Otto v. Wright County - Complaint

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STATE OF MINNESOTA

COUNTY OF RAMSEY

DISTRICT COURT

SECOND JUDICIAL DISTRICT

Rebecca Otto, in her official capacity as State

Auditor of the State of Minnesota,

Plaintiff,

vs.

Wright County,

Becker County,

Ramsey County, and

the State of Minnesota,

Defendants.

Case Type: Other Civil

Case No: ___________

COMPLAINT

For her Complaint against Defendants Wright County, Becker County, Ramsey County

(the County Defendants), and the State of Minnesota, Plaintiff Rebecca Otto, in her official

capacity as State Auditor of the State of Minnesota, states and alleges as follows:

INTRODUCTION

In the seminal case of State ex rel. Mattson v. Kiedrowski, the Minnesota Supreme Court

declared that constitutional officers in the State Executive Department possess core functions

that may not be usurped by legislative act, even if those core functions are merely transferred to

the domain of another constitutional officer within the Executive Department. Mattson stands

for the undeniable proposition that the Legislature cannot interfere with the core functions of

constitutional officers.

Filed in Second Judicial Dis

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Thirty years later, failing to heed the Supreme Courts warning in Mattson, the

Legislature once again passed legislation that purports to usurp the core functions of a

constitutional officerthe State Auditorand the Executive Department related to auditing

Minnesota counties and counties use of tax dollars. Specifically, in the waning moments of the

final day of the 2015 Legislative Session, the Legislature passed provisions purporting to usurp

those core functions from the State Auditor and granting them to the counties themselves (the

Privatization Legislation).

The Office of the State Auditor (OSA), and its predecessor, the Office of the Territorial

Auditor, have been auditing counties since Minnesota was a territory. Counties act as arms of

the State government and expend billions of dollars of taxpayer funds each year on behalf of the

State. Auditing counties is the primary core function of the OSA and has always been the

exclusive responsibility of the Executive Department of the State Government. Today, the

majority of the OSAs staff and resources are devoted to conducting county audits and

approximately 60 percent of the OSAs budget is derived from the fees counties pay for the

OSAs audit services.

According to the County Defendants, the Privatization Legislation privatizes the primary

core function of the OSAauditing countiesby permitting counties to outsource their annual

audits to private CPA firms in lieu of the full constitutional oversight of the OSA and Executive

Department. As a result of their interpretation of the Privatization Legislation and the significant

confusion caused by the Privatization Legislation, the County Defendants and 47 other counties

have rejected the OSAs efforts to exercise its core function of auditing counties by refusing to

submit to OSA-conducted audits for the entire upcoming three-year audit cycle.


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The County Defendants interpretation of the Privatization Legislation would deprive

Minnesota taxpayers of the auditing oversight and stewardship that the OSA has provided for

more than 150 years. Such an interpretation would also have a devastating effect on the OSA,

including lay-offs, lost talent and experience, a substantially smaller budget, and the loss of the

primary responsibility of the Office. Under the County Defendants interpretation, the

Privatization Legislation goes far beyond the legislation invalidated inMattsonwhich merely

transferred core duties from one constitutional Executive officer to another Executive

Department officialbecause it transfers a core function outside of the Executive Department

altogether to the counties.

Under well-established principles of constitutional interpretation, the Privatization

Legislation must be interpreted, if possible, in a manner consistent with the Minnesota

Constitution. To pass constitutional scrutiny, the Privatization Legislation must not improperly

circumscribe the authority of the OSA and must therefore be interpreted to allow the OSA to

continue to exercise its core function of auditing counties. Although, certain legislators may

have intended that the Privatization Legislation would permit counties to outsource the auditing

function, the language of the statute does not demand that result. The statute provides that [t]he

state auditor may make additional examinations as the auditor determines to be in the public

interest. The statutory language places no limits on the State Auditors authority in this regard.

Accordingly, the statute must be interpreted to permit the OSA to exercise its constitutional

authority to audit counties whenever it determines, in its discretion, that an OSA audit of the

county is in the public interest, regardless of whether the county has also engaged a private CPA

firm to conduct an audit.


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If the Privatization Legislation cannot be interpreted to permit the OSA to control the

conduct of county audits, or if the Privatization Legislation must be read to limit the scope of the

OSAs authority, it violates Article III, Section 1 of the Minnesota Constitution (the Separation

of Powers Clause) as delineated by the Minnesota Supreme Court in Mattson, by usurping the

State Auditors exercise of her core function of auditing counties.

Finally, in addition to the foregoing, in enacting the Privatization Legislation, the

Minnesota Legislature violated the constitutional procedural requirement that legislative acts

embrace only a single subject. SeeMinn. Const. art. IV, 17. The Privatization Legislation was

passed in a single bill with a multitude of other unrelated provisions on such disparate subjects as

continuing education requirements for cosmetologists, railroad eminent domain powers in

Hennepin County, and the official recognition of the Honor and Remember Flag. Because the

Legislature failed to abide by constitutional legislative process requirements, the State Auditor is

entitled to a declaration that the Privatization Legislation is without legal effect, and must be

severed from the enacted legislation.

The State Auditor brings this Complaint seeking a declaratory judgment that the

Privatization Legislation either must be interpreted to preserve the OSAs inherent constitutional

authority to audit counties or that the Privatization Legislation is unconstitutional.

THE PARTIES

1. Plaintiff Rebecca Otto is the eighteenth State Auditor of Minnesota, an

independent Executive Department office created by Article V of the Minnesota Constitution.

Auditor Otto is serving her third four-year term as State Auditor and was most recently elected in

2014 by a margin of more than 11 percent in the general election. Following each election,


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Auditor Otto swore an oath to support the Constitution of the United States and the Constitution

of the State of Minnesota.

2. The OSA consists of the State Auditor and approximately 90 additional

employees. The OSAs primary duty is conducting and overseeing audits of Minnesota counties.

Through this oversight, the OSA reviews the annual use by Minnesota counties of more than $6

billion of federal, state, and local tax dollars.

3. Defendant Wright County is a political subdivision of the State of Minnesota with

its county seat in Buffalo, Minnesota.

4.

Defendant Becker County is a political subdivision of the State of Minnesota with

its county seat in Detroit Lakes, Minnesota.

5. Defendant Ramsey County is a political subdivision of the State of Minnesota

with its county seat in St. Paul, Minnesota.

6. Defendant State of Minnesota was admitted as the thirty-second state of the

United States of America on May 11, 1858, and has its capital in St. Paul, Minnesota.

VENUE

7. Venue is proper in this Court under Chapter 542 of the Minnesota Statutes

because this cause of action arose in Ramsey County.

BACKGROUND

I. THE STATE AUDITORS PRIMARY CORE FUNCTION IS AUDITING

MINNESOTA COUNTIES.

A. Auditing Counties is the Current Primary Core Function of the Office

of the State Auditor.

8. Article V of the Minnesota Constitution creates an executive department

consisting of the five constitutional officers of the state: the Governor, the Lieutenant Governor,


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the Secretary of State, the State Auditor, and the Attorney General. SeeMinn. Const., art. V, 1.

With the exception of the Governor, Article V does not expressly detail the duties of the

constitutional executive officers. However, the Minnesota Supreme Court has explained that the

executive officers each possess core functions which the Legislature may not abrogate. State

ex rel. Mattson v. Kiedrowski, 391 N.W.2d 777 (Minn. 1986).

9. Since the creation of the office in 1858, the State Auditor has been charged with

exercising authority and oversight over state finances, including supervision and auditing of

county finances. In contrast to other political subdivisions like cities and towns which exist

primarily for local benefit, counties are subordinate agencies of the state responsible for

exercising state functions at the local level. Thus, oversight of county finances is a key

component of the State Auditors inherent authority and responsibility over the fiscal concerns of

the State.

10. Under current law, the authority of the OSA to audit counties is delineated in

Minnesota Statutes Section 6.48. The statute provides that [a]t least once in each year, if funds

and personnel permit, the state auditor may visit, without previous notice, each county and make

a thorough examination of all accounts and records relating to the receipt and disbursement of the

public funds and the custody of the public funds and other property. Counties are required to

pay to the state auditor enterprise fund the total cost and expenses of such examinations . . . .

Minn. Stat. 6.48.

11.

Conducting and overseeing county audits is not only a core function of the OSA,

it is the OSAs primarycore function. More than half of the OSAs staff members devote their

time to auditing counties, and the majority of the OSAs funding is derived from county audit

fees. In fiscal year 2015, the primary duty of 42 of the OSAs 92 employeesthe majority of the


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OSAs Audit Practice Divisionwas to audit counties and county related entities. The Audit

Practice Division operates out of the State Auditors primary office in St. Paul, as well as five

field offices across the State, allowing the OSA to better serve the counties that it audits. In

addition to the 42 employees in the Audit Practice Division whose primary duty it is to audit

counties, another 17 OSA employees in fiscal year 2015 supervised or supported county audit

work. In total, 64 percent of the OSAs staff audit counties or support the OSAs county audit

function.

12. As a result of legislative action in 2013, approximately 60 percent of the OSAs

budget is now derived from county audit fees. Instead of funding OSA operations out of the

General Fund, the Legislature created the State Auditor Enterprise Fund. Under the State

Auditor Enterprise Fund legislation, all amounts paid by counties and other units of government

for audits are credited to the State Auditor Enterprise Fund. The amounts in the State Auditor

Enterprise Fund are then annually appropriated to the state auditor to pay the costs and expenses

related to the examinations performed, including, but not limited to, salaries, office overhead,

equipment, authorized contracts, and other expenses. Minn. Stat. 6.581, subd. 1. Following

enactment of the State Auditor Enterprise Fund legislation, the General Fund appropriation to the

State Auditor fell over 75 percent from $17,290,000 for the biennium covering fiscal years 2012

and 2013 to $4,191,000 for the biennium covering fiscal years 2014 and 2015. The remaining

funding for the OSA$12,459,096 in fiscal years 2014 and 2015came from the fees paid by

counties and other units of government and from three special revenue funds. Of that total,

$9,614,905, or 77 percent, came from fees and expenses billed to counties and county-affiliated

entities. Stated otherwise, under the scheme created by the Legislature, approximately 60 percent

of the total funding of the OSA is now wholly dependent upon county audit fees.


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B. Auditing Counties Has Been a Core Function of the State Auditor

Since Minnesota Was a Territory.

13. For over 160 years, the Minnesota Executive Department has included an auditor,

whose duties have included supervisory authority over county finances. In 1851, two years after

the Territory of Minnesota was incorporated, the Territorial Legislature established the position

of Territorial Auditor. The Territorial Auditors duties included supervising and auditing county

finances and county treasurers were required to obtain the signature of the Territorial Auditor

verifying the amount of their tax payments to the Territory.

14. By enactment of the Minnesota Constitution in 1858, the position of Territorial

Auditor was elevated to the independent elected position of State Auditor in the Executive

Department of the State of Minnesota. The State Auditors supervisory authority over county

finances continued, and state law at the time recognized the State Auditors authority to audit

county revenue collection and pursue legal actions against county officials that failed to make

proper payments to the state.

15.

Following the enactment of the Constitution, the State Auditors duties continued

to include auditing and supervising county finances. Additionally, from 1878 through 1973, the

OSAs auditing oversight responsibilities for counties were shared with another Executive

Department officer, the Public Examiner, who reported to the Governor. The Legislature created

the Office of the Public Examiner in 1878, and tasked it with examining the books, accounts and

vouchers of county treasurers and other units of local government. In 1973, the county audit

work that had been performed by the Office of the Public Examiner was consolidated into the

OSA. SeeMinn. Stat. 6.46 (all the powers, duties and responsibilities of the public examiner

relating to audits of cities of all classes, counties, towns, school districts, and other governmental


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subdivisions or bodies corporate and politic . . . are hereby transferred to, vested in, and imposed

upon the state auditor).

16. As a result, after 1973 the responsibility for auditing that had been shared by

different officers within the Executive Department was fully consolidated with the constitutional

officer that had been charged by the Constitution with auditingthe State Auditor.

C. Following Budget Cuts by the Legislature in 2003, The OSA Exercised

its Discretion to Allow Certain Counties to Hire Private CPA Firms to

Conduct their Audits.

17. In 2003, as a result of budget cuts by the Legislature, the OSA exercised its

discretion to prioritize its available resources by allowing select counties to hire private CPA

firms to perform their county audits. Every three years, the OSA determines which counties the

Office will audit and which counties will be required to hire a private CPA firm.

18. For the latest three-year cycle, which consisted of audits for the years ending

December 31, 2012, 2013, and 2014, the OSA audited 59 counties and required 28 counties to

retain private CPA firms.

19. When the OSA determines that a county will be required to hire a private CPA

firm, the State Auditor retains ultimate authority for the audit, including the authority to decide

that an audit conducted by a private CPA firm is not appropriate for a particular county or to

require an OSA audit of a county audited in previous audit cycles by a CPA firm.

20. For example, the OSA performed the annual audits for Defendant Wright County

until 2005, before determining that the county could retain a private CPA firm to conduct its

audits for the three year cycles covering years 2006 through 2008, 2009 through 2011, and 2012

through 2014. However, the OSAs review of the audits performed by the private CPA firm

revealed significant concerns regarding the countys financial and compliance situation. Most


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significantly, the private CPA firm ignored Wright Countys use of a driver diversion program

that violated state and federal law and potentially imperiled Minnesotas federal highway

funding. Even after it was notified by the OSA of concerns regarding the driver diversion

program, the private CPA firm did not include a finding related to that program in its report. As

a result, the OSA declined Wright Countys request to continue to have its audits performed by

the private CPA firm and informed the county that the OSA will be auditing the county for the

three year cycle covering 2015, 2016, and 2017.

21. Similarly, the OSA allowed Defendant Becker County to have its audits

conducted by a private CPA firm from 2005 through 2011. However, because of deficiencies

identified with the audits performed by the private CPA firm, the OSA declined Becker Countys

request to utilize a private CPA firm for the three year cycle covering 2012, 2013, and 2014. The

OSA also informed Becker County that it will be auditing the county for the three-year cycle

covering 2015, 2016, and 2017.

II. THE LEGISLATURE ENACTED THE PRIVATIZATION LEGISLATION

IN AN ATTEMPT TO REDUCE THE STATE AUDITORSCONSTITUTIONAL AUTHORITY OVER COUNTY AUDITS.

A. The Legislature Enacted the Privatization Legislation, Which

Purports to Limit the State Auditors Authority over County Audits.

22. On the final night of the 2015 Legislative Session, the Legislature passed Senate

File 888 of the 89th Legislature, enacted as Chapter 77 of the 2015 Laws of Minnesota (the

State Government Finance Omnibus Bill or the Bill). The State Government Finance

Omnibus Bill contains the Privatization Legislation.


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23. The Privatization Legislation repeals the current statute recognizing the State

Auditors authority to audit countiesMinnesota Statute Section 6.48 (Section 6.48)and

replaces it with a new statuteMinnesota Statutes Section 6.481 (the Privatization Statute).

24. The text of the Privatization Statute reads, in relevant part:

Subdivision 1. Powers and duties. All the powers and duties conferred and

imposed upon the state auditor shall be exercised and performed by the stateauditor in respect to the offices, institutions, public property, and improvements ofseveral counties of the state. The state auditor may visit, without previous notice,

each county and examine all accounts and records relating to the receipt anddisbursement of the public funds and the custody of the public funds and other

property. The state auditor shall prescribe and install systems of accounts andfinancial reports that shall be uniform, so far as practicable, for the same class of

offices.

Subdivision 2. Annual audit required. A county must have an annual financialaudit. A county may choose to have the audit performed by the state auditor, ormay choose to have the audit performed by a CPA firm meeting the requirements

of section 326A.05. The state auditor or a CPA firm may accept the records andaudit of the Department of Human Services instead of examining county humanservice funds, if the audit of the Department of Human Services has been made

within any period covered by the auditors audit of other county records.

Subdivision 3. CPA firm audit. A county audit performed by a CPA firm must

meet the standards and be in the form required by the state auditor. The stateauditor may require additional information from the CPA firm if the state auditordetermines that is in the public interest, but the state auditor must accept the audit

unless the state auditor determines it does not meet recognized industry auditingstandards or is not in the form required by the state auditor. The state auditor maymake additional examinations as the auditor determines to be in the public

interest.

* * *

Subdivision 6. Payments to state auditor. A county audited by the state auditormust pay the state auditor for the costs and expenses of the audit. If the state

auditor makes additional examinations of a county whose audit is performed by aCPA firm, the county must pay the auditor for the cost of these examinations.Payments must be deposited in the state auditor enterprise fund.

* * *


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Minn. Stat. 6.481 (effective Aug. 1, 2016).

25. The Privatization Statute continues the requirementwhich has been in existence

for at least 137 yearsthat each county must be audited annually. However, the Privatization

Statute purports to allow, for the first time, a county to choose to have its audit outsourced to a

private CPA firm in lieu of the OSA audit. SeeMinn. Stat. 6.481, subd. 2.

26. For those counties that outsource the audit to a private CPA firm, the Privatization

Statute provides that the State Auditor must accept the audit performed by the private CPA

firm, unless the state auditor determines that it does not meet recognized industry standards or is

not in the form required by the state auditor. Importantly, however, the State Auditor is

authorized to make additional audits of counties if she determines that it is in the public

interest. Minn. Stat. 6.481, subd. 3.

B. The State Government Omnibus Finance Bill Improperly

Addressed Numerous Disparate Subjects.

27. In passing the State Government Finance Omnibus Bill, which contains the

Privatization Legislation, the 2015 Legislature violated the requirements of the Minnesota

Constitution by adding numerous unrelated policy provisions, including the Privatization

Legislation, to an appropriations bill.

28. Though the original topic of the State Government Finance Omnibus Bill was

appropriations to State departments and agencies, throughout the legislative session, the

Legislature added numerous topically diverse provisions. As a result, despite its name and

originand despite Article IV, Section 17 of the Minnesota Constitution, entitled Laws to

embrace only one subject, which provides [n]o law shall embrace more than one subject,

which shall be expressed in its title (the Single Subject Clause)the Bill combines a


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multitude of subjects, many of which have no relation to state government finance or to each

other.

29. The State Government Finance Omnibus Bill spans seventy-four pages and

includes 158 separate sections. The title alone covers more than a page, single-spaced, of the

Laws of Minnesota. The Bill is composed of four articles addressing various dissimilar topics.

Article 1 contains 38 sections and is titled State Government Appropriations; Article 2

contains 88 sections and is titled State Government Operations; Article 3 contains nine

sections and is entitled Military and Veteran Affairs; and Article 4 contains 23 sections and is

titled Pari-Mutuel Horse Racing. The codification of the Bill requires amendments at least 60

sections in 27 different chapters of the Minnesota Statutes and the Minnesota Laws, new

statutory sections in seven different chapters, and seven repeals in six different chapters of the

Minnesota Statutes.

30. Several examples illustrate the diversity of unrelated subjects addressed in the

State Government Finance Omnibus Bill:

Article 1, 1-37: Appropriations for state government branches.

Article 2, 5: The creation and membership of the Minnesota Council on LatinoAffairs, the Counsel for Minnesotans of African Heritage, and the Council on

Asian-Pacific Minnesotans;

Article 2, 17: Healthy Eating, Here at Home incentives to encourage low-income Minnesotans to use federal Supplemental Nutritional Assistance Programbenefits at farmers markets;

Article 2, 45: Continuing education requirements for cosmetologists, nail

technicians, estheticians, advanced practice estheticians, and salon managers;

Article 2, 54: Requirements for foreign corporations to reinstate revoked orcancelled certificates of authority to do business in Minnesota;

Article 2, 69: Unlawful acts for accountants;


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Article 2, 70: Inquiries regarding farm product liens and financing statements;

Article 2, 71: Regulatory fees for gambling licenses;

Article 2, 76: Limits on railroad condemnation powers in Hennepin County;

Article 3, 7: Recognizing the Honor and Remember Flag; and

Article 4, 1: Setting the racing season for pari-mutuel horse racing.

31. The Privatization Legislation itself is similarly a poor fit with the State

Government Finance Omnibus Bill. The amendments to the authority of the State Auditor set

forth in the Privatization Legislation share no filament with railroad condemnation power in

Hennepin County, the Honor and Remember Flag, registration of foreign corporations, the

regulation of the practice of cosmetology, or with numerous other topics included in the Bill.

Nor does the Privatization Legislation reasonably relate to appropriations to State Departments

and agenciesthe primary topic of the State Government Finance Omnibus Bill.

32. The State Government Finance Omnibus Bill was not an outlier. During the 2015

Legislative Session, only 80 bills were passed, and 77 enacted. This is the lowest number of

bills enacted during a regular session since Minnesota became a state. (Elizabeth Lincoln &

Carol Blackburn, A Record Low Number of Laws Enacted in 2015, Minnesota Legislative

Reference Library, Library News, May 27, 2015.) Of those 80 bills, over a third were passed in

the last three days of the legislative session. In jamming all of the work of the Legislative

Session into 80 bills, the Legislature improperly and unconstitutionally combined multiple

disparate subjects together in many bills, including in the State Government Finance Omnibus

Bill.


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C. The Privatization Legislation Was Slipped into an Unrelated Bill in

the Middle of the Night on the Last Day of the Legislative Session.

33. The State Government Finance Omnibus Bill began as companion bills in the

House and Senate, each based on the Governors proposed budget. In addition, each house of the

Legislature introduced its own separate budget bill. Via these separate bills, the House and

Senate independently developed a State Government Finance Omnibus Bill.

34. As the session progressed without the Legislature enacting other bills, however,

legislators added numerous other provisions to the bills that should have been enacted only as

separate bills. As a result, the contents of the eventual State Government Finance Omnibus Bill

have diverse origins; the Bill includes provisions that were initially included in at least 20 Senate

Files and at least 20 House Files. For example, the Senate Finance Committee added provisions

related to the practice of cosmetology, formerly contained in an independent single-subject bill,

to its version of the State Government Finance Omnibus Bill.

35. The Privatization Legislation had its origins in House File 495, which was

introduced on the House floor on February 2, 2015. House File 495 was a two-page policy bill

consisting exclusively of the county audit privatization language. A similar bill privatizing

county audits was introduced in the Senate, Senate File 860, but that bill was never heard by any

committee.

36. On February 24, 2015, the House Government Operation and Election Policy

Committee heard House File 495. The Committee voted to pass House File 495 and referred it to

the House State Government Finance Committee.


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37. The State Government Finance Committee met on April 15, 2015, and converted

House File 495 into the State Government Finance Omnibus Bill. By this point, the Bill spanned

over 100 pages and covered a mixture of budget and policy topics.

38. The Senate sent its final State Government Finance Omnibus Bill, which did not

include county audit privatization language, to the House on April 20, 2015. The House Ways

and Means Committee responded by replacing the text of Senate File 888 with the entirety of the

text of House File 495 (including the county audit privatization language) and returning it to the

Senate. The Senate refused to concur, and a conference committee was requested.

39.

The final Conference Committee hearing was eventually held on May 17, 2015,

and lasted until the early morning hours of May 18, 2015. It took bullying and a bait-and-

switch to come to a compromise regarding the county audit privatization language in the

Conference Committee. As detailed in a Star Tribune investigation:

In a Capitol corridor, GOP House Speaker Kurt Daudt, a top aide for DFL Senate

Majority Leader Tom Bakk and a few other legislative leaders were engaged in atense conversation on a surprise amendment to allow counties to outsource audits.

Approved by the House, the measure which would gut the role of the stateauditor, Democrat Rebecca Otto had never been heard in the Senate. Yet thatnight, Sens. Sandy Pappas and Jim Carlson, leaders of the bills conference

committee, were being instructed by Bakks chief of staff, Tom Kukielka, toapprove the controversial change.

(Ricardo Lopez, Hasty 3 a.m. Decision Triggered Minnesotas Budget Impasse, Star Tribune,

June 8, 2015.)

40.

Eventually, the Conference Committee approved a delete everything

amendment and pieced together a State Government Finance Omnibus Bill drawing from Senate

File 888 and House File 495, including the Privatization Legislation. Over the concerns of

Senate Democrats that the State Auditor privatization language was a significant policy measure


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that had never been heard by a Senate committee, the Conference Committee agreed to

recommend the newly-formed Bill.

41. On the Senate floor, Senator Sandy PappasPresident of the Senateexpressed

concerns about the State Auditor privatization language. She stated that she had not signed the

Conference Committee report because there had been a bait and switch regarding the

privatization of county audits. Senator Pappas reported that the original compromise in the

Conference Committee was to permit the Office of the Legislative Auditor to conduct a study of

the OSA; the compromise did not initially include passage of the Privatization Legislationa

measure that Senate Democrats on the Conference Committee opposed. Nevertheless, the

Privatization Legislation was bundled into the Bill, and the Bill was passed by the Senate and

House on May 18, 2015, along with funding for the State government.

42. Governor Mark Dayton signed the State Government Finance Omnibus Bill into

law on May 23, 2015, despite his public opposition to the Privatization Legislation. Because the

Legislature bundled the Privatization Legislation with the State Government Finance Omnibus

Bill, the Governor explained that he signed the Bill because it included a lot of other

[provisions], like funding for all the other agencies. In particular, signing the Bill was necessary

to avoid having to layoff thousands of State employees. Even after signing the State Government

Finance Omnibus Bill, the Governor attempted to force the Legislature to repeal the Privatization

Legislation as a condition of calling a special legislative session necessary to complete the work

of the session and to enact other bills the Governor had vetoed. A former State Auditor himself,

the Governor explained his opposition to the Privatization Legislation in a quote given to the

Pioneer Press:


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I am just strongly opposed to what they are attempting to do here.It basically wipes out a principal function of a constitutional office.

(Rachel E. Stassen-Berger, Mark Dayton would Halt Special Session over State Auditor

Provision, Pioneer Press, June 3, 2015.)

43. Citing the intransigence of Republican legislators, the Governor eventually

relented in order to avoid a partial shutdown of the State Government and the layoff of thousands

of State employees.

44. Due to these political machinations, the State Government Finance Omnibus Bill

includes legislation that had only been heard in one house of the Legislature, like the

Privatization Legislation; it also wraps together the topics of numerous bills that, until that late

date, had not passed through the Legislature standing alone.

III. THE PRIVATIZATION LEGISLATION IS HAVING AN IMMEDIATE

DETRIMENTAL IMPACT ON THE OSA AND THE PUBLIC.

A. Counties Have Refused to Submit to the Constitutional Authority of

the Office of the State Auditor By Choosing to Privatize Their Annual

Audits.

45. Although the current statuteSection 6.48is not replaced by the new statute

Section 6.481until August 1, 2016, the Privatization Legislation is already having a

detrimental effect on the OSA because counties are already refusing the authority of the OSA to

conduct their audits. Counties are interpreting the Privatization Legislation in a manner that

would impermissibly remove a core function from the State Auditorthe authority to direct and

control county auditsand transfer that function to the counties.

46. The OSA audits counties on a three-year cycle. The latest three-year cycle ended

with the year ending December 31, 2014. As is its customary practice, the OSA sent letters to

each county informing the county whether the OSA would perform its audits for the next three-


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year cyclethe years ending December 31, 2015, 2016, and 2017or whether the OSA would

require the county to retain a private CPA firm.

47. Of 87 total Minnesota counties, the OSA notified 61 counties that it would

perform their audits for the next three-year cycle (the State Audit Counties).

48. In an effort to increase efficiency and better plan and budget its resources, the

OSA combined the notice letter to each of the State Audit Counties with a contract for the three-

year period. The OSA asked counties to sign the contract and return it to the OSA.

49. The County Defendants refused to sign the contract. First, in an email dated

September 15, 2015, Wright County notified the OSA that it had retained a private CPA firm to

conduct its audit for 2015before the Privatization Legislation even goes into effect. Although

Wright County eventually agreed to submit to an OSA audit for 2015, it provided notice to the

OSA that the County would be replacing the OSA with a private CPA firm as soon as permitted

under the Privatization Legislation.

50. Becker County similarly refused to sign the contract. Like Wright County,

emboldened by the Privatization Legislation, a Becker County staff member initially informed

the OSA that Becker County was considering obtaining a private CPA audit in 2015before the

Privatization Legislation goes into effect. Becker County subsequently agreed to allow the OSA

to conduct its audit for 2015, but has refused to commit to OSA audits for future years.

51. Ramsey County also refused to sign the contract. Ramsey County stated that it

was very pleased with the services provided by your office, but explained that the County

would not commit to a full three-year cycle, preferring a year-to-year approach, because of its

concern that the Privatization Legislation might cause enough counties to opt out of State


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Auditor services, raising prices and negatively impacting staff levels and service quality

provided by your office.

52. These counties are not alone. Forty-seven additional counties have refused to sign

the three-year contract, based on their belief that the Privatization Legislation allows them to

choose to retain a private CPA firm to conduct their audits beginning next year.

53. As noted in a recent report issued by the Minnesota Office of the Legislative

Auditor, county financial officials had generally positive opinions of the OSA audit teams that

have audited their counties. However, many of the counties that refused to sign three-year

contracts with the OSA have explained that they are unwilling to sign the contract because the

OSA, unlike a private CPA firm, is unable to conduct the audits on a fixed-fee basis. In this

respect, the counties concern is misdirected, as the OSA is prevented by statute from charging a

fixed fee. Specifically, the Legislature has mandated that the OSA charge counties the costs and

expenses of an audit, including a proportionate share of the salaries of all auditors engaged in the

audit, which cannot be determined until after the audit is completed. SeeMinn. Stat. 6.56. As

a result, the Legislature itself created the circumstances under which counties are seeking to

replace the OSA with private CPA firms.

54. The refusal of 50 counties, including the County Defendants, to submit to OSA

audits constitutes a direct challenge to the State Auditors constitutional authority.

B. Allowing Counties to Outsource their Audits Would Eviscerate the

Constitutional Office of the State Auditor.

55. If countieseven only the 50 counties that have already refused to accept the

OSAs contract for the current three-year cycleare allowed to refuse OSA audits and instead

privatize the State Auditors function, the impact on the OSA would be devastating.


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56. As a direct result of the 2013 legislation, approximately 60 percent of the OSAs

budget is derived from the State Auditor Enterprise Fund. If even only these 50 counties cease

making audit fee payments to the State Auditor Enterprise Fund, it would reduce annual

payments to the fund from counties by approximately $3.9 million, reducing the OSAs total

budget by at least 44 percent. This would require the OSA to conduct substantial layoffs.

Moreover, the OSA would lose valuable experience and economies of scale, necessitating higher

audit rates to the OSAs remaining county clients. As the proportionate expenses increase, it will

only encourage more counties to attempt to retain private CPA firms. Because the majority of

the OSAs revenue is derived from county audit fees, every county that ceases making payments

to the State Auditor Enterprise Fund will result in staff reductions.

57. Despite its attempt to severely reduce the OSAs largest source of revenue

county audit fees paid to the State Auditor Enterprise Fundthe Legislature did not replace this

loss of revenue with additional funding from the General Fund. The General Fund appropriation

to the OSA for the biennium covering fiscal years 2016 and 2017 is $4,416,000. This

appropriation represents approximately one-quarter of the General Fund appropriation made to

the OSA by the Legislature in the biennium covering fiscal years 2012 and 2013, the last

biennium before the Legislature replaced the majority of the OSAs General Fund appropriation

with a direct appropriation from the State Auditor Enterprise Fund.

58. More importantly, privatization would substantially limit the State Auditor and

Executive Departments rolein place since the nineteenth centuryas steward of county

finances. The County Defendants seek to replace that inherent traditional role of the State

Auditor with a shella much smaller OSA threatening its constitutional role providing

independent and meaningful oversight over the billions of dollars counties spend annually.


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59. In sum, the net effect of the County Defendants interpretation of the Privatization

Legislation, which has already been set in motion by those counties that have refused to sign the

OSAs contract for the current three-year cycle, would be a drastically altered OSA and a

reduction in oversight of the use of taxpayer dollars. More importantly, the State Auditors core

function of auditing counties would be reduced to a limited role, wherein the Legislature purports

to constrain the State Auditors discretion and authority to accept private CPA firm audits.

60. Such an attempt to reduce the authority, budget, and staff of a constitutional office

is unprecedented in Minnesota historywith one exception. The last time the Legislature

attempted to drastically alter the scope, authority, and duties of a constitutional officer in the

Executive Department, the Supreme Court held that the attempt was unconstitutional. State ex

rel. Mattson v. Kiedrowski, 391 N.W.2d 777 (Minn. 1986). Constitutional checks and balances

reside with the People of Minnesota. The People, and not the Legislature, have the power to

dramatically reshape our State Government, and may only do so through a constitutional

amendment.

COUNT I

(Declaratory Judgment that the Privatization Legislation Requires Counties to

Submit to the Constitutional Authority of the State Auditor)

61. Plaintiff realleges all previous paragraphs of this Complaint.

62. Minnesota statutes are presumed constitutional, and courts are required to

construe statutes to be consistent with the Constitution if at all possible.

63.

The OSA has constitutional authority to audit counties, including by determining

whether counties should be audited by the OSA.


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64. The County Defendants have interpreted the Privatization Legislation as allowing

them to reject the OSAs audit authority, and have impermissibly refused to submit to the

constitutional authority of the OSA by refusing to submit to OSA audits.

65. There is a justiciable controversy between the parties and the controversy is ripe

for adjudication.

66. The Court may resolve this controversy by interpreting the Privatization

Legislation consistent with the State Auditors continuing exercise of her constitutional authority.

67. First, the plain language of the first subsection of 6.481 was retained, almost

verbatim, from Section 6.48, and recognizes the State Auditors authority to audit counties:

At least once in each year, if funds and personnel permit, The state auditor mayvisit, without previous notice, each county and make a thorough examination of

examineall accounts and records relating to the receipt and disbursement of the

public funds and the custody of the public funds and other property.

Minn. Stat. 6.481, subd. 1 (additions to Section 6.48 in bold, omissions from Section 6.48

struck-through).

68.

Second, although the Privatization Statute purports to allow counties to choose

to have an annual audit conducted by a private CPA firm and requires the State Auditor to

accept the audit unless the audit does not meet recognized industry standards, the State Auditor

has unfettered discretion to make additional examinations as the auditor determines to be in the

public interest. Minn. Stat. 6.481, subds. 2-3.

69. Third, counties are required to pay the State Auditor for the costs and expenses of

audits conducted by the State Auditor. Payments must be deposited in the State Auditor

Enterprise Fund. Minn. Stat. 6.481, subd. 6.


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70. As a result, although a county may elect to have an additional audit conducted by

a private CPA firm, and the State Auditor must accept the audit, the Privatization Statute is

silent as to the purpose for which a private CPA firm audit must be accepted, so the Privatization

Statute may be interpreted to allow the State Auditor to accept a private CPA firm audit for any

purpose she deems appropriate. Thus, the Privatization Legislation may be interpreted to allow

the State Auditor to continue to exercise her constitutional authority to audit counties at her

discretion and to require counties to pay for those audits.

71. Plaintiff is entitled to a declaratory judgment that:

a.

Auditing counties is an essential core function of the OSA under the

Minnesota Constitution and the OSA has the constitutional authority to

audit counties and control the county audit process, including by

determining whether counties should be audited by the OSA or allowed to

hire a private CPA firm;

b. Minnesota Statutes 6.481 may be construed in a manner that is

consistent with the OSAs continuing exercise of its essential core

function of auditing counties;

c. Minnesota Statutes 6.481 allows the OSA to continue to exercise its

constitutional authority to audit counties at its discretion and to require

counties to pay for such audits; and

d.

The County Defendants must submit to the OSAs constitutional authority

to audit counties, and must pay for audits conducted by the OSA.


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COUNT II(Declaratory Judgment that the Privatization Legislation

Violates the Separation of Powers Clause)


73. In the alternative, if the Privatization Legislation cannot be interpreted to allow

the State Auditor to continue to exercise her constitutional authority to audit counties at her

discretion and to require counties to pay for such audits, the Privatization Legislation violates the

Separation of Powers Clause of the Minnesota Constitution.

74. The State Auditor is an elected constitutional officer in the Executive Branch of

the Minnesota State Government. Minn. Const. art. V, 1. The State Auditor has core

functions which may not be abrogated by the Legislature or transferred away from the OSA.

State ex rel. Mattson v. Kiedrowski, 391 N.W.2d 777 (Minn. 1986).

75. The State Auditor has had supervisory authority over county finances since the

territorial government and, along with its predecessor the Office of Public Examiner, has been

auditing counties since 1851.

76. Auditing of counties, including the power to determine whether a county may

have its audit performed by a private CPA firm, is an inherent and core function of the OSA.

77. The Privatization Legislation purports to severely limit this core function and

transfer to each county the discretion to determine whether the OSA, or a private CPA firm, will

conduct the audit for that county.

78.

The effect of the Privatization Legislation, which is already being realized, will be

a severe reduction in the authority, budget, and staff of the OSA.

79. The Minnesota Constitution recognizes separation of powers and provides that the

[t]he powers of the government shall be divided into three distinct departments: legislative,


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executive and judicial. No person or persons belonging to or constituting one of these

departments shall exercise any of the powers properly belonging to either of the others except in

the instances expressly provided in this constitution. Minn. Const., art. III, 1.

80. The Legislature violated the Separation of Powers Clause when it enacted the

Privatization Legislation, which impermissibly purports to transfer inherent core functions of the

State Auditor to county governments and private CPA firms.

81. The County Defendants have impermissibly sought to exercise inherent core

functions of the State Auditor by refusing to submit to OSA audits.

82.

A justiciable controversy exists between the parties in this matter and the

controversy is ripe for adjudication.


a. The Privatization Legislation violates the Separation of Powers Clause,

Minn. Const., art. III, 1, by purporting to limit the State Auditors

authority relating to auditing counties and by transferring an inherent core

function of the State Auditor to county governments; and

b. As a result of the violation of the Separation of Powers Clause, the

Privatization Legislation is unconstitutional, null, void, and of no further

effect.

COUNT III(Declaratory Judgment that the Privatization Legislation Violates

the Single-Subject Clause)


85. The Single Subject Clause provides that [n]o law shall embrace more than one

subject, which shall be expressed in its title. Minn. Const., art. IV, 17.


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86. The Single Subject Clause is violated when a bill fails to embrace one general

subject. To satisfy the clause, subjects in a bill must be germane to some single subject and must

share at least a mere filament. The clause is not satisfied if the mere filament is reduced to a

mere figment. The purpose of the Single Subject Clause is to prevent the log-rolling of unrelated

legislation into a single bill.

87. The State of Minnesota is a proper defendant in a lawsuit asserting a violation of

the Single Subject Clause.

88. The remedy for a bills failure to comply with the Single Subject Clause is to

excise the challenged provision of the bill from Minnesota law.

89. The Privatization Legislation is not germane to the subject of the State

Government Finance Omnibus Bill: State government appropriations and finance. Nor does any

filament sufficient to satisfy the Single Subject Clause connect the many topics included in the

State Government Finance Omnibus Bill. Instead, the State Government Finance Omnibus Bill

and the Privatization Legislation are examples of log-rolling unrelated legislation into a single

bill.

90. The State Government Finance Omnibus Bill violates the Single Subject Clause.

91. A justiciable controversy exists between the parties in this matter and the

controversy is ripe for adjudication.


a. The State Government Finance Omnibus Bill violates the Single-Subject

Clause of the Minnesota Constitution, Article IV, Section 17;


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b. As a result of the violation of the Single Subject Clause, the Privatization

Legislation must be severed from the remainder of the State Government

Finance Omnibus Bill; and

c. As a result of being severed from the State Government Finance Omnibus

Bill, the Privatization Legislation is null, void, and of no further effect.

WHEREFORE, Rebecca Otto, in her official capacity as State Auditor of the State of

Minnesota requests judgment as follows:

1. Awarding the State Auditor a declaratory judgment that the OSA may continue to

exercise its constitutional authority to audit counties under Minn. Stat. 6.481 or, in the

alternative, that the Privatization Legislation is unconstitutional;

2. Requiring, based on the fact that the Office of Attorney General stated that it was

unable to represent the State Auditor in this matter, the State of Minnesota to reimburse the State

Auditor for the costs and attorneys fees incurred in connection with this matter;

3. Granting the State Auditor such other and further relief as the Court deems just

and equitable.


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Dated: February 4, 2016 /s/ Joseph T. Dixon

Joseph T. Dixon (#028903)Joseph J. Cassioppi (#0388238)Pari I. McGarraugh (#0395524)

FREDRIKSON & BYRON, P.A.

200 South Sixth Street, Suite 4000Minneapolis, MN 55402

Telephone: (612) 492-7000Facsimile: (612) [email protected]

[email protected]@fredlaw.com

ATTORNEYS FOR PLAINTIFF

ACKNOWLEDGMENT

Plaintiff acknowledges that sanctions may be imposed under Minn. Stat. 549.211.

Dated: February 4, 2016 /s/ Joseph T. Dixon

Joseph T. Dixon (#028903)

Joseph J. Cassioppi (#0388238)Pari I. McGarraugh (#0395524)

FREDRIKSON & BYRON, P.A.

200 South Sixth Street, Suite 4000Minneapolis, MN 55402Telephone: (612) 492-7000

Facsimile: (612) [email protected]@fredlaw.com

[email protected]

ATTORNEYS FOR PLAINTIFF

57951800_1.doc


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mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

Documents

Otto v. Wright County - Complaint