The 2nd meeting of the Interim Joint Committee on Labor and Industry was held on Thursday, November 20, 2003, at 10:00 AM, in Room 149 of the Capitol Annex. Senator Katie Stine, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Katie Stine, Co-Chair; Senators, Alice Kerr, Joey Pendleton, Richard Roeding, and Damon Thayer; Representatives Denver Butler, C.B. Embry Jr, Charlie Hoffman, Dennis Horlander, Joni Jenkins, Thomas Kerr, Russ Mobley, Rick Nelson, Jim Stewart, and Brent Yonts.
Guests: Mr. Gerald Hoppman, Performance Audit Director, Auditor of Public Accounts; Mr. Brian Lykins, Acting Director, Examination and Information Technology Division, Auditor of Public Accounts; Commissioner James Thompson, Department for Employment Services; Mr. Tony DeName, Director, Division of Unemployment Insurance.
LRC Staff: Melvin LeCompte, Adanna Hydes, and Reni Krey.
Co-Chair Stine welcomed the members and informed them that in his absence, Co-Chair Gray had requested that Representative Hoffman act as co-chair during the meeting.
Co-Chair Stine explained that SB 296, enacted in 1998, established the Service Capacity Upgrade Fund (SCUF) and authorized the Department for Employment Services (DES) to spend up to $10 million annually for three years to enhance the unemployment insurance technology data base and to personalize its customer services. Additionally she explained that the Kentucky Electronic Workplace for Employment Services (KEWES) was a major initiative that anticipated eliminating the need for claimants to stand in long lines at unemployment offices, eliminating massive and time consuming paper work involved with claims, and it was anticipated that it would save time and provide convenience to employers by allowing them to file their quarterly unemployment insurance (UI) reports, pay their unemployment insurance taxes and to allow new employers to register for accounts online. She also reminded members that although the General Assembly imposed a three-year limit on the funding for KEWES, it did not apply a time limit for its implementation.
Co-Chair Stine explained that according to the state auditor's report to the committee members, the KEWES report resulted from other routine audits which had been previously conducted. Subsequently, the auditor reviewed the KEWES project and reported several concerns relating to planning, implementation delays, and costs of the project. The concerns were outlined in the auditor's October letter addressed to the committee.
Co-Chair Stine introduced Mr. Gerald Hoppman, Performance Audit Director in the Office of Public Accounts. Mr. Hoppman informed the members that his office became concerned about KEWES after learning about an assessment of the KEWES project that was being conducted by TRW, now known as Northrop Grumman, during the course of their financial, information technology (IT), and performance audits of the Workforce Development Cabinet. Mr. Hoppman said the auditor was concerned after reviewing the assessment's findings which stated that the final increments of KEWES had not been completed and that DES was paying the Governor's Office for Technology (GOT) and a private vendor for system maintenance. Mr. Hoppman added that a weak audit trail existed and cited concerns regarding compliance with the Americans With Disabilities Act (ADA) requirements.
Mr. Hoppman explained that a new contract with GovConnect, had been issued but there had been no reduction in the contract price for the removal of the interactive voice response (IVR) system.
Mr. Hoppman said that as a result of the TRW report, the auditor's office initially corresponded with DES to request information in a letter dated July 10, 2003. He said a follow-up letter was sent August 12, 2003. He said that although DES responded with information following both letters, specific information the auditor had requested was not provided. He said the main information the auditor's office wanted to review was the status of the TRW findings and recommendations, original invoices and projected costs, and planning information. Mr. Hoppman said that after reviewing the information they received from DES, the auditor's office concluded that the committee was not aware of the TRW assessment and indicated that the 2002 Annual Report did not include a discussion of the problems cited by the TRW report.
Mr. Hoppman said that prior to releasing a letter to the committee, the auditor's office contacted other states to compare systems. He said they identified nine states that had implemented functional systems for less than one million dollars. Those states were Arizona, Idaho, Maryland, Minnesota, North Carolina, Oregon, Pennsylvania, Utah, and Washington. He defined functional system to mean that employers are able to file their quarterly reports, they are able to pay their taxes, and individuals are able to file online and also use an interactive voice response system. He admitted that the systems were not exactly the same as KEWES.
Mr. Hoppman said a letter from DES, dated August 4, 2003, stated that completion of the KEWES would be accomplished by the end of the calendar year. He said their concerns still existed regarding whether individuals will be able to initiate or continue claims via the internet from their personal computers or the IVR. In addition, Mr. Hoppman stated that the hosting fee of $33, 515, paid since last October, continues to be a concern to his office. He said information the auditor's office has requested but has not been provided includes an update from DES regarding the APA's 2003 performance assessment, including information regarding $62.4 million identified in accounts receivable, and he added the APA is still waiting for an update.
In conclusion, Mr. Hoppman said he was encouraged with the progress of the KEWES project and suggested that DES follow-up on Northrop-Grumman's report and update the auditor's office on previous financial and performance audit findings and recommendations.
Mr. Hoppman turned the presentation over to Mr. Brian Lykins, Director of Examinations and Information Technology, Auditor of Public Accounts, who provided an explanation of the purpose and benefit of auditing automated systems throughout the state. He explained that the financial audit division of the auditor's office is charged with auditing the comprehensive annual financial report and the single statewide audit of Kentucky.
Co-Chair Stine introduced Commissioner James Thompson, Department for Employment Services, and Mr. Tony DeName, Director, Unemployment Insurance Division. Mr. DeName explained that KEWES was funded with monies from the Service Capacity Upgrade Fund (SCUF) as a one time major investment to upgrade the technology of the Unemployment Insurance (UI) program. He explained that in addition to the SCUF monies, funding was provided from UI's federal administrative dollars received annually, through penalty and interest monies collected from accounts receivable, and from grants received from the United States Department of Labor.
Mr. DeName stated that KEWES was implemented incrementally, but that in some capacity, KEWES has been operational since July 2000. He said that the Revenue Cabinet now opens the agency's mail, deposits tax dollars and images tax reports, a measure that resulted in a reduction of 30 temporary, seasonal employees. In addition, he said new businesses may now apply online for UI tax identification numbers. Additionally he stated that the early partnership with GovConnect has allowed UI claimants to claim benefits by toll-free telephone service and provided the opportunity to eliminate outdated, costly hardware that had been maintained in five locations across the state. He also said that the collection increment of KEWES is fully operational and the imaging system is very successful and has eliminated the physical storage of over five million documents. He added that for approximately eight weeks, the remote claims process has been working. The agency has taken over 3,317 claims either through the use of intranet connected personal computers or by telephone in pilot or limited deployment of the system. He admitted that the process has taken a long time to implement, but that was purposeful and the time had been used to execute the best, user friendly system, and to appropriately train staff. He added that in spite of everything, the project has been and continues to be under budget. In closing, Mr. DeName directed the members' attention to charts which indicate staff reduction, overtime reduction and the workload resulting from KEWES.
Commissioner Thompson indicated that the APA had never viewed a single component of KEWES, had never spoken to a system operator, and rejected his offer for a personal demonstration. He said he received the auditor's report via email the morning prior to its being sent to the Labor and Industry Committee and that he was offered an opportunity to comment. He said he responded regarding the inaccuracies and was further informed that a response would be unnecessary. Commissioner Thompson addressed each of the six points cited in the auditor's report.
He explained that TRW, currently known as Northrop Grumman, was hired in early 2003 by the KEWES executive steering committee to conduct an independent verification and validation of the KEWES project to assess best practice procedures ensuring quality assurance. He noted that deficiencies were referenced in the final report and the KEWES steering committee met with the contractor, Bearing Point, who accepted responsibility for the deficiencies and committed to correcting them at no additional cost to the Commonwealth. The first three components were operational and the fourth component was nearing completion at the time of the auditor's report. He said only the fifth component, the internet and call center claims component, was encountering delays.
Responding to the second point which stated that DES failed to provide detailed information related to KEWES project costs, Commissioner Thompson informed the committee that every document in the department's possession was forwarded to the auditor's office on more than one occasion. He admitted that original invoices were not provided because they did not have original documents. He said the original invoices were in the possession of the Finance and Administration Cabinet who requires and authorizes those documents.
Commissioner Thompson agreed that DES has paid approximately $368,665 to GovConnect for a hosting fee even though the component was not yet operational. He said the agency was using the system for user acceptance testing, training of staff, to create training manuals, and to develop interfacing software used by the KEWES project. Additionally, the hosting fee paid for the help desk, system monitoring, software maintenance and many other services fundamental to developing the best possible system. He also stated that negotiations were taking place to reduce the 10 cents per minute charge to use the system to a lesser amount and that he had provided that information to the auditor's office. He said the auditor reported the 10 cents per minute charge but neglected to mention the negotiation for the rate decrease. He stated that the rate has now been reduced to six cents per minute.
Commissioner Thompson said that while other states may have implemented some type of technological system for claims processing, it was doubtful that any of these systems were comparable to KEWES. He said he had spoken to a UI employee in Minnesota about their technology system which had been referenced in the auditor's report and they denied that Minnesota had implemented a comparable system for less than one million dollars. He also informed the committee that Minnesota had recently contracted with Bearing Point to replicate KEWES for $32 million. Commissioner Thompson said four of the other states indicated in the auditor's report currently have projects under development to develop similar systems to KEWES with costs ranging from $20 million to $32 million.
In closing, Commissioner Thompson said that KEWES was the premiere system in the United States and should be applauded for the convenience offered to employers, claimants and taxpayers.
Co-Chair Stine allowed Mr. Hoppman to utilize his remaining 10 minutes to make follow-up comments. He said the report was a result of efforts of the executive staff in multiple divisions within the APA's office. He said the performance audit division became the central unit for gathering information relating to the TRW report. Responding to Commissioner Thompson's comment in which he referred to his offer to Mr. Hoppman to view the system personally, Mr. Hoppman said the invitation was issued to the auditor who, due to schedule constraints, was unable to visit the site. He also said his office tested the system by attempting to access the claims component on the internet. He acknowledged that the system was partially operational but he stated that the auditor's concern focused on the remaining components yet to be functional. He also said that although the auditor's office had received three boxes of information from DES, they did not receive the main information they requested.
Prior to opening the panel for discussion, Co-Chair Stine entertained a motion from Representative Yonts to approve the minutes of the August 21, 2003 meeting. Senator Pendleton seconded the motion and the minutes were approved.
Representative Yonts requested clarification of the auditor's finding regarding the $62.4 million outstanding in accounts receivable. Mr. DeName answered that some accounts date back to 1937 and that no statute of limitation exists on tax debt but that some debts are declared uncollectable. He informed the committee that the actual debt had been reduced to approximately $40 million. Mr. Hoppman referred to KRS 341.300 Section 4, which he said bars collecting UI taxes unless it is within a five year period. He said the auditor's office uses that criteria to recommend that accounts receivable are written off after five years to determine the amount that is truly collectable. Mr. DeName responded that the statute referenced was UI law and that it further states that if actions are pending, court action taken, collection activity ongoing, UI is entitled to attempt to collect the debt. Representative Yonts asked Mr. DeName to provide statistics to the committee at a later date regarding the actual status of the accounts receivable. Representative Yonts commented that it concerns him when state agencies are openly at odds, and he said the committee and the press received notification of the report at the same time. He asked Mr. Hoppman why the auditor's office did not come before the committee sooner to voice their concerns before making a public statement. Mr. Hoppman stated that the decision to inform the committee about the auditor's concerns was made by management above him. He said the press office within the auditor's office is a separate division and it is their policy to release information to the press to accompany any type of product or report of the auditor's findings. Representative Yonts asked DES about KEWES and its compliance with ADA. Commissioner Thompson said that DES expects KEWES to be in ADA compliance by the middle to end of 2004. Mr. DeName added that only the internet component is not yet in compliance but that steps are being taken to address the issue. Commissioner Thompson said that KEWES is expected to be 100 percent operational, statewide, on November 24.
Several members commented that the agencies should have come to this committee to present their concerns and that the auditor should have visited the site before issuing a public report. Senator Pendleton said he was impressed that KEWES reduced overtime costs from over $359,000 to a little more than $18,000 last year. Representative Hoffman congratulated DES on the KEWES project and said he had taken the opportunity to visit the site and a local field office to view the functions of the system. In response to questions from Representative Hoffman, Commissioner Thompson informed the committee that he began to notice projected dates passing by without completion and he became concerned and recommended an independent validation and verification which resulted in the TRW report. In addition, Commissioner Thompson said in addition to previously described benefits it has been determined that UI currently physically occupies more infrastructure sights than will be necessary once KEWES is fully operational, thereby further reducing costs.
Commissioner Thompson responded that at the time of the 2002 Annual Report, the first three increments of KEWES were operational and the agency did not have concerns at that time. He said shortly thereafter deadlines passed and that was when the decision was made to obtain the services of TRW to perform an assessment of the KEWES project.
Kimber Arvin, a representative of Northrop Grumman assured the committee that the Northrop Grumman report is unbiased. Ms. Arvin responded that Northrop Grumman is not on retainer, but rather has a contract with DES for a specific time period. She said representatives from Northrop Grumman have met with DES staff, Bearing Point management and programming staff, GOT's Information Technology staff, and other members to assess the progress and status of KEWES. She said they did not provide a rosy report but that they tried to provide an unbiased report and she pointed out that there are still some issues remaining. She said however, that the report provided bulleted points, which she briefly explained, and the steps DES has taken as corrective action. Robin Morley, GOT, in response to a question from Senator Stine, said the cost estimates for future support and upgrades of KEWES have not been completed. Commissioner Thompson said that when estimates are provided, DES intends to seek funding from monies available through the UI program or through the Reed Act money appropriated to the department annually. Senator Stine asked Mr. DeName if the cost of upgrading the system would impact employers' unemployment insurance tax rates. Mr. DeName said the department does not use UI Trust Fund dollars to fund KEWES. He explained that trust fund dollars can only be used to pay benefits to claimants and will not trigger a tax increase. Responding to Senator Stine, Mr. Hoppman said the statute requires the agency to follow up within 60 days of the report and he added that questions are pending and requested a formal update from DES relating to all of the financial audit findings where management said KEWES would help them address the findings and recommendations as well as recommendations in the performance assessment related to accounts receivable. Mr. DeName responded that Mr. Hoppman's statement was the first request he had for such information but that he would be happy to provide an update.
There being no further business, the meeting was adjourned.