A recent draft of a report from the Vermont state auditor's office has called into question the way the state treasurer's office reports expenses, documents investment reports, and handles cash disbursments.

The report, submitted to the speaker of the state House of Representatives, president of the state Senate, and the General Assembly as a whole on March 24, stemmed from an annual audit of all state-related fundings. The final report, due next month, is consistent with the current draft, said Alexander Acebo, state auditor of accounts.

Although Treasurer Paul W. Ruse Jr. "has made sweeping improvements in the way state investments are handled," there are several areas that still worry the auditor's office, Mr. Acebo said.

The report does not single out Mr. Ruse for criticism. Instead, it is more a condemnation of a longstanding system.

"This kind of stuff has been going on for 20 or 30 years," said David Wilson, secretary of administration and finance. "It has taken until now for people to begin asking why the state treasurer seems to be exempt from the same restrictions as other state workers."

Mr. Wilson agreed with the auditor's report and echoed the praise for Mr. Ruse's efforts to modernize the office.

Mr. Ruse, a former town financial manager, said the report is intended to further his reform of the office by spurring him to iron out any remaining wrinkles.

The report points to five areas of concern for the auditor: processing of travel expenses, documentation of foreign investments, resolution of long-term outstanding checks, breakdown of pension trust fund expenses, and verification procedures for cash advances. The report also calls into question whether the treasurer's office should keep its autonomy.

According to the audit, Mr. Ruse would submit expense reports for travel directly to State Street Bank and Fidelity Investment Services, two banks responsible for the management of the state's short-term debt.

When those institutions would report to the state the results of their investments, the total would be the net minus expenses instead of gross, as prescribed by Vermont State Law 32: Sec. 502(a).

The law states that "the gross amount of money received in their official capacities by every officer ..., from whatever source, shall be paid forthwith into the state treasury ..., without any deduction on account ..., of fees, costs, charges, expenses of any kind whatsoever."

In the period between March 4, 1991, and January 31, 1992, Fidelity Investment Services reported that over $129,000 had been paid directly out of Vermont investment earnings.

Of that amount, over $3,000 is described as either "travel or charter air service."

"All expenses are documented and accounted for," Mr. Acebo said. "It would just give the state a little more control if all expenses were paid according to state regulations."

"I have sent a letter to the auditor saying that in the future all expenses would be processed through the state's Financial Management Information System," Mr. Ruse said in a telephone interview. "I have been trying to change this practice since I took office, and from now on I will apply for all expenses to be covered directly by the state."

Mr. Acebo said in the report that the way expenses are currently collected "circumvents the state's established internal and accounting controls and results in mistatements."

The second section of the audit questions the documentation of foreign investments undertaken by the Vermont Retirement Board foreign markets, must be fully documented for submission to the state.

"This is really a new problem," Mr. Acebo said, "All of us are just trying to get used to having investments outside the country."

Mr. Ruse said, "Because of the relative newness in foreign investments, it has been difficult to settle on a standard of how to report returns on these investments. We currently have about $45 million of our $900 million retirement portfolio invested this way."

Mr. Ruse said the state has only been invested in foreign markets for two years and is still adjusting to their "very different way of doing business."

Section three of the audit states that the state treasurer's office has not fulfilled all of its requirements in removing long-term outstanding checks from the records.

According to the report, the treasurer's office has issued over $300,000 worth of checks going back to fiscal year 1983 that have not been cashed.

Mr. Acebo's report says the state's three largest accounts - through Mr. Ruse's office.

Mr. Acebo said the returns of state retirement funds, invested through the treasurer's office in vendors, payroll, and retirement -- contain the outstanding checks.

"The practice of carrying outstanding checks as reconciling items in the bank reconciliation process for such extended periods of time is not consistent with sound economic controls," Mr. Acebo said. "This office recommends that after 12 months, the checks should be removed from the accounts and their equivalent values remitted to the state treasurer's abandoned property division."

Mr. Ruse said the treasurer's office is investigating a program that would allow the office to cancel the checks under the abandoned property act.

"Prior to now, there has been no clear precedent for doing this," he said. "If we're successful, we will be able to treat the checks as any other kind of abandoned property and claim it after seven years."

In section four of the audit, Mr. Acebo suggested to the treasurer's office that it clarify the "administration and other expenses" category of the treasurer's pension trust fund expense forms.

The report recommends that the office expand the chart of accounts for pension fund expenses and break down the category into separate components.

Specifically, Mr. Acebo would like the expenses portion of the report to detail state funds used for travel, lodging, food, entertainment, office expenses, and administration.

The final segment of the audit recommends that when advancing travel funds in cash, the treasurer be more diligent in verification procedures.

"Sound internal control procedures require that cash advances be made only upon the presentation of proper documentation and identification," Mr. Acebo said in the report.

Mr. Acebo said there was little control over the disbursement of cash funds moving through the office and that the treasurer has never employed any verification procedures to assure that authorized signatures are authentic.

"It used to be that there were only a handful of people receiving state funds in the management of state investments," Mr. Acebo said. "But now, the fiscal strain the state is under and the far more complicated system employed by the treasurer's office demands more care.

"We weren't specifically conducting an investigation. This report was really just a result of a routine check into the office and how they can better meet the restrictions of the state."

He added that all state employees are responsible for filling the same forms to get reimbursed for expenses, but Mr. Ruse's position is slightly different.

Mr. Wilson said that because the state treasurer does not technically report to anyone except the voters, it has been easier for possible misconceptions about the office to be blown out of proportion.

"The office is so independent of everyone except the voters, it's difficult to get a read on how efficiently it is being run," Mr. Wilson said. "Obviously, everyone is simply interested in removing a conflict or even the appearance of a conflict of interest between working with the banks and helping the people of Vermont."

Mr. Ruse's office has been scrutinized by state officials in the past.

In May, Mr. Ruse appeared in a magazine advertisement for Fidelity Investments Services. The company currently is under contract with the state.

Mr. Ruse said Fidelity's company contribution to his 1990 campaign in no way influenced his decision to either award the contract to Fidelity or appear in the advertisement.

He said the advertisement was more a plug for the state's recent successful investment picture.

Assistant Treasurer Ronald Boucher said the relationships with Fidelity as financial adviser and manager of the state's short-term portfolio, and with Boston-based State Street Bank as custodian of those funds, were both necessary.

"Fidelity was not the lowest quote submitted for approval," he said. "But their long-term projection of state profitability placed them far and above the other banks involved in the bidding."

He added that although recent press reports on the contract with Fidelity were reported at $900,000 per year, that figure is merely a cap to possible spending.

Last year, Vermont paid Fidelity slightly more than $50,000.

"Before we came into office, the short-term debt was handled by four clerks who made daily decisions based on commercial paper rates," Mr. Boucher said.

"We are the ones that changed the system, upgraded it, hired a competent financial manager - and now after having completed that we are just face with new things to fix.

"We have realized an extra $500,000 per year by changing systems," he added.

State Representative Michael Obuchowski, D-Windham, said the scrutiny of Mr. Ruse's office is "nothing more than an attempt to control spending."

Mr. Obuchowski, who serves as chairman of the Appropriations Committee, said that Mr. Ruse and Mr. Boucher have done "a good job" in modernizing the treasurer's office, but that the state's economic position must be carefully monitored.

Last year, Mr. Boucher was ordered by the state legislature to reimburse the state for plane fare to a conference in Ireland that the legislature did not deem essential to state business.

"I won't say we are targeting the treasurer's office," Mr. Obuchowski said. "We're watching every office and we were forced to axe $250,000 from travel expenses alone last year."

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