39,567) $ (45,028)

Net Pension Asset

In accordance with GASB 68, the employer is required to recognize and report certain amounts associated with its
participation in the JRS. GASB 68 became effective June 30, 2015, and includes requirements for participant to
record and report its net pension asset (NPA), pension expense, deferred inflows of resources and deferred outflows
of resources associated with pensions.

(dollars presented in thousands)

Net Pension Liability Net Pension Liability
(Asset) as of 6/30/18 (Asset) as of 6/30/19 Percent of NPA

Employer's proportionate share $ (42,459) $ (39,567) 100%

At June 30, 2020, the employer reported a net pension asset of $39.6 million for its proportionate share of the net
pension asset. The net pension asset was measured as of June 30, 2019, and the total pension liability used to
calculate the net pension asset was determined by an actuarial valuation as of June 30, 2018, with update procedures
used to roll forward the total pension liability to June 30, 2019. The employer’s proportion of the net pension asset
was based on the employer’s contributions received by JRS during the measurement period July 1, 2018, through
June 30, 2019, relative to the total employer contributions received from all of the JRS participating employers.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other input
that affected the measurement of the total pension liability (asset).

Changes in benefit terms: There have been no changes in benefit terms since the previous
measurement date.

Changes in proportionate share: There were no changes between the measurement date of the net
pension asset and the employer’s reporting date that are expected to have a significant effect on the
employer’s proportionate share of the net pension asset.

Other Items Related to and Changes in Net Pension Asset

(in thousands)

Total Pension Plan Fiduciary Net Pension
Liability Net Position Liability/(Asset)

Balances at 6/30/2018 $ 60,192 $ 102,651 $ (42,459)
Service costs 1,772 — 1,772
Interest 4,458 _ 4,458
Difference between expected
and actual experience 2,743 _ 2,743
Contributions - member _ 517 (517)
Net investment income _ 5,687 (5,687)
Benefit payments (3,846) (3,846) —
Administrative expense _— (123) 123
Net changes 5,127 2,235 2,892

Balances at 6/30/2019 $ 65,319 § 104,886 $ (39,567)

Pension Expense
At June 30, 2020, the employer recognized pension expense of $(114.0) thousand for the JRS.
Deferred Outflows and Inflows
As of the fiscal year ended June 30, 2020, remaining deferred outflows of resources and deferred inflows of
resources related to the JRS are from the following sources:

(in thousands)

Deferred Outflows Deferred Inflows

of Resources of Resources

Net difference between projected and actual

earnings on pension plan investments $ 2,273 $ 1,450
Changes of assumptions 966 _—
Differences between expected and actual

experience 463 _—
Contributions paid to JRS subsequent to the

measurement date — FY 2020 contributions 1,988 _

Totals $ 5,690 $ 1,450

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the June 30, 2019 measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will
be recognized in pension expense as follows:

(in thousands)

Amount recognized in Pension
Expense as an increase or

Year ended June 30: (decrease) to Pension Expense

2021 $ 1,577
2022 (591)
2023 859
2024 407

Highway Patrol Officers’ Retirement System — The HPORS, administered by the MPERA, is a single-employer
defined benefit plan established on July 1, 1945, and governed by Title 19, chapters 2 & 6, MCA. This plan provides
retirement benefits to all members of the Montana Highway Patrol, including supervisory personnel. Benefits are
established by state law and can only be amended by the Legislature. The HPORS provides retirement, disability,
and death benefits to plan members and their statutory beneficiaries. Benefits are based on eligibility, years of
service, and highest average compensation. Member rights for death and disability are vested immediately. All other
member rights are vested after 5 or 10 years of service.

Section 19-6-709, MCA provides eligible members retired prior to July 1, 1991, or their survivors, an annual
supplemental lump-sum payment distributed each September. This lump-sum payment is funded by a statutory
appropriation requested by the PERB from the General Fund. Factors impacting eligibility include the number of
years the recipient has received a service retirement or disability benefit, the recipient’s age, and whether the
recipient is employed in a position covered by a retirement system under Title 19, MCA.

Deferred Retirement Option Plan (DROP)

Beginning October 1, 2015, eligible members of HPORS can participate in the DROP by filing a one-time
irrevocable election with the PERB. The DROP is governed by Title 19, Chapter 6, Part 10, MCA. A member must
have completed at least twenty years of membership service to be eligible. They may elect to participate in the
DROP for a minimum of one month and a maximum of 60 months and may only participate in the DROP once. A
participant remains a member of the HPORS, but will not receive membership service or service credit in the system
for the duration of the member’s DROP period. During participation in the DROP, all mandatory employer
contributions continue to the retirement system; mandatory employee contributions are deposited to the member's
DROP account. A monthly benefit is calculated based on salary and years of service to date as of the beginning of
the DROP period. The monthly benefit is paid into the member’s DROP account until the end of the DROP period.

B-79
B-80

At the end of the DROP period, the participant may receive the balance of the DROP account in a lump-sum
payment or in a direct rollover to another eligible plan, as allowed by the IRS. If the participant continues
employment after the DROP period ends, they will again accrue membership service and service credit. The DROP
account cannot be distributed until employment is formally terminated. As of June 30, 2020, the balance held by
MPERA for HPORS DROP participants was approximately $3.8 million.

Summary of Benefits
Member’s highest average compensation (HAC)
Hired prior to July 1, 2013 — HAC during any consecutive 36 months;
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s HAC.

Eligibility for benefit
20 years of membership service, regardless of age.

Early Retirement
Hired prior to July 1, 2013 — 5 years of membership service, actuarially reduced from age 60.
Hired on or after July 1, 2013 — 10 years of membership service, actuarially reduced from age 60.

Second Retirement (applies to retirement system members who return on or after July 1, 2017, to
active service covered by the system from which they retired):
a. If the member works more than 480 hours in a calendar year and accumulates less than
5 years of service credit before terminating again, the member:

. is not awarded service credit for the period of reemployment;

. is refunded the accumulated contributions associated with the period of
reemployment;

. starting the first month following termination of service receives the
same retirement benefit previously paid to the member; and

. does not accrue post-retirement benefit adjustments during the term of

reemployment but receives a GABA in January immediately following
the second retirement.
b. If the member works more than 480 hours in a calendar year and accumulates at least 5
years of service credit before terminating again, the member:

. is awarded service credit for the period of reemployment;
. starting the first month following termination of service, receives:
° the same retirement benefit previously paid to the member;
and

° a second retirement benefit for the period of reemployment
calculated based on the laws in effect as of the member's
rehire date; and

. does not accrue post-retirement benefit adjustments during the term of
reemployment but receive a GABA:

° on the initial retirement benefit starting January immediately
following second retirement; and

° on the second retirement benefit starting in January after
receiving that benefit for at least 12 months

c. A member who returns to covered service is not eligible for a disability benefit.

Vesting
Hired prior to July 1, 2013 — 5 years of membership service.
Hired on or after July 1, 2013 — 10 years of membership service.

Monthly benefit formula
Retire prior to July 1, 2013 — 2.5% of HAC per year of service credit.
Retire on or after July 1, 2013 — 2.6% of HAC per year of service credit.
Guaranteed Annual Benefit Adjustment (GABA)
Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12 full
months of retirement, the member’s benefit increases by a maximum of 3.0% each January, inclusive
of all other adjustments to the member’s benefit.

Hired on or after July 1, 2013 — after the member has completed 36 full months of retirement, the
member’s benefit increase by a maximum of 1.5% each January, inclusive of all other adjustments to
the member’s benefit.

Minimum Monthly Benefit (non-GABA)

If hired prior to July 1, 1997, and member did not elect GABA — the minimum monthly benefit is
equal to 2% of the service credit multiplied by the current base compensation of a probationary
highway patrol officer. Any annual increase is limited to 5.0% over the current benefit and may not
exceed 60% of the current base salary of a probationary officer.

Contributions to the Plan
Rates are specified by state law for periodic employee and employer contributions. The Legislature has the authority
to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s salary and
remitted by participating employer.

Hired prior to July 1, 1997, and not electing GABA — Plan members are required to contribute
13.00%.

Hired after June 30, 1997, and electing GABA — Plan members are required to contribute 13.05%.

Employer contributions to the system — As the employer, the State is required to contribute 38.33% of
a member’s compensation. The first 28.15% is payable from the same sources used to pay a
member’s compensation. The remaining amount, equal to 10.18%, is payable from the General Fund
through a statutory appropriation.

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The actuarial
assumptions used in the June 30, 2019, valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. There were several significant assumptions and other
inputs used to measure the total pension liability. Among those assumptions were the following:

¢« Investment Return 7.65%
¢ Administrative Expense as a% of Payroll 0.27%
* General Wage Growth 3.50%
¢ Inflation at 2.75%
¢ Merit Increases 0 to 6.30%

¢ Postretirement Benefit Increases — After the member has completed 12 full months of retirement, the
member’s benefit increases by the applicable percentage each January, inclusive of other adjustments to the
member’s benefit:
° If electing GABA or hired on or after July 1, 1997 — 3.00%
° Hired on or after July 1, 2013 — 1.50%
° Minimum Benefit Adjustment — Limited to 5% over the current benefit and may not
exceed 60% of a newly confirmed officer
¢ Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.
¢ Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant
Mortality Tables.

B-81
B-82

Discount Rate

The discount rate used to measure the total pension asset was 7.65%. The projection of cash flows used to determine
the discount rate assumed that contributions from participating plan members and employers will be made based on
the PERB’s funding policy, which establishes the contractually required rates under MCA. The State contributes
10.18% of salaries paid by employers, however, this is considered an employer contribution since HPORS is a
single-employer plan and the State is the only employer. Based on those assumptions, the HPORS’s fiduciary net
position was projected to be adequate to make all the projected future benefit payments of current plan members
through the year 2129. Therefore, the long-term expected rate of return on pension plan investments was applied to
all periods of projected benefit payments to determine the total pension liability. A municipal bond rate was not
incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the HPORS. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a
report dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including historical rates
of return, rate of return assumptions adopted by similar public pension systems, and by using a building-block
method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan
investment and inflation) are developed for each major asset class. These ranges were combined to produce the
long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation
percentage and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major
asset class included in the HPORS’s target asset allocation as of June 30, 2019, is summarized in the table that
follows:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%
Total 100.00%

Sensitivity Analysis

In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the table below presents the net pension liability calculated using the discount rate of 7.65%, as well as
what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%) or
1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)
HPORS net pension liability $ 117,532 $ 84,950 $ 58,614

Net Pension Liability

In accordance with GASB 68, the employer is required to recognize and report certain amounts associated with its
participation in the HPORS. GASB 68 became effective June 30, 2015, and includes requirements for participant to
record and report its net pension liability (NPL), pension expense, deferred inflows or resources, and deferred
outflows of resources associated with pensions.

(dollars presented in thousands)

Net Pension Liability | Net Pension Liability
as of 6/30/18 as of 6/30/19 Percent of NPL

Employer's proportionate share $ 78,382 $ 84,950 100%
B-83

At June 30, 2020, the employer reported a liability of $85.0 million for its proportionate share of the net pension
liability. The net pension liability was measured as of June 30, 2019, and the total pension liability used to calculate
the net pension liability was determined by an actuarial valuation as of June 30, 2018, with update procedures used
to roll forward the total pension liability to June 30, 2019. The employer’s proportion of the net pension liability was
based on the employer’s contributions received by HPORS during the measurement period July 1, 2018, through
June 30, 2019, relative to the total employer contributions received from all of the HPORS participating employers.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other
inputs that affected the measurement of the total pension liability.

Changes in benefit terms: There have been no changes in benefit terms since the previous
measurement date.

Changes in proportionate share: There were no changes between the measurement date of the net
pension liability and the employer’s reporting date that are expected to have a significant effect on
the employer’s proportionate share of the net pension liability.

Other Items Related to and Changes in Net Pension Liability

(in thousands)

Total Pension Plan Fiduciary Net Pension
Liability Net Position Liability

Balances at 6/30/2018 $ 227,581 $ 149,199 $ 78,382
Service costs 3,453 _ 3,453
Interest 16,926 _— 16,926
Difference expected and actual experience 2,413 _— 2,413
Contributions — employer _— 5,845 (5,845)
Contributions — non-employer (State) — 233 (233)
Contributions — member _— 2,002 (2,002)
Net investment income _— 8,269 (8,269)
Refund of contributions (582) (582) _—
Benefit payments (12,063) (12,063) _—
Administrative expense _— (127) 127
Other changes _— 2 (2)
Net changes 10,147 3,579 6,568

Balances at 6/30/2019 $ 237,728 $ 152,778 $ 84,950

Pension Expense
At June 30, 2020, the employer recognized pension expense of $12.1 million for the HPORS.

Deferred Outflows and Inflows

At June 30, 2020, the employer recognized a beginning deferred outflow of resources for fiscal year 2019
contributions of $6.1 million.

As of the fiscal year ended June 30, 2020, remaining deferred outflows of resources and deferred inflows of
resources related to the HPORS are from the following sources:
B-84

(in thousands)
Deferred Outflows Deferred Inflows of

of Resources Resources
Difference between expected and actual experience $ 2,798 $ —
Changes of assumptions 1.973 _
Net difference between projected and actual
earnings on pension plan investments 733 _
Contributions paid to HPORS subsequent to the
measurement date —- FY 2020 contributions 6,209 —
Totals $ 11,713 $ =

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the June 30, 2019, measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will
be recognized in pension expense as follows:

(in thousands)
Amount recognized in Pension

Year ended Expense as an increase or
(decrease) to Pension Expense
2021 $ 4,087
2022 (38)
2023 862
2024 593

Game Wardens’ & Peace Officers’ Retirement System — The GWPORS, administered by the MPERA, is a multi-
employer, cost-sharing defined benefit plan established in 1963, and governed by Title 19, chapters 2 & 8, MCA.
This plan provides retirement benefits to all persons employed as a game warden, warden supervisory personnel, or
state peace officer. Benefits are established by state law and can only be amended by the Legislature. The GWPORS
provides retirement, disability, and death benefits to plan members and their beneficiaries. Benefits are based on
eligibility, years of service, and highest average compensation.

The State of Montana and its discretely presented component units are the only employers who participate in the
GWPORS. Therefore, while the plan is considered to be a multi-employer, cost-sharing defined benefit plan for
actuarial valuation purposes, in accordance with GASB 68, the plan is treated as if it were a single-employer defined
benefit pension plan type for financial reporting.

Summary of Benefits
Member’s highest average compensation (HAC)
Hired prior to July 1, 2011 — highest average compensation during any consecutive 36 months;
Hired on or after July 1, 2011 — highest average compensation during any consecutive 60 months;
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s HAC.

Eligibility for benefit
Service Retirement
Age 50, 20 years of membership service.

Early Retirement (reduced benefit)
Age 55, vested members who terminate employment prior to 20 years of membership service.
Vesting
5 years of membership service.

Monthly benefit formula
2.5% of HAC per year of service credit.

Guaranteed Annual Benefit Adjustment (GABA)
After the member has completed 12 full months of retirement, the member’s benefit increases by the
applicable percentage (provided below) each January, inclusive of all other adjustments to the
member’s benefit:

° 3.0% for members hired prior to July 1, 2007

° 1.5% for members hired on or after July 1, 2007

Contributions to the Plan
Rates are specified by state law for periodic employee and employer contributions. The Legislature has the authority
to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s salary and
remitted by participating employers. Plan members are required to contribute 10.56% of member’s
compensation.

Employer contributions to the system — State agency and university employers are required to
contribute 9.0% of a member’s compensation.

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The actuarial
assumptions used in the June 30, 2019, valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. There were several significant assumptions and other
inputs used to measure the total pension liability. Among those assumptions were the following:

¢« Investment Return 7.65%
« Admin Expense asa% of payroll 0.23%
* General Wage Growth 3.50%
¢ Inflation at 2.75%
¢ Merit Increases 0% to 6.30%

¢ Postretirement Benefit Increases — After the member has completed 12 full months of retirement, the
member’s benefit increases by the applicable percentage each January, inclusive of other adjustments to the
member’s benefit:
° 3.00% for members hired prior to July 1, 2007
° 1.50% for members hired on or after July 1, 2007
¢ Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.
¢ Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant

Mortality Tables.

Discount Rate

The discount rate used to measure the total pension asset was 7.65%. The projection of cash flows used to determine
the discount rate assumed that contributions from participating plan members and employers will be made based on
the PERB’s funding policy, which establishes the contractually required rates under MCA. Based on those
assumptions, the GWPORS’s fiduciary net position was projected to be adequate to make all the projected future
benefit payments of current plan members through the year 2119. Therefore, the long-term expected rate of return

B-85
B-86

on pension plan investments was applied to all periods of projected benefit payments to determine the total pension
liability. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the GWPORS. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a
report dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including historical rates
of return, rate of return assumptions adopted by similar public pension systems, and by using a building-block
method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan
investment and inflation) are developed for each major asset class. These ranges were combined to produce the
long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation
percentage and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major
asset class included in the GWPORS’s target asset allocation as of June 30, 2019, is summarized in the table that
follows:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis

In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the table below presents the net pension liability calculated using the discount rate of 7.65%, as well as
what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%) or
1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)

Primary government employer GWPORS net pension

liability $ 73,739 $ 38,635 $ 9,965
Discretely presented component units employer

GWPORS net pension liability 3,875 2,030 524

Total employer GWPORS net pension liability $ 77,614 $ 40,665 $ 10,489

Net Pension Liability

In accordance with GASB 68, employers are required to recognize and report certain amounts associated with their
participation in the GWPORS. Statement 68 became effective June 30, 2015, and includes requirements for
participants to record and report their proportionate share of the collective net pension liability (NPL), pension
expense, deferred inflows of resources and deferred outflows of resources associated with pensions.

(dollars presented in thousands)

Net Pension Net Pension
Liability Liability Percent of
as of 6/30/18 as of 6/30/19 Collective NPL
Primary government employer proportionate share $ 38,851 § 38,635 95.007027 %
Discretely presented component units employer 2.096 2.030

proportionate share 4.992973 %
Total employer GWPORS proportionate share $ 40,947 $ 40,665 100 %
At June 30, 2020, the employer reported a total liability of $40.7 million for its proportionate share of the net
pension liability. The net pension liability was measured as of June 30, 2019, and the total pension liability used to
calculate the net pension liability was determined by an actuarial valuation as of June 30, 2018, with update
procedures used to roll forward the total pension liability to June 30, 2019. The employer’s proportion of the net
pension liability was based on the employer’s contributions received by GWPORS during the measurement period
July 1, 2018, through June 30, 2019, relative to the total employer contributions received from all of GWPORS
participating employers.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other inputs that
affected the measurement of the total pension liability.

Changes in benefit terms: There have been no changes in benefit terms since the previous measurement
date.

Changes in proportionate share: Between the measurement date of the collective net pension liability and
the employer’s reporting date, there were no changes in proportion that are expected to have a significant
effect on the employer’s proportionate share of the collective net pension liability.

Other Items Related to and Changes in Net Pension Liability

The State, as the primary government employer, has the following balances and changes related to the GWPORS’s
Net Pension Liability:

(in thousands)

Total Pension Plan Fiduciary Net Pension
Liability Net Position Liability
Balances at 6/30/2018 $ 222,467 $ 183,616 $ 38,851
Service costs 7,604 _— 7,604
Interest 16,738 — 16,738
Difference between expected
and actual experience (4,492) _— (4,492)
Contributions - employer _— 4,452 (4,452)
Contributions — member _— 5,288 (5,288)
Net investment income _— 10,569 (10,569)
Refunds of contributions (951) (951) _—
Benefit payments (6,983) (6,983) _—
Administrative expense _ (192) 192
Other changes 296 245 51
Net changes 12,212 12,428 (216)
Balances at 6/30/2019 $ 234,679 $ 196,044 $ 38,635

The Changes in Net Pension Liability table is only provided at the system level. The ending balances and the
components of the changes are derived from the primary government's proportionate share of the total plan
balances and the discretely presented component unit's proportionate share of the total plan balances. Due to
the change in proportionate share in each year, the other changes line item includes the difference between the
proportionate share of the balances and the preliminary calculated balances.

B-87
B-88

The State’s discretely presented component units, as employers, have the following balances and changes related to
the GWPORS’s Net Pension Liability:

(in thousands)

Total Pension Plan Fiduciary Net Pension
Liability Net Position Liability

Balances at 6/30/2018 $ 12,003 $ 9,907 $ 2,096
Service costs 400 _— 400
Interest 880 _— 880
Contributions - employer _— 234 (234)
Contributions - member _— 278 (278)
Net investment income _— 556 (556)
Refunds of contributions (50) (50) _—
Benefit payments (367) (367) _—
Administrative expense _— (10) 10
Other changes " (296) (244) (52)
Net changes 331 397 (66)

Balances at 6/30/2019 $ 12,334 $ 10,304 $ 2,030

The Changes in Net Pension Liability table is only provided at the system level. The ending balances and the
components of the changes are derived from the primary government's proportionate share of the total plan
balances and the discretely presented component unit's proportionate share of the total plan balances. Due to
the change in proportionate share in each year, the other changes line item includes the difference between the
proportionate share of the balances and the preliminary calculated balances.

Pension Expense
At June 30, 2020, the employer recognized a total pension expense of $9.5 million for its proportionate share of the

GWPORS pension expense: $9.1 million related to the primary government and $441.3 thousand related to
component units.

Deferred Outflows and Inflows

At June 30, 2020, the State, as a primary government employer, recognized a beginning deferred outflow of
resources for fiscal year 2019 contributions of $4.4 million.

As of the fiscal year ended June 30, 2020, remaining deferred outflows of resources and deferred inflows of
resources for the primary government, as an employer, related to the GWPORS are from the following sources:

(in thousands)
Deferred Outflows Deferred Inflows of

of Resources Resources

Difference between expected and actual experience $ 5,203 $ 3,593
Net difference between projected and actual 820

earnings on pension plan investments ~~
Changes in assumptions 2,233 _
Changes in proportion and differences between

employer contributions and proportionate share 221 136

of contributions
Contributions paid to GWPORS subsequent to the 4.599

measurement date — FY 2020 contributions , ~~

Totals $ 13,076 $ 3,729

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the June 30, 2019, measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.
B-89

Other amounts reported as deferred inflows of resources related to pensions will be recognized in pension expense
as follows:

(in thousands)

Amount recognized in Pension
Expense as an increase or

Year ended June 30: (decrease) to Pension Expense

2021 $ 3,095
2022 1,487
2023 345
2024 (179)

The State’s discretely presented component units, as employers, recognized a beginning deferred outflow of
resources for fiscal year 2019 contributions of $225.2 thousand.

As of the fiscal year ended June 30, 2020, remaining deferred outflows of resources and deferred inflows of
resources for the State’s discretely presented component units, as employers, related to the GWPORS are from the
following sources:

(in thousands)
Deferred Outflows Deferred Inflows

of Resources of Resources

Difference between expected and actual experience $ 273 $ 189
Net difference between projected and actual 43 _

earnings on pension plan investments
Changes in assumptions 118 _—
Changes in proportion and differences between

employer contributions and proportionate share _— 85

of contributions
Contributions paid to GWPORS subsequent to the 238 _

measurement date —- FY 2020 contributions

Totals $ 672 $ 274

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the June 30, 2019, measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will
be recognized in pension expense as follows:

(in thousands)

Amount recognized in Pension
Expense as an increase or

Year ended June 30: (decrease) to Pension Expense

2021 $ 128
2022 43
2023 6
2024 (17)

(2) State as an Employer and/or a Nonemployer Contributing Entity to Cost-Sharing Multiple-Employer
Plans

Public Employees’ Retirement System - Defined Benefit Retirement Plan — The PERS-DBRP, administered by
the MPERA, is a multiple-employer, cost-sharing plan established July 1, 1945, and governed by Title 19, Chapters
B-90

2 & 3, MCA. This plan covers employees of the State and local governments, and certain employees of the Montana
University System and school districts.

All new members are initially members of the PERS-DBRP and have a 12-month window during which they may
choose to remain in the PERS-DBRP or join the Public Employees’ Retirement System-Defined Contribution
Retirement Plan (PERS-DCRP) by filing an irrevocable election. Members may not be participants of both the
defined contribution and defined benefit retirement plans. All new members from the universities also have a third
option to join the university system’s Montana University System-Retirement Program (MUS-RP).

The PERS-DBRP provides retirement, disability, and death benefits to plan members and their beneficiaries.
Benefits are established by state law and can only be amended by the Legislature. Benefits are based on eligibility,
years of service, and highest average compensation.

Summary of Benefits
Member’s highest average compensation (HAC)
Hired prior to July 1, 2011 — HAC during any consecutive 36 months;
Hired on or after July 1, 2011 —HAC during any consecutive 60 months;
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s HAC.

Eligibility for benefit
Service retirement:
Hired prior to July 1, 2011 -
Age 60, 5 years of membership service;
Age 65, regardless of membership service; or
Any age, 30 years of membership service.

Hired on or after July 1, 2011 -
Age 65, 5 years of membership service;
Age 70, regardless of membership service.

Early retirement, actuarially reduced:
Hired prior to July 1, 2011 -
Age 50, 5 years of membership service; or
Any age, 25 years of membership service.
Hired on or after July 1, 2011 — Age 55, 5 years of membership service.

Second retirement (all require retuning to PERS-covered employment or PERS service):
Retire before January 1, 2016, and accumulate less than 2 years’ additional service credit or
retire on or after January 1, 2016, and accumulate less than 5 years’ additional service credit:
« A refund of member’s contributions from second employment plus regular interest

(0.77%);
¢ No service credit for second employment;
¢ Start the same benefit amount the month following termination; and
¢« GABA starts again in the January immediately following second retirement

Retire before January 1, 2016, and accumulate at least 2 years of additional service credit:
¢ A recalculated retirement benefit based on laws in effect at second retirement; and

¢ GABA starts the January after receiving recalculated benefit for 12 months
B-91

Retire on or after January 1, 2016, and accumulate 5 or more years of additional service
credit:
¢ The same retirement benefit as prior to their return to service;
« A second retirement benefit for second period of service based on laws in effect at
second retirement;
¢ GABA starts on both benefits in the January after receiving the original and new
benefit for 12 months

Vesting
5 years of membership service

Monthly benefit formula

Members hired prior to July 1, 2011 -
Less than 25 years of membership service: 1.785% of HAC per year of service credit;
25 years of membership service or more: 2% of HAC per year of service credit.

Members hired on or after July 1, 2011 -
Less than 10 years of membership service: 1.5% of HAC per year of service credit;
10 years or more, but less than 30 years of membership service: 1.785% of HAC per year of
service credit;
30 years or more of membership service: 2% of HAC per year of service credit.

Guaranteed Annual Benefit Adjustment (GABA) — After the member has completed 12 full months of
retirement, the member’s benefit increases by the applicable percentage (provided below) each
January, inclusive of other adjustments to the member’s benefit:
° 3.0% for members hired prior to July 1, 2007
° 1.5% for members hired between July 1, 2007 and June 30, 2013
° Members hired on or after July 1, 2013
°, 1.5% for each year PERS is funded at or above 90%;
°, 1.5% is reduced by 0.1% for each 2% PERS is funded below 90%; and,
°, 0% whenever the amortization period for PERS is 40 years or more.

Contributions to the Plan
Rates are specified by state law for periodic employee, employer, and nonemployer entity contributions. The
Legislature has the authority to establish and amend contribution rates to the plan.

Member contributions to the system: Contributions are deducted from each member’s salary and
remitted by participating Employers. Plan members are required to contribute 7.90% of member’s
compensation. The 7.90% member contribution rate is temporary and will be decreased to 6.9% on
January | following actuary valuation results that show the amortization period has dropped below
25 years and would remain below 25 years following the reduction of both the additional Employer
and additional member contribution rates.

Employer contributions to the system

State and University System employers are required to contribute 8.77% of member compensation.
Local government entities are required to contribution 8.67% of member compensation.

School district employers contributed 8.40% of member compensation.

Per the 2013 Legislative Session’s House Bill 454, section 4, effective July 1, 2013, PERS employer
contributions temporarily increased 1%. Beginning July 1, 2014, employer contributions will
increase an additional 0.1% a year over 10 years, through 2024. The Employer additional
contributions, including the 0.27% added in 2007 and 2009, terminates on January | following
actuary valuation results that show the amortization period of the PERS-DBRP has dropped below 25
years and would remain below 25 years following the reductions of both the additional employer and
B-92

member contributions rates. As of January 1, 2020, the additional contributions will not be
terminated.

Effective July 1, 2013, employers are required to make contributions on working retirees’
compensation. Member contributions for working retirees are not required.

The portion of employer contributions allocated to the Plan Choice Rate (PCR) are included in the
employer's reporting. The PCR was paid off effective March 2016 and the contributions previously
directed to the PCR are now directed to member accounts.

Non-Employer Entity Contributions

Special Funding
The State contributes 0.1% of member compensation on behalf of local government entities.
The State contributes 0.37% of member compensation on behalf of school district entities.
The State contributes a Statutory Appropriation from the General Fund. Funding provided for
the year ended June 30, 2020, totaled $33.6 million.

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. There were
several significant assumptions and other inputs used to measure the total pension liability. The actuarial
assumptions used in the June 30, 2019, valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. Among those assumptions were the following:

¢« Investment Return 7.65%
¢« Admin Expense as a % of Payroll 0.26%
* General Wage Growth 3.50%
¢ Inflation at 2.75%
¢ Merit Increases 0 to 4.8%

¢ Postretirement Benefit Increases — After the member has completed 12 full months of retirement, the
member’s benefit increases by the applicable percentage each January, inclusive of all other adjustments to
the member’s benefit:
° 3.00% for members hired prior to July 1, 2007

° 1.50% for members hired between July 1, 2007 and June 30, 2013
° Members hired on or after July 1, 2013:
1.50% for each year PERS is funded at or above 90%
1.50% is reduced by 0.1% for each 2% PERS is funded below 90%; and
0% whenever the amortization period for PERS is 40 years or more
¢ Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to

2020 using Scale BB, set back one year for males.
¢ Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant

Mortality Tables.

Discount Rate
The discount rate used to measure the total pension liability was 7.65%. The projection of cash flows used to

determine the discount rate assumed that contributions from participating plan members, employers, and
nonemployer contributing entities will be made based on the PERB’s funding policy, which establishes the
contractually required rates under MCA. The State contributes 0.1% of salaries for local governments and 0.37% for
school districts. In addition, the State contributes a Statutory Appropriation from the General Fund. Based on those
assumptions, the PERS-DBRP’s fiduciary net position was projected to be adequate to make all the projected future
benefit payments of current plan members through the year 2122. Therefore, the long-term expected rate of return
on pension plan investments was applied to all periods of projected benefit payments to determine the total pension
liability. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the PERS-DBRP. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined
in a report dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including historical rates
of return, rate of return assumptions adopted by similar public pension systems, and by using a building-block
method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan
investment and inflation) are developed for each major asset class. These ranges were combined to produce the
long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation
percentage and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major
asset class included in the PERS-DBRP’s target asset allocation as of June 30, 2019, is summarized in the table that
follows:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis

In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability (NPL) to changes
in the discount rate, the table below presents the net pension liability calculated using the discount rate of 7.65%, as
well as what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%)
or 1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)
State as an employer in PERS-DBRP — net
pension liability $ 1,175,466 $§ 818,162 $ 517,893
State as a nonemployer contributing entity to 733.123 510.277 323.003

PERS-DBRP -— net pension liability

Net Pension Liability

In accordance with GASB 68, employers and the nonemployer contributing entities are required to recognize and
report certain amounts associated with their participation in the PERS-DBRP. GASB 68 became effective June 30,
2015, and includes requirements for participants to record and report their proportionate share of the collective net
pension liability, pension expense, deferred inflows of resources and deferred outflows of resources associated with
pensions. The proportionate shares were determined based on contributions made to the plan by employers and the
nonemployer contributing entity special funding.

In accordance with GASB 68, the PERS-DBRP has a special funding situation where the State is legally responsible
for making contributions directly to the PERS-DBRP on behalf of the employers. Due to the existence of this special
funding situation, the State is required to report a proportionate share of a local government or school district’s
collective net pension liability that is associated with the non-State employer.

B-93
B-94

(dollars presented in thousands)

Net Pension Net Pension
Liability as of Liability as of Percent of
6/30/18 6/30/19 Collective NPL
State's proportionate share as an employer entity $ 825,387 $ 818,162 39.140686 %
State's proportionate share as a nonemployer
contributing entity 520,058 510,277 24.411533 %
State of Montana totals $ 1,345,445 $ 1,328,439 63.552219 %

At June 30, 2020, the State reported a liability of $1.3 billion for its proportionate share of the net pension liability as
an employer and nonemployer contributing entity. The net pension liability was measured as of June 30, 2019, and
the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The
proportion of the net pension liability is based on the employer’s and nonemployer's special funding contributions
received by the PERS-DBRP during the measurement period of July 1, 2018, through June 30, 2019, relative to the
total employer and nonemployer special funding contributions received from all PERS-DBRP participating
employers.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other
inputs that affected the measurement of the total pension liability.

Changes in benefit terms: There have been no changes in benefit terms since the previous
measurement date.

Changes in proportionate share: Between the measurement date of the collective net pension Liability
and the employer’s reporting date there were no changes in proportion that would have an effect on
the employer’s proportionate share of the collective net pension liability.

Employer Pension Expense and Nonemployer Contributing Entity Grant Expenses

At June 30, 2020, the State as an employer recognized a pension expense of $88.0 million for its proportionate share
of the PERS-DBRP’s pension expense. The State as a nonemployer contributing entity recognized grant expense of
$1.0 million for special funding support provided by the General Fund for its proportionate share of the PERS-
DBRP’s pension expense that is associated with local government and school district participants in the plan. The
State as a nonemployer contributing entity recognized grant expense of $33.6 million for special funding support
provided by the General Fund as a statutory appropriation for all participating employers in the plan. The State as a
nonemployer contributing entity recognized pension expense of $142.7 million that is actuarially allocated to the
State as a nonemployer. The total pension expense recognized by the State as a nonemployer was $177.3 million.
Total pension-related expenses recognized by the State, both as employer and nonemployer contributing entity at
June 30, 2020, were $265.3 million.

Deferred Outflows and Inflows
At June 30, 2020, the State as an employer recognized a beginning deferred outflow of resources for fiscal year 2019
contributions of $56.2 million.

As of the fiscal year ended June 30, 2020, the State as an employer has the following proportionate shares of the
PERS-DBRP’s deferred outflows of resources and deferred inflows of resources from the following sources:
B-95

(in thousands)
Deferred Outflows Deferred Inflows

of Resources of Resources
Actual versus expected experience $ 38,795 $ 38,498
Net difference between projected and actual earnings on 9.920 _
pension plan investments ,

Change of assumptions 34,734 _—
Changes in proportion and differences between employer _ 416.912
contributions and proportionate share of contributions ,
Contributions paid to PERS-DBRP subsequent to the 58.504 _

measurement date — FY 2020 contributions ,
Totals $ 141,953 $ 155,410

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the June 30, 2019 measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will
be recognized in pension expense as follows:

(in thousands)

Amount recognized in Pension
Expense as an increase or
Year ended June 30: (decrease) to Pension Expense

2021 $ (11,352)
2022 (73,202)
2023 3,690
2024 8,903

At June 30, 2020, the State as a nonemployer contributing entity recognized a beginning deferred outflow of
resources for fiscal year 2019 contributions of $34.6 million.

As of the fiscal year ended June 30, 2020, the State as a nonemployer contributing entity reported its proportionate
share of the PERS-DBRP’s deferred outflows of resources and deferred inflows of resources from the following
sources:

(in thousands)
Deferred Outflows Deferred Inflows of

of Resources Resources
Actual versus expected experience $ 24,196 $ 24,011
Net difference between projected and actual earnings 6 187 _
on pension plan investments ,
Change of assumptions 21,663 _—
Changes in proportion and differences between
employer contributions and proportionate share of 191,364 _—
contributions
Contributions paid to PERS-DBRP subsequent to the 35.008 _
measurement date —- FY 2020 contributions ,
Totals $ 278,418 $ 24,011

Amounts reported as deferred outflows of resources related to pensions resulting from the nonemployer’s
contributions made subsequent to the June 30, 2019 measurement date will be recognized as a reduction to its share
of the net pension liability in the fiscal year ended June 30, 2021.
B-96

Other amounts reported as deferred inflows of resources related to pensions will be recognized in grant expense as
follows:

(in thousands)

Amount recognized in Grant
Expense as an increase or

Year ended June 30: (decrease) to Grant Expense

2021 $ 125,389
2022 86,156
2023 2,301
2024 5,553

Sheriffs’ Retirement System — The SRS, administered by the MPERA, is a multiple-employer, cost-sharing
defined benefit plan established July 1, 1974, and governed by Title 19, chapters 2 & 7, MCA. This plan provides
retirement benefits to all Department of Justice criminal and gambling investigators hired after July 1, 1993, all
detention officers hired after July 1, 2005, and to all Montana sheriffs. Benefits are established by state law and can
only be amended by the Legislature. The SRS provides retirement, disability, and death benefits to plan members
and their beneficiaries. Benefits are based on eligibility, years of service, and highest average compensation.

Summary of Benefits

Member’s highest average compensation (HAC)

Hired prior to July 1, 2011 — highest average compensation during any consecutive 36 months;

Hired on or after July 1, 2011 — highest average compensation during any consecutive 60 months.
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s HAC.

Eligibility for benefit
Service Retirement: 20 years of membership service, regardless of age.
Early Retirement: Age 50, 5 years of membership service, actuarially reduced.

Second Retirement (applies to retirement system members re-employed in a SRS position on or after
July 1, 2017):
a. If the member works more than 480 hours in a calendar year and accumulates less than 5
years of service credit before terminating again, the member:

. is not awarded service credit for the period of reemployment;

. is refunded the accumulated contributions associated with the period of
reemployment;

. starting the first month following termination of service receives the
same retirement benefit previously paid to the member; and

. does not accrue post-retirement benefit adjustments during the term of

reemployment but receives a GABA in January immediately following
the second retirement.
b. If the member works more than 480 hours in a calendar year and accumulates at least 5
years of service credit before terminating again, the member:

. is awarded service credit for the period of reemployment;
. starting the first month following termination of service receives:
° the same retirement benefit previously paid to the member;
and

° a second retirement benefit for the period of reemployment
calculated based on the laws in effect as of the member's
rehire date; and

. do not accrue post-retirement benefit adjustments during the term of
reemployment but receive a GABA:

° on the initial retirement benefit starting in January
immediately following second retirement; and
° on the second retirement benefit starting in January after
receiving that benefit for at least 12 months
c. A member who returns to covered service is not eligible for a disability benefit.

Vesting
5 years of membership service

Monthly benefit formula
2.5% of HAC per year of service

Guaranteed Annual Benefit Adjustment (GABA)
After the member has completed 12 full months of retirement, the member’s benefit increases by the
applicable percentage (provided below) each January, inclusive of all other adjustments to the
member’s benefit.

° 3.0% for members hired prior to July 1, 2007

° 1.5% for members hired on or after July 1, 2007

Contributions to the Plan

Rates are specified by state law for periodic employee and employer contributions and are a percentage of the
member’s compensation. The Legislature has the authority to establish and amend contribution rates to the plan.

Member contributions to the system — Contributions are deducted from each member’s salary and
remitted by participating employers. Plan members are required to contribute 10.495% of member’s
compensation.

Employer contributions to the system — The employers are required to contribute 13.115% of member
compensation. Employer contributions are required to be paid on working retiree compensation.
Member contributions are not required for working retirees.

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The actuarial
assumptions used in the June 30, 2019 valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. There were several significant assumptions and other
inputs used to measure the total pension liability. Among those assumptions were the following:

Investment Return 7.65%
Administrative Expense asa % of Payroll 0.23%

General Wage Growth 3.50%
Inflation at 2.75%
Merit Increases 0.00% to 6.30%

Postretirement Benefit Increases — After the member has completed 12 full months of retirement, the
member’s benefit increases by the applicable percentage each January, inclusive of other adjustments to the
member’s benefit.

° 3.00% for members hired prior to July 1, 2007

° 1.50% for members hired on or after July 1, 2007
Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.
Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant
Mortality Tables.

B-97
B-98

Discount Rate

The discount rate used to measure the total pension liability was 7.65%. The projection of cash flows used to
determine the discount rate assumed that contributions from participating plan members, employers, and
nonemployer contributing entities will be made based on the PERB’s funding policy, which establishes the
contractually required rates under MCA. SRS’s fiduciary net position was projected to be adequate to make all the
projected future benefit payments of current plan members through the year 2120. Therefore, the long-term expected
rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the
total pension liability. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the SRS. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a report
dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on pension plan
investments was determined by considering information from various sources, including historical rates of return,
rate of return assumptions adopted by similar public pension systems, and by using a building-block method in
which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment
and inflation) are developed for each major asset class. These ranges were combined to produce the long-term
expected rate of return by weighing the expected future real rates of return by the target asset allocation percentage
and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major asset class
included in the SRS’s target asset allocation as of June 30, 2019, is summarized in the table that follows:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis
In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the table below presents the net pension liability calculated using the discount rate of 7.65%, as well as

what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%) or
1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)
Employer's SRS net pension liability $ 7,216 $ 4,067 $ 1,486

Net Pension Liability

In accordance with GASB 68, employers are required to recognize and report certain amounts associated with their
participation in the SRS. GASB 68 became effective June 30, 2015, and includes requirements for participants to
record and report their proportionate share of the collective net pension liability (NPL), pension expense, deferred
inflows of resources, and deferred outflows of resources associated with pensions.

(dollars presented in thousands)

Net Pension Liability Net Pension Liability Percent of
as of 6/30/18 as of 6/30/19 Collective NPL

Employer proportionate share $ 3,663 $ 4,067 4.876949 %
At June 30, 2020, the State, as an employer, reported a liability of $4.1 million for its proportionate share of net
pension liability. The net pension liability was measured as of June 30, 2019, and the total pension liability used to
calculate the net pension liability was determined by an actuarial valuation as of June 30, 2018, with update
procedures used to roll forward the total pension liability to June 30, 2019. The employer’s proportion of the net
pension liability was based on the employer’s contributions received by the SRS during the measurement period,
July 1, 2018, through June 30, 2019, relative to the total employer contributions received from all of SRS
participating employers.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other
inputs that affected the measurement of the total pension liability.

Changes in benefit terms: There have been no changes in benefit terms since the previous
measurement date.

Changes in proportionate share: Between the measurement date of the collective net pension Liability
and the employer’s reporting date, there were no changes in proportion that are expected to have a
significant effect on the Employer’s proportionate share of the collective net pension liability.

Pension Expense
At June 30, 2020, the employer recognized a pension expense/(income) of $63.0 thousand for its proportionate share
of the SRS pension expense/(income).

Deferred Outflows and Inflows

At June 30, 2020, the State as an employer recognized a beginning deferred outflow of resources for fiscal year 2019
contributions of $513.5 thousand.

As of the fiscal year ended June 30, 2020, the State, as an employer, reported its proportionate share of the SRS's
deferred outflows of resources and deferred inflows of resources from the following sources:

(in thousands)
Deferred Outflows Deferred Inflows of

of Resources Resources
Difference between actual and expected experience $ 262 $ 5
Net difference between projected and actual 79 _
earnings on pension plan investments
Changes of assumptions 1,273 2,196
Changes in proportion and differences between
employer contributions and proportionate share _— 312
of contributions
Contributions paid to SRS subsequent to the 530 _
measurement date — FY 2020 contributions
Totals $ 2,144 $ 2,913

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the measurement date of June 30, 2019, will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred inflows of resources related to pensions will be recognized in pension expense
as follows:

B-99
B-100

(in thousands)

Amount recognized in Pension
Expense as an increase or

Year ended June 30: (decrease) to Pension Expense

2021 $ (460)
2022 (645)
2023 109
2024 97

Municipal Police Officers’ Retirement System — The MPORS, administered by the MPERA, is a multiple-
employer, cost-sharing defined benefit plan that was established in 1974 and is governed by Title 19, chapters 2 & 9,
MCA. This plan covers all municipal police officers employed by first- and second-class cities and other cities that
adopt the plan. Benefits are established by state law and can only be amended by the Legislature. The MPORS
provides retirement, disability, and death benefits to plan members and their beneficiaries. Benefits are based on
eligibility, years of service, and final average compensation.

Deferred Retirement Option Plan (DROP)

Beginning July 2002, eligible members of the MPORS can participate in the DROP by filing a one-time irrevocable
election with the PERB. The DROP is governed by Title 19, Chapter 9, Part 12, MCA. A member must have
completed at least twenty years of membership service to be eligible. They may elect to participate in the DROP for
a minimum of one month and a maximum of 60 months and may only participate in the DROP once. A participant
remains a member of the MPORS, but will not receive membership service or service credit in the system for the
duration of the member’s DROP period. During participation in the DROP, all mandatory contributions continue to
the retirement system. A monthly benefit is calculated based on salary and years of service to the date of the
beginning of the DROP period. The monthly benefit is paid into the member’s DROP account until the end of the
DROP period. At the end of the DROP period, the participant may receive the balance of the DROP account in a
lump-sum payment or a direct rollover to another eligible plan, as allowed by the IRS. If the participant continues
employment after the DROP period ends, they will again accrue membership service and service credit. The DROP
account cannot be distributed until employment is formally terminated. As of June 30, 2020, the balance held by
MPERA for MPORS DROP participants was approximately $10.7 million.

The State is not an employer participant in the MPORS plan. However, because the PERB is a fiduciary component
unit of the State, this CAFR presents certain information to help ensure compliance with GASB 67. In addition, the
State provides nonemployer entity contributions classified as special funding in accordance with GASB 68.
Disclosures made in this financial report for MPORS are meant to reflect the aforementioned relationships.

Summary of Benefits

Member’s final average compensation (FAC)

Hired prior to July 1, 1977 — average monthly compensation of final year of service;

Hired on or after July 1, 1977 — final average compensation (FAC) for last consecutive 36 months.
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s FAC.

Eligibility for benefit

Service Retirement: Age 50, with 5 years of membership service, or 20 years of membership service,
regardless of age.

Second Retirement: Age 50, reemployed in a MPORS position

Vesting
Death and disability rights are vested immediately.
5 years of membership service.

Monthly benefit formula
2.5% of FAC per year of service credit.
B-101

Second retirement benefit formula for members re-employed in a MPORS position after July 1, 2017:
1) If the member works more than 480 hours in a calendar year and accumulates less than 5
years of service credit before terminating again, the member:
a. Is not awarded service credit for the period of reemployment;
Is refunded the accumulated contributions associated with the period of reemployment;
c. Starting the first month following termination of service receives the same retirement
benefit previously paid to the member; and
d. Does not accrue post-retirement benefit adjustments during the term of reemployment
but receives a Guaranteed Annual Benefit Adjustment (GABA) in January immediately
following second retirement.
2) Ifthe member works more than 480 hours in a calendar year and accumulates at least 5
years of service credit before terminating again, the member:
Is awarded service credit for the period of reemployment;
Starting the first month following termination of service receives:
i. The same retirement benefit previously paid to the member, and
i. A second retirement benefit for the period of reemployment calculated based on
the laws in effect as of the member's rehire date; and
c. Does not accrue post-retirement benefit adjustments during the term of reemployment
but receives a GABA:
i. On the initial retirement benefit in January immediately following second
retirement, and
i. On the second retirement benefit starting in January after receiving that benefit
for at least 12 months.
3) A member who returns to covered service is not eligible for a disability benefit.

Guaranteed Annual Benefit Adjustment (GABA)

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12 full
months of retirement, the member’s benefit increases by a maximum of 3% each January, inclusive
of all other adjustments to the member’s benefit.

Minimum benefit adjustment (non-GABA) If hired before July 1, 1997, and member did not elect
GABA - the monthly retirement, disability, or survivor’s benefit may not be less than 50% of the
compensation of a newly confirmed officer of the employer where the member was last employed.

Contributions to the Plan
Rates are specified by state law for periodic employee, employer, and nonemployer entity contributions. The
Legislature has the authority to establish and amend contribution rates to the plan.

Member contributions — Contribution rates are dependent upon the date of hire as a police officer.
Contributions are deducted from each member’s salary and remitted by the participating Employer.
For fiscal year 2020:

¢ Ifhired prior to July 1, 1975, member contributions as a percentage of salary are 5.80%

¢ If hired after June 30, 1975, and prior to July 1, 1979, member contributions as a percentage of
salary are 7.00%;

¢ If hired after June 30, 1979, and prior to July 1, 1997, member contributions as a percentage of
salary are 8.50%; and,

¢ If hired on or after July 1, 1997, and for members electing GABA, member contributions as a
percentage of salary are 9.00%.

Employer Contributions — Employers are required to contribute 14.41% of a member’s
compensation.

Nonemployer Entity Contributions — The State contributes 29.37% of a member’s compensation from
the General Fund. These amounts are considered a special funding situation in accordance with
GASB 68.
B-102

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The actuarial
assumptions used in the June 30, 2019 valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. There were several significant assumptions and other
inputs used to measure the total pension liability. Among those assumptions were the following:

¢« Investment Return 7.65%
¢ Admin expense asa % of Payroll 0.23%
* General Wage Growth 3.50%
¢ Inflation at 2.75%
¢ Merit Increases 0.00% to 6.60%
¢ Postretirement Benefit Increases
° GABA

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12 full
months of retirement, the member’s benefit increases by a maximum of 3% each January,
inclusive of all other adjustments to the member’s benefit
° Minimum benefit adjustment (non-GABA)
If hired before July 1, 1997 and member did not elect GABA — the monthly retirement, disability
or survivor’s benefit may not be less than 50% the compensation of a newly confirmed officer in
the city that the member was last employed
¢ Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.
¢« Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant
Mortality Tables.

Discount Rate

The discount rate used to measure the total pension liability was 7.65%. The projection of cash flows used to
determine the discount rate assumed that contributions from participating plan members, employers, and
nonemployer contributing entities will be made based on the PERB’s funding policy, which establishes the
contractually required rates under MCA. The State contributes 29.37% of salaries paid by employers. Based on
those assumptions, the MPORS’s fiduciary net position was projected to be adequate to make all the projected future
benefit payments of current plan members through the year 2133. Therefore, the long-term expected rate of return
on pension plan investments was applied to all periods of projected benefit payments to determine the total pension
liability. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the MPORS. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a
report dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including historical rates
of return, rate of return assumptions adopted by similar public pension systems, and by using a building-block
method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan
investment and inflation) are developed for each major asset class. These ranges were combined to produce the
long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation
percentage and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major
asset class included in the MPORS’s target asset allocation as of June 30, 2019, is summarized in the table that
follows:

Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis
In accordance with GASB 68, regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the table below presents the net pension liability calculated using the discount rate of 7.65%, as well as

what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%) or
1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)

196,248 $ 133,487 $ 83,247

State as a nonemployer entity net §
pension liability

Net Pension Liability

In accordance with GASB 68, employers and nonemployer contributing entities are required to recognize and report
certain amounts associated with their participation in the MPORS. GASB 68 became effective June 30, 2015, and
includes requirements for participants to record and report their proportionate share of the collective net pension
liability, pension expense, deferred inflows of resources, and deferred outflows of resources associated with
pensions.

In accordance with GASB 68, the MPORS has a special funding situation in which the State is legally responsible
for making contributions directly to the MPORS on behalf of the employers. Due to the existence of this special
funding situation, the State is required to report a proportionate share of a local government’s collective net pension
liability that is associated with the non-State employer.

(dollars presented in thousands)

Net Pension Liability | Net Pension Liability Percent of
as of 6/30/18 as of 6/30/19 Collective NPL
State as a nonemployer contributing 5 114,956 $ 133,487 67.063878 %

entity — proportionate share

At June 30, 2020, the State, as a nonemployer contributing entity, reported a liability of $133.5 million for its
proportionate share of the net pension liability. The net pension liability was measured as of June 30, 2019, and the
total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of June
30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The
nonemployer’s proportion of the net pension liability was based on the nonemployer’s special funding contributions
received by the MPORS during the measurement period of July 1, 2018, through June 30, 2019, relative to total
contributions received from all of the MPORS’s participating employers and the nonemployer contributing entity.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other inputs that
affected the measurement of the total pension liability.

B-103
B-104

Changes in benefit terms: There have been no changes in benefit terms since the previous measurement date.

Changes in proportionate share: Between the measurement date of the collective net pension liability and
the employer’s reporting date, there were no changes in proportion that effect on the employer’s
proportionate share of the collective net pension liability.

Grant Expense Related to Special Funding

The State recognized grant expense of $21.0 million for special funding support provided by the General Fund for
its proportionate share of the MPORS’s pension expense that is associated with other employer participants in the
plan.

Deferred Outflows and Inflows

At June 30, 2020, the State as a nonemployer contributing entity recognized a beginning deferred outflow of
resources for fiscal year 2019 contributions of $15.9 million.

As of the fiscal year ended June 30, 2020, the State as a nonemployer reported its proportionate share of the deferred
outflows of resources and deferred inflows of resources related to MPORS from the following sources:

(in thousands)
Deferred Outflows Deferred Inflows

of Resources of Resources
Difference between expected and actual experience $ 11,847 $ 848
Net difference between projected and actual earnings
on pension plan investments 2,481 _—
Change of assumptions 2,685 _
Changes in proportion and differences between
employer contributions and proportionate share
of contributions 209 _—
tributions paid to MPORS subsequent to the
measurement date — FY 2020 Contributions 16,677 _
Totals $ 33,899 $ 848

Amounts reported as deferred outflows of resources related to pensions resulting from the nonemployer’s
contributions made subsequent to the June 30, 2019, measurement date will be recognized as a reduction of the net
pension liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred inflows of resources related to pensions will be recognized in grant expense as
follows:

(in thousands)

Amount recognized in Grant
Expense as an increase or

Year ended June 30: (decrease) to Grant Expense

2021 $ 7,579
2022 2,955
2023 4,590
2024 1,250

Firefighters’ Unified Retirement System — The FURS, administered by the MPERA, is a multiple-employer, cost-
sharing defined benefit plan established in 1981, and governed by Title 19, chapters 2 & 13, MCA. This system
provides retirement benefits to firefighters employed by first- and second-class cities, other cities and rural fire
district departments that adopt the plan, and to firefighters hired by the Montana Air National Guard on or after
October 1, 2001. Benefits are established by state law and can only be amended by the Legislature. The FURS
provides retirement, disability, and death benefits to plan members and their beneficiaries. Benefits are based on
eligibility, years of service, and compensation.
B-105

Summary of Benefits
Member’s compensation
Hired prior to July 1, 1981 and not electing GABA — highest monthly compensation (HMC);
Hired after June 30, 1981, and those electing GABA — highest average compensation (HAC) during
any consecutive 36 months.
Hired on or after July 1, 2013 — 110% annual cap on compensation considered as a part of a
member’s highest average compensation.
Part-time firefighter — 15% of regular compensation of a newly confirmed full-time firefighter.

Eligibility for benefit
Service retirement: 20 years of membership service, regardless of age.
Early Retirement: Age 50, 5 years of membership service.

Vesting
Death and disability rights are vested immediately
5 years of membership service.

Monthly benefit formula
Members hired prior to July 1, 1981, and not electing GABA are entitled to the greater of:
2.5% of HMC per year of service; or
¢ if less than 20 years of service — 2% of HMC for each year of service;

¢ if more than 20 years of service — 50% of the member’s HMC plus 2% of the

member’s HMC for each year of service over 20 years.

Members hired on or after July 1, 1981, and those electing GABA: 2.5% of HAC per year of
membership service.

Guaranteed Annual Benefit Adjustment (GABA)

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12 full
months of retirement, the member’s benefit increases by a maximum of 3% each January, inclusive
of all other adjustments to the member’s benefit.

Minimum Benefit Adjustment (non-GABA)

If hired before July 1, 1997 and the member did not elect GABA, the monthly retirement, disability,
or survivor’s benefit may not be less than 50% of the compensation of a newly confirmed active
firefighter of the employer that last employed the member.

Contributions to the Plan

Rates are specified by state law for periodic employee, employer, and nonemployer entity contributions. The
Legislature has the authority to establish and amend contribution rates to the plan. Effective July 1, 2013, employer
and state contributions are required to be paid on working retiree compensation. Member contributions are not
required for working retirees.

Member contributions to the system — Contributions are deducted from each member’s salary and
remitted by the participating Employer. For members:
Hired prior to July 1, 1997, and not electing GABA, member contributions as a percentage of
salary are 9.50%;
Hired on or after July 1, 1997, and electing GABA, member contributions as a percentage of
salary are 10.70%.

Employer contributions to the system — Employers are required to contribute 14.36% of member’s
compensation.

Nonemployer entity contributions to the system — The State contributes 32.61% of a member’s
compensation from the General Fund.
B-106

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The actuarial
assumptions used in the June 30, 2019, valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. There were several significant assumptions and other
inputs used to measure the total pension liability. Among those assumptions were the following:

¢« Investment Return 7.65%
¢« Admin Expense as a % of Payroll 0.25%
* General Wage Growth 3.50%
¢ Inflation at 2.75%
¢ Merit Increases 0% to 6.30%
¢ Postretirement Benefit Increases
° GABA

Hired on or after July 1, 1997, or those electing GABA — after the member has completed 12 full
months of retirement, the member’s benefit increases by a maximum of 3% each January, inclusive of
all other adjustments to the member’s benefit.
° Minimum Benefit Adjustment (non-GABA)
Hired before July 1, 1997, and member did not elect GABA — the monthly retirement, disability, or
survivor’s benefit may not be less than 50% the compensation of a newly confirmed firefighter
employed by the city that last employed the member.
¢ Mortality assumptions among contributing members, terminated vested members, service retired members
and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.
¢« Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant
Mortality Tables.

Discount Rate

The discount rate used to measure the total pension liability was 7.65%. The projection of cash flows used to
determine the discount rate assumed that contributions from participating plan members, employers, and
nonemployer contributing entities will be made based on the PERB’s funding policy, which establishes the
contractually required rates under MCA. The State contributes 32.61% of salaries paid by employers. Based on
those assumptions, the FURS’s fiduciary net position was projected to be adequate to make all the projected future
benefit payments of current plan members through the year 2133. Therefore, the long-term expected rate of return
on pension plan investments was applied to all periods of projected benefit payments to determine the total pension
liability. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the FURS. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a
report dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including historical rates
of return, rate of return assumptions adopted by similar public pension systems, and by using a building-block
method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan
investment and inflation) are developed for each major asset class. These ranges were combined to produce the
long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation
percentage and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major
asset class included in the FURS’s target asset allocation as of June 30, 2019, is summarized in the table that
follows:
Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis

In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the table below presents the net pension liability calculated using the discount rate of 7.65%, as well as
what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%) or
1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current Discount 1.0% Increase
(6.65%) Rate (8.65%)
State as an employer in FURS — net pension
liability $ 4033 $ 2,309 $ 919
State as a nonemployer contributing entity to 138.890 79.524 31.656

FURS — net pension liability

Net Pension Liability

In accordance with GASB 68, employers and nonemployer contributing entities are required to recognize and report
certain amounts associated with their participation in the FURS. GASB 68 became effective June 30, 2015, and
includes requirements to record and report their proportionate share of the collective net pension liability, pension
expense, deferred inflows of resources and deferred outflows of resources associated with pensions.

In accordance with GASB 68, the FURS has a special funding situation in which the State is legally responsible for
making contributions directly to the FURS on behalf of the employers. Due to the existence of this special funding
situation, the State is required to report a proportionate share of a local government or fire district’s collective net
pension liability that is associated with the non-State employer.

(dollars presented in thousands)

Net Pension Liability | Net Pension Liability Percent of
as of 6/30/18 as of 6/30/19 Collective NPL
State's proportionate share as an
employer entity 8 2,650 § 2,309 2.013129 %
State's proportionate share as a
nonemployer contributing entity 78,285 79,524 69.323577 %
State of Montana totals $ 80,935 $ 81,833 71.336706 %

At June 30, 2020, the State reported a liability of $81.8 million for its proportionate share of the net pension liability
as an employer and nonemployer contributing entity in relation to the FURS. The net pension liability was measured
as of June 30, 2019, and the total pension liability used to calculate the net pension liability was determined by an
actuarial valuation as of June 30, 2018, with update procedures used to roll forward the total pension liability to June
30, 2019. The proportion of the net pension liability was based on all employer and nonemployer contributions
received by the FURS during the measurement period, July 1, 2018, through June 30, 2019, relative to the total
contributions received from all FURS participating employers and the nonemployer contributing entity.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other inputs that
affected the measurement of the total pension liability.

B-107
B-108

Changes in benefit terms: There have been no changes in benefit terms since the previous measurement date.

Changes in proportionate share: Between the measurement date of the collective net pension liability and
the employer’s reporting date, there were no changes in proportion that effect the employer’s proportionate

share of the collective net pension liability.

Employer Pension Expense and Nonemployer Contributing Entity Special Funding Grant Expense

At June 30, 2020, the State as an employer recognized pension expense of $530.1 thousand for its proportionate
share of the FURS pension expense. The State also recognized grant expense of $17.0 million for special funding
support provided by the General Fund for its proportionate share of the FURS’s pension expense that is associated
with other employer participants in the plan. Total pension-related expenses at June 30, 2020, was $17.5 million.

Deferred Outflows and Inflows

At June 30, 2020, the State, as an employer, recognized a beginning deferred outflow of resources for fiscal year

2019 contributions of $493.5 thousand.

As of the fiscal year ended June 30, 2020, the State as an employer reported its proportionate share of deferred
outflows of resources and deferred inflows of resources related to the FURS from the following sources:

(in thousands)
Deferred Outflows Deferred Inflows
of Resources of Resources

Difference between actual and expected experience $ 208 $ 24
Net difference between projected and actual 7 _

earnings on pension plan investments
Change of assumptions 170 _—
Changes in proportion and differences between

employer contributions and proportionate share 30 171

of contributions
Contributions paid to FURS subsequent to the 599

measurement date —- FY 2020 contributions 7

Totals $ 1,084 $ 195

(in thousands)

Amount recognized in Pension

Expense as an increase or

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the measurement date of June 30, 2019, will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will
be recognized in pension expense as follows:

Year ended June 30: (decrease) to Pension Expense
2021 $ 191
2022 7
2023 90
2024 50
2025 (48)

At June 30, 2020, the State recognized a beginning deferred outflow of resources as a nonemployer contributing
entity for fiscal year 2019 contributions of $16.2 million.
As of the fiscal year ended June 30, 2020, the State as a nonemployer contributing entity reported its proportionate
share of deferred outflows of resources and deferred inflows of resources related to FURS from the following
sources:

(in thousands)
Deferred Outflows Deferred Inflows

of Resources of Resources
Difference between expected and actual experience $ 7,149 $ 825
Net difference between projected and actual 9.650 _
earnings on pension plan investments ,
Change in assumptions 5,863 _—
Changes in proportion and differences between
employer contributions and proportionate share 1,186 _—
of contributions
Contributions paid to FURS subsequent to the 17.147 _
measurement date —- FY 2020 contributions ,
Totals $ 33,995 $ 825

Amounts reported as deferred outflows of resources related to pensions resulting from the nonemployer’s
contributions made subsequent to the June 30, 2019 measurement date will be recognized as a reduction of the net
pension liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred inflows of resources related to pensions will be recognized in grant expense as
follows:

(in thousands)

Amount recognized in Grant
Expense as an increase or
Year ended June 30: (decrease) to Grant Expense

2021 $ 5,294
2022 2,773
2023 4,693
2024 3,160
2025 103

Volunteer Firefighters’ Compensation Act — The VFCA, administered by the MPERA, is a multiple-employer,
cost-sharing defined benefit plan that was established in 1965, and governed by Title 19, chapter 17, MCA. All
members are unpaid volunteers and the State is the only contributor to the plan. Benefits are established by state law
and can only be amended by the Legislature. The VFCA provides pension, disability, and survivorship benefits for
all eligible volunteer firefighters who are members of qualified volunteer fire companies in unincorporated areas,
towns or villages, and includes volunteer fire departments, fire districts, and fire service areas under the laws of the
State. Benefits are based on eligibility and years of service. Member rights are vested after ten years of credited
service. The VFCA also provides limited benefits for death or injuries incurred in the line of duty. A member who
chooses to retire and draw a pension benefit may return to service with a volunteer fire department without loss of
benefits. However, a returning retired member may not be considered an active member accruing credit for service.

Summary of Benefits
Eligibility for benefit
Age 55, 20 years of credited service;
Age 60, 10 years of credited service.

Effective July 1, 2011, members who retire on or after July 1, 2011, and have greater than 30 years of
credited service will receive $7.50 per month for each additional year of credited service over 30
years if the pension trust fund is actuarially sound, amortizing any unfunded liabilities in 20 years or
less. This determination will be made annually and a member’s benefit will be capped at $250 a
month (30 years of credited service) if the amortization period grows to greater than 20 years.

Vesting

B-109
B-110

10 years of credited service.

Monthly benefit formula (effective January 1, 2016)
$8.75 per year of credited service up to 20 years;
$7.50 per year of credited service after 20 years

Contributions to the Plan

The State, as a nonemployer contributing entity, is the only contributor to the VFCA. Contributions are 5% of fire
insurance premium taxes collected on certain fire risks. This requires the plan to be treated as a special funding
situation in accordance with GASB 68. The State Auditor makes annual payments from the General Fund to the
VFCA fund. Rates are specified by state law for contributions to the VFCA plan. The State legislature has the
authority to establish and amend contribution rates to the plan.

Actuarial Assumptions

The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. There were
several significant assumptions and other inputs used to measure the total pension liability. The actuarial
assumptions used in the June 30, 2019, valuation were based on the results of the last actuarial experience study,
dated May 2017 for the six-year period ended June 30, 2016. Among those assumptions were the following:

¢ Investment Return 7.65%
¢ Inflation at 2.75%
¢ Mortality assumptions among contributing members, terminated vested members, service retired members

and beneficiaries are based on RP-2000 Combined Employee and Annuitant Mortality Tables projected to
2020 using Scale BB, set back one year for males.

¢ Mortality assumptions among Disabled Retirees are based on RP-2000 Combined Employee and Annuitant
Mortality Tables.

For VFCA, administrative expenses are assumed to equal $70.6 thousand. This dollar amount is added to normal
cost for valuation purposes.

Discount Rate

The discount rate used to measure the total pension liability was 7.65%. The projection of cash flows used to
determine the discount rate assumed that contributions from the nonemployer contributing entity will be made based
on the PERB’s funding policy, which establishes the contractually required rates under MCA. The State contributes
5% of fire insurance premium taxes paid on certain fire risks. Based on those assumptions, the VFCA’s fiduciary net
position was projected to be adequate to make all the projected future benefit payments of current plan members
through the year 2111. A municipal bond rate was not incorporated in the discount rate.

Target Allocations

The long-term expected return on pension plan assets is reviewed as part of the regular experience study prepared
for the VFCA. The most recent analysis, performed for the six-year period ended June 30, 2016, is outlined in a
report dated May 2017, and can be located on the MPERA website. The long-term expected rate of return on
pension plan investments was determined by considering information from various sources, including historical rates
of return, rate of return assumptions adopted by similar public pension systems, and by using a building-block
method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan
investment and inflation) are developed for each major asset class. These ranges were combined to produce the
long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation
percentage and by adding expected inflation. Best estimates of the arithmetic real rates of return for each major
asset class included in the VFCA’s target asset allocation as of June 30, 2019, is summarized in the table that
follows:
Target Asset Long-term Expected

Asset Class Allocation Real Rate of Return
Cash Equivalents 3.00% 4.09%
Domestic Equity 36.00% 6.05%
Foreign Equity 18.00% 7.01%
Fixed Income 23.00% 2.17%
Private Equity 12.00% 10.53%
Real Estate 8.00% 5.65%

Total 100.00%

Sensitivity Analysis
In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the above table presents the net pension liability calculated using the discount rate of 7.65%, as well as

what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.65%) or
1.00% higher (8.65%) than the current rate.

(in thousands)

1.0% Decrease Current 1.0% Increase
(6.65%) Discount Rate (8.65%)
State as a nonemployer entity $ 11,433 $ 6,907 $ 3.069

net pension liability

Net Pension Liability

In accordance with GASB 68, employers and nonemployer contributing entities are required to recognize and report
certain amounts associated with their participation in the VFCA. GASB 68 became effective June 30, 2015, and
includes requirements to record and report proportionate shares of the collective net pension liability, pension
expense, deferred inflows of resources, and deferred outflows of resources associated with pensions.

In accordance with GASB 68, the VFCA has a special funding situation in which the State is legally responsible for
making contributions directly to the VFCA on behalf of volunteer employers. Due to the existence of this special
funding situation, the State is required to report a proportionate share of a volunteer fire company’s collective net
pension liability that is associated with the non-State volunteer employer.

(dollars presented in thousands)

Net Pension Liability | Net Pension Liability Percent of
as of 6/30/18 as of 6/30/19 Collective NPL
State as a nonemployer 5 7,667 $ 6.907 400 %

proportionate share

At June 30, 2020, the State reported a liability of $6.9 million for its proportionate share of the net pension liability.
The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of
June 30, 2018, with update procedures used to roll forward the total pension liability to June 30, 2019. The
nonemployer’s proportion of the net pension liability was based on the nonemployer’s contributions received by the
VFCA during the measurement period, July 1, 2018, through June 30, 2019, relative to total contributions received.

Changes in actuarial assumptions and methods: There were no changes in assumptions or other
inputs that affected the measurement of the total pension liability.

Changes in benefit terms: There have been no changes in benefit terms since the previous
measurement date.

B-111
B-112

Changes in proportionate share: There were no changes between the measurement date of the
collective net pension liability and the nonemployer’s reporting date that are expected to have a
significant effect on the nonemployer’s proportionate share of the collective net pension liability.

Grant Expense Related to Special Funding

The State as a nonemployer contributing entity recognized grant expense of $1.5 million for special funding support
provided by a portion of fire tax premiums paid to the State and transferred to MPERA for its proportionate share of
the VFCA pension expense that is associated with other employer participants in the plan.

Deferred Outflows and Inflows

At June 30, 2020, the State as a nonemployer contributing entity recognized a beginning deferred outflow of
resources for fiscal year 2019 contributions of $2.4 million.

As of the fiscal year ended June 30, 2020, the State as a nonemployer contributing entity reported its proportionate
share of deferred outflows of resources and deferred inflows of resources related to VFCA from the following
sources:

(in thousands)
Deferred Outflows Deferred Inflows of

of Resources Resources

Difference between expected and actual

experience $ — § 426
Net difference between projected and actual 363 _

earnings on pension plan investments
Contributions paid to VFCA subsequent to the 2.475 _

measurement date —- FY 2020 contributions ,

Totals $ 2,838 $ 426

Amounts reported as deferred outflows of resources related to pensions resulting from the State’s contributions
made subsequent to the June 30, 2019 measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows and deferred inflows of resources related to pensions will be
recognized in grant expense as follows:

(in thousands)

Amount recognized in Grant
Expense as an increase or
Year ended June 30: (decrease) to Grant Expense

2021 $ (123)
2022 (210)
2023 99
2024 171

Teachers’ Retirement System — The TRS is administered by the Teachers’ Retirement Board (TRB), which is the
governing body of a mandatory multiple-employer cost-sharing defined benefit pension plan that provides
retirement services to persons in Montana employed as teachers or professional staff of any public elementary or
secondary school, community college, or unit of the university system. The TRS, as an employer, does not
participate in the plan and acts only as the administrator of the plan.

The TRB is the governing body of the TRS, and the TRS’s staff administer the TRS in conformity with the laws set
forth in Title 19, chapter 20, MCA, and administrative rules set forth in Title 2, chapter 44 of the Administrative
Rules of Montana.
Summary of Benefits

Through June 30, 2013, all members enrolled in TRS participated in a single-tiered plan ("Tier One"). Employees
with a minimum of 25 years of service or who have reached age 60 with 5 years of service are eligible to receive an
annual retirement benefit equal to creditable service years divided by 60 times the average final compensation. Final
compensation is the average of the highest three consecutive years of earned compensation. Benefits fully vest after
5 years of creditable service. Vested employees may retire at or after age 50 and receive reduced retirement benefits.
Benefits are established by state law and can only be amended by the Legislature.

Beginning July 1, 2013, new members in TRS participate in a second benefit tier ("Tier Two"), which differs from
Tier One as follows:

¢ Tier Two uses a 5-year average final compensation (as opposed to 3-year AFC in Tier One)

¢ Tier Two provides for unreduced service retirement benefits at age 60 with 5 years of creditable service or
at age 55 with at least 30 years of creditable service (rather than at age 60 with 5 years of service or at any
age with creditable service in 25 years in Tier One)

¢ Tier Two provides for early retirement benefits with 5 years of creditable service at age 55 (rather than age
50 in Tier One)

¢ Tier Two has one percent higher normal employee contribution rate (though a temporary 1% supplemental
employee contribution rate is also currently in place for Tier One members), and

¢ Tier Two provides for an enhanced benefit calculation—1.85% of the AFC multiplied by the years of
creditable service—for members retiring with at least 30 years of creditable service and at least 60 years of
age (rather than 1.6667 x AFC x years of creditable service)

A guaranteed annual benefit adjustment (GABA) is payable on January 1 of each calendar year for each retiree who
has received at least 36 monthly retirement benefit payments prior to that date. The GABA is applicable to both Tier
One and Tier Two members. The GABA for Tier 1 members is 1.5% of the benefit payable as of January 1. For Tier
Two members, the GABA each year may vary from 0.5% to 1.5% based on the retirement system’s funding status
and the period required to amortize any unfunded accrued actuarial liability as determined in the prior actuarial
valuation.

Contributions to the System
All active employees in the TRS, regardless of employer type, are required to provide a contribution equal to 8.15%
of their compensation.

All State and University employers are required to contribute 11.45% of compensation provided to an active, non-
reemployed member. All school districts and other employers are required to contribute 9.07% of an active, non-
reemployed, member's compensation to the System.

Section 19-20-605, MCA, requires each employer to contribute 9.85% of total compensation paid to all reemployed
TRS retirees employed in a TRS reportable position. Pursuant to Section 19-20-609, MCA, this amount shall
increase by 1.00% for fiscal year 2014 and increase by 0.10% each fiscal year through 2024 until the total employer
contribution is equal to 11.85% of reemployed retiree compensation.

The TRS receives a portion of the total required statutory contributions directly from the State for all employers. The
employers are considered to be in a special funding situation, and the State is treated as a nonemployer contributing
entity in the TRS. The System receives 0.11% of earned compensation from the General Fund for all TRS members.
The TRS also receives 2.38% of earned compensation from the General Fund for TRS members employed at school
districts, community colleges, educational cooperatives, and counties in Montana. Finally, the State is also required
to contribute $25 million in perpetuity payable July 1 of each year. The Legislature has the authority to establish and
amend contribution rates to the plan.

Actuarial Assumptions
The total pension liability as of June 30, 2019, is based on the results of an actuarial valuation date of July 1, 2019.
There were several significant assumptions and other inputs used to measure the total pension liability. The actuarial

B-113
B-114

assumptions used in the July 1, 2019, valuation were based on the results of the last actuarial experience study, dated
May 2018. Among those assumptions were the following:

¢ Total Wage Increases 3.25% to 7.76% for non-university members
(includes 3.25% general wage increase assumption) 4.25% for university members
« Merit Increases 0 to 4.51% for non-university members
1.00% for university members
¢ Investment Return 7.50%
¢ — Price Inflation 2.50%
¢« Admin Expense as a % of Payroll 0.36%

¢ Postretirement Benefit Increases (starting three years after retirement)

° Tier One members: If the retiree has received benefits for at least three years, the retirement allowance
will be increased by 1.5% on January 1.

° Tier Two members: The retirement allowance will be increased by an amount equal to or greater than
0.5% but no more than 1.5% if the most recent actuarial valuation shows the TRS to be at least 90.0%
funded and the provisions of the increase is not projected to cause the funded ratio to be less than
85.0%. Since an increase in the amount of the GABA is not automatic and must be approved by the
TRS, the assumed increase was lowered from 1.5% to the current rate of 0.5% per annum.

* Mortality among contributing members, service retired members, and beneficiaries:

° For Males and Females: RP-2000 Healthy Combined Mortality Table projected to 2022 adjusted for
partial credibility setback for two years. The tables include margins for mortality improvements, which
are expected to occur in the future.

* Mortality among disabled members

° For Males: RP-2000 Disabled Mortality Table for Males, set back three years, with mortality
improvements projected by Scale BB to 2022.

° For Females: RP-2000 Disabled Mortality Table for Females, set forward two years, with mortality
improvements projected by Scale BB to 2022.

Discount Rate

The discount rate used to measure the total pension liability was 7.50%. The projection of cash flows used to
determine the discount rate assumed that contributions from participating TRS members, employers, and
nonemployer contributing entities will be made based on the TRB’s funding policy, which establishes the
contractually required rates under MCA. In addition to these contributions, the State General Fund will contribute
$25.0 million annually to the TRS payable July 1 of each year. Based on those assumptions, the TRS’s fiduciary net
position was projected to be adequate to make all the projected future benefit payments of current plan members
through the year 2124. Therefore, the long-term expected rate of return on pension plan investments was applied to
all periods of projected benefit payments to determine the total pension liability. No municipal bond rate was
incorporated in the discount rate.

Target Allocations

The assumed long-term expected return on pension plan assets is reviewed as part of the regular experience studies
prepared for the TRS. The most recent analysis, performed for the period covering fiscal years 2013 through 2017, is
outlined in a report dated May 3, 2018. Several factors are considered in evaluating the long-term rate of return
assumption, including long-term historical data, estimates inherent in current market data, and an analysis in which
best-estimate ranges of expected future real rates of return (expected return, net of investment expense and
inflation). Estimates of variability and correlations for each asset class were developed by the TRS's investment
consultant. These ranges were combined to develop the long-term expected rate of return by weighting the expected
future real rates of return by the target asset allocation percentage and then adding expected inflation. The long-term
rate of return assumption is intended to be a long-term assumption (30 to 50 years). It is not expected to change
absent a significant change in the asset allocation, a change in the inflation assumption, or a fundamental change in
the market that alters expected returns in future years. The average long term capital market assumptions published
in the Survey of Capital Market Assumptions 2019 Edition by Horizon Actuarial Service, LLC, yield a median real
return of 4.91%. Based on this information, the TRS's adopted assumption of 5.00% for the real return is reasonable.
Combined with the 2.50% inflation assumption, the resulting nominal return is 7.50%. Best estimates of arithmetic
real rates of return for each major asset class included in the TRS’s target asset allocation as of June 30, 2019, is
summarized in the table below:
B-115

Target Asset Long-Term Expected

Asset Class Allocation Real Rate of Return

Broad US Equity 35.00% 6.05%
Broad International Equity 18.00% 7.01%
Private Equity 10.00% 10.53%
Natural Resources 3.00% 4.00%
Core Real Estate 7.00% 5.65%
TIPS 3.00% 1.40%
Intermediate Duration Bonds 19.00% 2.17%
High Yield Bonds 3.00% 4.09%
Cash 2.00% 0.78%

Total 100.00%

Sensitivity Analysis

In accordance with GASB 68 regarding the disclosure of the sensitivity of the net pension liability to changes in the
discount rate, the table below presents the net pension liability calculated using the discount rate of 7.50%, as well as
what the net pension liability would be if it were calculated using a discount rate that is 1.00% lower (6.50%) or
1.00% higher (8.50%) than the current rate.

(in thousands)

1.0% Decrease Current Discount 1.0% Increase
(6.50%) Rate (8.50%)
State as an employer in TRS — net
pension liability $ 63,590 $ 46,493 $ 32,168
State as a nonemployer contributing entity 978.810 715.637 495.140

to TRS — net pension liability

Net Pension Liability

In accordance with GASB 68, employers and nonemployer contributing entities are required to recognize and report
certain amounts associated with their participation in the TRS. GASB 68 became effective June 30, 2015, and
includes requirements for participants to record and report their proportionate share of the collective net pension
liability, pension expense, deferred inflows of resources, and deferred outflows of resources associated with
pensions. In accordance with GASB 68, the TRS has a special funding situation in which the State is legally
responsible for making contributions directly to TRS that are used to provide pension benefits to the retired
members of the TRS. Due to the existence of this special funding situation, the State is required to report a
proportionate share of a local government or school district’s collective net pension liability that is associated with
the non-State employer.

(dollars presented in thousands)

Net Pension Liability | Net Pension Liability Percent of
as of 6/30/18 as of 6/30/19 Collective NPL
State's as an employer entity $ 47,407 $ 46,493 2.411113 %
State's as a nonemployer entity 700,417 715,637 37.112880 %
State of Montana totals $ 747,824 $ 762,130 39.523993 %

At June 30, 2020, the State reported a liability of $762.1 million for its proportionate share of the net pension
liability as an employer and nonemployer contributing entity. The net pension liability was measured as of June 30,
2019, and the total pension liability used to calculate the net pension liability was determined by an actuarial
valuation as of July 1, 2019. The employer’s proportion of the net pension liability was based on the State’s
B-116

contributions received by the TRS during the measurement period, July 1, 2018, through June 30, 2019, relative to
all contributions received from the TRS’s participating employers and the nonemployer contributing entity.

Changes in actuarial assumptions and methods: The GABA for Tier Two members is a variable rate
between 0.5% and 1.5% as determined by the TRS. Since an increase in the amount of the GABA is not
automatic and must be approved by the TRS, the assumed increase was lowered from 1.5% to the current
rate of 0.5% per annum.

Changes in benefit terms: There have been no changes in benefit terms since the previous measurement
date.

Changes in proportionate share: There were no changes between the measurement date of the collective
net pension liability and the employer’s reporting date.

Employer Pension Expense and Nonemployer Contributing Entity Special Funding Grant Expense

At June 30, 2020, the State as an employer recognized a pension expense of $15.2 million for its proportionate share
of the collective TRS pension expense. The State as a nonemployer contributing entity also recognized grant
expense of $69.3 million for special funding support provided by the State’s General Fund for its proportionate share
of the collective TRS pension expense that is associated with other employer participants in the TRS. Total pension-
related expenses for fiscal year 2020 was $83.4 million.

Deferred Outflows and Inflows
At June 30, 2020, the State as an employer recognized a beginning deferred outflow of resources for fiscal year 2019
contributions of $16.5 million.

As of the fiscal year ended June 30, 2020, the State as an employer reported its proportionate share of deferred
outflows of resources and deferred inflows of resources related to the TRS from the following sources:

(in thousands)
Deferred Outflows Deferred Inflows of

of Resources Resources
Difference between expected and actual
experience 8 308 $ ~~
Net difference between projected and actual 451 _
earnings on pension plan investments
Change of assumptions 2,321 104

Changes in proportion and differences between
employer contributions and proportionate 13,034 815
share of contributions

Contributions paid to TRS subsequent to the 16.686
measurement date - FY 2020 contributions , ~
Totals $ 32,800 $ 919

Amounts reported as deferred outflows of resources related to pensions resulting from the employer’s contributions
made subsequent to the June 30, 2019, measurement date will be recognized as a reduction of the net pension
liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows of resources and inflows of resources related to pensions will be
recognized in pension expense as follows:
B-117

(in thousands)

Amount recognized in Pension
Expense as an increase or

Year ended June 30: (decrease) to Pension Expense

2021 $ 8,418
2022 4,854
2023 1,550
2024 373

At June 30, 2020, the State as a nonemployer contributing entity recognized a beginning deferred outflow of
resources for fiscal year 2019 contributions of $44.3 million.

As of the fiscal year ended June 30, 2020, the State as a nonemployer contributing entity reported its proportionate
share of deferred outflows of resources and deferred inflows of resources from the following sources:

(in thousands)
Deferred Outflows Deferred Inflows

of Resources of Resources
Difference between expected and actual experience $ 4,737 $ _—
Net difference between projected and actual 6.937 _
earnings on pension plan investments ,
Changes of assumptions 35,734 1,604
Changes in proportion and differences between
employer contributions and proportionate share 5,011 28,569
of contributions
Contributions paid to TRS subsequent to the 44 841 _
measurement date —- FY 2020 Contributions ,
Totals $ 97,260 $ 30,173

Amounts reported as deferred outflows of resources related to pensions resulting from the nonemployer’s
contributions subsequent to the June 30, 2019, measurement date will be recognized as a reduction of the net
pension liability in the fiscal year ended June 30, 2021.

Other amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in grant
expense as follows:

(in thousands)

Amount recognized in Grant
Expense as an increase or
Year ended June 30: _ (decrease) to Grant Expense

2021 $ 16,683
2022 (173)
2023 (8)
2024 5,744

D. Legal Actuarial Status of Plans

The Montana Constitution, Article VIII, Section 15, and Section 19-2-409, MCA state that public retirement systems
shall be funded on an actuarially sound basis. To maintain a fund on an actuarially sound basis, the rate of
contributions should fund the normal cost, in addition to amortizing the unfunded liability over a period not to
exceed 30 years.

A traditional funding actuarial valuation of each of the defined benefit plans is performed annually. The purpose of
the traditional funding actuarial valuation is to measure funding progress and to determine the actuarial determined
contribution, contribution sufficiency or deficiency, and other actuarial information necessary for monitoring
funding position. The most recent actuarial valuation was performed for fiscal year ended June 30, 2020. The
statutory funding rate is tested in the valuation of each public retirement plan to determine if it is sufficient to cover
B-118

the normal cost rate plus an amortization payment of the unfunded actuarial liability, if any, within 30 years. As of
June 30, 2020, the Game Warden & Peace Officers’ Retirement System (GWPORS), the Highway Patrol Officers’
Retirement System (HPORS), and the Public Employees’ Retirement System-Defined Benefit Retirement Plan
(PERS-DBRP) were not in compliance and do not amortize within 30 years.

E. Public Employee Defined Contribution Retirement Plans

Public Employees’ Retirement _System-Defined Contribution Retirement Plan — The Public Employees’
Retirement System - Defined Contribution Retirement Plan (PERS-DCRP) is a multiple Employer plan established
July 1, 2002, and governed by Title 19, Chapters 2 & 3, MCA. This plan is available to eligible employees of the
State, Montana University System, local governments, and school districts. All new PERS members are initially
members of the PERS-DBRP and have a 12-month window during which they may choose to transfer to the PERS-
DCRP, or remain in the PERS-DBRP, by filing an irrevocable election. If an election is not filed, the member
remains in the PERS-DBRP. Members may not be members of both the defined contribution and defined benefit
retirement plans. The PERS-DBRC provides retirement, disability, and death benefits to plan members and their
beneficiaries.

Member and Employer contribution rates are established by state law and may be amended only by the Legislature.
Employees contribute at a rate of 7.90% of their compensation. Contributions made to the plan by an employee
remain 100% vested in their interest. Members who achieve 5 years of employment are vested in the plan. Should
they terminate prior to this 5-year period, all employer contributions are forfeited to the plan. Amounts forfeited are
held in a separate plan forfeiture account and can only be used to pay the administrative expenses, including startup
costs, of the plan. Total pension expense for the State as a PERS-DCRP employer for the year ended June 30, 2020,
is $8.3 million and, contribution forfeitures were $448.6 thousand.

Local government entities contribute 8.67% of member compensation. School district employers contributed 8.40%
of member compensation. The State contributes 0.10% of member compensation on behalf of local government
entities and 0.37% of member compensation on behalf of school district entities. Each State agency and University
employer contributed 8.77% of member compensation.

The total contribution rate of 8.77%, referenced in the preceding paragraph, is allocated as follows: 8.43% to the
member’s retirement account; 0.04% to the defined contribution education fund; and 0.30% to the defined
contribution Other Post Employment Benefit (OPEB) disability plan.

The PERS-DCRP also administers an OPEB disability plan. Refer to PERB's annual financial report for additional
information related to this portion of the plan.

457-Deferred Compensation Plan — The 457-Deferred Compensation Plan (457-Plan) is a voluntary supplemental
retirement savings plan established in 1974. The Deferred Compensation Plan is governed by Title 19, Chapter 50,
MCA, in accordance with Internal Revenue Code (IRC) Section 457. This plan is available to all employees of the
State, Montana University System, and contracting political subdivisions. The State and 60 non-state entity
employers participate in the 457-Plan.

Assets of the Deferred Compensation Plan are required to be held in trusts, custodial accounts, or insurance
company contracts for the exclusive benefit of participants and their beneficiaries. Empower Retirement™ is the
record keeper for the plan. Participants elect to defer a portion of their salary, within IRC limits. The deferred salary
is not available to employees until separation from service, retirement, death, or upon an unforeseeable emergency
while still employed, provided IRS-specified criteria are met.

F. Montana University System Retirement Program

Montana University System-Retirement Program (MUS-RP) — This system was established in January 1988 and
is underwritten by the Teachers Insurance and Annuity Association (TIAA). Effective July 1, 1993, MUS-RP was
made the mandatory retirement plan for new faculty and administrative staff with contracts under the authority of
the Board of Regents, previously referred to as the Optional Retirement Program (ORP). The MUS-RP is a defined
contribution retirement plan governed by Title 19, Chapter 21, MCA. Combined contributions to the faculty and
professional staff plan cannot exceed 13% of the participant’s compensation per Section 19-21-203, MCA.
Combined contributions to the classified staff plan are 16.67% per Section 19-3-316, MCA and Section 19-3-315,
MCA.

The benefits at retirement depend upon the amount of contributions, amount of investment gains and losses, and
investment allocations by the participant. Individuals are immediately vested for both employee and employer
contributions. The Montana University System records employee/employer contributions, and remits monies to
TIAA. Total contributions made to the plan by the employer were $17.2 million, and the total employee
contributions were $19.9 million for the fiscal year ended June 30, 2020.

G. Method Used to Value Investments

The Montana Board of Investments (BOI) manages the investments, as authorized by state law, for the defined
benefit retirement plans in two investment pools, the Consolidated Asset Pension Pool (CAPP) and the Short-Term
Investment Pool (STIP). CAPP is an internal investment pool and STIP is an external investment pool. Each
retirement plan’s ownership in the pools is based on the funds contributed. Individual investments in the pools are
not specifically identified to the respective retirement plan. Investments are reported at either fair value or cost,
depending on the underlying investment type. Fixed income and equity investments classified in Level 1 of the fair
value hierarchy are valued using prices quoted in active markets for those securities. Fixed income investments
classified in Level 2 of the fair value hierarchy are valued using a Matrix pricing technique. Matrix pricing is used to
value securities based on the securities’ relationship to benchmark quoted prices. Mortgages are present value
adjusted. Investment valuation not classified within the fair value measurement levels are reported at Net Asset
Value. Further detail related to investments is provided in Note 3.

H. Long-term Contracts for Contributions

Per Section 19-2-706, MCA, the Montana Legislature enacted a provision of the Employee Protection Act (EPA)
allowing state and university system employees who are eligible for a service retirement and whose positions have
been eliminated, to have their employer pay a portion of the total cost of purchasing up to three years of “1-for-5”
additional service. In fiscal year 2020, 261 employees participated in the program.

The Employer has up to ten years to complete payment for the service purchases and is charged the actuarially
required rate of return as established by MPERA on the unpaid balance. Total contributions received (including
interest) during fiscal year 2020 totaled $17.9 thousand. The outstanding balance at June 30, 2020, totaled $9.2
thousand.

I. Litigation

Tadman, et al. v. State. A retired member of the Sheriffs' Retirement System filed a class action in the Eighth
Judicial District of Montana against the State of Montana on October 6, 2015, alleging the inappropriate advising,
reporting, and withholding of state and federal income taxes on certain line-of-duty disability benefits before
conversion to a normal retirement benefit. The State was served with the Complaint on November 25, 2015, and is
represented by Jean Faure and Jason Holden of the Faure Holden law firm in Great Falls, Montana. On June 11,
2019, the Court issued an Order granting Plaintiff's Motion to Certify Class. The Court has defined the prospective
class of plaintiffs in this matter and the parties were instructed by the Court to meet and confer to agree on the class
form of notice and notice plan concerning the matter. Counsel representing the class are Lawrence A. Anderson
from Great Falls, Montana and Tom and Sean Morrison from Helena, Montana.

Murnion v. MPERA and PERB. A retired member of the Public Employees! Retirement System appealed a Final
Order of the PERB upholding the Hearing Examiner's Proposed Findings of Fact and Conclusions of Law
determining that the retired member was not entitled to full-time PERS service credit for his part-time years of
employment. On March 15, 2019, the retired member filed a Petition for Appeal of Agency Action and Complaint in
the First Judicial District of Montana to appeal the PERB's Final Order under the provisions of the Montana
Administrative Procedure Act (MAPA). On June 26, 2019, MPERA filed a motion to vacate any forthcoming
Scheduling Order, set a briefing schedule to control the judicial review of this matter, and dismiss the retired
member's Count II and III for failure to state a claim within the Court's jurisdiction, or, in the alternative, confine

B-119
B-120

any review of each claim to the administrative record. On July 12, 2019, a Scheduling Order was issued by the Court
calling for additional periods for discovery and setting a date for a two-day non-jury bench trial beginning on July 8,
2020. On July 15, 2019, Petitioner filed a response to MPERA's motion, and MPERA filed a reply on July 19, 2019.
MPERA filed a notice of submittal on July 22, 2019. On August 21, 2020, an amended Scheduling Order was issued
by the Court extending deadlines for periods of discovery as well as all pre-trial dates. This matter was settled
between the parties on October 8, 2020.

PERB y. Lewis and Clark County. On May 1, 2020, the PERB filed a Complaint for Declaratory Relief in the First
Judicial District of Montana against Lewis and Clark County. This complaint asked the Court to rule that the
Montana Constitution, Article VIII, Section 15, vests the PERB with the authority to actuarially determine the
amount of the unfunded pension liabilities attributable to a component unit of Lewis and Clark County that has
terminated its participation in a PERB administered defined benefit plan, and compel the payment of and collect this
unfunded pension liability upon this component unit's termination. On May 13, 2020, Lewis and Clark County filed
a motion to dismiss the Complaint. This motion has been fully briefed by both parties and the PERB awaits a ruling
from the Court. On Junel, 2020, the PERB filed its First Amended Complaint amending its original pleading to add
a claim for breach of contract against Lewis and Clark County. On June 18, 2020, Lewis and Clark County filed a
motion to dismiss PERB's First Amended Complaint. This motion has been fully briefed and the PERB awaits a
ruling from the Court.

Montana Association of Counties (MACo), Lewis and Clark County, and Cascade County v. PERB and MPERA.
On May 1, 2020, the MACo filed a Complaint for Declaratory Judgement, Injunctive Relief, and a Writ of
Prohibition against the PERB and MPERA in the First Judicial District Court of Lewis and Clark County. This
Complaint asked the Court to rule that the Montana Constitution, Article VIII, Section 15, does not vest the PERB
with the authority to determine and collect unfunded pension liabilities owed to the PERS-DBRP trust as a result of
partial withdrawals of employees or reductions in force, and that the 1947 Contract between the PERB and Lewis
and Clark County and Cascade County, as well as other similar agreements between the PERB and all other
Montana counties, does not vest the PERB with the authority to determine and collect unfunded pension liabilities
owed to the PERS-DBRP trust as a result of partial withdrawals of employees or reductions in force, and that MACo
is entitled to a preliminary and permanent injunction enjoining PERB from assessing withdrawal penalties against
Montana counties, and that MACo is entitled to a Writ of Prohibition arresting the PERB from assessing withdrawal
penalties against Montana counties. On May 15, 2020, MACo amended its original pleading by filing its First
Amended Complaint. This amendment added the additional parties of Lewis and Clark County and Cascade County
to this action as plaintiffs as well as the additional claims for breach of express and implied contract. On June 25,
2020, the PERB filed a Motion to Dismiss, or in the Alternative, Partial Summary Judgement with regard to the
Plaintiffs' Count II, IV, V, and VI. This motion has been fully briefed by all parties and PERB awaits a ruling from
the Court.
NOTE 7. OTHER POSTEMPLOYMENT BENEFITS (OPEB)
A. General Information Non-trust Plans

The State of Montana (State) and the Montana University System (MUS) provide optional postemployment
healthcare benefits in accordance with Section 2-18-704, MCA to the following employees and dependents who
elect to continue coverage and pay administratively established contributions: (1) employees and dependents who
retire under applicable retirement provisions and (2) surviving dependents of deceased employees. Medical, dental,
and vision benefits are available through this plan. The State and MUS offer OPEB plans that are not administered
through trusts; as such, there are no plan assets accumulated to offset the total OPEB liability.

In accordance with Section 2-18-704, MCA, the State provides post-retirement health insurance benefits to eligible
employees who receive retirement benefits from the Public Employees’ Retirement System (PERS) or various other
State retirement systems, and elect to start medical coverage within 60 days of leaving employment. Retirement
eligibility criteria differ by State retirement plan. Further detail on State Retirement Plans is provided in Note 6.
MUS provides post-retirement health insurance benefits to eligible employees who receive retirement benefits from
their plan, or an annuity under the MUS-RP, and have been employed by MUS for at least five years, are age 50, or
have worked 25 years with MUS. They must elect to start medical coverage within 60 days of leaving employment.
Spouses, unmarried dependent children, and surviving spouses are also eligible for both plans.

Montana State Fund, a discretely presented component of the State and participant in the State OPEB plan, by
statute, prepares separately issued financial statements on a calendar year-end basis. Due to the difference in
reporting period, there will be a variance between the note disclosures and the financial statements for OPEB related
information.

B. Plan Descriptions

Both healthcare OPEB plans for the State and MUS are reported as single-employer plans. In addition to the primary
government, the participating employers under the State OPEB plan are Facility Finance Authority, Montana Board
of Housing, Public Employees’ Retirement System, Montana State Fund, and Teachers’ Retirement System. The
participating employers under the MUS OPEB plan are Office of Commissioner of Higher Education (OCHE),
Montana State University - Billings (MSU-Billings), Montana State University - Bozeman (MSU-Bozeman), Great
Falls College MSU, Montana State University - Northern (MSU-Northern), Montana Technological University,
Helena College UM, University of Montana - Missoula (UM-Missoula), and University of Montana - Western (UM-
Western). Participating employers under MUS, but excluded from the total OPEB liability due to not qualifying as
component units, are Dawson Community College (Dawson CC), Flathead Valley Community College (Flathead
CC), and Miles Community College (Miles CC). Each participating employer is required to disclose additional
information as required per GASB Statement No. 75, Accounting and Financial Reporting for Postemployment
Benefits Other than Pensions (GASB 75).

The State and MUS pay for post-employment healthcare benefits on a pay-as-you-go basis. Section 2-18-812, MCA
gives authority for establishing and amending the funding policy to the Department of Administration for the State
group health insurance plan. Section 20-25-1310, MCA gives authority for establishing and amending the funding
policy to the Board of Regents for the MUS group health insurance plan. The healthcare OPEB plans allow retirees
to participate, as a group, at a rate that does not cover all of the related costs. This results in reporting the total OPEB
liability in the related financial statements and note disclosures. Reported contributions are not a result of direct
funding to the plans or for associated liabilities, but are a measure of the difference in retiree payments into the plans
and actual medical costs associated with those individuals paid for by the plans.

As of December 31, 2019, the State OPEB plan’s administratively established retiree medical premiums vary
between $448.00 and $1,777.00 per month, depending on the medical plan selected, family coverage, and Medicare
eligibility. Administratively established dental premiums vary between $41.10 and $70.00 per month and vision
hardware premiums vary between $7.64 and $22.26 per month, depending on the coverage selected. The plan
provides different coinsurance amounts and deductibles depending on whether members use in-network or out-of-
network providers. Once retiree members become Medicare eligible, the plan automatically processes claim
reimbursement as the secondary insurer, even if the member is not enrolled in Medicare.

B-121
B-122

As of June 30, 2020, the MUS OPEB plan’s administratively established retiree medical premiums vary between
$368.00 and $2,746.00 per month. Retiree dental premiums vary between $52.00 and $156.00 per month, while
vision premiums vary from $10.70 to $31.18, depending on the types and number of dependents enrolled and which
medical Third Party Administrator (TPA) was selected. The plan provides different coinsurance amounts and
deductibles depending on whether members use in-network or out-of-network providers. The plan automatically
reduces claim reimbursement for members eligible for Medicare, even if the member is not enrolled in Medicare.
The premium changes were based on actual claims experience and actuarial projections based on the experience and
trends.

C. Basis of Accounting

Total OPEB liability is reported on an accrual basis on the proprietary and fiduciary fund financial statements, the
government-wide financial statements, and the component unit financial statements. Total OPEB liability is not
reported on the governmental fund financial statements, as it is considered a long-term liability. Plan member
contributions are recognized in the period in which the contributions are made. Benefits and refunds are recognized
when due and payable in accordance with the terms of each plan.

Both OPEB plans state, that an employee enrolled in the OPEB plan, who (a) at least meets the early retirement
criteria defined by Montana Public Employees’ Retirement Administration (MPERA); and (b) makes arrangements
with their respective benefit office, within 60 days of the date active employee coverage ends, to continue post-
retirement coverage, may continue with the OPEB plan on a self-pay basis, retroactive back to the date active
employee coverage was lost, and adhere to these provisions. Therefore, each plan does not include terminated
employees who have accumulated benefits but are not yet receiving them. There have been no significant changes in
the number covered or the type of coverage as of June 30, 2020.

The number of State Plan participants as of March 31, 2020, follows:

State Plan Participants

Facility Montana Montana

: Public Employee Teachers
Finance Board Retirement State —_ Retirement
Enrollment State Authority® — of Housing” Board “) Fund” System™ Total
Active employees 12,056 1 12 48 2719 21 12,417
Retired employees,
spouses, and
surviving spouses 2,914 2 3 1 20 6 2,546
Total 14,570 3 15 49 299 27 14,963
The number of MUS Plan participants as of March 31, 2020, follows:
MUS Plan Participants
UM-
MSU- —UM- MSU- MSU- MSU- UM- MT UM-
Enrollment GFC® HC” Billings” Bozeman” Northern™ OCHE™ Missoula” Tech” Western” Total
Active employees 110 82 451 3,136 171 63 1,874 388 191 6,466
Retired employees,
spouses, and
surviving spouses 7 14 117 493 34 17 500 102 56 1,340
Total 117 96 568 3,629 205 80 2,374 490 247 7,806

") Primary Government
Discrete Component Units of Primary Government
D. Schedule of Changes in Total OPEB liability

The following table presents the other items related to and changes in the total OPEB liability:

Annual OPEB Cost & Changes in Total OPEB liability

(in thousands)

State Plan MUS Plan
Discrete Discrete
Primary | Component Primary | Component
Government Unit Total Government Unit Total
Total OPEB OPEB Total State | Total OPEB OPEB Total MUS
Liability Liability Plan Liability Liability Plan
Balances at 6/30/2019 $ 54,593 $ 1,104 $ 55,697 | $ 425 $ 38,923 $ 39,348
Changes for the year:
Service cost 1,899 47 1,946 11 1,725 1,736
Interest 1,554 32 1,586 12 1,118 1,130
Difference between expected and
actual experience (9,504) 95 (9,409) (162) (14,853) (15,015)
ipa of assumptions or other (1,828) (49) (1,877) (18) (1,773) (1,791)
Benefit payments (585) (16) (601) 15 1,426 1,441
Net changes (8,464) 109 (8,355) (142) (12,357) (12,499)
Balances at 6/30/2020 " $ 46,129 $ 1,213 $ 47,342 1$ 283 $ 26,566 $ 26,849

{") State and discretely presented component units proportion of the collective total OPEB liability as of the measurement date for fiscal years 2019 and
2020 for the State Plan was 100% both years and for the MUS Plan is 95.59% and 94.92%, respectively.

E. Actuarial Methods and Assumptions

The total OPEB liability (TOL) measured under GASB 75 is based upon service cost and more standardized
reporting assumptions than prior GASB Statements. As a pay-as-you-go public entity, GASB 75 requires a 20-year
current municipal bond discount rate to establish an Actuarially Determined Contribution (ADC). The GASB 75
valuation is further required to show both historical and projected future net changes in TOL, as well as sensitivity to
changes in key underlying assumptions. Actuarially determined amounts are subject to continual revisions, meaning
actual results are compared with past expectations and new estimates are made about the future. Actuarial
calculations reflect a long-term perspective. The projection of benefits for financial reporting purposes does not
explicitly incorporate the potential effects of legal or contractual funding limitations on the pattern of cost-sharing
between the employer and plan members in the future.

The schedule of changes in the State’s and MUS's TOL and related ratios, presented as required supplementary
information following the notes to the financial statements is designed to present multi-year trend information about
whether the actuarial value of plan TOL is increasing or decreasing over time relative to the actuarial liabilities for
benefits. The schedule of changes in the State’s and MUS's TOL and related ratios are based on the substantive plan
(the plan as understood by the employer and the plan members). This includes the types of benefits provided at the

time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members
to that point.

B-123
B-124

The State's OPEB Plan TOL on December 31, 2019, rolled forward to March 31, 2020, actuarial valuation was
determined using the following actuarial assumptions and other inputs, applied to all periods included in the
measurement, unless otherwise specified:

Other Postemployment Benefits
State Single Employer Plan

Retiree/Surviving

Spouse Spouse

Contributions (weighted average):

Before Medicare eligibility $ 14,772 $ 5,470

After Medicare eligibility 5,376 4,659
Actuarial valuation date December 31, 2019
Experience study period January 1, 2017 through December 31, 2019
Actuarial measurement date March 31, 2020
Actuarial cost method Entry age normal funding method
Amortization method Open basis
Asset valuation method Not applicable since no assets meet the definition

of plan assets under GASB 75

Actuarial assumptions:

Discount rate 2.15%
Projected payroll increases 2.50%
Participation:
Future retirees 40.00%
Future eligible spouses 70.00%
Marital status at retirement 70.00%

(") Updated procedures were used to roll forward the total OPEB liability to the measurement date.

Mortality - Health: For TRS, healthy mortality is assumed to follow the RP-2000 Healthy Annuitant
Mortality Table for ages 50 and above and the RP-2000 Combined Healthy Annuitant Mortality Table for
ages below 50, set back four years for males, set back two years for females, with mortality improvements
projected by Scale BB to 2018. For all other groups, healthy mortality is assumed to follow the RP-2000
Combined Mortality Table with improvements projected by Scale BB to 2020, set back one year for males.

Mortality - Disabled: For TRS, disabled mortality is assumed to follow the RP-2000 Disabled Mortality
Table, set forward one year for males and set forward five years for females, with mortality improvements
projected by Scale BB to 2018. For all other groups, disabled mortality is assumed to follow the RP-2000
Combined Mortality Table with no projections.

Changes in actuarial assumptions and methods since last measurement date: Changes in actuarial
assumptions include a participation rate reduction from 55% to 40% based on recent experience study, a
revision to rates per the Retirement System pension valuations as of July 1, 2019, and the interest/discount
rate was based on the average of multiple March 31, 2020 municipal bond rate sources.

Changes in benefit terms since last measurement date: None
B-125

Additional information as of the latest actuarial valuation for MUS OPEB plan follows:

Other Postemployment Benefits
MUS Single Employer Plan

Retiree/Surviving

Spouse Spouse
Contributions (in thousands):
Before Medicare eligibility $ 11,212 $ 9,199
After Medicare eligibility 4,301 5,295
Actuarial valuation date December 31, 2019

Actuarial measurement date March 31, 2020

Experience study period January 1, 2017 through December 31, 2019
Actuarial cost method Entry age normal funding method
Amortization method Open basis
Asset valuation method Not applicable since no assets meet the definition of
plan assets under GASB 75

Actuarial assumptions:

Discount rate 2.15%

Projected payroll increases 2.50%

Participation:

Future retirees 40.00%

Future eligible spouses 70.00%
Marital status at retirement 70.00%

(") Updated procedures were used to roll forward the total OPEB liability to the measurement date.

Mortality - Healthy: For TRS and MUS-RP, healthy mortality is assumed to follow the RP-2000 Healthy
Annuitant Mortality Table for ages 50 and above and the RP-2000 Combined Healthy Annuitant Mortality
Table for ages below 50, set back four years for males, set back two years for females, with mortality
improvements projected by Scale BB to 2018. For all other groups, healthy mortality is assumed to follow
the RP-2000 Combined Mortality Table with improvements projected by Scale BB to 2020, set back one
year for males.

Mortality - Disabled: For TRS For TRS and MUS-RP, disabled mortality is assumed to follow the RP-2000
Disabled Mortality Table, set forward one year for males and set forward five years for females, with
mortality improvements projected by Scale BB to 2018. For all other groups, disabled mortality is assumed
to follow the RP-2000 Combined Mortality Table with no projections.

Changes in actuarial assumptions and methods since last measurement date: Changes in actuarial
assumptions include a participation rate reduction from 55% to 40% based on recent experience study, a
revision to rates per the Retirement System pension valuations as of July 1, 2019, and the interest/discount
rate was based on the average of multiple March 31, 2020 municipal bond rate sources.

Changes in benefit terms since last measurement date: Changes in benefit terms include increased annual
deductible and out-of-pocket maximums.
B-126

Sensitivity of the TOL to changes in the discount rate

The following presents the TOL of the State and MUS OPEB plans, as well as what they would be if calculated
using a discount rate that is 1-percentage-point lower (1.75 percent) or 1-percentage-point higher (3.75 percent) than
the current discount rate:

State OPEB plan (in thousands)

Current Discount Rate

1.0% Decrease (1.75%) (2.75%) 1.0% Increase (3.75%)
Primary Government $ 59,852 $ 46,129 $ 36,138
Discrete Component Units 1,616 1,213 916
Total OPEB liability $ 61,468 $ 47,342 $ 37,054

MUS OPEB plan (in thousands)

Current Discount Rate

1.0% Decrease (1.75%) (2.75%) 1.0% Increase (3.75%)

Primary Government $ 382 § 283 $ 211
Discrete Component Units 35,949 26,566 19,794
Total OPEB liability $ 36,331 $ 26,849 $ 20,005

Sensitivity of the TOL to changes in the healthcare cost trend rates

The following presents the TOL of the State and MUS OPEB plans, as well as what they would be if calculated
using healthcare cost trend rates that are 1-percentage-point lower (5.0 percent) or 1-percentage-point higher (7.0
percent) than the current healthcare cost trend rates:

State Plan (in thousands)

Current Healthcare Cost
1.0% Decrease (5.0%) Trend Rate (6.0%) 1.0% Increase (7.0%)
Primary Government $ 36,175 $ 46,129 $ 60,223
Discrete Component Unit 915 1,213 1,630
Total OPEB liability $ 37,090 $ 47,342 $ 61,853
MUS Plan (in thousands)
Current Healthcare Cost
1.0% Decrease (5.0%) Trend Rate (6.0%) 1.0% Increase (7.0%)
Primary Government $ 211 $ 283 $ 384
Discrete Component Unit 19,731 26,566 36,276

Total OPEB liability $ 19,942 $ 26,849 $ 36,660
B-127

OPEB Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to OPEB
For the year ended June 30, 2020, the State OPEB plan's OPEB expense is $2.5 million and the MUS OPEB plan's
OPEB expense is $1.5 million.

At June 30, 2020, the State OPEB plan deferred outflows and inflows of resources are from the following sources:

State Plan (in thousands)

Deferred Outflows of Deferred Inflows of
Resources Resources
Primary Government
Difference between expected and actual experience $ — $ 12,210
Changes of assumptions or other inputs 16,160 15,732
Total $ 16,160 $ 27,942
Discrete Component Units
Difference between expected and actual experience $ 132 $ 137
Changes of assumptions or other inputs 431 420
Amounts associated with transactions subsequent to the
measurement date of the total OPEB liability’ 4 _—
Total $ 567 $ 557

In prior years, the amounts deferred for transactions subsequent to the measurement date of the total OPEB liability were employer contributions. In the year
ending June 30, 2020, such contributions were significantly reduced or nonexistent because fewer medical claims were experienced during the period
subsequent to the measurement date. This was due to postponement of procedures, by hospitals and clinics, in response to the COVID-19 pandemic.

At June 30, 2020, MUS OPEB plan deferred outflows and inflows of resources are from the following sources:

MUS Plan (in thousands)
Deferred Outflows of Deferred Inflows of
Resources Resources

Primary Government
Difference between expected and actual experience $ — $ 159
Changes of assumptions or other inputs 106 113

Total $ 106 $ 272
Discrete Component Units
Difference between expected and actual experience $ — $ 14,663
Changes of assumptions or other inputs 10,352 11,070

Total $ 10,352 $ 25,733

In prior years, the amounts deferred for transactions subsequent to the measurement date of the total OPEB liability were employer contributions. In the year
ending June 30, 2020, such contributions were significantly reduced or nonexistent because fewer medical claims were experienced during the period
subsequent to the measurement date. This was due to postponement of procedures, by hospitals and clinics, in response to the COVID-19 pandemic.

Deferred outflows of resources and deferred inflows of resources related to TOL will be recognized as OPEB
expense as follows:
B-128

Amount recognized in OPEB expense as an increase or (decrease) to OPEB
expense

State Plan (in thousands)

Discrete Component

Year ended June 30 Primary Government Units State Plan Total
2021 $ (1,057) $ (1) $ (1,058)
2022 (1,057) (1) (1,058)
2023 (1,057) (1) (1,058)
2024 (1,057) (1) (1,058)
2025 (1,057) (1) (1,058)
Thereafter (6,497) 11 (6,486)

Amount recognized in OPEB expense as an increase or (decrease) to OPEB

expense
MUS Plan (in thousands)
Discrete Component
Year ended June 30 Primary Government Units MUS Plan Total
2021 $ (14) $ (1,321) $ (1,335)
2022 (14) (1,321) (1,335)
2023 (14) (1,321) (1,335)
2024 (14) (1,321) (1,335)
2025 (14) (1,321) (1,335)
Thereafter (96) (8,776) (8,872)
F. General Information Trust Plan

General Information

Section 19-3-2141, MCA, establishes a long-term disability plan trust fund (PERS-DCRP Disability) for all State of
Montana employees that participate in the Public Employee Retirement System-Defined Contribution Retirement
Plan (PERS-DCRP). All new PERS members are initially members of the Public Employee Retirement System-
Defined Benefit Retirement Plan (PERS-DBRP) and have a 12-month window during which they may choose to
transfer to the PERS-DCRP or remain in the PERS-DBRP by filing an irrevocable election. If an election is not
filed, the member remains in the PERS-DBRP. Members may not be members of both the defined contribution and
defined benefit retirement plans. Only those participants that choose the PERS-DCRP are covered by the PERS-
DCRP Disability plan.

Plan Description

The PERS-DCRP Disability is a multiple-employer cost-sharing plan that covers employees of the State, local
governments, and certain employees of the university system and school districts, who are not covered by a separate
retirement system governed by Title 19, MCA. The PERS-DCRP Disability plan provides disability benefits to
PERS-DCRP plan members who are vested in the plan and are currently ineligible for retirement.

A separate trust has been established for purposes of providing disability benefits to PERS-DCRP Disability plan
members, and it is accounted for as a fiduciary fund. The assets are held in a trust capacity for the beneficiaries. The
Public Employee Retirement System issues publicly available annual reports, which include financial statements and
required supplemental information for the plan. Those reports may be obtained online (http://mpera.mt.gov) or by
contacting the following:

Public Employees’ Retirement Board
100 North Park, Suite 200

P.O. Box 200131

Helena, MT 59620-0131

G. Termination Benefits

During the year ended June 30, 2020, the State made the following termination benefit arrangements: continued
coverage of group health insurance benefits for one employee provided for up to six months, one-time lump-sum
incentive payments for 15 employees, and paid administrative leave for 15 employees.

During the year ended June 30, 2020, component units of the State made the following termination benefit
arrangements: continued coverage of health insurance benefits and/or one-time incentive payments for 12
employees.

During the year ended June 30, 2020, the cost of termination benefits for the fiscal year was $107.1 thousand and
$366.4 thousand for the State and its component units, respectively.

B-129
B-130

NOTE 8. RISK MANAGEMENT

There are three primary government public entity risk pools and one claims-servicing pool that are reported within
the enterprise funds. These pools include Hail Insurance, the Montana University System (MUS) Group Insurance
Plan, the MUS Workers Compensation Program, and the Subsequent Injury claims-servicing pool. The State of
Montana (Old Fund) provides risk financing as an entity other than a public entity risk pool. The liability and
payment of the workers' compensation claims for incidents occurring before July 1, 1990, are reported in the
government-wide financial statements within the primary government. Unpaid claims and claim adjustment
expenses are estimated based on the ultimate cost of settling the claims, including the effects of inflation and other
societal/economic factors. Additionally, the primary government reports its own risk management activity within
two internal service funds: Employees Group Benefits Plans and Administration Insurance Plans. In all of these
funds, there are no significant reductions in insurance coverage from the prior year. These funds use the accrual
basis of accounting. By statute, these funds cannot invest in common stock. Investments are recorded at fair value.
Premiums and discounts are amortized using the straight-line method over the life of the securities.

A. Public Entity Risk Pools

(1) Hail Insurance — Any Montana producer engaged in growing crops subject to destruction or damage by hail
may participate in the Hail Insurance program. The Hail Insurance program issued 532 policies during the 2020
growing season. This fund accounts for premium assessments paid by producers for crop acreage insured,
investment and interest earnings, administrative costs, and claims paid for hail damage. Depending upon the reserve
fund's actuarial soundness and the damage in a season, producers may receive a premium refund. Anticipated
investment income is considered in computing a premium deficiency, of which there is none.

A claim must be submitted to the State Board of Hail Insurance within 14 days of a loss occurrence. The claim must

indicate whether the grain is stemming, in the boot, heading out, in the milk, in the stiff dough, ready to bind, or
combine. If beans, peas, or other crops are damaged, the growth-stage must also be indicated. Inspection of a crop
will occur as promptly as possible after claim receipt. The liability on all insured crops expires after October 1. The
insurance only covers loss or damage to growing grain that exceeds 5.0% destruction by hail.

To reduce its exposure to large losses, the fund purchased Crop Hail Quota Share Reinsurance for the 2020 growing
season, with a 75.0% share of premiums and losses allotted to the Reinsurer and a 25.0% share of each allotted to
the State Hail Insurance. The fund recorded a liability of $11.1 thousand, which is 25.0% of the estimated claims
($42.6 thousand) plus adjustment expenses through June 30, 2020. The amount deducted from the estimated claims
as of June 30, 2020, for reinsurance was $31.9 thousand (75.0% of estimated claims). The premiums ceded to the
Reinsurer through June 30, 2020, were $844.6 thousand, which was 75.0% of total premiums of $1.1 million.

Any crop insurance liability is paid to the producers within one year of occurrence; therefore, liabilities are not
discounted. The fund has no excess insurance or annuity contracts.

(2) Montana University System (MUS) Group Insurance Plan — This plan is authorized by the Board of Regents
and in Section 20-25-13, MCA. The Plan's purpose is to provide medical, dental, prescription drug, and related
group benefits coverage to employees of the Montana University System and affiliates, and their dependents,
retirees, and COBRA members. The MUS Group Benefits Plan is fully self-insured, except for life insurance, long-
term care, long-term disability, and accidental death and dismemberment insurance. Delta Dental administers the
dental plan, Blue Cross and Blue Shield of Montana administers the vision plan, and Navitus is the administrator for
the prescription drug program. Allegiance Benefit Plan Management, Blue Cross and Blue Shield of Montana, and
Pacific Source are the three third-party claims administrators for the self-insured managed care plan. Allegiance
Benefit Plan Management, Blue Cross and Blue Shield of Montana, and Pacific Source have contracts for utilization
management. The utilization management program consists of hospital pre-authorization and medical necessity
review as well as large case management. Premiums are collected from employees through payroll deductions and
recorded in the MUS Group Insurance enterprise fund. The claims liability is calculated by Actuaries Northwest and
estimated to be $10.3 million as of June 30, 2020, based on prior year experience. A liability is reported in the
accompanying financial statements for these estimated claims.

(3) Montana University System (MUS) Workers’ Compensation Program — This plan was formed to provide
self-insured workers compensation coverage for MUS employees. The MUS Board of Regents provides workers’
compensation coverage under Compensation Plan Number One (Section 39-7-2101, MCA). The program is self-
insured for workers’ compensation claims with losses in excess of $750.0 thousand per occurrence ($500.0 thousand
for claims occurring prior to July 1, 2013) and $1.0 million per aircraft occurrence covered by reinsurance with a
commercial carrier. Employer’s liability claims are covered to a maximum of $1.0 million above the self-insured
amount of $750.0 thousand ($500.0 thousand for claims occurring prior to July 1, 2013). During fiscal year 2020,
the program ceded $361.2 thousand in premiums to reinsurers.

The MUS Workers' Compensation Program Committee establishes premium rates for all participating campuses
based on actuarial calculations of premium need and composite premium rate. Premium rates are adjusted
periodically based on inflation, claims experience, and other factors. Premiums are recorded as revenue in the MUS
Workers’ Compensation Program in the period for which coverage is provided. Members may be subject to
supplemental assessments in the event of deficiencies. The program considers anticipated investment income in
determining if a premium deficiency exists.

The fund recorded a liability of $4.8 million for estimated claims at June 30, 2020. The liability is based on the
estimated ultimate cost of settling the reported and unreported claims, claims reserve development, including the
effects of inflation, and other societal and economic factors. Estimated amounts of subrogation and reinsurance
recoverable on unpaid claims are deducted from the liability for unpaid claims. Estimated claims liabilities are
recomputed periodically based on a current review of claims information, experience with similar claims, and other
factors. Adjustments to estimated claims liabilities are recorded as an increase or decrease in claims expense in the
period the adjustments are made.

(4) Subsequent Injury — The purpose of the Subsequent Injury Fund (SIF) is to assist individuals with a permanent
impairment that may create an obstacle to employment by limiting workers' compensation exposure for employers
who hire SIF-certified individuals. The program is funded through an annual assessment for Montana self-insured
employers and a surcharge on premium for private insured and Montana State Fund policyholders.

The Employment Relations Division sets the assessment and surcharge rates annually. The amount assessed is
calculated by adding the amount of paid losses reimbursed by SIF from April 1 of the previous calendar year
through March 31 of the current calendar year, plus administration expenses, less other income earned. Employers
share in the reimbursement in two ways: (1) If self-insured, the reimbursement is based on their share of overall paid
losses in the previous calendar year. (2) If insured through a private carrier or Montana State Fund, the
reimbursement is based on both overall paid losses in the previous calendar year, and the amount of the employer's
premium paid for their business.

The SIF program reduces the liability of the employer (if self-insured) or insurer by placing a limit of 104 weeks on
the amount an employer (if self-insured), or the employer’s insurer, will have to pay for medical and wage loss
benefits in the event a worker who is SIF-certified becomes injured or re-injured on the job. SIF will assume liability
for the claim when the 104 weeks is reached. For an insured employer, since the insurer's liability is limited to 104
weeks on the claim, this can favorably impact the employer’s modification factor, which in turn could keep
premiums lower than would otherwise be the case without SIF. For a self-insured employer, it provides a direct
recovery of expenses paid for a workers’ compensation claim. If a certified worker does become injured on the job,
the worker remains entitled to all benefits due under the Workers’ Compensation Act.

An estimated liability is recorded based on a projected cost analysis and total population of registered SIF
participants. As of June 30, 2020, this liability amount was estimated to be $2.4 million.

(5) Changes in Claims Liabilities for the Past Two Years — As indicated above, these funds establish liabilities
for both reported and unreported insured events, including estimates of future payments of losses and related claim
adjustment expenses. The following tables present changes (in thousands) in those aggregate liabilities during the
past two years. All information in these tables is presented at face value and has not been discounted.

B-131
B-132

MUS Group MUS Workers
Hail Insurance Insurance Plan Compensation
2020 2019 2020 2019 2020 2019
Unpaid claims and claim adjustment
expenses at beginning of year $ 17 $ 35 $ 10,000 $ 10,200 $ 6,789 $ 5,831
Incurred claims and claim
adjustment expenses:
provision for insured events
of the current year 793 422 92,564 88,473 1,992 2,523
Increase (decrease) in provision for
insured events of prior years (5) 96 _ _ (2,485) 93
Total incurred claims and claim
adjustment expenses 788 518 92,564 88,473 (493) 2,616
Payments:
Claims and claim adjustment
expenses attributable to insured
events of the current year (782) (405) (92,264) (88,673) (539) (644)
Claims and claim adjustment
expenses attributable to
insured events of prior years (12) (131) _— _— (920) (1,014)
Total payments (794) (536) (92,264) (88,673) (1,459) (1,658)
Total unpaid claims and claim
adjustment expenses at end of year $ 11 $ 17 $ 10,300 $ 10,000 $ 4,837 $ 6,789

B. Entities Other Than Pools

(1) Administration Insurance Plans — This self-insurance plan provides coverage for general liability, automobile
liability, automobile physical damage, foster care liability, and State-administered foreclosure of housing units. The
State self-insures the $2.0 million deductible per occurrence for most property insurance, as well as various
deductible amounts for other State property. The State also self-insures against property losses below $2.0 million of
value, with State agencies paying the first $1.0 thousand. Commercial property insurance protects approximately
$5.8 billion of State-owned buildings and contents. The State’s property insurance includes separate earthquake and
flood protection coverage, with deductibles of $2.0 million for earthquake and $2.0 million for flood per occurrence.
Premiums are collected from all state agencies, including component units, and recorded as revenue in the
Administration Insurance Fund.

An annual actuarial study prepared by Willis Towers Watson Company, and issued for the accident period July 1,
2010, through June 30, 2020, is the basis for estimating the liability for unpaid claims and is supported by historical
loss data. As of June 30, 2020, the estimated claims liability was $53.8 million. Of the $53.8 million estimated
claims liability, $36.4 million is related to a catastrophic property loss for which the insurance proceeds were
received prior to the incurred expenses.

(2) Employee Group Benefits Plans — The medical and dental health plans provided by the State are fully self-
insured with the State assuming the risk for claims incurred by employees of the State, elected officials, retirees,
former employees covered by COBRA benefits, and their dependents. The State contracted with Allegiance as the
third-party administrator for medical coverage. Delta Dental is the administrator for dental coverage. Navitus is the
administrator for the pharmacy program. Contributions are collected through payroll deductions, deductions through
the Public Employees Retirement Administration, the Legislative Branch, and self-payments. The contributions are
recorded as revenue in the Employee Group Benefits internal service fund. As of June 30, 2020, estimates for claims
liabilities, which include both incurred but not reported claims and grandfathered claims resulting from a 1998
change in period for which the benefit coverage is available, as well as other actuarially determined liabilities, were
$19.0 million as provided by Actuaries Northwest, a consulting actuarial firm. In fiscal year 2021, $18.8 million of
these claims liabilities are estimated to be paid.

(3) State of Montana (Old Fund) — State of Montana (Old Fund) covers workers’ compensation claims that were
incurred before July 1, 1990. Old Fund was originally a risk financing insurance entity, but upon depletion of all of
its assets, is now financed by the General Fund. The participants within the pool are individuals outside of
governmental entities.

An actuarial study prepared by Willis Towers Watson, as of June 30, 2020, estimated the cost of settling claims that
have been reported but not settled and claims that have been incurred but not reported. At June 30, 2020, $48.3
million of unpaid claims and claim adjustment expenses were reported at face value.

(4) Changes in Claims Liabilities for the Past Two Years — These funds establish liabilities for both reported and
incurred but not reported claims. Grandfathered claims are not included as they relate to future claims not yet
incurred. The following table presents changes in the balances of claims liabilities during the past two fiscal years
(in thousands).

Administration Employers Group State of Montana
Insurance Plans Benefits Plan Old Fund
2020 2019 2020 2019 2020 2019
Amount of claims liabilities at the
beginning of each fiscal year $ 16,157 $ 15,180 $ 18896 $ 17,723 $ 44,266 $ 31,109
Incurred claims:
Provision for insured events
of the current year 7,091 4,803 170,812 175,435 — —
Increase (decrease) in provision for
insured events of prior years 1,120 12,348 (4,377) (1,672) 12,616 22,193
Total incurred claims 8,211 17,151 166,435 173,763 12,616 22,193
Payments:
Claims attributable to insured
events of the current year (3,063) (2,167) (151,950) (156,695) _— _—
Claims attributable to
insured events of prior years (3,874) (14,007) (14,399) (15,895) (8,602) (9,036)
Total payments (6,937) (16,174) (166,349) (172,590) (8,602) (9,036)
Total claims liability at end of
each fiscal year $ 17,431 $ 16,157 $ 18982 $ 18896 $ 48,280 $ 44 266

{$36.4 million of additional claims for the Administration Insurance Plans not included in the table above, are related to a catastrophic

property loss for which the insurance proceeds were received prior to the incurred expenses.

B-133
B-134

NOTE 9. COMMITMENTS
A. Highway Construction

At June 30, 2020, the Department of Transportation had contractual commitments of approximately $281.5 million
for construction of various highway projects. Funding for these highway projects is to be provided from federal
grants and matched with state special revenue funds.

B. Capital Construction

At June 30, 2020, the Department of Administration, Architecture & Engineering Division, had commitments of
approximately $60.9 million for capital projects construction. The primary government will fund $40.4 million of
these projects, with the remaining $20.5 million funded from the Montana University System.

At June 30, 2020, Fish, Wildlife, and Parks had contractual commitments of approximately $1.9 million for
engineering and construction of various capital projects. The majority of the funding for these projects is to be
provided by federal grants and state special revenue funds.

C. Loan and Mortgage Commitments

The Montana Board of Investments (BOI) makes firm commitments to fund commercial loans, residential
mortgages, and Veterans' Home Loan Mortgages (VHLM) from the Coal Severance Tax Permanent Trust Fund.
These commitments have expiration dates and may be extended according to BOI policies. As of June 30, 2020,
BOI had committed, but not yet purchased, $21.7 million in loans from Montana lenders. In addition to the above
commitments, lenders had reserved $8.1 million for loans as of June 30, 2020. As of June 30, 2020, another $825.9
thousand represented lender reservations for the VHLM residential mortgage purchases with no purchase
commitments.

The BOI makes reservations to fund mortgages from the State’s pension funds. As of June 30, 2020, there were no
mortgage reservations. All BOI residential mortgage purchases are processed by the Montana Board of Housing
(MBOH). The MBOH does not differentiate between a mortgage reservation and a funding commitment.

The BOI makes firm commitments to fund loans from the INTERCAP loan program. The BOI’s outstanding
commitments to eligible Montana governments, as of June 30, 2020, totaled $29.6 million.

D. Department of Corrections Bond Commitments

At June 30, 2020, the outstanding tax-exempt bonds distributed by the Facility Finance Authority were issued in the
amount of $10.3 million, of which $1.8 million in principal payments are scheduled to be paid by June 30,
2021. These bonds have been issued to facilities operating treatment and pre-release centers. The Department of
Corrections agrees to provide payment on behalf of the contractors for the total principal and interest regarding these
outstanding bonds. These costs are then recovered through the center's monthly billing for inmate room and board.

E. Department of Labor and Industry Commitments

At June 30, 2020, the Department of Labor and Industry, had $1.9 million contractual commitments for Montana
State AmeriCorps Programs and a $1.8 million commitment for information technology contracts. The funding for
these programs is federal grants, state special revenue funds, and proprietary funds.
F. Proprietary Fund Commitments

Budgets are administratively established in the enterprise and internal service funds, excluding depreciation,
compensated absences, and bad debt expense. Appropriations may be committed for goods/services that are not
received as of fiscal year-end. These executory commitments are included in unrestricted net position in the

accompanying financial statements as follows (in thousands):

G. Encumbrances

As of June 30, 2020, the State of Montana encumbered expenditures as presented in the table below (in thousands):

Encumbrances

Enterprise Funds
BOI Municipal Finance Programs

Liquor Warehouse

State Lottery Fund

Prison Industries

Other Enterprise Funds
Subtotal - Enterprise funds

Internal Service Funds

SABHRS Finance and Budget Bureau
Investment Division

Labor Central Services

Subtotal - Internal Service funds

Amount

$ 12

186
19
3

1

$ 221

$ 218
49
1,193

$ 1,460

Nonmajor
Federal Special Governmental State Special
Revenue Fund General Fund Funds Revenue Fund Total
$ 39,219 $ 16,769 $ 939 §$ 50,452 $ 107,379

B-135
B-136

NOTE 10. LEASES/INSTALLMENT PURCHASES PAYABLE

The State has entered into various capital and operating leases for land, buildings, equipment, and computer
software. Lease contracts are required by law to contain a clause indicating if the continuation of the lease is subject
to funding by the Legislature. It is expected, in the normal course of operations, that most of these leases will be
replaced by similar leases.

A. Capital Leases/Installment Purchases

Obligations under capital leases/installment purchases at June 30, 2020, were as follows (in thousands):

Governmental Business-Type
Fiscal Year Ending June 30: Activities Activities

2021 $ 5,918 §$ 12
2022 4,419 11
2023 2,905 4
2024 2,003 _
2025 1,571 —
2026 - 2030 3,877 _
2031 - 2035 1,660 —
Total minimum payments 22,353 27
Less: interest (1,736) (1)

Present value of minimum payments $ 20,617 $ 26

Assets acquired under capital leases for the primary government by asset class were as follows (in thousands):

Asset Class

Buildings $ 1,596
Equipment 38,568
Less: Accum Depreciation (13,137)
Net Book Value $ 27,027

B. Operating Leases

Primary government rental payments for operating leases in fiscal year 2020 totaled $26.3 million. Future rental
payments under operating leases are as follows (in thousands):

Governmental Business-Type
Fiscal Year Ending June 30: Activities Activities
2021 $ 23,465 $ 663
2022 21,675 611
2023 19,999 562
2024 17,047 563
2025 14,235 537
2026 - 2030 48,192 1,441
2031 - 2035 26,588 758
Thereafter 13,604 735

Total future rental payments $ 184,805 $ 5,870
NOTE 11. STATE SHORT-TERM DEBT AND LONG-TERM LIABILITIES
A. General Information

The State has no constitutional limit on its power to issue obligations or incur debt, other than a provision that no
debt may be created to cover deficits incurred because appropriations exceeded anticipated revenues. No State debt
shall be created unless authorized by a two-thirds vote of the members of each house of the Legislature or a majority
of the electors voting thereon. The Board of Examiners (consisting of the Governor, Secretary of State, and Attorney
General) is authorized, pursuant to various enabling acts, to issue bonds and notes of the State.

B. Short-term Debt

The Board of Examiners, upon recommendation of the Department of Administration, may issue notes in
anticipation of the receipt of taxes and revenues. Notes may not be issued to refund outstanding notes.

During fiscal year 2020, the State issued two bond anticipation notes. The proceeds of the State Revolving Fund
Programs Wastewater 2020D and Drinking Water 2019D issuances were used to fund wastewater and drinking
water system improvements and rehabilitation. The State made some payments to Drinking Water 2019A, as well as
paid off Wastewater 2019B, during fiscal year 2020. An additional bond anticipation note has been authorized, but
not issued as of fiscal year-end. The following schedule summarizes the activity for the year ended June 30, 2020 (in
thousands):

Bond Anticipation Notes Beginning Balance Additions Reductions Balanee

Water/Wastewater - 2019B 1,190 1,910 3,100 —
Drinking Water - 2019A 1,400 1,500 2,300 600
Drinking Water - 2019D — 1,300 — 1,300
Water/Wastewater — 2020D “ — 1,100 — 1,100

These bond anticipation notes have not been fully drawn at fiscal year-end.

The Board of Investments (BOI) of the State is authorized to issue Intermediate-Term Capital (INTERCAP) bonds
under the Municipal Finance Consolidation Act. These bonds may not aggregate more than $190.0 million, as
amended by the 2007 Legislature. The purpose of the bonds is to provide funds for BOI to make loans to eligible
government units. The bonds are not a debt or liability of the State. The bonds are limited obligations of BOI,
payable solely from (1) repayments of principal and interest on loans made by BOI to participating eligible
governmental units, (2) investment income under the indenture, and (3) an irrevocable pledge by BOI. BOI has no
taxing power. The bonds may be redeemed, at the bondholder's option, any March 1, prior to maturity. BOI did not
enter into an arms-length financing agreement to convert the bonds "put," or tender, and did not resell the bonds into
some other form of long-term obligation. Accordingly, these bonds, considered demand bonds, are included in short-
term debt. The amounts issued and outstanding at June 30, 2020, were as follows (in thousands):

Amount Balance

Series Issued June 30, 2020

2003 $ 15,000 $ 14,310
2004 18,500 17,975
2007 15,000 14,620
2010 12,000 11,880
2013 12,000 11,960
2017 20,000 19,925

$ 90,670

B-137
B-138

The following schedule summarizes the activity relating to the demand bonds during the year ended June 30, 2020
(in thousands):

Beginning a: . Ending
Balance Additions Reductions Balance

Demandbonds $ 105,065 $ — $ 14,395 $ 90,670

C. Long-term Debt

The full faith, credit, and taxing powers of the State are pledged for the payment of all general obligation debt.
Revenue and mortgage bonds are secured by a pledge from the facilities to which they relate and by certain other
revenues, fees, and assets of the State and the various colleges and universities. Primary government bonds and
notes outstanding at June 30, 2020, were as follows (in thousands):

Principal Payments

Amount Interest Fiscal Year _In Year of Balance

Governmental Activities Series Issued Range (%) 2021 Maturity? June 30, 2020
General obligation bonds
Hard Rock Mining Reclamation 2002C 2,500 3.5-4.7 180 200 (2023) 570
CERCLA Program ©) 2005D 2,000 3.25-4.3 115 140 (2026) 765
Energy Conservation Program «) 2006B 3,750 4.0-6.0 320 330 (2022) 650
Long-Range Bldg Program 2008D 3,100 3.375-4.35 160 220 (2028) 1,495
Long-Range Bldg Program Refunding 2010A =. 20,220 2.0-4.0 710 710 (2021) 710
Trust Land (Taxable) 2010F 21,000 1.55-4.9 1,000 1,450 (2031) 13,265
Long-Range Bldg Program 2010G 550 1.5-2.7 60 60 (2021) 60
Long-Range Bldg Program Refunding 2011D 5,755 3.0-3.25 670 720 (2023) 2,085
Long-Range Bldg Program Refunding 2013C 6,780 2.0-4.0 685 115 (2025) 3,010
Long-Range Bldg Program Refunding 2014 28,810 1.5-5.0 2,085 820 (2028) 17,555
Water Pollution Control Revolving Fund ) 2015C =. 24,365 3.0-5.0 905 1,860 (2036) 21,185
Long-Range Bldg Program 2020C 28,900 2.0-5.0 2,605 3,465 (2030) 28,900

Total general obligation bonds $147,730 $ 9,495 $ 90,250
Special revenue bonds
Renewable Resource Program (Taxable) “” 2010C 6,720 0.9-4.2 410 170 (2031) 3,540
Renewable Resource Program ” 2013A 2,255 2.0-3.625 145 155 (2024) 595
Renewable Resource Program (Taxable) @ 2013B 3,390 1.0-4.75 210 290 (2029) 2,215
U.S. Highway 93 GARVEE Refunding ®) 2016 = 22,540 0.74-1.86 3,390 3,740 (2023) 10,685
State Hospital Project © 2018 = 4,575 4.0-5.05 1,130 1,165 (2022) 2,295

Total special revenue bonds $ 39,480 $ 5,285 $ 19,330
Principal Payments

Amount Interest Fiscal Year In Year of Balance

Governmental Activities Issued — Range (%) 2021 Maturity” June 30, 2020
Notes Payable
Middle Creek Dam Project ® 3,272 8.125 96 226 (2034) 1,854
Tongue River Dam Project ‘°? 11,300 — 290 290 (2038) 5,215
ITSD IBM Professional Services 758 0.19 167 72 (2023) 409

Total notes payable $ 15,330 $ 553 $ 7,478

Subtotal governmental activities,

before unamortized balances 117,058

Unamortized premium 10,348

Total governmental activities $202,540 $ 15,333 $ 127,406

SBS

GSE

The interest range is over the life of the obligation.

Year of maturity refers to fiscal year.

This bond provides matching funds to enable the State to obtain capitalization grants from the U.S Environmental Protection Agency for water system
development loans to state political subdivisions.

Bonds issued for financing the design, construction, and installation of energy conservation projects at various state buildings.

The CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) Program Bonds were issued for the purpose of financing the
costs of State of Montana participation in the remedial actions under Section 104 of the CERCLA 42 United States Code Sections 9601-9657, and State of
Montana costs for maintenance of sites under CERCLA. The CERCLA Bonds are secured additionally by a pledge of monies received by the State as cost
recovery payments and revenues derived from the resource indemnity and groundwater assessment tax in the event cost recovery payments are
insufficient.

Facility Finance Authority loan to the Department of Public Health and Human Services for the Montana State Hospital Project.

Issued by the Department of Natural Resources and Conservation and backed by a pledge of coal severance taxes and project revenues.

The U.S. Highway 93 GARVEES (Grant Anticipation Revenue Vehicles) Bonds were issued for the purpose of improving a 44.8-mile stretch of U.S.
Highway 93. Repayment of the bonds is secured by a pledge of certain federal aid revenues.

U.S. Bureau of Reclamation loan to the Department of Natural Resources & Conservation.

Northern Cheyenne Tribe loan to the Department of Natural Resources & Conservation. The loan will not accrue interest and will be repaid over 39 years.
Loan repayment is secured by the issuance of a coal severance tax bond to the tribe.

Debt Service Requirements

Primary government debt service requirements at June 30, 2020, were as follows (in thousands):

Governmental Activities

General Obligation Bonds Special Revenue Bonds Notes Payable

Year Ended June 30: Principal Interest Principal Interest Principal Interest

2021 $ 9,495 $ 3,656 $ 5,285 $ 913 $ 553 $ 8
2022 8,845 3,571 5,910 678 560 44
2023 8,905 3,104 4,565, 432 465 41
2024 8,320 2,137 860 209 398 41
2025 7,965 2,350 745 141 403 41
2026 - 2030 35,350 6,765 2,195 271 2,095 204
2031 - 2035 9,510 1,547 170 5 2,135 163
2036 - 2040 1,860 47 _— — 869 —

Total $ 90,250 $ 23,777 $ 19,330 _$ 2,649 $ 7,478 $ 542

B-139
B-140

E. Summary of Changes in Long-term Liabilities

Primary government long-term liability activities for the year ended June 30, 2020, were as follows (in thousands):

Amounts
Amounts Dueln More
Beginning Ending DueWithin Than One
Balance Additions Reductions Balance One Year Year
Governmental activities
Bonds/notes payable
General obligation bonds $ 73,090 $ 28900 $ 11,740 $ 90,250 $ 9,495 $ 80,755
Special revenue bonds 38,425 — 19,095 19,330 5,285 14,045
Notes payable 8,150 — 672 7,478 553 6,925
119,665 28,900 31,507 117,058 15,333 101,725
Unamortized discount (7) 7 _ _ _ —
Unamortized premium 7,461 2,887 _ 10,348 _ 10,348
Total bonds/notes payable 127,119 31,794 31,507 127,406 15,333 112,073
Other liabilities
Lease/installment purchase payable 12,545 16,653 8,581 20,617 5,634 14,983
Operating lease rent holiday 8 — 8 — — —_
Compensated absences payable “” 101,685 59,366 51,758 109,293 51,621 57,672
Estimated insurance claims ' 79,318 187,262 145,482 121,098 46,576 74,522
Pollution remediation 177,850 — 4,358 173,492 14,250 159,242
Net pension liability 2,220,765 49,435 27,116 2,243,084 — 2,243,084
Total OPEB liability 54,012 — 8,419 45,593 — 45,593
Total other liabilities 2,646,183 312,716 245,722 = 2,713,177 118,081 2,595,096
Total governmental activities long-term
liabilities $ 2,773,302 $ 344,510 $ 277,229 $ 2,840,583 $ 133,414 $ 2,707,169
Business-type activities
Lease/installment purchase payable $ 18 $ 53 $ 45 $ 26 $ 1 $ 15
Compensated absences payable 2,022 1,055 860 2,217 860 1,357
Arbitrage rebate tax payable 44 21 43 22 — 22
Estimated insurance claims 19,069 92,423 93,969 17,523 12,942 4,581
Net pension liability 11,943 662 1,095 11,510 — 11,510
Total OPEB liability 1,004 — 187 817 — 817
Total business-type activities long-term
liabilities $34,100 $ 94214 $ 96199 $ 32,115 $ 13,813 $ 18,302

"The compensated absences liability attributable to the governmental activities will be liquidated by several of the governmental and internal service funds.
The Employee Group Benefits and Administration Insurance internal service funds will liquidate the estimated insurance claims liability.

$36.4 million Administration Insurance Plans included in the table above, are related to a catastrophic property loss for which the insurance proceeds were
received prior to the incurred expenses.

Deferred outflows, including those related to bonds payable, are reported separately on the Statement of Net Position based on GASB Statement No. 65.
Total OPEB liability and Pension benefits payable beginning balances were restated due to prior period adjustments.

F. Refunded and Early Retired Debt

Prepayments
The Department of Natural Resources and Conservation (DNRC) used current available resources to make several

prepayments: $1.2 million on Series 2010B general obligation bond, $450.0 thousand on Series 2013D general
obligation bond, $1.2 million on Series 2013E general obligation bond, $805.0 thousand on Series 2003A special
revenue bond, $1.1 million on Series 2010B state special revenue bond, and $865.0 thousand on Series 2013A
special revenue bond. The prepayments on all three general obligation bonds, as well as those made to special
revenue bonds Series 2003A and Series 2010B, resulted in payoffs.
G. No-Commitment Debt

Information is presented below for financing authorities participating in debt issues. The related debt issued does not
constitute a debt, liability, obligation, or pledge of faith and credit of the State. Accordingly, these bonds and notes
are not reflected on the accompanying financial statements.

Montana Board of Investments (BOT)

BOI is authorized to issue Qualified Zone Academy Bonds (QZAB) under the Municipal Finance Consolidation Act
as conduit (no-commitment) debt. The revenues, and in some cases, the taxing power of the borrower, are pledged to
repay the bonds. At June 30, 2020, QZAB debt outstanding aggregated $5.0 million.

BOI is also authorized to issue Qualified School Construction Bonds (QSCB) under the Municipal Finance
Consolidation Act as conduit (no-commitment) debt. The revenues of the borrower are pledged to repay the bonds.
At June 30, 2020, QSCB debt outstanding aggregated $3.9 million.

H. Estimated Pollution Remediation Obligation

Estimated pollution remediation obligations are obligations to address the current or potential detrimental effects of
existing pollution by participating in pollution remediation activities such as site assessments and cleanups. The
estimates are derived using the expected cash flows method as well as technical estimates from record of decisions,
consent decrees, and/or settlement agreements. There may be factors influencing the estimates that are not known at
this time. Prospective recoveries from other responsible parties may reduce the State’s obligation.

The State’s estimated pollution remediation liability as of June 30, 2020, was $173.5 million. Of this liability, $4.5
million resulted in settlement agreements to provide restoration of natural resources, water supplies, and natural
resource-based recreational opportunities up to the settlement amount; $162.5 million is based on decrees or
settlements for remediation activities. Other estimated liabilities have been recorded for soil and Polychlorinated
Biphenyls (PCB) contamination, as well as removal of asbestos contamination. The estimated pollution remediation
liability was recorded in compliance with accounting and reporting standards and does not constitute the State’s total
acceptance of the liability or responsibility on these matters.

I. Non-Exchange Financial Guarantee

BOI provides loan guarantees from the Coal Severance Tax Fund to the Facility Finance Authority (FFA). BOI
exposure to bond issues, surety bonds, and designated loans of the FFA totaled $88.3 million as of June 30, 2020.
FFA is a discretely presented component unit of the State of Montana. FFA guarantee requests are submitted to BOI
for review and approval. BOI’s participation, either duration or any other consideration, to either purchase bonds or
loans or to lend money for deposit into FFA’s statutorily allowed capital reserve account is explicitly limited by
statute, which requires BOI to act prudently. The guarantee requests from FFA pertain to bonds issued by FFA with
a term of up to 40 years. BOI receives a credit enhancement fee at FFA bond closing based on the term of the
financing, the type of bond, the rating of the borrower, and the type of reserve fund. BOI and FFA have entered into
an agreement detailing repayment to BOI. The credit enhancement fee received during the fiscal year was $54.0
thousand. BOI has not had to perform on any loan guarantee in the past.

The following schedule summarizes the activity related to the non-exchange financial guarantee during the year
ended June 30, 2020 (in thousands):

Beginning Ending
Balance Additions Reductions Balance

$ 88,941 $ 4,000 $ 4,595 $ 88,346

B-141
B-142

NOTE 12. INTERFUND BALANCES AND TRANSFERS
A. Balances Due From/To Other Funds

Balances due from/to other funds arise when there is a time lag between the dates that reimbursable expenditures
and interfund services provided/used are recorded in the accounting system and the dates on which payments are
made. Balances also arise when there is a time lag between the dates transfers between funds are recorded and the
dates on which payments are made. Balances due from/to other funds also include the current portion of balances
related to amounts loaned by the Municipal Finance Programs to other funds, under the Board of Investments'
INTERCAP loan program. Balances due from/to other funds are expected to be repaid within one year from
origination.

Balances due from/to other funds at June 30, 2020, consisted of the following (in thousands):

Due to Other Funds
Coal Federal Internal Nonmajor Nonmajor State
Severance Special General Service Land Enterprise Governmental Special

Tax Revenue Fund Funds Grant Funds Funds Revenue Total
Due from Other Funds
Coal Severance Tax $ — $ — $ — $ —$ —$ — $ 8 $ — $ 8
General Fund = 1,499 = = = 15,954 — 9,018 26,471
Internal Service Funds 40 26 — — — — — 43 109
Municipal Finance Programs _ _ _ 1,924 _ _ 1,414 _ 3,338
Nonmajor Governmental
Funds = 308 29 = = = = 1,110 1,447
State Special Revenue “” 550 18 170 — 1,750 125 524 — 3,137

Total $ 590 $ 1,851 $ 3,070 $ 1,924 $1,750 $ 16,079 $ 1,946 $ 10,182 $ 37,392

) Total due from other funds to the state special revenue fund on the fund financial statement is reported as $13.7 million. The difference of $10.6
million between the amount reported above of $3.1 million and the amount reported in the fund financial statement relates to long-term receivables.
The receivables are reported on the fund financial statement, and the long-term liabilities are reported on the government-wide statement.

) Total due to other funds from the non-major enterprise funds on the fund financial statement is reported as $16.3 million. The difference of $245.1
thousand between the amount reported above of $16.1 million and the amount reported on the fund financial statement relates to loans payable. The
receivables are reported on the government-wide statement, and the liabilities are reported on the fund financial statement.

B. Interfund Loans Receivable/Payable

Montana statutes include a provision for interfund loans when the expenditure of an appropriation is necessary, and
the cash balance in the account from which the appropriation was made is insufficient to pay the expenditure.
Interfund loans receivable/payable are expected to be repaid within one year from the date of origination.
Interfund loans receivable/payable at June 30, 2020, consisted of the following (in thousands):

Interfund Loans Payable

B-143

Coal Federal _ Internal Nonmajor Nonmajor State
Severance Special Service Governmental Enterprise Special Land Unemployment

Tax Revenue Funds Funds Funds Revenue Grant Insurance Total
Interfund Loans
Receivable
General Fund $ 1,332 $ 88,769 $ 258 $ 257 $ 80 $ 5,283 §$ — $ — $ 95,979
Nonmajor
Enterprise Funds _ 61 _ = — — _ — 61
Nonmajor
Governmental Funds — — = — — 5 — _ 5
State Special
Revenue _— 100,225 19 200 _— _— 10 1,500 101,954

Total $ 1,332 $ 189,055 $ 277 $ 457 $ 80 $ 5,288 $ 10 $ 1,500 $197,999

C. Advances To/From Other Funds

Advances to/from other funds represent the portion of interfund loans that are not expected to be repaid within one
year from the date of origination. Advances to/from other funds also include the noncurrent portion of balances
related to amounts loaned by the Municipal Finance Programs to other funds, under the Board of Investments'
INTERCAP loan program. For more information on the INTERCAP loan program, refer to Note 11.

Advances to/from other funds at June 30, 2020, consisted of the following (in thousands):

Advances from Other Funds

Advances to Other Funds

Coal Severance Tax $
General Fund

Municipal Finance Programs
Nonmajor Governmental Funds

State Special Revenue

Total $

Federal Internal Nonmajor State
Special Service Governmental Special
Revenue Funds Funds Revenue Total
—$ —$ 2,507 $ —$ 2,507
355 — — — 355
— 5,407 1,601 — 7,008
— — — 6,065 6,065
25,131 — 3,217 — 28,348
25,486 $ 5,407 $ 7,325 $ 6,065 $ 44,283

Additional detail for certain advance balances at June 30, 2020, follows (in thousands):

Advances from the Municipal Finance Programs
under the INTERCAP Loan Program

Departmental Function Balance
Natural Resources and Conservation $ 1,601
Fish, Wildlife, and Parks 756
Transportation 4,651
Total $ 7,008

D. Interfund Transfers

Routine transfers between funds are recorded to (1) transfer revenues from the fund legally required to receive the
revenue to the fund authorized to expend the revenue, (2) transfer resources from the General Fund and special
B-144

revenue funds to debt service funds to support principal and interest payments, (3) transfer resources from enterprise
funds to the General Fund to finance general government expenditures, and (4) provide operating subsidies.

Interfund transfers for the year ended June 30, 2020, consisted of the following (in thousands):

Transfers Out

Coal Federal Internal Nonmajor — Nonmajor State
Severance Special General Service Land Enterprise Governmental Special
Tax Revenue Fund" Funds” Grant Funds”) Funds Revenue Total
Transfers In
Coal Severance Tax $ — $ — $ — $ —$ —$ — $ 2 $ — $ 2
General Fund “ 21,600 114 — — 5 50,522 — 14,532 86,773
Land Grant _— _— 5 _— _— _— _— 1 6
Nonmajor Governmental Funds 589 31,838 19,685 — 2,187 — 1,376 12,987 68,662
State Special Revenue 11,598 16,681 55,839 391 59,393 8,752 23,559 — 176,213
Total $33,787 $ 48633 $76,949 $ 391 $61,585 $ 59,274 $ 24,937 $ 64,180 $369,736

$57.1 million was transferred from the General Fund to the Budget Stabilization Reserve Fund; however, those funds are combined for reporting
purposes. Therefore the transfer is not accounted for in the above table as both the transfer-in and the respective transfer-out have been eliminated
as required for proper financial reporting.

Total transfers-out for internal service funds on the fund financial statements is reported as $944.0 thousand. The difference of $553.3 thousand
between the amount reported above of $390.7 thousand and the amount reported on the fund financial statements relates to the transfer of capital
assets between a governmental fund type and the internal service fund type. When capital assets are transferred between these fund types, the
transferring fund reports the net book value of the capital asset as a transfer-out, and the receiving fund reports the net book value of the capital
asset as a capital contribution.

Total transfers-out for nonmajor enterprise funds on the fund financial statements is reported as $59.4 million. The difference of $120.9 thousand
between the amount reported above of $59.3 million and the amount reported on the fund financial statements relates to the transfer of capital assets
between a governmental fund type and the nonmajor enterprise fund type. When capital assets are transferred between these fund types, the
transferring fund reports the net book value of the capital asset as a transfer-out, and the receiving fund reports the net book value of the capital
asset as a capital contribution.
NOTE 13. FUND EQUITY DEFICITS

The following funds have a deficit net position remaining at June 30, 2020, as follows (in thousands):

Fund Type/Fund Deficit “”
Governmental Funds

Federal Special Revenue ” $ (6,800)
Federal/Private Construction Grants (710)

Internal Service Funds

Information Tech Services $ (16,334)
Building and Grounds (1,171)
Admin Central Services (1,817)
Labor Central Services (5,962)
Commerce Central Services (1,377)
OPI Central Services (2,227)
DEQ Indirect Cost Pool (3,623)
Payroll Processing (1,638)
Warrant Processing (8)
Investment Division (2,298)
Aircraft Operation (678)
Justice Legal Services (709)
Personnel Training (159)
Other Internal Services (345)
SABHRS Finance & Budget Bureau (252)
Enterprise Fund

State Lottery $ (1,898)
Subsequent Injury (1,313)
Local Government Audits (163)

The allocation of net pension liability and total OPEB liability
is a significant factor in creating these deficits. For more detail
related to these liabilities, see Notes 6 and 7, respectively.
Delayed fire season federally reimbursable costs, which are
currently reported as unavailable revenues within deferred
inflow of resources, is a significant factor creating this deficit.

B-145
B-146

NOTE 14. MAJOR PURPOSE PRESENTATION

Special Revenue and Fund Balances Classifications by Purpose — In the governmental fund financial statements,
classifications of special revenue fund revenues and fund balances are presented in the aggregate. The tables
presented below further display the special revenue fund revenues and fund balances by major purpose for the year
ending June 30, 2020.

State Special Revenue By Source (in thousands)

Health and
General Public Human Natural
Government Safety Transportation Services Education Resources Total
Licenses/permits $ 124,482 $ 46,545 $ 22,478 $ 3,280 $ 156 $ 88,698 $ 285,639
Taxes 212,989 5,091 260,331 — — 16,733 495,144
Charges for services 26,865 18,209 9,307 33,009 2,346 16,905 106,641
Investment earnings 700 11,852 507 491 1,513 24,100 39,163
Securities lending income _— 27 _— _— 3 45 15
Sale of documents/
merchandise/property 1,386 3,417 89 84 6 7,954 12,536
Rentals/leases/royalties 298 16 672 50 7 303 1,346
Contributions/premiums 28,290 — — 5,204 — 315 33,809
Grants/contracts/donations 1,495 767 276 10,545 1,791 4,629 19,503
Federal 6,184 — 1 430 27 — 6,642
Federal indirect cost
recoveries _— _— 52,086 43 _— 5,380 57,509
Other revenues 2,112 429 291 140 193 784 3,949
Transfers in 35,320 8,602 1,536 8,034 1,264 121,457 176,213
Total State Special
Revenue $440,121 $ 94955 $ 347,574 $ 61,310 $ 7,306 $ 286,903 $ 1,238,169
Federal Special Revenue By Source (in thousands)
Health and
General Public Human Natural
Government Safety Transportation Services Education Resources Total
Charges for services $ 818 $ 6 $ — $ 6,531 $ 1 $ 2 $ 7,358
Investment earnings 456 17 _— _— 57 138 668
Securities lending income 37 _— _— _— _— _— 37
Grants/contracts/donations _ _ _ 13 59 _— 72
Federal 204,771 18,983 565,747 2,071,021 193,655 126,323 3,180,500
Federal indirect cost
recoveries _— _— _— 91,703 58 1,526 93,287
Other revenues 6 9 _— 1,269 2 3 1,289
Transfers in _— 1,356 _— 109 20 _— 1,485

Total Federal Special
Revenue $ 206,088 $ 20,371 $ 565,747 $ 2,170,646 $ 193,852 $ 127,992 $ 3,284,696
B-148

NOTE 15. RELATED PARTY TRANSACTIONS

The Montana School for the Deaf and Blind is associated with a foundation, which is a nonprofit organization
outside of state government. The school’s foundation is governed by a board of directors that annually approves a
budget for the financial support to be provided to the school. This budget defines the allowable expense categories
for the year. A school employee is the person approving the expenses to be paid by the foundation based on its
budget. The employee submits the approved invoices to the foundation’s bookkeeper, who then prepares the checks
and submits them to a board member who reviews backup documentation and signs the checks.

The Department of Labor and Industry's Workforce Services Division rents space in Libby, MT, from Mineral
Plaza, LLC, in which one of the owners is a local job service manager. The term of the lease is July 1, 2013 and
ending June 30, 2021. The annual lease amount is currently set at $21.3 thousand.

The Department of Labor and Industry Workforce Services Division rents space in Cut Bank, MT from Glacier
Community Health Center, Inc., in which one of the active board members is a local job service manager. The term
of the lease is July 1, 2019 and ending June 30, 2022. The annual lease amount is currently set at $35.0 thousand.

The relative of a member of Montana Department of Transportation’s (MDT) management team is part owner of a
business that holds a State term contract for supplies. A term contract is a contract in which a source for supplies is
established for a specific period of time at a predetermined unit price. The term contracts are issued by the State
Procurement Bureau of the Department of Administration (DOA) and state agencies are required to use the DOA
issued term contracts for such supplies. MDT purchased supplies from this business in the amount of $95.9 thousand
for the fiscal year ended June 30, 2020.

A relative of a member of MDT's Management Team is part owner of a business which has been granted the right by
the local airport to operate and provide related services. There is only one such operator at this airport. Given this
exclusivity, MDT had transactions with this business. MDT purchased services in the amount of $16.9 thousand for
the fiscal year ended June 30, 2020.

Per Section 85-1-617 and 85-1-624, MCA, Renewable Resource Grant and Loan Program, the Department of
Natural Resources and Conservation (DNRC) is eligible to issue General Obligation (GO) bonds for the purpose of
making private sale loans. DNRC has applied and received “recycled loan funds” from the SRF program for the
non-point source private loan program. The loans are GO private sale bonds. The balances for loans in repayment
for fiscal year 2020 was $3.1 million. The loans have interest rates of 2.5% and are repaid over 15 years. These
loans are presented as Advances to Other Funds on the balance sheets.

Per Administrative Rules of Montana 17.58.101, the Montana Petroleum Tank Release Compensation Board
(Board) is an independent board that is attached to Department of Environmental Quality (DEQ) for administrative
purposes only. Board members are required to follow Montana's code of ethics, which includes recusing oneself in
matters related to a conflict of interest. DEQ is required to go through a competitive bidding process to ensure this
State law is followed. Four Board members were identified as having related party transactions with DEQ. These
relationships include members who are: 1) an employee of a company that had a release and is receiving funds; 2) an
agent for an insurer that covered a station tank release and is receiving funds; 3) an officer in a bank that receives
funds; and 4) a contractor for DEQ, that is responsible for clean-up oversight, and is also a shareholder of a separate
company that receives funds. A DEQ employee's spouse is an elected City Commissioner for the City of Helena
which was awarded $25.5 thousand in VW Settlement funds for three electric charging stations by DEQ. Total
payments to all related parties were direct payments to the contractors in the amount of $282.2 thousand and $34.0
thousand, and indirect payments to the bank and the insurance company in the amount of $45.1 thousand and $12.1
thousand, respectively, for the fiscal year ended June 30, 2020.

All lotteries that offer multi-state games transact with the Multi-State Lottery Association (MUSL), which requires
the lottery directors from each of the states to be on the MUSL board of directors. The Director of the Montana
Lottery is on the MUSL board, and serves as the Secretary of its board of directors. As such, the Director of the
Montana Lottery is in a management position for both MUSL and the Montana Lottery, which have significant
transactions between each other. The Montana Lottery has prize reserves with MUSL in the amounts of $1.1 million
for the fiscal year ended June 30, 2020. The prize reserve monies are assets of the Montana Lottery and would be
returned if the Montana Lottery were to quit any of the multi-state games. Weekly, MUSL collects each state’s share
of prize expenses to go towards respective jackpots. If a state has a large enough prize amount or number of winners
for any particular draw, MUSL would then reimburse any state for the excess prize payments. The Montana Lottery
paid MUSL $5.4 million for its share of prizes and received reimbursements for prizes in the amount of $3.0 million
for the fiscal year ended June 30, 2020.

There are campus-affiliated foundations within the Montana University System (MUS) as identified in the Montana
Board of Regents of Higher Education Policy 901.9 — Campus-Affiliated Foundations; Montana University System
Foundation. The private foundations affiliated with campuses of the MUS provide support to their respective
campuses, consistent with the mission and priorities of such campus. As such, transactions occur between the
Commissioner of Higher Education and said foundations as reimbursements for hosting MUS constituents and other
related events and gatherings. These transactions do not affect the financial statements in any way; however, total
such transactions were $7.3 thousand for the fiscal year ended June 30, 2020.

In addition, the MUS Group Insurance Program offers insurance coverage and receives insurance premiums from
other related parties such as the campus-affiliated foundation and the community colleges. This premium revenue
for campus-affiliated foundations and the community colleges approximately amounts to $6.5 million for the fiscal
year ended June 30, 2020.

Montana Higher Education Student Assistance Corporation (MHESAC) has no employees and its business
operations are managed by the Student Assistance Foundation (SAF). A Board of Regents board member is also a
MHESAC Board of Directors member, an Office of the Commissioner of High Education OCHE staff member is a
MHESAC officer, and the Commissioner of Higher Education is an Ex-Officio member of the board.

B-149
B-150

NOTE 16. CONTINGENCIES

Litigation

The State is party to legal proceedings, which normally occur in government operations. The legal proceedings are
not, in the opinion of the State's legal counsel and the Department of Administration, likely to have a material
adverse impact on the State's financial position, except where listed below.

In State of Montana v. Philip Morris, Inc., No. CDV 97-306 (Mont. first Jud. Dist. Lewis & Clark County), the State
of Montana filed various claims against six tobacco manufacturers seeking recovery of an unspecified amount of
damages, penalties, and attorney’s fees. The lawsuit was resolved eventually through two settlements. The State first
settled its claims against one of the manufacturers, Liggett & Meyers, Inc., for $1.0 million to be paid over a 20-year
period. Next, Montana was among the Settling States that signed onto the 1998 Master Settlement Agreement
(MSA) and settled its claims against the remaining manufacturers for a settlement amount calculated annually on
cigarette sales by Participating Manufacturers in perpetuity. The base amount was augmented by $90.0 million in
1999 for a strategic contribution portion for those states instrumental in obtaining the settlement, with the additional
amount to be paid in equal installments over a 10-year period beginning in 2007 and ending in 2017. Multiple other
tobacco product manufacturers joined the MSA after the initial signing period. Collectively, the signing
manufacturers are known as “Participating Manufacturers.”

The settlement provides that the tobacco product manufacturers may potentially offset, against their payment in any
year, certain amounts of money if it is found that the Participating Manufacturers have lost more than 2% of their
national market share (from 1997) to non-settling manufacturers (known as NPMs) and that the disadvantages
imposed by the settlement were a “significant factor” in the market share loss. The settlement further provides that
the offset, known as the “NPM adjustment,” may not be taken against the payments to any state that has enacted a
“Qualifying Statute” and diligently enforced the statute during the year in question. Montana enacted such a
Qualifying Statute in 1999, Section 16-11-401 to 404, MCA, and complementary legislation in 2003, Section
16-11-501 to 512, MCA.

In March 2006, a determination was made (pursuant to the settlement) that the Participating Manufacturers had lost
sufficient market share in 2003 to trigger an NPM adjustment analysis and that disadvantages caused by the
settlement were a significant factor in the market share loss. Similar findings have been made or agreed to for years
2004 through 2017. The State filed a motion in the Montana lawsuit seeking a declaration that it diligently enforced
its Qualifying Statute during 2003. The Participating Manufacturers moved to compel arbitration of the question.
The First Judicial District Court ordered arbitration but was overruled on appeal to the Montana Supreme Court.
Virtually all of the other Settling States filed similar motions or new actions in their various court systems,
preferring to litigate their diligent enforcement disputes in court rather than in the tobacco companies proposed
nationwide arbitration. Montana was the only state to prevail on its argument against arbitration before its highest
state court. Montana then successfully defended the favorable ruling from a petition for rehearing in Montana and,
ultimately, a certiorari petition to the U.S. Supreme Court filed by tobacco companies, which the Court rejected.

Simultaneously, arbitration between the other Settling States and the tobacco companies commenced and proceeded
to discovery. After the U.S. Supreme Court denied cert regarding Montana’s participation in the arbitration, the
tobacco companies sought and received a stay of Montana’s litigation pending completion of the nationwide
arbitration, effectively shutting Montana out of any opportunity for input or influence over standards for determining
what constitutes “diligent enforcement,” and potentially subjecting Montana to whatever standards may ultimately
result from the ongoing nationwide arbitration for lack of any alternative interpretative precedent. Thereafter, the
Montana Supreme Court granted Montana’s writ for supervisory control, overturned the stay, and allowed the
State’s district court action to proceed to discovery.

The Montana litigation ended with entry of a stipulated consent decree on June 25, 2012, reflecting the tobacco
companies’ determination after initial discovery that they would not contest Montana’s diligent enforcement during
2003. In the nationwide arbitration, and as applied to Montana’s consent decree, a “no contest” determination for an
individual state means that state would not participate in the NPM Adjustment for 2003 (i.e., as a “no contest” state
Montana had no reduction to its annual OPM settlement payments for 2003).
However, the “no contest” for 2003 has no precedential effect in any subsequent year for Montana or any other
state’s case. Accordingly, Montana was not subject to the 2003 NPM Adjustment. Still the consent decree
specifically articulated that Defendants’ consent to its terms “is not a factual concession that Montana, in fact, did or
did not diligently enforce the Montana Qualifying Statute in 2003 or any other year.”

Despite Montana’s successful defense of its 2003 and 2004 enforcement actions no precedential protections exist,
and the State remains vulnerable to further expected litigation regarding its diligent enforcement in 2005-2017. The
Participating Manufacturers have already received a determination that MSA terms were a “substantial factor”
reducing their market share and triggering an NPM Adjustment analysis with the potential to reduce annual
payments for those Settling States which failed to enforce their statutes diligently.

The Participating Manufacturers conceded that Montana enacted a qualifying statute within the meaning of the
MSA, which was in full force and effect during 2005-2016 and thereafter to date. Factual arguments exist to show
that Montana diligently enforced its Qualifying Statute during 2005-2017. However, legal and procedural
uncertainties exist that make an adverse determination possible. An adverse determination on the diligent
enforcement issue could result in the loss of some or all of the MSA annual payments to the State for years
2005-2017, which would be recouped through an offset of payments due to Montana in future years. The
Participating Manufacturers will assert claims for NPM adjustments for future years as well. The outcome of these
claims is also uncertain.

In 2015, certain Settling States and Participating Manufacturers commenced multi-state arbitration of the issue of
diligent enforcement for calendar year 2004. Montana is not a party to this arbitration; this arbitration continues.

Montana filed a Declaratory Judgment Motion in 2017 for the 2004 NPM Adjustment to have its MSA Court (First
Judicial District) declare that Montana had a qualifying statute in place and diligently enforced its Qualifying Statute
for the 2004 calendar year. The Participating Manufacturers conceded that Montana has a Qualifying Statute. As
part of this action, Montana successfully obtained a ruling from its MSA Court on the burden of proof whereby the
Participating Manufacturers must prove that Montana did not diligently enforce its Qualifying Statute to succeed
under the NPM Adjustment. Montana is the only state party to the MSA with this ruling on the burden of proof. On
the eve of trial, the Participating Manufacturers settled with Montana for all of the 2004 NPM Adjustment funds
previously withheld plus interest and earnings. The settlement does not provide a precedent for future NPM
Adjustment proceedings, except for the ruling on the burden of proof.

A stipulated dismissal with prejudice was filed on November 17, 2020 following a settlement of $65.3 million to be
paid to the State for withheld payments from the disputed payment account. The State also secured ongoing relief
for the next eleven years preventing the participating manufacturers from claimed the State did not diligently enforce
the Master Settlement Agreement.

PPL v. Montana involves ownership of sections of riverbed on the Missouri, Clark Fork, and Madison rivers. The
case originated in 2003, when a group of parents of school-age children sued Petitioner PPL Montana, LLC (PPL),
in Federal Court, alleging that the company must pay rent for the use of state-owned riverbeds to generate
hydroelectric power. After the Federal Court dismissed the case for lack of jurisdiction, PPL filed an action in state
district court seeking a declaration that the state could not charge them rent for the use of the riverbeds at issue. The
State intervened in the case and counterclaimed for a declaration that PPL and its co-plaintiffs unlawfully occupied
state lands and must compensate the State land trust on behalf of its public beneficiaries for the use of those lands.
The legal test for ownership of the riverbeds is whether the rivers at issue were navigable at the time of
statehood. Based upon the historical record, the District Court granted the State summary judgment on the question
of navigability, and the case proceeded to trial on the issue of compensation for the use of trust lands. In June of
2008, the Court issued its ruling and ordered that PPL owed the State almost $41.0 million for past use of the
riverbeds.

PPL appealed the decision to the Montana Supreme Court. The case was briefed and argued before the Court. In
March of 2010, the Montana Supreme Court issued a decision upholding the district court’s finding of navigability
and determination of compensation.

B-151
B-152

PPL appealed the case to the United States Supreme Court. The case was briefed and argued, and in February of
2012, the Court reversed the Montana Supreme Court’s decision. The United States Supreme Court concluded that
the Montana courts had applied an incorrect legal standard for determining a river’s navigability. The Court clarified
that navigability had to be determined on a segment-by-segment basis. The Court remanded the case for further
proceedings, and the case currently is pending in the Montana First Judicial District, Lewis and Clark County, Judge
Michael McMahon presiding. The cause number is CDV 2004-846. Additional detail is provided below as the case
has been remanded to the United States District Court, District of Montana, Helena Division.

The most obvious impact of the Supreme Court’s decision is that the State is no longer entitled to the $41.0 million
judgment. The monetary amount that the State may be entitled to depends on the navigability of the rivers, which
will have to be determined under the Supreme Court’s segment-by-segment approach. Going forward, the litigation
will focus on applying the Supreme Court’s segmentation approach to determine the navigable reaches of the
Madison, Clark Fork, and Missouri Rivers. At this stage, it is difficult to predict an outcome of this litigation.

A less obvious financial impact is the bill of costs that PPL submitted to the district court following the remand. PPL
requested that the district court tax the State of Montana with $1.2 million for PPL’s costs relating to the appellate
proceedings. All, but approximately $31.0 thousand, relate to premiums that PPL paid for a supersedeas bond in
support of staying the $41.0 million judgment. In May 2012, the State filed its response to PPL’s bill of costs and
agreed to costs for $31.3 thousand. However, the State moved the court to deny PPL’s request for costs related to the
supersedeas bond. The parties stipulated to hold this issue in abeyance until the court rules on all remaining matters
in the case. Counsel for the State has agreed to release the supersedeas bond. In the opinion of counsel, there are
good legal arguments that support the State’s position that it should not be required to pay the supersedeas bond
premiums; however, legal and procedural uncertainties exist that make an adverse determination reasonably
possible.

This case, now known as State of Montana v. Talen Montana, LLC et al. (Cause No. CV 16-35-H-DLC-JCL), is
scheduled for a bench trial beginning September 27, 2021. All Defendants have answered the State's amended
complaint, including the recently added Defendant United States. The State's expert witnesses have been disclosed
and Defendants’ expert witnesses are required to be disclosed in February 2021. Discovery will close May 21, 2021.
The State's claims against the utilities remain unchanged and the State still holds the opinion that no further potential
liability to the State is expected relative to this action and no additional updates are necessary in regard to the
outstanding litigation.

Diaz et al. v. Blue Cross and Blue Shield of Montana et al. (Diaz) was a lawsuit filed in the Montana First Judicial
District Court, Lewis and Clark County, Cause No. BVD-2008-956, in October 2008, by plaintiffs Jeanette Diaz,
Leah Hoffman-Bernhardt, and Rachel Laudon, individually, and on behalf of others similarly situated, naming Blue
Cross and Blue Shield of Montana (BCBS), New West Health Services (New West), Montana Comprehensive
Health Association, and the State of Montana (State) as defendants. The complaint alleges that the defendants have
violated the made-whole laws of Montana and illegally given themselves subrogation rights.

On June 12, 2009, the Plaintiffs filed with the District Court a motion for class certification. The District Court
Judge denied the Plaintiffs’ motion for class certification on December 16, 2009. The Plaintiffs appealed this
decision to the Montana Supreme Court. As part of the review of the underlying decision denying class certification,
the Montana Supreme Court remanded the case to the District Court to determine the question of whether the made-
whole laws, codified in Section 2-18-902 and 33-30-1102, MCA, apply to the various types of third-party
administrators (TPAs) at issue in Diaz. The District Court held that these laws do not apply to TPAs. The Plaintiffs
appealed this decision.

On December 21, 2011, the Supreme Court issued its decision, holding that the District Court abused its discretion
in denying a class action and that BCBS and New West, as TPAs of the State’s health plan, are not subject to the
made-whole laws as “insurers” under Section 2-18-901 to 902, MCA, or under a third-party beneficiary theory.

On June 20, 2012, the District Court ruled on the State’s summary judgment motion seeking an order from the court
that the State has not violated the made-whole laws in the administration of its health plan. The court denied the
State’s motion, ruling that the State is an insurer for the purposes of the made-whole laws and that it must conduct a
made-whole analysis before exercising and subrogation/coordination of benefits rights. The State filed with the
District Court a motion requesting that the court certify its decision to the Montana Supreme Court. The District
Court granted the motion, and the Montana Supreme Court, over Plaintiffs’ objection, ultimately agreed in a
November 27, 2012, Order to hear this issue. The Plaintiffs also appealed to the Montana Supreme Court, the
District Court’s definition of the class action.

On August 6, 2013, the Montana Supreme Court issued its opinion, affirming the Montana First Judicial District
Court’s decision defining the class action to include only those State benefit plan members who had timely filed
claims for covered benefits within eight years before the filing of the Plaintiffs’ complaint, which was October 23,
2008.

On November 6, 2013, the Montana Supreme Court issued its opinion, affirming the District Court’s June 20, 2012
decision that the applicable made-whole laws apply to the State benefit plan.

On September 8, 2014, the District Court issued an order ruling on several motions that the parties had filed. The
principal rulings were: (i) the Court authorized Plaintiffs to proceed with additional discovery to determine if the
class definition should be altered or amended; (ii) given its order to allow additional discovery, the Court held in
abeyance its decision on the State’s Motion for Summary Judgment requesting that the class be limited to those who
timely filed claims within the one-year filing restriction contained in the State’s policy; (iii) the Court granted the
Plaintiffs’ motions asking the Court to require the State to conform its health plans, procedures, notices and practices
to comply with the Montana Supreme Court’s rulings in this case and to pay covered medical expenses, await the
resolution of claims against liability carriers, and then conduct a made-whole determination before it can exercise
subrogation or accept reimbursements from its members or providers; and (iv) the Court ordered the parties to
develop a class notice to be sent to past and current plan members dated back to eight years before this suit was
filed. The State and Plaintiffs’ counsel developed the notice that has been sent to class members.

On April 13, 2015, the District Court issued an Order on Interest to Be Paid, requiring the State to include in the
payments ultimately made to class members' interest at the rate of 10.0% per annum. For claims arising before

December 24, 2009, interest will begin 30 days following the Montana Supreme Court’s decision in Blue Cross and

Blue Shield of Montana, Inc. v. Montana State Auditor. For any claims arising after December 24, 2009, interest
will begin starting on the day the underlying medical expenses were incurred.

On October 5, 2015, the Plaintiffs filed with the District Court a motion directing the State to pay attorney fees
arising from the class action suit. On November 9, 2015, the District Court issued an order denying Plaintiffs’
motion for attorney fees.

On December 14, 2015, the District Court issued an order certifying that its orders concerning interest and attorney
fees were final for purposes of an appeal to the Montana Supreme Court. On January 12, 2016, the Plaintiffs filed a
Notice of Appeal with the Montana Supreme Court, appealing the interest and attorney fee orders.

Pursuant to the Montana Supreme Court’s mandatory mediation process, the parties reached a settlement on attorney
fee payments; however, the parties did not reach agreement on the interest issue. On October 25, 2016, the Montana
Supreme Court issued its ruling on the interest issue, finding that November 14, 2009, is the date that interest
commences; and, for claims arising after November 14, 2009, interest will begin starting on the day the underlying
medical expenses were incurred.

On April 28, 2017, the District Court appointed a Special Master to consider and resolve issues regarding expanding
the class to persons with unsubmitted claims; whether to include claims after 2009; whether the State must identify
members from third party administrators other than Blue Cross/Blue Shield; whether, if at all, the State must reform
its systematic practices; supervising the payment and notice process; which party or parties should pay the Special
Master for her time and expenses; whether the District Court should approve a partial payment of attorney fees;
setting a time frame for making claims; setting a time for ending the class action; determining payment of residual
funds; any other issues as necessary to facilitate the swift and equitable resolution of the case.

As of June 30, 2017, the State paid Plaintiffs $1.4 million in based payments plus interest.

B-153
B-154

On June 21, 2017, the Special Master issued a report and recommended order regarding the partial payment of the
Plaintiffs’ counsels’ attorney fees. This recommendation was based on a stipulation the State and the Plaintiffs’
counsel had reached, agreeing that the State would pay counsel $400.8 thousand for claims made by individuals that
could be documented. The State has paid this amount to class counsel.

The Special Master issued a second report and recommended order expanding the class on August 8, 2018. The
principal findings of this recommendation were to expand the class definition to include those individuals who did
not submit claims to the State for processing; to expand the class to end June 30, 2016; and to redefine the class as
(a) employees, employee dependents, retirees, and retiree dependents who participate or participated in the State of
Montana’s health benefit plan(s), administered or operated by the State and/or the third party administrators whose
claims for covered benefits took place no earlier than eight years prior to the filing of the complaint in this action,
which was October 23, 2008; (b) who were injured through the legal fault of persons who have legal obligations to
compensate them for all damages sustained; and (c) who have not been made whole for their damages (or for whom
the State and TPAs conducted no made whole analysis) because the State and the third party administrators
programmatically failed to pay benefits for their covered medical costs. On October 29, 2018, the District Court
Judge issued an Order Adopting the Special Master's Report Expanding the Class.

As of June 30, 2018, the State paid Plaintiffs $1.7 million in based payments plus interest.

On April 23, 2019, the District Court Judge approved the parties' motion for a process to identify and distribute
residual funds for known class members on the master list for Blue Cross Blue Shield of Montana claims. On May 2,
2019, the State issued payment of $122.0 thousand to the Hunt Law Firm for the residual funds and interest thereon.

On May 1, 2019, the parties filed the Notice to Special Master of Agreement on Notice Procedure. Pursuant to that
notice, the State distributed notices to all former and current State employees enrolled in the State health plan
between January 1, 2010 through June 30, 2016. Notice was distributed through email and first-class mail. The
initial distribution of notices was May 23, 2019. The deadline for a claimant to return a claim to the State is
November 30, 2019.

As of June 30, 2019, the State paid Plaintiffs $2.0 million, including the payment for residual funds and interest.

As of June 30, 2020, the State paid Plaintiffs $2.9 million for claim payments, interest, and attorney fees for
Plaintiffs' counsel.

Since the case is ongoing, the State does not have sufficient information to determine the ultimate cost to the State.

Disability Rights Montana v. Batista (Cause # CV-15-22) is a civil rights case filed by the ACLU of Montana on
behalf of Plaintiff, alleging deliberate indifference in the provision of mental health care to seriously mentally ill
inmates at Montana State Prison. The District Court dismissed the case for failure to state a claim, which order was
appealed by Plaintiffs to the Ninth Circuit Court of Appeals. The Ninth Circuit Court of Appeals overturned the
district court’s ruling and remanded the case back to the district court in front of a new judge. As a result, the
Department of Corrections (Department) has participated in on-going discovery, with the aid of outside expert
witnesses and the defense of the case through outside legal counsel. The parties had previously exchanged
settlement proposals without success. Because of legislation enacted during the 2019 legislative session, the
department implemented significant changes in the use of restrictive housing, especially as related to seriously
mentally ill inmates. The Plaintiff has made several unreasonable demands that would cost the Department millions
of dollars and at least $800.0 thousand in attorney’s fees and undisclosed expert witness fees. At this time, the
Department continues to be unable to specify an anticipated amount of financial obligation imposed either by
settlement or by judgment.

Kila Shepherd v. Montana Department of Corrections (Department) (Cause # BDV-2020-302/DA 20-0376) is a Step
Ill Grievance proceeding, in accordance with 2.21.8017, Administrative Rules of Montana (ARM), and the
Department has hired outside legal counsel to represent it regarding Ms. Shepherd's termination from her position at
the Department. Ms. Shepherd sought in excess of $1.0 million for punitive damages, lost wages, loss of benefits,
emotional distress, and attorney's fees. A hearing on the Step II grievance before an administrative law judge (ALJ)
was held in January 2019. The ALJ issued a decision in February 2020, finding in favor of the Department and
recommending denial of the grievance. The Department concurred with the decision and issued its final
administrative decision denying Ms Shepherd's grievance over the termination. Ms. Shepherd then filed a lawsuit in
Lewis & Clark County district court, alleging wrongful discharge. The Department filed a motion to dismiss on the
grounds that the suit had been filed after the statute of limitations had run. The district court granted the motion after
full briefing. Ms. Shepherd has appealed that decision to the Montana Supreme Court and the matter is now fully
briefed.

Cascade County v. State of Montana, Montana and Department_of Corrections (Department) (Cause #
CDV-2019-1181) is a case filed by Cascade County, suing for breach of contract, unjust enrichment and breach of
implied covenant of good faith and fair dealing, seeking over $766.0 thousand in unpaid jail reimbursement costs
plus interest at 10.0% per annum. This case involves interpretation of contract and statutory language. This matter
has been referred to the Department of Justice Agency Legal Services for representation of the Department. The
likelihood of success is reasonably probable.

Vincent, Benner, and Hoch v. DPHHS (CDV-19-0314, Eighth Judicial District Court, Cascade County) was filed on
May 17, 2019, by Montana Optometric Association members seeking class certification of all licensed Montana
optometrists who are participating providers in Montana Medicaid. The named plaintiffs claim the department’s
Medicaid rate structure discriminates against them because they are paid less than physicians (doctors of medicine or
doctors osteopathy) for performing the same services. They cite Section 37-10-104, MCA, as the basis of the
discrimination claim. They seek declaratory relief and permanent injunctive relief in their claims of discrimination,
violations of MAPA, and breach of contract and implied covenant of good faith. They request damages, interests,
costs, and attorney fees, which would amount to more than $1 million.

Moody's Market, Inc. et al. v. Montana State Fund, Montana Board of Investments, and State of Montana (Cause #
DV-18-12) is a case filed by a group of Montana State Fund (MSF) policyholders, in Lake County District Court.
MSF Policyholders filed this in an effort to prevent the Board of Investments (BOI) from charging a 3.0%
management fee on any single investor whose average portfolio balance held by BOI is greater than $1.0 billion.
This fee was implemented per Senate Bill (SB) 4, passed during the 2017 Legislative Special Session. The District
Court issued a decision dismissing MSF as a party and subsequently dismissed the case against the State of Montana
and Board of investments. The plaintiffs appealed the District Court Decision to the Montana Supreme Court.

The Montana Supreme Court dismissed the appeal on justiciability grounds because SB4 had terminated by its own
terms, thereby sustaining the District Court's decision dismissing the underlying case. While plaintiffs have indicated
they may attempt to continue litigating the case, no new complaint or other pleading has been filed.

LL Liquor v. State of Montana (District of Montana, D.C. No. 6:15-cv-00071-SEH) 912 F.3d 533 is a case in which
LL Liquor sued the Department of Revenue (Department) for breach of contract for changes to the Montana agency
liquor stores' commission rates. The Ninth Circuit Court held that the Department breached the agency liquor store
franchise agreement. On remand for damages, the Federal District Court confirmed a settlement of $5.0 million. The
Ninth Circuit Court recently held that the Department must pay 10.0% interest on the settlement amount, in
accordance with section 18-1-404, MCA. That additional amount, currently at $586.3 thousand, continues to accrue.
The resulting amount of $5.6 million is a set financial loss. The Department is asking the Legislature for a
supplemental under House Bill No. 3 for the amount. However, the Department has since asked the Federal District
Court to reconsider and that petition has not been ruled on.

The Public Employee Retirement Board (PERB) has four items of outstanding litigation in relation to the Sheriffs’
Retirement System (SRS) and the Montana Public Employee's Retirement Administration (MPERA). Refer to Note
6, section I, for additional disclosure in relation to this legal proceeding.

The Montana State Fund, a discretely presented component unit of the State, has two items of litigation, in addition
to the case listed above, in relation to their operations and underlying statutory authority governing the program.
Refer to Note 18, section O, for additional disclosure in relation to these legal proceedings.

Federal Contingencies
Federal Grants - The State receives significant financial assistance from the Federal government in the form of
grants and entitlements, including several non-cash programs (which are not included in the basic financial

B-155
B-156

statements). Receipt of grants is generally conditioned upon compliance with terms and conditions of the grant
agreements and applicable Federal regulations, including the expenditure of resources for eligible purposes.
Substantially all grants are subject to either the Federal Single Audit Act or financial and compliance audits by the
granter agencies of the Federal government or their designees. Disallowances and sanctions as a result of these
audits may become liabilities of the State. The State is currently involved in administrative and legal proceedings,
with certain federal agencies, contesting various disallowances and sanctions related to federal assistance programs
ranging from $1.8 million to $5.0 million at June 30, 2020. The State's management believes ultimate disallowances
and sanctions, if any, will not have a material effect on the basic financial statements.

Food Distribution Program — The amount reported for Food Distribution programs (CFDA #10.555, #10.565,
#10.567, #10.569, and #93.053) represents the dollar value of food commodities distributed to eligible recipients
during the year. The U.S. Department of Agriculture provides the current value of the commodities used by the State
to compute the amount reported. The amount of funds received to administer the program is also included in the
reported amount. The State also distributes food commodities to other states in the western region of the United
States, the value of which is excluded from the reported amounts. During fiscal year 2020, the State distributed $1.2
million of food commodities under CFDA #10.567 to other states.

The State distributed $12.2 million in commodities in fiscal year 2020. The value at June 30, 2020, of commodities
stored at the State’s warehouse, is $4.7 million, for which the State is liable in the event of loss. The State has
insurance to cover this liability.

Miscellaneous Contingencies

Loan Enhancements — As of June 30, 2020, the Board of Investments (BOI) had provided loan guarantees from the
Coal Severance Tax Permanent Fund to the Municipal Finance Programs and the Facility Finance Authority (a
component unit of the State of Montana), totaling $179.0 million. The BOI’s exposure to bond issues of the
Municipal Finance Programs was $90.7 million, while exposure to bond issues, surety bonds, and designated loans
of the Facility Finance Authority were $88.3 million. The BOI has not been held responsible for any loan guarantee
in the past.

Gain Contingencies — Certain natural resource and corporate tax assessments are not reported on the State's financial
statements because they are being protested administratively. As of June 30, 2020, the following assessments (by
fund type) were outstanding (in thousands):

Taxes General Fund
Corporate Tax $ 6,693

The collectability of these contingencies is dependent upon the decisions of the court, other authorities, or agreed
upon settlements. The corporate tax assessments include material estimates that could result in a significant
reduction of the tax assessed once actual numbers are provided. Interest related to corporate tax assessments is
distributed to the General Fund and is included in the assessment total above.

Loss Contingencies — Certain corporations have requested refunds that are not reported on the State’s financial
statements as of June 30, 2020. The corporations have appealed the Department of Revenue's decision to deny or
adjust the refund. As of June 30, 2020, these include $11.2 million of General Fund corporate tax refunds. It is
estimated that most of these corporation tax refunds would consist primarily of tax and could be significantly
reduced or eliminated due to audits and appeals currently in process.

Certain companies have protested property taxes that have been included as revenue on the State’s financial
statements as of June 30, 2020. As of June 30, 2020, these include $16.3 thousand of protested property taxes
recorded in the General Fund and $18.4 thousand recorded in the State Special Revenue Fund.
NOTE 17. SUBSEQUENT EVENTS

Investment Related Issues
Since June 30, 2020, the Board of Investments (BOI) made additional commitments to fund loans from the
INTERCAP loan program in the amount of $8.1 million.

Since June 30, 2020, BOI has committed $228.5 million within the Real Estate Pension Asset Class of Consolidated
Asset Pension Pool (CAPP).

Since June 30, 2020, BOI has committed and funded another $1.5 million to Montana lenders from the Coal
Severance Tax Permanent Fund's In-State Loan Program and committed, but not yet funded, an additional $1.8
million. On top of these commitments, lenders have also reserved $6.5 million in new loans. Of the reservations in
effect as of June 30, 2020, $7.0 million have expired. Additional reservations in the amount of $2.4 million were
made for the Veteran's Home Loan Mortgage Program residential mortgage purchases.

In August 2020, BOI approved an additional loan guarantee from the Coal Severance Tax Permanent Fund to
Facility Finance Authority totaling $20.0 million.

Other Subsequent Events
In August 2020, Department of Natural Resources & Conservation (DNRC) received $10.1 million from
Department of Fish, Wildlife & Parks in payment for the permanent recreation easement at Big Arm State Park.

On August 26, 2020, the Board of Examiners authorized a $1.5 million Non-Point Source Renewable Resource
2020F bond, which was issued on October 15, 2020.

On September 11, 2020, DNRC issued Series 2020E bonds, in the amount of $2.8 million, for the St. Mary's Project.

On September 29, 2020, the Department of Administration issued a total of $50.9 million in three new general
obligation bond series. Bond Series 2020G, authorized by 2019 HB652, was issued at par value of $32.5 million.
Bond Series 2020H, for the Long-Range Building Montana Historical Society project, was issued at par value of
$5.9 million. Bond Series 20201 was issued at $12.5 million for the refunding of outstanding Potomac Trust Lands
general obligation bond Series 2010F.

On October 20, 2020, DNRC issued Series 2020J bonds for the Water Pollution Control State Revolving Fund, in
the amount of $24.9 million. The bond proceeds will be used to refund the outstanding balance of Series 2015C
bonds of $19.3 million and the remaining will be used for new loans within the program.

On November 16, 2020, the Department of Justice reached a settlement of $49.0 million to be recovered from
tobacco companies as a result of wrongly withheld taxes from a 1998 settlement.

On November 16, 2020, The Board of Examiners authorized the following:
* $1.0 million Series 2020K general obligation bonds, which were issued on December 3, 2020,
* $14.0 million Coal Severance Tax Series 2020L bonds, whose proceeds will be used to refund the
outstanding balance on existing Coal Severance Tax bonds, which were issued on December 23, 2020,
¢ $1.7 million Coal Severance Tax Series 2020M bonds, which were issued on December 23, 2020, and
¢ $8.0 million general obligation bond anticipated note, $4.0 million for the Water Pollution Control and $4.0
million for the Drinking Water State Revolving Fund Programs, neither of which have been issued.

On December 23, 2020, DNRC issued taxable Series 2020N general obligation bond anticipation note for the
Drinking Water State Revolving Fund Program, in the amount of $3.2 million.

Though nearly $100.0 million was spent during fiscal year 2020, the total amount of the Coronavirus Aid, Relief,
and Economic Security (CARES) Act funding granted to Montana by the federal government, $1.25 billion, is
expected to be expended during fiscal year 2021 for COVID-19 related grants and expenditures incurred. The
allocation of these funds is estimated to be distributed, most notably, as follows:

¢ 22% through the Business Stabilization, Adaptability, and Innovation programs,

B-157
B-158

¢ 22% through local government and state agency reimbursements,
¢ 20% through additional Unemployment Insurance benefits,

¢ 7% through public and private school programs,

¢ 6% through working capital loans and loan deferments,

¢ 5% through child care programs, and

¢ 4% through social services grants to nonprofits.
B-159

NOTE 18. COMPONENT UNITS

A. Condensed Financial Statements

Below are the condensed financial statements of the component units for the State of Montana as of June 30, 2020
(in thousands):

Condensed Statement of Net Position

Component Units

Montana Facility Montana Montana University Total
Board of Finance State State of Component
Housing Authority Fund (1) University Montana Units
Assets:
Cash, investments and other assets $ 706,291 $ 8,564 $ 1,690,107 $ 661,740 $ 610,922 $ 3,677,624
Due from primary government _— _— _— 277 1,048 1,325
Due from component units — — — — 176 176
Capital assets (net) (Note 18C) 17 1 38,190 561,777 390,663 990,648
Total assets 706,308 8,565 1,728,297 1,223,794 1,002,809 4,669,773
Deferred Outflows of Resources 555 58 3,317 43,611 30,020 77,561
Liabilities:
Accounts payable and other liabilities 11,873 22 108,644 77,448 72,638 270,625
Due to primary government _— _— _— 2,025 60 2,085
Due to component units — — — 176 — 176
Advances from primary government (2) (3) _— _— _— 16,993 2,991 19,984
Long-term liabilities (Note 181) 534,714 271 1,041,217 349,542 293,856 2,219,600
Total liabilities 546,587 293 1,149,861 446,184 369,545 2,512,470
Deferred Inflows of Resources 362 45 3,661 22,512 29,642 56,222
Net Position:
Net investment in capital assets 3 1 38,190 365,329 279,070 682,593
Restricted 159,911 — — 343,094 335,639 838,644
Unrestricted — 8,284 539,902 90,286 18,933 657,405
Total net position $ 159,914 $ 8,285 $ 578,092 $ 798,709 $ 633,642 $ 2,178,642

‘Montana State Fund reports their financial statements on a calendar-year basis. The information provided is for the year ended December 31, 2019.

® Loans from the Coal Severance Tax Permanent Fund make up $4.5 million and $3.0 million of these balances for Montana State University and
University of Montana, respectively.

® Loans from the Board of Investment's INTERCAP and the Department of Environmental Quality's energy conversation loan programs make up $9.9
million and $2.6 million, respectively, of the balance for Montana State University.
B-160

Condensed Statement of Activities
Component Units

Montana Facility Montana Montana University Total
Board of Finance State State of Component
Housing Authority Fund") University Montana Units
Expenses $ 24,455 § 705 $ 201,034 $ 630,487 $ 452,417 $ 1,309,098
Program Revenues:
Charges for services 1,742 741 156,871 287,201 169,686 616,241
Operating grants and contributions 25,151 155 _— 213,150 126,758 365,214
Capital grants and contributions _— _— _— 5,972 1,875 7,847
Total program revenues 26,893 896 156,871 506,323 298,319 989,302
Net (expense) program revenues 2,438 191 (44,163) (124,164) (154,098) (319,796)
General Revenues:
Unrestricted investment earnings _— _— 136,145 3,397 3,559 143,101
Transfer from primary government (2) _— _— _— 140,660 104,003 244,663
Gain (loss) on sale of capital assets _— _— (88) 244 _— 156
Miscellaneous _— _— 1,036 _— _— 1,036
Contributions to term and permanent
endowments _— _— _— 14 37,043 37,057
Total general revenues and contributions _— _— 137,093 144,315 144,605 426,013
Change in net position 2,438 191 92,930 20,151 (9,493) 106,217
Total net position — July 1 — as previously
reported 157,476 8,043 483,186 779,022 643,135 2,070,862
Adjustments to beginning net position _— 51 1,976 (464) _— 1,563
Total net position - July 1 — as restated 157,476 8,094 485,162 778,558 643,135 2,072,425
Total net position - June 30 $ 159,914 $ 8,285 $ 578,092 $ 798,709 $ 633,642 $ 2,178,642

Montana State Fund reports their financial statements on a calendar-year basis. The information provided is for the year ended December 31, 2019.
Transfers to both Montana State University and the University of Montana are appropriated by the State legislature to assist with higher education
related costs.

B. Cash/Cash Equivalents and Investments

Due to the integration of funds and combined financial information, component unit cash and cash equivalents,
equity in pooled investments, and investments are included with the primary government in Note 3. For more detail
on investments held outside of the Montana Board of Investments, refer to the entity's respective separately issued
financial statements.
C. Capital Assets

The following table summarizes net capital assets reported by the discretely presented component units (in
thousands). All component units, other than higher education units, are included under the “Other” caption for this
schedule:

Montana
State University of
University Montana Other Total
Capital assets not being depreciated:
Land $ 8,202 $ 8,306 $ 1,140 $ 17,648
Construction work in progress 72,292 10,420 12,130 94,842
Capitalized collections 9,910 28,098 — 38,008
Livestock for educational purposes 4,198 — — 4,198
Total capital assets not being depreciated 94,602 46,824 13,270 154,696
Capital assets being depreciated:
Infrastructure 44,994 9,904 _— 54,898
Land improvements 31,700 16,408 — 48,108
Buildings/Improvements 749,697 660,181 27,941 1,437,819
Equipment 167,970 104,266 7,907 279,743
Livestock _ 255 _ 255
Library books 67,680 62,583 _ 130,263
Leasehold improvements 8,784 — — 8,784
Total capital assets being depreciated 1,070,825 853,597 35,448 1,959,870
Total accumulated depreciation (621,188) (513,996) (10,645) (1,145,829)
Total capital assets being depreciated, net 449,637 339,601 24,803 814,041
Intangible assets 1,205 1,783 135 3,123
MSU Component Unit capital assets, net 16,333 _ _ 16,333
UM Component Unit capital assets, net — 2,455 — 2,455
Discretely Presented Component Units
capital assets, net $ 561,777 $ 390,663 $ 38,208 $ 990,648

D. Other Postemployment Benefits (OPEB)

Non-university component units are included in the State of Montana benefit plan, whereas the Office of the
Commissioner of Higher Education (included in the primary government otherwise) is included in the Montana
University System benefit plan. For these reasons, component unit OPEB information is included in Note 7.

E. Risk Management

Montana State Fund (MSF or New Fund) is the only component unit risk pool. Unpaid claims and claim adjustment
expenses are estimated based on the ultimate cost of settling the claims, including the effects of inflation and other
societal/economic factors. There are no significant reductions in insurance coverage from the prior year, nor any
insurance settlements exceeding insurance coverage for the last three years for MSF. This fund uses the accrual basis
of accounting. Montana State Fund investments are recorded at fair value, and the premiums and discounts are
amortized using the scientific interest method over the life of the securities.

(1) Montana State Fund (MSF) — This fund provides liability coverage to employers for injured employees who
are insured under the Workers Compensation and Occupational Disease Acts of Montana and workers compensation
claims occurring on or after July 1, 1990. MSF is a self-supporting, competitive State fund, and functions as the
guaranteed market. At December 31, 2019, approximately 23,300 employers were insured with MSF. Anticipated

B-161
B-162

investment income is considered for computing a premium deficiency, and employers must pay premiums to MSF
within specified time frames.

An actuarial study prepared by Willis Towers Watson, as of December 31, 2019, estimated the cost of settling
claims that have been reported but not settled and claims that have been incurred but not reported. Due to the fact
that actual claim costs depend on complex factors such as inflation and changes in the law, claim liabilities are
recomputed periodically using a variety of actuarial and statistical techniques. These techniques are used to produce
current estimates that reflect recent settlements, claim frequency, and other economic and societal factors.

A provision for inflation is implicit in the calculation of estimated future claim costs because reliance is placed both
on actual historical data that reflect past inflation and on other factors that are considered to be appropriate modifiers
of past experience. As of December 31, 2019, $956.6 million of unpaid claims and claim adjustment expenses were
presented at face value.

Section 39-71-2311, MCA, requires MSF to set premiums, at least annually, at a level sufficient to ensure adequate
funding of the insurance program during the period the rates will be in effect. It also requires MSF to establish a
minimum surplus above risk-based capital requirements to support MSF against risks inherent in the business of
insurance.

For the year ended December 31, 2019, MSF ceded premiums to other reinsurance companies to limit the exposure
arising from large losses. These arrangements consist of excess of loss contracts that protect against individual
occurrences over stipulated amounts, and an aggregate stop-loss contract which protects MSF against the potential
that aggregate losses will exceed expected levels expressed as a percentage of premium. The excess of loss contract
provides coverage for occurrences up to $100.0 million; however, MSF retains the first $5.0 million of coverage.
The excess of loss protection applies to an individual occurrence with a maximum of $5.0 million on any one life.

The term of the current aggregate stop-loss contract is January 1, 2017 through January 1, 2020. The contract
provides coverage based on MSF’s premium levels not to exceed 15.0% of the subject net earned premium. In the
event reinsurers are unable to meet their obligations, under either the excess of loss contracts or the aggregate stop-
loss contract, MSF would remain liable for all losses, as the reinsurance agreements do not discharge MSF from its
primary liability to the policyholders.

Premium revenue was reduced by premiums paid for reinsurance coverage of $9.6 million during the year ended
December 31, 2019.

Estimated claim reserves were reduced by $387.0 thousand as of December 31, 2019, for the amount of reinsurance
estimated to be ultimately recoverable on incurred losses due to the excess of loss reinsurance contract. There were
no estimated recoverables due to the aggregate stop-loss contract.

(2) Changes in Claims Liabilities for the Past Two Years — As indicated above, this fund establishes liabilities
for both reported and unreported insured events, including estimates of future payments of losses and related claim
adjustment expenses. The following table presents changes (in thousands) in the aggregate liabilities for Montana
State Fund net of estimated reinsurance recoverable. The information presented is at face value and has not been
discounted.
B-163

Year Ended Year Ended
December 31,2019 December 31, 2018

Unpaid claims and claim adjustments expenses
at beginning of year $ 941,638 $ 919,690

Incurred claims and claim adjustment expenses:

Provision for insured event of the current year 129,455 137,066
Increase (decrease) in provision for insured
events of prior years (9,466) (15,141)
Total incurred claims and claim adjustment
expenses 119,989 121,925
Payments:

Claims and claim adjustment expenses
attributable to insured events of the

current year (24,965) (22,903)
Claims and claim adjustment expenses
attributable to insured events of prior years (80,068) (77,074)
Total payments (105,033) (99,977)
Total unpaid claims and claim adjustment
expenses at end of year $ 956,594 $ 941,638

F. Capital Leases/Installment Purchases

Obligations under capital leases/installment purchases at June 30, 2020, were as follows (in thousands):

Discretely
Presented
Fiscal Year Ending June 30: © Component Units
2021 $ 185
2022 127
2023 84
2024 43
2025 22
Thereafter 4
Total minimum payments 465
Less: interest (39)

Present value of minimum
payments $ 426
B-164

G. Operating Leases

Future rental payments under operating leases at June 30, 2020, are as follows (in thousands):

Discretely Presented

Fiscal Year Ending June 30:

Component Units

2021
2022
2023
2024
2025

Thereafter
Total future rental payments $

H. Debt Service Requirements

$

5,238
4,297
3,978
3,165
3,922
15,806

36,406

Debt service requirements of discretely presented component units at June 30, 2020, were as follows (in thousands):

Montana Board of Housing

Montana State University

Montana State University

Direct Placement University of Montana

Ended

June 30: Principal Interest Principal Interest Principal Interest Principal Interest
2021 18,735 17,380 10,530 7,330 421 454 2,415 5,562
2022 19,385 16,923 10,598 6,955 433 442 3,010 5,467
2023 19,850 16,440 6,275 6,621 446 429 3,130 5,348
2024 20,315 15,904 6,580 6,340 459 416 3,255 5,224
2025 20,495 15,334 31,360 6,039 2,505 402 3,380 5,096
2026 - 2030 113,935 66,277 30,635 25,025 2,896 1,794 19,285 23,101
2031 - 2035 112,590 46,826 25,700 17,684 3,347 1,392 24,090 18,287
2036 - 2040 91,223 28,245 26,975 10,603 3,869 927 28,440 13,958
2041 - 2045 71,495 12,814 10,940 4,487 1,274 390 33,310 9,066
2046 - 2050 33,215 2,891 — 454 — 6 39,140 3,237
2051 - 2055 220 4 — — — — — —

Total $ 521,458 $ 239,038 $ 159,593 $ 91,538 $ 15,650 $ 6,652 $ 159,455 $ 94,346
I. Summary of Changes in Long-term Liabilities Payable
Long-term liability activity of discretely presented component units for the year ended June 30, 2020, was as follows
(in thousands):
Amounts
Amounts Due In More
Beginning Ending Due Within Than One
Balance” Additions Reductions Balance One Year Year
Discretely presented component units
Bonds/notes payable
Montana Board of Housing 493,225 112,309 74,252 531,282 18,735 512,547
Montana State University (MSU) 178,345 576 11,566 167,355 10,530 156,825
MSU Direct Placement 16,058 — 409 15,649 421 15,228
University of Montana (UM) 87,636 169,463 88,864 168,235 2,415 165,820
Total bonds/notes payable ” 775,264 282,348 175,091 882,521 32,101 850,420
Other liabilities
Lease/installment purchase payable 496 35 105 426 162 264
Compensated absences payable 65,191 31,431 26,982 69,640 33,102 36,538
Arbitrage rebate tax payable 1,124 390 393 1,121 559 562
Estimated insurance claims 941,638 139,078 124,122 956,594 106,402 850,192
Due to federal government 32,536 112 5,391 27,257 — 27,257
Derivative instrument liability 4,227 1,272 _ 5,499 — 5,499
Reinsurance funds withheld 48,386 8,368 — 56,754 — 56,754
Unearned compensation 391 _— _— 391 _— 391
Net pension liability 193,190 17,977 24,772 186,395 — 186,395
Total OPEB liability 39,694 9,604 21,838 27,460 — 27,460
Total other liabilities 1,326,873 208,267 : 203,603 1,331,537 140,225 1,191,312
2,102,137 490,615 378,694 2,214,058 172,326 2,041,732
Long-term liabilities of Montana University System component units ”) 1,270 4,272
Total discretely presented component units’ long-term liabilities $ 173,596 $ 2,046,004

(1)
(2)
(3)

J.

When applicable, this amount includes unamortized discounts and unamortized premiums.

Beginning balances are taken from component unit financial statements, which may have been adjusted from the prior year's ending balances.

Inter-entity transaction eliminations between Montana University System component units for debt shown in the component unit information can cause
negative balances in component unit information.

Refunded and Early Retired Debt

Refunded Debt
On June 16, 2020, Montana Board of Housing (MBOH) issued Single Family Mortgage Bond Series A-1 in the
amount of $39.1 million to refund 2009 Series E bond and Series A-2 in the amount of $3.3 million to refund 2011
Series A bond.

Defeased Debt Outstanding

The University of Montana has defeased certain bond issues by placing the proceeds of new bonds in an irrevocable
trust. The proceeds, together with interest earned thereon, will be sufficient for future debt service payments on the
refunded issues. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the
University's consolidated financial statements.The debt service cash flows for the refunding portion are less than that
for the advance refunded debt by $8.8 million. The economic gain from the advanced refunding was $7.4 million.
As of June 30, 2020, $139.5 million of bonds outstanding were considered defeased.

B-165
B-166

Kk. No-Commitment Debt

Information is presented below for financing authorities participating in debt issues. The State has no obligation for
this debt. Accordingly, these bonds and notes are not reflected in the accompanying financial statements.

Facility Finance Authority (FFA)

FFA is authorized to issue bonds and notes to finance projects for qualifying health care and other community-based
service providers. The revenue bonds are payable solely from loan repayments to be made by eligible facilities
pursuant to loan agreements, and further, from the funds created by the indentures and investment earnings thereon.
The notes are payable solely from loan repayments pursuant to loan agreements. The revenue bonds and notes
payable issued by FFA do not constitute a debt, liability, obligation, or pledge of faith and credit of the State of
Montana, with the exception of the Montana State Hospital Project included in Note 11. At June 30, 2020, revenue
bonds and notes outstanding aggregated $1.1 billion.

The Board of Investments and FFA have entered into a capital reserve account agreement for certain bond issues.
See Note 16 for more information.

Montana Board of Housing (MBOH)

MBOH is authorized to issue bonds and make mortgage loans in order to finance affordable housing for Montana
residents. The bonds are special limited obligations, payable solely from pledged revenues and assets of the
borrower, not general obligations of MBOH. These bonds issued by MBOH do not constitute a debt, liability,
obligation, or pledge of faith and credit of the State of Montana. At June 30, 2020, bonds outstanding aggregated
$81.3 million.

L. Non-Exchange Financial Guarantee

BOI provides loan guarantees from the Coal Severance Tax Fund to the Facility Finance Authority (FFA). BOI
exposure to bond issues, surety bonds, and designated loans of the FFA totaled $88.3 million as of June 30, 2020.
FFA is a discretely presented component unit of the State of Montana. FFA guarantee requests are submitted to BOI
for review and approval. BOI’s participation, either duration or any other consideration, to either purchase bonds or
loans or to lend money for deposit into FFA’s statutorily allowed capital reserve account is explicitly limited by
statute, which requires BOI to act prudently. The guarantee requests from FFA pertain to bonds issued by FFA with
a term of up to 40 years. BOI and FFA have entered into an agreement detailing repayment to BOI. BOI has not had
to perform on any loan guarantee in the past.

The following schedule summarizes the activity related to the non-exchange financial guarantee during the year
ended June 30, 2020 (in thousands):

Beginning Ending
Balance Additions Reductions Balance
$ 88,941 $ 4,000 $ 4,595 $ 88,346

M. Derivative Transactions Related to Long-term Debt

Montana State University (MSU) has two interest rate swaps as of June 30, 2020. Interest rate swaps are classified
as hedging derivative instruments if the instruments meet the criteria of paragraphs 27 (a) and (b) of GASB
Statement No. 53 — Accounting and Financial Reporting for Derivative Instruments (GASB 53), or as investment
derivative instruments if they do not.

Trade Effective Termination
Derivative Description Date Date Date Terms Counterparty
$25.75 million fixed payerswap 3/10/2005 = 7/21/2005 11/15/2035 Pay 3.953%, Receive SIFMA Deutsche Bank AG
$25.25 million basis swap 12/19/2006 11/15/2007 11/15/2035 Pay SIFMA, Receive 86.8% Morgan Stanley

of 10-year SIFMA Capital

As of June 30, 2020, the fixed payer swap is classified as a hedging derivative instrument under GASB 53, whereas
the basis swap is an investment derivative instrument because there is no identified financial risk being hedged by
the basis swap that can be expressed in terms of exposure to adverse changes in cash flows or fair values. GASB 53
includes four methods for evaluating hedge effectiveness; a governmental entity may use any of the evaluation
methods outlined in GASB 53 and is not limited to using the same method from period to period. The four methods
described in GASB 53 are: consistent critical terms, synthetic instrument, dollar-offset, and regression analysis. In
addition, GASB 53 permits a governmental entity to use other quantitative methods that are based on “established
principles of financial economic theory.” The fixed payer swap passes the established criteria using the regression
analysis methodology.

The fair values of the interest rate swaps were estimated using the zero-coupon method. This method calculates the
future net settlement payments required by the swap, assuming that the current forward rates implied by the yield
curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied
by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the
swaps. To measure non-performance risk for a derivative liability, credit spreads implied by the credit rating for debt
issues by entities with similar credit characteristics were used. This is the best method available under current
market conditions since MSU has no credit default swaps that actively trade in the marketplace. For a derivative
asset, the adjustment for non-performance risk of counterparties was determined by analyzing counterparty-specific
credit default swaps, if available. If not available, credit default swaps in the market for entities of similar type and
rating were used, along with information found in various public and private information services. This analysis is
used to construct a credit curve that is applied to the discount curve on the net settlement payments of the derivative.

The counterparty to the fixed payer swap had the right to terminate the swap at $0 on December 14, 2016 (a
European option); this option was not exercised. As of the trade date, the option’s value included intrinsic value and
time value. The option’s intrinsic value (calculated as the difference between the at-market rate of 4.11% and the
off-market rate of 3.953%) is accounted for as a loan receivable and is repaid by the off-market portion of each swap
payment. On September 10, 2010, the Series J bonds were converted to index bonds. On September 4, 2018, the
original Series J bonds were refunded in full with proceeds from the Series F 2018 bonds, which were issued in a
"SIFMA Index Rate" mode. While in the SIFMA Index Rate, and through the Index Interest Rate Period, which
spans from September 4, 2018 through and including September 1, 2023, the interest rate is reset weekly at a rate of
the SIFMA rate plus a fixed spread. The spread is based on the long-term, unenhanced rating assigned to MSU with
the current spread as of June 30, 2020, was 0.45%. The dependent variable in the regression is the interest rates of
the hedged cash flows; the independent variable is the floating rates due under the hedging derivative.

The fair value of the fixed payer swap liability as of June 30, 2020 is at fair value level 2 and was based on forward
SIFMA rates using the three-month Libor Zero Curve, and the BMA Swaption Volatility on the AA Rated Muni
Revenue Curve. The fair value of the nonhedging derivative investment is also at level 2 and was based on forward
SIFMA rates using the 10-year forward BMA constant maturity swap, the three-month Libor Zero Curve, and the
BMA Swaption Volatility on the counterparty’s credit default swap.

The following table summarizes the reported balances as of, and the derivative instrument activity during, the year
ended June 30, 2020 (in thousands):

Activity During 2020 Fair Values at June 30, 2020
Cash flow hedges: Notional Classification Amount Classification Amount
Cash flow hedge —
Pay fixed interest rate swap 18,225 Interest expense 18 Loan receivable 194
Investment income — Derivative liability 5,499
Deferred outflow 1,272
Investment derivative -
Basis swap 18,225 Investment loss 273 Nntereet accrued) = (18)

B-167
B-168

The objective and terms of MSU’s hedging derivative outstanding as of June 30, 2020, is as follows (in thousands):

Notional Termination Cash (Paid)/
Type Objective amount Effective Date Date Received Terms
Pay fixed, cancelable Hedge interest rate risk Pay 3.953%
interest rate swap on Series F 2018 Bonds $ 18,255 7/21/2005 11/15/2035 = $ — Receive SIFMA

Credit Risk

It is MSU’s policy to enter into derivative agreements with highly rated counterparties. As of June 30, 2020,
counterparty ratings were A3 by Moody’s and BBB+ by Standard and Poor’s (S&P). MSU manages credit risk by
requiring its counterparties to post collateral in certain events. MSU is entitled to collateral from its fixed payer swap
counterparty if the interest rate swap’s fair value is greater than $5.0 million, and the counterparty is rated A+ or A
by S&P, or Al or A2 by Moody’s. If the counterparty to the fixed payer swap is rated A- or below, by S&P, or A3
or below by Moody’s, MSU is entitled to collateral up to 100% of the swap’s fair value. MSU is not required to post
collateral. MSU will continue to monitor counterparty credit risk.

MSU enters into derivative agreements with multiple counterparties to limit the concentration of credit risk.
Currently, MSU has interest rate swaps with two different counterparties, and each counterparty accounts for
approximately 50% of outstanding notional. MSU monitors counterparty credit risk on an ongoing basis.

Interest Rate Risk

Interest payments on variable rate debt will typically increase as interest rates increase. MSU believes it has
significantly reduced interest rate risk by entering into a pay-fixed, receive floating interest rate swap. As interest
rates increase, net swap payments decrease so that changes in hedged variable-rate debt interest payments,
attributable to SIFMA, are largely offset by the net swap payments.

Basis Risk

The variable-rate cash flows being hedged by the pay-fixed swap will increase or decrease as SIFMA rates increase
or decrease. Because the hedged cash flows are SIFMA based and the floating receipts of the pay-fixed swap are
SIFMA based, there is no basis risk.

Termination Risk

MSU or its counterparties may terminate a derivative instrument if the other party fails to perform under the terms of
the contract. In addition, MSU’s fixed payer swap counterparty has the right to terminate the derivative if the credit
rating of MSU’s unenhanced long-term revenue bond rating is withdrawn, suspended, or reduced below BBB-, in
the case of S&P, or below Baa3 in the case of Moody’s. If such an event occurs, MSU could be forced to terminate
the fixed payer swap in a liability position. As of June 30, 2020, MSU’s unenhanced long-term revenue bond rating
was Aa3 by Moody’s and A+ by S&P.

Foreign Currency Risk
All hedging derivatives are denominated in US Dollars, and therefore MSU is not exposed to foreign currency risk.

Market Access Risk

Market access risk is the risk that MSU will not be able to enter credit markets or that credit will become more
costly. For example, to complete a derivative instrument’s objective, an issuance of refunding bonds may be planned
in the future. If at that time MSU is unable to enter credit market, expected cost savings may not be realized.
N. Related Party Transactions

Private nonprofit organizations with relations to the University of Montana (UM) include the Alumni Association,
the Montana Technology Enterprise Center (MonTEC), the Montana Tech Booster Club, and the Montana Tech
Alumni Association. The associations and booster club operate exclusively to encourage, promote, and support
educational programs, research, scholarly pursuits, and athletics at, or in connection with UM. For the year ended
June 30, 2020, $300.8 thousand was transferred from or expended by the Montana Tech Booster Club for
scholarships and construction projects. In exchange, UM provides the associations and booster club with office
space, staff, and some related office expenses. MonTEC was established as a nonprofit 501(c)3 corporation in fiscal
year 2001 as a result of an agreement between UM and the Missoula Area Economic Development Foundation
(MAEDF). MonTEC provides low-cost lease space and business consulting to local “start-up” companies. The
corporation’s board of directors is comprised of four members. Two members of the board of directors are UM
employees, and two are non-UM employees. UM does not provide office space or other services to MonTEC.

Private nonprofit organizations affiliated with Montana State University (MSU) include the MSU-Bozeman
Bookstore, Friends of KUSM, and Friends of KEMC. Friends of Montana Public Television provided $1.9 million
during 2020, and Friends of KEMC Public Radio provided $1.2 million during 2020 in support of MSU’s television
and radio stations.

O. Litigation Contingencies

Susan Hensley v. Montana State Fund involves a constitutional challenge to one of the revisions to the Workers’
Compensation Act passed in 2011. At issue is the constitutionality of the changes to section 39-71-703 (2), MCA,
which state that a Class I impairment is not payable unless that occurred on or after that date. The Workers'
Compensation Court issued its decision on August 22, 2019, upholding the statute and granting the State Fund's
motion for summary judgment. The petitioner's attorney filed a notice of appeal on September 12, 2019, and the
matter is currently before the Montana Supreme Court. Should the statute be held unconstitutional and apply to other
claims retroactively, the potential liability is estimated to be at least $2.2 million per year, based on the National
Council on Compensation Insurance initial pricing, and current estimated business volumes. However, based on
experience, costs may be substantially higher than the estimate of $2.2 million per year.

Steven Hanson v. Montana State Fund is a companion case to Susan Hensley v. Montana State Fund and has been
held in abeyance pending a decision in Hensley.

P. Subsequent Events

On July 1, 2020, two Montana Board of Housing (MBOH) Multifamily Housing Revenue private placement conduit
bonds were issued. The Butte Affordable Owner 1 Project, Series 2020 was issued in the amount of $13.2 million.
The Butte Affordable Owner 11 Project, Series 2020 was issued in the amount of $29.3 million.

On August 3, 2020, a Master Loan Program Bond of $13.5 million was made from the Facilities Finance Authority
(FFA) to Powell County Medical Center for the purpose of refunding its existing Series 2010A Bond.

On August 20, 2020, MBOH approved a Habit for Humanity set-aside for fiscal year 2021 of $3.0 million with an
expiration date of June 30, 2021.

On September 11, 2020, Montana State Fund's board declared a dividend of $20.0 million to be distributed to
approximately 22,500 employers.

In September 2020, Montana State University received authorization from the Board of Regents to expend up to
$60.0 million to design and construct a comprehensive Student Wellness Center. The project will be financed with
insurance proceeds of $36.0 million, revenue bonds proceeds of $22.0 million, and existing student fee balances of
$2.0 million.

On October 15, 2020, the 2020 Series C Single Family Mortgage Bonds, were closed by MBOH in the amount of
$30.0 million.

B-169
B-170

On October 29, 2020, a Master Loan Program Bond of $20.0 million and a Stand Alone Program Bond of $32.7
million was made from the FFA to Shodair Children's Hospital for the purpose of constructing a new children's
hospital.

Q. Commitments

Montana State Fund (MSF or New Fund) is in a multi-year project to replace its legacy policy management system.
The first phase to select vendors, coordinate change management processes, and develop and implement core policy
management and billing transaction systems is expected to be completed by December 2020 and require total
expenditures estimated at $33.4 million. The total project cost through December 31, 2019, was $23.0 million. The
last phase to develop remaining enhancement features will be planned and arranged with consulting services towards
the end of 2020. Costs during the application development phase will be capitalized and recorded as construction
work in process until the system is deployed.

As of June 30, 2020, Montana State University (MSU) had issued purchase orders committing the expenditure of
approximately $17.2 million for equipment, supplies, and services which had not yet been received.

In September 2018, the US Department of Education (Department) informed the University of Montana (UM) that it
was imposing a fine of $966.6 thousand for its failure to comply with the requirements of the Jeanne Clery
Disclosure of Campus Security Policy and Campus Crime Statistics Act (the Clery Act) in Section 485 (f) of the
Higher Education Act of 1965, 20 USC Section 1092 (f). In October 2018, UM submitted a letter to appeal the
proposed fine action and requested a hearing with the Department’s Office of Hearings and Appeals. In January
2019, UM and the Department agreed to resolve the matter, and the fine amount was reduced to $395.0 thousand to
be paid in installments over five years. UM subsequently paid off the remaining balance due to the Department in
July 2019.
NOTE 19. MATERIAL VIOLATIONS OF FINANCE-RELATED LEGAL PROVISIONS
Constitutionality of Retirement Plan Funding

The Montana Constitution, Article VIII, Section 15, states that public retirement systems shall be funded on an
actuarially sound basis. Public pension plans are considered actuarially sound if the unfunded accrued actuarial
liability amortization period is within 30 years. As of June 30, 2020, the Game Warden & Peace Officers’
Retirement System (GWPORS), the Highway Patrol Officers’ Retirement System (HPORS), and the Public
Employees’ Retirement System - Defined Benefit Retirement Plan (PERS-DBRP) were not in compliance and did
not amortize within 30 years. The unfunded liabilities in the other state retirement systems amortize in 30 years or
less as of the fiscal year ended June 30, 2020.

B-171
B-172

BUDGETARY COMPARISON SCHEDULE

GENERAL AND MAJOR SPECIAL REVENUE FUNDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2020
(amounts expressed in thousands)

REVENUES
Licenses/permits
Taxes:

Natural resource

Individual income

Corporate income

Property

Fuel

Other
Charges for services/fines/forfeits/settlements
Investment earnings
Sale of documents/merchandise/property
Rentals/leases/royalties
Contributions/premiums
Grants/contracts/donations
Federal
Federal indirect cost recoveries
Other revenues

Total revenues

EXPENDITURES
Current:
General government
Public safety
Transportation
Health and human services
Education
Natural resources
Debt service (Note RSI-1):
Principal retirement
Interest/fiscal charges
Capital outlay (Note RSI-1)
Total expenditures
Excess of revenue over (under) expenditures

OTHER FINANCING SOURCES (USES)
Insurance proceeds
General capital asset sale proceeds
Bond premium
Bond proceeds
Energy conservation loans
Transfers in (Note 12)
Transfers out (Note 12)
Total other financing sources (uses)

Net change in fund balances

(Budgetary basis)

RECONCILIATION OF BUDGETARY/GAAP REPORTING
1. Securities lending income

2. Securities lending costs

3. Inception of lease/installment contract

4. Adjustments for nonbudgeted activity

(GAAP basis)

Fund balance - July 1
Prior period adjustments
Increase (decrease) in inventories

Fund balances - June 30

The notes to the required supplementary information are an integral part of this schedule.

GENERAL FUND
—CRIGINAL FINAL
BUDGET BUDGET ACTUAL VARIANCE

$ 132,987 $ 132,987 $ 132,654 (333)
77,397 77,397 69,726 (7,671)
1,410,943 1,410,943 1,421,934 10,991
165,893 165,893 186,680 20,787
304,113 304,113 308,093 3,980
235,043 235,043 237,274 2,231
35,224 35,224 33,453 (1,771)
_ _ 20,243 20,243
273 273 273 —
7 7 8 1
21 21 11,315 11,294
21,475 21,475 18,889 (2,586)
58 58 178 120
4,304 4,304 2,414 (1,890)
2,387,738 2,387,738 2,443,134 55,306
357,750 357,750 372,209 (14,459)
329,888 329,888 321,661 8,227
180 180 — 180
548,817 548,817 480,752 68,065
879,431 879,431 1,082,324 (202,893)
40,683 40,683 36,263 4,420
— — 208 (208)
— — 256 (256)
— — 11,681 (11,681)
2,156,749 2,150,749 2,305,354 (148,605)
230,989 230,989 137,780 (93,209)
_ _ 48 48
94 94 75 (19)
81,924 81,924 86,773 4,849
(263,727) (263,727) (76,948) 186,779
(181,709) (181,709) 9,948 191,657
49,280 49,280 147,728 98,448
— — 433 433
49,280 49,280 748, 161 98,681
_ _ 443,409 443,409
— — 1,445 1,445
— — (203) (203)
$ 49,280 $ 49,280 $ 502,812 $ 543,532

Budgetary data is not broken down to the same account level as actual financial statement data, which accounts for some of the larger variances.
The original and final budget figures reflect adjustments to the original budget for various reasons, including legislative and executive changes.
B-174

NOTES TO THE REQUIRED SUPPLEMENTARY INFORMATION
NOTE RSI - 1. BUDGETARY REPORTING
A. State Budget Process

The Montana Legislature meets in the odd-numbered years to prepare annual budgets for the next biennium. The
Constitution requires that legislative appropriations not exceed available revenues. The Legislature uses revenue
estimates in the budgetary process to establish appropriation levels. Expenditures may not legally exceed budget
appropriations at the fund level. In addition, the State Constitution prohibits borrowing to cover deficits incurred
because appropriations exceeded anticipated revenues. State law requires an appropriation for disbursements from
the general, special revenue and capital projects funds, except for those special revenue funds from non-state and
non-federal sources restricted by law or by the terms of an agreement. The level of budgetary control is established
by fund type, except capital project funds, which are at project level. Budgets may be established in other funds for
administrative purposes.

Agency budget requests are submitted to the Governor, and the Legislative Fiscal Division receives a copy. The
Office of Budget and Program Planning (OBPP) and the Governor analyze the requests, establish priorities, and
develop the requests into the executive budget request submitted to the Legislature. Joint appropriations
subcommittee hearings are held, and an omnibus appropriation bill is reported in the House and subsequently sent to
the Senate. The Legislature generally enacts one bill to establish the majority of appropriations for the next two
fiscal years. OBPP establishes appropriations for each program by accounting entity (fund) within an agency. The
Legislature enacts other appropriations, but only within the available revenue. Agencies must prepare and submit to
the budget director operational plans showing the allocation of operating budgets by expenditure category (i.e.,
personal services, operating expenses, equipment, etc.). The budget director or other statutorily designated
approving authority may authorize changes among expenditure categories and transfers between program
appropriations.

Appropriations may not be increased by amendment in the General Fund. However, a department, institution, or
agency of the executive branch desiring authorization to make expenditures from the General Fund during the first
fiscal year of the biennium from appropriations for the second fiscal year of the biennium may apply for
authorization from the Governor through the budget director. In the second year of the biennium, during the
legislative session, the Legislature may authorize supplemental appropriations. The Governor, or designee, may
approve budget amendments for non-general fund monies not available for consideration by the Legislature and for
emergencies. In the accompanying financial schedule, original and final budget amounts are reported. There were no
expenditures in excess of total authorized appropriations in the State's budgeted funds for the fiscal year.

Appropriations for debt service activities are continuing through statutory authority until the obligation is
extinguished. Because these non-operating budgets primarily serve a management control purpose, and related
appropriations are continuing in nature, no comparison between budgeted and actual amounts for funds budgeted on
this basis is provided. Appropriations for capital projects funds are not made on an annual basis, but are adopted on a
project-length basis. Because these non-operating budgets primarily serve a management control purpose, and
related appropriations are continuing in nature, no comparison between budgeted and actual amounts for funds
budgeted on this basis is provided.

Appropriations may be continued into the next fiscal year when authorized by the Legislature or the Governor's
Office. After fiscal year-end, appropriations that are not continued are reverted. The reverted appropriations remain
available for one fiscal year for expenditures that exceed the amount accrued or encumbered. Fund balances are not
reserved for reverted appropriations. For fiscal year 2020, reverted governmental fund appropriations were as
follows: $64.9 million in the General Fund, $136.5 million in the State Special Revenue Fund, and $239.9 million in
the Federal Special Revenue Fund. Agencies are allowed to carry forward 30.0% of their reverted operating
appropriations into the next two fiscal years. This amount can be used for new expenditures at the request of the
agency and upon approval of OBPP.

B. Budget Basis

The Legislature's legal authorization ("appropriations") to incur obligations is enacted on a basis inconsistent with
Generally Accepted Accounting Principles (GAAP). The budget basis differs from GAAP for encumbrances
outstanding at fiscal year-end, compensated absences, capital assets and inventories purchased in proprietary funds,
certain loans from governmental funds, and other miscellaneous n on-budgeted activity.
REQUIRED SUPPLEMENTARY INFORMATION

NOTE RSI - 2. PENSION PLAN INFORMATION

Required Supplementary Information
State of Montana as an Employer Entity

Judges’ Retirement System
Schedule of Changes in Net Pension Liability/(Asset) and Related Ratios '
For the Fiscal Year Ended June 30

(dollars in thousands)

2020 2019 2018 2017 2016 2015

Total Pension Liability (TPL)
Service costs $ 1,772 $ 1664 $ 1,628 $ 1,578 $ 1,653 $ 1,594
Interest 4,458 4,503 4,044 3,986 3,934 3,824
Differences between expected and actual experience 2,743 (2,901) 862 (1,341) (1,032) —
Changes of assumptions — — 3,865 — — —
Refunds of contributions — (149) — — — —
Benefit payments (3,846) (3,723) (3,554) (3,416) (3,041) (3,023)

Net change in total pension liability 5,127 (606) 6,845 807 1,514 2,395
Total pension liability - beginning 60,192 60,798 53,953 53,146 51,632 49,237
Total pension liability - ending $ 65,319 $ 60,192 $ 60,798 $ 53953 $ 53146 $ 51,632
Plan Fiduciary Net Position
Contributions — employer $ — $ 108 $ 1,800 $ 1806 $ 1684 $ 1,651
Contributions - member 517 575 488 129 534 481
Net investment income 5,687 8,467 10,368 1,779 3,843 12,421
Refunds of contributions — (149) — — — —
Benefit payments (3,846) (3,723) (3,554) (3,416) (3,041) (3,023)
Administrative expense (123) (264) (254) (197) (136) (100)
Other _ 7 _ (3) _ _

Net change in plan fiduciary net position 2,235 5,998 8,848 698 2,884 11,430
Plan fiduciary net position - beginning 102,651 96,653 87,805 87,107 84,223 72,793
Plan fiduciary net position - ending $ 104,886 $ 102,651 $ 96653 $ 87,805 $ 87,107 $ 84,223
Net Pension (Asset) - Beginning $ (42,459) $ (35,855) $ (33,852) $ (33,961) $ (32,591) $ (23,556)
Net Pension (Asset) - Ending $ (39,567) $ (42,459) $ (35,855) $ (33,852) (33,961) (32,591)
Plan fiduciary net position as a percentage of TPL 160.58% 170.54% 158.97% 162.74% 163.90% 163.12%
Covered payroll $ 7,382 $ 7,291 $ 6974 $ 6920 $ 6525 $ 6,355
Net pension (asset) as a percentage of covered payroll (535.99)% (582.35)% = (514.12)% — (489.19)% — (521.00)% (513.00)%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

B-175
B-176

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 1,988 $ — $ 1,085 $ 1,800 $ 1,786 $ 1,684
Contributions made in relation to the
contractually required contributions 1,988 _— 1,085 1,800 1,786 1,684
Contribution deficiency/(excess) $ — $ — $ — $ — $ = $ =
Covered payroll $ 8001 $ 7,382 $ 7,291 $ 6974 $ 6920 $ 6,525
Contributions as a percentage of
covered payroll 24.85% 0.00% 14.88% 25.81% 26.00% 26.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Judges’ Retirement System
Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined
as of June 30, 2019.

The following key methods and assumptions were used to determine the contractual contribution rates reported in
that schedule:

Actuarial cost method Entry age Normal

Amortization method Level percentage of pay, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%, including inflation

Salary increases 0%

Inflation 2.75%

Investment rate of return 7.65%, net of pension plan investment expense, including inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table projected
to 2020 using scale BB, males set back | year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.17%

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
Required Supplementary Information
State of Montana as an Employer Entity

Highway Patrol Officers’ Retirement System

Schedule of Changes in Net Pension Liability and Related Ratios '

Total Pension Liability (TPL)
Service costs
Interest

Changes in benefits

Difference between expected and actual experience

Changes of assumptions
Benefit payments
Refunds of contributions

Net change in total pension liability
Total pension liability — beginning
Total pension liability - ending
Plan Fiduciary Net Position
Contributions - employer
Contributions - non-employer
Contributions - member
Net investment income
Benefit payments
Administrative expense
Refunds of contributions
Other

Net change in plan fiduciary net position

Plan fiduciary net position — beginning
Plan fiduciary net position - ending

Net Pension Liability - Beginning
Net Pension Liability - Ending

Plan fiduciary net position as a percentage of TPL

Covered payroll

Net pension liability as a percentage of covered payroll

For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
$ 3,453 $ 3643 $ 3665 $ 3799 $ 3598 $ 3,464
16,926 16,294 15,121 14,545 14,113 13,518

2,413 590 2,774 18 267 —

(582) (322) (245) (94) — —
10,147 8,659 18,170 7,786 9,833 7,539
227,581 218,922 200,752 += 192,966 ~—s-183,133-—Ss«‘175,594
$ 237,728 $ 227,581 $ 218,922 $ 200,752 $ 192,966 $ 183,133
$ 5845 $ 5858 $ 5782 $ 5916 $ 5840 $ 5,736
233 250 263 243 — —
2,002 2,387 1,950 1,917 1,624 1,458

8,269 12,283 15,099 2,605 5,738 18,677
(127) (256) (248) (197) (144) (109)
(582) (322) (245) (94) — —

2 8 — (2) — —

3,579 8,662 11,564 (94) 3,057 16,319
$ 152,778 $ 149,199 $ 140,537 $ 128,973 $ 129,067 $ 126,010
$ 78,382 $ 78,385 $ 71,779 $ 63,899 $ 57,123 $ 65,903
$ 84,950 $ 78,382 $ 78,385 $ 74,779 $ 63,899 $ 57,123
64.27% 65.56% 64.20% 64.24% 67.00% 69.00%

$ 15,178 $ 15,251 $ 14,779 $ 15,276 $ 14,549 $ 14,149

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

B-177
B-178

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 6,209 $ 6051 $ 5843 $ 5706 $ 6,161 $ 5,782
Contributions in relation to the

contractually required contributions 6,209 6,051 5,843 5,706 6,161 5,782
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ =
Covered payroll $ 15608 $ 15,178 $ 15,251 $ 14,779 $ 15,276 $ 14,549
Contributions as a percentage of

covered payroll 39.78% 39.87% 38.31% 38.61% 40.00% 40.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
Highway Patrol Officers’ Retirement System
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined
as of June 30, 2019.

The following key methods and assumptions were used to determine the contractual contribution rates reported in
that schedule:

Actuarial cost method Entry age Normal

Amortization method Level percentage of pay, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%, including inflation

Salary increases 0% to 6.30%

Inflation 2.75%

Investment rate of return 7.65%, net of pension plan investment expense, including inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table projected
to 2020 using scale BB, males set back | year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.27%

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
Required Supplementary Information
State of Montana as an Employer Entity

Game Wardens’ and Peace Officers’ Retirement System

Schedule of Changes in Net Pension Liability and Related Ratios '

For the Fiscal Year Ended June 30

Total Pension Liability (TPL)
Service costs
Interest
Difference between expected and actual experience
Changes of assumptions
Benefit payments
Refunds of contributions
Net change in total pension liability
Total pension liability — beginning
Total pension liability - ending
Plan Fiduciary Net Position
Contributions - employer
Contributions - member
Net investment income
Benefit payments
Administrative expense
Refunds of contributions
Other
Net change in plan fiduciary net position
Plan fiduciary net position — beginning

Plan fiduciary net position - ending

Net Pension Liability - Beginning

(dollars in thousands)

2020 2019 2018 2017 2016 2015
$ 8,004 $ 8098 $ 8623 $ 8403 $ 8,008 $ 7,850
17,618 16,018 14,269 12,911 12,398 11,258
(4,728) 4,781 3,743 2,705 731 —
(7,350) (6,523) (5,810) (5,068) (5,352) (5,229)
(1,001) (1,105) (1,036) (1,066) — —
12,543 21,269 25,667 17,885 15,785 13,879

234,470 213,201

187,534 169,649

153,864 139,985

$247,013 $ 234,470

$213,201 $ 187,534

$169,649 $ 153,864

$ 468 $ 4613 $ 4464 $ 4278 $ 4,088 $ 3,762
5,566 5,512 5,278 5,036 4,924 4,462
11,125 15,573 18,590 3,167 6,435 20,069
(7,350) (6,523) (5,810) (5,068) (5,352) (5,229)
(202) (369) (329) (269) (200) (162)
(1,001) (1,105) (1,036) (1,066) — —

1 (19) (1) (31) — —
12,825 17,682 21,156 6,047 9,895 22,902

193,523 175,841

154,685 148,638

138,743 1

15,841

$ 206,348 $ 193,523

$175,841 $ 154,685

$148,638 $ 138,743

$ 40,947 $ 37,360

$ 32,849 $ 21,011

$ 15,121 $ 24,144

Net Pension Liability - Ending $ 40,665 $ 40947 $ 37,360 $ 32,849 $ 21,011 $ 15,121
Plan fiduciary net position as a percentage of TPL 83.54% 82.54% 82.48% 82.48% 87.00% 90.00%
Covered payroll $ 51,677 $ 50823 $ 49381 $ 47,108 $ 44885 $ 41,637
Net pension liability as a percentage of covered payroll 78.69% 80.57% 75.66% 69.73% 47.00% 36.00%
Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)
2020 2019 2018 2017 2016 2015

Contractually required contributions $ 4,837 $ 4,644 $ 4574 $ 4447 $ 4240 $ 4,040

Contributions in relation to the

contractually required contributions 4,837 4,644 4,574 4,447 4,240 4,040

Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ =

Covered payroll $ 53825 $ 51,677 $ 50,823 $ 49381 $ 47,108 $ 44,885

Contributions as a percentage of

covered payroll 8.99% 8.99% 9.00% 9.01% 9.00% 9.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

B-179
B-180

Notes to Required Supplementary Information
Game Wardens’ and Peace Officers’ Retirement System
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined
as of June 30, 2019.

The following key methods and assumptions were used to determine the contractual contribution rates reported in
that schedule:

Actuarial cost method Entry age Normal

Amortization method Level percentage of pay, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%, including inflation

Salary increases 0% to 6.30%

Inflation 2.75%

Investment rate of return 7.65%, net of pension plan investment expense, including inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table projected
to 2020 using scale BB, males set back | year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.23%

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
B-181

Required Supplementary Information
State of Montana as an Employer Entity

Public Employees’ Retirement System-Defined Benefit Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 39.140686% 39.546272% 53.049189% 53.241100% 53.611080% 53.223780%
Employer's proportionate share of the net pension
liability $ 818,162 $ 825,387 $ 1,033,200 $ 906880 $ 749414 $ 663,174
Employer's covered payroll $ 638,674 $ 640,177 $ 648,671 $ 621,755 $ 620,286 $ 597,083
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 128.10% 128.93% 159.28% 145.86% 120.82% 111.07%
Plan fiduciary net position as a percentage of the total
pension liability 73.85% 73.47% 74.00% 75.00% 78.00% 80.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 58504 $ 56183 $ 54844 $ 56256 $ 59073 $ 58575
Contributions in relation to the contractually required
contributions 58,504 56,183 54,844 56,256 59,073 58,575
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ —
Covered payroll $ 654,193 $ 638,674 $ 640,177 $ 648671 $ 621,755 $ 620,286
Contributions as a percentage of covered payroll 8.94% 8.80% 8.57% 8.67% 9.50% 9.44%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined
as of June 30, 2019.

The following actuarial methods and assumptions were used to determine contractual contribution rates reported in
that schedule:

Actuarial cost method Entry age Normal

Amortization method Level percentage of payroll, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%, includes inflation

Salary increases 0% to 4.80%

Inflation 2.75%

Investment rate of return 7.65%, includes inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table projected
to 2020 using scale BB, males set back | year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.26%

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
B-182

Required Supplementary Information
State of Montana as a Nonemployer Entity

Public Employees’ Retirement System-Defined Benefit Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Nonemployer’s proportion of the net pension liability 24.411533% 24.917247% 1.007464% 0.956169% 0.956090% 0.961287%
Nonemployer’s proportionate share of the net pension

liability $ 510,277 $ 520,058 $ 19,622 $ 16,287 $ 13,365 $ 11,978
Plan fiduciary net position as a percentage of the total
pension liability 73.85% 73.47% 74.00% 75.00% 78.00% 80.00%

Schedule of Nonemployer Contributions |
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 35,008 $ 34642 $ 34706 $ 28763 $ 30,800 $ 32,397
Contributions in relation to the contractually required
contributions 35,008 34,642 34,706 28,763 30,800 32,397
Contribution deficiency/(excess) $ — $ —$ —$ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
determined contribution rates are set forth by the Legislature and are contained within the Montana Code Annotated
(MCA). The amounts used for the valuation as of the year ended June 30, 2019, are as follows:

Special Funding

The State contributes 0.1% of member compensation on behalf of local government entities per Section
19-3-319, MCA.

The State contributes 0.37% of member compensation on behalf of school district entities per Section
19-3-319, MCA.

The State contributes a Statutory Appropriation from General Fund per Section 19-3-320, MCA.

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
Required Supplementary Information
State of Montana as an Employer Entity

Sheriffs’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 4.876949% 4.872800% 4.856692% 5.454386% 5.637055% 5.535000%
Employer's proportionate share of the net pension
liability $ 4067 $ 3663 $ 3696 $ 9582 $ 5434 $ 2,304
Employer's covered payroll $ 3915 $ 3,781 $ 3634 $ 3850 $ 3836 $ 3,580
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 103.88% 96.88% 101.71% 248.88% 141.66% 64.36%
Plan fiduciary net position as a percentage of the total
pension liability 81.89% 82.68% 81.00% 63.00% 75.00% 87.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 530 $ 513 $ 496 $ 368 §$ 389 $ 388
Contributions in relation to the contractually required
contributions 530 513 496 368 389 388
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ —
Covered payroll $ 4041 $ 3915 $ 3781 $ 3634 $ 3850 $ 3,836
Contributions as a percentage of covered payroll 13.12% 13.10% 13.12% 10.13% 10.10% 10.11%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined
as of June 30, 2019. The following actuarial methods and assumptions were used to determine contractual
contribution rates reported in that schedule:

Actuarial cost method Entry age Normal

Amortization method Level percentage of payroll, open

Asset valuation method 4-year smoothed market

Wage Inflation 3.50%, includes inflation

Salary increases 0% to 6.30%

Inflation 2.75%

Investment rate of return 7.65%, includes inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table projected
to 2020 using scale BB, set back 1 year for males

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin expense as a % of payroll 0.23%

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.

B-183
B-184

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Municipal Peace Officers’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015

Nonemployer’s proportion of the net pension liability 67.063878% 67.124706% 67.085433% 66.499650% 66.954111% 66.888728%
Nonemployer’s proportionate share of the net pension

liability $ 133,487 $ 114,956 $ 119,354 $ 119,708 $ 110,756 $ 105,106
Plan fiduciary net position as a percentage of the total
pension liability 68.84% 70.95% 68.00% 66.00% 67.00% 67.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 16677 $ 15941 $ 15283 $ 13215 $ 13,752 $ 13,433
Contributions in relation to the contractually required
contributions 16,677 15,941 15,283 13,215 13,752 13,433
Contribution deficiency/(excess) $ — $ — $ —$ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
determined contribution rates are set forth by the Legislature and are contained within the Montana Code Annotated
(MCA). The amounts used for the valuation as of the year ended June 30, 2019, are as follows:

The State contributes 29.37% of member compensation on behalf of all employer entities per Section
19-9-702, MCA.

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
Required Supplementary Information
State of Montana as an Employer Entity

Firefighters’ Unified Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 2.013129% 2.300917% 2.233929% 2.261523% 2.399255% 1.850026%
Employer's proportionate share of the net pension
liability $ 2309 $ 2650 $ 2525 $ 2583 $ 2454 $ 1,806
Employer's covered payroll $ 1,051 $ 1,103 $ 1,022 $ 974 $ 986 $ 735
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 219.70% 240.25% 247.06% 265.20% 249.00% 245.00%
Plan fiduciary net position as a percentage of the total
pension liability 80.08% 79.03% 78.00% 75.00% 77.00% 77.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 599 $ 494 §$ 518 $ 472 $ 475 §$ 142
Contributions in relation to the contractually required
contributions 599 494 518 472 475 142
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ —
Covered payroll $ 1,276 $ 1,051 $ 1,103 $ 1,022 $ 974 §$ 986
Contributions as a percentage of covered payroll 46.94% 47.00% 46.96% 46.18% 49.00% 14.40%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined
as of June 30, 2019. The following actuarial methods and assumptions were used to determine contractual
contribution rates reported in that schedule:

Actuarial cost method Entry age Normal

Amortization method Level percentage of payroll, open

Asset valuation method 4-year smoothed market

Wage inflation 3.50%, including inflation

Inflation 2.75%

Salary increases 0% to 6.30%

Investment rate of return 7.65%, including inflation

Mortality (healthy) RP-2000 Combined employee and annuitant mortality table projected
to 2020 using scale BB, males set back | year

Mortality (disabled) RP-2000 Combined employee and annuitant mortality table

Admin as a % of payroll 0.25%

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.

B-185
B-186

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Firefighters’ Unified Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Nonemployer’s proportion of the net pension liability 69.323577% 67.972164% 67.876338% 67.809541% 67.358196% 68.005182%
Nonemployer’s proportionate share of the net pension

liability $ 79,524 $ 78,285 $ 76,724 $ 77,448 $ 68892 $ 66,384
Plan fiduciary net position as a percentage of the total
pension liability 80.08% 79.03% 78.00% 75.00% 77.00% 77.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 17,147 $ 16209 $ 15,272 $ 14042 $ 13635 $ 13,573
Contributions in relation to the contractually required
contributions 17,147 16,209 15,272 14,042 13,635 13,573
Contribution deficiency/(excess) $ — $ —$ —$ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of statutorily determined contributions: The statutorily determined
contribution rates are set forth by the Legislature and are contained within the Montana Code Annotated (MCA).
The amounts used for the valuation as of the year ended June 30, 2019, are as follows:

The State contributes 32.61% of member compensation on behalf of all employer entities per Section
19-13-604, MCA.

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
B-187

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Volunteer Firefighters’ Compensation Act
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Nonemployer’s proportion of the net pension liability 100% 100% 100% 100% 100% 100%
Nonemployer’s proportionate share of the net pension
liability $ 6907 $ 7,667 $ 10,087 $ 10,599 $ 10,504 $ 5,089
Plan fiduciary net position as a percentage of the total
pension liability 85.23% 83.48% 78.00% 76.00% 76.00% 87.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 2,475 $ 2,361 $ 2,207 $ 2,054 $ 2,024 $ 1,913
Contributions in relation to the contractually required
contributions 2,475 2,361 2,207 2,054 2,024 1,913
Contribution deficiency/(excess) $ — $ —$ —$ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of actuarially determined contributions: The statutorily determined
contribution rates are set forth by the Legislature and are contained within the Montana Code Annotated (MCA).
The amounts used for the valuation as of the year ended June 30, 2019, are as follows:

The State contributes 5% of certain fire tax insurance premiums paid per Section 19-17-301, MCA.

Changes of assumptions: No changes in assumptions or other inputs that affected the measurement date have been
made since the prior measurement date.
B-188

Required Supplementary Information
State of Montana as an Employer Entity

Teachers’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Employer's proportion of the net pension liability 2.411113% 2.554088% 2.860298% 3.121008% 3.422388% 4.689747%
Employer's proportionate share of the net pension
liability $ 46,493 $ 47,407 $ 48227 $ 57,016 $ 56,230 $ 72,168
Employer's covered payroll $ 23,250 $ 24,275 $ 26944 $ 28915 $ 31,252 $ 32,937
Employer ’s proportionate share of the net pension
liability as a percentage of its covered payroll 199.97% 195.29% 178.99% 197.18% 179.00% 219.00%
Plan fiduciary net position as a percentage of the total
pension liability 68.64% 69.09% 70.00% 67.00% 69.00% 70.00%

Schedule of Employer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 16686 $ 16538 $ 17,298 $ 17,396 $ 16946 $ 16,234
Contributions in relation to the contractually required
contributions 16,686 16,538 17,298 17,396 16,946 16,234
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ —
Covered payroll $ 22,384 $ 23,250 $ 24,275 $ 26,944 $ 28915 $ 31,252
Contributions as a percentage of covered payroll 74.54% 71.13% 71.26% 64.56% 58.00% 52.00%

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Changes of assumptions: The Guaranteed Annual Benefit Adjustment (GABA) for Tier Two members is a variable
rate between 0.50% and 1.50% as determined by TRS. Since an increase in the amount of the GABA is not
automatic and must be approved by TRS, the assumed increase was lowered from 1.50% to the current rate of 0.50%
per annum.

Method and assumptions used in calculations of actuarially determined contributions: The actuarially determined
contribution rates are determined on an annual basis for the fiscal year beginning July 1, 2019, determined as of June
30, 2019. The following actuarial methods and assumptions were used to determine actuarial contribution rates
reported in that schedule:

Actuarial cost method Entry age

Amortization method Level percentage of pay, open

Remaining amortization period 31 years

Asset valuation method 4-year smoothed market

Wage inflation 3.25%, including inflation

Inflation 2.50%

Salary increase 3.25% to 7.76%, including inflation for non-University Members and

4.25% for University Members
Investment rate of return 7.50%, net of pension plan investment expense, and including inflation
B-189

Required Supplementary Information
State of Montana as a Nonemployer Contributing Entity

Teachers’ Retirement System
Schedule of Proportionate Share of the Net Pension Liability '
For the Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015

Nonemployer's proportion of the net pension liability 37 449g80% —37.735743% 38.133267% 38.729473% 39.384625% 38.777294%

Nonemployer’s proportionate share of the net pension

liability $ 715,637 $ 700,417 $ 642,958 $ 707,527 $ 647,092 $ 596,724
Plan fiduciary net position as a percentage of the total
pension liability 68.64% 69.09% 70.00% 67.00% 69.00% 70.00%

Schedule of Nonemployer Contributions '
For the Fiscal Year Ended June 30
(dollars in thousands)

2020 2019 2018 2017 2016 2015
Contractually required contributions $ 44841 $ 44333 $ 43,718 $ 43028 $ 42400 $ 42,806
Contributions in relation to the contractually required
contributions 44,841 44,333 43,718 43,028 42,400 42,806
Contribution deficiency/(excess) $ — $ — $ — $ — $ — $ =

' Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Notes to Required Supplementary Information
For the Year Ended June 30, 2020

Method and assumptions used in calculations of contractually determined contributions: The contractually
required contribution rates are set forth by the Legislature and are contained within the Montana Code Annotated
(MCA). The amounts used for the valuation as of the year ended June 30, 2019, are as follows:

The State contributes 0.11% of the compensation of members participating per Section 19-20-604, MCA.

The State contributes 2.38% of member compensation on behalf of school district and community college
entities per Section 19-20-607, MCA.

The State contributes a $25 million payment from the General Fund per Section 19-20-607, MCA.

Changes of assumptions: The Guaranteed Annual Benefit Adjustment (GABA) for Tier Two members is a variable
rate between 0.50% and 1.50% as determined by TRS. Since an increase in the amount of the GABA is not
automatic and must be approved by TRS, the assumed increase was lowered from 1.50% to the current rate of 0.50%
per annum.
B-190

REQUIRED SUPPLEMENTARY INFORMATION

NOTE RSI-3. OTHER POSTEMPLOYMENT BENEFITS PLAN INFORMATION (OPEB)

The State of Montana and MUS OPEB plans allow retirees to participate, as a group, at a rate that does not cover all
of the related costs. This results in the reporting of the Total OPEB Liability in the related financial statements and

note disclosures.

In accordance with GASB 75, the following information is presented to reflect the funding progress of the Other
Postemployment Benefits Plans for the State of Montana OPEB plan.

Total OPEB Liability and Related Ratios
Last 10 Fiscal Years "
(in thousands)

Total
OPEB
Liability 2020 2019 2018

Service cost $ 1946 $ 2,062 $ 1,889
Interest 1,586 1,990 2,014
Changes of benefit terms — — —
Difference between expected (9,409) — (4,723)
and actual experience
Changes of assumptions or other (1,877) 2,895 (295)
inputs
Benefit payments (601) (1,709) 1,705

Net change in Total OPEB (8,355) 5,238 590

Liability

Total OPEB Liability -

Beginning 55,697 50,459 49,869

Total OPEB Liability -
Ending $ 47,342 $ 55,697 $ 50,459

State and discretely presented
component units’ proportion of
the collective Total OPEB
Liability 100 % 100 % 100 %
Covered employee payroll $ 690,563 $ 702,688 $ 675,661
Total OPEB Liability as a
percentage of covered employee 6.86 % 7.93 % TAT%
payroll

Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.

Note to Schedule: No assets are accumulated in a trust that meets the criteria of GASB 75.

Factors that significantly affect trends in the amounts reported:

Changes of benefit terms, No changes in assumptions or other inputs that affected the measurement date have been

made since the prior measurement date.
B-191

In accordance with GASB 75, the following information is presented to reflect the funding progress of the Other
Postemployment Benefits Plans for MUS plan.

Total OPEB Liability and Related Ratios
Last 10 Fiscal Years
(in thousands)

Total
OPEB
Liability 2020 2019 2018
Service cost 1,736 $ 1,952 ¢ 1,954
Interest 1,130 1,495 1,410
Changes of benefit terms — — —
Difference between expected and (15,015) — (1,323)
actual experience
Changes of assumptions or other (1,791) 1,351 (182)
inputs
Benefit payments 1,441 (888) (679)
Net change in Total OPEB (12,499) 3,910 1,180
Liability
39,348 35,438 34,258
Total OPEB Liability - Beginning
Total OPEB Liability - Ending
26,849 $ 39,348 $ 35,438
State and discretely presented
component units’ proportion of the
collective Total OPEB Liability
94.92 % 95.59 % 95.62 %
Covered employee payroll ” 418,193 $ 451,613 $ 434,243
Total OPEB Liability as a
percentage of covered employee 6.42 % 9.11 % 8.53%

payroll

(2

") Schedules are intended to present information for 10 years. Additional years will be displayed as they become available.
) Amount reported is for the whole MUS plan for 2018 and 2019. Community Colleges were included due to lack of ability to separate covered
employee payroll for those years.

Note to Schedule: No assets are accumulated in a trust that meets the criteria of GASB 75.

Factors that significantly affect trends in the amounts reported:

Changes of benefit terms, Changes in benefit terms include increased annual deductible and out-of-pocket

maximums.
B-192

REQUIRED SUPPLEMENTARY INFORMATION
NOTE RSI - 4. RISK MANAGEMENT TREND INFORMATION

The following tables present risk management trend information for the Hail Insurance Fund and the MUS Group
Benefits Fund. The Hail Insurance Fund pays claims within a calendar year cycle that parallels the growing season
from spring planting to fall harvesting; therefore, it has no development cycle. The MUS Group Benefits Fund has a
three to five-year development cycle.

The tables illustrate how the earned revenues (net of reinsurance) of the funds and their investment income compare
to related costs of loss (net of loss assumed by reinsurers) and other expenses assumed by the funds as of the end of
the fiscal year (in thousands). Section 3 shows the funds’ incurred claims and allocated claim adjustment expense
(both paid and accrued) as originally reported at the end of the first year in which the event that triggered coverage
under the contract occurred. Section 4 shows the cumulative amounts paid as of the end of successive years for each
policy year. Section 6 shows how each policy year's incurred claims increased or decreased as of the end of
successive years. This annual re-estimation results from new information received on known claims, reevaluation of
existing information on known claims, as well as emergence of new claims not previously known. Section 7
compares the latest re-estimated incurred claims amount to the amount originally established (Section 3) and shows
whether this latest estimate of claims cost is greater or less than originally thought. As data for individual policy
years mature, the correlation between original estimates and re-estimated amounts is commonly used to evaluate the
accuracy of incurred claims currently recognized in less mature policy years. This table will be revised as data for
successive policy years develops.
B-238

STATE OF MONTANA
NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
FOR THE FISCAL YEAR ENDED JUNE 30, 2020

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Schedule of Expenditures of Federal Awards includes the federal
award activity of the state of Montana under programs of the federal government for the
fiscal year ended June 30, 2020. The information in this schedule is presented in
accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200,
Uniform Administrative Requirements, Cost Principles, and Audit Requirements for
Federal Awards (referred to as the “Uniform Guidance”), and where applicable, Office of
Management and Budget Circular A-133 requirements.

Because this schedule presents only a selected portion of the operations of the state of
Montana, it is not intended to, and does not present, the financial positions, change in net
assets, or, where applicable, its cash flows for the fiscal year ended June 30, 2020.

Significant Accounting Policies

Expenditures shown on the Schedule of Expenditures of Federal Awards are reported on
the modified accrual basis of accounting, except as noted below. Under the modified
accrual basis of accounting, expenditures are generally recorded in the accounting period
in which the liability is incurred. However, there are some payments, such as
compensated absences, that are only recorded when the payment is due.

Such expenditures are recognized following the cost principles contained in the Uniform
Guidance, OMB Circular A-87, or other costs circulars wherein certain types of
expenditures are not allowed or are limited as to reimbursement. Negative amounts
shown on the schedule represent adjustments or credits made in the normal course of
business to amounts reported as expenditures in prior years.

The Montana University System uses full accrual accounting to report campus federal
expenditure activity. The Unemployment Insurance, Section 8 Voucher, and Section 8
Project-Based programs are accounted for as enterprise fund activity. Enterprise funds
also use the full accrual basis of accounting. Under the full accrual basis of accounting,
expenditures are recorded when a liability is incurred, regardless of the timing of the
related cash flows.

Loan and Loan Guarantee Programs (Note 2), Federal Excess Personal Property (Note
7), and the Department of Defense Firefighting Property (Note 8) are presented using the
basis of accounting described in each note. The Books for the Blind and Physically
Handicapped Program (Note 9) is not presented on the Schedule of Expenditures of
Federal Awards but is provided as additional information regarding the types of donations
received by the state as part of this federal program.

The state of Montana did not elect to use the 10% de minimis indirect cost rate allowed
under the Uniform Guidance.

Coronavirus Relief Fund

The state of Montana expended $685,219,735 in Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) funds during fiscal year 2020. Amounts funded under the
various CARES Act programs are indicated by a “COVID-19” reference in front of the
federal program name on the fiscal year 2020 Schedule of Expenditures of Federal
Awards.

A summary of the federal programs that received funding under the CARES Act is shown
on the following page:

B-239
B-240

CFDA# CARES Act Funding FY 2020
Expenditures
10.551 Supplemental Nutrition Assistance Program $22,609,431
10.553 School Breakfast Program $805,929
10.555 National School Lunch Program $1,959,640
10.556 Special Milk Program for Children $206
10.558 Child and Adult Care Food Program $3,205,405
10.559 Summer Food Service Program for Children $10,563,625
10.569 Emergency Food Assistance Program (Food Commodities) $314,196
14.231 Emergency Solutions Grant Program $100,715
14.241 Housing Opportunities for Persons with AIDS $31,894
16.034 Coronavirus Emergency Supplemental Funding Program $52,143
17.225 Unemployment Insurance $499,740,638
20.106 Airport Improvement Program $212,432
20.509 Formula Grants for Rural Areas $5,784,009
21.019 Coronavirus Relief Fund $93,151,036
59.037 Small Business Development Centers $23,552
84.007 Federal Supplemental Educational Opportunity Grants $75,560
84.425 Education Stabilization Fund $12,191,090
Special Programs for the Aging, Title Vil, Chapter 2, Long Term Care
93.042 Ombudsman Services for Older Individuals $10,820
Special Programs for the Aging, Title Ill, Part B, Grants for Supportive
93.044 Services and Senior Centers $300,463
93.045 Special Programs for the Aging, Title Ill, Part C, Nutrition Services $1,786,293
93.048 Special Programs for the Aging, Title IV, and Title Il, Discretionary $304,000
Projects
93.052 National Family Caregiver Support, Title Ill, Part E $141,846
93.268 Immunization Cooperative Agreements $523
93.301 Small Rural Hospital Improvement Grant Program $2,849,939
93.323 Epidemiology and Laboratory Capacity for Infectious Diseases (ELC) $4,909,222
Public Health Emergency Response: Cooperative Agreement for
93.354 Emergency Response: Public Health Crisis Response $2,604,568
93.498 Provider Relief Fund $934,894
93.568 Low-Income Home Energy Assistance $3,571,621
93.569 Community Services Block Grant $35,386
93.575 Child Care and Development Block Grant $6,682,283
93.636 ACA - Reinvestment of Civil Money Penalties to Benefit Nursing Home $49,256
Residents
93.889 National Bioterrorism Hospital Preparedness Program $619
97.036 Disaster Grants - Public Assistance (Presidentially Declared Disasters) $10,216,501
Total CARES Act Funding $685,219,735
The state received $3,121,023 in supplies and equipment under CFDA #97.036, Disaster
Grants - Public Assistance (Presidentially Declared Disasters) which is shown on the
Schedule of Expenditures of Federal Awards. Of this amount, $576,228 was received
from the Strategic National Stockpile and $691,191 was donated hand sanitizer, swabs,
and cloth face masks from the Federal Emergency Management Agency.

Families First Coronavirus Response Act

Section 6008 of the Families First Coronavirus Response Act provided a temporary 6.2
percentage point increase to each qualifying state and territory's Federal Medical
Assistance Percentage (FMAP) under section 1905(b) of the Social Security Act. In fiscal
year 2020, the state paid an additional $36,762,371 for the Medical Assistance Program
(CFDA #93.778), and an additional $2,137,212 for the Children’s Health Insurance
program (CFDA #93.767), as a result of this FMAP increase.

Food Distribution Program

The amount reported for Food Distribution programs (CFDA #10.555, #10.565, #10.567,
#10.569, and #93.053) represents the dollar value of food commodities distributed to
eligible recipients during the year. The U.S. Department of Agriculture provides the
current value of the commodities used by the state to compute the amount reported. The
amount of funds received to administer the program is also included in the reported
amount. Montana also distributes food commodities to other states in the western region
of the United States. During fiscal year 2020, Montana distributed $1,202,826 of food
commodities under CFDA #10.567 to other states.

The state of Montana distributed $12,212,219 in commodities in fiscal year 2020. The
June 30, 2020 value of commodities stored at the state’s warehouse is $4,749,696, for
which the state is liable in the event of loss. The state has insurance to cover this liability.

Minority Health and Health Disparities Research

The amount reported for the Minority Health and Health Disparities Research Program
(CFDA #93.307) includes endowment funds of $9,375,000, along with interest earned on
the endowment. The entire endowment amount is reported as expended each year, as
the funds are restricted for the life of the endowment.

Immunization Cooperative Agreements

The amount reported for the Immunization Cooperative Agreements (CFDA #93.268)
includes the dollar value of vaccine doses received during fiscal year 2020. The state
used the Centers for Disease Control’s price list to calculate the value of doses received.
During fiscal year 2020, Montana received 185,060 vaccine doses valued at $10,501,107.

B-241
B-242
Note 2. Loan and Loan Guarantee Programs

The following loan and loan guarantee programs are reported on the Schedule of
Expenditures of Federal Awards at their July 1, 2019 beginning loan balance plus the
amount of any interest subsidy, cash, or administrative cost allowance received during
fiscal year 2020:

Federal Loan/Loan Guarantee Program FY 2020 Ending

CFDA# State Revolving Loans Balance

66.458 Capitalization Grants for Clean Water State Revolving Funds $ 303,244,326

66.468 Capitalization Grants for Drinking Water State Revolving Funds $ 172,607,800

Total State Revolving Loan Programs $ 475,852,126
CFDA# Federal Loan/Loan Guarantee Program FY 2020 Ending
Student Financial Assistance Balance
University Loans
84.038 Federal Perkins Loan Program_Federal Capital Contributions $23,537,043
93.264 Nurse Faculty Loan Program (NFLP) $6,063
93.364 Nursing Student Loans $2,435,380
Total Student Financial Assistance Programs $26,229,488

Perkins Loan Programs

Under the Perkins Loan Extension Act of 2015, universities participating in this program
are no longer permitted to make Perkins Loan disbursements after June 30, 2018.
Institutions may choose to continue servicing their existing Perkins Loans until such time
the institution's outstanding loans have been paid in full or otherwise retired. Both
Montana State University and the University of Montana have chosen to continue to
service their current loans.

Economic Adjustment Assistance Program

The Economic Adjustment Assistance Program (CFDA #11.307) consists of two separate
awards, which are reported on the Schedule of Expenditures of Federal Awards at the
June 30, 2020 ending loan balances.
B-243

The amount of loans outstanding as of June 30, 2020 is $312,521 for award number 05-
19-02445 and $3,006,744 for award number 05-79-73005. The calculation for each of
these loan balances is as follows:

Award Number: 05-19-02445

State Name = EDA Revolving Loan

Federal Grantor = US Department of Commerce

Federal Program Name = Title IX SSED Revolving Loan Fund
Federal Catalog Number = 11.307

RLF Loan Balance FYE 2020 $ 293,074
Cash & Investments FYE 2020 $ 147,097
FY 2020 Admin paid out of RLF Income $ -
Unpaid Principal of loans written of during FY $ -

$ 440,171
Federal Percentage 71%
Federal Share of Revolving Loan Fund $ 312,521

Award Number: 05-79-73005

State Name = EDA Revolving Loan

Federal Grantor = US Department of Commerce

Federal Program Name = Economic Adjustment Assistance
Federal Catalog Number = 11.307

RLF Loan Balance FYE 2020 $ 5,885,488
Cash & Investments FYE 2020 $ 98,076
FY 2020 Admin paid out of RLF Income $ 29,923
Unpaid Principal of loans written of during FY $

$

6,013,487

Federal Percentage 50%
Federal Share of Revolving Loan Fund $ 3,006,744

Other Federal Loans

The following loans, originally funded through federal programs, do not have any
continuing federal compliance requirements imposed on the state, other than the loan
repayments. These loans are not reported on the Schedule of Expenditures of Federal
Awards:
B-244

Tongue River —Northern Cheyenne Tribal Loan

The Northern Cheyenne Tribe and the Department of Natural Resources and
Conservation entered into an agreement on July 1, 1994 in which the tribe agreed to loan
the state of Montana $11,300,000 of federal funds appropriated as part of the Northern
Cheyenne Indian Reserved Water Rights Settlement. The loan is to assist the state in
financing costs of the Tongue River Dam project. No expenditures of tribal loan funds
were incurred on project costs during fiscal year 2020. The amount of the loan
outstanding as of June 30, 2020 is $5,215,385.

Middle Creek Dam Rehabilitation Project Loan

The Department of Natural Resources and Conservation and the U.S Department of the
Interior, Bureau of Reclamation (BOR), entered into an agreement on September 21,
1990. The BOR agreed to loan the state of Montana “...a sum of money not to exceed
the lesser of (1) $3,023,925 plus reimbursable interest during construction, or (2) the
actual cost of the project, including reimbursable interest during construction...” The total
loan repayable is $2,990,129, and reimbursable interest during construction is $281,857.
As of June 30, 2020, the loan outstanding is $1,691,794, and reimbursable interest during
construction is $162,581.

Note 3. Type A Federal Programs

The state of Montana issues a biennial single audit report. The Montana Single Audit
report for the two fiscal years ended June 30, 2021 will be issued by March 31, 2022.

The Type A program threshold will be determined based on actual expenditures incurred
during the two fiscal years ended June 30, 2021.

Note 4. CFDA Number

The CFDA number assigned for each federal program listed in the Schedule of
Expenditures of Federal Awards is based upon agency agreements with the federal
government and the Catalog of Federal Domestic Assistance in effect during the audit
period.

The complete CFDA number is a five-digit number, where the first two digits represent the
federal agency and the second three digits represent the program. Programs not
assigned a CFDA number in the Catalog of Federal Domestic Assistance were assigned
a CFDA number in the format **.UXX or **. RD. Also refer to Note 13.
B-245
Note 5. Program Clusters

As defined by 2 CFR section 200.17, a cluster of programs is a grouping of closely
related programs that share common compliance requirements. Except for the Student
Financial Assistance Cluster, clusters of programs are presented on the Schedule of
Expenditures of Federal Awards either within their respective federal agency (for non-
research and development programs) or by federal agency and major subdivision (for
research and development programs.

Student Financial Assistance Cluster

Amounts reported for the Student Financial Assistance Cluster include programs
administered by both the Department of Education and the Department of Health and
Human Services. These clusters are shown separately, within their respective federal
agencies, on the Schedule of Expenditures of Federal Awards.

The combined Student Financial Assistance Cluster includes the following programs:

CFDA# Student Financial Assistance Cluster FY 20
Expenditures
84.007 Federal Supplemental Educational Opportunity Grants $1,638,881
84.033 Federal Work-Study Program $1,914,835
84.038 Federal Perkins Loan Program_Federal Capital Contributions $28,249,249
84.063 Federal Pell Grant Program $40,941,532
84.268 Federal Direct Student Loans $155,770,460
Teacher Education Assistance for College and Higher Education Grants
84.379 (TEACH Grants) $5,838
93.264 Nurse Faculty Loan Program (NFLP) $8,630
93.342 Health Professions Student Loans, Including Primary Care Loans/Loans for $320,347
Disadvantaged Students
93.364 Nursing Student Loans $2,925,738
Total Student Financial Assistance Cluster $231,775,510

Note 6. Research and Development Grants

Research and Development includes all research activities, both basic and applied, and
all development activities that are performed by a non-federal entity. Research is defined
as a systematic study directed toward fuller scientific knowledge or understanding of the
subject studied. The term research also includes activities involving the training of
individuals in research techniques, where such activities utilize the same facilities as other
research and development activities, and where such activities are not included in the
instruction function.

Development is the systematic use of knowledge and understanding gained from
research directed toward the production of useful materials, devices, systems, or
B-246
methods, including design and development of prototypes and processes. Federal
awards that meet the research and development criteria are listed in the Research and
Development Cluster.

Note 7. Federal Excess Personal Property

The state of Montana receives Federal Excess Personal Property (FEPP). The title to
this property remains with the federal agency. In accordance with General Services
Administration guidelines, the amounts are presented at fair market value at the time of
receipt by the state, which is determined to be 23.34% of the original acquisition cost of
the property.

Property received under CFDA #81.UXX, Miscellaneous Non-major Grants, is shown at
its fair market value at the time of receipt.

The following is a list of the FEPP received by the state of Montana during fiscal year
2020. The negative amount reflects property sold (title transferred at public sale) or other

disposition.
CFDA# Program FY 20 FY 20 Ending
Amount Inventory
10.203 Payments to Agricultural Experiment Stations $0 $124,578
Under the Hatch Act
10.500 Cooperative Extension Service $0 $3,157
10.664 Cooperative Forestry Assistance ($165,984)| $4,487,536
10.UXX Miscellaneous — Non-major Grants $0 $136,426
15.UXX Miscellaneous — Non-major Grants $0 $3,553
39.003 Donation of Federal Surplus Personal Property $84,100 $193,804
81.UXX Miscellaneous — Non-major Grants ($2,235) $2,370
43.UXX Miscellaneous — Non-major Grants $0 $665,190
47.UXX Miscellaneous — Non-major Grants ($1,254) $122,614

Note 8. Department of Defense Firefighting Property

The Department of Natural Resources and Conservation (DNRC) receives Department of
Defense Firefighting Property (FFP). The title to this property is transferred to the DNRC.
In accordance with General Services Administration guidelines, the amounts are
presented at fair market value at the time of receipt by DNRC, which is determined to be
23.34% of the original acquisition cost of the property. The following is the value of FFP
received by the state of Montana during fiscal year 2020:

CFDA# Program FY 20 FY 20 Ending
Amount Inventory
12.UXX Miscellaneous — Non-major Grants $66,811 $3,220,138
B-247

Note 9. Books for the Blind and Physically Handicapped

The Montana State Library receives “talking book” machines, cassette books,
accessories, and magazines from the federal government under the Books for the Blind
and Physically Handicapped Program (CFDA #42.001). These items are then distributed
to provide library services to blind and physically handicapped individuals. The federal
government retains title to these items. The approximate value of the items in inventory
(not distributed to individuals) at June 30, 2020 was $917,764.

Since this program is considered a federal “use of equipment” agreement, the
accompanying Schedule of Expenditures of Federal Awards does not include this
amount.

Note 10. Unemployment Benefits

The unemployment compensation system is a_ federal-state partnership. State
unemployment insurance laws must conform to certain provisions of the federal law.
Federal funds are expended for administrative costs. State unemployment taxes must be
deposited into a state account in the Federal Unemployment Trust Fund and are used
only to pay benefits. State Unemployment Insurance (UI) funds, as well as federal funds,
are included on the Schedule of Expenditures of Federal Awards.

The following schedule provides a breakdown of the state and federal portions of the total
expenditures recorded for the Unemployment Insurance Program (CFDA #17.225).

State UI Expenditures $ 265,690,764
Federal UI Expenditures 494 103,546
Total $ 759,794,310

Note 11. Subgrants to State Agencies

Federal assistance transferred from one Montana state agency to another Montana state
agency is shown only once on the Schedule of Expenditures of Federal Awards.

Federal assistance received from non-state sources, which are considered subgrants by
the awarding agency, are treated as pass-through grants to the state. These pass-
through awards are listed below the direct federal awards reported on the Schedule of
Expenditures of Federal Awards. Pass-through grant numbers are included for those
awards that were assigned an identifying number.

Note 12. Subgrants to Non-State Agencies

Federal assistance transferred from a Montana state agency or university to a non-state
agency, such as a city, county, tribal government, or nonprofit organization, is identified in
the Amount to Subrecipients column shown in the Schedule of Expenditures of Federal
Awards. These amounts are included in the expenditure totals shown on the report.
B-248

The Amounts to Subrecipients includes federal assistance transferred from a Montana
state agency or university that was originally received as a subgrant from another
Montana state agency or university. These amounts are not included in the expenditure
totals shown on the report, since the original award is only shown once on the Schedule
of Expenditures of Federal Awards, as described in Note 11 above.

A summary of amounts that were subgranted to a non-state agency, such as a city,
county, tribal government, or nonprofit organization, which were made from awards
originally received from another Montana state agency or university, is shown below:

CFDA#_ Federal Program

Amount to
Subrecipients

Non Research and Development

16.833
21.019
84.048
84.419

93.243
93.262

National Sexual Assault Kit Initiative

Coronavirus Relief Fund

Career and Technical Education -- Basic Grants to States

Preschool Development Grants

Substance Abuse and Mental Health Services Projects of Regional and
National Significance

Occupational Safety and Health Program

Total - Non Research and Development

Research and Development Cluster

20.205
93.778

Highway Planning and Construction
Medical Assistance Program

Total Research and Development Cluster

Note 13. Federal Awards Not Having a CFDA Number

$100,202
$79,527,728
$2,798,047
$86,953

$38,449
$14,581

$82,565,960

$12,000
$155,430

$167,430

The following schedules contain contract or grant numbers associated with awards that
did not have a CFDA number and were assigned either a **.UXX or **.RD number in the
Schedule of Expenditures of Federal Awards. Not all **.UXX or **.RD awards reported on
the SEFA had a grant or contract number. Also refer to Note 4.
Federal Agency

DEPARTMENT OF AGRICULTURE
10.U01
10.U02
10.U03
10.U04
10.U05
10.U06
10.U07
10.U08
10.U09
10.U10
10.U11
10.U12

DEPARTMENT OF DEFENSE
12.U01
12.U02
12.U03
12.U04
12.U05
12.U06
12.U07
12.U08
12.U09
12.U10
12.U11

DEPARTMENT OF EDUCATION
84.U01

DEPARTMENT OF ENERGY
81.U01
81.U02
81.U03
81.U04

Schedule of Unknown Federal CFDA Numbers (**.UXX)

State Agency Contract or Grant Number
Montana State University - Bozeman Unknown
Department of Natural Resources and Conservation 15-Fl-11010200-001

16-Fl-11010200-019
16-Fl-11011100-057
16-Fl-11011100-060
16-Fl-11011500-026
17-Fl-11011600-013
17-Fl-11015200-003
18-Fl-11011600-026
18-Fl-11015200-008
18-FP-11011500-017
DNRC-BLM-18-001

University of Montana - Missoula 1900163
W9128F-17-2-0028
Department of Fish, Wildlife and Parks 19-102P
19-85P
20-105P
20-144P
W9128F-15-D-0015
W9128F-20-D-0025
W912DW-15-2-0001-0005
W912DW-20-2-0001

Department of Natural Resources and Conservation Unknown
Office of Public Instruction Contract # ED-IES-14-C-0086
Department of Fish, Wildlife and Parks 19-36G
20-18G
00-UGPR-34
Department of Natural Resources and Conservation Unknown

DEPARTMENT OF HEALTH AND HUMAN SERVICES

93.U01
DEPARTMENT OF THE INTERIOR

15.U01
DEPARTMENT OF TREASURY

21.U01
LIBRARY OF CONGRESS

42.U01

Department of Public Health and Human Services Unknown
Department of Fish, Wildlife and Parks 140G0219P0131
Department of Administration Unknown

Montana Historical Society Unknown

B-249

Amount

$986
$322
$1,392
$1,789
$29,708
$744
$2,820
$24,110
$3,580
$9,896
$15,465
$1,445

$78,510
$172,108
$170,654
$1,187,025
$458,487
$61,193
$202,951
$145,270
$337,449
$44,014
$66,811

$113,496

$60,551
$58,624
$222,717
$42,830

$163,827

$54,684

$5,992

$5,300
B-250

Schedule of Unknown Federal CFDA Numbers for Research and Development Awards (XX.RD)

Federal Agency State Agency

DEPARTMENT OF AGRICULTURE
10.RD Montana State University - Bozeman

University of Montana - Montana Tech

DEPARTMENT OF DEFENSE
12.RD University of Montana - Missoula

Montana State University - Bozeman

DEPARTMENT OF ENERGY
81.RD University of Montana - Montana Tech

DEPARTMENT OF HEALTH AND HUMAN SERVICES
93.RD University of Montana - Missoula

Montana State University - Bozeman

Department of Public Health and Human Services

DEPARTMENT OF HOMELAND SECURITY
97.RD Montana State University - Bozeman

DEPARTMENT OF THE INTERIOR
15.RD University of Montana - Missoula

Contract or Grant Number

A17-0837-S001
078863-16983
14-CS-11011100-026
15-CS-11021400-031
16-JV-11221639-136
17-CS-11010200-019
17-CS-11011100-012
17-CS-11015600-056
17-JV-11221636-068
18-CS-11011800-017
58-2056-5-002
59-0206-5-002
59-0206-5-003
59-0206-5-004
AG-3151-C-17-0012
MSU-ARF ORBC MOU
09-CS-11010800-018

N62473-19-2-0005
W911KB-19-2-1500
W911KB-19-2-1501
W9126G-19-2-0035
W9126G-20-2-0016
W9128F20P0030
W912G-19-2-0007
313-0873
SUBCONTRACT NUMBER 313-0742
SUBK-MSU-VDHWFS2-01-012720
SUBK-MSU-NLAO-01-100518
$2-1025-19-01
$B1911-001-1
ARM212-MSU/ PO# EP0166321
FA701418C5000
FA701418C5004
M67854-18-3-1330
W912HZ-18-2-0010

230444
223911
2151826
1663302
1922244

GENFD0001583403
7273 POPS V
75N93019C0045
HHSN272201400050C
HHSN272201800048C
18BBSK0053 (HHSN26100014)
75N91019P00691
Unknown

7ORSAT19TPIAOO001

LO212A-A

LO205A-A

50002.001
100130
100145

Amount

$24,004
$50,523
$7
$12,831
$6,085
$5,929
$7,300
$576
$16,388
$13,837
$13,354
$9,624
$12,138
$7,993
$100,698
$12,608
-$1

$132,680
$72,586
$492,429
$1,944
$9,916
$681
$2,510
$510,676
$59,386
$134,729
$39,288
$948
$196,821
$30,191
$9,649
$4,989
$332,581
$326,511
$2,061,223
$19,348

$5,291
$6,000
$26,456
$26,224
$45,340

$758,671
$7,624
$1,036,127
$1,802,944
$2,369,073
$20,092
$63,295
$142,861

$1,527,489

$201,721
$209,286
$196,575
$46,745
$38,228
B-251

Schedule of Unknown Federal CFDA Numbers for Research and Development Awards (XX.RD)

Federal Agency State Agency Contract or Grant Number Amount
100006 $224,518
33172.002 $3,797
140B0619F0343 $11,311
140F0619C0021 $10,067
140F0619P0068 $22,321
140F0619P0069 $14,743
140L0618F0380 $291,593
140L0619F0248 $4,869
140L0619F0249 $64
140L0619F0291 $643
140L0619F0292 $1,965
140L0619F0301 $41,635
140L0619F0302 $8,026
140L0619F0359 $58,164
140L1018P0018 $1
140L619F0285 $33,994
140L619F0342 $1,803
G15PC00055 $16,117
Montana State University - Bozeman G19AC00047 $40,760
68-0325-15-005 $95,724
University of Montana - Montana Tech H1580070001 -$23,395

ENVIRONMENTAL PROTECTION AGENCY
66.RD University of Montana - Montana Tech MONTT-19-001 $4,047

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
43.RD University of Montana - Missoula 1422120 $176,029
AUDITOR'S REPORT & FINDINGS

20-02
C-1

Angus Maciver, Legislative Auditor
Deborah F. Butler, Legal Counsel

Deputy Legislative Auditors:
Cindy Jorgenson
William Soller

INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE FOR EACH
Major FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER
COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE

The Legislative Audit Committee
of the Montana State Legislature:

Report on Compliance for Each Major Federal Program

We have audited the state of Montana’s compliance with the types of compliance requirements
described in the OMB Compliance Supplement that could have a direct and material effect on each of
the state of Montana’s major federal programs for the two fiscal years ended June 30, 2021. The state
of Montana’s major federal programs are identified in the summary of auditor’s results section in the
accompanying Schedule of Findings and Questioned Costs.

Management’s Responsibility
Management is responsible for compliance with federal statutes, regulations, and the terms and
conditions of its federal awards applicable to its federal programs.

Auditor’s Responsibility

Our responsibility is to express an opinion on compliance for each of the state of Montana’s major
federal programs based on our audit of the types of compliance requirements referred to above. We
conducted our audit of compliance in accordance with auditing standards generally accepted in the
United States of America; the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States; and the audit requirements of Title
2 US. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles,

and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform
Guidance require that we plan and perform the audit to obtain reasonable assurance about whether
noncompliance with the types of compliance requirements referred to above that could have a direct
and material effect on a major federal program occurred. An audit includes examining, on a test basis,
evidence about the state of Montana’s compliance with those requirements and performing such other
procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our adverse, qualified, and unmodified
opinions on compliance for major federal programs. However, our audit does not provide a legal
determination of the state of Montana’s compliance.

Room 160 ¢ State Capitol Building * PO Box 201705 * Helena, MT * 59620-1705
Phone (406) 444-3122 * FAX (406) 444-9784 ¢ E-Mail lad@mt.gov
Basis for Adverse Opinion on Epidemiology and Laboratory Capacity for Infectious Diseases (ELC)
As described in Findings #2021-052, 2021-054, 2021-055, 2021-062, and 2021-066 in the
accompanying Schedule of Findings and Questioned Costs, the state of Montana did not comply with
requirements regarding the following:

Finding # ALN# Program Name Compliance Requirement
2021-052 Subrecipient Monitoring
2021-054 Subrecipient Monitoring
2021-055 93.323 Capacity for Infectious Subrecipient Monitoring
9021-062 Diseases (ELC) Activities Allowed or Unallowed
Allowable Costs/Cost Principles
2021-066 Reporting

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Adverse Opinion on Epidemiology and Laboratory Capacity for Infectious Diseases (ELC)

In our opinion, because of the significance of the matters described in the “Basis for Adverse Opinion
of Epidemiology and Laboratory Capacity for Infectious Diseases (ELC)” paragraph, the state of
Montana did not comply, in all material respects, with the types of compliance requirements referred
to above that could have a direct and material effect on the Epidemiology and Laboratory Capacity for
Infectious Diseases (ELC) Program for the two fiscal years ended June 30, 2021.

Basis for Adverse Opinion on Foster Care-Title IV-E

As described in Findings #2021-051, 2021-061, 2021-063, 2021-065, and 2021-067 in the
accompanying Schedule of Findings and Questioned Costs, the state of Montana did not comply with
requirements regarding the following:

Finding # ALN # Program Name Compliance Requirement
2021-051 Subrecipient Monitoring
Activities Allowed or Unallowed
2021-061 Allowable Costs/Cost Principles
93.658 Foster Care-Title IV-E Subrecipient Monitoring
2021-063 Allowable Costs/Cost Principles
2021-065 Reporting
2021-067 Reporting

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Adverse Opinion on Foster Care-Title IV-E

In our opinion, because of the significance of the matters described in the “Basis for Adverse Opinion of
Foster Care-Title IV-E” paragraph, the state of Montana did not comply, in all material respects, with
the types of compliance requirements referred to above that could have a direct and material effect on
the Foster Care-Title IV-E program for the two fiscal years ended June 30, 2021.
C-3

Basis for Qualified Opinion on Highway Planning and Construction Cluster
As described in Finding #2021-002 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
20.205
2021-002 20.219
20.224

Highway Planning and Construction

Cluster Special Tests and Provisions

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on Highway Planning and Construction Cluster

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Highway Planning and Construction Cluster” paragraph, the state of Montana complied, in all
material respects, with the types of compliance requirements referred to above that could have a direct
and material effect on the Highway Planning and Construction Cluster for the two fiscal years ended
June 30, 2021.

Basis for Qualified Opinion on Formula Grants for Rural Areas Program
As described in Findings #2021-003 and 2021-004 in the accompanying Schedule of Findings and
Questioned Costs, the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Program Name Compliance Requirement
2021-003 Procurement, Suspension, and
20.509 Formula Grants for Rural Areas Debarment
2021-004 Subrecipient Monitoring

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Formula Grants for Rural Areas Program

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Formula Grants for Rural Areas Program” paragraph, the state of Montana complied, in all material
respects, with the types of compliance requirements referred to above that could have a direct and
material effect on the Formula Grants for Rural Areas Program for the two fiscal years ended June 30,
2021.

Basis for Qualified Opinion on SNAP Cluster
As described in Finding #2021-045 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
2021-045 10.551, 10.561 SNAP Cluster Special Tests and Provisions
C-4

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on SNAP Cluster
In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
SNAP Cluster” paragraph, the state of Montana complied, in all material respects, with the types of

compliance requirements referred to above that could have a direct and material effect on the SNAP
Cluster for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Child Nutrition Cluster
As described in Finding #2021-039 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
10.553
10.555 ; a: .
2021-039 40.556 Child Nutrition Cluster Special Tests and Provisions
10.559

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on Child Nutrition Cluster

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on Child
Nutrition Cluster” paragraph, the state of Montana complied, in all material respects, with the types
of compliance requirements referred to above that could have a direct and material effect on the Child
Nutrition Cluster for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Unemployment Insurance
As described in Findings #2021-017, 2021-018, and 2021-019 in the accompanying Schedule of
Findings and Questioned Costs, the state of Montana did not comply with requirements regarding the

following:

Finding # ALN# Program Name Compliance Requirement
2021-017 Special Tests and Provisions
2021-018 17.225 Unemployment Insurance Activities Allowed or Unallowed
2021-019 Special Tests and Provisions

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Unemployment Insurance

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Unemployment Insurance” paragraph, the state of Montana complied, in all material respects, with the
types of compliance requirements referred to above that could have a direct and material effect on the
Unemployment Insurance Program for the two fiscal years ended June 30, 2021.
C-5

Basis for Qualified Opinion on Title I Grants to Local Educational Agencies
As described in Findings #2021-035, 2021-043, and 2021-044 in the accompanying Schedule of
Findings and Questioned Costs, the state of Montana did not comply with requirements regarding the

following:

Finding # ALN# Program Name Compliance Requirement
2021-035 Subrecipient Monitoring
Title | Grants to Local Matching, Level of Effort,
2021-043 84.010 Educational Agencies Earmarking
2021-044 Special Tests and Provisions

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Title I Grants to Local Educational Agencies

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on Title I
Grants to Local Educational Agencies” paragraph, the state of Montana complied, in all material
respects, with the types of compliance requirements referred to above that could have a direct and

material effect on the Title I Grants to Local Educational Agencies Program for the two fiscal years
ended June 30, 2021.

Basis for Qualified Opinion on Special Education Cluster (IDEA)
As described in Finding #2021-035 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
84.027 i i
2021-035 A173 (DEA) Education Cluster | su brecipient Monitoring

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on Special Education Cluster (IDEA)
In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on Special
Education Cluster (IDEA)” paragraph, the state of Montana complied, in all material respects, with the

types of compliance requirements referred to above that could have a direct and material effect on the
Special Education Cluster (IDEA) for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Temporary Assistance for Needy Families

As described in Findings #2021-053, 2021-063, and 2021-064 in the accompanying Schedule of
Findings and Questioned Costs, the state of Montana did not comply with requirements regarding the
following:

Finding # ALN# Program Name Compliance Requirement
2021-053 Subrecipient Monitoring
2021-063 93.558 Temporary Assistance for Allowable Costs/Cost Principles

Needy Families
2021-064 Reporting

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.
C-6

Qualified Opinion on Temporary Assistance for Needy Families

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Temporary Assistance for Needy Families” paragraph, the state of Montana complied, in all material
respects, with the types of compliance requirements referred to above that could have a direct and

material effect on the Temporary Assistance for Needy Families Program for the two fiscal years ended
June 30, 2021.

Basis for Qualified Opinion on CCDF Cluster
As described in Finding #2021-059 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
93.575
2021-059 93.596 CCDF Cluster Special Tests and Provisions

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on CCDF Cluster
In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
CCDF Cluster” paragraph, the state of Montana complied, in all material respects, with the types of

compliance requirements referred to above that could have a direct and material effect on the CCDF
Cluster for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Children’s Health Insurance Program

As described in Findings #2021-046, 2021-048, and 2021-063 in the accompanying Schedule of
Findings and Questioned Costs, the state of Montana did not comply with requirements regarding the
following:

Finding # ALN # Program Name Compliance Requirement
Activities Allowed or Unallowed
2021-046 Allowable Costs/Cost Principles
Eligibility
93.767 pnidrens Health Insurance Activities Allowed or Unallowed
2021-048 9 Allowable Costs/Cost Principles
Eligibility
2021-063 Allowable Costs/Cost Principles

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Children’s Health Insurance Program

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Children’s Health Insurance Program” paragraph, the state of Montana complied, in all material
respects, with the types of compliance requirements referred to above that could have a direct and
material effect on the Children’s Health Insurance Program for the two fiscal years ended June 30,
2021.
Basis for Qualified Opinion on Medicaid Cluster
As described in Findings #2021-046, 2021-049, and 2021-063 in the accompanying Schedule of
Findings and Questioned Costs, the state of Montana did not comply with requirements regarding the

following:
Finding # ALN# Cluster Name Compliance Requirement
Activities Allowed or Unallowed
2021-046 93.775 Allowable Costs/Cost Principles
93.777 Medicaid Cluster Eligibility
2021-049 93.778 Special Tests and Provisions
2021-063 Allowable Costs/Cost Principles

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on Medicaid Cluster

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Medicaid Cluster” paragraph, the state of Montana complied, in all material respects, with the types of
compliance requirements referred to above that could have a direct and material effect on the Medicaid
Cluster for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Coronavirus Relief Fund

As described in Findings #2021-007, 2021-010, and 2021-011 in the accompanying Schedule of
Findings and Questioned Costs, the state of Montana did not comply with requirements regarding the
following:

Finding # ALN # Program Name Compliance Requirement
2021-007
2021-010 21.019 Coronavirus Relief Fund Subrecipient Monitoring
2021-011

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Coronavirus Relief Fund

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Coronavirus Relief Fund” paragraph, the state of Montana complied, in all material respects, with the
types of compliance requirements referred to above that could have a direct and material effect on the
Coronavirus Relief Fund Program for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Disaster Grants — Public Assistance (Presidentially Declared Disasters)
As described in Finding #2021-014 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN # Program Name Compliance Requirement

Disaster Grant - Public
2021-014 97.036 Assistance (Presidentially Reporting
Declared Disasters)
C-8

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Disaster Grants — Public Assistance (Presidentially Declared Disasters)

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on Disaster
Grants — Public Assistance (Presidentially Declared Disasters)” paragraph, the state of Montana
complied, in all material respects, with the types of compliance requirements referred to above that
could have a direct and material effect on the Disaster Grants — Public Assistance (Presidentially
Declared Disasters) Program for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Research and Development Cluster
As described in Finding #2021-034 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
9021-034 Various Research and Development Equipment and Real Property
Cluster Management

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Qualified Opinion on Research and Development Cluster

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Research and Development Cluster” paragraph, the state of Montana complied, in all material respects,
with the types of compliance requirements referred to above that could have a direct and material effect
on the Research and Development Cluster for the two fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Education Stabilization Fund Under the Coronavirus Aid, Relief, and
Economic Security Act

As described in Findings #2021-035, 2021-036, 2021-037, 2021-038, and 2021-042 in the
accompanying Schedule of Findings and Questioned Costs, the state of Montana did not comply with
requirements regarding the following:

Finding # ALN # Program Name Compliance Requirement
2021-035 Subrecipient Monitoring
2021-036 Activities Allowed or Unallowed
Education Stabilization Fund Under Subrecipient Monitoring
84.425 the Coronavirus Aid, Relief, and ,
2021-037 Economic Security Act Reporting
2021-038 Reporting
2021-042 Cash Management

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the program.

Qualified Opinion on Education Stabilization Fund Under the Coronavirus Aid, Relief, and
Economic Security Act

In our opinion, except for the noncompliance described in the “Basis for Qualified Opinion on
Education Stabilization Fund Under the Coronavirus Aid, Relief, and Economic Security Act”
C-9

paragraph, the state of Montana complied, in all material respects, with the types of compliance
requirements referred to above that could have a direct and material effect on the Education
Stabilization Fund Under the Coronavirus Aid, Relief, and Economic Security Act Program for the two
fiscal years ended June 30, 2021.

Basis for Qualified Opinion on Student Financial Assistance Programs Cluster
As described in Findings #2021-021, 2021-022, 2021-023, 2021-026, 2021-028, 2021-029, 2021-030,
2021-031, 2021-032, and 2021-033 in the accompanying Schedule of Findings and Questioned Costs,
the state of Montana did not comply with requirements regarding the following:

Finding # ALN# Cluster Name Compliance Requirement
2021-021 84.007 Special Tests and Provisions
2021-022 84.033 Special Tests and Provisions
2021-023 84.038 Special Tests and Provisions
2021-026 84.063 Special Tests and Provisions
2021-028 84.268 Student Financial Assistance Special Tests and Provisions
2021-029 84.379 Programs Cluster Special Tests and Provisions
2021-030 93.264 Special Tests and Provisions
2021-032 93.342 Special Tests and Provisions
2021-033 93.364 Special Tests and Provisions
2021-031 93.925 Reporting

Compliance with such requirements is necessary, in our opinion, for the state of Montana to comply
with requirements applicable to the cluster.

Unmodified Opinion on Each of the Other Major Federal Programs

In our opinion, the state of Montana complied, in all material respects, with the types of compliance
referred to above that could have a direct and material effect on each of its other major federal programs
identified in the summary of auditor’s results section of the accompanying Schedule of Findings and
Question Costs for the two fiscal years ended June 30, 2021.

Other Matters

The results of our auditing procedures disclosed other instances of noncompliance which are required to
be reported in accordance with the Uniform Guidance and which are described in the accompanying
Schedule of Findings and Questioned Costs as items #2021-009, 2021-013, 2021-015, 2021-068, and
2021-069. Our opinion on each major federal program is not modified with respect to these matters.

‘The state of Montana’s response to the noncompliance findings identified in our audit are described
in the accompanying Schedule of Findings and Questioned Costs. The state of Montana’s response
was not subjected to the auditing procedures applied on the audit of compliance, and accordingly, we
express no opinion on the response.

Report on Internal Control Over Compliance

Management of the state of Montana is responsible for establishing and maintaining effective internal
control over compliance with the types of compliance requirements referred to above. In planning
and performing our audit of compliance, we considered the state of Montana’s internal control over
C-10

compliance with the types of requirements that could have a direct and material effect on each major
federal program to determine the auditing procedures that are appropriate in the circumstances for the
purpose of expressing an opinion on compliance for each major federal program and to test and report
on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose
of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do
not express an opinion on the effectiveness of the state of Montana’s internal control over compliance.

Our consideration of internal control over compliance was for the limited purpose described in

the preceding paragraph and was not designed to identify all deficiencies in internal control over
compliance that might be material weaknesses or significant deficiencies and therefore, material
weaknesses or significant deficiencies may exist that were not identified. However, as discussed below,
we identified certain deficiencies in internal control over compliance that we consider to be material
weaknesses and significant deficiencies.

A deficiency in internal control over compliance exists when the design or operation of a control over
compliance does not allow management or employees, in the normal course of performing their
assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance
requirement of a federal program on a timely basis. A material weakness in internal control over
compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that
there is a reasonable possibility that material noncompliance with a type of compliance requirement of
a federal program will not be prevented, or detected and corrected, on a timely basis. We consider the
deficiencies in internal control over compliance described in the accompanying Schedule of Findings
and Questioned Costs, and listed in the following table, to be material weaknesses.

Material Weaknesses
Finding # ALN# Program Name or Cluster Compliance Requirement

2021-002 20.219 Asa te dl Special Tests and Provisions

20.224
2021-007 21.019 Coronavirus Relief Fund Subrecipient Monitoring
2021-008 21.019 Coronavirus Relief Fund Subrecipient Monitoring
2021-010 21.019 Coronavirus Relief Fund Subrecipient Monitoring
2021-011 21.019 Coronavirus Relief Fund Subrecipient Monitoring

Presidentially Declared
Other Needs

2021-018 17.225 Unemployment Insurance Activities Allowed or Unallowed
2021-019 17.225 Unemployment Insurance Special Tests and Provisions

84.007

84.033

84.038
nanos 0826 Student Financial Assistance . a
2021-022 84.379 Cluster Special Tests and Provisions
2021-023 93.264

93.342

93.364

93.925
2021-026

84.007
84.033
84.038
84.063
84.268
93.264
93.364
93.925

Student Financial Assistance
Cluster

Special Tests and Provisions

2021-028

84.007
84.033
84.038
84.063
84.268
84.379
93.342

Student Financial Assistance
Cluster

Special Tests and Provisions

2021-029

84.007
84.033
84.038
84.063
84.268
84.379
93.342

Student Financial Assistance
Cluster

Special Tests and Provisions

2021-030

84.007
84.033
84.038
84.063
84.268
84.379
93.342

Student Financial Assistance
Cluster

Special Tests and Provisions

2021-031

84.007
84.033
84.038
84.063
84.268
84.379
93.342

Student Financial Assistance
Cluster

Reporting

2021-032

84.007
84.033
84.038
84.063
84.268
84.379
93.342

Student Financial Assistance
Cluster

Special Tests and Provisions

2021-033

84.007
84.033
84.038
84.063
84.268
84.379
93.342

Student Financial Assistance
Cluster

Special Tests and Provisions

C-11
C-12

Equipment and Real Property

2021-034 Various R&D Cluster M
anagement
84.010 Title | Grants to Local
Educational Agencies
84.027 Special Education Cluster
2021-035 84.173 (IDEA) Subrecipient Monitoring
Education Stabilization Fund
84.425 Under the Coronavirus Aid,
Relief, and Economic Security
Act
Education Stabilization Fund
Under the Coronavirus Aid, Activities Allowed or Unallowed
2021-036 84.425 Relief, and Economic Security Subrecipient Monitoring
Act
Education Stabilization Fund
Under the Coronavirus Aid, .
2021-037 84.426 Relief, and Economic Security Reporting
Act
Title | Grants to Local
84.010 Educational Agencies
2021-038 Education Stabilization Fund Reporting
Under the Coronavirus Aid,
84.425 Relief, and Economic Security
Act
10.553
2021-039 10.556 Child Nutrition Cluster Special Tests and Provisions
10.559
10.553
10.555 Child Nutrition Cluster
10.556
2021-042 10.559 Cash Management
Education Stabilization Fund
84.425 Under the Coronavirus Aid,
Relief, and Economic Security
Act
Title | Grants to Local Matching, Level of Effort,
2021-043 84.010 Educational Agencies Earmarking
2021-044 84.010 Title ! Grants to Local Special Tests and Provisions
Educational Agencies
2021-045 40.564 SNAP Cluster Special Tests and Provisions
Children’s Health Insurance
93.767 Program
Activities Allowed or Unallowed
2021-046 93.775 Allowable Costs/Cost Principles
93.777 Medicaid Cluster Eligibility

93.778
93.767 Children’s Health Insurance
93775 Program Activities Allowed or Unallowed
2021-047 ; ‘nai Allowable Costs/Cost Principles
93.777 Medicaid Cluster Eligibility
93.778
Children’s Health Insurance Activities Allowed or Unallowed
2021-048 93.767 Proaram Allowable Costs/Cost Principles
9 Eligibility
93.775
2021-049 93.777 Medicaid Cluster Special Tests and Provisions
93.778
2021-051 93.658 Foster Care - Title IV-E Subrecipient Monitoring
Epidemiology and Laboratory
2021-052 93.323 Capacity for Infectious Subrecipient Monitoring
Diseases (ELC)
2021-053 93.558 Temporary Assistance for Subrecipient Monitoring
Needy Families
Epidemiology and Laboratory
2021-054 93.323 Capacity for Infectious Subrecipient Monitoring
Diseases (ELC)
Epidemiology and Laboratory
2021-055 93.323 Capacity for Infectious Subrecipient Monitoring
Diseases (ELC)
93.575 Matching, Level of Effort,
2021-058 CCDF Cluster Earmarking
93.596 Period of Performance
2021-059 98.979 CCDF Cluster Special Tests and Provisions
; 93.596 4 pec vst
Activities Allowed or Unallowed
2021-061 93.658 Foster Care - Title IV-E Allowable Costs/Cost Principles
Subrecipient Monitoring
Epidemiology and Laboratory a:
2021-062 93.323 Capacity for Infectious Activities Allowed or Unallowed
j Allowable Costs/Cost Principles
Diseases (ELC)
93.558 Temporary Assistance for
Needy Families
93.658 Foster Care - Title IV-E
Children’s Health Insurance
2021-063 93.767 Program Allowable Costs/Cost Principles
93.775 |
93.777 Medicaid Cluster
93.778
2021-064 93.558 Temporary Assistance for Reporting
Needy Families
2021-065 93.658 Foster Care - Title IV-E Reporting
Epidemiology and Laboratory
2021-066 93.323 Capacity for Infectious Reporting
Diseases (ELC)
2021-067 93.658 Foster Care - Title IV-E Reporting

C-13
C-14

A significant deficiency in internal control over compliance is a deficiency, or combination of deficiencies,
in internal control over compliance with a type of compliance requirement of a federal program that

is less severe than a material weakness in internal control over compliance, yet important enough to
merit attention by those charged with governance. We consider the deficiencies in internal control over
compliance described in the accompanying Schedule of Findings and Questioned Costs, and listed in
the following table, to be significant deficiencies.

Significant Deficiencies

Finding # ALN # Program Name or Cluster Compliance Requirement
National Guard Military
2021-001 12.401 Operations and Maintenance Allowable Costs/Cost Principles
(O&M) Projects
2021-003 90.509 Formula Grants for Rural Procurement, Suspension, and
Areas Debarment

Formula Grants for Rural

2021-004 20.509 A Subrecipient Monitoring
reas
Formula Grants for Rural Activities Allowed or Unallowed
2021-005 20.509 A Allowable Costs/Cost Principles
Subrecipient Monitoring
. : Activities Allowed or Unallowed
2021-006 21.019 Coronavirus Relief Fund Allowable Costs/Cost Principles
2021-012 21.019 Coronavirus Relief Fund Activities Allowed or Unallowed

Allowable Costs/Cost Principles

Disaster Grants - Public
2021-014 97.036 Assistance (Presidentially Reporting
Declared Disasters)

2021-017 17.225 Unemployment Insurance Special Tests and Provisions

Activities Allowed or Unallowed

2021-020 17.225 Unemployment Insurance Eligibility

84.007
84.033
84.038

84.063 Student Financial Assistance ; ..
2021-024 84.268 Cluster Special Tests and Provisions

93.264
93.364
93.925
84.007
84.033
84.038
84.063 i i i

9021-025 34068 student Financial Assistance Eligibility
93.264
93.364
93.925
84.007
84.033
84.038 ;
9021-027 84,063 Student Financial Assistance Eligibility
Cluster
84.268
84.379
93.342
10.553
2021-040 10.556 Child Nutrition Cluster Activities Allowed or Unallowed
10.559
Activities Allowed or Unallowed
9021-041 84.027 Special Education Cluster Allowable Costs/Cost Principles
84.173 (IDEA) Matching, Level of Effort, Earmarking
Period of Performance
10.551 Temporary Assistance for
2021-045 10.561 Needy Families Activities Allowed or Unallowed
Allowable Costs/Cost Principles
93.558 SNAP Cluster
Children’s Health Insurance Activities Allowed or Unallowed
2021-050 93.767 Program Allowable Costs/Cost Principles
2021-056 93.558 Temporary Assistance for Reporting
Needy Families
2021-057 93.568 Low-Income Home Energy Reporting
Assistance
93.575
2021-060 93,596 CCDF Cluster Activities Allowed or Unallowed

‘The state of Montana’s response to the internal control over compliance findings identified in our audit
are described in the accompanying Corrective Action Plan. The state of Montana's response was not
subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no

opinion on the response.

‘The purpose of this report on internal control over compliance is solely to describe the scope of our
testing of internal control over compliance and the results of that testing based on the requirements of

the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.

June 9, 2022

Respectfully submitted,

/s/ Cindy Jorgenson

Cindy Jorgenson, CPA

Deputy Legislative Auditor

Helena, MT

C-15
C-17
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section I— Summary of Auditor’s Results

Basic Financial Statements
For Each of the Two Fiscal Years Ended June 30, 2021

2020 2021
Type of report issued on whether the financial statements Unmodified | Unmodified
audited were prepared in accordance with GAAP:

Internal control over financial reporting:

e Material Weaknesses identified? No Yes

e Significant Deficiencies identified? Yes Yes

Noncompliance material to the financial statements noted? Yes Yes
Federal Awards

For the Two Fiscal Years Ended June 30, 2021

2020 and 2021
Internal control over major programs:
e Material Weaknesses identified? Yes
e Significant Deficiencies identified? Yes

Type of auditor’s report issued on compliance for Unmodified for all major programs except
Major federal programs: for:
e Epidemiology and Laboratory
Capacity for Infectious Diseases
(ELC); and Foster Care-Title IV-E,
which are adverse.
e Highway Planning and Construction
Cluster; Formula Grants for Rural
Areas; SNAP Cluster; Child Nutrition
Cluster; Unemployment Insurance;
Title I Grants to Local Educational
Agencies; Special Education Cluster
(IDEA); Temporary Assistance for
Needy Families; CCDF Cluster;
Children’s Health Insurance
Program; Medicaid Cluster; Disaster
Grants — Public Assistance
(Presidentially Declared Disasters);
Coronavirus Relief Fund; Research

20-02
C-18

Montana Legislative Audit Division

Any audit findings disclosed that are required to be
reported in accordance with 2 CFR 200.516(a)?

Identification of major programs:

ALN(s)
10.551 & 10.561

10.553, 10.555, 10.556, & 10.559
12.401

17.225

20.205, 20.219, & 20.224
20.509

21.019

21.023**

66.458

66.468

84.010

84.027 & 84.173

84.425

84.007, 84.033, 84.038, 84.063, 84.268, 84.379,
93.264, 93.342, 93.364, & 93.925

93.323

93.558
93.568
93.575 & 93.596
93.658
93.767

93.775, 93.777, & 93.778

and Development Cluster; Education
Stabilization Fund Under the
Coronavirus Aid, Relief, and
Economic Security Act; and Student
Financial Assistance Programs
Cluster, which are qualified.

Yes

Name of Federal Program or Cluster
SNAP Cluster
Child Nutrition Cluster

National Guard Military Operations and
Maintenance Projects (O&M)

Unemployment Insurance

Highway Planning and Construction Cluster
Formula Grants for Rural Areas
Coronavirus Relief Fund

Emergency Rental Assistance Program
Clean Water State Revolving Fund
Drinking Water State Revolving Fund

Title I Grants to Local Educational Agencies
Special Education Cluster (IDEA)

Education Stabilization Fund Under the
Coronavirus Aid, Relief, and Economic
Security Act

Student Financial Assistance Programs

Epidemiology and Laboratory Capacity for
Infectious Diseases (ELC)

Temporary Assistance for Needy Families
Low-Income Home Energy Assistance
CCDF Cluster

Foster Care- Title [V-E

Children’s Health Insurance Program

Medicaid Cluster
97.036

97.050

Various
** High-risk Type B program

Dollar threshold used to distinguish between Type
A and Type B programs:

Auditee qualified as low-risk Auditee?

C-19

Disaster Grants — Public Assistance
(Presidentially Declared Disasters)

Presidentially Declared Disaster Assistance
to Individuals and Households — Other Needs

Research and Development Cluster

$30,000,000

No

20-02
C-21

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-1:

Criteria: Article VII, Section 15, of the Montana Constitution requires defined benefit public
retirement systems to be funded on an actuarially sound basis. To be actuarially sound, a
retirement system’s contributions and investments must be sufficient to pay the full actuarial cost
of the plan over a scheduled period of time, defined in §19-2-409, Montana Code Annotated
(MCA), as no more than 30 years.

Condition: Based on the June 30, 2020, actuarial valuations of the defined benefit public
retirement systems administered by the Montana Public Employee’s Retirement Administration
(MPERA), the following three are not actuarially sound, as the amortization periods are more
than 30 years.

e Public Employees’ Retirement System (PERS) — 35-year amortization period

e Game Wardens and Peace Officers’ Retirement System (GWPORS) — 40-year
amortization period

e Highway Patrol Officers’ Retirement System (HPORS) — 39-year amortization period

The June 30, 2021 actuarial valuation indicated PERS and HPORS were actuarially sound, as the
systems amortize within 30 years. However, GWPORS continued to not be actuarially sound, as
its amortization period was 35 years.

Effect: The board is not in compliance with Montana Constitution and state law.

Cause: For the June 30, 2020, valuations, the systems remained above the 30-year amortization
period primarily because the average annual investment returns over the preceding 7 years were
lower than the assumed rate. However, for GWPORS, the actuarial valuation also noted that
without significant good investment experience, the current contributions would not be sufficient
to ever bring the amortization period below 30 years.

For the June 30, 2021, GWPORS valuation, increase in investment returns did decrease the
amortization period, but not to within 30 years.

Recommendation: We recommend the Legislature work with the Public Employees’
Retirement Board to restore the actuarial soundness of the Game Wardens’ and Peace Officers’
Retirement System, the Highway Patrol Officers’ Retirement System, and the Public Employees’
Defined Benefit Retirement Plan as required by the Montana Constitution and state law.

20-02
C-22 Montana Legislative Audit Division

Views of Responsible Officials: MPERA concurs with this recommendation. For additional
information regarding MPERA’s planned corrective action, see the Corrective Action Plan
starting on page D-1.
C-23
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-2:

Criteria: Section 17-1-102(2), Montana Code Annotated (MCA), requires activity to be reported
in accordance with generally accepted accounting principles (GAAP).

Montana Operations Manual Policy, 399, indicates Management is responsible for establishing
and maintaining an effective internal control system.

Montana Operations Manual Policy, 302, indicates state agencies and component units shall
record all financial activity in accordance with GAAP by fiscal year-end in SABHRS, as
required by §17-1-102(2), Montana Code Annotated (MCA). It also indicates state agencies are
responsible for implementing internal control procedures.

Condition: In fiscal year 2021, the Department of Labor and Industry’s (department) controls
did not prevent, or detect and correct in a timely manner, several multimillion-dollar
misstatements in its accounting records related to the Unemployment Insurance program.

The department discovered several misstatements in financial activity for the Unemployment
Insurance program subsequent to the books closing at fiscal year-end 2021. For the
Unemployment Insurance enterprise fund, the department identified the following errors:

e Cash was understated by $25.3 million

e Current Accounts Receivable, less allowance for doubtful accounts, were overstated by
$40.1 million

e Long-Term Receivables, less allowance for doubtful accounts, were understated by $53.4
million

e Operating Grants and Contribution Revenues were understated by $29.5 million

e Expenses, primarily comprised of bad debt expense, were overstated by $9.8 million

e Net Position was understated by $35.0 million

We reviewed the identified misstatements to evaluate the accuracy of the department’s
calculation of the errors and agree with the department’s analysis.

Effect: The department’s accounting records and financial reports were misstated.

Cause: The misstatements were the result of transactions not being recorded on the accounting
records, transactions entered incorrectly, and inaccurate accounting estimates.

Department personnel stated the errors were not detected and corrected before fiscal year-end for
several reasons including the significantly increased workload due to the coronavirus public
health emergency, the department’s aging unemployment insurance benefits system which lacks

20-02
C-24

Montana Legislative Audit Division

the necessary queries and reports to easily analyze activity, and the need to analyze a separate
system for the Pandemic Unemployment Assistance benefit program. In addition, the large
volume of pandemic-related activity made it difficult to run a journal line detail for all claims
payments; instead, each day was run separately and compiled in manual spreadsheets which
increased the chance of error. These challenges, combined with a shorter fiscal year-end period,
resulted in less time to properly review the entries.

Recommendation: We recommend the Department of Labor and Industry enhance its internal
controls over the recording of financial transactions related to its Unemployment Insurance
Program to ensure all necessary transactions are recorded in the state’s accounting system before
fiscal year-end as required by state law.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-25

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-3:

Criteria: Section 17-1-102(2), Montana Code Annotated (MCA), requires activity to be reported
in accordance with generally accepted accounting principles (GAAP).

Montana Operations Manual Policy, 399, indicates management is responsible for establishing
and maintaining an effective internal control system.

Montana Operations Manual, 302, indicates to help facilitate statewide compliance with GAAP,
state agencies are responsible for implementing internal control procedures. In addition, it
indicates to help a department facilitate GAAP compliance, management of a State agency must
document their internal control systems for major financial processes. They also must update
their internal control documentation to reflect current procedures, prior to each following fiscal
year-end.

Condition: The Department of Administration (department) State Financial Services Division’s
(SFSD) internal controls were ineffective in preventing, or detecting and correcting, errors in the
Unemployment Insurance (UI) enterprise fund activity presented within the state’s basic
financial statements (BFS). Our audit work identified several multimillion-dollar errors in the UI
enterprise fund information presented in the BFS.

To prepare the BFS, personnel in the department’s SFSD use the financial data from the
Statewide Accounting, Budgeting, and Human Resources System (SABHRS) used by all
agencies, and record adjustments as necessary for correction of errors made by agencies to
present the BFS in accordance with GAAP.

As part of preparing the BFS, including making adjustments to SABHRS for agency errors, we
identified the following types of errors, indicating room for improvement in internal controls:

(1) As outlined in Finding 2021-2, internal controls at the Department of Labor and Industry
(DLI) were ineffective in ensuring all UI-related financial activity was recorded on
SABHRS at fiscal year-end. SFSD personnel recorded several large adjustments to the
UI enterprise fund’s accounting records as part of preparing the BFS. One of the
necessary adjustments increased cash and federal revenues in the fund by approximately
$26.3 million.

As part of a separate process completed while preparing the BFS, SFSD written
procedures directed staff to review the fiscal year-end cash reconciliation of the UI
enterprise fund cash on SABHRS to the state’s cash balance in the U.S Treasury. The
written procedures directed personnel to adjust cash and accounts payable for the

20-02
C-26 Montana Legislative Audit Division

reconciling items, without considering the nature of the reconciling items. For fiscal year
2021 there were approximately $34 million in reconciling items, the largest of which was
the $26.3 million in federal revenues and cash that were not recorded on SABHRS at
fiscal year-end. SFSD personnel did not consider the nature of the reconciling items or
identify that they previously adjusted the accounting records for $26.3 million of the

$34 million and recorded the adjustment as directed by written procedures.

(2) DLI’s UI enterprise fund accounting records at fiscal year-end also contained errors in
the allowance for doubtful accounts and bad debt expense related to accounts receivable
for benefit overpayments. SFSD recorded adjustments to SABHRS for these errors, at
incorrect amounts.

(3) We also identified several errors in the Statement of Cash Flows (SCF) for the UI
enterprise fund. The initial SCF provided for audit included the effect of the errors in
cash and accounts payable previously discussed, and therefore required modification by
SFSD personnel. In each of the next two versions of the SCF provided for audit, we
identified multiple errors in the activity presented for the UI enterprise fund.

Based on the extent, size, and nature of the errors identified, we believe there is a material
weakness in internal controls over financial reporting. This material weakness is isolated to
reporting for the UI enterprise fund, which is presented in both the Government-Wide financial
statements, in the Business Type Activities column, and the Proprietary Fund financial
statements, in the Unemployment Insurance column.

Effect: The UI enterprise fund information in the BFS provided for audit contained several
multimillion-dollar errors:

(1) A $26.3 million overstatement of cash and accounts payable.

(2) A $12.65 million overstatement of bad debt expense, a $2.30 million overstatement of
allowance for doubtful accounts (current portion), a $14.99 million understatement of
allowance for doubtful accounts (non-current portion), and a $12.65 million
understatement of Net Position.

(3) Errors ranging from approximately $6.5 million to $87.8 million, across six lines on the
SCF.

SFSD corrected these errors after we brought them to their attention.
Cause: Overall, SFSD’s processes for preparing the BFS did not accommodate or fully
contemplate the significant fluctuations in UI enterprise fund financial activity resulting from the
coronavirus public health emergency.
Additionally:

(1) Department personnel indicated their preliminary review procedures did not identify the

overstated cash and accounts payable, partially due the volatility of the activity of the UI
enterprise fund caused by the coronavirus public health emergency. They also believed
C-27

additional review procedures, completed later in the process, would have identified the
error.

(2) SFSD recorded adjustments to SABHRS for DLI doubtful account related errors based on
preliminary adjusting entries in DLI’s accounting records but did not realize DLI’s
adjustments were not yet finalized. Per SFSD personnel, when DLI finalized their
analysis, the dollar amounts changed.

(3) SFSD processes did not consider the nature of the activity associated with various asset
and liability accounts, and which revenue and expense streams are affected by changes in
the asset and liability accounts.

Recommendation: We recommend the Department of Administration State Financial Services
Division enhance internal controls to ensure:

A. Staff consider the underlying nature of UI enterprise fund activity when preparing the
basic financial statements, especially in years where the fund has new or unusual
activity and

B. Adjustments made for errors in agency accounting records do not duplicate
adjustments made through other processes completed while preparing the basic
financial statements and are appropriate to correct the errors.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-28

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-4:

Criteria: Federal regulation 2 CFR 200.510(b)(1) and (3) require the Schedule of Expenditures
of Federal Awards (SEFA) to list individual federal programs and to provide total federal awards
expended for each individual federal program by its assigned Assistance Listing Number (ALN).

Office of Budget and Program Planning’s (OBPP) instructions for preparation of the fiscal year
2021 SEFA indicate each federal financial assistance program must be placed on one row of the
worksheet which is submitted to OBPP.

In addition, federal regulation 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: Contrary to standard department practices, the department of Public Health and
Human Services (department) recorded federal expenditures for the Pandemic-Electronic
Benefits Transfer (P-EBT) program as activity of another federal program on the state’s
accounting records. The P-EBT activity was comingled with the Supplemental Nutrition
Assistance Program (SNAP) activity. This resulted in a $27.6 million error in SEFA information
the department submitted to OBPP for fiscal year 2021.

Effect: Comingling the activity from two federal programs caused the Business and Financial
Services Division (BFSD) to report the total on the department’s SEFA spreadsheet as SNAP
activity and to not report any activity for P-EBT. This resulted in a $27.6 million error in the
SEFA information submitted to OBPP. By including P-EBT expenditure with SNAP
expenditures on the SEFA spreadsheet, the department did not comply with OBPP instructions
which are designed to comply with federal requirements for SEFA reporting. Additionally, had
the department incurred costs for P-EBT in excess of the state’s major program threshold, this
error could set the state up for not properly identifying and auditing its major federal programs.
OBPP corrected the error in the final SEFA.

Cause: The department’s standard procedures include using a separate account with the federal
special revenue fund be used to record activity for each federal program it administers.

However, the department’s Health and Community Services Division did not use a separate
account within the state’s federal special revenue fund to record P-EBT benefits despite the fact
that P-EBT has its own federal award identification number. The department’s BFSD, the
division responsible for preparing the department’s SEFA spreadsheet, was not aware of the
comingling of SNAP and P-EBT expenditures until we brought it to their attention. To prevent
comingling of federal award activity in the future, the department must enhance internal controls.
C-29

Recommendation: We recommend the Department of Public Health and Human Services:
A. Enhance internal controls to ensure a separate account is used to record activity for each
federal program administered by the department.
B. Report information for each federal financial assistance program on a separate row of the
department’s SEFA worksheet, as required by Office of Budget and Program Planning
instructions.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-30

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-5:

Criteria: Montana Operations Manual Policy, 399, states “Management’s role is to provide the
leadership that an agency needs to achieve its goals and objectives. Part of that responsibility
encompasses the establishment of internal control policies and procedures designed to... help
ensure compliance with applicable laws and regulations.”

Condition: Montana State University (the university) does not have controls in place to ensure
capital assets reported on the financial statements are complete and accurate. The university does
not ensure the data processed by its asset management system is complete and accurate. While
the university has consistently obtained a System and Organization Controls (SOC) report from
the software vendor, it is a SOC 2 report, which does not provide any assurance over data
processing and controls relevant to financial reporting.

The university has approximately $562 million in capital assets, net of depreciation, including
buildings, infrastructure, and equipment. The university contracts with a software vendor,
considered a service organization, for an asset management system. The university has
contracted with the service organization since 2013. The asset management system is used to
track the acquisition of capital assets, disposal of capital assets, and the related depreciation. The
data tracked and calculated by the system is used as a basis to record accounting entries related
to capital assets.

If the university chooses to use a SOC report as assurance over service organization controls to
address their control issue, they should obtain a SOC 1 report, which is used to evaluate internal
controls over financial reporting. In addition to obtaining the SOC 1 report, the university needs
to review the report’s contents. Without proper review of the report, the university would not be
aware of any deficiencies identified and additional user entity controls the university is
responsible to implement. If the university does not choose a SOC report as assurance, they will
need to implement compensating controls.

While the university does not have controls in place to ensue capital assets reported on the
financial statements are complete and accurate, we did not identify any errors in the amount
reported.

Effect: Without adequate internal controls in place, there is risk errors may not be identified in a
timely manner in the financial records.

Cause: University staff indicated they were not aware of the different kinds of SOC reports and
that the one they received did not provide the type of assurance needed. Additionally, they have
not received training about SOC reports.
C-31

Recommendation: We recommend Montana State University establish and maintain adequate
internal controls over capital asset activity to ensure complete and accurate financial reporting.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-32

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-6:

Criteria: Montana Operations Manual Policy, 399, states “Management’s role is to provide the
leadership that an agency needs to achieve its goals and objectives. Part of that responsibility
encompasses the establishment of internal control policies and procedures designed to... help
ensure compliance with applicable laws and regulations.”

Montana Operations Manual Policy, 335, provides guidance related to the financial transactions
and reporting of capital assets. Policy requires integral parts of a structure, when replaced, be
recorded as building improvement costs and recorded as a new capital asset which can be linked
to the original building. Policy also specifies once projects are completed and placed in service
the project is retired from Construction Work In Progress (CWIP) and recorded to the
appropriate capital asset account.

Condition: The University of Montana’s (university) draft financial statement capital asset
disclosure and underlying support classified various capital assets in a manner which did not
adhere to state accounting policy. During the audit, we identified capital asset misclassifications
or discrepancies that indicated existing managerial procedures and internal controls are not
effective to provide accurate financial data that adheres to state accounting policy.

We identified several instances totaling approximately $9.2 million of building improvement and
land improvement projects completed and placed in service in fiscal years 2018, 2019, and 2020
still included in the university’s CWIP listing. Additionally, we identified $688 thousand of
assets classified as buildings that should have been classified as building improvements.

Lastly, we identified ongoing projects totaling approximately $6.1 million listed in the
university’s commitment disclosure but not their CWIP listing. For these ongoing projects not in
the CWIP listening, the university believe three projects totaling the $6.1 million do not meet
capital asset requirements as the university considers them basic repair and maintenance projects
that should be expensed in the year incurred. The projects in their entirety do not fall within the
repair and maintenance definition. Rather, equipment such as fixed seating, light fixtures, AV
equipment, and athlete lockers are intended to be used over a longer period and would lose their
identity if removed from the building. Thus, they are considered integral parts of the building
and the cost should be captured for future capitalization when the projects are complete. We
believe a portion of each project falls under capitalizable building cost items per state policy. The
university will need to determine what portion of the $6.1 million should be capitalized.

The net effect of the three situations described above resulted in a net CWIP overstatement up to
approximately $3.1 million and $688 thousand of misclassified capital assets for the draft fiscal
year 2021 financial statements we received. The university corrected the identified errors as part
C-33

of the financial statement process. Corrections included reclassifying approximately
$8.7 million from CWIP to building improvements and reclassifying approximately
$688 thousand from buildings to building improvements.

Effect: Inadequate internal controls and managerial procedures that contrast state accounting
policy over capital asset activity increase the risk of incomplete or inaccurate financial
statements and notes. Projects that are completed but remain in CWIP overstate this account and
understate the appropriate capital asset account. Additionally, the effect of not having projects in
the CWIP listing understates CWIP, which has the potential to result in a material misstatement
in the university’s financial statements. Lastly, misclassification between capital asset types can
cause improper classification and recognition of depreciation expense in the financial statements.

Cause: The university interpreted state accounting policy as not explicitly stating what the
proper method of recording an asset is when there is an overarching construction project that is
broken down into phases. The university made the decision to capitalize all phases of a project
when the overall project is completed rather than capitalizing each phase as it is completed and
placed into service. For projects on the commitments list but not in CWIP, the university
believed three projects that included replacing fixed seating, light fixtures, replacing athlete
locker room lockers, and upgrading AV equipment did not meet capital asset requirements as the
university considered them basic repair and maintenance projects that should be expensed in the
year incurred.

Recommendation: We recommend that the University of Montana:

A. Enhance, document, and implement internal controls to ensure the completeness and
accuracy of capital assets and their related note disclosures on the university’s financial
statements.

B. Adhere to state policy when recognizing building improvements as capital assets.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-34

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section II — Financial Statement Findings

Finding 2021-7:

Criteria: Montana Operations Manual Policy, 399, indicates management is responsible for
establishing and maintaining an effective internal control system.

Federal regulations, 42 CFR 435.914(a) and 42 CFR 457.965, require the Department of Public
Health and Human Services (department) to include facts to support their eligibility decision in each
applicant’s case record for the Medicaid Cluster and the Children’s Health Insurance Program
(CHIP), respectively.

Federal regulations, 42 CFR 435.603, 42 CFR 457.310, and 42 CFR 457.315, require the use of
multiple criteria, including household income, when determining eligibility for Medicaid and CHIP.

Condition: The department administers the Medicaid and CHIP programs to provide medical
coverage to eligible individuals. The department’s internal controls over Medicaid and CHIP
eligibility determination did not consistently operate as designed in fiscal year 2020. We
considered this to be a significant deficiency in internal controls over financial reporting for
fiscal year 2020.

In the prior Single Audit for the two fiscal years ending June 30, 2019, we reported internal
control and compliance issues related to eligibility determinations for the Medicaid and CHIP
programs. Conclusions were based on federal and state program requirements, federal guidance
to auditors, and results of our review of 63 case files which also included consideration of state
tax data as an external data source. As a result, we reported a material weakness in internal
controls and material non-compliance in the Report on Internal Control Over Financial Reporting
and on Compliance and Other Matters Based on an Audit of Financial Statements for fiscal year
2019, and reported Financial Statement finding 2019-3 in in the prior Single Audit report.

As required by auditing standards, we performed follow-up on the internal control and
compliance issues identified in our fiscal year 2019 testing as part of the fiscal year 2020 audit of
the state’s basic financial statements. We noted several changes occurred for fiscal year 2020,
including:

e Federal guidance to auditors no longer contained a requirement to redetermine eligibility
to ensure beneficiaries qualify for the Medicaid program and are in the appropriate
enrollment category. Additionally, the federal guidance indicated the auditor is not
expected to test beyond the requirements of the state. As such, if the department
accepted self-attested information verified at a later date, then the auditor should accept
such information in audit testing.

e Montana Chapter 415, Laws of 2019 (House Bill 658) required the department to verify
the information provided on application for Medicaid to confirm an applicant’s eligibility
C-35

before authorizing payment of benefits under the program. House Bill 658 also required
the department to use state tax data in its verifications. The department implemented
verification at application as of January 1, 2020, and the use of state tax data began on
May 14, 2020. The department was ready to require proof of residency in March 2020,
but the change was put on hold due to a requirement in Section 6008 of the Families First
Coronavirus Response Act which prevented the inclusion of additional eligibility policy
changes during the pandemic. As such, the department continued to accept self-
attestation as proof of residency during the remainder of fiscal year 2020.

We considered these changes as we designed and conducted audit tests in support of the audit of
the state’s basic financial statements for fiscal year 2020.

We conducted a stratified judgmental sample from nearly 300,000 client eligibility
determinations or redeterminations made during fiscal year 2020. From that population, we
selected 34 clients, including new clients (initial eligibility determinations) and continuing
clients (eligibility redeterminations). A portion of our sample was directed at clients who
incurred more significant benefit costs during the fiscal year. We randomly selected 25 of the
clients reviewed. Of the remaining nine, we selected two clients based on eligibility categories
where issues were identified in the prior audit, one client based on the initial intake information
being collected by the Department of Corrections, and six because of the significant benefits
costs they incurred during the audit period. This was not a statistically valid sample.

Through our testing of the randomly selected files, we identified one instance where a Medicaid
client’s eligibility for their current category had not been confirmed since November 2017.
While the department’s automated data processes occurred, a difference flagged by the system
requiring department staff resolution was not completed as required. In fiscal year 2020 when
the department completed the required procedure, the individual was misclassified in the state’s
eligibility system, which resulted in the individual incorrectly not being required to pay a
premium. We identified the misclassified individual through our audit work. In this situation,
the misclassification did not result in an incorrect federal or state match.

We considered the results of our testing, as well as the magnitude of the Medicaid and CHIP
programs, which collectively incurred over $2 billion in benefits and claims expenditures. While
there was no misapplication of federal and state match for this identified instance, the breakdown
in internal controls could have resulted in a misapplication of match or the department not
identifying an ineligible individual. Given the magnitude of the payments under the programs,
we considered this to be a significant deficiency in internal controls over financial reporting for
fiscal year 2020. We did not issue a new recommendation to the department as a result of this
work.

Subsequent to the follow-up performed in support of our audit of the state’s basic financial
statements for fiscal year 2020, we completed a separate audit of the department for fiscal years
2020 and 2021, through which we tested the Medicaid and CHIP programs, in accordance with
Uniform Guidance.

20-02
C-36

Montana Legislative Audit Division

In that separate audit, we considered the Center for Medicaid Services (CMS) response to the
related federal compliance finding from the prior Single Audit, and its implications over
financial reporting. We determined the department’s controls over eligibility no longer correlate
to internal controls over financial reporting. As such, we have not issued a recommendation to
the department related to internal controls over financial reporting. However, our testing of
Medicaid and CHIP eligibility in accordance with Uniform Guidance continue to indicate room
for improvement in internal controls over compliance with eligibility requirements of the
programs, and we have issued Federal Findings 2021-046 through 2021-048. These
recommendations address both internal controls over compliance and compliance with eligibility
determinations.

Effect: When these controls do not operate as designed, the state of Montana is at risk of
misapplying match requirements between the General Fund and the Federal Special Revenue
Fund sources, or of not identifying ineligible participants.

Cause: Department personnel attribute the error we identified in our fiscal year 2020 testing
primarily to human error. They indicated the case was properly identified by the system as up
for renewal in fiscal year 2019, and properly ran through the department’s process for auto-
renewal. Since the member’s premium needed to be re-calculated, the complete auto renewal
process was stopped and a task was created. The task was never completely worked, so a new
re-determination process was not triggered to be set-up in the system, which directly resulted in a
delayed re-determination in fiscal year 2020.

Recommendation: As previously outlined, we did not issue a new recommendation to the
department related to internal controls over financial reporting based on our findings from our
testing in support of the state’s basic financial statements for fiscal year 2020. Federal Findings
2021-046 through 2021-048 contain recommendations on internal controls over and compliance
with federal eligibility requirements of the Medicaid and CHIP programs based on our
compliance audit for fiscal years 2020 and 2021.

Views of Responsible Officials: See Federal Findings 2021-046 through 2021-048 for the
department’s views on the continued eligibility findings for the Medicaid and CHIP programs.
C-37
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-001: U.S. Department of Defense
ALN # 12.401, National Guard Military Operations and Maintenance
(O&M) Projects
Grant # W9124V-18-2 and W9124V-21-2

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

National Guard Regulations (NGR) 5-1 states in section 5-3, that in order for costs to be
allowable, they must be allocable, allowable, and reasonable. Allocable means the costs must
have been incurred by the grantee and allocable to the cooperative agreement (CA) supported
program, project, or facility.

Condition: A Post Engineer split is calculated every six months to allocate costs of certain
workers, such as carpenters, between the General Fund and the O&M grant based on actual
hours worked on buildings or projects for the previous six months. Based on the actual hours
worked a ratio is calculated for charging either federal or state funds. The splits are entered into
the state’s accounting system so that when applicable employees input their time, their salaries
are appropriately allocated between the federal and state funds. Through our sample testing, we
found that splits effective for January 1, 2020, through June 30, 2020, were not updated in the
state’s accounting system. The splits from the previous six-month time frame continued to be
used. While the splits do not typically change substantially each period, using the incorrect splits
for a six-month time period resulted in a $6,179 overallocation to the federal fund and under
allocation to the General Fund for the same amount.

Questioned Costs: We identified $6,179 in questioned costs.

Context: During our audit, we sampled 40 expenditure transactions from a population of 23,472
and found two instances where payroll charges were not properly allocated between the federal
grant and the General Fund. The two instances allowed us to identify a systematic problem that
extended to all applicable employees during the affected time frame. This was not a statistically
valid sample.

Effect: Internal controls did not ensure the recalculated payroll split was input into the state’s
accounting system which resulted in $6,179 in overcharges to the federal grant.

Cause: Adequate controls, such as a checklist or calendar reminder, were not in place to ensure
that the payroll splits were updated in the state’s accounting system.

20-02
C-38 Montana Legislative Audit Division

Recommendation: We recommend the Department of Military Affairs:
A. Comply with federal requirements to allocate the correct amount of salaries for
employees whose time is split between federal and state projects.
B. Establish internal controls to ensure the state’s accounting system is updated when the
splits are recalculated, and
C. Reimburse the federal government for the amount of payroll costs it was overallocated.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-39
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-002: U.S. Department of Transportation
ALN # 20.205, 20.219 and 20.224, Highway Planning and Construction
Cluster
Grant # Not Applicable

Criteria: Federal regulation, 29 CFR 5.5, requires certified payrolls be submitted for each week
in which any contract work is performed.

Federal regulation, 29 CFR 5.6, indicates no payment be made if the contractor and its
subcontractors are not in compliance with the provisions of 29 CFR 5.5.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with federal
statutes, regulations, and the terms and conditions of the Federal award. This establishes an
expectation that the Montana Department of Transportation (department) will have internal
controls in place to ensure contractors and subcontractors are compliant with wage rate
requirements.

Condition: The department’s internal controls were ineffective in ensuring all certified payrolls
for highway construction projects were submitted in a timely manner.

Questioned Costs: None.

Context: In the prior audit of the department, we determined the department did not ensure all
payrolls were received prior to issuing payments to contractors. We also identified multiple
projects for which the department did not receive all payrolls. In the current audit, we noted the
department took steps to address this situation, including continuing to use the new electronic
payroll submission module within AASHTOWare’s Construction and Materials System. The
new module has built in flags designed to identify instances of missing payrolls when contractor
pay estimates are generated in the system. This system was implemented for all new projects let
from October 2019 forward. Older projects not migrated to the new system use procedures and
paper payrolls which have not changed since the last audit. The older system is expected to still
be in use through the next biennium and accounts for 187 of the 546 projects.

We sampled 36 projects and identified:
e Seven projects using paper payrolls, that were certified by department personnel as
having submitted all payrolls at project close, where 27 payrolls were missing. This is
across four department districts and 12 contractors.

20-02
C-40

Montana Legislative Audit Division

e Five projects, three using paper and two using electronic submission, having 16 overdue
payrolls. The overdue payrolls were across three department districts and seven
contractors.

e Two projects were missing four subcontractor approval checklists which are used to
determine which subcontractors are held to certified payroll submission requirements.
Without these checklists, the contractor was not notified of the reporting requirements.

These samples were not statistically valid. Given the number of active projects during the audit
period and the control deficiency, we believe there are likely other instances of non-compliance.

Effect: These untimely or incomplete certified payroll submissions constitute noncompliance
with federal regulations. Further, the department is in noncompliance with federal regulations
requiring the withholding of payment until certified payrolls are submitted. Additionally, there
is risk the department will not identify instances where contractors or subcontractors are not
paying prevailing wages.

Cause: While the new system was implemented for all new projects let from October 2019
forward, the use of the system features is not consistent across all project managers or districts.
For the project flags to work, the department personnel must complete daily work reports and fill
in the contractor and subcontract performing on the day reported. Of the 25 projects tested that
use the new system, 9 projects did not have the contractor section completed.

Projects in the old system are tracked manually and the department’s internal controls have not
been sufficient to ensure the certified payrolls are received. As the department implemented a
new system, the department has no plans to improve the manual process.

Repeat Finding: This is a repeat finding and has been reported as Single Audit findings 2017-
028 and 2019-026 in the audits for the two fiscal years ending June 30, 2017, and June 30, 2019,
respectively.

Recommendation: We recommend the Montana Department of Transportation:
A. Enhance internal controls to ensure all required payrolls are received.
B. Obtain and review all required certified payrolls weekly from contractors and
subcontractors for all active construction projects under the Highway Planning and
Construction program to ensure compliance with federal prevailing wage requirements.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-41

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-003: U.S. Department of Transportation
ALN # 20.509, Formula Grants for Rural Areas
Grant # MT-18-X064-00, MT-2016-005, MT-2017-002,
MT-2017-022, MT-2018-011, MT-2020-003, MT-2020-013

Criteria: Federal regulation, 2 CFR 200.317, requires the state to follow state procurement
policy to procure federally funded procurements.

Montana Operation Manual Procurement Policy 335 (VID)(D) lays out strict requirements for the
use of sole source procurements, where this procurement method may only be used if the item is
only available from a single vendor.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

For vehicle purchases, Montana Department of Transportation (department) policy requires Post-
Delivery Certifications to be filed with the department’s procurement section within 30 days of
final vehicle acceptance.

Condition: The department’s internal controls did not ensure vehicles procured using the
Formula Grants for Rural Areas program followed state policy and procedures.

Questioned Costs: We question $75,825 of costs charged to the program.

Context: From a population of nine purchase orders, we tested three and identified instances in
all three where the department did not follow state policy and procedures for vehicles purchased
under the program, as outlined below. This was not a statistically valid sample.

e The first instance was a sole source procurement used to replace an existing purchase
order for vans. The vans are available from more than one vendor. As such, the two vans
costing $75,825 were improperly purchased as a sole source procurement.

e The second and third instances, totaling $680,740, were procurements where the
department did not complete and file Post-Delivery Certifications in accordance with
department policy. Department policy requires the certifications be filed with the
department’s procurement sections within 30 days of final vehicle acceptance. The
certifications are evidence the vehicles met specifications and were received as agreed
upon within the procurement.

20-02
C-42

Montana Legislative Audit Division

Effect: The department is not in compliance with state procurement policies and procedures.
As a result of the first instance of non-compliance, there are questioned costs.

Cause: For the sole source procurement, department staff incorrectly interpreted federal
procurement best practices as requiring significant deviations from an initial invitation to bid be
considered a sole source procurement. The department thought a new procurement using sole
source was required instead of using a change order to accommodate the significant deviation.

For the Post-Delivery Certifications, department staff overlooked the need to complete the
certifications at the time of vehicle inspection. The department’s internal controls were
insufficient to ensure the certifications were completed and submitted in the time frame required
by department policy.

Recommendation: We recommend the Montana Department of Transportation:
A. Enhance internal controls to ensure all procurement follow state policy to comply with
federal requirements.
B. Comply with state procurement policy for all vehicle purchases.
C. Complete and submit the Post-Delivery Certifications as required by department policy.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-43

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-004: U.S. Department of Transportation
ALN # 20.509, Formula Grants for Rural Areas
Grant # MT-18-X064-00, MT-2016-005, MT-2017-002,
MT-2017-022, MT-2018-011, MT-2020-003, MT-2020-013

Criteria: Federal regulation, 2 CFR 200.1, defines a subaward and requires a legal agreement.

Federal regulation, 2 CFR 200.331, lays out the fourteen required elements to communicate to
subrecipients, the requirements for risk assessments, and monitoring during and after the award
to ensure subrecipient compliance. This federal regulation was renumbered to 2 CFR 200.332
during the audit period.

Federal regulation, 2 CFR 200.334, requires the retention of records for audit review.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Montana Department of Transportation’s (department) monitoring of
subrecipients of the Formula Grants for Rural Areas program can be enhanced.

Questioned Costs: None

Context: Under this program, the department provides operating and capital grant awards to
subrecipients. The subrecipients include local government transit authorities, nonprofit
organizations or an operator of public transportation, or intercity bus services. We identified
several discrepancies relating to the subrecipient monitoring requirements, as summarized
below:

e Inour sample of eight of the 39 subrecipients, we looked at 13 grant agreements. This
was not a statistically valid sample. A subrecipient receives separate grant agreements
based on the type of award: operating, capital, or intercity bus grants. Of the 13 grant
agreements, seven did not contain the total amount of federal funds obligated to the
subrecipient including the current obligation. As the different types of awards are not
awarded at the same time, each grant should include the awards provided to the
subrecipient prior to the current award in the total obligation under the current year’s
Formula Grants for Rural Areas program.

e The risk assessment performed on a new subrecipient receiving federal funds from the
department in fiscal year 2021 was completed without all elements of risk being assessed.

20-02
C-44

Montana Legislative Audit Division

e The department performs detailed financial reviews on the first year’s submission of
quarterly reports for new subrecipients. During fiscal year 2021, the third quarter detail
review was not performed for the new subrecipient. After we communicated the issue,
the department initiated the review.

e One of eight subrecipient compliance reviews was not documented. The compliance
reviews for the remaining seven were not performed following department policy. The
department reviewer only looked at one vehicle to check compliance instead of the
required two.

e The department’s review of quarterly reports from the subrecipients did not address
vehicle disposals during their reviews, which require additional procedures. This resulted
in one vehicle being maintained on the subrecipients records for an additional year. In
addition, the department’s record retention policies were not followed for several vehicle
disposals. Two of eight sales forms and four of eight lien releases were unaccounted for
as of when we completed our procedures.

Effect: Without efficient internal controls over compliance to ensure all elements of
subrecipient monitoring are followed, the department is noncompliant with federal regulations.
Additionally, noncompliance with subrecipient monitoring could result in undetected
noncompliance on the part of the subrecipient and potentially unidentified questioned costs.

Cause: Department personnel indicated the myriad of errors relating to subrecipient monitoring
were due to staff turnover, incomplete archiving of documentation, an office remodel resulting in
missing or misplaced documentation, and one file was unintentionally shredded/destroyed
instead of archived.

Recommendation: We recommend the Montana Department of Transportation comply with
federal subrecipient monitoring requirements by:

Performing and documenting risk assessments,

Including required elements in grant agreements,

Performing subrecipient monitoring, and

Maintaining associated documentation.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-45

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-005: U.S. Department of Transportation
ALN # 20.509, Formula Grants for Rural Areas
Grant # MT-18-X064-00, MT-2016-005, MT-2017-002,
MT-2017-022, MT-2018-011, MT-2020-003, MT-2020-013

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 2 CFR 200.332(d)(3), requires the state to issue a management decision for
applicable audit findings pertaining to federal awards.

Condition: The Montana Department of Transportation (department) did not collect identified
unallowable costs of the Formula Grants for Rural Areas program that were identified as part of
the internal audit function’s audits of completed grants. The length of time that transpired
between identification and recovery of questioned costs indicates internal controls are not
effective.

Questioned Costs: We question $13,237 of costs charged to the program.

Context: The department’s Audit Services office conducted three audits of transit grant
recipients during fiscal year 2020 as part of monitoring subrecipients of the program. Each of
these audits identified questioned costs that needed to be recovered by the state and then remitted
to the Federal Transit Authority (FTA). These audits were published in September 2019,
December 2019, and April 2020, with a total of $13,237 in questioned costs.

The department’s procedures are to reduce the next quarterly payment to the grant recipient by
the amount of the questioned costs. In fiscal year 2021, the quarterly payments were disrupted
due to additional funding received under the Coronavirus Aid, Relief, and Economic Security
(CARES) Act. The department chose not to conflate funding by reducing the CARES grants for
the previously identified questioned costs. While we understand the extenuating circumstances,
we did identify regular quarterly payments for one of the grant recipients that could have been
used to offset the questions costs. As of September 2021, the questioned costs had not been
recovered.

Effect: The department is not in compliance with federal regulations. Additionally, there is risk
the questioned costs will be forgotten and never recovered. Federal regulations allow the FTA to
collect interest on funds owed. While interest rates remain low, depending on the length of time

20-02
C-46 Montana Legislative Audit Division

outstanding, the amount owed to the federal grating agency could grow larger than the initial
questioned costs.

Cause: The department indicated their current processes did not consider timely return of
identified questioned costs.

Recommendation: We recommend the Montana Department of Transportation enhance internal
control procedures to ensure timely recovery and remittance of identified questioned costs.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-47

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-006: U.S. Department of the Treasury
ALN # 21.019, Coronavirus Relief Fund
Grant # SLT0077, SLT0006

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award. Effective
internal controls should include establishing procedures to ensure eligibility determinations are
performed in accordance with program requirements.

Per 21 USC 812(c)(10), marijuana is a Schedule | drug and controlled substance. Per 21 USC
841 (a) “it shall be unlawful for any person knowingly or intentionally- (1) to manufacture,
distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled

The Montana Department of Commerce (department) established eligibility criteria for the
Business Stabilization Grant Program (BSG), funded by the Coronavirus Relief Fund. The
eligibility criteria included being a business in good standing in Montana, with 50 or fewer
employees, and having sustained revenue loss due to the pandemic. Additionally, criteria
indicated marijuana-based businesses were ineligible.

Condition: The department’s controls over the BSG were not adequate to ensure only
businesses meeting the department’s eligibility requirements received funding under this
program, and that the funding was used only for purposes allowed by this program. Some
ineligible businesses received funding under the BSG, including two medical marijuana
companies.

Questioned Costs: We identified questioned costs totaling $49,716.

Context: The BSG provided working capital to support allowable business expenses for small
businesses in the state. This program aimed to help businesses retain their current employees and
maintain business viability. The department spent approximately $253.8 million on grants for the
BSG in fiscal years 2020 and 2021.

In a non-statistical sample of 60 of the 13,049 grant recipients, we identified one business that
was not eligible and that has identified questioned costs, six businesses that used the funding for
salary draws which was unallowed, and one nonprofit that received funding. For each of these
situations, we performed additional analytical procedures and reviews of supporting documents

20-02
C-48 Montana Legislative Audit Division

to determine if these were isolated situations or if other similar situations existed for more than
the businesses included in our initial sample.

One of the businesses that received assistance was a medical marijuana provider. Medical
marijuana is illegal at the federal level, and the department’s eligibility requirements
disallowed these providers from receiving funding under this program. However, the
department’s application review process did not identify the business as a medical
marijuana provider and awarded the business $27,620. The department performed
additional reviews after we identified this business and identified one additional medical
marijuana provider that was awarded $22,096. We consider both of these to be
questioned costs of $49,716.

Several sole proprietors received assistance for salary draws, which are not considered
business expenses but instead a return of income. We identified six sole proprietors who
indicated they used the funding for salary draws. The department indicated this was
confusing to sole proprietors, and many misclassified expenses such as payments to
contractors, as salary. During their detailed post-award reviews, the department also
identified that sole proprietors who claimed salary draws also had other eligible expenses
allowed under the BSG program. The department expects this is the case for the ones we
identified but completed post-award reviews were not available to support their assertion
at the time of our testing.

One of the six sole proprietors also indicated on their BSG application that they were
receiving unemployment insurance assistance. Sole proprietors could apply for and
receive benefits through the Unemployment Insurance program. Disallowing sole
proprietor salary draws ensured funding was not received from two federal sources for
the same expenses. Using data from the department collected through the application
process, we identified an additional 93 businesses that appear to be sole proprietors
receiving both unemployment insurance and BSG funding for salary draws. Based on the
review of available data, we could not determine if funding was received for the same
period, or for the same expenses. As a result, we do not consider these to be questioned
costs.

Nonprofit entities were not initially eligible to receive funding through the BSG program.
The Department of Public Health and Human Services administered a separate program
with CRF funds specifically for nonprofits. However, after multiple nonprofits applied
for the BSG program, the department decided to allow nonprofits to receive funding
under the BSG program if they hadn’t received funding through the other CRF program.
During our testing we identified four of the 34 nonprofits received funding from both
programs. We reviewed the information submitted for each program and determined the
funds were used for different purposes under each program, so we do not consider these
questioned costs. However, since the department’s controls were not sufficient to prevent
or detect these situations, these nonprofits could have received funding for the same
activities from both CRF programs.

Effect: This resulted in questioned costs and ineligible businesses receiving funding.
C-49

Cause: The department did perform application reviews before awarding funding and performed
audits of randomly selected businesses after the program ended. However, none of these procedures
identified the situations above as the department’s controls were not sufficient.

Recommendation: We recommend the Department of Commerce:
A. Recover the funds from the subrecipients, and pay back the Coronavirus Relief Fund for the
$49,716 questioned costs.
B. Perform additional risk analysis and post-award reviews of subrecipient use of funds.
C. Develop controls that are sufficient to ensure only eligible applicants receive funding, that
applicants understand the requirements for the use of funds, and required documentation is
sufficient to ensure any new federal program funds are used for appropriate purposes.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-50

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-007: U.S. Department of the Treasury
ALN # 21.019, Coronavirus Relief Fund

Grant # SLT0077, SLT0006

Criteria: Federal regulation, 2 CFR 200.331, requires pass through entities to communicate
specific required information to subrecipients. This federal regulation was renumbered to 2 CFR
200.332 during the audit period.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award. Effective internal
controls should include establishing procedures to ensure eligibility determinations are
performed in accordance with program requirements.

Condition: The Montana Department of Commerce’s (department) did not ensure all required
information was provided to subrecipients of the various grant programs established from
funding provided through the Coronavirus Relief Fund (CRF). The department’s internal
controls were insufficient to ensure that subrecipients received communication regarding the
necessary items.

Questioned Costs: None.

Context: Through the Business Stabilization Grant, Tourism Safety, Loan Deferment, and
Working Capital Loan programs established using CRF funds, the department provided federal
assistance to approximately 13,000 businesses. The department considered all of these
businesses to be subrecipients. The department awarded approximately $253.8 million,

$15 million, $46.6 million, and $23.1 million in grants for the Business Stabilization, Tourism
Safety, Loan Deferment, and Working Capital Loan programs, respectively, during fiscal years
2020 and 2021.

For each of these programs, the department developed and sent standardized documents to all
subrecipients. However, those standardized documents did not contain all required items, such as
the Assistance Listing Number (ALN), amount awarded, terms of the award, indirect cost rate,
and access to the subrecipient’s records. Some of this information was not initially available
when the documents were created. The documents were not updated when the information
became available, and other available information was not included in some of the documents.

The specific items not communicated to subrecipients under each program are included in the
following table, as red Xs.
Items Required to be Communicated

Business
Stabilization

Tourism
Safety
Grant

Loan
Deferment

Working
Capital Loan

Federal award identification number

Federal award date

Total amount of the federal award
committed to subrecipient by the department

Name of federal awarding agency and
contact information for the awarding
official of the department

ALN and name

Identification of whether the award
is research and development

Indirect cost rate for the federal award
including if the de minimis rate is charged

Requirement that subrecipients permit
the department and auditors to have
access to their records and

financial statements

Subrecipient name (which must match the
name associated with its unique entity
identifier)

Subrecipient’s unique entity identifier

Requirements imposed by the department
on the subrecipient so that the Federal
award is used following Federal statutes,
regulations, and the terms and conditions of
the award

Any additional requirements that the
department imposes on the subrecipient for
the pass-through entity to meet responsibility
to the Federal awarding agency

Subaward period of performance start and
end date

Amount of Federal Funds obligated by this
action, and total Federal fund obligated to
the subrecipient by the department

20-02

C-51
C-52

Montana Legislative Audit Division

Effect: These required communications are intended to help the subrecipient meet all their
reporting requirements, and to meet all award terms. Subrecipients subject to Single Audits will
also need this information for their audit which will occur after much of the department’s post-
award monitoring is complete. The department is also not in compliance with federal
subrecipient monitoring requirements.

Cause: The documents the department used to communicate with subrecipients did not contain
all required items, and the department used the same documents for all subrecipients within a
given program.

Recommendation: We recommend the Montana Department of Commerce:
A. Communicate all required award information to subrecipients subject to Single Audit.

B. Develop controls to ensure that all award information is communicated to subrecipients
as required for any new federal programs.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-53
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-008: | U.S. Department of the Treasury
ALN # 21.019, Coronavirus Relief Fund

Grant # SLT0077, SLT0006

Criteria: Federal regulation, 2 CFR 200.331(d), requires pass through entities to monitor the
activities of the subrecipient to ensure that the subaward is used for authorized purposes. This
monitoring must include reviewing financial and performance reports and issuing a management
decision for audit findings pertaining to the federal award provided to the subrecipient from the
pass-through entity. This federal regulation was renumbered into 2 CFR 200.332 during the
audit period.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award. Effective internal
controls should include establishing procedures to ensure eligibility determinations are
performed in accordance with program requirements.

Condition: The Department of Commerce (department) does not review subrecipient audit
reports and issue management decisions for audits of subrecipients of the Tourism Safety Grant
Program, funded by the Coronavirus Relief Fund, as required by federal regulations.

Questioned Costs: None.

Context: The Tourism Safety Grant Program provided money to the six tourism regions and 18
convention visitor bureaus to help them distribute safety information through marketing campaigns.
In total, $15 million in grants were awarded in fiscal years 2020 and 2021. The purpose of the
program was to alert those traveling through Montana to COVID restrictions and to promote general
safety during the pandemic. All 24 recipients of this funding were considered subrecipients. They
are primarily nonprofits subject to Single Audit requirements. This program awarded over $750,000
to two of the subrecipients. Additional subrecipients could also meet this threshold through other
federal funding received in addition to Tourism Safety.

Effect: If the department does not review audit reports and issue management decisions they
will not be in compliance with federal regulations. The department also will not be aware of
instances where the subrecipient did not use the funds as required by the program and not recover
those funds from the subrecipient, as appropriate.

Cause: Program staff indicated that they initially believed the monitoring they are performing was
sufficient, but they do plan to review the Single Audit reports for subrecipients.

20-02
C-54 Montana Legislative Audit Division

Recommendation:
We recommend the Department of Commerce:

A. Develop controls to perform the required subrecipient monitoring which includes reviewing
the subrecipients’ Single Audit reports and issuing management decisions.

B. Review the Single Audits of the Tourism Safety Grant program subrecipients, and issue
management decisions.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective

Action Plan starting on page D-1.
C-55
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-009: U.S. Department of the Treasury
ALN # 21.019, Coronavirus Relief Fund
Grant # SLT0077, SLT0006

Criteria: Federal regulation, 2 CFR 200.331(b), (d), and (e), establishes requirements for
subrecipient monitoring that includes assessing risk and developing a level of monitoring in line
with the level of risk. This federal regulation was renumbered into 2 CFR 200.332 during the
audit period.

Condition: The Montana Department of Transportation (department) did not initially complete
sufficient subrecipient monitoring as required by federal regulation to ensure allowability of
expenditures under the Live Entertainment Grant program funded by the Coronavirus Relief
Fund. When subrecipients are high-risk, federal regulations require more robust subrecipient
monitoring by the department.

Questioned Costs: We question $189,261 in costs charged to the program. During our audit
period we identified $95,000 in questioned costs, while the department identified an additional
$94,261 subsequent to the audit period.

Context: The State of Montana received $1.25 billion in funds from the Coronavirus Relief
Fund (CRF). In partnership with the Montana Governor’s Office of Budget and Program
Planning, the department created the Live Entertainment Grant program from the state’s CRF
allocation, totaling $10.3 million in July 2020. The program was designed to help Montana-
based businesses and nonprofits whose income was primarily generated through the live
entertainment events. The funding replaced the recipient’s lost revenue from the closure of live
events during the pandemic. The department and the Governor’s Office determined these
businesses and nonprofits were subrecipients.

The department was responsible for awarding, managing, and monitoring the subgrants. The
department performed risk assessments, beginning in September 2020, of the applicants for the
Live Entertainment Grants. The risk assessment process was used to determine whether
additional review was needed before a funding determination was made. The department also
required a final report and a supporting financial statement be submitted by January 2021.

Review of the department’s subrecipient monitoring identified the following:
e The department’s risk assessment process resulted in further review being performed on
29 applications, with a “no fund” determination made for 14 applicants. According to

department personnel, subsequent discussion with the Governor’s Office resulted in six
of these applicants receiving grants totaling $1,367,779.

20-02
C-56

Montana Legislative Audit Division

e Wereviewed the final report and supporting financial statement for six randomly selected
grants out of the 76 grant recipients. This was not a statistically valid sample. At the
time of our review in July 2021, the documentation provided for these recipients caused
questioned costs. Two of the subrecipients have final reports which do not support the
allowability of $95,000 in costs associated with the grant program. One subrecipient self-
certified, with support of an excel spreadsheet, $36,000 was spent on allowable
expenditures during the granted period. The second recipient did not have support in
their final report and submitted a profit and loss statement for $59,000. The second
subrecipient reported costs not mentioned in their application and did not provide or
document support for why the change in use of the $59,000 was allowable under the
program.

e The department’s Audit Services also reviewed eight of 76 grantees in August 2021,
including one of the six grants receiving a grant after a no fund recommendation. The
reviews addressed approximately 18.5 percent of the awarded funds. We reviewed the
results of the eight reviews completed by the department, which included $94,261 in
costs considered to be unallowable, which was about five percent of total expenditures
reviewed.

In October 2021, the department indicated they plan to perform reviews over 18 additional
subrecipients with completion occurring between October and the end of December 2021.

Effect: Untimely subrecipient monitoring may result in a lack of identified questioned costs or
collection of those questioned costs from for-profit businesses which may continue to feel the
economic pressures of the pandemic.

Cause: Department staff initially determined the final report was sufficient to consider the costs
allowable if the report tied back to the initial grant application. Additionally, due to internal
discussions a delay in increasing the detailed review of subrecipients occurred.

Recommendation: We recommend the Montana Department of Transportation continue to
complete additional Live Entertainment Grants reviews to ensure subrecipients complied with
federal program requirements.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-57
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-010: U.S. Department of Treasury
ALN #21.019, Coronavirus Relief Fund
Grant # SLT0077, SLT0006

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 2 CFR 200.331(1)(a), requires the pass-through entities to communicate
specific required information to subrecipients. This federal regulation was renumbered into
2 CFR 200.332 during the audit period.

Condition: The Montana Department of Administration’s (department) internal controls did not
ensure subrecipients of the Coronavirus Relief Fund (CRF) programs administered by the
department were provided all of the required information to identify their subaward, and several
required items were not communicated to subrecipients.

Questioned Costs: None.

Context: The department administered two programs using CRF funding, one that provided
reimbursement-based funding to local governments and one that provided reimbursement-based
and advance funding to school districts. The department expended approximately

$193.98 million through the local government program and $81.77 million through the school
district program in fiscal years 2020 and 2021, issuing payments to 124 local governments and
421 school districts. Based on our review, the federal award identification number (FAIN),
federal award date, and name of federal awarding agency were not provided to these
subrecipients.

Effect: The department is not in compliance with subrecipient monitoring requirements.
Additionally, subrecipients of the department’s CRF programs were not provided all of the
required information to identify their subawards and may not have all of the information
necessary to comply with the terms of the award and to meet all of their federal compliance
requirements, resulting in unintended noncompliance. Subrecipients subject to Single Audits
will also need this information for their audit which will occur after much of the department’s
post-award monitoring is completed.

Cause: The focus of administering the programs was to provide funding to local governments
and school districts to mitigate the impacts of the COVID-19 public health emergency. Due to

20-02
C-58

Montana Legislative Audit Division

this and the department’s speed to implement the programs, a few of the upfront communication
requirements were overlooked.

Recommendation: We recommend the Montana Department of Administration:

A. Communicate all required award information to subrecipients, as required by federal
regulations for any new federal programs.

B. Develop controls to ensure that all award information is communicated to subrecipients
as required for any new federal programs.

Views of Responsible Officials: The department concurs with this recommendation. For

additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-59
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-011: U.S. Department of Treasury
ALN # 21.019, Coronavirus Relief Fund
Grant # SLT0077, SLT0006

Criteria: Federal regulation, 2 CFR 200.331(1)(a), requires pass-through entities to
communicate specific required information to subrecipients. This federal regulation was
renumbered into 2 CFR 200.332 during the audit period.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Internal controls did not ensure the Department of Public Health and Human
Services (department) provided subrecipients of the Coronavirus Relief Fund (CRF) programs
administered by the department with all of the required information to identify their subaward.

Questioned Costs: None.

Context: During the audit, we reviewed eight of the department’s CRF programs. Of the eight,
four of the programs made grants to subrecipients. These four programs made subgrants totaling
approximately $132 million in fiscal years 2020 and 2021, to approximately 2,400 subrecipients.
These subrecipients consisted of local and tribal health departments, social services nonprofit
organizations, behavioral health providers, school districts, and licensed childcare programs.
Based on our review, multiple required disclosures were missing including the subrecipient’s
unique entity identifier, federal award identification number, total amount of federal funds
committed to the subrecipient, and the name of the federal awarding agency.

Effect: The department has not complied with federal regulations regarding required
subrecipient disclosures. Additionally, failure to provide subrecipients with the required federal
award information increases risk of subrecipient noncompliance with federal requirements.

Cause: Per the department, internal controls were not centralized when the funding was awarded
to the department resulting in missing disclosures. Due to this and the speed which the
department was expected to implement multiple programs, some of the upfront communication
with subrecipients was missed.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Establish and document internal controls to ensure required subrecipient disclosures are
included for new federal program subrecipient agreements.

20-02
C-60 Montana Legislative Audit Division

B. Ensure the required subrecipient disclosures are included correctly in new federal
program subrecipient monitoring agreements.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-61

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-012: U.S. Department of Treasury
ALN # 21.019, Coronavirus Relief Fund
Grant # SLT0077, SLT0006

Criteria: Per the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Title VI, Sec
601(d)(1) funds are allowable if they "are necessary expenditures incurred due to the public
health emergency with respect to the Coronavirus Disease 2019 (COVID-19)".

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) made two
duplicate payments to facilities as part of its Quarantine Isolation benefits program using
Coronavirus Relief Funds. Duplicate payments are unnecessary expenditures under the
Coronavirus Relief Fund (CRF) program.

Questioned Costs: We question costs in the amount of $35,820.

Context: The Quarantine Isolation program was one of 17 CRF programs the department
administered. This program provided funds to facilities for any isolated or quarantined patients
for days where the patient was actively positive or presumptively positive for Coronavirus.
Providers included nursing homes, assisted living homes, and group homes.

We reviewed a total of 48 payments to 13 different facilities, of 155 total facilities, during fiscal
years 2020 and 2021. As part of this work, we identified two duplicate payments to facilities, one
for $28,410 and one for $7,410. This was not a statistically valid sample.

Effect: The department is not in compliance with federal regulations as the duplicate payments
were not an allowable use of the federal funds.

Cause: Internal controls did not prevent these payments being issued. Department staff
acknowledged the payments were made and stated they were identified during a reconciliation
process. Per department personnel, the department was expected to implement multiple
programs quickly and as a result, items were overlooked. The department is currently working
with the entities to recover the overpayments.

20-02
C-62 Montana Legislative Audit Division

Recommendation: We recommend the Department of Public Health and Human Services

enhance internal controls to ensure duplicate payments are not made to recipients of federal
funds.

Views of Responsible Officials: The department concurs with this recommendation. For

additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-63

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-013: | U.S. Department of the Treasury
ALN # 21.023, Emergency Rental Assistance Program
Grant # ERA-2101123145

Criteria: The Consolidated Appropriation Act, 2021, Section 501 establishes the Emergency
Rental Assistance program and indicates who is eligible including income thresholds, that the
recipient must be facing housing instability, and they must have been impacted by the COVID-
19 pandemic.

Condition: The Department of Commerce’s (department) internal control procedures identified
potentially fraudulent applications paid from the Emergency Rental Assistance program funds.

Questioned Costs: For fiscal year 2021, the department identified that $33,700 was incorrectly
paid to these applicants, which we consider questioned costs. Similar situations occurred in fiscal
year 2022, and as of December 2021, the department identified $62,000 that we have reported as
questioned costs. We anticipate additional questioned costs may be identified through the
department’s review processes as the department has seen a coordinated effort to submit potentially
fraudulent applications.

Context: While reviewing applications for this program, the department identified potentially
fraudulent applications where applicants submitted incorrect information or, in some cases, did not
live at the address they were requesting assistance for. The department determined these applicants
were eligible based on the federally-established eligibility criteria for the emergency rental assistance
program. Subsequent new information received by the department showed that the initial information
submitted by these applicants was incorrect or false, and the department determined these applicants
were not actually eligible to receive the funds that had been disbursed to them. The department is
working with appropriate authorities to address the potentially fraudulent nature of the applications
and could recover some of the payments made to ineligible parties. The United States Department of
the Treasury does not require states to report these instances until they reach $100,000.

After identifying the initial situations described, the department implemented supplementary
controls, including some targeted reviews, to detect future situations before the applicant receives
funding through the program

Effect: This resulted in the department paying applicants who did not meet the eligibility
requirements for the program, resulting in questioned costs.

Cause: The department received a high volume of applicants that had to be processed quickly, and
did not initially identify these situations, but after identifying the first couple situations, the
department implemented additional controls to identify these situations in the future.

20-02
C-64 Montana Legislative Audit Division

Recommendation: We recommend the Department of Commerce continue to perform processes
and reviews to identify ineligible applicants for the Emergency Rental Assistance Program.

Views of Responsible Officials: The department concurs with this recommendation. For

additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-65
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-014: U.S. Department of Homeland Security
ALN # 97.036, Disaster Grants — Public Assistance (Presidentially

Declared Disasters)
Grant # 4508DRMTP00000001

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 2 CFR 170, Appendix A requires a Federal Financial Assistance
Transparency Act (FFATA) report for each subaward no later than the end of the month
following the month in which an obligation was made.

Condition: The Department of Military Affairs (department) did not have controls in place to
ensure timely and accurate FFATA reporting over the federally declared disaster related to the
Coronavirus public health emergency. While we noted no errors in the information contained in
the reports submitted, the department sub-granted funds to six entities during the months of
September 2020 through December 2020 which were not reported until February 2021. This is
between one and four months later than required by federal regulations.

Questioned Costs: None.

Context: During the audit period, the department submitted three FFATA reports. The initial
report in February 2021 included all subawards made from the onset of the disaster including the
six entities receiving subgrants during the months of September 2020 through December 2020.
The reports submitted in April 2021 and May 2021 included the subawards required to be
reported for those time periods. While no controls are documented to review the reports for
accuracy, we noted no errors in the data reported on any of the reports. In total, $35.5 million
was spent during fiscal year 2020 and 2021, of which $6.5 million was not reported timely.
Reports should have been filed for the months of October 2020, November 2020,

December 2020, and January 2021. Activity that should have been included on these reports
were included on the February 2021 report.

Repeat Finding: No.

Effect: A lack of documented internal controls led to the late submission of required FFATA
reports and noncompliance with federal regulations. Additionally, a lack of documented internal
controls could result in the omission of subawards on the report or the reporting of inaccurate
amounts.

20-02
C-66 Montana Legislative Audit Division

Cause: While the department established some controls over the preparation of the report, they
did not include documentation of any procedures for review to ensure timeliness and accuracy.
Additionally, due to the personnel resources needed to respond to the pandemic, the department
did not have the staff necessary to complete timely FFATA reports.

Recommendation: We recommend the Department of Military Affairs:
A. Document and implement internal controls to ensure the timely and accurate submission
of FFATA reports.
B. Submit FFATA reports in accordance with federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-67

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-015: U.S. Department of Homeland Security
ALN # 97.042, Emergency Management Performance Grants (EMPG)
Grant # EMD — 2017-EP-00003 (FY 19)
EMD — 2018-EP-00005 (FY 19, FY20)
EMD — 2019-EP-00005 (FY20)

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulations, 2 CFR 200.53 and 2 CFR 200.403, further state that improper payments
include any payments where insufficient or lack of documentation prevents a reviewer from

discerning whether a payment was proper and in order for costs to be allowable they must be
adequately documented, respectively.

Condition: The Department of Military Affairs (department) does not have adequate internal
controls in place to ensure adequate support is provided prior to reimbursement for grant
expenditures incurred by local governments. While the department has put in place procedures
for the reimbursement process for the grant, the procedures did not properly detail the type of
documentation needed from subrecipients in order to approve the reimbursement.

Questioned Costs: In our follow-up on finding 2019-028 from the prior Single Audit, we
identified actual questioned costs of $38,443 and $89,511in fiscal years 2019 and 2020,
respectively.

Context: In total for fiscal year 2019 and 2020, $3.7 million was reimbursed to subrecipients for
EMPG grants. We completed a statistically valid sample of grants administered by the
department’s Disaster & Emergency Services (DES) Division. In this sample, there was a total
population of 376 EMPG items, and we selected a sample of 17 EMPG payments. Our sample
identified 15 instances where the supporting documentation was not adequate to demonstrate the
costs were allowable per the grant.

Repeat Finding: This is a repeat finding, initially reported as 2017-011 in the Single Audit
report for the two fiscal years ended June 30, 2017. It was reported as finding 2019-028 in the
Single Audit report for the two fiscal years ended June 30, 2019.

Effect: Because the department does not have adequate internal controls in place over the DES
grant reimbursement process, they have reimbursed subgrantees for unallowable costs. We
identified questioned costs, as noted above.

20-02
C-68

Montana Legislative Audit Division

Cause: This issue is on-going from the department prior audit report. The department had
planned to make headway with implementing controls to better oversee reimbursements related
to the DES grant program. However, due to the fact that the department’s prior audit report was
not issued until October of 2019, they were not able to implement internal controls prior to the
next funding cycle for the grant. The department provided state guidance documents to
subrecipients that were updated in January of 2020 and implemented for the fiscal year 2020-
2021 grant cycle.

Recommendation: We recommend the Department of Military Affairs continue to enhance
internal control procedures and provide training to ensure proper documentation is obtained prior
to the reimbursement of expenses under the Emergency Management Performance Grants
program.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-69
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-016: U.S. Department of Homeland Security
ALN # 97.050, Presidentially Declared Disaster Assistance to Individuals
and Households — Other Needs
Grant # 4508DRMTSPLW

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Labor and Industry’s (department) internal controls did not
ensure information reported to the federal government was complete and accurate in relation to
its Lost Wages Assistance grant.

Questioned Costs: None.

Context: To help provide additional unemployment benefits during the COVID-19 public health
emergency, the department applied for, and received, a federal Other Needs Assistance —
Supplemental Payments for Lost Wages (Lost Wages Assistance) grant award, funded by

ALN 97.050. In addition to an Unemployment Insurance claimant’s calculated benefit, the grant
provided eligible claimants an extra $400 per week. The Federal Emergency Management
Agency (FEMA) Lost Wages Assistance program was active for six benefit weeks.

During the grant award period, the department was required to submit quarterly financial reports
and weekly programmatic reports to the federal government. To ensure the accuracy of the
quarterly financial reports, the information was reviewed by a person other than the preparer of
the report before the report’s submission. However, in our review, two of the four financial
reports submitted to the federal government for this grant did not have evidence of a review
being completed prior to submission.

In addition, while obtaining an understanding of the department’s procedures for completing the
weekly programmatic reports, we were unable to identify a departmental control over the
accuracy of the information submitted to the federal government.

Effect: While we did not identify any errors in the information reported to the federal
government, without documentation, or implementation, of internal controls, the department is at
increased risk of reporting incorrect information to the federal government and is not in
compliance with federal regulations.

20-02
C-70

Montana Legislative Audit Division

Cause: Department personnel stated all quarterly financial reports were reviewed and approved,
but verbal approval was given for the two we identified as not having documented evidence of
review. Additionally, when we inquired specifically about the department’s control over the
weekly programmatic reports, department personnel stated the risk of error was deemed low for
these reports as they did not require complex calculations or a compilation of data from multiple
sources. As a result, the department did not have someone review the reported information prior
to submitting it to the federal government.

Recommendation: We recommend the Department of Labor and Industry develop, implement,
and document internal controls over reporting requirements for new federal funding sources to
ensure compliance with federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-71
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-017: U.S. Department of Labor
ALN # 17.225, Unemployment Insurance
Grant # UI-35659-21-55-A-30 (2021 Base Grant)
UI-34069-19-55-A-30 (2020 Base Grant)
UI-34726-20-55-A-30 (2020 COVID funding)

Criteria: Federal regulation, 20 CFR 602.30(a), indicates the U.S. Department of Labor
(USDOL) shall establish required methods and procedures and provide technical assistance as
needed on the QC process. This regulation outlines the U.S. Department of Labor will establish
guidelines for states to follow regarding quality control reviews.

Federal regulation, 20 CFR 602.21(a) — Standard methods and procedures, requires each state to
perform the requirements of this section in accordance with instructions issued by the U.S
Department of Labor, pursuant to §602.30(a) of this part, to ensure standardization of methods
and procedures in a manner consistent with this part. This regulation instructs the Department of
Labor and Industry (department) to follow the Benefit Accuracy Measurement (BAM) State
Operation Handbook.

Benefit Accuracy Measurement State Operations Handbook (ET Handbook No. 395, 5" Edition)
Chapter II Section 3, states “each SWA must develop written procedures to guide the operation
of the BAM program. The procedures must cover all investigative and administrative functions
of the BAM unit. The procedures should be adapted to the particular circumstances of the state,
but must adhere to the guidelines contained in this Handbook so as to provide for proper
administration of the BAM program.”

Montana Benefit Accuracy Measurement Quality Control Program Policy and Procedures
Manual, Section IX(A), states “The BAM Supervisor is responsible for the cases completed in
the BAM unit, whether she reviews each of them or not. USDOL has recommended that the
BAM Supervisor review as many completed cases as possible. At a minimum, the Montana
BAM Supervisor will review all improper cases.”

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The department did not follow its documented internal control regarding BAM
audits resulting in noncompliance with federal regulations.

Questioned Costs: None.

20-02
C-72

Montana Legislative Audit Division

Context: We tested a sample of 41 BAM reviews out the approximately 1,400 completed by the
department’s BAM unit in fiscal years 2020 and 2021. The sample included both paid and
denied claims. The sample was not statistically valid. Per the department’s BAM policies, the
BAM supervisor must review all cases where improper payments to claimants are identified by
BAM staff. In our review, we found BAM staff determined improper payments were made to
claimants for seven of the 19 paid claims in our sample. However, six of the seven improper
payments were not reviewed by the BAM supervisor as required by department policy.

Effect: Because internal controls failed to ensure required supervisory reviews occurred, the
department was not in compliance with the department’s BAM policies and procedures, and
thus, not in compliance with federal regulations. If policies and procedures over the BAM
process are not followed, the department is at increased risk of additional errors occurring within
the Unemployment Insurance program.

Cause: Department staff stated the required reviews did not occur due to significant staff
turnover and restructuring within the BAM unit in addition to the significant demands placed on
the department resulting from the COVID-19 public health emergency.

Recommendation: We recommend the Department of Labor and Industry:

A. Follow its documented internal control policies and procedures governing benefit
accuracy measurement reviews completed by the department, and

B. Complete the required supervisory reviews of benefit accuracy measurement audits that
identify improperly paid unemployment insurance benefits, as required by federal
regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-73
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-018: U.S. Department of Labor
ALN # 17.225, Unemployment Insurance
Grant # UI-34726-20-55-A-30 (2020 COVID funding)

Criteria: Federal regulation, 20 CFR 625.6(a), states “In all States, except as provided in
paragraphs (c) and (d) of this section, the amount of DUA payable to an unemployed worker or
unemployed self-employed individual for a week of total unemployment shall be the weekly
amount of compensation the individual would have been paid as regular compensation, as
computed under the provisions of the applicable State law for a week of total unemployment. In
no event shall such amount be in excess of the maximum amount of regular compensation
authorized under the applicable State law for that week.”

Federal regulation, 20 CFR 625.6(b), states “If the weekly amount computed under paragraph (a)
of this section is less than 50 percent of the average weekly payment of regular compensation in
the State, as provided quarterly by the Department, or, if the individual has insufficient wages
from employment or insufficient or no net income from self-employment (which includes
individuals falling within paragraphs (a)(3) and (b)(3) of § 625.5) in the applicable base period to
compute a weekly amount under paragraph (a) of this section, the individual shall be determined
entitled to a weekly amount equal to 50 percent of the average weekly payment of regular
compensation in the State.”

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Labor and Industry’s (department) internal controls did not detect
and correct errors in benefit amounts for unemployment insurance claimants receiving Pandemic
Unemployment Assistance (PUA) benefits.

Questioned Costs: We identified $4,066 in known question costs, and project likely questioned
costs of more than $25,000.

Context: In a statistical sample of 60 PUA claimants, we found four claimants who received
incorrect benefit amounts, as described below. This was a statistically valid sample.

e For one claimant, department staff entered the claimant’s yearly wages divided equally
between all four quarters instead of recording the wages that were actually earned each
quarter. This resulted in the claimant receiving $1,088 less than entitled.

20-02
C-74

Montana Legislative Audit Division

e For one claimant, the department again entered the claimant’s yearly wages divided
equally between all four quarters, instead of recording the wages actually earned each
quarter. While we determined the underpayment could be as much as $3,042, when we
brought this error to the department’s attention, it was determined further investigation
was necessary due to potential fraud.

e One claimant had two Schedule Cs filed with their taxes, one showing a profit and one
showing a loss. To determine the claimant’s base period wages, the department should
have netted the two schedules together. However, the department only entered the
information reflecting the profit resulting in an overpayment of $448.

e For one claimant, the department accepted a 1099-MISC tax form as proof of income.
However, the 1099-MISC tax forms report gross income, but regulations require net
income to be used in benefit calculations. This resulted in an overpayment of $3,618.

Effect: The department is not in compliance with federal requirements related to the PUA
program with the Unemployment Insurance program for fiscal years 2020 and 2021. We
brought the discrepancies we found to the department’s attention. Claimants entitled to
additional benefits have been paid what they were owed, and the department waived the
overpayments of the claimants, as allowed by federal regulations, who received more than they
were entitled to.

Cause: Per department personnel, these were human errors on the part of the department. All
four instances were due to department staff entering incorrect base period wages into the PUA
system.

Recommendation: We recommend the Department of Labor and Industry:
A. Enhance internal controls to ensure wage information is correctly used to calculate
unemployment insurance benefits, and

B. Calculate Unemployment Insurance benefits correctly in accordance with federal
regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-75
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-019: U.S. Department of Labor
ALN # 17.225, Unemployment Insurance
Grant # UI-35659-21-55-A-30 (2021 Base Grant)
UI-34069-19-55-A-30 (2020 Base Grant)
UI-34726-20-55-A-30 (2020 COVID funding)

Criteria: Federal regulation, 26 USC 3304(a)(4)(D), states “all money withdrawn from the
unemployment fund of the State shall be used solely in the payment of unemployment
compensation, exclusive of expenses of administration, and for refunds of sums erroneously paid
into such fund and refunds paid in accordance with the provisions of section 3305(b); except
that...amounts shall be deducted from unemployment benefits and used to repay overpayments
as provided in section 303(g) of the Social Security Act.”

Federal regulation, 42 USC 503(a)(11)(A), states “At the time the State agency determines an
erroneous payment from its unemployment fund was made to an individual due to fraud
committed by such individual, the assessment of a penalty on the individual in an amount of not
less than 15 percent of the amount of the erroneous payment.”

Section 39-51-3201(1)(a)(i), Montana Code Annotated (MCA), states “A person who makes a
false statement or representation knowing it to be false or who knowingly fails to disclose a
material fact in order to obtain or increase any benefit or other payment under this chapter or
under an employment security law of any other state or territory or the federal government, either
for the individual or for any other person, is...required to repay to the department, pursuant to
the provisions of §39-51-3206, a sum equal to the amount wrongfully received by the individual,
plus a department-assessed penalty equal to 50% of the fraudulently obtained benefits. The
department-assessed penalty incorporates the 15% penalty required under 42 U.S.C. 503(a).”

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Labor and Industry (department) did not implement adequate
internal controls to ensure compliance with federal regulations and state laws governing
pandemic-related unemployment insurance overpayment recovery and did not comply with those
laws and regulations.

Questioned Costs: None.

20-02
C-76

Montana Legislative Audit Division

Context: We completed a sample of 60 of approximately 25,600 department-identified
overpayments and found ten claimants who continued to receive unemployment benefits after
their overpayment was established. This was not a statistically valid sample. For six claimants,
the department took measures to recover the associated overpayment by reducing the benefit
amount the claimants were still recetving. However, the department did not offset the continuing
benefits for four claimants to reduce their established overpayment.

Based on our review, the four claimants without benefit offsets had been placed in the wrong
Unemployment Insurance program at the beginning of their claims which resulted in the
overpayments, as described below.

e Three claimants were incorrectly established in the Pandemic Unemployment Assistance
(PUA) program when they were eligible for regular Unemployment Insurance. When the
department discovered this, they created an overpayment in the PUA program for the
PUA benefits received to date and established the claims in the regular Unemployment
Insurance program. The claimants then received a payment for the amount they would
have received under the regular Unemployment Insurance program had they been
established correctly, in addition to the amounts already received in the PUA program,
essentially doubling the claimants’ benefits. The PUA overpayments were not paid back
by the claimants using the regular UI benefits received after the overpayments were
established and they were not offset against the regular Unemployment Insurance
benefits the claimants continued to receive.

e One claimant was incorrectly established in the regular Unemployment Insurance
program when the claimant qualified for the PUA program. An overpayment was
established in the regular Unemployment Insurance program and a claim established in
the PUA program. The claimant received a PUA program payment for the time they
were on regular Unemployment Insurance and should have been on PUA, resulting in
excess benefits being paid. In this instance, the claimant did repay a significant portion
of the regular Unemployment Insurance overpayment though not through a departmental
offset.

Additionally, in our review, we discovered the department did not assess the required penalty on
PUA overpayments related to fraud.

Effect: Since internal controls were insufficient to ensure overpayments were offset by
continuing Unemployment Insurance benefit payments, were unable to identify overpayments
that resulted from fraudulent activity in the PUA program, and were unable to ensure penalties
were assessed, the Department of Labor and Industry is not in compliance with federal
regulations governing Unemployment Insurance overpayments.

Cause: Department personnel stated because the department was utilizing two different benefits
systems, one for regular Unemployment Insurance and one for PUA, it was not possible to offset
some PUA claims. Programming did occur in the fall of 2020 to allow the offset of an
overpayment if a claimant went from the PUA program to the regular Unemployment Insurance
program. However, overpayment offsets were not always established by the department.
C-77

Additionally, related to assessing required penalties, department personnel stated they were
working with the PUA system vendor prior to the end of the PUA program to improve system
capabilities to be able to identify, and assess penalties on, overpayments due to fraud. This was
not accomplished prior to fiscal year-end 2021, resulting the department’s inability to assess the
required penalties for fraud related PUA overpayments during the audit period.

Recommendation: We recommend the Department of Labor and Industry:
A. Develop and implement internal controls to ensure necessary information system
modifications are made to properly administer new federal programs, and
B. Recover unemployment benefit overpayments, including any associated penalties, as
required by federal and state law.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-78

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-020: U.S. Department of Labor
ALN # 17.225, Unemployment Insurance
Grant # UI-34726-20-55-A-30 (2020 COVID funding)

Criteria: Montana Operations Manual (MOM) State Information Technology Services Division
(SITSD) Security Policy — Appendix A outlines baseline security controls for every state agency
to implement for information technology systems they manage. Included among the baseline
controls are requirements for the development and documentation of a security plan;
documentation of access control policies and procedures, including periodic review of user
access; and documentation of a formal change management system.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Labor and Industry (department) relied on the Pandemic
Unemployment Assistance (PUA) information system to determine claimant eligibility and
calculate benefit payments. However, we determined the department relied on the PUA system
without having adequate internal controls in place to do so.

Questioned Costs: None.

Context: The department utilizes one system to collect employer contributions and another to
process claims and provide benefits to eligible claimants. However, the department’s regular
unemployment benefit system, MISTICS, was not equipped to process new requirements, such
as acceptance of self-employment information, imposed by the PUA benefit program. As a
result, the department contracted with a vendor to utilize software explicitly designed to
administer the PUA program.

The department did not obtain a Service Organization Controls (SOC) report specifically for the
PUA system and while the department does have a system security plan (SSP) for the PUA
system, it does not document all the information required by state policy. The vendor did provide
the department with a SOC report, but it was for a different service offered by the vendor and
provided no assurance over the PUA system.

In addition to not having sufficient documentation of security controls in general, we also
identified two important system controls not adequately addressed by the department: user access
and change management controls. The process for requesting, terminating, and reviewing user
access to the system should be clearly documented. However, while the department does have
C-79

procedures for requesting and terminating access for department employees, those procedures are
not officially documented. The department also does not perform any periodic reviews of current
user access and does not manage the access of employees outside of the department.

The second system control not addressed by the department pertains to change management.
Although the department could not make changes to the application, they were responsible for
knowing what changes the vendor made and why. Even though the department held weekly
meetings with the vendor to discuss software changes and had access to an environment to test
new features before implementation, the department still relied on the vendor to provide a
complete log of changes made. Without testing the system, the department had no assurance that
changes were made as described or that other, unexpected changes were not made.

Effect: These internal control issues have a cumulative effect on software processing integrity
and we were unable to determine if all eligibility and benefit determinations were complete,
valid, accurate, timely and authorized. This resulted in a significant deficiency in internal
controls and noncompliance with federal regulations and state policies.

Cause: The department put great effort into making the PUA program operational in a very short
time frame with many competing priorities of high importance. The department’s focus on
operational success resulted in some general system controls being overlooked or not officially
documented. Additionally, department management considered the SOC report received
adequate even though it did not address the core responsibilities of the department or the vendor
related to the PUA system.

Recommendation: We recommend the Department of Labor and Industry enhance internal
controls by obtaining an application-level Service Organization Controls (SOC) report, or
implement and formally document baseline security controls for all new Unemployment
Insurance program-related information technology systems, as required by state policy and
federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-80

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-021: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial

Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services

ALN # 93.264, 93.342, 93.364, 93.925, Student Financial Assistance
Programs Cluster

Grant # Not Applicable

Criteria: Federal regulation, 16 CFR 314.4(b) (version effective for fiscal years 2020 and 2021),
requires Montana’s universities to “Identify reasonably foreseeable internal and external risks to
the security, confidentiality, and integrity of customer information that could result in the
unauthorized disclosure, misuse, alteration, destruction or other compromise of such information,
and assess the sufficiency of any safeguards in place to control these risks. At a minimum, such a
risk assessment should include consideration of risks in each relevant area of your operations,
including:

(1) Employee training and management;

(2) Information systems, including network and software design, as well as information
processing, storage, transmission and disposal; and

(3) Detecting, preventing and responding to attacks, intrusions, or other systems failures.”

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the federal award in compliance with federal
statutes, regulations, and the terms and conditions of the federal award.

Section 20-32-101, Montana Code Annotated (MCA), establishes an educational
telecommunications network for instructional and educational coursework of students from
kindergarten through higher education as well as any supporting information to teachers.

Section 20-25-301, MCA, outlines the powers and duties of the Board of Regents (board),
including that the board shall ensure an adequate level of security for data within the university
system by addressing state law information security requirements. These requirements are further
defined in §2-15-114, MCA, and direct agencies to develop and maintain policies and procedures
to ensure information security, ensure an individual is responsible for a security program and
safeguards, and conduct internal evaluations of the security program for improvements.
C-81

Board policy is meant to clarify how this statute is carried out and states that “Where
appropriate, campuses should follow the National Institute of Standards and Technology (NIST)
Framework for policy guidance.”

Condition: The current board security policy has not been reviewed since 2014. The Office of
the Commissioner of Higher Education (OCHE) has delegated to the major campuses the
authority to administer their own information network. As a result, campuses have the individual
responsibility to assess their IT environments and security programs for various risks from
external threats, weak controls, and compliance with state and federal requirements. As
described in Findings 2021-022 and 2021-023, during fieldwork we identified that risk
management processes within IT were not consistent or comprehensive at the universities. This
has contributed to the universities’ non-compliance with federal regulations requiring an
information security risk assessment process.

Questioned Costs: None.

Context: The universities gather and store various types of sensitive information electronically
related to students’ education and personal information, employees’ personal information, credit
and bank account information, intellectual property, and personal health information. Personally
identifiable information (PII) can include student names, mothers’ maiden names, social security
numbers, identification numbers, or parent/guardian information. As the entity directed to ensure
security, the board and OCHE are responsible for governance and policies that guide the
frameworks in place for the university system. This governing policy should create consistency
and be explicit about the high-level procedures to maintain a security program. Each university
can determine more specific policies around controls and how they are managed as they also
need to consider business differences.

Effect: The universities are not in compliance with federal regulations as described in Findings
2021-022 and 2021-023.

Cause: One FTE at OCHE is tasked with operational, management, and oversight
responsibilities, leaving little time for establishing governance or coordinating security across an
entire university system. OCHE staffing does not include dedicated security responsibilities.
According to board security policy, security responsibilities are expected to be established at
each university. Currently, these staff dedicated to security are at each flagship campus. The
smaller campuses do not have IT security staff. While OCHE intended to give the universities
leeway in deciding on what exact framework would work best, the language chosen has caused
the universities to not formally adopt any framework to guide their security programs. The lack
of framework has contributed to the current state of security programs and has slowed progress
in development. The lack of this governance structure has contributed to the struggles in
maturing security programs at each university and could make sharing IT services related to
security more complicated. If each university addresses a problem differently, they lose the
ability to share knowledge and services for efficiency.

20-02
C-82

Montana Legislative Audit Division

Recommendation: We recommend that the Board of Regents establish system-wide IT
governance that ensures:
A. OCHE has an active role in improving security posture of the university system,

B. Security policy addresses the requirements of data security statute and other relevant federal
requirements,
C. There is clear allocation of security responsibility, authority, and accountability, and

D. Communication and reporting mechanisms are formalized between various entities that
oversee or make decisions within the university system.

We further recommend that Board of Regents and the universities review and enforce university
system security policy that includes:

E. Clear direction within policy to manage a security program and mandate a consistent security
framework, going above and beyond maintaining security policies.

F. Requirements for Board of Regents security policy to be reviewed continuously.

Views of Responsible Officials: OCHE concurs with these recommendations. For additional
information regarding OCHE’s planned corrective action see Corrective Action Plan starting on
page D-1.
C-83

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-022: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services

ALN # 93.264, 93.364, 93.925, Student Financial Assistance Programs
Cluster

Grant # Not Applicable

Criteria: Federal regulation, 16 CFR 314.4(b) (version effective for fiscal years 2020 and 2021),
requires Montana State University (university) to “Identify reasonably foreseeable internal and
external risks to the security, confidentiality, and integrity of customer information that could
result in the unauthorized disclosure, misuse, alteration, destruction or other compromise of such
information, and assess the sufficiency of any safeguards in place to control these risks. At a
minimum, such a risk assessment should include consideration of risks in each relevant area of
your operations, including:

(1) Employee training and management;

(2) Information systems, including network and software design, as well as information
processing, storage, transmission and disposal; and

(3) Detecting, preventing and responding to attacks, intrusions, or other systems failures.”

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the federal award in compliance with federal
statutes, regulations, and the terms and conditions of the federal award.

Condition: As indicated in finding 2021-021, the Office of the Commissioner of Higher
Education (OCHE) has delegated to the major campuses the authority to administer their own
information network. As a result, campuses have the individual responsibility to assess their IT
environments and security programs for various risks from external threats, weak controls, and
compliance with state and federal requirements. We identified that risk management processes
within information technology (IT), including those required by federal regulations governing
the Student Financial Assistance Cluster related to information security and risk assessment,
were not consistent or comprehensive at the university.

We determined that the Bozeman campus has individuals coordinating the information security
program. However, it’s unclear how affiliate campuses at Billings, Great Falls and Havre should
be included in this work because the boundary of the security programs that each university
manages is not clearly defined. After reviewing IT risk assessment procedures, we determined

20-02
C-84

Montana Legislative Audit Division

that the Bozeman campus has not performed an IT risk assessment that addresses the three areas
required by federal regulations. There is no IT formal risk management program, including
documented safeguards, that supports the improvements and drives initiatives for a
comprehensive security program that meets the intentions of the requirements.

Industry standards provide many tools and guidance on assessing security programs. For our
work, we chose an assessment tool that was developed for higher education. The tool assesses
high-level, common security practices. The university scored low in risk management. We also
contracted with an outside consultant with experience in security testing and phishing campaigns
to review security vulnerabilities and security awareness at the university. Our contractor’s work
identified vulnerabilities where the control structure does not completely mitigate a specific risk.
From testing, the university had two high concerns and five moderate concerns found in testing.
The university’s security program is at a lower maturity level.

Questioned Costs: None.

Context: The university is comprised of four separate campuses with a combined total
enrollment of 20,261 and 19,422 students during fiscal years 2020 and 2021, respectively.

The table below summarizes the number of students receiving assistance through Title IV-A
programs by campus; the table contains duplicate counts because individual students may qualify
for multiple types of assistance. No students received new Perkins loans during this period;
students with loan balances from prior periods are not included in the table.

Academic Year 2019-20 Academic Year 2020-21

Program Billings | Bozeman Falls Havre | Billings | Bozeman Falls Havre
Federal Supplemental
Educational Opportunity 421 848 87 86 376 1,114 83 116
Grants
Federal Work-Study 102 183 19 62 60 158 8 29
Program
Pell Grants 1,428 3,259 616 472 1,419 2,918 522 404
Direct Loans 1,905 11,122 944 826 3,025 9,820 871 690

Total 3,856 15,412 1,666 | 1,446 4,880 14,010 1,484 | 1,239

The university gathers and stores various types of sensitive information electronically related to
students’ education and personal information, employees’ personal information, credit and bank
account information, intellectual property, and personal health information. Personally identifiable
information (PII) can include student names, mothers’ maiden names, social security numbers,
identification numbers, or parent/guardian information.

Effect: The university is not in compliance with federal regulations. Possible outcomes could be
data breaches or ransomware attacks that impact university reputation and could stop the
university from providing services to students.
C-85

Cause: While the Office of the Commissioner of Higher Education intended to give the
university leeway in deciding on what exact framework would work best, the language chosen
has caused the university to not formally adopt any framework to guide their security programs.
The lack of framework has contributed to the current state of security programs and has slowed
progress in development. University staff indicated that overall IT staffing challenges have
impacted the progress of the security program.

Recommendation: We recommend the Montana State University complete a comprehensive IT
risk assessment to develop a formal approach for maturing security procedures.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see Corrective Action
Plan starting on page D-1.

20-02
C-86

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-023: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 16 CFR 314.4(b) (version effective for fiscal years 2020 and 2021),
requires the University of Montana (university) to “Identify reasonably foreseeable internal and
external risks to the security, confidentiality, and integrity of customer information that could
result in the unauthorized disclosure, misuse, alteration, destruction or other compromise of such
information, and assess the sufficiency of any safeguards in place to control these risks. At a
minimum, such a risk assessment should include consideration of risks in each relevant area of
your operations, including:

(1) Employee training and management;

(2) Information systems, including network and software design, as well as information
processing, storage, transmission and disposal; and

(3) Detecting, preventing and responding to attacks, intrusions, or other systems failures.’

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the federal award in compliance with federal
statutes, regulations, and the terms and conditions of the federal award.

Condition: As indicated in finding 2021-021, the Office of the Commissioner of Higher
Education (OCHE) has delegated to the major campuses the authority to administer their own
information network. As a result, campuses have the individual responsibility to assess their IT
environments and security programs for various risks from external threats, weak controls, and
compliance with state and federal requirements. During fieldwork we identified that risk
management processes within information technology (IT) were not consistent or comprehensive
at the university.

We determined the Missoula campus has individuals coordinating the information security
program. However, it’s unclear how affiliate campuses at Butte, Helena and Dillon should be
included in this work because the boundary of the security programs that each university
manages is not clearly defined. After reviewing IT risk assessment procedures, we determined
that the Missoula campus has not performed an IT risk assessment that addresses the three areas
required by federal regulations. There is no IT formal risk management program, including
C-87

documented safeguards, that supports the improvements and drives initiatives for a
comprehensive security program that meets the intentions of the requirements.

Industry standards provide many tools and guidance on assessing security programs. For our
work, we chose an assessment tool that was developed for higher education. The tool assesses
high-level, common security practices. The university scored low in risk management.
Additionally, we contracted with an outside consultant to conduct testing and run a phishing
campaign at the university. This testing identified specific vulnerabilities and showed what
security weaknesses could be exploited if identified by a malicious actor. Our contractor’s work
also identified vulnerabilities where the control structure does not completely mitigate a specific
risk. From testing, the university had two high concerns and five moderate concerns found in
testing. The university’s security program is at a lower maturity level.

Questioned Costs: None identified

Context: The university is comprised of four separate campuses with a combined total
enrollment of 12,764 and 11,915 students during fiscal years 2020 and 2021, respectively. The
table below summarizes the number of students receiving assistance through Title [V-A
programs by campus; the table contains duplicate counts because individual students may qualify
for multiple types of assistance. No students received new Perkins loans during this period;
students with loan balances from prior periods are not included in the table.

Academic Year 2019-20 Academic Year 2020-21

Program Missoula | Butte | Dillon | Helena | Missoula | Butte | Dillon | Helena
Federal Supplemental
Educational Opportunity 1,068 291 176 152 942 258 186 217
Grants
Federal Work-Study Program 579 82 96 32 327 60 77 10
Pell Grants 2,777 604 | 564 585 2,366 533 | 491 524
Direct Loans 4,736 1,611 796 502 4,168 1,431 704 380
TEACH Grants 1 1 1

Total 9,161 2,588 | 1,633 1,271 7,803 2,282 | 1,459 1,131

The university gathers and stores various types of sensitive information electronically related to
students’ education and personal information, employees’ personal information, credit and bank
account information, intellectual property, and personal health information. Personally identifiable
information (PII) can include student names, mothers’ maiden names, social security numbers,
identification numbers, or parent/guardian information.

Effect: The university is not in compliance with federal regulations. Possible outcomes could be
data breaches or ransomware attacks that impact university reputation and could stop the
university from providing services to students.

Cause: The university’s IT division has had multiple changes and temporary staff since 2018.
Management is also responsible for ensuring sufficient resources are available for a security
program, and that roles and responsibilities are clearly defined. Throughout these changes in

20-02
C-88

Montana Legislative Audit Division

management and leadership, responsibilities related to security have not been defined or
documented officially for all security related positions. Key security roles at the university varied
in their level of documentation, including a job description that was being updated, a job posting,
and an inaccurate job description. Without this clarity, the university’s security program lacks
accountability and understanding of expectations in some areas. This also limits enforcement to
ensure staff complete necessary tasks that meet the needs of the security program. The university
has not been able to hire a permanent position to be accountable for a comprehensive security
program either. In recent attempts, they have struggled to bring someone in who is willing to
progress a security program from a low maturity level.

Recommendation:
We recommend the University of Montana:

A. Update and formalize job descriptions for positions that have responsibilities for
developing, maintaining, or supporting the security program, and

B. Complete a comprehensive IT risk assessment that is used to develop strategic initiatives
and the required budget to mature the security program and security awareness.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see Corrective Action
Plan starting on page D-1.
C-89
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-024: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial

Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services

ALN # 93.264, 93.364, 93.925, Student Financial Assistance Programs
Cluster

Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: Great Falls College MSU and MSU-Northern did not have documented controls in
place addressing review requirements for the School Account Statement (SAS) data file Direct
Loan reconciliations and did not retain any documentation demonstrating the reconciliations
were reviewed.

Questioned Costs: None.

Context: Through our testing, we determined all four of the Montana State University campuses
were completing the required reconciliations. However, two of the four did not have documented
internal controls or evidence of reviews being completed.

Effect: Our audit did not identify any material noncompliance, but a lack of documented internal
controls could result in reconciliations not being done or being done inaccurately. Current staff
are aware of the requirement but if there is staff turnover, that knowledge leaves with the person.

Cause: Both campuses have a process in place to complete the reconciliations and keep
documentation of the process, but they were unaware there should be documentation and
evidence that a review was completed.

Recommendation: We recommend the Great Falls College MSU and MSU-Northern document
their internal control process and retain evidence of reviews over Direct Loan reconciliations.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-90 Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-025: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services

ALN # 93.264, 93.364, 93.925, Student Financial Assistance Programs
Cluster

Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: Through our testing, we determined Montana State University (MSU) Bozeman,
MSU Billings, MSU-Northern, and Great Falls College MSU do not have documentation of
review of the Cost of Attendance (COA) calculation performed by someone not involved in the
process of creating it.

Questioned Costs: None.

Context: This condition exists at all four of the MSU campuses. Each campus calculates and
awards individual student financial aid awards based on the institution’s COA and the
individual’s expected family contribution. Although each campus uses slightly different
methodology, the financial aid director at each campus creates the COA using historical costs,
known or estimated tuition and fee increases, averages of meal plans and local rents, as well as
consumer price index increases. A different COA is calculated for the different enrollment
categories such as: resident vs nonresident, off campus vs on campus, graduate, undergraduate,
and full-time vs % time vs 4 time.

Effect: Deficiencies in internal control increase the risk the university may not identify non-
compliance in a timely manner. The large number of COAs at each campus increases the risk
that not all errors in the COA would be identified on a timely basis and may cause students’
Student Financial Assistance amounts to be incorrect.

Cause: University staff indicated they believe their practice is sufficient because any large errors
would be noticed as they would significantly affect the amount of aid students are awarded.
C-91

Recommendation: We recommend each campus of Montana State University document their
internal controls over the calculation of Cost of Attendance.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-92 Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-026: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services

ALN # 93.264, 93.364, 93.925, Student Financial Assistance Programs
Cluster

Grant # Not Applicable

Criteria: Federal regulation, 34 CFR 674.19(e)(4)(ili), requires an institution to return the
original or a true and exact copy of the note marked “paid in full” to the borrower, or otherwise
notify the borrower in writing that the loan is paid in full and retain a copy for the prescribed
period, after the loan obligation is satisfied.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Montana State University (MSU) Northern did not send paid in full letters to Perkins
Loan borrowers when the loan obligation was satisfied, contrary to federal regulations.

Questioned Costs: None.

Context: The MSU Bozeman, MSU Billings, and MSU Northern campuses participate in the
Perkins Loan program. While new loans are no longer made under the program, the three
campuses are still servicing loans. They each contract with a third-party service provider to
perform some of the services and federal record retention requirements of these loans.

We tested a sample of 71 of the approximate 3,500 borrowers with paid in full, cancelled, or
assigned loans status, divided proportionately between the three campuses. This was not a
statistically valid sample. We tested a total of 17 borrowers at MSU Northern and found none of
them received the paid in full letters. Of the three campuses, MSU Northern is the only campus
where we found noncompliance with this requirement.

Effect: MSU Northern is not in compliance with federal regulations for the Student Financial
Assistance cluster. Such noncompliance could result in inaccurate loan records of whether a
loan is still active or fully paid off.
C-93

Cause: MSU Northern staff indicated they thought the service provider was responsible for the
letters. While a contract could not be located to support this, compliance with federal regulations
is ultimately the responsibility of the university.

Recommendation: We recommend that MSU Northern:
A. Develop internal controls to ensure paid in full notifications are sent when a borrower’s
loan obligation is satisfied.
B. Send “paid in full” letters to borrowers after the loan obligation is satisfied in accordance
with federal Perkins loan requirements.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-94

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-027: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: We found that the University of Montana (university) campuses UM Missoula, UM
Western, and Helena College do not have internal controls in place to ensure review and
approval of the cost of attendance (COA) calculations by someone not involved in the process of
creating it. Helena College has a process in place to provide the calculations to various other
campus staff for review, but their review is not documented and thus untestable. Montana Tech
did not have these controls in place for fiscal year 2020, but controls were put in place and
documented beginning in fiscal year 2021.

Questioned Costs: None.

Context: The financial aid director at each campus calculates and awards individual students
financial aid based on the COA at the institution and the individual’s expected family
contribution. The COA is, generally, the total of: tuition and fees; an allowance for books,
supplies, transportation and miscellaneous personal expenses; an allowance for room and board;
where applicable, allowances for costs for dependent care; costs associated with study abroad
and cooperative education; costs related to disabilities; and fees charged for student loans.
Although each campus uses slightly different methodology, they each create the COA using
historical costs, known or estimated tuition and fee increases, averages of meal plans and local
rents, as well as consumer price index increases.

A different COA is created for the different categories of students: resident vs. nonresident, off
campus vs. on campus, graduate, undergraduate, and full-time vs. *%4 time vs. 2 time. The
number of yearly COAs calculated by each campus range from 76 to 294.
C-95

Effect: Without a review and approval process, there is risk the COA calculation may contain
errors and/or may not be adequately supported and cause students to be awarded an incorrect
amount of financial aid. As part of testing, we identified that UM Western did not have support
for three and four of the five elements of the report in the COA calculations for academic years
2019-20 and 2020-21, respectively. Additionally, the total COAs published on the campus
website were $1,020 less than the COA calculated by the campus on the spreadsheets provided to
us as part of the audit.

Cause: Some university staff indicated their current practice is sufficient because any large
errors would be noticed as they would significantly affect the amount of aid students are
awarded.

Recommendation: We recommend:
A. UM Missoula, UM Western, and Helena College implement internal controls as required
by federal regulations to ensure the COA calculations are accurate and supported.
B. MT Tech continue to implement and document their review process over the COA.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-96

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-028: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 34 CFR 668.22(c)(1) outlines how an institution determines a student’s
withdrawal date for the purposes of calculating the amount of the term attended by the student.

Federal regulation, 34 CFR 668.22(c)(4) requires an institution to document a student’s
withdrawal date and maintain the documentation as the date of the institution’s determination
that a student withdrew.

Federal regulations, 34 CFR 668.22(g)(1) and (2) require an institution to return the lesser of the
total amount of unearned Title IV assistance or an amount equal to the total institutional charges
incurred by the student for the period multiplied by the percentage of Title IV grant or loan
assistance that has not been earned by the student, and requires the institutional charges incurred
by the student used in the calculation only be tuition, fees, room and board and other
educationally-related expenses assessed by the institution.

Federal regulation, 34 CFR 668.22(j)(1) requires an institution return the amount of Title IV
funds for which it is responsible as soon as possible but no later than 45 days after the date of the
institution's determination that the student withdrew.

Condition: We identified material weakness in internal controls for multiple instances where the
University of Montana (university) campuses UM Missoula and UM Western did not comply
with the federal regulations for calculating and timely returning unearned student financial aid.

Questioned Costs: There are $5,588 of known questioned costs but likely questioned costs are
projected to exceed $25,000.
C-97

Context: The university calculates and awards individual student’s financial aid based on the
cost of attendance at the institution and the individual’s expected family contribution. The cost of
attendance used to award the aid is based on the student’s enrollment at the beginning of each
term. If a student drops any courses or fully withdraws from the university, their aid must be
adjusted. If a student fully withdraws, either by officially notifying the university or simply no
longer attending classes, federal regulations require each campus to calculate the amount of aid
the student earned for the time they attended. If a student attended less than 60 percent of the
calendar days in a term, they did not earn the full amount of their initially disbursed financial aid,
and federal regulations require the unearned funds be returned to the federal government. We
tested a sample of 54 of the 3,849 students who received aid and subsequently withdrew during
the audit period. This sample was not statistically valid.

UM Missoula: The campus’s process is for one staff member in Student Accounts to
complete the calculation of the aid to be returned. If the calculation indicates a portion of the
student’s aid must be returned, a second staff member in Student Accounts reviews and
approves the calculation. If the calculation indicates no aid must be returned, this review and
approval does not occur. After Student Accounts staff complete the calculation, Financial
Aid staff are responsible for adjusting the student’s Banner account and Business Services
staff are responsible for returning the funds to the Department of Education (ED). Based on
our review of the campus’s processes and the results of our sample testing, we identified the
following areas of internal control deficiencies and noncompliance:

e For instances where the initial return calculation indicates the student has attended at
least 60 percent of the semester, and thus earned 100 percent of their aid, the campus
does not have controls in place to verify the accuracy of the calculation. We tested
18 students whom staff determined had attended 60 percent or more of the semester and
did not identify any instances where the determination was incorrect. While we did not
identify any resulting noncompliance for these students, the university should have a
process in place to verify the initial calculations as an error at this stage could result in
the campus not returning federal funds as required.

e For three students reviewed in the sample, the university’s controls did not ensure the
calculation of funds to return was correct. For these instances, staff used an incorrect
withdrawal date to determine how much of the semester the students attended, and the
review process did not identify the errors.

e The campus also does not have sufficient internal controls to ensure the aid is returned to
ED timely once it has been calculated. We identified one instance where the campus
completed the return 96 days after the student notified the campus of their withdrawal
instead of within the 45 days required. We also identified two instances where the
campus did not complete the return process once the amount had been calculated.

UM Western: The campus does not have sufficient internal controls to ensure the amount of
aid to be returned was calculated correctly. Staff use a calculation form on the Common
Origination and Disbursement (COD) system to determine the amount of funds to be
returned. The entire process is completed by a single staff member, without review and
approval by another staff person. We identified the following errors in the calculations,
indicating internal controls should be enhanced:

20-02
C-98

Montana Legislative Audit Division

e We identified one instance where the campus used an incorrect tuition amount in the
calculation and thus miscalculated the amount of aid to be returned by $75.13. However,
the campus ultimately returned the correct amount.

e We identified one instance where the campus used an incorrect withdrawal date in the
calculation. However, the campus ultimately returned the correct amount.

e We also identified one instance where the campus was unable to provide support for a
student’s last day of attendance. As such, we were unable to determine whether the
amount of funds returned was appropriate.

Effect: The university is not in compliance with federal regulations for the Student Financial
Assistance programs. Additionally, without maintaining supporting documentation for key items
in the calculation, such as the last date of attendance, the campus cannot demonstrate compliance
with federal regulations.

Cause: UM Missoula staff stated they stop the return process once they have determined a
student has attended at least 60 percent of the semester, so these items never make it to the
review portion of the process discussed above. Additionally, campus staff believe the items
above were the result of an employee not completing assigned job duties who was ultimately
relieved of those duties. The employee worked in the position from December 2019 through
early January 2021.

UM Western staff believed the use of the COD form to complete the calculation was sufficient
internal controls to ensure the calculation is correct.

Recommendation: We recommend:
A. UM Missoula enhance internal controls to ensure the amount of financial aid to be
returned is calculated correctly and the aid is returned to ED timely.
B. UM Western implement internal controls to ensure the amount of financial aid to be
returned is calculated correctly and supporting documentation is maintained.
C. UM Missoula and UM Western comply with the federal requirements governing the
return of Title IV funds process.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-99

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-029: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303(a) requires non-Federal entities to establish and
maintain effective internal control over the Federal award that provides reasonable assurance that
the non-Federal entity is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.

Federal regulation, 34 CFR 685.309(b) requires schools participating in the Direct Loan program
to complete an enrollment reporting process outlined by the Secretary of Education.

Federal regulation, 34 CFR 690.83(b)(2) requires institutions participating in the Pell grant
program to submit reports and information required by the Secretary of Education in accordance
with established deadlines.

The National Student Loan Data System Reporting Guide, Section 5.1, issued November 2020,
requires schools to certify enrollment data at least every 60 days by receiving the Roster file,
responding within 15 days and correcting errors within 10 days.

Condition: To assist the Department of Education (ED) in administering the Pell Grant and
Direct Loan Programs, each campus is required to complete student enrollment reporting
throughout the year. Student enrollment information is housed in a central, federal database by
ED: the National Student Loan Data System (NSLDS). Periodically, NSLDS provides a roster
file of enrollment information for students who received Pell grants or Direct Loans to the
campuses. Each campus must review, update, and verify student enrollment statuses, program
information, and effective dates within 15 days of receiving the file. The University of Montana
campus UM Missoula did not complete the required enrollment reporting for over 200 students
receiving student financial aid, in violation of federal regulations. Given the number of students
and range of grade levels affected, this is a material weakness in internal controls.

Questioned Costs: None.

Context: Although ultimately responsible for the reporting, all of the campuses use a third-party
organization, the National Student Clearinghouse (clearinghouse), to complete the reporting.

20-02
estima Montana Legislative Audit Division

Campus staff extract the current enrollment information from Banner via standard reports and
review it for errors and students who should not be included. Staff then send the report to the
clearinghouse, who matches it up to the roster file provided by ED and sends it back to NSLDS.
If errors or inconsistencies are identified by NSLDS, they provide an error file that must be
corrected and resubmitted within 10 days.

As part of our testing, we completed a sample of 69 students across the University of Montana’s
(university) four campuses, who received Pell grants or Direct Loans during the audit period
across all campuses. Of the sampled students, 37 were at UM Missoula. This sample was not
statistically valid and identified errors in the enrollment reporting for two students at UM
Missoula. Through follow-up testing, we identified deficiencies in UM Missoula’s enrollment
reporting process and significant noncompliance with the federal reporting requirements, as
outlined below:

e Dual Enrollment Students: Eligible Montana high school students can take college
courses for credit for free or at a reduced cost at any campus in the Montana University
System. At UM Missoula, these students are identified in Banner using a specific
attribute code. As part of the enrollment reporting process, staff filter out students with
the dual enrollment attribute code as they are not eligible to receive federal financial aid
and are thus not entered in NSLDS. During our testing, we determined the dual
enrollment code was not being updated in Banner for students who became regularly
enrolled after participating in the dual enrollment program. There were 147 students with
this inaccurate code ranging from freshmen to doctoral students. Of these students, 28
received Pell grants or Direct Loans during the audit period, and thus should have been
included in the enrollment reporting to NSLDS. Given the range of grade levels affected,
this is a systemic internal control deficiency.

e Missing Social Security Numbers (SSN): Students are not required to provide SSNs as
part of the admissions application process. Providing SSNs is, however, required to
receive federal financial aid and SSNs are provided as part of the student’s Free
Application for Federal Student Aid (FAFSA) application process. When a student
provides the SSN as part of the FAFSA but not the admissions application, their SSN is
only housed in the financial aid Banner data. As of spring semester 2021, there were
approximately 1,400 students enrolled at UM Missoula who had not provided their SSN
as part of the enrollment application. When staff run the extract process for the
enrollment reporting, the financial aid data is not included as the reporting is specific to
enrollment data. Student’s SSNs are used only as an identifier to match campus student
records to the NSLDS student records. The SSNs themselves are not required to be
reported to NSLDS. As a result, these students with no SSNs in the enrollment Banner
data are flagged by the clearinghouse and returned to campus staff as potential errors or
students who do not need to be reported. Because the errors are not resolved, these
students are not reported to NSLDS by the clearinghouse. Of the 1,400 students with no
enrollment SSN, 173 received Pell grants or Direct Loans during the audit period, and
thus should have been included in the enrollment reporting to NSLDS.
C-101

Effect: By not reporting these 201 students, UM Missoula is not in compliance with the federal
requirements and is at risk of being fined by ED for their administration of the Pell Grant
program. Additionally, it is like they are not enrolled at all from ED’s perspective.

Cause: During our testing, we determined the dual enrollment attribute code was not being
updated in Banner for students who became regularly enrolled after participating in the dual
enrollment program. For the missing SSNs, UM Missoula staff do not resolve these errors when
they are flagged by the clearinghouse because it is not required to be reported to NSLDS and
they want to instead focus their time on resolving errors in the information that is required to be
reported.

Recommendation: We recommend UM Missoula improve internal controls to ensure all
required students are reported to NSLDS and comply with the federal requirements governing
the enrollment reporting process.

Views of Responsible Officials: The university concurs with this recommendation. For additional
information regarding the university’s planned corrective action see the Corrective Action Plan
starting on page D-1.

20-02
esliyae Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-030: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 34 CFR 685.300(b)(5), requires institutions to reconcile institutional records
with Direct Loan funds received from the Secretary and the disbursement records submitted to
and accepted by the Secretary on a monthly basis.

Federal regulation, 34 CFR 668.24(c)(1)(vi), requires institutions to maintain records for the
reports and forms used in its participation in a title [V, HEA program, and any records needed to
verify data that appear in those reports and forms.

Federal regulation, 34 CFR 668.24(e)(2)(ii), requires institutions to keep records relating to its
participation in the FFEL or Direct Loan Program, including records of any other reports or
forms, for three years after the end of the award year in which the records are submitted.

Condition: The University of Montana (university) did not complete all federally required
monthly reconciliations for the Direct Loan Program during the audit period. The university’s
controls over these monthly reconciliations are not sufficient to ensure the required monthly
Direct Loan reconciliations are completed, accurate, and any differences are followed up on in
compliance with the federal regulations.

Questioned Costs: None.

Context: Campuses calculate and award individual students Direct Loan awards based on the
cost of attendance (COA) at the institution and the individual’s expected family contribution.
Once accepted, these loans are applied to the students’ bills and any excess is disbursed directly
to students. The university is then required to report these disbursements to the Department of
Education (ED) via the Common Origination and Disbursement (COD) System within 15 days
of applying to the students’ accounts. Each month, the COD system provides institutions with
C-103

School Account Statement (SAS) data files consisting of financial information related to the
Direct Loan disbursements. Institutions are required to reconcile these files to their financial
records monthly.

We completed a sample of three reconciliations at each campus. This sample was not statistically
valid. We identified the following:

e UM Missoula: The campus was missing reconciliations for five of the 24 months in
fiscal years 2020 and 2021. The campus maintained some supporting documentation for
the reconciliations, but not enough to fully tie them back to support for the three
reconciliations we sampled. UM Missoula also had a difference of $910 noted on the
reconciliation from January through June 2021 with no documentation of any follow-up
being performed. Because a reconciliation process involves both comparing amounts and
then following up on any differences, when unresolved differences exist it indicates the
campus did not fully complete the process.

e UM Western: The campus did not complete any of the required monthly reconciliations
during fiscal years 2020 and 2021.

e MT Tech: The campus did not complete the June 2021 monthly reconciliation and did
not have supporting documentation for the other 23 reconciliations completed during
fiscal years 2020 and 2021. The campus also had a difference of $982 noted on the
reconciliations for February, March, and April of 2020. As noted earlier, when
unresolved differences exist it indicates the campus did not fully complete the process.

e Helena College: The campus did not complete any of the required monthly
reconciliations during fiscal years 2020 and 2021.

Effect: By not completing the required monthly reconciliations and maintaining the supporting
documents, the university has violated one of the requirements in their program participation
agreements with ED and is not in compliance with federal regulations for the Student Financial
Assistance program.

Cause: Some university officials indicated that due to limited staff resources, the reconciliations
are not always a priority; instead, they focus on activities directly impacting students.
Additionally, for UM Missoula, the campus staff stated the staff member responsible for these
reconciliations retired and thus they were unsure why the differences were not followed up on
and where any remaining supporting documentation was located. UM Western campus staff
stated they were not aware they needed to complete these monthly reconciliations. MT Tech
campus staff indicated the difference was due to a computer issue and they worked closely with
their software provider to investigate and resolve the difference. However, as the work was not
documented, we were unable to confirm. The campus staff further stated that the June 2021
reconciliation might not have been saved because no differences were identified. However, in
our testing, we observed other monthly reconciliations with no differences saved during the audit
period. Helena College campus staff stated the previous employee responsible for these
reconciliations left abruptly in January 2020 and did not leave behind any documentation of
processes or completed reconciliations. The current staff is developing a process to complete the
reconciliations in the future.

20-02
esta Montana Legislative Audit Division

Recommendation: We recommend UM Missoula, UM Western, Helena College, and MT
Tech:
A. Implement internal controls to ensure the required monthly Direct Loan reconciliations
are completed, accurate, supported, and any differences are followed up on in compliance
with the federal regulations, and

B. Comply with federal requirements governing the Direct Loan Program by reconciling the
SAS data files monthly.

Views of Responsible Officials: The university concurs with this recommendation. For

additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-105

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-031: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial

Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 34 CFR 674.19(d)(2), requires, for the Federal Perkins Loan Program,
institutions to submit the Fiscal Operations Report and other information required by the
Secretary and to insure the information reported is accurate.

Federal regulation, 34 CFR 675.19(b)(3), requires, for the Federal Work-Study Program,
institutions to submit the Fiscal Operations Report and other information required by the
Secretary and to insure the information reported is accurate.

Federal regulation, 34 CFR 676.19(b)(3), requires, for the Federal Supplemental Educational
Opportunity Grant Program, institutions to submit the Fiscal Operations Report and other
information required by the Secretary and to insure the information reported is accurate.

Federal regulation, 34 CFR 668.24(e)(1)(1), requires institutions to keep the Fiscal Operations
Report and Application to Participate (FISAP) in the Federal Perkins Loan, Federal Work-Study,
and Federal Supplemental Educational Opportunity Grant Programs (FSEOG) and any records
necessary to support the data contained in the FISAP for three years after the end of the award
year in which the FISAP was submitted.

Condition: Internal controls over completing the Fiscal Operations Report and Application to
Participate (FISAP) reports were insufficient to ensure the reports submitted were complete and
accurate at the University of Montana (university) campuses UM Western and Helena College,
as required by federal regulations.

Questioned Costs: None.

20-02
C-106

Montana Legislative Audit Division

Context: Each campus is required to complete the FISAP yearly for its campus-based programs.
The institution uses the Fiscal Operations Report portion of the FISAP to report its expenditures
and students served in the previous award year and the Application to Participate portion of the
FISAP to apply for funding for the following year.

As outlined in the table below, our testing identified instances of incorrect or unsupported line
items in the FISAP reports reviewed.

Instances of Incorrect or Unsupported Line Items

Campus Incorrect Unsupported
UM Western 8 12
Helena College 0 138

Effect: By not accurately completing and keeping the required support for the FISAP reports,
the campuses have violated one of the requirements in their program participation agreements
with the U.S. Department of Education and are not in compliance with the federal regulations for
the Student Financial Assistance program.

Cause: Helena College staff stated they were not aware they needed to keep the supporting
documents for these reports. UM Western staff stated the report preparation process was manual
and prone to mistakes and other counting errors.

Recommendation: We recommend UM Western and Helena College:

A. Implement internal controls to ensure the Fiscal Operations Report and Application to
Participate (FISAP) reports submitted are accurate and supported in compliance with the
federal regulations, and

B. Comply with federal requirements governing the Federal Perkins Loan, the Federal
Work-Study, and Federal Supplemental Educational Opportunity Grant programs by
accurately completing the FISAP reports and maintaining the required supporting
documentation.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-107

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-032: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial

Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 34 CFR 674.19(e)(3)(i1) requires an institution to retain repayment records,
including cancellation and deferment requests for at least three years from the date on which a
loan is assigned to the Secretary, canceled or repaid.

Federal regulation, 34 CFR 674.19(e)(4) requires an institution to keep the original promissory
notes and repayment schedules until the loans are satisfied.

Federal regulation, 34 CFR 674.19(e)(4)(iii) requires after the loan obligation is satisfied, an
institution to return the original or a true and exact copy of the note marked “paid in full to the
borrower, or otherwise notify the borrower in writing that the loan is paid in full, and retain a
copy for the prescribed period.”

Condition: University of Montana (university) campuses UM Missoula, UM Western, and MT
Tech participate in the Perkins Loan Program. While new loans are no longer made under the
program, the three campuses still service outstanding loans. Our testing identified multiple
instances where the campuses did not comply with federal regulations to retain cancellation and
deferment requests, repayment schedules, and notification to the borrower the loan obligation is
paid in full.

Questioned Costs: None.

Context: We tested a sample of 65 borrowers with loans in repayment or deferment status out
of a population of 2,196 and a sample of 61 borrowers with paid in full, canceled, or assigned
loans status out of a population of 1,127. Neither sample was statistically valid. We identified
significant noncompliance and systemic internal control issues related to retaining records as
described below:

20-02
C-108

Montana Legislative Audit Division

e UM Missoula: We identified 22 loans where the campus was unable to provide
documentation that the written “paid in full” notification was sent. Per Student Accounts
staff, they stopped sending the notification in January 2021 due to limited staffing
resources due to the COVID pandemic and instead focused on higher priority work.
Fourteen of the loans we identified fell after this decision. However, the remaining eight
occurred before and staff indicated the notifications were sent but they were unable to
find them during our testing.

e UM Western: We identified four loans where the campus was unable to provide
cancellation or deferment requests and three loans where they could not provide
documentation that the written “paid in full” notification was sent.

e MT Tech: We identified five loans where the campus was unable to provide the
repayment schedule and seven loans where they could not provide documentation that the
written “paid in full” notification was sent.

Effect: The UM Missoula, UM Western, and MT Tech campuses are not in compliance with
federal requirements related to records retention. Also, by not completing the “paid-in-full”
notifications, there is the potential for borrowers to continue paying on satisfied loans, resulting
in the university having to issue refunds.

Cause: As noted above, UM Missoula stopped sending the notification in January 2021 due to
limited staffing resources due to the COVID pandemic and instead focused on higher priority
work. Additionally, for the missing letters prior to this decision, they were not sure why the
letters weren’t filed in the student files, but it could be because they are behind with filing and
the office is moving.

Both UM Western and MT Tech staff indicated the reason they were unable to provide the
necessary documents during our testing was because their third-party servicer completed them.
UM Western staff stated they were unable to retrieve them from the servicer’s system. MT Tech
staff stated the missing repayment schedules were not transferred when they switched servicers.
For the written “paid in full” notifications, the servicer does not keep copies of these letters but
rather considers memos on the borrower’s account in their system to suffice as documentation.
Additionally, the servicer indicated there were two borrowers who did not have the letters sent at
all and they are unsure why. However, as the ultimate responsibility for complying with the
federal regulations belongs to the university, this is noncompliance. Additionally, the federal
regulations are clear the documents themselves need to be retained, not just an indication in a
system that they were completed.

Recommendation: We recommend:

A. UM Missoula comply with the federal requirements to notify the borrower in writing that
the loan is paid in full and retain a copy for the prescribed period.

B. UM Western comply with the federal requirements to retain cancellation and deferment
requests and written notification to the borrower that the loan is paid in full for the
prescribed period.

C. MT Tech comply with the federal requirements to retain repayment schedules and written
notification to the borrower that the loan is paid in full for the prescribed period.
C-109

D. UM Missoula, UM Western, and MT Tech implement internal controls to ensure
compliance with the record retention requirements for Perkins Loans.

Views of Responsible Officials: The university concurs with this recommendation. For
additional information regarding the university’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
osbtigee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-033: U.S. Department of Education
ALN # 84.007, 84.033, 84.038, 84.063, 84.268, 84.379, Student Financial
Assistance Programs Cluster
Grant # Not Applicable

U.S. Department of Health and Human Services
ALN # 93.342, Student Financial Assistance Programs Cluster
Grant # Not Applicable

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Per the Office of Management and Budget 2021 compliance supplement for the Student
Financial Assistance Program Cluster, page 5-3-52, when an institution uses a third party
servicer for its Perkins Loan program, the institution must perform due diligence to ensure the
third party servicer is in compliance with the requirements for the functions the third party
services is performing for the school.

Condition: The campuses do not monitor their Perkins Loan servicer and are in noncompliance
with the federal requirement to monitor their Perkins Loan servicer.

Questioned Costs: None.

Context: University of Montana (university) campuses UM Missoula, UM Western, and MT
Tech participate in the Perkins Loans Program. While new loans are no longer made under the
program, the three campuses still service outstanding loans. Each campus contracts with a third-
party to perform some of the servicing and record retention federal requirements for the Perkins
Loans they are still servicing, as outlined in the table on the following page:
C-111

Contracted Perkins Loans Service by Campus
Key Compliance Requirement UM Missoula MT Tech UM Western

Creating and retaining borrower
repayment schedules. v v

Processing and maintaining borrower Y Y Y

repayment records.

Processing and maintaining borrower Y Y Y

cancellation and deferment requests.

Providing “paid-in-full” notice to
borrowers. v v

Although contracting with a third-party is allowed, the ultimate responsibility for these
requirements still lies with the university. Additionally, the Department of Education requires the
campuses to perform due diligence to ensure their servicer is in compliance with the
requirements for the pieces it is performing for the school. This due diligence could take many
forms, including, but not limited to, the items we’ve suggested below.

° Service Organization Controls (SOC) Report review: A SOC I Type II report
is used to evaluate the design and operating effectiveness of the contractor’s internal
controls over achieving compliance requirements. This report focuses on controls at the
service organization that are useful to user entities and their auditors and is an efficient
way for the campuses to monitor the loan servicer. The loan servicer does receive a SOC
report and makes it available to clients, however none of the campuses currently review
it. This leaves them at risk of being unaware of system issues affecting the services it
receives and not implementing all of the necessary compensating user entity controls.

° Compliance Audit Report review: Some contractors who perform services for
federal programs receive a compliance audit.

° Loan records review: Campus staff could perform a review of the
documentation for a selection of borrowers to ensure all the required items are present.

Effect: By not performing any due diligence over their third-party loan servicer, the university
is not only in noncompliance with the requirement to do so, but also was not aware of the
noncompliance with the Perkins Loans record retention federal requirements as discussed in
recommendation number 2021-032.

Cause: Per campus staff, they were not aware they needed to perform monitoring of their
contractor beyond their normal day-to-day contacts.

Recommendation: We recommend UM Missoula, MT Tech, and UM Western implement
internal controls to ensure they perform due diligence over their Perkins Loans servicer and
comply with the federal requirements governing Perkins Loans.

20-02
(otha Montana Legislative Audit Division

Views of Responsible Officials: The university concurs with this recommendation. For additional

information regarding the university’s planned corrective action see the Corrective Action Plan
starting on page D-1.
C-113

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-034: Various Federal Agencies*
ALN # Various*, R&D Cluster
Grant # Not Applicable

Criteria: Federal regulation 2 CFR 200.313(b) requires that a state must use, manage and
dispose of equipment acquired under a Federal award by the state in accordance with state laws
and procedures.

Federal regulation 2 CFR 200.303 requires non-Federal entities to, among other things, establish
and maintain effective internal control over the Federal award that provides reasonable assurance
that the non-Federal entity is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.

Montana Operations Manual Policy 335 (V)(A)(1) requires all major equipment be identified in
the manner that promotes easy identification and requires property tags be placed in plain sight
on the equipment. While state policy does allow some discretion based on the physical nature of
some equipment for situations where property tags may not be feasible, it does require that
“whenever possible, the tag number will still be identified on the item by some means such as
etching, decal, indelible ink, etc.”

Condition: The University of Montana’s (university) internal controls are not sufficient to
ensure equipment purchased with federal Research and Development (R&D) funds are tagged as
required by federal requirements.

Questioned Costs: None.

Context: During fiscal years 2020 and 2021, the university purchased approximately
$3.5 million of equipment through the R&D Program.

We sampled ten equipment purchases during the audit period out of approximately

111 equipment purchases over $5,000, to determine whether the assets were tagged and easily
identifiable, as required by state policy. This was not a statistically valid sample. For eight of the
items selected, there were no property tags or other permanent identification affixed to the assets
that corresponded to university property records. As such, the assets were not easily identifiable
by state policy, and we were unable to confirm the assets we observed were those purchased by
the federal grant funds. For all eight items, we believe tagging or labeling of the assets was
feasible. The items not tagged included network servers, weather stations, cameras, and traveling
museum equipment with costs ranging from $5,054 to $69,347.

20-02
(oSble Montana Legislative Audit Division

While completing this work, we visited the data center used to house network servers and
estimate asset tag numbers were present on only 5 percent of installed units. Additionally, while
looking for a high-speed camera at a field station, we observed three other high-speed cameras,
none of which had asset tags. Both locations contained visibly identical equipment and university
personnel struggled or were unable to differentiate them.

Effect: Equipment tagging is necessary to maintain an accurate physical inventory and to
facilitate timely identification of lost or missing equipment. In addition, for equipment purchased
using federal funds, there are added requirements related to asset disposals. The primary asset
disposal requirement is the university must obtain disposition instructions from the federal
awarding agency.

Cause: One university personnel responsible for some of the equipment we tested indicated they
did not know the process for obtaining asset tags and conceded that although some equipment is
difficult to tag without interfering with its function, labeling the equipment is still necessary and
possible. We believe the results of our testing indicate university internal controls for tagging of
equipment are not adequate.

Recommendation: We recommend UM Missoula implement internal controls to ensure all
equipment is tagged and comply with federal requirements governing equipment for the
Research and Development Program.

Views of Responsible Officials: The university concurs with this recommendation. For additional
information regarding the university’s planned corrective action see the Corrective Action Plan
starting on page D-1.

* - See Appendix A
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-035: U.S. Department of Education
ALN # 84.010, Title I Grants to Local Educational Agencies
Grant # SO10A190026-19A, GAN_S010A200026-20A

ALN # 84.027, 84.173, Special Education Cluster (IDEA)
Grant # H027A200096, H173A200099, H027A 190096, H173A190099

ALN # 84.425D, Education Stabilization Fund Under the Coronavirus
Aid, Relief, and Economic Security Act
Grant # S425D200006 and S425D210006

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 2 CFR 200.331, requires the Office of Public Instruction (OPI) to do the
following in relation to the monitoring of their subawards:
e Clearly identify award information to subrecipients at the time the award is granted.

e Evaluate each subrecipient’s risk of noncompliance to determine the appropriate
monitoring.

e Review subrecipients’ audits, including following up on all deficiencies.

e Issue management decisions for any deficiencies identified in subrecipients’ audit
reports within six months of the Federal Audit Clearinghouse’s acceptance of the audit
report. The regulation also requires OPI to follow 2 CFR 200.521, which requires these

management decisions to contain specific elements, including a timetable for follow-up.

This federal regulation was renumbered to 2 CFR 200.332 during the audit period.

Condition: OPI did not perform all required subrecipient monitoring for federal programs
selected for testing, so subrecipient monitoring controls should be improved.

Questioned Costs: None.

Context: In our prior audit report, we recommended OPI enhance internal controls related to
subrecipient monitoring and comply with subrecipient monitoring requirements for a variety of
federal programs. Although OPI implemented new procedures in response to our audit finding,
we continued to find control and compliance issues related to subrecipient monitoring
requirements, as outlined below.

20-02

C-115
C-116

Montana Legislative Audit Division

Subaward Disclosures:

OPI did not ensure required disclosures were made to the subrecipients. Through a statistically
valid sample, we tested grant award documents for 35 of 841 local educational agencies (LEAs).
We identified missing elements related to grants for Title I, Elementary and Secondary School
Emergency Relief (ESSER), and IDEA. Examples of missing elements are clear identification of
the award as a subaward, the federal award date, and the identification of whether the award is a
research and development program. Since the grant award documents are compiled
automatically in OPI’s grant system, we expect any missing elements to impact all grant awards.

Risk Assessments:

During fiscal year 2020, personnel reviewed the audits and considered financial findings in their
risk assessment process but did not consider federal findings. Improvements were made in fiscal
year 2021, because risk of noncompliance was considered in the overall risk assessment process.
However, federal program personnel did not always rely on these centralized monitoring
activities, so the federal programs were not always considering Federal Single Audit findings
when determining appropriate subrecipient monitoring.

As part of our audit, we conducted three separate samples; a statistically valid sample for the
IDEA federal award and separate non-statistically valid samples for each the ESSER and Title I
federal awards. In our audit procedures, including the samples, we identified the following
issues in the fiscal year 2021 risk assessments:
* For Title I and ESSER, OPI did not use the office-wide risk assessments to determine the
appropriate monitoring.
o Subrecipients identified as high risk overall were not necessarily considered high
risk by Title I program staff.
oA post-expenditure monitoring plan has not yet been developed for ESSER. There
was a plan during the first round of payments, but OPI determined the plan was not
sustainable.
* For IDEA, OPI adjusted their monitoring level for some subrecipients based on increased
risk of federal noncompliance but did not document their additional monitoring.
¢ For ESSER, OPI did not always document the basis for the LEA’s risk assessment. This
occurred in 11 out of 60 cash draws tested.

Management Decisions:
During fieldwork, we reviewed OPI’s management decision letters to determine compliance
with these federal regulations.

From our testing:

e We could not always determine when the management decision letters were
sent out because the template document automatically updated to the current
date. This occurred in 3 of the 44 IDEA LEAs tested and 3 of the 60 ESSER
LEAs tested. The IDEA sample was statistically valid with a population of
841. The ESSER sample was not statistically valid and had a population of
898.
C-117

e Management decisions did not always contain a timetable for follow-up as
required by federal regulations. This occurred in 7 of the 60 ESSER LEAs
cash draws tested.

Repeat Finding: Montana’s Single Audit for the two fiscal years ended June 30, 2019, included

a recommendation (#2019-032) to OPI to implement internal controls to ensure compliance with

federal subrecipient monitoring requirements and to comply with federal subrecipient monitoring
requirements.

Effect: Overall, OPI is not in compliance with federal regulations related to subrecipient
monitoring. Monitoring is important, because without it:

e OPI may not properly notify subrecipients of applicable federal requirements,
e OPI may not be aware of all risky areas for non-school entities,

e Subrecipients may not understand their responsibilities over the federal grant and
may not comply with all federal requirements, and

e Federal money could be misspent.

These compliance issues indicate OPI did not have adequate controls in place over subrecipient
monitoring in either fiscal year 2020 or 2021.

Cause: Per OPI staff, they were adjusting their subrecipient monitoring process during fiscal
year 2020 and didn’t get the new process put in place until fiscal year 2021. We also believe the
subrecipient monitoring compliance issues happened because there is confusion over the new
process’s implementation: what elements of subrecipient monitoring are centralized and what
elements are completed by federal program staff. The impacts of COVID-19 and implementing
the new ESSER federal program also contributed to confusion on how to implement the prior
audit recommendation.

Recommendation: We recommend the Office of Public Instruction:

A. Continue to implement internal controls to ensure compliance with federal subrecipient
monitoring requirements by documenting an office-wide subrecipient monitoring plan,
and

B. Comply with federal subrecipient monitoring requirements.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
OSbERame Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-036: U.S. Department of Education
ALN # 84.425D, Education Stabilization Fund Under the Coronavirus
Aid, Relief, and Economic Security Act
Grant # S425D200006 and S425D210006

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Coronavirus Aid, Relief, and Economic Security (CARES) Act section 18003(d) requires
Elementary and Secondary School Emergency Relief (ESSER) grant funds be used for pandemic
related expenditures. Further, federal regulation 2 CFR 200.439 requires equipment purchases
have prior approval from the US Department of Education or the pass-through entity.

Federal regulation, 2 CFR 200.334, requires states retain records for audit purposes.

Condition: We found the Office of Public Instruction (OPI) did not require sufficient
documentation to ensure subrecipients were complying with federal program requirements.

Questioned Costs: We question the unsupported cash requests totaling $460,154. We believe
additional questioned costs may exist.

Context: We tested a random sample of 60 ESSER payments to local educational agencies
(LEAs). This was not a statistically valid sample. The population was 898 cash requests. We
identified the following issues in the testing:

° Twelve application budgets had insufficient detail to support how funds would be spent
on allowable purchases under the subaward. The budgets included salaries, benefits,
transportation, and supplies. These descriptions are not specific enough for OPI to
determine whether the spending is allowable under ESSER requirements.

° OPI used spreadsheets to calculate ESSER allocations by LEA based on Title I
distributions and other factors determined by OPI. We compared the allocations on the
spreadsheet to the actual amount in OPI’s grant system to see if LEAs received the
intended amount. We found 15 differences for a net amount of $121. No documentation
exists on the reasons for the adjustments. Staff noted the person who adjusted the
calculation no longer works for OPI.

e Sixteen cash requests, totaling $460,154, either contained insufficient detail to
demonstrate the funds were spent in accordance with ESSER regulations, or could not
be tied back to the approved budgets. The requests included broad categories such as
C-119

salaries, benefits, and supplies, or a teacher’s name without detail in the budget or cash
request to demonstrate how the teacher’s salary or benefits related to the coronavirus
pandemic. Additionally, one equipment line had a budget of “transportation” without
the detail of what would be purchased, but the cash request was for a bus totaling
$25,000. Equipment purchases over $5,000 are required to have prior approval. Thus,
we considered the purchase unallowable.

OPI started requiring more documentation in their cash requests for the second and third
allocations of ESSER funds. OPI has the opportunity to finalize their post expenditure
monitoring plan in addition to reviewing cash requests. This is important as most of the spending
is happening in the future.

Effect: The lack of effective internal controls resulted in OPI’s inability to detect and prevent
noncompliance for fiscal years 2020 and 2021 for subrecipient activity. LEAs may have spent
ESSER funds on items not allowed by federal requirements.

Cause: Per OPI staff, this issue occurred because the federal government had not finalized
program requirements when they issued the first round of money. We agree federal ESSER
program requirements changed, but the requirement to have controls to provide reasonable
assurance LEAs comply with federal requirements is not new. OPI needs more information to
meet their monitoring responsibilities, no matter how ESSER requirements change. In addition,
there were two different ESSER program managers in place during the audit period and the
position was a vacant position during our fieldwork. We believe this contributed to difficulties
running the ESSER program.

Recommendation: We recommend the Office of Public Instruction:
A. Strengthen internal controls to ensure ESSER subrecipient grant expenditures are
allowable under the program.
B. Review and evaluate ESSER subrecipients budgets and cash requests and, where
appropriate, obtain additional support or recoup improperly spent funds.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
(os btimee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-037: U.S. Department of Education
ALN # 84.425D, Education Stabilization Fund Under the Coronavirus
Aid, Relief, and Economic Security Act
Grant # S425D200006, Educational Stabilization Fund Program.

Criteria: Federal regulation, 2 CFR 200.328 and 329(a) and (b), requires the non-Federal entity
report financial and performance information as required by the terms and conditions of the
Federal award.

Assertion L, Annual Reporting of the compliance supplement for Elementary and Secondary
School Emergency Relief (ESSER) funds lays out the required reporting elements as:

e Overall ESSER I and ESSER II Fund Grant for state education agency (SEA);
e SEA Reserve (up to 10 percent of total allocation);

e Mandatory Subgrants to local educational agencies (LEAs), Section 18003(c) of the
Coronavirus Aid, Relief, and Economic Security (CARES) Act and Section 313(c) of the
Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act (at least
90 percent of the ESSER Fund grant);

e Student Participation and Engagement; and
e Full-Time Equivalent (FTE)Positions

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Office of Public Instruction’s (OPI) internal controls were ineffective in
detecting and preventing noncompliance for fiscal year 2021, when the report ESSER annual
report was submitted.

Questioned Costs: None.

Context: The Federal Department of Education required annual reporting of the use of ESSER
expenses starting in fiscal year 2021. OPI gathered most of the information in the report by
surveying LEAs. They used their grant tracking system for information on total expenditures.
OPI submitted the ESSER report twice, and we found the following errors in the required
elements in the updated ESSER report:
C-121

e OPI reported overall dollar amounts of ESSER I and ESSER II funds granted to OPI and
reserves (up to 10 percent of total allocation), but they did not include how the “reserve”
was awarded or expended as required.

e Amounts subgranted to LEAs were inaccurate. At least $1.5 million in subgrants were
unreported.

e ESSER I expenditures are not consistent in the report. The total expenditures disbursed to
LEAs is $2.7 million through September 3, 2020, but the detail of how the expenditures
were spent as reported by LEAs total $5.8 million. The dollar amounts should match.

e FTE positions were inaccurately reported (there were 48 LEAs with no reported FTE).

Effect: Because of the number of errors found, we determined OPI’s internal controls were
ineffective in detecting and preventing noncompliance for fiscal year 2021, when the report was
submitted.

Cause: According to OPI personnel, OPI had difficulties reporting ESSER information
accurately, because the required data elements were unclear or changed several times right up to
the reporting deadline.

Due to the fluid requirements, it was difficult for OPI to obtain information from the school
districts. OPI surveyed school districts to obtain some information, but some schools reported
inaccurate information. We agree that the changes in requirements made reporting difficult, but
OPI should consider using their grants or accounting systems when possible going forward.

Recommendation: We recommend the Office of Public Instruction:
A. Enhance internal controls to ensure ESSER annual reports are accurate and supported.
B. Correct and resubmit the ESSER annual report.
C. Ensure ESSER annual reports include all required data elements and those elements are
fully supported as required by federal regulations.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
(o5b44ee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs
Finding 2021-038: U.S. Department of Education
ALN # 84.425D, Education Stabilization Fund Under the Coronavirus
Aid, Relief, and Economic Security Act
Grant # S425D200006

ALN # 84.010, Title I Grants to Local Educational Agencies
Grant # S010A200026

Criteria: Federal regulation, 2 CFR 170 Appendix A(I)(a)(2)(ii), requires the subaward to be
reported no later than the end of the month following the month in which the obligation was
made.

Federal regulation, 2 CFR 170.220(b), requires any subaward equal to or exceeding $30,000 to
be reported.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Office of Public Instruction (OPI) had no internal controls to ensure compliance
with the Federal Funding Accountability and Transparency Act (FFATA) reporting requirements
for Elementary and Secondary School Emergency Relief (ESSER) I and Title I subawards.

Questioned Costs: None.

Context: Through nonstatistical sampling, we tested five ESSER subawards and five Title I
subawards for the June 30, 2021, FFATA reporting, and all ESSER subawards were inaccurate
because OPI reported the amount expended, not the amount awarded. We did not find errors for
Title I reporting.

We found the following compliance issues with the FFATA reporting for ESSER:

e OPI reported expenditures spent at the local educational agency (LEA) level instead of on
the amount of the subaward during fiscal year 2020 and 2021, causing the report to be
inaccurate for most subawards.

e Some subawards were not reported as required, because their expenses had not reached
the reporting threshold but their subaward amount was large enough to be reported.

We communicated this issue during the design of our audit, and OPI revised the FFATA reports,
but the revisions did not occur during our audit period.
The required FFATA summary information is included below.

Transactions Subaward Not Report not Subaward Subaward
Tested Reported Timely Amount Missing Key
Incorrect Elements
5 2 5 3 0
Dollar Amount Subaward Not Report not Subaward Subaward
of Tested Reported Timely Amount Missing Key
Transactions Incorrect Elements
$925,846.45 $423,485.93 $925,846.45 $315,373.52 0

Effect: Staff misinterpreting of FFATA reporting requirements resulted in OPI’s inability to
detect and prevent noncompliance for ESSER I. While we did not find errors for Title | FFATA
reporting, errors can occur without a secondary review.

Cause: The general OPI expectation requires a secondary review of all reports, but this

requirement was not part of the FFATA desk manual, so it did not occur.

Recommendation: We recommend the Office of Public Instruction:

A. Establish internal controls to ensure Federal Funding Accountability and Transparency

Act (FFATA) reports are submitted, supported and timely.

B. Review the ESSER I FFATA reports previously submitted and ensure all subawards over

$30,000 have been reported using the subaward amount.
C. Comply with reporting requirements for the FFATA.

Views of Responsible Officials: OPI concurs with this recommendation. For additional

information regarding OPI’s planned corrective action see the Corrective Action Plan starting on

page D-1.

20-02

C-123
(0502S Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-039: U.S. Department of Agriculture
ALN # 10.553, 10.555, 10.556, 10.559, Child Nutrition Cluster
Grant # 193MT306N1099, 203MT306N1099, 213MT306N1099,
213MT306N1199

Criteria: Federal regulation, 7 CFR 250.12(b), requires the Office of Public Instruction (OPI) to,
on an annual basis, conduct a physical review of donated food inventories at all storage facilities
used by the distributing agency (or by a subrecipient distributing agency), and must reconcile
physical and book inventories of donated foods. The distributing agency must report donated
food losses to Food and Nutrition Service (FNS) and ensure that restitution is made for such
losses.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: OPI personnel stated they did not complete a physical inventory in fiscal year 2020.
In fiscal year 2021, OPI completed a physical inventory and a reconciliation between the
physical count and OPI’s food tracking system. However, OPI’s reconciliation documentation
was inaccurate. We noted two discrepancies OPI did not identify, and OPI documented a
difference that did not exist when we compared OPI’s records to the count. The differences we
noted above indicate controls are not adequate over the inventory process and OPI has not
complied with inventory requirements in fiscal years 2020 and 2021.

Questioned Costs: None.

Context: We noted a 540-item difference in the peanut butter count vs. OPI’s tracking system
and another small difference. There were no differences when we compared OPI’s tracking
system to the warehouse’s documentation, indicating OPI’s physical count was likely incorrect
and the food was not missing. If they completed a reconciliation to OPI records, we would
expect them to notice the differences and follow up to determine if the count was inaccurate.
Our audit tests did not include sampling procedures.

As part of our consideration of the cause of the control issues, we noted the staff member in
charge of ordering inventory is also responsible for entering the inventory in the Montana
Agreement and Payment System (MAPS) and taking the physical inventory count at fiscal year-
end. We generally expect controls to involve more than one person because someone doing the
entire process puts them in a position where errors or irregularities may not be detected. Updated
control procedures need to address this segregation of duties issue.
C-125

Effect: The differences we identified indicate either missing food, inaccurate inventory, or
inaccurate OPI records in fiscal year 2021. We could not determine if there were similar
differences in fiscal year 2020 because OPI records were not available compared to warehouse
records. As explained above, the most likely issue is inaccurate inventory counts.

Cause: OPI personnel stated they did not complete a physical inventory in fiscal year 2020
because of the COVID-19 pandemic, but noted the Montana Department of Public Health and
Human Services warehouse personnel did complete an inventory. OPI received an email from
the federal government saying another state agency can complete inventory during the pandemic
but encouraged OPI to participate via video. OPI did not participate via video, and no
documentation of the inventory count reconciliation to OPI records was maintained. Without a
reconciliation, no assurance is provided over the completeness and accuracy of OPI records.

Recommendation: We recommend the Office of Public Instruction:

A. Establish internal control procedures, including segregating duties, to ensure an annual
physical inventory is completed, and the inventory is reconciled to office and warehouse
records.

B. Comply with federal regulations to complete and document a physical inventory and
reconciliation to records for donated foods for the Child Nutrition Cluster.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
C-126

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-040: U.S. Department of Agriculture
ALN # 10.553, 10.555, 10.556, 10.559, Child Nutrition Cluster
Grant # 193MT306N1099, 203MT306N1099, 213MT306N1099,
213MT306N1199

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: Controls over testing the information system used to calculate payments for the
Child Nutrition program are not adequate.

Questioned Costs: None.

Context: We asked the Office of Public Instruction (OPI) about internal controls to test the
Montana Agreement and Payment System’s (MAPS) calculation of the Child Nutrition
payments. Staff reported completing testing regularly, but testing is not always documented. The
contractor that maintains MAPS received a System and Organization Controls (SOC) 2 report,
but OPI did not obtain and review the report until our inquiry.

Effect: Without assurance over the system via an outside audit of the system or internal testing
of the system, MAPS can have issues OPI is not aware of, leading to incorrect payments and
unallowable federal costs. OPI is responsible for calculating the applicable meals times rates
formula and sending the correct payments to subrecipients.

Cause: OPI was not aware they should be requesting and reviewing SOC reports, and they
believe the system does not need to be tested unless there are changes to the system. We believe
regular system testing is important because the contractor could make changes to the system OPI
is not aware of. In addition, staff indicated testing the updated rates was likely a regular part of
OPI’s process. Still, they did not consider it necessary to document their testing unless there was
a major change to the system.

Recommendation: We recommend the Office of Public Instruction document internal control
procedures over the Montana Agreement and Payment System’s calculation of Child Nutrition
payments to schools to ensure payments recorded in the state’s accounting records and sent to

subrecipients are correctly calculated.
C-127

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
(o5b2:3ae Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-041: U.S. Department of Education
ALN # 84.027 and 84.173, Special Education Cluster (IDEA)
Grant # H027A200096, H173A200099, H027A 190096, H173A19009

Criteria: Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

The Office of Public Instruction (OPI) policies require reviewing allocation increases/decreases
greater than 10% as well as written approval via e-mail and a copy of the signed allocation
spreadsheet.

Federal regulation, 34 CFR 300.163, says the State must not reduce the amount of State financial
support for special education and related services for children with disabilities below the amount
of support for the preceding year.

Federal regulation, 2 CFR 200.1, defines period of performance as the total estimated time
between the start of an initial Federal award and the planned end date.

Condition: OPI should strengthen internal controls related to IDEA allocations, state
maintenance of effort, and period of performance.

Questioned Costs: None

Context: Most of the money spent on the IDEA program is subgranted to Local Education
Agencies (LEAs). Therefore, OPI is responsible for calculating and distributing the correct
funding to each school. OPI uses an allocation spreadsheet for both the general Grants to States,
IDEA Part B grant, and the preschool grant every fiscal year. We reviewed the four spreadsheets
for fiscal years 2020 and 2021. OPI did not always follow their own distribution policies during
the audit period:

e Review of differences between years greater than 10 percent by LEA and following up
on unexpected differences did not occur in fiscal year 2020 and 2021.

e Approval by a secondary reviewer of the allocations was not documented in fiscal year
2021.

OPI did not have a control in place to ensure the maintenance of effort requirement was met. OPI
has a spreadsheet it uses to ensure the amount appropriated is sufficient, but they do not compare
actual money spent by the state on special education to money spent the previous year.
C-129

OPI uses a reconciliation process comparing the state’s accounting system to the OPI’s grant
system to track the period of performance. We completed a sample of the 24 monthly
reconciliations and found two instances out of five tested where numbers on the reconciliations
were not supported. This was not a statistically valid sample. We completed additional testing
and did not identify any instances of spending outside the allowed time period.

Effect: We found no allocation errors, but errors can occur when internal controls aren’t
followed. Also, noncompliance with federal activities allowed, allowable costs, maintenance of
effort, and period of performance requirements could occur if controls are not in place and
working as intended.

Cause: OPI staff stated the control issues were a result of staffing changes, lack of
documentation, allocations being finalized amid COVID, and not having staff cross-trained to fill
in for a staff member on leave. Having a plan on who can cover important controls prior to
turnover or emergencies can help prevent this situation from occurring.

Recommendation: We recommend the Office of Public Instruction:
A. Follow OPI policy related to allocation of grant funds,
B. Improve controls over period of performance by including cross training for monthly
reconciliations, and
C. Improve controls related to state maintenance of effort by reviewing actual state
expenditures to ensure compliance with federal regulations.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
eSkiigee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-042: U.S. Department of Education
ALN # 84.425D, Education Stabilization Fund Under the Coronavirus
Aid, Relief, and Economic Security Act
Grant # S425D200006 and S425D210006

U.S. Department of Agriculture
ALN # 10.553, 10.555, 10.556, 10.559, Child Nutrition Cluster
Grant # 203MT306N1099 and 213MT306N1099

Criteria: Federal regulation, 2 CFR 200.305, requires states follow the treasury state agreement
(TSA). The TSA is governed by federal regulation, 31 CFR 205, which requires states use the
reimbursement basis.

The Child Nutrition TSA requirement is to “request funds weekly on Wednesday, or as
reasonable to address negative cash needs. . . the amount of the request shall be based on the
amount of actual program costs incurred during the prior week, Wednesday through Thursday.”

Per the Educational Stabilization Compliance Supplement 2021, ESSER requires limiting draw
to as close as administratively feasible to a state’s actual cash outlay for direct program costs and
proportionate share of any allowable indirect costs.

Federal regulation, 2 CFR 200.303, requires the non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Internal controls were ineffective for ensuring the Office of Public Instruction (OPI)
did not have excess cash for the Child Nutrition Cluster and ESSER programs.

Questioned Costs: None.

Context: We completed a sample of draws for the Child Nutrition and ESSER programs. One of
17 Child Nutrition Cluster and one of seven ESSER cash draws tested did not have expenditures
supporting revenues drawn. There were 24 total months for both of these samples, and the
sample was not statistically valid. The Child Nutrition Cluster error was a typo where the
expenditures amount was $317 but $31,700 was requested. The error was corrected in the next
draw. The other mistake (for ESSER) was drawing for the same $1.7 million expenditure twice.
OPI noted the error at fiscal year-end and reversed the revenue but did not fix the cash draw.
There were not ESSER expenses to support the cash on hand for over a month.
C-131

Effect: Per federal regulation, OPI could owe interest on excess cash. With the current interest
rates, this is likely immaterial, but larger errors could occur in the future if the control deficiency
is not corrected.

Cause: The overdraws were due to human error. All cash draws were reviewed by a second
person, so OPI’s controls should have caught these errors before requesting reimbursement from
the federal program. The cash draw process at OPI is complex, because there are many federal
programs. Management should consider adding cash management controls to their monitoring
process in order to determine a way to improve the current control process,

so human error is less likely to occur.

Recommendation: We recommend the Office of Public Instruction:
A. Enhance cash management internal controls and monitor their effectiveness to ensure
OPI only requests federal cash for incurred expenditures.
B. Comply with cash management requirements.

Views of Responsible Officials: OPI does not concur with this recommendation. While
management acknowledges there were instances during the audit period where cash was ordered
in excess of expenditures and the secondary reviewer did not identify the error, they believe
compensating controls did identify the excess cash resulting in correcting journals for the excess
funds. For additional information regarding OPI’s planned corrective action, see the Corrective
Action Plan starting on page D-1.

Rebuttal of Views of Responsible Officials: We considered OPI’s nonconcurrence with the
recommendation. The correcting entry for ESSER processed by OPI did not mitigate its
noncompliance with cash management requirements, because the entry did not affect cash. As
noted in the finding, there were not ESSER expenses to support the cash on hand for over a
month. In addition, if internal controls are not working as intended, further noncompliance can
occur. As such, our recommendation stands.

20-02
(oskyaee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-043: U.S. Department of Education
ALN # 84.010, Title I Grants to Local Educational Agencies
Grant # S010A190026-19A, S010A200026-20A

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Section 1003 (b) of the Elementary and Secondary Education Act (ESEA) requires the Office of
Public Instruction (OPI) to earmark seven percent of the Title I amount granted to Montana to
serve schools implementing comprehensive support and improvement activities or targeted
support and improvement activities. Not less than 95 percent of the earmarked funds must be
spent on the schools identified.

Condition: OPI does not have controls in place to ensure compliance with Title I earmarking
requirements.

Questioned Costs: We question $40,692 charged to the Title I program. Since we only reviewed
a portion of the costs, more questioned costs may exist. Additional questioned costs may also
exist in salary charges.

Context: The total Title I award to OPI was $50 million. The amount of Title I funding
earmarked for school improvement activities in fiscal years 2020 and 2021 was approximately
$3.5 million. Schools identified for improvement can give OPI permission to spend the money
on serving them, otherwise, OPI would have to send 95 percent of the earmarked funds directly
to the schools identified for improvement.

OPI budgets 40 percent of the $3.5 million to OPI activities, and 60 percent as grants to schools.
OPI spent $729,496 in fiscal year 2020 and $925,453 in fiscal year 2021. We reviewed OPI
salary charges to the Title I grant but OPI did not track whose time was administrative costs and
whose time benefited identified schools. Therefore, we could not confirm administration costs
did not exceed the approximately $175,000 cap, because the 40 percent budgeted to OPI
activities included both admin and school improvement activities in one accounting code.

In addition, we tested 17 non-personnel services Title I expenditure transactions and determined
eight, totaling $40,692 were unsupported. Unsupported costs included costs charged to
supporting all schools in Montana instead of those schools identified for improvement, costs with
unclear documentation, or costs for overall Title I administration charged to school improvement
activities. This was not a statistically valid sample.
C-133

Effect: Without proper controls, OPI is at risk of spending money allocated for school
improvement on administration.

Cause: OPI does not monitor the amounts they spend on administration as compared to school
improvement activities, so cannot demonstrate compliance with federal earmarking regulations.

Recommendation: We recommend the Office of Public Instruction:
A. Develop internal controls to ensure earmarked funds are spent on allowable activities and
improve documentation to support cost allowability.
B. Comply with Title I earmarking requirements.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
(oSk7aee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-044: U.S. Department of Education
ALN # 84.010, Title I Grants to Local Educational Agencies
Grant # S010A190026-19A, S010A200026-20A

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Elementary and Secondary Education Act (ESEA), Section 8101 (25) B requires local education
agencies (LEAs) to obtain documentation to confirm that a student has transferred out, emigrated
to another country, or transferred to a prison or juvenile facility, or is deceased in order to
remove a student from a cohort.

Condition: The Office of Public Instruction (OPI) requires each LEA to certify the number of
graduates and dropouts by the LEA. However, OPI’s certification policy does not include the
federal requirement that LEAs maintain documentation to confirm the appropriate removal of a
student from the cohort. In addition, OPI does not have a procedure to monitor LEAs compliance
with retaining this documentation.

Questioned Costs: None.

Context: Federal guidance allows the state’s data system to be official documentation when a
student transfers schools within the state. We agree, but OPI must communicate to schools when
they can use the state’s system as documentation and when they cannot. For example, the
guidance cited by OPI would not apply if the student transferred out of state, moved to home
school or a juvenile corrections facility, or died. OPI also does not monitor LEAs’ compliance
with retaining appropriate documentation for removing students from the cohort.

Effect: Without the required policies and procedures, OPI is not compliant with federal
regulations related to the Title I program. If LEAs do not know the requirements for removing a
student from a cohort, they may provide OPI with an inaccurate graduation rate, which makes
the state’s overall graduation rate inaccurate.

Cause: As we worked with staff to understand their policies and procedures related to this Title I
requirement, there was confusion about who was responsible for this federal regulation. Staff
noted districts remove students from the cohort, not OPI.
Recommendation: We recommend the Office of Public Instruction:
A. Develop internal controls that address LEAs responsibilities for documenting the removal
of a student from the adjusted cohort, and
B. Monitor the LEA’s adherence to the federal requirements.

Views of Responsible Officials: OPI concurs with this recommendation. For additional
information regarding OPI’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02

C-135
C-136

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-045: U.S. Department of Agriculture
ALN # 10.551 and 10.561, SNAP Cluster
Grant # 2020208251443, 2021218251443

U.S. Department of Health and Human Services
ALN # 93.558 Temporary Assistance for Needy Families (TANF)
Grant # 1901MTTANF, 2001IMTTANF, 2101IMTTANF

Criteria: Federal regulation, 7 CFR 274.1(i)(2), requires a yearly examination of the State
electronic benefit transfer (EBT) service provider for the SNAP Cluster.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) obtained an
examination by an independent auditor of the EBT service provider. The report only covered
three months of the two-year audit period, which is not sufficient for the department to
demonstrate adequate internal control or compliance with certain SNAP and TANF program
requirements.

Questioned Costs: None.

Repeat Finding: Montana’s Single Audit for the two fiscal years ended June 30, 2019, included
a recommendation (#2019-008) to obtain an annual SOC-1 Type 2 report over the EBT service
provider for SNAP and establish and maintain internal controls to ensure SNAP and TANF
benefit transactions achieve applicable compliance requirements.

Context: The department uses an EBT provider for its SNAP federal program. The EBT service
provider is responsible for settlement, or payment, to retailers that have agreed to accept EBT
cards for food purchases. The same EBT service provider is involved in delivery of benefits for
the TANF program.
C-137

The following table depicts benefit distributions processed by the EBT service provider:

Benefits Processed by EBT Service Provider
Federal Fiscal Year 2020 | Fiscal Year 2021
Program
SNAP $161.8 million $229.3 million
TANF $16.2 million $11.5 million

Effect: Without assurance over the operating effectiveness and appropriate design and operation
of controls at the service organization, the department cannot demonstrate adequate internal
control over EBT payments for the audit period. Because the examination does not cover the
entire period, the department did not comply with federal SNAP requirements.

Cause: Historically, as noted by our prior audit, the department did not obtain a SOC-1 Type 2
report for the EBT service provider. On January 21, 2020, the department instructed the EBT
service provider to provide a SOC-1 Type 2 report. While the report for July 1, 2020 through
September 30, 2020 was completed as quickly as possible, it does not provide any assurance
over processing for fiscal year 2020 and provides limited assurances over fiscal year 2021
activity.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Establish and maintain internal controls to receive and review assurances over the
EBT service provider for the Supplemental Nutrition Services Program and
Temporary Assistance for Needy Families program.

B. Comply with federal regulations for the Supplemental Nutrition Services Program by
requiring a yearly examination of EBT service provider transaction processing
regarding the issuance, redemption, and settlement of program benefits and review
the results.

Views of Responsible Officials: Based on the department’s inability to fully comply with the
prior audit recommendation due to timing of when the issue was identified by our prior audit, the
department conditionally concurs with this recommendation. For additional information
regarding the department’s planned corrective action see the Corrective Action Plan starting on
page D-1.

20-02
eskigee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-046: U.S. Department of Health and Human Services
ALN # 93.775, 93.777, and 93.778, Medicaid Cluster
Grant # 180S5MTSMAP, 190SMTSMAP, 200SMTSMAP, 210SMTSMAP

ALN # 93.767, Children’s Health Insurance Program (CHIP)
Grant # 1905MT5021, 2005MT5021, 2105MT5021

Criteria: Federal regulations, 42 CFR 435.914(a) and 42 CFR 457.965, require the Department
of Public Health and Human Services (department) to include facts to support its eligibility
decision in each applicant’s case record for Medicaid and CHIP, respectively.

Federal regulations, 42 CFR 435.603, 42 CFR 457.310 and 457.315, require the use of multiple
criteria, including household income, when determining eligibility for Medicaid and CHIP.

As described in the department’s verification plan, if inconsistencies are noted between self-
attested information and electronic data sources, follow up is necessary in certain situations. For
income discrepancies, if self-attested income is below the applicable income standard and the
electronic data source indicates income is above the applicable income standard, and the
difference between the two is greater than 10 percent, the state is required to request
documentation to resolve the discrepancy.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The department administers the Medicaid and CHIP programs to provide medical
coverage to eligible individuals. Department personnel enter the necessary data for eligibility
determinations into an individual’s case file in the department’s eligibility system, the Combined
Healthcare Information and Montana Eligibility System (CHIMES). This data is used to
determine the client’s eligibility for the department’s various eligibility categories based on
factors including age, household composition, residency, and income. The department’s
verification plan details how and when each piece of eligibility criteria needs to be verified.
CHIMES interfaces with various electronic data sources to verify information. CHIMES flags
discrepancies between the interfaces and self-attested information, and the state’s verification
plan requires follow-up on the discrepancies.

As part of our testing, we identified instances where the department did not consistently verify
eligibility factors per the state’s verification plan, fully document and support eligibility
decisions in case files, or place individuals in the correct eligibility categories. We determined
C-139

the department’s internal controls were insufficient to comply with federal regulations for both
the Medicaid and CHIP programs. In addition, we also identified instances where eligibility
related processes were inconsistently applied across applications.

Questioned Costs: Known questioned costs for the cases in which the eligibility determination
or eligibility category was incorrect totaled $34,517 and $10,019 for Medicaid and CHIP,
respectively. Known questioned costs for the case where the individual was not eligible for any
CHIP or Medicaid eligibility category totaled $1,483 in federal CHIP funds. Overall, federal
questioned costs for the full population of both Medicaid and CHIP programs are likely to
exceed the known costs discussed above. For all issues identified in both programs, known or
likely questioned costs exceed the $25,000 threshold for federal reporting.

Context:

Eligibility Issues

We performed a sample of Medicaid and CHIP eligibility determinations for individuals for
fiscal years 2020 and 2021, which consisted of control and compliance testing. The total
population of Medicaid and CHIP cases for the audit period totaled 472,447. For control testing,
the populations for Medicaid and CHIP were combined. We selected a sample of 64 to test
internal controls (48 Medicaid and 16 CHIP). For compliance testing, the Medicaid and CHIP
programs were separately analyzed, so 60 sample items were selected from each Medicaid and
CHIP for 120 total sample items. This was not a statistically valid sample.

From the sample, we identified 19 cases with control issues, compliance issues, or both. The
types of issues we identified in our testing are described below followed by tables summarizing
the issues by case.

e Instances where eligibility information was not verified or discrepancies were not
followed up on timely as required by the verification plan.

e Income used in eligibility determinations was not fully supported in the case file.
Evidence in the case file was not sufficient to support the income used in the eligibility
determination. As a result, we could not verify whether the income was correct.

e Income used in determining eligibility was incorrect per support in the case file.
e Residency and/or household composition is not supported in the case file.

e Eligibility criteria used in the determination was incorrect, but the eligibility category
was correct.

e Eligibility criteria used in the determination was incorrect and as a result, the eligibility
category was incorrect.

e The case file was fully supported, but the department’s eligibility determination was
incorrect.

e The case file was not fully supported and as a result the department’s eligibility
determination was incorrect.

20-02
(osetia Montana Legislative Audit Division

Medicaid Eligibility Issues in Tested Cases

Medicaid Eligibility Issues

Types of Issues
as described above

Case #1 #2 #3 #4 #5 #6 #7

Eligibility information was not
verified or discrepancies were
not followed up on promptly

Income used in eligibility
determinations was not fully
supported

Income used in determining
eligibility was incorrect

Residency and/or household
composition is not supported

Eligibility criteria used was
incorrect, but eligibility category
was correct

Eligibility criteria used was
incorrect making the eligibility
category incorrect

Case file was fully supported,
but department’s eligibility
determination was incorrect

Case file was not fully
supported making department's
eligibility determination incorrect

CHIP Eligibility Issues in Tested Cases

CHIP Eligibility Issues

Type of Issues
as described above

Case#1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12

Eligibility information was not
verified or discrepancies were
not followed up on promptly

Income used in eligibility
determinations was not fully
supported

Income used in determining
eligibility was incorrect

Residency and/or household
composition is not supported

Eligibility criteria used was
incorrect, but eligibility category
was correct

Eligibility criteria used was
incorrect making the eligibility
category incorrect

Case file was fully supported,
but department’s eligibility
determination was incorrect

Case file was not fully
supported making department's
eligibility determination incorrect
C-141

Based on the issues identified above, there were ten cases (three Medicaid and seven CHIP) in
which the eligibility determination or eligibility category was incorrect. In some cases, while the
individual was placed in the wrong category, both categories were in the same federal program,
so there are no related questioned costs. There were two cases identified where the individuals
were eligible but placed into a category in the wrong federal program, resulting in the application
of the wrong federal match percentage. There was one CHIP case identified where the
individual was not eligible for any CHIP or Medicaid eligibility category.

Inconsistencies
We identified the following types of inconsistences:

e Income

o Income support can be provided by applications in a weekly or biweekly form,
this income is then multiplied by a factor to estimate monthly income per the
department’s manual. While the department manual discusses the need to factor
income, it does not specify how this should be done. We noted several instances
where different factors were used to determine monthly income. For example,
when projecting biweekly pay period incomes for a month, some calculations
used a factor of 2.0 and others used 2.15.

o Insome cases, applicants provide multiple pay stubs to support their income. The
department’s manual is not clear in how many pay stubs should be used. We
identified calculations in which the case workers used all provided pay stubs in
determining income, while others used only the most recent pay stub.

co Reported overtime or weekend wages were not treated consistently. In comes
cases, the amounts were included with normal wages, while in others they were
considered separately.

e Transitional coverage

o Incertain situations, the department may provide transitional coverage to parents
and children for up to six months following an Affordable Care Act Medicaid
case closure. We identified instances involving similar circumstances where the
application of transitional coverage for children in CHIP categories was used
differently. For example, in one case while the adult moved to transitional
coverage, the children were reauthorized in a CHIP category. In a similar case,
the entire household was moved to transitional coverage even though the children
were still eligible for a CHIP category.

Repeat Finding: Montana’s Single audit for the two fiscal years ended June 30, 2019, included
a recommendation (#2019-001) to the department to establish and maintain internal controls to
timely verify client eligibility factors and comply with federal regulations and state plan
requirements by placing only eligible clients into correct eligibility categories.

Effect: The department is not in compliance with federal requirements and is at risk of not
making uniform eligibility decisions and potentially placing individuals in wrong eligibility
categories without consistent application of the eligibility determination process. For the
inconsistencies noted, we did not identify errors in eligibility determinations. However, cases

20-02
(o5U94ee Montana Legislative Audit Division

with income close to a category income threshold could result in income calculations that result
in different eligibility determinations.

Cause: We discussed each of the case files, and the results of our testing with the department
during the audit. Based on those discussions, the department agrees there are issues with 11 of
the cases summarized above. For these cases, our audit procedures and conversations with
department personnel indicate the errors resulted from human error in the determination process.
For the other cases, including those where we determined verification did not occur or case files
did not contain appropriate support, the department does not agree. In some cases, the
department was able to find support or explain why an eligibility decision was made. While we
considered this additional information, if the information was not sufficiently documented or
supported in the case at the time of determination, we concluded the case file was not supported.
For the inconsistencies noted, the department believes the specific facts of individual cases
explain different treatments between cases and different treatments would not cause errors in
eligibility determinations.

Recommendation: We recommend the Department of Public Health and Human Services
revise its policies and procedures for Medicaid and Children’s Health Insurance Program and
provide training to case workers to:
A. Ensure eligibility elements and decisions are documented and supported by the case file.
B. Follow up on differences and make changes to case files as required by the department’s
verification plan.
C. Comply with federal regulations and state plan requirements by placing only eligible
clients into correct eligibility categories.
D. Improve guidance to ensure consistent calculation of the household income used to
determine eligibility.
E. Consistently apply the transitional period for children enrolled in the Children’s Health
Insurance Program.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-143

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-047: U.S. Department of Health and Human Services
ALN # 93.775, 93.777, and 93.778, Medicaid Cluster
Grant # 180SMTSMAP, 190S5MTSMAP, 200S5MTSMAP, 2105MTSMAP

ALN # 93.767, Children’s Health Insurance Program (CHIP)
Grant # 1905MT5021, 2005MT5021, 2105MT5021

Criteria: Federal regulation, 42 CFR 435.914(a), requires the Department of Public Health and
Human Services (department) to include facts to support its eligibility decision in each
applicant’s case record for Medicaid and CHIP.

Federal regulation, 42 CFR 435.916(a)(1), states the eligibility of Medicaid beneficiaries whose
financial eligibility is determined using MAGI-based income must be renewed once every
12 months, and no more frequently than once every 12 months.

Federal regulation, 42 CFR 457.343, requires the department to apply the renewal procedures
described in 42 CFR 435.916 in administering a separate CHIP.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The department’s eligibility redetermination processes for Medicaid and CHIP can
be improved. While we did not identify any timeliness issues related to redeterminations during
the audit period, we did identify some overall system issues with the eligibility redetermination
process.

Questioned Costs: None.

Context: The department administers the Medicaid and CHIP programs to provide medical
coverage to eligible individuals. Once individuals are enrolled, they have a 12-month continuous
eligibility period, a renewal process is completed at the end of the period, and eligibility is
redetermined. For eligibility categories under the Affordable Care Act (ACA), the
redetermination is an automated process within the department’s eligibility system, the
Combined Healthcare Information and Montana Eligibility System (CHIMES). During the
COVID-19 public health emergency, the department suspended the renewal process under
multiple waivers.

20-02
(oSU2Sae Montana Legislative Audit Division

As part of reviewing eligibility determinations, we evaluated whether required eligibility
renewals and redeterminations occurred during the audit period. We considered the effects of
the changes in process under the COVID-19 public health emergency in evaluating whether
redeterminations were done timely. Overall system issues with the eligibility redetermination
process are discussed in more detail below:

e For the automatic renewal process in CHIMES, we identified instances where the
eligibility redetermination did not include all income types. Overall, the CHIMES
renewal process includes data matches for state wage information and unemployment
benefits but does not consider other income types including self-employment income or
unearned income, such as pension or rental income. We also identified instances where
only the individual’s income was used in redetermination instead of the household’s
income, which should be used for eligibility determinations. The department represented
this issue has since been fixed in the CHIMES system.

e For automatic renewals, we identified instances where the system indicated the automatic
renewal failed or there were incompatibilities identified with electronic data matches, yet
the case was renewed without explanation or documentation in the case file.

e The manual renewal process allows renewals to be completed without the system
recalculating eligibility based on updated income unless a case worker manually selects
the option to recalculate in the system. The income information is pulled forward from
previous eligibility determinations in this situation.

Effect: For automatic renewals, the design of the renewal process in CHIMES creates a risk that
the incorrect income amount is used in determining eligibility at renewal. Without proper
documentation of decisions made during the renewal process, the department is at risk of
noncompliance with federal regulations requiring case files to include facts to support eligibility
determinations. For manual renewals, there is a risk income will not be recalculated as part of
the renewal process, resulting in incorrect eligibility determinations.

Cause: The department agrees with the manual renewal income recalculation issue. They
represented they will implement improvements to the renewal process, ensuring recalculation of
income does not rely on case workers selection in CHIMES. While the department does not
agree with the auto renewal issues resulting in errors in eligibility determinations, they made
some changes to the renewal process in CHIMES and indicated more improvements will be
made following the public health emergency.

Recommendation: We recommend the Department of Public Health and Human Services
enhance internal controls for Medicaid and Children’s Health Insurance Program to ensure
annual redeterminations are completed accurately using up-to-date information and cases are
fully supported as required by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-145

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-048: U.S. Department of Health and Human Services
ALN # 93.767, Children’s Health Insurance Program (CHIP)
Grant # 1905MT5021, 2005MT5021, 2105MT5021

Criteria: Federal regulation, 42 CFR 457.320(a)(2), sets the age limit for CHIP eligibility at up
to age 19.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) administers
CHIP to provide medical coverage to eligible children under the age of 19. Our testing
determined the department does not consistently ensure individuals are removed from CHIP once
they turn 19 and age out of the program.

Questioned Costs: None.

Context: From our sample of 60 individuals enrolled in CHIP, we identified two instances
where individuals aged out, but they were not properly removed from the program when they
turned 19. For these instances, the individuals aged out in 2017, but remained in the CHIP
program during the audit period. This sample was not statistically valid.

Additionally, through our testing, we identified four additional individuals who aged out of the
program during the COVID-19 public health emergency. These individuals were enrolled in
Healthy Montana Kids (HMK) Plus Expansion, which is a CHIP-funded category that receives
Medicaid Benefits coverage. During the public health emergency, the department accepted an
enhanced federal match for benefits payments. In order to receive the enhanced federal match,
the federal government prohibited removing Medicaid coverage from individuals who had
coverage at the start of the public health emergency. Since these cases were receiving Medicaid
coverage, the department was prohibited from removing the individuals from the program.

Under the public health emergency requirements, the department could evaluate aged out
individuals for a Medicaid program and transition them to continue coverage, but they were not
required to transition individuals. Since the end of the audit period, the department has
completed some administrative reviews of specific cases and moved eligible individuals to adult
Medicaid programs. As a result of the public health emergency requirements, we did not take
issue with these four cases.

20-02
C-146

Montana Legislative Audit Division

Effect: The department is not in compliance with federal regulations for CHIP.
Department personnel represented the benefits claims processing system for CHIP also
has additional controls in place to ensure claims are not paid under these eligibility
categories if the individual is aged out. We confirmed there were no benefits paid out for
these two cases during the audit period. However, for one case, claims were paid for the
individual prior to the audit period, but after the individual aged out.

Cause: The department’s eligibility system, the Combined Healthcare Information and
Montana Eligibility System (CHIMES), is designed to auto-close CHIP cases at the end
of the month the individual turns 19. The system creates a task for a case worker to
complete a review to determine if the individual is eligible for Medicaid programs.
However, if the case has another open task in CHIMES, the auto-close process cannot be
completed. In these situations, a separate task is created for a case worker to manually
close the case. For the two cases identified, the department acknowledges CHIMES had
open tasks requiring a manual closeout. Per department personnel, the department had a
significant backlog of case tasks to complete, so the close outs did not happen timely.

Recommendation: We recommend the Department of Public Health and Human
Services:

A. Enhance internal controls to ensure compliance with federal regulations related to
individuals who have aged out of Children’s Health Insurance Program funded
program.

B. Comply with federal regulations by removing individuals from Children’s Health
Insurance Program funded programs who have turned 19.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the
Corrective Action Plan starting on page D-1.
C-147

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-049: U.S. Department of Health and Human Services
ALN # 93.775, 93.777, and 93.778, Medicaid Cluster
Grant # 1305MTSMAP, 190S5MTSMAP, 2005MTSMAP, 210SMTSMAP

Criteria: NCCI Technical Guidance Manual paragraphs 7.1.2 and 7.1.3 states the department
may share quarterly Medicaid NCCI edit file with any entity assisting with implementation of the
state’s Medicaid NCCI program in processing of claims, only when appropriate confidentiality
agreements are in place. The manual requires, at a minimum, that certain elements are included
in the confidentiality agreements.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) does not have
confidentiality agreements with contracted parties prior to sharing Medicaid National Correct
Coding Initiative (NCCI) edit files as required by the NCCI Technical Guidance Manual.

Questioned Costs: None.

Context: The department is required to incorporate NCCI methodologies into the state Medicaid
program. The NCCI methodologies are a set of claim edits created by the federal government to
promote correct coding, prevent coding errors, and reduce improper payments related to
Medicaid claims. The state contracts with an entity to perform claims processing for the
Medicaid program. This contractor has a subcontractor responsible for implementing a portion
of the NCCI edit check methodologies for the state’s Medicaid claims. The department
downloads the quarterly edit files from the federal government through a secure portal. The edit
files are then sent directly to the subcontractor for use in implementing the NCCI edits.

The requirements established in the NCCI manual apply to all subcontractors with whom the
department shares edit files. Since the department shares the confidential edit files with the
subcontractor, a confidentiality agreement should be in place. While the department has some
confidentiality agreements in place through its contractor, the specific elements required by the
manual are not included.

Effect: The department is not in compliance with federal requirements. Additionally, without the
required confidentiality agreements, there is increased risk edit files may be used inappropriately
by entities outside the department.

20-02
(OSUi:wae Montana Legislative Audit Division

Cause: The department was unaware of the requirement to have a confidentiality agreement.
Additionally, the department believes its already existing confidentiality agreement with its
contractor was sufficient to cover the NCCI processing.

Recommendation: We recommend the Department of Public Health and Human Services
A. Enhance internal controls to ensure compliance with Medicaid NCCI confidentiality
agreement requirements.
B. Obtain a confidentiality agreement with any contracted party and their subcontractors
prior to sharing Medicaid NCCI edit files per federal requirements.

Views of Responsible Officials: The department conditionally concurs with this
recommendation. The department disagrees that without the required confidentiality agreement,
there is increased risk the edit files may be used inappropriately as they have general
confidentiality provisions in place. However, since the end of the audit, the department has
obtained a confidentiality agreement with the Medicaid NCCI subcontractor. For additional
information regarding the department’s planned corrective action see the Corrective Action Plan
starting on page D-1.
C-149

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-050: U.S. Department of Health and Human Services
ALN # 93.767, Children’s Health Insurance Program (CHIP)
Grant # 1905MT5021, 2005MT5021, 2105MT5021

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) does not review
the System and Organization Controls (SOC) report for the CHIP claims processing vendor. It is
the department’s responsibility to review the SOC report to confirm no additional work is
necessary to ensure proper claims processing.

Questioned Costs: None.

Context: The department contracts with an entity for claims processing for provider payments
on CHIP claims. The department obtains a SOC report for the contractor which provides
assurance over data processing and internal controls. The SOC reports obtained during the audit
period did not identify significant issues over the vendor’s processing of claims.

Effect: By not reviewing the SOC report, the department risks being unaware of system issues
affecting the services it receives from the claims processor. Additionally, the department is at
risk of not implementing all of the necessary compensating user entity controls.

Cause: Department staff indicated they do not review the SOC reports for the claims processing
vendor as they are not considered part of the standard reporting requirement of its contract with
the vendor. However, department staff represented they are very involved with the vendor and
receive and review multiple other reports from the vendor that provide assurance as to whether
the claims processing system is working properly.

Recommendation: We recommend the Department of Public Health and Human Services
review the SOC report for the Children’s Health Insurance Program claims processor, and
document this review, to ensure there are no issues with the services received from the vendor
and to ensure all necessary compensating controls are implemented.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action, see Corrective
Action Plan starting on page D-1.

20-02
eSbiimee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-051: U.S. Department of Health and Human Services
ALN # 93.658, Foster Care — Title IV-E
Grant # 2107MTFOST, 2007MTFOST, 1907MTFOST

Criteria: Federal regulation, 45 CFR 75.352, requires the Department of Public Health and
Human Services (department) to ensure that every subaward is clearly identified to the
subrecipient as a subaward and includes the required information at the time of the subaward and
if any of these data elements change, include the changes in subsequent subaward modification.
When some of this information is not available, the pass-through entity must provide the best
information available to describe the Federal award and subaward. Required information
includes, but is not limited to:

e Subrecipient name and subrecipient’s unique entity identifier,

e Federal award identification number,

e Date the state’s federal award was signed by the federal awarding agency,

e Subaward start and end dates,

e Amount of federal funds obligated to the subrecipient with the current agreement,

e Total amount of federal funds obligated to the subrecipient including the current
agreement,

e Applicable indirect cost rates for the federal award,

e Assistance Listings Number (formerly known as Catalog for Federal Domestic
Assistance number) and title,

e Federal awarding agency,
e Department name and contact information,

e Federal award project description, as required to be responsive to Federal Funding
Accountability and Transparency Act (FFATA),

e Permission for department officials and auditors to have access to the
subrecipient’s records, and

e Terms and conditions concerning the closeout of the award.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Subrecipients for the department’s Foster Care program include tribal governments
and institutions of higher education. In response to our prior audit recommendations, in the fall
C-151

of 2019 the department sent memos to tribes disclosing what is required by the federal
government, and subsequently signed amended contracts containing what the department
believed to be the required subrecipient disclosures. The department also renewed or amended
agreements with two institutions of higher education. However, required items were still omitted,
and the department’s controls did not detect or correct omissions in subrecipient agreements for
the Foster Care program, resulting in noncompliance with federal regulations.

Questioned Costs: None.

Context: Amended tribal agreements included a list of disclosures, but not all the disclosures
were included correctly. We identified inaccuracies or omissions including the federal award
date, the name of the federal awarding agency, the assistance listing number, the amount of
federal funds obligated by the current agreement, and the cumulative amount of federal funds
obligated to the subrecipient.

The department executed a new contract with a university in June 2020 and included most
contract disclosures. However, the department omitted the federal award identification number,
name of the federal awarding agency, and amount made available under the federal award from
the university agreement. Additionally, the department omitted nearly all contract disclosures
from its September 2020 contract amendment with a college. The original college contract was
also missing the disclosures, as reported in our prior audit.

While we agree certain specific information may be unavailable at the time of the award, the
department can improve the accuracy and content of its subrecipient contract disclosures.
Additionally, the department can use subsequent subaward modifications to notify the
subrecipient when data elements change.

Repeat Finding: In Montana’s Single Audit for the two fiscal years ended June 30, 2015, we
recommended (#2015-014) the department properly classify its agreements with the state’s tribal
organizations as subrecipients and comply with all federal regulations regarding subrecipients.
Because the department had incorrectly classified the tribal organizations as vendors rather than
subrecipients, the related agreements with the tribal organizations were missing required
subrecipient disclosures. In Montana’s Single Audit for the two fiscal years ended June 30,
2017, we concluded the recommendation was partially implemented and made no further
recommendation because the department represented it intended to include the subrecipient
language in the next tribal agreements which were due in fiscal year 2018. In Montana’s Single
Audit for the two fiscal years ended June 30, 2019, we recommended (#2019-016) the
department establish and document internal controls to ensure required subrecipient disclosures
are included in Foster Care contract agreements prior to signature and ensure required
subrecipient disclosures are included in Foster Care contract agreements, as required by federal
regulations.

Effect: The department has not complied with federal regulations regarding required
subrecipient disclosures. Because contract information is used to complete Federal Funding
Accountability and Transparency Act (FFATA) reporting, omitted, incomplete, and inaccurate
contract disclosures put the department at risk for inaccurate federal reporting. Additionally,

20-02
(osbyaee Montana Legislative Audit Division

failure to provide subrecipients with the required federal award information increases the risk of
subrecipient noncompliance with federal requirements.

Cause: Department staff indicated they included vague information in the contract disclosures
because certain information was not available at the time of the subaward. Additionally,
department staff indicated the Foster Care program is an entitlement program, and as such, the
department does not always know the actual grant number from which they will compensate the
subrecipient.

Recommendation: We recommend the Department of Public Health and Human Services:
A. Establish and document internal controls to ensure required subrecipient disclosures are
included in Foster Care contract agreements prior to signature.
B. Ensure the required subrecipient disclosures are included correctly in Foster Care
subrecipient agreements, as required by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-153

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-052: U.S. Department of Health and Human Services
ALN # 93.323, Epidemiology and Laboratory Capacity for Infectious
Diseases (ELC)
Grant # NUSO0CK000500

Criteria: Federal regulation, 45 CFR 75.352(a), requires the Department of Public Health and
Human Services (department) to ensure that every subaward is clearly identified to the
subrecipient as a subaward and includes the required information at the time of the subaward and
if any of these data elements change, include the changes in subsequent subaward modification.
When some of this information is not available, the pass-through entity must provide the best
information available to describe the Federal award and subaward. Required information
includes, but is not limited to:

e Subrecipient name and subrecipient’s unique entity identifier,

e Federal award identification number,

e Date the state’s federal award was signed by the federal awarding agency,

e Subaward start and end dates,

e Amount of federal funds obligated to the subrecipient with the current agreement,

e Total amount of federal funds obligated to the subrecipient including the current
agreement,

e Applicable indirect cost rates for the federal award,

e Assistance Listings Number (formerly known as Catalog for Federal Domestic
Assistance Number) and title,

e Federal awarding agency,
e Department name and contact information,

e Federal award project description, as required to be responsive to Federal Funding
Accountability and Transparency Act (FFATA),

e Permission for department officials and auditors to have access to the
subrecipient’s records, and

e Terms and conditions concerning the closeout of the award.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

20-02
(oSbY See Montana Legislative Audit Division

Condition: The department did not establish internal controls to ensure subrecipient agreements
include required disclosures, resulting in omissions in ELC subrecipient agreements.

Questioned Costs: None.

Context: Before the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the
department incurred less than $3 million in federal expenditures annually for the ELC award.
When federal funding increased exponentially in response to the COVID-19 public health
emergency, the department amended existing subaward agreements with various county
governments to better position the state in responding to the pandemic. We conducted a sample
of six of the department’s 27 subrecipient agreements for the ELC award and identified missing
subrecipient contract disclosures in all six agreements. The sample was not statistically valid.
Based on information from department staff, this noncompliance is pervasive to all subrecipient
agreements for the ELC award.

Effect: The department has not complied with federal regulations regarding required
subrecipient disclosures. Additionally, failure to provide subrecipients with the required federal
award information increases the risk of subrecipient noncompliance with federal requirements.

Cause: Per our review of the department’s county master contract agreement and task order
amendment templates, the required contract disclosure prompt is included in the master contract
agreement template. However, the templates are not clear as to when the disclosures are
required. Additionally, based on discussion with the department, training is needed to ensure
program and fiscal staff are aware of subrecipient contract disclosure requirements.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Provide training to staff regarding federal requirements for agreements with
subrecipients.

B. Establish and document internal controls to ensure required subrecipient disclosures are
included in Epidemiology and Laboratory Capacity for Infectious Diseases subrecipient
agreements prior to signature.

C. Ensure the required subrecipient disclosures are included correctly in Epidemiology and
Laboratory Capacity for Infectious Diseases subrecipient agreements and contract
amendments, as required by federal regulations.

D. Modify its Master Agreement and Task Order Contract Amendment templates for county
government agreements to make it clear the federal contract disclosures are required for
Epidemiology and Laboratory Capacity for Infectious Diseases subrecipient agreements.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-155

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-053: U.S. Department of Health and Human Services
ALN # 93.558, Temporary Assistance for Needy Families (TANF)
Grant # 19001MTTANF, 2001IMTTANF, 2101MTTANF

Criteria: Federal regulation, 45 CFR 75.352(a), requires the Department of Public Health and
Human Services (department) to ensure that every subaward is clearly identified to the
subrecipient as a subaward and includes the required information at the time of the subaward and
if any of these data elements change, include the changes in subsequent subaward modification.
When some of this information is not available, the pass-through entity must provide the best
information available to describe the Federal award and subaward. Required information
includes, but is not limited to:

e Subrecipient name and subrecipient’s unique entity identifier,

e Federal award identification number,

e Date the state’s federal award was signed by the federal awarding agency,

e Subaward start and end dates,

e Amount of federal funds obligated to the subrecipient with the current agreement,

e Total amount of federal funds obligated to the subrecipient including the current
agreement,

e Applicable indirect cost rates for the federal award,

e Assistance Listings Number (formerly known as Catalog for Federal Domestic
Assistance number) and title,

e Federal awarding agency,
e Department name and contact information,

e Federal award project description, as required to be responsive to Federal Funding
Accountability and Transparency Act (FFATA),

e Permission for department officials and auditors to have access to the
subrecipient’s records, and

e Terms and conditions concerning the closeout of the award.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

20-02
C-156

Montana Legislative Audit Division

Condition: Department controls did not prevent or detect and correct the missing required
subaward disclosures for the 24 subaward agreements for the TANF program during the audit
period.

Questioned Costs: None.

Context: The department contracts with 12 subrecipient entities, called Pathways Providers, to
manage the cases of the clients who are eligible for TANF and who need assistance to achieve
household stability of their finances. We reviewed the 24 agreements in place during the audit
period and identified all subrecipient agreements contained incorrect or missing information.
Specific errors included incorrect funding source, federal award date, and subaward period of
performance start and end dates. Agreements also omitted the name of the federal awarding
agency.

Effect: The department has not complied with federal regulations regarding required
subrecipient disclosures. Because contract information is used to complete Federal Funding
Accountability and Transparency Act (FFATA) reporting, omitted, incomplete and inaccurate
contract disclosures put the department at risk for inaccurate federal reporting. Additionally,
failure to provide subrecipients with the required federal award information increases the risk of
subrecipient noncompliance with federal requirements.

Cause: Department internal controls were insufficient to identify the omitted or inaccurate
information. Although the department’s contract template includes a placeholder for the required
contract disclosures, this section was improperly modified in the signed contract agreements.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Establish and document internal controls to ensure required subrecipient disclosures are
included in Temporary Assistance for Needy Families contract agreements prior to
signature.

B. Ensure the required subrecipient disclosures are included correctly in Temporary
Assistance for Needy Families subrecipient contract agreements, as required by federal
regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-157

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-054: | U.S. Department of Health and Human Services
ALN # 93.323, Epidemiology and Laboratory Capacity for Infectious
Diseases (ELC)
Grant # NUS0CK000500

Criteria: Federal regulation, 45 CFR 75.352(d) through (e), requires the Department of Public
Health and Human Services (department) monitor the activities of the subrecipient as necessary
to ensure the subaward is used for authorized purposes, in compliance with federal statutes,
regulation, and terms and conditions of the subaward, and subaward performance goals are
achieved.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Department procedures did not include post-award monitoring of subrecipients for
the federal ELC award, and the department has not complied with the requirements.

Questioned Costs: None.

Context: The department amended existing subaward agreements with various county
governments to better position the state in responding to the pandemic, resulting in subaward
agreements with 27 county governments. The department did not provide evidence of post-award
monitoring for any of the six county subaward agreements included in our sample. This was not
a statistically valid sample. This applies to all county subaward agreements based on discussion
with the department.

Effect: The department has not complied with federal regulations requiring post-award
monitoring of it subrecipients, which means risk exists that federal funds were not expended in
accordance with federal award requirements.

Cause: Based on discussion with department staff, they were unaware of the degree of
subrecipient monitoring required for the subaward agreements.

Recommendation: We recommend the Department of Public Health and Human Services:
A. Establish and document internal controls for the federal Epidemiology and Laboratory
Capacity for Infectious Diseases to ensure subrecipients use funds for authorized
purposes, comply with federal statutes, regulations, and terms and conditions of the

20-02
oSGi:mee Montana Legislative Audit Division

subaward agreement, and performance goals are achieved, as required by federal
regulations.

B. Conduct monitoring of subrecipients of the federal Epidemiology and Laboratory
Capacity for Infectious Diseases award, as required by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-159

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-055: U.S. Department of Health and Human Services
ALN # 93.323, Epidemiology and Laboratory Capacity for Infectious
Diseases (ELC)
Grant # NUS50CK000500

Criteria: Federal regulation, 2 CFR 200.331, describes the characteristics for subrecipients and
contractors. Subrecipient characteristics include the use of federal funds to carry out the federal
program for a public purpose, as opposed to contractor characteristics of providing goods or
services for the benefit of the pass-through entity. This federal regulation was renumbered to

2 CFR 200.332 during the audit period.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) misclassified
certain agreements as contractor, rather than subrecipient, agreements and has therefore not
complied with federal subrecipient monitoring requirements.

Questioned Costs: None.

Context: As part of our audit, we reviewed payments from the ELC program to entities the
department classified as subrecipients and contractors. In reviewing the underlying agreements,
we identified the following situations where entities were misclassified as contractors rather than
as subrecipients.

e The department contracts with a university to maintain full-time equivalent (FTE)
positions to assist the department in increasing public health system ability to
respond to antibiotic resistant threats.

e The department entered into agreements with three Montana hospitals. The
agreements were to dedicate FTE positions to increasing the statewide laboratory
capacity in response to the COVID-19 public health emergency.

Both the university and the hospital agreements are established to help position the state to better
respond to infectious disease and not to provide services directly to the department. As such,
these should be classified as subrecipient rather than contractor agreements.

Effect: By misclassifying the agreements with the university and the three hospitals, the
department has not complied with federal requirements for subrecipients, such as providing

20-02
feos(Sime Montana Legislative Audit Division

federal award information to the entity, assessing risk for the entity, and conducting post-award
monitoring of the entity. Misclassification also increases the risk that use of funds will not fully
align with the purpose of the federal program.

Cause: Department procedures did not include formal consideration of subrecipient or contractor
classification for university and hospital agreements at the time the agreements were established.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Establish internal control review procedures to document consideration of contractor or
subrecipient classification at the time of entering into contract agreements for the
Epidemiology and Laboratory Capacity for Infectious Diseases federal award.

B. Properly classify agreements as subrecipient or contractor relationships for the
Epidemiology and Laboratory Capacity for Infectious Diseases federal award, as required
by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-161

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-056: U.S. Department of Health and Human Services
ALN # 93.558, Temporary Assistance for Needy Families (TANF)
Grant # 1901IMTTANF, 2001MTTANF, 2101MTTANF

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: There are no Department of Public Health and Human Services (department) level
controls over the accuracy and completeness of the ACF-199 TANF Data Report prior to its
submission to the federal government.

Questioned Costs: None.

Context: The department uses its Combined Healthcare Information and Montana Eligibility
System-Enterprise Architecture (CHIMES) system to determine TANF eligibility and benefit
amounts. A contractor for the department uses the CHIMES system to submit the TANF ACF-
199 report on behalf of the department. While the department represents it tested ACF-199
report functionality with CHIMES implementation in approximately 2012 and retests and
validates with system enhancements, the department did not provide this evidence for our
consideration. As such, there is no current system assurance available for report accuracy and
completeness. Our audit did not identify material noncompliance in the department’s ACF-199
reports.

Effect: Without department-level controls to review the file for accuracy and completeness prior
to submission and in the absence of documentation of initial and ongoing testing of the
CHIMES-EA, the department is unable to demonstrate adequate internal control over its ACF-
199 reports.

Cause: The department believes its up-front data collection procedures within the eligibility
system as well as validation of the data file in the state/federal exchange are controls sufficient
for its ACF-199 reports.

Recommendation: We recommend the Department of Public Health and Human Services
document department-level internal controls to ensure complete and accurate reporting for the
Temporary Assistance for Needy Families ACF-199 reports.

20-02
oslo Montana Legislative Audit Division

Views of Responsible Officials: The department concurs with this recommendation. For

additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-163

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-057: U.S. Department of Health and Human Services
ALN # 93.568, Low-Income Home Energy Assistance
Grant # 18BIMTLIEA, 19BIMTLIBA, 2001MTLIEA, 2101MTLIEBA,
2001MTESC3

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: There are no documented Department of Public Health and Human Services
(department) level controls to confirm accuracy and completeness of information system
generated extracts used to populate two required annual reports of the Low-Income Home
Energy Program (LIHEAP) prior to submission to the federal government.

Questioned Costs: None.

Context: As part of our audit, we reviewed four different reports the department is required to
submit to the federal government for LIHEAP. Of the four types of reports, two are generated
using extracts ran out of the department’s case management information system. The case
management system is used for intake of client data and eligibility data as well as other uses for
the federal program.

Department staff also communicated that the information entered into the case management
system is reviewed and monitored. Although the department does review and monitor this
activity, these types of reviews do not address whether the system extracts are complete and
accurate for reporting purposes. While we identified a lack of controls, we did not identify errors
in our testing of the reports submitted to the federal government.

Effect: The department cannot demonstrate compliance with federal regulation requirements to
maintain effective internal controls. Without effective internal controls, there is risk the required
federal reports are not complete or accurate.

Cause: The department communicated they have controls in place to review the extracts out of
the case management system as staff reviews reports for anomalies, comparing to prior year data.
However, this process is not documented, and we were not able to test it. Staff acknowledge this
process could be better documented. While the department has controls over the data entered into
the system, the department lacks controls to ensure that data is being compiled completely and
accurately in the system extracts.

20-02
esa Montana Legislative Audit Division

Recommendation: We recommend the Department of Public Health and Human Services
document internal controls over federal reporting data pulled out of the department’s case
management system to ensure complete and accurate reporting for the Low-Income Home
Energy Program.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-165

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-058: U.S. Department of Health and Human Services
ALN # 93.575 and 93.596, CCDF Cluster
Grant # 1801MTCCDF, 1901MTCCDM, 1901IMTCCDF, 1901MTCCDD,
2001MTCCDF, 2101MTCCDF

Criteria: Federal regulation, 2 CFR 200.303 requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) did not have
sufficient controls in place to ensure matching funds and maintenance of effort requirements
were met, or to track remaining funds to ensure period of performance requirements would be
met for grants, for the Child Care Development Fund (CCDF).

Questioned Costs: None.

Context: The CCDF Cluster has multiple federal requirements related to fiscal management of
grant funds, including the matching federal funds, maintenance of effort, earmarking of
administrative funds, and the period in which the grant must be spent. The department lacked
controls for the entire audit period to track matching funds, maintenance of effort, and period of
performance requirements. For earmarking requirements, the department relied on a tool
provided by the federal government. The federal government compiled this tool using quarterly
financial reports from the department. Without verifying the information used in the tool is
correct, the department cannot rely on this tool as an internal control.

We completed additional testing over each of these requirements and concluded the department
met each of the matching funds, maintenance of effort, earmarking, and period of performance
federal requirements.

Repeat Finding: Montana’s Single Audit for the two fiscal years ended June 30, 2019, included
a recommendation (#2019-019) to the department to develop internal controls to document the
obligation of all funding types for the CCDF federal program.

Effect: The department is not in compliance with federal regulations as they did not establish
and maintain internal controls to ensure compliance with multiple federal requirements. Without
proper internal controls to track these requirements, the department is at risk of unknowingly not
complying with federal regulations governing the CCDF program.

20-02
C-166

Montana Legislative Audit Division

Cause: For the majority of the requirements, the department agrees that they did not have a
control in place to track the requirements. Staff indicated the program had been through some
turnover and changes because of reorganization. While we were made aware of a tracking tool
developed late in fiscal year 2021 for matching funds, maintenance of effort, and period of
performance requirements, we did not see evidence of the tool consistently being used. For the
earmarking requirements, the department relied on the tool completed by the federal government
to ensure the requirements were met. The federal government stopped providing this tool in
fiscal year 2021, so the department recreated the tool for its own tracking purposes.

Recommendation: We recommend the Department of Public Health and Human Services
establish and maintain internal controls to ensure compliance with federal matching funds,
earmarking, maintenance of effort, and period of performance requirements for the Child Care
Development Fund program.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-167

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-059: U.S. Department of Health and Human Services
ALN # 93.575 and 93.596, CCDF Cluster
Grant # 1801MTCCDF, 1901MTCCDM, 1901MTCCDF, 1901MTCCDD,
2001MTCCDF, 2101MTCCDF

Criteria: Federal regulation, 45 CFR 98.42(b)(2), requires the Department of Public Health and
Human Services (department) to complete at least annual inspections of childcare providers and
facilities to ensure compliance with health and safety standards.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Department internal controls were not effective in ensuring childcare providers or
facilities received inspections annually as required by federal regulations.

Questioned Costs: None.

Context: We completed a sample of invoices reimbursing childcare costs for participant families
receiving Child Care Development Fund (CCDF) assistance during the audit period. The sample
was not a statistically valid sample. We also completed testing over the corresponding childcare
providers as part of this sample. Out of total 55,075 childcare centers, 40 were tested, and we
identified four providers without a current inspection completed within 12 months. Under the
COVID-19 public health emergency, the state obtained a waiver that temporarily suspended on-
site monitoring and inspections. The four instances identified were not related to this waiver.

Effect: The department has not complied with federal regulations regarding annual inspection of
childcare providers. As a result, the department is at risk of providing payment for childcare at a
provider who has not met all health and safety requirements.

Cause: While the department has a process in place to track inspections of childcare providers,
department internal controls were not sufficient to identify and prompt inspections to be
completely timely.

Recommendation: We recommend the Department of Public Health and Human Services:
A. Enhance internal controls to complete annual inspections of childcare providers per
federal requirements for the Child Care Development Fund program.
B. Comply with federal regulations by completing annual inspections of childcare providers.

20-02
oSlé:wae Montana Legislative Audit Division

Views of Responsible Officials: The department concurs with this recommendation. For

additional information regarding the department’s planned corrective action, see Corrective
Action Plan starting on page D-1.
C-169

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-060: U.S. Department of Health and Human Services
ALN # 93.575 and 93.596, CCDF Cluster
Grant # 1801MTCCDF, 1901MTCCDM, 1901MTCCDF, 1901MTCCDD,
2001IMTCCDF, 2101MTCCDF

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) did not maintain
records of some approved grant applications for the Child Care Development Fund (CCDF).

Questioned Costs: None.

Context: We completed a sample of subrecipients for the CCDF. This sample was not
statistically valid. Of the 45 grantees we tested, the department could not provide the grant
application for five grantees in fiscal year 2020. We completed additional testing over the
corresponding payments and do not question the validity of payments made to the grantees. All
of the payment amounts were consistent with other grantees and all grantees were licensed
providers and had completed the necessary certification. However, we were unable to determine
whether the grant application was approved.

Effect: Since the department could not provide grant applications, we are unable to see evidence
of approval prior to payment. The department could not demonstrate compliance with federal
regulations to maintain effective internal controls.

Cause: Per department staff, the files were misplaced during the department’s move to a new
location.

Recommendation: We recommend the Department of Public Health and Human Services
enhance internal controls to ensure records of grant applications are tracked and maintained.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
(esViimee Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-061: U.S. Department of Health and Human Services
ALN # 93.658, Foster Care- Title IV-E
Grant # 1901MTFOST, 2007MTFOST, 2107MTFOST

Criteria: Federal regulation, 2 CFR 200.403 (g), specifies costs must be adequately documented
to be allowable under the award.

Federal regulation, 45 CFR 1356.60(b)(2), requires all training activities and costs funded under
title [V-E be included in the department’s training plan for title [V-B.

Regarding training plans for the Foster Care program, Federal regulation, 45 CFR 235.63(c),
specifies, in part, that federal financial participation in costs is available when certain conditions
are met. These conditions include that grants to educational institutions are made for the purpose
of developing, expanding, or improving training for personnel employed by the state or
individuals preparing for employment by the state and for an educational program that is directly
related to the department’s training program.

Federal regulation, 2 CFR 200.303 requires non-Federal entities to, among other things, establish
and maintain effective internal control over the Federal award that provides reasonable assurance
that the non-Federal entity is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) continued to
make payments to subrecipients without first obtaining and reviewing detailed supporting
documentation.

Questioned Costs: Based on our sample results, we question costs for the amount of $2,002,503
for costs associated with the Foster Care program. Based on overall level of activity, we estimate
likely questioned costs are $5.1 million, which represents projected errors in payments to Foster

Care subrecipients.

Repeat Finding: Montana’s prior Single Audit report for the two fiscal years ended June 30,
2019, included a recommendation (#2019-017) that the department reimburse college and tribes
only for activities allowed by federal regulations and to design and implement internal control to
ensure detailed support for invoices is obtained, reviewed, and approved prior to payment.

Context: The department maintains subrecipient agreements with the seven tribes located within
the state and two colleges/universities (colleges). Federal funds are provided to these entities to
either help administer the Foster Care program, provide stipends to college students studying
social work, or to provide training to department staff.
C-171

In our sample of fourteen invoices submitted by tribes or colleges, we identified nine instances
where supporting documentation did not exist or supporting documentation was not detailed
enough to determine whether the costs were allowable. Of the fourteen invoices tested, five were
related to training costs. This sample was not statistically valid. Due to lack of supporting
documentation submitted by the colleges, we were unable to determine whether training costs
were specified in the department’s training plan. Our observations of inadequate documentation
include:

e Support for one college payment for $59,124 was a budget to actual report by
expenditure category which itemized approximately $13,500 for payroll and fringe
benefit costs, $600 for supplies, $16,000 for subscriptions, $20,000 for stipends, and
$8,000 for indirect expenses. We were unable to determine whether payroll costs were
for proper individuals or for correct amounts as no timecards or detailed payroll reports
were available to compare to the college contract. Additionally, supply, subscription and
stipend cost information were not supported with receipts or details to indicate what was
purchased or the names of the stipend recipients. As such, we were unable to determine
whether costs incurred by the college were authorized under the contract and allowable
for reimbursement with federal funds.

e Tribal invoices were often supported only with standardized billing invoices which
outline personnel positions under the contract, the individual salaries including fringe
benefits of the personnel, and operating expenditures. When no other support was
provided by the tribe, we could not verify if the expenditures outlined on the invoice were
actually incurred.

The total costs in our sample are as follows:

Subrecipient Wages Operation Indirect Costs
Type Unsupported Expenses Unsupported Total
Unsupported
Tribes $ 47,657 $ 828 $12,464 $ 60,949
Colleges $1,465,513 $476,041 N/A $1,941,554
Total $1,513,170 $476,869 $12,464 $2,002,503

Effect: Without adequate supporting documentation, the department is unable to demonstrate
compliance with internal control requirements in federal regulation. Additionally, for payments
which lack adequate support, the department may have incurred costs for unallowable activities
under the federal award.

Cause: For instances where a general ledger expense listing is provided, the department believes
its controls for review of the summary by each program and fiscal staff for allowability and
sufficiency of evidence are effective controls for subrecipient payment activities. For tribal
reimbursements, the department created a standardized billing form on which tribes list positions
under the contract, the salary amount and fringe benefits, and total operating costs incurred. The
department believes the completed standardized billing form information is sufficient because
this information can be compared to the contract. We disagree with the department’s position
regarding adequate supporting documentation. Reasons for our opinion include instances where:

20-02
(oS0/eee Montana Legislative Audit Division

Documentation for college invoices included salary, travel costs such as airline and hotel
costs, and supply items. Without more detailed documentation, the department can
neither be sure the salaries or travel costs were incurred by college staff employed under
the contract nor that supplies purchase were reasonable and necessary for administering
the program.

The standardized billing form was incorrectly completed by the tribe which resulted in
the department overpaying the tribe. In this case, the tribe did supply the department
with detailed wage reports for each employee. Salary amounts for two of the tribal
employees were listed as the total gross salary plus the employer and employee payroll
deductions. These errors were not identified and corrected in the department’s review.

Salaries on the standardized billing form listed over $110,000 in salary costs incurred
when the tribe’s general ledger print out showed approximately $93,000 in salary costs.
The department’s review of the invoice did not identify the discrepancy and the tribe was
overpaid. In order to properly identify which of the 25 tribal employee salaries was
incorrect, the department would need detailed gross salary information provided to them.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Design and implement internal controls for its Foster Care federal awards to ensure
adequate documentation for contractor and subrecipient is obtained, reviewed, and
approved prior to payment.

B. Reimburse Foster Care federal award contractors and subrecipients only for activities
allowed by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-173
State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-062: U.S. Department of Health and Human Services
ALN # 93.323, Epidemiology and Laboratory Capacity for Infectious
Diseases (ELC)
Grant # NUSOCK000500

Criteria: Federal regulation 2 CFR 200.403(g) specifies costs must be adequately documented
in order to be allowable under federal awards.

Federal regulation, 2 CFR 200.303 requires non-Federal entities to, among other things, establish
and maintain effective internal control over the Federal award that provides reasonable assurance
that the non-Federal entity is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) made payments
to ELC subrecipients and contractors without first obtaining and reviewing detailed supporting
information.

Questioned Costs: We question $2,144,872 in costs incurred for the ELC program which
includes all payments made to subrecipients and to the university.

Context: As part of our audit, we conducted samples of each subrecipient and contractor
payments for the ELC financial assistance program. The subrecipient sample was not a
statistically valid sample. The contractor payment testing consisted of a statistically valid sample
of 30 journals with an additional 7 journals selected judgmentally. Both samples identified
instances where costs were not adequately documented, as further described below.

Subrecipient Payments — The department made payments to 27 county governments,
subrecipients of the ELC award, for the purpose of hiring a full-time equivalent (FTE)
position for an epidemiologist, county sanitarian, or disease intervention specialist. We
sampled one payment to each of six subrecipients. Supporting documentation provided
by the department was insufficient to determine whether the subrecipients had incurred
costs for purposes under the contract. Auditor observations include:

e Support for each of the payments was an email from the county which simply
specified whether the county had hired an FTE and did not contain detailed
support such as payroll reports or timesheets.

e Contract payments were established at a set rate and were not based on costs
incurred by the counties. For one county where salary and fringe benefit
information was provided, we estimate the county was overpaid by $28,970
from December 2020 to June 2021.

20-02
(0502S Montana Legislative Audit Division

e Of the six payments in our sample, there were one each from December 2020,
January 2021, and April 2021, with the remaining three payments taking place in
June 2021. Because support provided by the department was in email form
dated May or June 2021, we concluded the department made payments to
counties without any documentation for the December, January, and April
payments.

e One county indicated it was in the process of hiring for an FTE. The department
disbursed funds to the county in June 2021. However, the subrecipient
agreement was not signed until November 2021.

Contractor Payments — We sampled 37 journals, including 114 expenditure transactions.
We identified the following payments to contractors where supporting documentation
was not sufficient at the time of payment.

e The department maintains a contract with a university to maintain FTE to assist
the department in increasing public health system ability to respond to antibiotic
resistant threats. Supporting documentation did not include review of payroll
reports or timesheets.

e Agreements with three Montana hospitals were to dedicate FTE to increasing
statewide laboratory capacity in response to the COVID-19 public health
emergency. While supporting documentation was provided at the end of the
contract period, it was not obtained and reviewed prior to monthly contract
payments to the hospitals.

Effect: Lack of sufficient documentation for the subrecipient and contractor payments renders
the costs unallowable under federal regulations, and has resulted in significant questioned costs
for the audit period.

Cause: Department procedures for subrecipient and contractor payments did not include
evaluation of adequacy of supporting documentation for federal awards.

Recommendation: We Recommend the Department of Public Health and Human Services:

A. Design and implement internal controls for its Epidemiology and Laboratory
Capacity for Infectious Diseases federal awards to ensure adequate documentation for
contractor and subrecipient payments is obtained, reviewed, and approved prior to
payment.

B. Reimburse Epidemiology and Laboratory Capacity for Infectious Diseases federal
award contractors and subrecipients only for activities allowed by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.
C-175

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-063: U.S. Department of Health and Human Services
ALN # 93.558, Temporary Assistance for Needy Families (TANF)
Grant # 19001MTTANF, 200 1IMTTANF, 2101MTTANF

ALN # 93.658, Foster Care — Title IV-E
Grant # 2107MTFOST, 2007MTFOST, 1907MTFOST

ALN # 93.767, Children’s Health Insurance Program (CHIP)
Grant # 1905MT5021, 2005MT5021, 2105MT5021

ALN # 93.775, 93.777, 93.778, Medicaid Cluster

Grant # 190S5MTSADM, 2005MTSADM, 2105MTSADM,
1190S5MTIMPL, 1905MTINCT, 2005MTIMPL, 200S5MTINCT,
2105MTIMPL, 2105MTINCT, 2005MT50C3, 2105MT50C3

Criteria: Federal regulation, 2 CFR Appendix VI, in part, requires the state public assistance
agency to develop, document, and implement a public assistance cost allocation plan in
accordance with federal regulations.

Federal regulation, 2 CFR 200.416(a), in part, requires there to be a process whereby central
service costs can be identified and assigned to benefited activities on a reasonable and consistent
basis.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) did not follow
its federally approved plan to allocate costs among state and federal programs. Additionally,
department internal controls did not identify these inconsistencies. We noted the following
exceptions to compliance with the applicable cost allocation plan:

e The allocation method specified for the Economic Section Branch Manager Indirect Cost
Pool lists the allocation method as full-time equivalent (FTE) directly supervised by the
Economic Services Branch Manager. The department erroneously allocated a portion of
the pool costs using FTE which directly report to the Director’s Office.

e We were unable to locate the DET Contract Specialist Indirect Cost Pool or the MHPMP
Maint and Operations 75 Indirect Cost Pool in the department’s Cost Allocation Plan
(CAP), yet the department allocated costs associated with these pools during the audit
period.

20-02
C-176

Montana Legislative Audit Division

e We reviewed three allocations to the Director’s Office Indirect Cost Pool (DO Pool). Per
the CAP, the department director supervises Chief Legal, Chief Personnel Officer, branch
managers, and the Public Health and Safety Division Administrator. The allocation
method for the DO Pool is to benefit other indirect cost pools. During the audit, we
noted the department did not allocate costs to the Public Health and Safety Division as
required, which also resulted in over-allocations to the other benefiting cost pools.

e We reviewed two allocations for the Operations Services Branch Manager Indirect Cost
Pool. Per the CAP, costs for this pool allocate to the Technology Services Division,
Business and Financial Services Division, and Quality Assurance Division administrator
pools. During the audit, we noted one instance where costs were not allocated to the
Chief Information Officer pool and one instance where costs were allocated to the Project
Management Bureau, bypassing the Chief Information Officer pool. The department’s
organizational chart also lists the Chief Information Officer, Strategic Planning, Research
and Analysis, Internal Audit Bureau, Medical Marijuana Bureau, and Office of Budget
and Finance as direct reports to the Operations Services Branch Manager. The
department allocated costs to each of these functions even though the CAP does not
specify them as receiving allocations.

e We reviewed three allocations to the MPQHF QUI LOC Indirect Cost Pool. While costs
were allocated, the department did not provide supporting documentation for the review
of the allocation method and the pool was not included in the CAP.

Questioned Costs: Based on the amount of costs allocated to these programs, we project
questioned costs for errors identified in our sample as well as other unidentified errors could
accumulate to more than $25,000 for each of the CHIP, Foster Care, Medicaid and TANF
programs.

Context: During the period under audit, the department allocated costs under two different cost
allocation plans. In total, the department allocated approximately $164.8 million and

$172.6 million in costs for fiscal years 2020 and 2021, respectively. Monthly, there are
approximately 130 cost pools for which the department allocates costs. We conducted a
nonstatistical sample of 61 cost pool allocations.

The table below depicts total indirect costs allocated to each of the 4 federal programs where we
identified material noncompliance.

Total Costs Allocated to Select Federal Programs for Fiscal Years 2020 and 2021
Federal Special Revenue Fund
Federal Program FY2020 FY2021 Total
CHIP $4,162,131 $3,317,393 $7,479,524
Foster Care $4,454,339 $3,894,529 $8,348,868
Medicaid $53,114,531 $55,539,639 $108,654,170
TANF $5,764,828 $5,908,191 $11,673,019

Repeat Finding: Montana’s Single Audit report for the two fiscal years ended June 30, 2017,
included a recommendation (#2017-014) to the department regarding the internal controls over
and administration of its cost allocation plan. Montana’s Single Audit report for the two fiscal
C-177

years ended June 30, 2019, included a recommendation (#2019-022) to the department to
conduct and document a review of all cost pools to ensure alignment with the approved cost
allocation plan, to implement changes to the cost allocation process only after receiving approval
from, or submitting a plan revision to, the federal government, to develop and implement internal
controls to detect variances in cost pools allocated using a full-time equivalent staff statistic, and
to allocate costs in accordance with its cost allocation plan.

Effect: In combination, the errors identified by our audit resulted in both over-allocations and
under-allocations of indirect costs. Due to inherent complexities in stepping costs through each
indirect cost pool, we did not quantify the errors for individual major federal programs.
However, we project questioned costs exceeding $25,000 could exist for those programs.

Cause: The department’s CAP is a 33 page text document. When updated, the department must
submit a red-line strike out version along with a clean version of the proposed CAP. During
each of the last two updates, the department’s review of the changes did not identify and correct
cost pools inadvertently deleted or were otherwise overlooked for inclusion.

Recommendation:
We recommend the Department of Public Health and Human Services:
A. Enhance internal controls over cost allocation, including consideration of an in-depth
review of its cost allocation procedures and plan.
B. Allocate costs as specified in the cost allocation plan, as required by federal regulations.
C. Implement changes to the cost allocation process only after receiving approval from, or
submitting a plan revision, to the federal government.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
(ose Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-064: U.S. Department of Health and Human Services
ALN # 93.558, Temporary Assistance for Needy Families (TANF)
Grant # 1901IMTTANF, 2001IMTTANF, 2101MTTANF

Criteria: Federal regulation, 2 CFR 200.170, Appendix A, requires the Department of Public
Health and Human Services (department) report under the Federal Funding Accountability and
Transparency Act (FFATA) each action on subaward agreements that equals or exceeds $30,000
in federal funds. Reports must be submitted to the FFATA Subaward Reporting System (FSRS)
no later than the end of the month following the month in which the obligation was made and
reports must include specific information about the obligating action, as outlined on the FSRS
website.

In addition, federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award. Effective
internal controls should include establishing procedures to ensure eligibility determinations are
performed in accordance with program requirements.

Condition: Department of Public Health and Human Services (department) internal controls did
not identify a change in contracting system information which caused necessary FFATA reports
to be overlooked for the TANF program.

Questioned Costs: None.

Context: Department staff query for changes in its contracting system by comparing the current
month vendor obligation data to prior month vendor obligation data. The initial time the
obligation accumulates to an amount exceeding $30,000, or any increase in obligation amount
thereafter, should be identified and reported as part of the department’s procedures.

In total for six major programs, we identified 269 instances where changes in the federal
obligation in the department’s contracting system prompted, or should have prompted, the
department to submit a FFATA report. For TANF, we reviewed four instances; this sample was
not statistically valid. We reviewed the underlying agreements which were for Pathways
Program providers who are considered subrecipients of federal TANF funds. Their subrecipient
status supports the FFATA reports being necessary. However, the department did not complete
and submit FFATA reports for these four TANF obligations.
C-179

The required FFATA summary information is included below.

Summary of FFATA Report Testing
by Number of Reports and Associated Dollar Amounts
Number of Subaward Not Report Not Subaward Subaward
Transactions Reported Timely Amount Incorrect Missing Key
Tested Elements
4 4 0 0 0
Dollar Amount of | Subaward Not Report Not Subaward Subaward
Transactions Reported Timely Amount Incorrect Missing Key
Tested Elements
$403,503 $403,503 $0 $0 $0

Effect: By not submitting required FFATA reports, the department did not comply with federal
reporting requirements for the TANF program.

Cause: Based on information provided by the department, personnel did not identify when one
of the data fields in its contracting system was repurposed to account for federal expenditure
activity rather than state general fund activity. When this change occurred, department internal
controls were not updated to fully consider the implications for FFATA reporting. Because the
department did not update the data field to indicate federal funds were involved, the department
did not identify the need to prepare and submit FFATA reports for Pathways Provider
obligations.

Recommendation: We recommend the Department of Public Health and Human Services:
A. Enhance internal controls to identify when changes in data fields in the contracting
system impact its ability to properly identify changes in contract obligations for
FFATA reporting for the TANF program.
B. Submit accurate and complete FFATA reports for the TANF program, as required by
federal regulations

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
OSE ime Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-065: U.S. Department of Health and Human Services
ALN # 93.658, Foster Care- Title IV-E
Grant # 1907MTFOST, 2007MTFOST, 2107MTFOST

Criteria: Federal regulation, 2 CFR 200.170, Appendix A, requires the Department of Public
Health and Human Services (department) report under the Federal Funding Accountability and
Transparency Act (FFATA) each action on subaward agreements that equals or exceeds $30,000
in federal funds. Reports must be submitted to the FFATA Subaward Reporting System (FSRS)
no later than the end of the month following the month in which the obligation was made and
reports must specify information about the obligating action, as outlined on the FSRS website.

Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other things,
establish and maintain effective internal control over the Federal award that provides reasonable
assurance that the non-Federal entity is managing the Federal award in compliance with Federal
statutes, regulations, and the terms and conditions of the Federal award.

Condition: Foster Care contracts contained unsupported dollar amounts and inaccurate federal
award identification numbers, resulting in errors in FFATA reporting.

Questioned Costs: None.

Context: Department staff query for changes in its contracting system by comparing the current
month data to prior month data. The initial time the obligation accumulates to an amount
exceeding $30,000, or any increase in obligation amount thereafter, should be identified and
reported as part of the department’s procedures.

In total for six major federal programs, we identified 269 instances where changes in the federal
obligation in the department’s contracting system prompted, or should have prompted, the
department to submit a FFATA report. For Foster Care, we reviewed 6 instances; this sample
was not statistically valid. While the reports were submitted timely, we could not determine the
accuracy of the obligation information and the federal award identification number included on
the FFATA reports, as the underlying contracts did not contain accurate disclosure information.
The required FFATA summary information is included below.

Summary of FFATA Report Testing
by Number of Reports and Associated Dollar Amounts
Number of Subaward Not Report Not Subaward Subaward
Transactions Reported Timely Amount Incorrect Missing Key
Tested Elements
6 0 0 6 6
Dollar Amount of | Subaward Not Report Not Subaward Subaward
Transactions Reported Timely Amount Incorrect Missing Key
Tested Elements
$511,509 $0 $0 $511,509 $511,509

Effect: The department did not comply with federal FFATA reporting requirements.

Cause: The department’s contracts with subrecipients for the Foster Care program did not

include complete and accurate information, as discussed in Finding 2021-051. Because the
contracts were incomplete and inaccurate, the contracting system that drives FFATA reporting
also contained incomplete or inaccurate data.

Recommendation: We recommend the Department of Public Health and Human Services:
A. In conjunction with enhancements to Foster Care subrecipient award agreements
discussed in Finding 2021-051, enhance internal controls to ensure contracting
system information is complete and accurate for Foster Care subawards.
B. Submit accurate and complete FFATA reports for the Foster Care program, as
required by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
(o5t:34me Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-066: U.S. Department of Health and Human Services
ALN # 93.323, Epidemiology and Laboratory Capacity for Infectious
Diseases (ELC)
Grant # NUS0CK000500

Criteria: Federal regulation, 2 CFR 200.170, Appendix A, requires the Department of Public
Health and Human Services (department) report under the Federal Funding Accountability and
Transparency Act (FFATA) each action on subaward agreements that equals or exceeds $30,000
in federal funds. Reports must be submitted to the FFATA Subaward Reporting System (FSRS)
no later than the end of the month following the month in which the obligation was made and
reports must specify information about the obligating action, as outlined on the FSRS website.

In addition, federal regulation, 2 CFR 200.303 requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Condition: Our sample testing for the ELC award identified multiple internal control and
compliance issues related to FFATA reporting.

Questioned Costs: None.

Context: Department staff query for changes in its contracting system by comparing the current
month data to prior month data. The initial time the obligation accumulates to an amount
exceeding $30,000, or any increase in obligation amount thereafter, should be identified and
reported as part of the department’s procedures.

For the ELC program, we identified 144 instances where changes in the federal obligation in the
department’s contracting system prompted, or should have prompted, the department to submit a
FFATA report, and we reviewed 19 instances. This sample was not statistically valid. We
identified eight instances where reports were not submitted and 11 instances where reports were
not submitted timely. For all reports submitted, we identified subaward data was missing key
elements as the federal award identification number was omitted and did not properly describe
the purpose of the award in relation to the underlying subrecipient agreements. The required
FFATA summary information is included below.
Summary of FFATA Report Testing
by Number of Reports and Associated Dollar Amounts

Number of Subaward Not Report Not Subaward Subaward
Transactions Reported Timely Amount Incorrect Missing Key

Tested Elements

19 8 11 0 19

Dollar Amount of | Subaward Not Report Not Subaward Subaward
Transactions Reported Timely Amount Incorrect Missing Key

Tested Elements

$22,544,689 $21,557,612 $987,077 $0 $22,544,689

C-183

Effect: By not submitting required FFATA reports, the department did not comply with federal
reporting requirements for the ELC program. Without clear communication between department
functions, the department risks continued FFATA reporting errors.

Cause: For three of the required reports not submitted, there was a breakdown in
communication between the department’s Business and Financial Services Division (BFSD) and
the program staff involved in the contracting processes. For these instances, BFSD staff
indicated there was no Data Universal Numbering System (DUNS) number, yet program staff
were able to quickly locate the DUNS number at our request.

Recommendation: We recommend the Department of Public Health and Human Services:

A. Enhance internal controls to ensure the Business and Financial Services Division staff
receives unique entity identification number information for Epidemiology and
Laboratory Capacity for Infectious Diseases contracts to allow for proper FFATA
reporting.

B. Submit accurate and complete FFATA reports for the Epidemiology and Laboratory
Capacity for Infectious Diseases program, as required by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
(OSES Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-067: U.S. Department of Health and Human Services
ALN # 93.658, Foster Care — Title IV-E
Grant # 1901MTFOST, 2001IMTFOST, 2101MTFOST

Criteria: Instructions for completion of the CB-496 report indicate Federal Share of Child
Support Collections related to Title IV-E be included on line 3 of the CB-496 report.
Additionally, instructions for line 17 of the CB-496 report require an estimate for Foster Care
expenditures for the next quarter.

Federal regulation, 2 CFR 200.303 requires non-Federal entities to, among other things, establish
and maintain effective internal control over the Federal award that provides reasonable assurance
that the non-Federal entity is managing the Federal award in compliance with Federal statutes,
regulations, and the terms and conditions of the Federal award.

Condition: The Department of Public Health and Human Services (department) did not properly
correct misreported information in its Foster Care CB-496 reports submitted during the audit
period.

Questioned Costs: None.

Context: We reviewed four CB-496 reports, out of eight submitted for the audit period. This
was not a statistically valid sample. We identified incorrect amounts were included in reports
submitted for quarters ended September 2020 and December 2020. On those reports, the
department incorrectly reported Temporary Assistance for Needy Families cost recoveries rather
than Foster Care cost recoveries. While the department identified the errors and made
adjustments on its report for the quarter ended March 2021, the adjustments were not made
correctly.

Additionally, for reports reviewed, the department reported estimated federal expenditures
ranging from $1.3 million to $2.9 million. In contrast, for these same reports the department
incurred between $1.5 million and $4.4 million in federal expenditures. On average, the
department under-estimated upcoming federal expenditures by over $1 million on each report.

Effect: Without effective internal control, the department continues to risk submitting incorrect
CB-496 Foster Care reports. Due to the department’s under-estimation of upcoming quarterly
expenditures, the department exhausts its federal grant allocation early each quarter.

Cause: Department internal control procedures include identification and investigation of
variances greater than 10% from the prior report for individual line items in the CB-496 reports.
For the errors identified in our audit, the department’s controls did not flag the variances for
C-185

follow-up even though the percentage of change ranged from 32% to 1192%. Additionally, the
department input adjustments backwards on subsequent reports and these errors were not
identified in the department’s review of the reports.

Recommendation: We recommend the Department of Public Health and Human Services:
A. Enhance internal control to review Foster Care CB-496 reports for accuracy prior to
submission.
B. Submit accurate information for cost recoveries and adjustments from prior periods on
Foster Care CB-496 reports, as required by federal regulations.

Views of Responsible Officials: The department concurs with this recommendation. For
additional information regarding the department’s planned corrective action see the Corrective
Action Plan starting on page D-1.

20-02
C-186

Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-068: U.S. Department of Interior
ALN # 15.605, 15.611, 16.626, Fish and Wildlife Cluster
Grant # FI1SAF00528

Criteria: Federal regulation, 2 CFR 200.303, requires non-Federal entities to, among other
things, establish and maintain effective internal control over the Federal award that provides
reasonable assurance that the non-Federal entity is managing the Federal award in compliance
with Federal statutes, regulations, and the terms and conditions of the Federal award.

Federal regulation, 2 CFR 200.405, states costs must be “allocable to a particular Federal award
or other cost objective if the goods or services involved are chargeable or assignable to that
Federal award or cost objective in accordance with relative benefits received.” Per the standard,
“this standard is met if the cost:

(1) Is incurred specifically for the Federal award;

(2) Benefits both the Federal award and other work of the non-Federal entity and can be
distributed in proportions that may be approximated using reasonable methods; and

(3) Is necessary to the overall operation of the non-Federal entity and is assignable in part to
the Federal award in accordance with the principles in this subpart.”

Federal regulation, 2 CFR 200.403 states costs must “be necessary and reasonable for the
performance of the Federal award and be allocable thereto under these principles” and “be
consistent with policies and procedures that apply uniformly to both federally-financed and other
activities of the non-Federal entity.” It also states costs must be “adequately documented.”

Condition: The Department of Fish, Wildlife & Parks (department) obtained an administrative
grant from the U.S. Fish and Wildlife Service related to the Wildlife Restoration and Basic
Hunter Education grant that included 100% of the internal auditor’s position salary. The grant
agreement indicates that the internal auditor position is responsible for assessing agency
functions to ensure the department complies with all requirements necessary to maintain ongoing
eligibility relative to the grant programs. While the internal auditor performed two audits directly
related to the grant, the internal auditor also performed duties that are not directly related to the
grant. The employee did not track time in a way that would allow a determination of what
portion of time benefited the grant and was allowable to be charged to the grant. We question the
entire amount of the internal auditor’s salary and benefit expenditures charged to the grant in
state fiscal year 2020.

Questioned Costs: We identified $28,105 in questioned costs.

Context: The department charged approximately 40% of its internal auditor’s salary to the
Wildlife Restoration and Basic Hunter Education grant in state fiscal year 2020. While there
C-187

were two internal audits conducted related to the grant, most of the pay periods charged do not
line up with the timeline of when the audits were in progress.

Effect: Because the department did not have internal control procedures to ensure the portion of
the internal auditor’s salary and benefits costs charged to the Wildlife Restoration and Basic
Hunter Education grant program benefitted the program, the department cannot demonstrate
compliance with federal regulations, resulting in questioned costs.

Cause: The internal auditor’s position responsibilities include assessing fiscal and programmatic
functions to ensure that the department complies with all requirements necessary to maintain
ongoing eligibility relative to the Wildlife Restoration and Basic Hunter Education grant
program. The internal auditor performs duties, such as internal audits for other department
activities, that are not associated with the grant. While department personnel stated their internal
auditor’s time was used to complete eligible activities, they neglected to document activities
performed for time worked to support the costs charged to the grant.

Repeat Finding: This is a repeat finding and was reported as Single Audit finding 2019-036 in
the audit for the two fiscal years ended June 30, 2019.

Recommendation: We recommend the Department of Fish, Wildlife & Parks:

A. Implement procedures to ensure the internal auditor’s time is allocated to the Wildlife
Restoration and Basic Hunter Education grant according to the proportionate benefit
received.

B. Charge internal audit salary costs to the grant for time that is necessary, reasonable, and
allocable.

Views of Responsible Officials: The department partially concurs with this

recommendation. Management believes that given the employee’s time was used on specific
eligible activities or other activities that benefited the grant as a whole, time allocation was not
necessary. For additional information regarding the department’s planned corrective action see
the Corrective Action Plan starting on page D-1.

Rebuttal of Views of Responsible Officials: We considered the department’s partial
concurrence. As noted above, the internal auditor performs duties, such as internal audits for
other department activities, that are not associated with the grant. Due to a lack of
documentation, the department cannot demonstrate the portion of the internal auditor’s salary
and benefits costs charged to the grant directly benefitted the program.

20-02
OSEiwae Montana Legislative Audit Division

State of Montana
Schedule of Findings and Questioned Costs
For the Two Fiscal Years Ended June 30, 2021

Section III — Federal Award Findings and Questioned Costs

Finding 2021-069: U.S. Institute of Museum and Library Services
ALN # 45.310, Grants to States
Grant # LS-246178-OLS-20, LS-249973-OLS-21

Criteria: Federal regulation, 2 CRF 200.430 (f), indicates “Incentive compensation to
employees based on cost reduction, or efficient performance, suggestion awards, safety awards,
etc., is allowable to the extent that the overall compensation is determined to be reasonable and
such costs are paid or accrued pursuant to an agreement entered into in good faith between the
non-Federal entity and the employees before the services were rendered, or pursuant to an
established plan followed by the non-Federal entity so consistently as to imply, in effect, an
agreement to make such payment.”

Federal regulation, 2 CFR 200.403(c), indicates costs must be consistent with policies and
procedures that apply uniformly to both Federally-financed and other activities of the non-
Federal entity to be allowable uses of Federal funds.

State of Montana Operations Manual (MOM) Broadband Pay Policy allows for lump-sum
payments for reasons established in an agency’s pay policy, including an employee incentive
award, housing allowances, temporary assignment pay, or a performance award for completing
pre-set conditions of a project.

Condition: The Montana Library (Library) paid employee incentive bonuses in fiscal years 2020
and 2021. The Library’s pay plan policy dated August 10, 2018, in effect during the audit
period, did not provide for these types of incentives or lump-sum payments. Contrary to federal
regulations, the bonus costs were not paid as part of an established plan during the audit period.
Therefore, the costs are unallowable and constitute noncompliance with federal regulations. A
pay plan including incentive pay was effective October 13, 2021, subsequent to our audit period.

Questioned Costs: We question $45,777 in bonus payments charged to the federal grant.

Context: In fiscal years 2020 and 2021, the Library used unspent personal services budget to
fund bonuses for library staff. The Montana State Library Commission approved the bonuses
based on Library successes throughout the year. The library paid the bonuses to all staff based on
position. In fiscal year 2020, Helena Supervisors received 6 percent and remaining staff received
5 percent while Remote Supervisors received 4 percent and the remaining remote staff received

3 percent. In 2021 supervisors received $3,500 and staff received $2,500. The Library split the
costs between funds in the same manner as employee salaries. Bonuses charged to the grants
were $18,877 in fiscal year 2020 and $26,900 in fiscal year 2021. Total personal service costs for
the bonuses were $112,818 and $132,000, respectively.
C-189

Effect: The bonus practice is noncompliance with federal regulations and state policy, and
results in questioned costs.

Cause: Under MOM policy, the Library is required to update its pay plan policy every two
years. While the pay plan in effect during fiscal years 2020 and 2021 did not have language
allowing for lump-sum or incentive payments, prior policies did contain such language.
Management indicated the language was accidently removed from the policy in effect during the
audit period and they have added the language back into current policy. In addition, Library
personnel indicated they cannot implement expectations at the beginning of the period because
they may not have sufficient resources to pay the bonus.

Recommendation: We recommend the Montana Library comply with federal regulations and
state policy regarding employee incentive pay.

Views of Responsible Officials: The Library does not concur with this recommendation. While
management acknowledges the Library did not include the required language to govern the
application of their pay incentive strategy in their adopted pay plan policy, they disagree the
bonus costs charged to the federal funds were not consistent with federal regulations.
Management’s position is based, in part, on e-mail correspondence with a federal Institute of
Museum and Library Services Program Officer, occurring after the audit period.

Rebuttal of Views of Responsible Officials: Federal grantor agencies are responsible for
issuing management decisions on federal findings after, not before, receipt of the Single Audit
report. However, as part of our audit procedures, we considered the e-mail correspondence with
the Program Officer. In that correspondence, management indicated the payments were made in
accordance with the state’s pay plan policy. We have determined, and management has
acknowledged, that the language required to be included in the pay plan policy to govern bonus
payments, was not included in the policy in place during the audit period. As such, we do not
consider the bonus payments to have been made in accordance with the state’s pay plan policy.
Additionally, we do not consider the fact that similar payments were made eight times in the last
twelve years to imply, in effect, an agreement to make payment.

20-02
C-190 Appendix A
Research and Development Cluster Activity by ALN # and Location

Federal Agency and ALN Information Location
ALN # Title UM - Missoula MSU - Bozeman
U.S Department of Agriculture
10.001 Agricultural Research Basic and Applied Research X X
10.025 Plan and Animal Disease, Pest Control, and Animal Care X X
10.200 Grants for Agricultural Research, Special Research Grants X
10.202 Cooperative Forestry Research X
10.215 Sustainable Agriculture Research and Education X
10.217 Higher Education - Institution Challenge Grants Program X
10.226 secondary And Two-Year Postsecondary Agriculture Education Challenge xX
rants
10.227 1994 Institutions Research Program X X
40.250 Agricultural and Rural Economic Research, Cooperative Agreements and X
Collaborations
10.290 Agricultural Market and Economic Research X
10.303 Integrated Programs X
10.304 Homeland Security Agricultural X
10.307 Organic Agriculture Research and Extension Initiative X
10.309 Specialty Crop Research Initiative X
10.310 Agriculture and Food Research Initiative (AFRI) X X
40.312 Biomass Research and Development Initiative Competitive Grants Program xX
(BRDI)
10.318 Women and Minorities in Science, Technology, Engineering, and Mathematics xX
Fields
10.329 Crop Protection and Pest Management Competitive Grants Program X
10.330 Alfalfa and Forage Research Program X
10.350 Technical Assistance to Cooperatives X
10.460 Risk Management Education Partnerships X
10.500 Cooperative Extension Service X
10.525 Farm And Ranch Stress Assistance Network Competitive Grants Program X
10.610 Export Guarantee Program X
10.652 Forestry Research X X
10.664 Cooperative Forestry Assistance X X
10.672 Rural Development, Forestry, and Communities X
10.680 Forest Health Protection X X
10.682 National Forest Foundation X
10.684 International Forestry Programs X
10.699 Partnership Agreements X X
10.707 Research Joint Venture And Cost Reimbursable Agreements X
10.902 Soil and Water Conservation X X
10.903 Soil Survey X
10.912 Environmental Quality Incentives Program X X
10.960 Technical Agricultural Assistance X
U.S Department of Commerce

11.020 Cluster Grants X
11.431 Climate and Atmospheric Research X
11.438 Pacific Coast Salmon Recovery Pacific Salmon Treaty Program X
11.440 Environmental Sciences, Applications, Data, and Education X
11.459 Weather And Air Quality Research X
11.467 Meteorologic And Hydrologic Modernization Development X
11.472 Unallied Science Program X
11.609 Measurement And Engineering Research And Standards X
U.S Department of Defense
12.002 Procurement Technical Assistance for Business Firms X
12.005 Conservation And Rehabilitation Of Natural Resources On Military Installations X
12.114 Collaborative Research and Development X
12.300 Basic and Applied Scientific Research X X
12.420 Military Medical Research and Development X X
12.431 Basic Scientific Research X
12.630 Basic, Applied, And Advanced Research In Science And Engineering X
12.632 Legacy Resource Management Program X
12.800 Air Force Defense Research Sciences Program X X
12.910 Research and Technology Development X
U.S Department of the Interior
15.035 Forestry On Indian Lands X
15.224 Cultural and Paleontological Resources Management X X
15.225 Recreation and Visitor Services X
15.228 BLM Fuels Management and Community Fire Assistance Program Activities X
15.230 Invasive and Noxious Plant Management X X
15.231 Fish, Wildlife and Plant Conservation Resource Management X X
15.232 Joint Fire Science Program X X
15.236 Environmental Quality and Protection X
15.238 Challenge Cost Share X X
15.247 Wildlife Resource Management X X
15.248 National Landscape Conservation System X
15.517 Fish and Wildlife Coordination Act X
15.605 Sport Fish Restoration X
15.608 Fish and Wildlife Management Assistance X X
15.611 Wildlife Restoration and Basic Hunter Education X
15.615 Cooperative Endangered Species Conservation Fund X
15.631 Partners for Fish and Wildlife X X
15.634 State Wildlife Grants X X
15.637 Migratory Bird Joint Ventures X
15.650 Research Grants (Generic) X
15.654 National Wildlife Refuge System Enhancements X
15.655 Migratory Bird Monitoring, Assessment and Conservation X X
15.657 Endangered Species Conservation - Recovery Implementation Funds X
15.660 Endangered Species - Candidate Conservation Action Funds X

C-191
C-192

15.663 NFWF - USFWS Conservation Partnership
15.664 Fish And Wildlife Coordination And Assistance X
15.665 National Wetlands Inventory
15.670 Adaptive Science
15.678 Cooperative Ecosystem Studies Units X
15.805 Assistance to State Water Resources Research Institutes X
15.808 U.S. Geological Survey Research and Data Collection X
15.810 National Cooperative Geologic Mapping X
15.812 Cooperative Research Units X
15.815 National Land Remote Sensing Education Outreach and Research X
15.820 National and Regional Climate Adaption Science Centers
15.926 American Battlefield Protection
45.945 Cooperative Research and Training Programs - Resources of the National Park xX
System
U.S Department of Justice
16.560 National Institute of Justice Research, Evaluation, and Development Project xX
Grants
U.S Department of State
19.408 Academic Exchange Programs - Teachers X
19.415 Professional and Cultural Exchange Programs - Citizen Exchanges X
19.600 Bureau of Near Eastern Affairs X
U.S Department of Transportation
20.109 Air Transportation Centers of Excellence X
20.200 Highway Research and Development Program X
20.205 Highway Planning and Construction X
20.215 Highway Training And Education X
20.514 Public Transportation Research, Technical Assistance, and Training X
20.600 State and Community Highway Safety X
20.614 National Highway Traffic Safety Administration (NHTSA) Discretionary Safety xX
Grants and Cooperative Agreements
20.616 National Priority Safety Programs X
20.701 University Transportation Centers Program X
U.S Department of Treasury
21.020 Community Development Financial Institutions Program X
U.S National Aeronautics and Space Administration
43.001 Science X
43.008 Office of Stem Engagement (OSTEM) X
43.009 Cross Agency Support X
43.012 Space Technology X
U.S National Endowment for the Humanities
45129 Promotion of the Humanities Federal/State Partnership X
45.312 National Leadership Grants X
45.313 Laura Bush 21st Century Librarian Program X
U.S National Science Foundation

47.041 Engineering X X

47.049 Mathematical and Physical Sciences X X

47.050 Geosciences X X

47.070 Computer and Information Science and Engineering X X

47.074 Biological Sciences X X

47.075 Social, Behavioral, and Economic Sciences X X

47.076 Education and Human Resources X X

47.078 Polar Program X X

47.079 Office of International Science and Engineering X

47.083 Integrative Activities X X
U.S Department of Veterans Affairs

64.054 Research and Development X
U.S Environmental Protection Agency

66.202 Congressionally Mandated Projects X

66.461 Regional Wetland Program Development Grants X

66.509 Science to Achieve Results (STAR) Research Program X

66.510 Surveys, Studies, Investigations and Special Purpose Grants within the Office xX
of Research and Development

66.716 Research, Development, Monitoring, Public Education, Outreach, Training, X
Demonstrations, and Studies

66.808 Solid Waste Management Assistance Grants X

66.951 Environmental Education Grants X

66.962 Columbia River Basin Restoration (CRBR) Program X
U.S Department of Energy

81.049 Office of Science Financial Assistance Program X X

81.086 Conservation Research And Development X

81.087 Renewable Energy Research and Development X

81.089 Fossil Energy Research and Development X

81.121 Nuclear Energy Research, Development and Demonstration X

81.135 Advanced Research Projects Agency - Energy X
U.S Department of Education

84.217 TRIO McNair Post-Baccalaureate Achievement X

84.299 Indian Education - Special Programs for Indian Children X

84.305 Education Research, Development and Dissemination X

84.336 Teacher Quality Partnership Grants X
U.S Department of Health and Human Services

93.001 Civil Rights and Privacy Rule Compliance Activities X

93.103 Food And Drug Administration Research X

93.107 Area Health Education Centers X

93.113 Environmental Health X X

93.121 Oral Diseases And Disorders Research X

93.155 Rural Health Research Centers X

93.172 Human Genome Research X

93.173 Research Related to Deafness and Communication Disorders X

C-193
C-194

93.213 Research and Training in Complementary and Integrative Health X
93.233 National Center On Sleep Disorders Research X
93.242 Mental Health Research Grants X X
93.243 Substance Abuse and Mental Health Services Projects of Regional and xX
National Significance
93.247 Advanced Nursing Education Workforce Grant Program X
93.262 Occupational Safety and Health Program X X
93.273 Alcohol Research Programs X
93.276 Drug-Free Communities Support Program Grants X
93.279 Drug Abuse and Addiction Research Programs X
93.286 Discovery and Applied Research for Technological Innovations to Improve xX
Human Health
93.300 National Center For Health Workforce Analysis X
93.301 Small Rural Hospital Improvement Grant Program X
93.307 Minority Health and Health Disparities Research X
93.310 Trans-NIH Research Support X X
93.350 National Center for Advancing Translational Sciences X
93.351 Research Infrastructure Programs X X
93.359 Nurse Education, Practice Quality and Retention Grants X
93.361 Nursing Research X
93.393 Cancer Cause and Prevention Research X X
93.433 ACL National Institute on Disability, Independent Living, and Rehabilitation xX
Research
93.670 Child Abuse and Neglect Discretionary Activities X
93.772 Tribal Public Health Capacity Building And Quality Improvement Umbrella X
Cooperative Agreement
93.837 Cardiovascular Diseases Research X
93.838 Lung Diseases Research X X
93.846 Arthritis, Musculoskeletal and Skin Diseases Research X
93.847 Diabetes, Digestive, and Kidney Diseases Extramural Research X X
93.853 Extramural Research Programs in the Neurosciences and Neurological xX xX
Disorders
93.855 Allergy and Infectious Diseases Research X X
93.859 Biomedical Research and Research Training X X
93.865 Child Health and Human Development Extramural Research X X
93.866 Aging Research X X
93.867 Vision Research X
93.879 Medical Library Assistance X X
93.913 Grants To States For Operation Of State Offices Of Rural Health X
93.933 Demonstration Projects for Indian Health X
93.969 PPHF Geriatric Education Centers X
93.970 Health Professions Recruitment Program for Indians X
U.S Social Security Administration
96.007 Social Security Research and Demonstration X
U.S Agency for International Development
98.001 USAID Foreign Assistance for Programs Overseas X
TABLE OF CONTENTS
Transmittal Letter for Corrective Action Plan

CORRECTIVE ACTION PLAN

D-i
D-1

OFFICE OF THE GOVERNOR

BUDGET AND PROGRAM PLANNING
STATE OF MONTANA

GreG GIANFORTE CapPITOL BUILDING - P.O. Box 200802

GOVERNOR HELENA, MONTANA 59620-0802
June 9, 2022
Mr. Angus Maciver, Legislative Auditor JUN 09 2022
Legislative Audit Division iT DIV.
Room 160, State Capitol LEGISLATIVE AUD .
PO Box 201705

Helena MT 59620-1705

Re: Corrective Action Plan
Montana Single Audit Report #20-02
For the Two Fiscal Years Ended June 30, 2021

Dear Mr. Maciver:

In accordance with Uniform Guidance requirements, the state of Montana is responsible for follow-up and
corrective action on all audit findings identified in the Montana Single Audit Report. As part of this
responsibility, the state is required to prepare a corrective action plan to address each financial or federal
audit finding included in this report. The Office of Budget and Program Planning compiles this information
on behalf of the state and oversees the implementation status of these audit findings.

Attached is the State of Montana’s Corrective Action Plan for the two fiscal years ended June 30, 2021.
This summary document, which was prepared by each agency or university with a finding in this report,
provides the name of the contact person responsible for the corrective action, the corrective action planned,
and the anticipated completion date.

Sincerely,

/s/ Ryan Osmundson

Ryan Osmundson
Budget Director

cc: Sonia Powell, Single Audit Coordinator

TELEPHONE: (406) 444-3616 FAX: (406) 444-4670
SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS

TABLE OF CONTENTS
Transmittal Letter for Summary Schedule of Prior Audit Findings .......ccesseseseeeseseeeeeees E-1
Summary Schedule of Prior Audit Findings ......ceseseeeseseeesseesseeecscsesescseacacaeseseeseseeeens E-3

E-i
OFFICE OF THE GOVERNOR

BUDGET AND PROGRAM PLANNING
STATE OF MONTANA

GREG GIANFORTE CapIToL BUILDING - P.O. Box 200:

GOVERNOR HELENA, MONTANA 59620-0802
June 9, 2022
Mr. Angus Maciver, Legislative Auditor JUN 09 2022
Legislative Audit Division LEGISLATIVE aynac
Room 160, State Capitol wave AUDIT DIV,
PO Box 201705

Helena MT 59620-1705

Re: Summary Schedule of Prior Audit Findings
Montana Single Audit Report #20-02
For the Two Fiscal Years Ended June 30, 2021

Dear Mr. Maciver:

In accordance with Uniform Guidance requirements, the state of Montana is responsible for follow-up
and corrective action on all audit findings identified in the Montana Single Audit Report. As part of
this responsibility, the state is required to prepare a summary schedule reporting the status of all audit
findings included in the prior audit’s schedule of findings and questioned costs relative to federal
awards. The Office of Budget and Program Planning compiles this information on behalf of the state
and oversees the implementation status of these audit findings.

Attached is the State of Montana’s Summary Schedule of Prior Audit Findings for the two fiscal years
ended June 30, 2021. This summary identifies the implementation status of all prior audit findings,
except for those findings that have been fully corrected, are no longer valid, or do not warrant further
action on the part of the state.

Sincerely,

/s/ Ryan Osmundson

Ryan Osmundson
Budget Director

cc: Sonia Powell, Single Audit Coordinator

TELEPHONE: (406) 444-3616 FAX: (406) 444-4670


File and source

File

REPORT_MT-LAD_20-02_2020.pdf

Size

10,410,012 bytes

SHA-256

963b14d84f69371159e215ebbe3781745dd136108808bed505988d5d18df5598

Our copy

REPORT_MT-LAD_20-02_2020.pdf

Original

No public link identified.