The 12th meeting of the Program Review and Investigations Committee was held on Thursday, September 13, 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, Vernie McGaha, and Dan Seum; Representatives Adrian Arnold, Dwight Butler, Charlie Hoffman, Ruth Ann Palumbo, and Dottie Sims.
Guests: Jim Greider, Rick Stansel, Sandra Perry and Pat Foley, representing the Transportation Cabinet; Commissioner Don Speer, Department of Administration, Finance and Administrative Cabinet; Sally Hamilton, KET; and Jennifer Steele, Kentucky Retirement Systems.
LRC Staff: Ginny Wilson, Ph.D., Committee Staff Administrator, Lowell Atchley, Judy Fritz, Greg Hager, Ph.D., Tom Hewlett; Alice Hobson, Joseph Hood, Margaret Hurst, CPA, Dan Jacovitch and Susan Spoonamore, Committee Assistant.
Minutes of the August 30, 2001 meeting were approved by voice vote upon a motion made by Rep. Arnold and seconded by Sen. Guthrie.
Tom Hewlett, Program Review staff, presented a report regarding Executive Branch Contracting for Services: Inconsistent Procedures Limit Accountability and Efficiency (a copy of the report and recommendations can be found in the LRC Library). Mr. Hewlett explained that the Program Review and Investigations Committee had requested and approved a study proposal to examine executive agencies’ use of contracts to obtain services. The overall goal of the study was to evaluate whether the use of service contracts was an efficient and accountable method of delivering government services and to assess the impact of extensive use of service contracts on regular executive agency employment. Mr. Hewlett told the committee that there were serious systemic issues surrounding the state’s system for contracting that led to confusion, inconsistencies, and errors. He highlighted the four major problems: (1) keys aspects of the state’s system for issuing contract for services had not been formalized in statutes or regulations, and the existing statutes or regulations were are often vague or inconsistent; (2) the analyses and documentation of the need for services which should be undertaken before a contract is developed, are often inadequate. The analysis should include an assessment to determine if the capability to perform the service exists in any other part of state government or within state universities; (3) the advertising of contract opportunities is often not sufficient to ensure full competition by the most vendors possible; and (4) there is inconsistent and often inadequate monitoring of the work done on contracts. This is a particular problem with sole source contracts.
Sen. Stine asked for a definition of best practices or good contract monitoring. Mr. Hewlett stated that the National Institute of Governmental Purchasing defines contract monitoring as: “…the process by which…government agencies oversee and check the contractor’s performance to assure that it meets the contract’s performance standards…”.
Sen. Seum asked if staff found any glaring examples of a contract being let when state government itself was easily able to do what was necessary. Mr. Hewlett said staff found no glaring examples.
Sen. Seum asked what the bid process was for a sole source contract, and if those contracts were being advertised. Mr. Hewlett stated that there are some personal service contracts exempted by statute, which can be issued for sole source contracts without any need of competition. He also said that the contracts were not advertised because the agency identifies the person it wants. Per the statute, those are things like public speakers, performers, etc. The statute also provides that in instances where there is no other viable source, where a particular vendor is the only means of getting that service met, then the agency can issue a sole source contract. It requires approval in advance by the Secretary of the Finance Cabinet.
Sen. Stine asked if there were any instances in which sole source contracts were specifically made to order in an effort to hire to a specific vendor. Mr. Hewlett said that was more of an issue in contracts for commodities or goods.
Sen. Borders asked if one-time, one-year limited contracts indicated the need to hire 8,600 additional state employees. Mr. Hewlett stated that there would be no need to hire additional state employees for limited contracts. It would be more efficient to hire a contractor to do that type of job.
Sen. Stine asked if agencies were performing cost analysis in determining the use of private contracting. She also asked if the state’s current system of contracting was creating a new category of state employees that might be affected by the pressures of politics. Mr. Hewlett stated that the lack of performing cost analysis was a big concern. As to the state’s current system of contracting, there is concern that while the merit system has built-in protections to limit the amount of political influence on who is hired or who is fired, those protections do not necessarily exist within the contracting system. Mr. Hewlett stated that after reviewing a large number of sole source contracts and finding that 17% of the contracts being awarded were sole source contracts, staff was concerned about the lack of protections built into the system to limit political influence.
Sen. Stine asked if the MARS system would be capable of providing a central web site containing all contracts offered by the state. Mr. Hewlett stated that Texas and Tennessee have a central web site which contains all contracts offered by all state agencies which would be a good model for Kentucky. He stated that he did not think MARS would be capable of providing a web site system, but there was a possibility that a central web site system could be integrated with MARS.
Rep. Arnold asked for further explanation of benefits for a common law employee. Mr. Hewlett stated that in determining who is an employee and who is not an employee for retirement benefit purposes, the Kentucky Employees Retirement System follows some of the IRS guidelines. For example whether training, office space or office supplies, or health benefits are being provided. If those types of supports are being provided, then an individual is more like an employee than a contractor. If someone is found to be a common law employee, they can conceivably file a claim for state government benefits. When negotiating contracts, most of the contractors set their fees based on not getting those benefits. Their fees are generally higher than state workers, in lieu of those benefits. These issues raise the concern regarding contractors negotiating a certain salary level and then coming back at a later point to get benefits because of the way they were managed by state agencies.
Rep. Graham stated that after working in state government for 17 years, in two different cabinets, he found that people in the ranks to be quality people wanting to perform well. In some instances, jobs have been taken from state government employees. There is some justification in saying that we could have used state employees and saved some money. It would be helpful if agencies had strong leaders who could train the employees for the jobs that are contracted out.
Sen. Seum asked if the state agencies who had been interviewed for this study had received a copy of the report prior to the meeting. Mr. Hewlett stated that the agencies had received copies of the report, but since it was a lengthy report some of them had requested to be put on the agenda for the October Program Review meeting.
Sen. Stine asked if staff was able to determine who was getting, or granting the contracts and who was actually doing the work and why. Mr. Hewlett stated that staff reviewed approximately 70 architectural and engineering contracts in Finance, and a good portion of those contracts never saw any work. The contracts were awarded to whoever was qualified and who had completed the proper paperwork. The actual amount of work awarded under the contract was pretty much left up to the discretion of the agency. The problem with doing it that way, was the fact that the Government Contract Review Committee was not getting that information. The Committee saw the work in potentia, but never saw the actual work being awarded through the delivery orders for those contracts. Therefore, staff recommended that summary reporting should be provided to the Government Contract Review Committee.
Sen. McGaha stated that, according to the contractor’s survey conducted by staff, 50% of the people were directly contacted by a state agency. He asked how many of that 50% ended up getting a contract and what percentage was sole source contracts. Greg Hager, Ph.D., Program Review staff, stated that, based on the answers received, it was not possible to separate the information. There were two ways to look at being contacted directly by an agency. The bad faith version would be that there are people who want to hire a particular contractor. The good faith reason would be that the agency thinks it knows all the qualified firms or people who can do the work. That gives the appearance of being unfair to contractors who were not contacted and it is also ineffective and inefficient because it presumes that agencies know all the good contractors. By publicizing contracts in such a limited way, potential good contractors who could do good work for the Commonwealth are overlooked.
Sen. Stine asked if staff looked at diversity issues. Mr. Hewlett stated that the information was not examined from diversity prospectives. Even if an advertisement is put out, it does not guarantee a fair hearing for a contract.
Sen. Stine told the Committee that representatives of the Crime Victims Compensation Fund would be invited to appear at the October meeting to discuss its response to questions raised by the committee.
With no further business, the meeting was adjourned at 11:30 a.m.