PFD fraud detection program falls short of promised savings

JUNEAU — A Permanent Fund dividend fraud detection program launched at the direction of a powerful state senator has failed to deliver its promised savings.

The Permanent Fund Division signed its no-bid, $650,000 contract with data company LexisNexis last year. The money appeared after Senate President Pete Kelly, R-Fairbanks — then co-chairman of the Senate Finance Committee — amended the state budget to include it.

Kelly is a personal friend of Eldon Mulder, the former legislator turned lobbyist whose clients include RELX, LexisNexis' multinational corporate parent. The company lobbied in more than three dozen other states between 2010 and 2014, according to the Center for Public Integrity.

New data published Monday by the Permanent Fund Division show that LexisNexis' software stopped 224 ineligible dividend payments in 2016, worth some $230,000.

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The state is trying to collect another $435,000 in dividends from the preceding six years that the software identified as ineligible, including 111 from 2015. But so far just $18,000 has been paid back, according to Sara Race, the division director.

LexisNexis' software will also be used to review 2017 dividend applications under the data company's 11-month agreement with the division. But the review would have to yield nearly twice as many denials for the savings to match the value of the state's payment to LexisNexis, let alone amount to a gain.

A LexisNexis spokeswoman, Mary Alice Johnson, didn't respond to a request for comment.

Kelly, through a spokesman, declined to be interviewed. After the 2016 session, when questioned about his budget amendment, he suggested the reporter was approaching him with a partisan agenda. Kelly wrote in an email: "It sounds like the Republicans may have made a sound business decision to reduce fraud in PFD."

"Next year when we've saved millions will you write a story on that?" Kelly wrote. "Probably not," he added, answering his own question.

In a prepared statement Tuesday, Kelly said the new audit program had shown "early signs of success," and he noted that the savings would have doubled had Gov. Bill Walker not vetoed about half of the money set aside for last year's dividend payments.

"No one likes fraud and we have the ability to detect and stop it," Kelly said in the statement. "Next year's audit will catch even more cheaters and we'll save even more money — so far, this program is a win."

Kelly said last year that his budget amendment came after a pitch from another company, which he didn't identify. Revenue Commissioner Randy Hoffbeck, whose department houses the PFD division, recalled a meeting in Kelly's office with the senator and a lobbyist he thought was working for LexisNexis, but whose name he couldn't remember.

Kelly's amendment didn't earmark LexisNexis for a contract. But it set aside money for the Permanent Fund Division to pay for the same type of service sold by the company, saying that the cost of the fraud detection program shouldn't exceed one-fifth of the expected savings.

On that basis, with a $650,000 contract, the savings should have reached $3.25 million, more than 10 times the actual amount.

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In August, the division approved a no-bid "alternative procurement" with LexisNexis, with division officials justifying the purchase by citing a tight time frame after the state budget's passage, along with Alaska's massive deficit.

LexisNexis' huge national database tools were used to analyze all 675,000 dividend applications — of which some 4,500 are traditionally audited if they're filed from out-of-state computers, with an out-of-state postmark, or raise other red flags.

The company's software added new layers to the state's standard review process, with the most successful examining out-of-state property tax breaks tied to residency known as "homestead exemptions," according to Race, the Permanent Fund Division director. The division itself doesn't currently search for out-of-state residency exemptions, she said, though it may now add a question about them in its standard application.

The LexisNexis software identified about 1,200 questionable applications from 2016, though just 272 ended up being denied — about 0.04 percent of the number of applications. Of those, about 40 are under an informal appeal process or otherwise in limbo.

Kelly's spokesman, Daniel McDonald, didn't respond when asked if the senator would propose spending money to keep the LexisNexis audit in the budget next year after the 11-month contract expires.

Nathaniel Herz

Nathaniel Herz is a reporter for the Anchorage Daily News. He’s been a reporter in Alaska for nearly a decade, with stints at ADN and Alaska Public Media. He’s reported around the state and loves cross-country skiing.