The 8th meeting of the Program Review and Investigations Committee was held on Thursday, May 10, 2001 at 10:00 AM, in Room 131 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, Chair; Representative Gippy Graham, Co-Chair; Senators Charlie Borders, Brett Guthrie, Ernie Harris, Paul Herron Jr, Vernie McGaha and Dan Seum; Representatives Adrian Arnold, Sheldon Baugh, Dwight Butler, Jack Coleman, Charlie Hoffman, Ruth Ann Palumbo, and Dottie Sims.
Guests: Steve Barger, Executive Secretary-Treasurer, Kentucky State District Council of Carpenters AFL-CIO and Tom Schulz, General Counsel, Kentucky State District Council of Carpenters AFL-CIO.
LRC Staff: Ginny Wilson, Ph.D., Committee Staff Administrator, Program Review staff, Lowell Atchley, Judy Fritz, Greg Hager, Alice Hobson, Joseph Hood, Doug Huddleston, Margaret Hurst, Dan Jacovitch, Susan Spoonamore, Committee Assistant, and Michael Clark, Ph.D., LRC Economist’s Office.
Minutes of the April 16, 2001 meeting were approved by voice vote upon a motion made by Rep. Coleman and seconded by Rep. Arnold.
The first item on the agenda was a presentation by Dr. Ginny Wilson, Committee Staff Administrator, who reviewed the amended recommendations for The Child Support Guidelines Commission. They are as follows:
If the Child Support Guidelines Commission is to fulfill its public policy advisory role in a manner that meets the needs of the General Assembly and the interested public without unduly burdening Commission members to the point that volunteers become unwilling to serve, the 2002 General Assembly may want to consider amending KRS 403.213 to achieve the following:
a. Clarifying the structure and procedures of the Commission;
b. Specifying exactly who is responsible for staffing the Commission and what the responsibilities are; and
c. Providing Commission members reimbursement for travel and other expenses related to attendance at Commission meetings.
Prior to or in the absence of action by the 2002 General Assembly, the Program Review and Investigations Committee may want to recommend to the Governor and the Secretary of the Cabinet for Families and Children that the Cabinet assume responsibility for providing a greater level of operational support and guidance to the Commission.
After the four new members mandated under HB123 are appointed, all Commission members should attend an introductory training work session on the responsibilities of volunteer members of state boards and commissions and the normal procedures of such bodies.
The Commission should develop a regular meeting schedule, and that schedule, should be made available to the public.
The Cabinet for Families and Children, acting as support staff to the Commission, should devote whatever resources are necessary to meet statutory requirements in responding to open records requests for Commission materials.
The Commission should draft and implement a set of regular operating procedures. Those procedures should include predictability and provide a regular forum for allowing involvement of members of the audience in Commission meetings. Additionally, the Commission should attempt to schedule its meetings in a location that is more accommodating of the public’s interest in its activities.
Senator Stine asked if the Governor had appointed the new members to the Commission yet. Dr. Wilson replied, that to her knowledge, he had not.
Senator Stine stated that if the Office of the Attorney General is charged with enforcing open meeting laws, the Committee would like for the Attorney General or a representative from the AG’s Office to attend the June meeting of Program Review to give an analysis, or at least discuss the apparent failures of the Commission, to comply with the law. Another issue that needs to be addressed by the Attorney General’s Office is whether or not a conflict of interest exists since a representative from the AG’s office serves on the Commission.
Upon a roll call vote, a motion made by Senator McGaha and seconded by Senator Borders to adopt the Recommendations from the staff report on The Child Support Commission Guidelines passed.
The next issue on the agenda was discussion of the Prevailing Wage Study Proposal (a copy of which can be found in the LRC Library file). Dr. Wilson outlined the four tasks that the Committee requested staff to research. In preparing the study research proposal, she identified four objectives. The first objective is to provide a detailed definition of the prevailing wage and a clear description of how prevailing wage requirements are implemented in Kentucky. Staff will review and summarize federal and state Regulations regarding prevailing wage, specifically looking at the way the federal and state laws are implemented in Kentucky and how they are implemented by the Labor Cabinet. The second objective is to elicit, summarize, and report the opinions about prevailing wage requirements held by those most directly affected by the requirements. Therefore, staff will conduct interviews in order to target the key issues, and once staff feels like they have a good understanding, a survey will be developed and mailed out to the affected groups eliciting opinions about those issues. The third objective is to determine if prevailing wages accurately reflect local wages. She said the research task will be difficult because the data does not currently exist to determine what average wages by occupations are in regions of the state. That data will become available in 2003 when the Census Bureau releases detailed data for the Commonwealth. Until then, the only approach staff has at its disposal is to look at how a prevailing wage was developed and to comment on the quality and breadth of data that is used in making the prevailing wage determinations.
The fourth objective is to evaluate the existing research literature and available data to determine if either can provide a statistically significant indication of the impact of prevailing wage requirements on state construction costs. Staff will review, critique and summarize existing research. Dr. Wilson also stated that since this is a highly political topic and there are many publications that attempt to support a particular opinion on the effects of prevailing wage, staff will comment on the literature and decide if it suffers from threats to the validity of the conclusions because of deviations from standard research protocol. The literature review will be reported as accurately and fairly as staff knows how to do. The second task will be to see if there is data that will allow staff to comment on the essential question of whether there are cost differences between prevailing wage and non-prevailing wage projects. In the past, LRC Economists and other economists in Kentucky have been asked to address that question from a research standpoint. In most cases the standard research protocol that has been used is to select a group of projects that were constructed under prevailing wage and then select a group of projects not constructed under prevailing wage to see if the models could tease out the statistical effect of prevailing wage. Thus far we have seen that there is more variation from one prevailing project to another prevailing wage project and one non-prevailing project to another. The many differences swamp the ability to tease out the statistical effect between the groups. Another approach was used by the Legislative Budget Office in Ohio, which asked contractors to give hypothetical bids, one under prevailing wages and one not under prevailing wages. We think this approach has some serious flaws in that research does not demonstrate a very good link between what a hypothetical bid is and what people actually bid when they have to deliver a product at that price. In contrast, staff would like to obtain actual payroll records for individuals who work on prevailing wage jobs. Since those are public records, this Committee does have a right to those records in the sense that this Committee is granted the authority to gain access to the records of an entity that receives its funds from or provides services to the Commonwealth. Staff would like to get individual payroll records for individual workers who work on prevailing wage jobs, then would also like to obtain the payroll records for those same individuals for the work they perform for a contractor on non-prevailing wage jobs. That would enable us to compare to see if there is a difference between what the same individual is paid for doing the same work on a prevailing wage project versus a non-prevailing wage project within a similar time period. Another question is what percentage of a total construction project’s cost are comprised of labor costs. If those two pieces of information can be obtained, staff may be able to come up with a reasonable estimate of what the impact would be on labor costs for state and public construction projects. Dr. Wilson also stated that it was her understanding that this Committee will not have the jurisdiction to require contractors to furnish their private wage data, so this research design will depend on the willingness of contractors to come forward to share their data with the Committee so that we can do this analysis. Also, she can foresee this Committee having a role in eliciting the contractors’ support and willingness to participate in the project. Staff has to establish standard research protocols for ensuring that the data received is not biased and has not been pulled just to prove a particular point. Dr. Wilson stated that if, in her professional judgement, staff feels this is the case then staff will not report the data. Also, she stated that she wanted to make it clear to the Committee and to the many people who are interested in this topic and who care very much about the results of this research effort that staff will do the most credible and impartial research that they are capable of on this project. Staff will try to get the best data and bring whatever results we feel are reliable to the Committee. If the results are not supportable, staff will not put them out there.
Representative Palumbo asked that since there are no guarantees that the contractors will provide the information and because there was a recent study dated February 2001, from an Economist in Utah, Dr. Peter Phillips, dealing with prevailing wage in Kentucky, Ohio and Michigan, if this study is really needed.
Senator Stine responded that the decision to study the issue was made at the last meeting.
Senator Seum asked if part of the study would include the quality of work. There is a world of difference between a $30 hourly rate plumber and a $10 hourly rate plumber. He stated that the quality of that workforce and the higher pay has got to be part of this, but was not sure how you could plug that information in.
Dr. Wilson stated that the study proposal does address that topic, but we are in a situation where there are many factors to control before coming to the conclusion whether the project was prevailing wage or not. Therefore, we do not think we will be able to obtain any reliable conclusions about quality differences. She also explained that staff will elicit opinions in the survey regarding the issue and will present those opinions to the Committee, but she didn’t want to mislead the Committee to think that there is some research design that can be implemented to bring a statistically significant result. Dr. Wilson also stated that, in her opinion, the data does not exist to allow staff to do that.
Representative Baugh asked Dr. Wilson if she thought that every issue the Committee studies involves parties who have vested interests one way or the other, and if this is correct, why would the parties in this issue have a more vested interest in skewing the results in some way.
Dr. Wilson responded that she agreed that the Committee studies have parties who have vested interests one way or the other. She went on to say that the issue involves a lot more people than many of the issues that this Committee sometimes studies, but it was, in her mind, very similar. Staff will be looking at the conduct of a state agency, how a state agency implements state and federal laws, and staff will be trying to determine what the effect of that implementation is on the Commonwealth’s own cost.
Representative Baugh asked Dr. Wilson why she felt that this would be an unworthy project.
Dr. Wilson explained that there have been other studies that have been reviewed and heavily criticized because they did not appear to be impartial, and we will comment on those studies. In terms of staff’s research, her only concerns were about the availability of the data and the quality of the data. One reason this has been a perennial question and debate is the fact that the data has not really existed that would allow for a definitive answer.
Rep. Baugh asked Dr. Wilson why she thought it might not be a valid study.
Sen. Stine stated that it was her intention to have testimony from the varying sides of the issues.
Sen. Harris asked Dr. Wilson if staff planned to look at folks who had the same project bid under two different time frames.
Dr. Wilson stated that staff does not plan to look at that because we do not think there are enough of those to generalize to all projects, but we will elicit the information to see if we can get a sample to review.
Rep. Coleman stated that he would be interested in looking at whether the projects were completed in the same form in which they were begun.
Sen. McGaha stated that staff did compare prevailing wage versus average wage in Northern Kentucky, which showed a disparity, but then the study proposal goes on to state that this will not be done in this research. Rather, determinations will be made by attending prevailing wage hearings.
Mike Clark, Ph. D., of the LRC Economist’s Office, responded that the only data available was from Louisville and Northern Kentucky. There is a national wage and occupational survey done by the Bureau of Labor Statistics. It could be a joint project where they survey wages in metropolitan areas. The sample size is fairly small and what you see in metropolitan areas is that they do not have enough observations to properly evaluate the wages of any particular occupation at this level. We are waiting until additional data is available to allow us to do it over a broader region.
Sen. McGaha asked if staff had any plans to look at data from Ohio or any of the other states which have taken some action on this.
Dr. Wilson responded that staff intends to review their literature but has no plans to get their data and analyze it. Sometimes when people do not have to actually take the money out of their pocket or bear a cost, research has shown that their bids are not quite the same as when they have to put their pocketbooks on the line.
Sen. McGaha asked that if indicators are found, even though they might not be included in the report, that they please be shared with the Committee.
Sen. Stine asked staff to conduct an analysis on other studies like the one from Ohio to determine if there are flaws in it from a research prospective and to report the findings to the Committee even though the information may not be included in the report.
Rep. Palumbo stated that if you do not compare apples to apples you are not going to get accurate information. Knowing that we might not be able to do that and knowing that there has been a study completed already, it would appear that we have a lot of other issues to deal with during this interim.
Sen. Stine responded that the Committee is asking staff to take a look at these other studies to determine how flawed or valid they might be.
Sen. Stine introduced Steve Barger, Executive Secretary-Treasurer, and Tom Schulz, General Counsel, both representing the Kentucky State District Council of Carpenters AFL-CIO. Mr. Barger stated that KSDCC does have concerns about the Committee’s authority and procedure on this issue. KSDCC would like for the Committee to include in its survey some of the folks who drive the nails, tie the rebar, and pull the wire.
Mr. Schulz stated that the Program Review and Investigations Committee is set up under KRS Chapter 6 which allows the Committee to conduct investigations and review. The review has to be of the accomplishments, management and activities of an agency or program. Part of the study appears to be touching on areas of public policy. According to KRS Chapter 7, 100 (2), the Legislative Research Commission is authorized to look into matters of public policy. However, that language was not used when the legislative Program Review and Investigations Committee was drafted. Mr. Schulz also stated that, in his opinion, this Committee is limited to investigations and review, and the reviews are limited to agencies and programs. This is a matter of public policy, not a matter of a program. The authority to look into matters of public policy must come from either the LRC or the General Assembly. KSDCC objects to this Committee looking at matters of public policy and spending the taxpayers’ dollars on studies without the authorization and the debate necessary. If the Committee wants to look at what the Department of Labor is doing with the existing law, that is fine. But if you want to get into matters of public policy, I believe you are going over your jurisdiction.
Sen. Stine asked Dr. Wilson to respond to the issue of jurisdiction.
Dr. Wilson stated that under the Program Review Statutes, the Committee can review state agencies and conduct evaluations of their efficiency and effectiveness. Staff will be reviewing the efficiency and effectiveness as to the application of state and federal law by the Department of Labor, but the other matter under consideration is the efficiency of state construction practices in looking at the effect of this particular state law on the costs that the Commonwealth absorbs as it funds schools, builds roads, and funds other capital construction projects throughout state government. Reviewing the application of the law by a state agency and reviewing the efficiency of our construction approach and the state laws that could affect our cost of construction, falls well within the purview of the Committee. In KRS 6.9 there are broad definitions of the entities subject to the Committee’s review including any entity created by the Constitution, by an act of the General Assembly or any branch of state government, any entity which receives any part of its funding or resources from state tax dollars, fines, fees, licensing, penalties authorized by state statute or administrative regulations, and to that portion of a public or private entity related to the delivery of services to or for the Commonwealth. Since contractors deliver construction services to the Commonwealth, they do fall within the purview of the Committee’s review. In terms of whether this Committee has jurisdiction or not, the statute goes on to say that any study conducted by the Committee shall be deemed within its lawful duties and jurisdiction unless notified to the contrary by the Legislative Research Commission. Dr. Wilson opined that the Committee can proceed unless it is directed otherwise by the LRC.
Rep. Palumbo asked if it would be better to hold off on this issue until the U.S. Census Bureau releases more precise data in 2003.
Sen. Stine stated that Dr. Wilson had taken great pains to itemize all the different possible modalities of this study and settled upon what she thought was the most fair and unbiased way of studying it. She also stated that Dr. Wilson specifically stated that if there is not participation from the contractor community for us to review their private books, then there may be problems in accomplishing this study.
Rep. Palumbo asked Dr. Wilson if she felt like she could present a more accurate and unbiased study after the census report is released.
Dr. Wilson responded that it is the Committee’s decision whether or not they want staff to take this on. Staff will be as unbiased as they know how to be at all times. She also stated that staff is trying to put puzzle pieces in place so the Committee can start to get an understanding of what the picture looks like. It is very rare when doing public policy research to come up with “the” answer. In response to the specific question of our ability to compare prevailing wages to what the average wages for a particular occupation might be in a specified local area, it is correct that we believe we will be able to address that question much more fully when the census data is released in 2003.
Sen. Stine stated that she was even more persuaded that the study was squarely within the Committee’s jurisdiction, particularly upon reflection of KRS 6.9 (e) and also 6.910 (b) regarding the Committee’s obligation to examine efficiency of various activities and programs of the state.
Upon roll call vote, a motion made by Sen. McGaha and seconded by Sen. Harris to adopt the study proposal for the Impact on Prevailing Wage Requirements on State Construction Costs passed.
Dr. Wilson presented the study proposal for the Impact Plus Program (a copy of which can be found in its entirety in the LRC Library file). In her remarks, she outlined the objectives of the study and the research methods as follows: 1) Provide an accurate description of the operations of the Impact Plus program from inception to date; 2) Determine why costs have increased so substantially for a program that was projected to be budget neutral; 3) Ascertain if eligibility determination and service utilization review are consistent with accepted practice for behavioral health services; 4) Determine the methods used by program administrators to project funding requests for Impact Plus; 5) Assess the information used by administrators to manage the effectiveness and efficiency of the Impact Plus program and determine the feasibility of developing performance indicators that would both assist managers and provide information useful to legislators in evaluating future funding requests for the program.
Regarding the research methods, Dr. Wilson explained that Program Review and other LRC staff will review the literature and current practices in the management of behavioral health programs. Program operations will be reviewed for compliance with state and federal requirements. Relevant documents will be examined, evaluated for accuracy, and summarized. Such documents include contracts, billing records, financial records, public statements, correspondence, files, and other applicable materials. Staff will interview selected individuals, including Cabinet officials, Impact Plus program managers and staff, case managers, providers and participating families. Finally, all program data will be reviewed and efforts will be made to validate the accuracy of the data and the adequacy of internal controls in the data collection system. Staff’s primary focus will be on the budgetary, fiscal impact, and efficiency issues.
Sen. Stine stated that in looking at the fiscal issues, the original budget was $26 million with additional funding repeatedly added to it. She questioned if it is now to the point that they receive $52 million. It also indicates that the cost per child in 1999 was about $3,600, and in 2000 it increased to $4,400. Now we are in 2001, and it is $8,600. She asked if the $10 million per 1,000 children expenditure was taken into consideration.
Greg Hager, Ph.D., Program Review staff, stated that the original request of $6 million was a place marker since everybody understood that there would be larger requests later. There was a second request for $10 million, and then there was expected to be another request for an additional $10 million. He was not sure if the third request was granted, but it was included in the total of $26 million. Dr. Hager also explained that depending on which committee meeting you are attending on a particular day, you get different estimates as to how many children are in the program. Based on information he was able to obtain, he picked a number that was in the middle. You could also pick the higher number and the costs per child are still up significantly, and, of course, if you pick the lower number, then costs per child would be up even more.
Sen. Guthrie said that the policy side of this issue is how do we serve these children.
Rep. Palumbo stated that she is concerned that there is a big discrepancy from provider to provider since it is up $5,000 per child in two years. Nationally we have seen how there have been overbilling practices, and that is an area that needs to be looked at.
Upon roll call vote, a motion made by Sen. Harris and seconded by Rep. Graham to adopt the study proposal of the Impact Plus Program passed.
Sen. Stine recommended that the next issue, Primer for the Performance-Based Budgeting, be presented at the June meeting since it was an extremely technical primer and would require additional time for the presentation. Instead, she asked Dr. Wilson to go over the memorandum regarding Off-Budget Accounts in Kentucky.
Dr. Wilson explained that staff had been specifically asked in context of performance budgeting to look at off-budget funds and the state’s treatment of them. As staff did that, this piece grew to be fairly long and technical and specific to Kentucky. Therefore, staff decided to pull that piece out and prepare a separate memo (a copy of which can be found in the LRC Library file).
Sen. Stine asked staff to explain off-budget and what it meant. She also asked if the Y2K contingency funds of $865,312 listed in the Finance and Administration Cabinet was just a cash balance carried forward. She questioned if that money is just sitting in limbo and asked about the $23,348 listed in the Board of Elections which was allocated to addressing the crisis that never occurred with Y2K. She also sked about the DMA Helicopter Insurance proceeds of $1,195,100.
Dan Jacovitch, Program Review Staff, stated the topic was pulled out from the report on performance-based budgeting because it had too much detail to fit in well with the report. The source of the information was the Management Reporting Data Base, which is a data warehouse that contains all the accounting information for the state. He said he uses a particular table called the general ledger view and wherever possible, the figures were tied to the comprehensive annual financial report which is referred to as CAFR. All off-budget accounts were selected. Investment accounts and unredeemed checks account were excluded because they had a negative balance. They are a means of accounting for the investment of the funds balances that you are seeing on your list. They pretty much off-set that amount – it is a financial account that keeps track of the investments of that money. The balances stated are for FY2000 year-end cash balances carried forward into FY 2001, and they do reflect a snapshot. It is also important to note that they do not reflect obligations or encumbrances of those funds. It is not necessarily money that is available. It may be claimed for other uses.
Dr. Wilson offered two definitions for off-budget. Off-budget funds are funds that are included in the Commonwealth’s Comprehensive Annual Financial Report, because the Governmental Accounting Standards Board said that the view of the Commonwealth’s financial position would be incomplete without including those funds, but which are not appropriated by the General Assembly. Also, she noted that encumbered funds are promised to a particular expenditure for which the bill has not come in.
Sen. Stine asked that if the General Assembly was not appropriating the funds, then who was.
Dr. Wilson stated that they are trust and agency funds. There are basically three kinds of funds. Governmental funds are used for traditional governmental purposes. Proprietary funds are those funds for activities that are like a private business, such as state parks. They usually keep their receipts and use them for their business-type activities, so some of those are not appropriated by the General Assembly. Fiduciary funds are those funds that the Commonwealth holds in trust for others; for example, retirement contributions for state employees. The General Assembly does not usually appropriate those funds because they have restricted uses, and they are not to be appropriated for general governmental uses.
Sen. Stine asked if proprietary funds are included the Department of Correction’s furniture making process. She asked if is proprietary because it acts like a private business and where does the money from the profits go.
Dr. Wilson explained that the Commonwealth is not in the business of making a profit. For instance, the state parks usually have to be subsidized by appropriations of the General Assembly. Some of the university housing and dining operations may break even, but they rarely make a profit. Receipts of Corrections’ industries stay within the account and are used for those proprietary activities, but they are appropriated by the General Assembly.
Rep. Palumbo asked if governmental funds were discretionary funds within the agencies and the cabinets.
Mr. Jacovitch stated that the funds listed encompass the ones that you are probably most familiar with in the budgeting process. The general fund is a governmental fund. The Capital Projects fund for capital projects is an on-budget fund. A subset category of governmental funds is special revenue funds, and they are dedicated to specific operations other than expendable trusts or major capital projects. The ones noted in red on the slide are off-budget funds. For example in Fund 1400, which is Other Special Revenue Funds, all the accounts are off-budget. Many of these accounts are used to receive and hold funds until they can be distributed to the proper account. For example, the Medical Assistance Revolving Trust, which is referred to as MART, had a $132.2 million-dollar balance in FY 2000. That money represented provider tax receipts that had been received, but the money is disbursed from that fund. It is transferred into an account within the agency in Fund 1300, out of which the funds are appropriated. Many of the accounts that are off-budget are accounts that act as holding places for the money that is appropriated through the Agency Revenue Funds. The $37.3 million Income Clearing Account also under the Other Special Revenues Fund, represents funds that have come in but have not been distributed yet. This is a snapshot at the end of the fiscal, and it doesn’t reflect the potential use of the money.
Rep. Arnold stated that the General Assembly issued a $40 million bond issue to help build local jails, and sometimes those counties pay money back into that fund. He asked if that was considered off-budget. After conferring with Jerry Bailey, LRC Deputy Director for Budget Review, Dr. Wilson stated that it was off-budget.
Mr. Ed Ross, of the Finance and Administration Cabinet, came to the table to answer questions.
Sen. Stine stated that it appears that we are saying that these are monies which stay in each agency. She asked if the amounts and totals are made clear to members of the General Assembly and those who sit on the Appropriations and Budget Committee when they are helping to determine the budget allotments for these agencies. She also asked if they are aware that there is perhaps money there.
Mr. Ross responded that if you take the Revenue Cabinet as an example, the Cabinet has a number of accounts that they call clearing accounts, and they may be in the 1400 Fund or the 7200 Fund. There are millions of dollars that will come into these accounts and be held for maybe a day or two until they determine where they need to be distributed. In some cases they are there for maybe three months until they are distributed back to counties or other taxing entities. A number of the accounts sitting there are clearing accounts or holding accounts until the distribution can be calculated to determine the entity that the money belongs to.
Sen. Stine asked about instances like the Y2K fund that is almost one million dollars and what happens to that. Mr. Ross stated that since it has almost been a year, some of those balances may have been disposed of. Sen. Stine asked if the balances default back into the General Fund, and if it becomes a part of a surplus. Mr. Ross stated that determination is based upon what fund or agency the balance belongs to. It does become a part of the surplus.
Rep. Palumbo asked if interest is received on the money that is held for a couple of days or three months.
Mr. Ross explained that each one would have to be looked at on an individual basis. Many of the accounts do not earn interest. A specific account would have to be chosen and then the underlying factors could be analyzed.
Rep. Palumbo asked if there was a lot of money in some of these accounts not earning interest. Mr. Ross responded that they earn interest in the overall general fund and it goes back to the fund itself rather than through the individual account. He further explained that all funds in state government earn interest on overnight or short-term investments.
Dr. Wilson stated that there is an entity in Finance and Administration called the Asset Liability Commission, and one of its duties is to manage the short-term and long-term investments of the Commonwealth and its cash holdings in order to achieve the highest interest rates available while still maintaining the integrity of all the accounts.
Rep. Arnold asked what the classification of unclaimed properties is in the Treasurer’s Office. Mr. Ross pointed out that those funds are located under 0100 – General Fund, General Government, State Treasurer and that the $36,867,305 has accumulated in the State Treasurer’s Office since it was transferred from the Revenue Cabinet about ten years ago. To date about $65 or $70 million dollars have accumulated since the true owners have not been found. The money stays in the General Fund and is used by the General Fund. If the owners of the $65 or $70 million showed up today, we would be in trouble with the General Fund, more so than we are now.
Rep. Arnold asked if it could be budgeted every year. Mr. Ross explained that the Cabinet looks at the past history of ten years to determine what can be paid. There is a reserve of $15 million on the financial report stating that there is the potential that it might be paid out over the next five years.
Rep. Arnold asked if it was held in reserve just in case the owners were found. Mr. Ross said it was preserved on the financial statement.
Sen. Stine asked if Kentucky’s off-budget accounts were externally audited as is done in other states. She also asked if the results of the audit are then given to the Legislature.
Mr. Ross stated that the funds are audited, but in some of those states the off-budget funds are outside their system, and therefore, are audited probably for that purpose. In Kentucky’s case, the Auditor of Public Accounts audits all of the funds within state government, and so off-budget accounts would be included in the annual audit performed by the Auditor of Public Accounts.
Sen. Stine asked if the auditor was auditing the off-budget accounts.
Mr. Ross explained that the Auditor audits it as a whole and then reports the results in the Comprehensive Annual Financial Report each year.
Rep. Baugh stated it was his understanding that when the insurance surcharge passed, it was supposed to stay in that department for benefit of the policemen and firemen and questioned if that was correct? There is a surcharge tax of 1-1/2 percent on property and casualty insurance polices that was designed for the benefit of policemen and firemen, their pension plans, and their training. He questioned if the money stays in that fund or is it reverted back to the General Fund, and have Governors, past and present, taken money from that fund for other purposes. Mr. Ross stated that in the last ten years, some of those funds have been transferred to the General Fund through either the appropriation bill or within the statute.
Rep. Baugh stated that most fire departments believed that when that fund started the money would accumulate in order to build up a larger fund to benefit the fire departments. In reality, most of the departments are struggling to get funds, and it is my understanding, present Governor excluded, that past Governors have taken from $5 million to $7 million a year out of that fund for purposes other than fire and police protection.
Dr. Wilson stated that it was her understanding that there are certain eligibility requirements that individuals have to meet in order to get the training bonus. You have a tax that is applied to this side that generates a certain amount of revenue, and that revenue is not directly tied to the expenditures need on the other side. Under the existing training qualifications, the Fund has accumulated greater balances than the expenditures to draw on that fund, and the history has been that the enacted budget bill has swept some of that money from that restricted account into the General Fund and used it in various ways. It would be up to the members of the General Assembly to change the eligibility requirements if they want to consider having a greater draw against those funds.
Rep. Baugh stated that it was his understanding that it was intended to stay in that fund, and asked if it was correct. Dr. Wilson responded that she could not speak regarding the legislative intent.
Mr. Jacovitch stated that the Debt Service and Other Special Revenues Funds are in off-budget. The on-budget governmental funds such as General Fund, Capital Projects, and agency revenue funds do have a few off-budget accounts, but they are for tracking purposes only. In the General Fund there is the Treasury, Abandoned Property, with a $37-million balance. General Fund Surplus had a $10.2-million balance, and County Costs-General Receipts had a $313-million balance. Those funds track receipts of money, but the money for spending purposes goes into the General Fund, which is appropriated and on-budget.
The Proprietary Funds have two categories, Enterprise and Internal Service funds. Most of the Proprietary Funds are on budget and lumped together into the Restricted Funds, and they are appropriated through Restricted Funds. Dr. Wilson stated that after consulting with Jerry Bailey, Correction Funds are on-budget, so they are appropriated.
Mr. Jacovitch stated that the funds listed in the proprietary funds were a mix of on-budget and off-budget. The Insurance Administration Fund has a mix of on-budget and off-budget accounts. For FY 2000 the two larger balances that were off-budget, cash balance carry forwards were in Agriculture (the Kentucky Grain Insurance Fund) and in the Department of Insurance, (Insurance Premiums Collected).
Rep. Arnold asked when the funds get up to a certain amount in the Kentucky Grain Insurance Fund, if they stop collecting an assessment until they have claims and if it drops, is it built back up? He also questioned if it is a continuous income and does it cap off at a certain liability. Dr. Wilson stated that Jerry Bailey said that was correct. It does taper off.
Mr. Jacovitch continued with the second category for Proprietary Funds. He stated that many of these funds are lumped into Restricted Funds which is on-budget. The Risk Management Fund is a mix of on-budget and off-budget accounts. For FY 2000 the two larger balances are Fire and Tornado Losses and Personnel Workers’ Compensation Reserve at $5.3 million and $11.9 respectively. The Fiduciary Funds are funds that are held by the Commonwealth as a trustee. There is a group called the Pension Trust Funds, which all begin with the account number of 5,000. This is where the retirement money is accounted for.
Sen. Stine asked if that was the CLEF fund that was continually being raided. Dr. Wilson stated that was not correct.
Mr. Jacovitch stated that another category within Fiduciary funds is Expendable Trust Funds. The Commonwealth holds these funds as legal trustee, and they are expendable for designated purposes. The Unemployment Compensation Fund (the benefits portion) is on-budget and appropriated, and the Tobacco Settlement Fund is on-budget. The remaining funds are off-budget and include the Unemployment Compensation Fund (the tax receipts portion) and the Other Expendable Trust Funds, which has several accounts in it. The fund had a $257-million balance and the sizeable piece of that was Empower Kentucky, which is referred to as the Technology Trust Fund; those monies are off-budget. There was $75.6-million dollar balance. Since the beginning of accounting for it in FY 1997, there has been $173.1-million of inflows and $47.5-million of outflows.
Sen. Stine asked how much has it saved the State and if it has increased government efficiency. Mr. Ross said that was correct, but he could not cite the number. Sen. Stine said she would be interested in knowing.
In continuing, Mr. Jacovitch said that another fund was the Local Government Economic Development monies. A small balance was carried forward under the SSDI Fund, which is a children’s trust fund. The final category in the Fiduciary Funds is Agency Funds, which are held for custodial purposes only. The County Sinking Fund and the Special Deposit Trust Fund are off-budget. The County Sinking funds are monies that are held from the sale of bonds for specific use by counties, and the Special Deposit Trust Fund has numerous accounts in it including, as examples, the Anthem settlement fund, the employee income tax withholdings, oil and gas bonds held by the Department of Mines and Minerals, and health insurance escrow accounts. In conclusion, Mr. Jacovitch said there were several reasons why there is a need for off-budget funds. Some funds are trustee funds, which are Fiduciary funds, and they are not available for general use. Other funds are used to track restricted taxes and fees and charges, such as provider taxes which fall under Fund 1400. The money comes in off-budget, but it is appropriated through the Agency Revenue Fund 1300. There is no money spent out of that account, it is a means for it to come into. Other accounts are used as clearing accounts, which are required in order for the Financial Accounting System to work properly.
Rep. Palumbo asked that under Governmental Funds, 1400 Other Special Revenue Funds, be discussed the next time information is presented if that is agreeable.
Sen. Stine indicated that the next meeting of Program Review would be at the Northern Kentucky Convention Center in Covington on June 14.
Sen. Stine stated that it is clear that we have asked staff to do many enormous tasks, if there are no objections, she would like to send a letter from this Committee to Bobby Sherman asking him to consider lending LRC staff and Health and Welfare staff to assist in some of these tasks that we have to undertake.
Meeting adjourned.