Program Review and Investigations Committee


Minutes <MeetNo1>


<MeetMDY1> July 8, 2004


The<MeetNo2> July 8, 2004 meeting of the Program Review and Investigations Committee was held <MeetMDY2>at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Charlie Hoffman, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Katie Stine, Co-chair; Representative Charlie Hoffman, Co-chair; Senators Charlie Borders, Brett Guthrie, Joey Pendleton, and Dan Seum; Representatives Adrian Arnold, Dwight Butler, Rick Nelson, Ruth Ann Palumbo, Dottie Sims, and Jim Thompson.


Guests: Secretary Robbie Rudolph, Finance and Administration Cabinet; Mack Gillim, Deputy Commissioner, Division of Collections, Department of Revenue, Finance and Administration Cabinet; Melinda Wheeler, Acting Director, Administrative Office of the Courts; Donna Tucker, General Manager of Court Services, Administrative Office of the Courts; George Davis, Judge, Ashland, Kentucky.


LRC Staff:  Greg Hager, Committee Staff Administrator, Kara Daniel, Rick Graycarek, Tom Hewlett, Margaret Hurst, Van Knowles, Erin McNees, Cindy Upton, Jacob Fowles, Wayne Linscott, and Susan Spoonamore, Committee Assistant.


Resolution in memory of Sen. Paul Herron was approved, without objection, by voice vote upon motion made by Sen. Borders and seconded by Sen. Pendleton.


Minutes of the June 10, 2004 meeting were approved, without objection, by voice vote upon motion made by Rep. Arnold and seconded by Sen. Guthrie.


Chairman Hoffman welcomed Sen. Pendleton to the Program Review Committee.  Sen. Pendleton replaced Sen. Herron. 


Sen. Stine stated that upon agreement with Co-chair Hoffman, the Cabinet for Health and Family Services’ response to the report would be postponed until the August 12th meeting.  She stated that staff’s presentation of the report would consist of Chapters 1 and 2.


Cindy Upton and Kara Daniel, Program Review staff, presented Chapters 1 and 2 of the report Uncollected Revenues and Improper Payments Cost Kentucky Millions of Dollars a Year.  Ms. Upton  stated that the Committee had authorized a study to examine the extent of improper payments and the effects of uncollected debts on the state’s finances. She said that staff had focused on programs and activities that could potentially produce millions of dollars for the state. Ms. Upton noted that the study did not include collection of unpaid taxes.  She stated that the objectives of the study were to determine:


·        How improper payments are prevented and detected when they occur;

·        How debts are identified and collected; and

·        How policies and procedures could be improved.


She stated that “improper payments” as used in the report means overpayments, amounts that should not have been paid or were paid for the wrong amount; “non-tax revenue” means state income not classified as a tax, such as hunting and fishing licenses; “debts” are non-tax revenue that has not been collected; and “accounts receivable” are debts recorded in an agency’s accounting records.  


Ms. Upton stated that staff reached seven major conclusions:


1.      Amounts owed to the courts for unpaid debts could not be determined. Staff estimated that a 10 percent increase in collections would provide more than $3 million a year to the general fund.

2.      Public benefit programs make improper payments because of errors and fraud by providers, recipients, and state agency personnel. Staff determined that improper payments were being made because of errors and fraud and a lack of procedures to prevent the payments.

3.      Medicaid does not collect all drug rebates owed because of fraudulent pricing information provided by pharmaceutical companies.  In the last five years, the state has recovered more than $7 million from companies.

4.      Medicaid has an incentive to prevent overpayments to providers and to recover overpayments when they are discovered. Avoiding the cost up front means that state money can be invested to earn interest. Medicaid avoided making improper payments of $190 million in fiscal year 2002. Cost avoidance has been a success and can be even more successful.

5.      Unenforced child support orders place an extra financial burden on the state’s public assistance programs and the public school system. When child support orders are not enforced, affected families may qualify for programs such as Food Stamps, K-TAP, and Medicaid.  If non-custodial parents provided health insurance as ordered, staff estimated that $2.4 million to $11 million in state Medicaid costs a year could be saved. Increased child support enforcement could also save millions of dollars in public school funding.

6.      Whether it is cost effective to collect debt depends on how much is owed, how much is reasonably collectible, and how much the state will spend to collect it.   For example, for every dollar spent on child support enforcement, the federal government pays 66 cents and the state pays 34 cents. She stated that federal funding should be considered in any cost-benefit analysis of collections.

7.      House Bill 162 and Senate Bill 228, enacted by the 2004 regular session of the General Assembly, amended existing statutes to provide new ways the state can prevent improper payments and collect debts. The Finance and Administration Cabinet has already started collecting certain debts under the new laws. Best practices of other states and the federal government are available to help implement the new laws.


Ms. Upton explained that the judicial branch collected $65 million in fiscal year 2003. Collections are left up to the individual judges on a case-by-case basis. Employees of the Administrative Office of the Courts (AOC) and the circuit clerks’ offices do not use formal procedures to collect unpaid debts. Ms. Upton also explained that the information systems being used by the AOC were inadequate and incompatible for tracking and recording uncollected debt.  She stated that three case management systems and two bookkeeping systems are being used across the state.

Ms. Upton noted four significant barriers to improving court collections: AOC has not made a priority of collecting and tracking debts; the decentralized court system structure makes it difficult and time-consuming to implement changes; the courts’ information systems are not designed to capture information on the total amount of unpaid debts still owed the state; and there is little monetary incentive for the courts to collect debts.

Ms. Upton stated that new state laws require the courts to refer uncollected debts to the Finance and Administration Cabinet for collection. However, it is not likely that the court system will be able to track unpaid debts for some time.


Ms. Upton stated that the following recommendations were based on information that staff acquired:


        Recommendation 2.1: AOC should consult with the Finance and Administration Cabinet in designing and implementing a new computerized bookkeeping system to track and report amounts owed the courts.


        Recommendation 2.2: AOC should consult with the Finance and Administration Cabinet to consider the feasibility of implementing interim policies until the new computerized bookkeeping system is in place. For example, AOC could implement a policy instructing clerks to assign a 60-day review date for open cases in which bench warrants or summonses were issued and refer those with outstanding amounts to the Finance and Administration Cabinet. 


        Recommendation 2.3: AOC should work with the Finance and Administration Cabinet to develop guidelines to assess the collectibility of outstanding debts so that debts reported as accounts receivable and referred to Finance for collection are debts that might realistically be collected.


        Recommendation 2.4: AOC officials should review the feasibility of establishing and executing criminal garnishments to collect unpaid fines, fees, and costs and should consult with Finance and Administration Cabinet officials regarding their plans to execute garnishments.


        Recommendation 2.5:  AOC officials should consult with the Finance and Administration Cabinet and the State Treasurer to determine the feasibility of implementing a system to allow withholding of unpaid fines, fees, and costs from state disbursements, including salaries, retirement benefits, other government benefits, and tax refunds. 


        Recommendation 2.6: AOC officials should consult with Finance and Administration  Cabinet officials to implement the acceptance of credit card payments and should then take the necessary steps to enable circuit clerks’ offices to accept credit card payments. AOC officials should also consider the feasibility of adding credit card payment capability to the Court of Justice website.


Recommendation 2.7: AOC officials should study other states’ best practices in collection systems and determine which methods would best suit Kentucky’s needs.


Recommendation 2.8: AOC officials should consult with Finance and Administration Cabinet officials to develop a strategic plan to collect debts. The plan should include which collection methods the courts will adopt, a means of prioritizing debts for collection, and a proposed performance measure that takes into account the proportion of debt that might realistically be collected. 



Sen. Borders stated that all the recommendations needed to be addressed but he was concerned over the lack of judges, especially since the court system was already overcrowded.  He stated that investing more dollars in the judicial system could result in more money being collected.


Sen. Seum asked if the amounts owed to the courts were for fines and court costs.


Ms. Upton stated that was correct.


Sen. Seum asked how many child support collection divisions there are.


Ms. Upton stated that there were approximately 119 child support collection divisions.


Sen. Seum suggested that the child support collection divisions be examined. He also recommended that priority be given to collecting from delinquent payers.



Rep. Arnold asked how much the federal government pays towards the collection costs of child support enforcement.


Ms. Upton stated that for every dollar spent on enforcement, the federal government pays 66 cents and the state pays 34 cents.


Rep. Arnold asked that if a fine were paid by a credit card, and the cardholder refused to make payments to the credit card company, would that refusal be reported to the credit bureau.


Ms. Upton stated that she thought it would be reported to the credit bureau.


Sen. Stine asked how the committee could help AOC implement the new laws by the deadlines of October 1, 2004 and October 1, 2005. 


Ms. Upton stated that recommendations 2.1 and 2.2 could help if AOC officials would consult with the Finance and Administration Cabinet.


Sen. Stine asked how frequently the clerks association met, and if those meetings were a venue for training.


Ms. Upton stated that she did not have that information.


Rep. Palumbo stated that she had been working on child support issues, and was concerned about problems with the delinquent non-custodial parent refusing to pay child support.  She said that several cases involved non-custodial parents dealing in illegal drugs, and that after several court hearings they would finally come up with money owed in child support arrearage.  She would like to see legislation making an individual liable for aiding and abetting a drug dealer, which would include forfeiture of real and personal property.


Co-chair Hoffman introduced Melinda Wheeler, Acting Director, Administrative Office of the Courts, and District Judge George Davis, who works with the legislative committee for district judges. 


Ms. Wheeler stated that as to Recommendation 2.1, AOC had been consulting with the Finance and Administration Cabinet on designing and implementing a new computerized bookkeeping system. 

As to recommendation 2.2., she stated that the AOC was doing credit card collections in Warren County.  She said that approximately $35,000 had been collected since January 2004. She stated that the problem in using credit card collections was the additional costs being assessed to the Commonwealth.  She stated that the AOC and the Court of Justice were paying for the expenses incurred toward using the credit card since that fee could not be assessed to the taxpayer.

As to recommendation 2.3., she stated that AOC would work with Finance to develop guidelines to assess the collectibility of outstanding debts.

She explained that an assessment performed by the circuit court clerks’ national association found that Kentucky was 660 deputy clerks short of what was required by national standards. She said that the clerks in Kentucky created their own standards and, through their own assessment, concluded that they were 330 deputy clerks short.

She also stated that judiciary continued to have increased caseloads with no additional judgeships.

  She said that in order to train the 120 clerks and to make sure that the bookkeeping processes were accurate, AOC had four auditors who performed audits. In addition to the auditors, AOC also had 10 court services staff who were in the process of training the clerks’ employees on the Kentucky Courts II case management system. She said that the system would not be completed statewide until March 2005. She stated that being on one computer system would allow the AOC to effectively show what debts are owed. She stated that in addition to the auditors and the court services employees, the AOC had eight programmers for the Court of Justice. She stated that the Administrative Office of the Courts definitely needed more staff persons to implement the mandated requirements.

Ms. Wheeler stated that AOC would review recommendation 2.4 more extensively.

Ms. Wheeler stated that in regard to recommendation 2.5, staff would consult with the  Finance Cabinet and the State Treasurer to determine the feasibility of withholding debts from state payments.

In regard to recommendation 2.6, she stated that staff would consult with the Finance Cabinet about implementing the acceptance of credit card payments.

Ms. Wheeler stated that in regard to recommendation 2.7, AOC staff would study other states’ collection systems for best practices.

In regard to recommendation 2.8, she stated that AOC would consult with the Finance Cabinet to develop a strategic plan to collect debts.


Sen. Guthrie asked if it was statutorily possible for AOC to charge a fee for the convenience of using a credit card.


Ms. Wheeler stated that the credit card company would not allow AOC to charge an additional fee; it had nothing to do with a statutory mandate.


Donna Tucker stated that there were federal laws that would not allow the consumer to be put at disadvantage by paying with a credit card instead of paying in cash. 


Sen. Guthrie stated that it was his understanding that some counties were accepting payments by credit cards and charging an additional fee for the service.


Donna Tucker stated that Jefferson County had been using Vital Check for a number of years, and that fee was being passed on the consumer because the laws were different 10 years ago. She  explained  that Warren County uses Vital Check and the AOC is paying a three percent fee that cannot be passed on to the consumer.


Rep. Palumbo asked if it would help if judges stopped continuing cases month by month and required payment at the first appearance in court.


Judge Davis stated that he did not generally continue a child support case. He said he would set a bond in the amount of the child support arrearage, and most of the time the non-custodial parent would find the money. He stated that continuing cases did add to the cost. 

Judge Davis stated that the majority of those convicted paid their court costs and fees within a reasonable period of time, and if not, then a bench warrant was issued and they were required to either pay or go to jail. He said most people paid quickly when faced with incarceration, but there would always be people who would never work, causing a tremendous burden on fiscal courts. He noted that less than one percent ended up being incarcerated.

Judge Davis stated that the definition of “liquidated debt” means that a debt becomes solid after a 12-month period and judges are mandated to collect the liquidated debt. He said that any jail time served could be applied toward the debt. He stated that judges did not like placing people in jail, but it was important to retain the integrity of the system.  He said that placing people in jail resulted in large expenses to the county fiscal courts.


Rep. Palumbo asked if she heard correctly that there was only one percent who refused to work and preferred to sit in jail.


Judge Davis stated that one percent might not be the exact figure, but it would be close. He said that one percent may sound small, but it created a large amount of debt. He said judges had the discretion to write off fines and court costs up front for persons who were indigent. He stated that judges preferred not to do write offs since most people did have a source of income, even though it might be public assistance. He stated that the courts were prohibited by statute from tapping into public assistance funds.


Rep. Palumbo asked if the courts were able to determine if a correlation existed in that the one percent might have many children, and if so, then it could be that only a few people owe the biggest percentage of the uncollected child support.


Judge Davis stated that was correct.


Rep. Palumbo stated that it would be interesting to do some research on that.


Sen. Stine asked Ms. Wheeler to provide more information regarding the state’s ability to withhold debts from public assistance at the next Program Review meeting in August. She also asked for information pertaining to statutory provisions that are impediments to the collection process.


Ms. Wheeler stated that she would do her best to get that information.


Sen. Stine asked if the clerks or the courts would be more aggressive in collecting outstanding debts if larger financial incentives were provided.


Ms. Wheeler stated that larger financial incentives would help. She explained that the courts or the clerks were responsible for all the paperwork and the bookkeeping, and they only get five percent, which is capped at $2.5 million. She stated that when a new law went into effect, it required more changes within the circuit clerks’ offices and the judicial branch, necessitating more training and paperwork.


Sen. Stine asked if there was a venue for training the circuit court clerks.


Ms. Wheeler stated that the clerks meet in June and October to review the new legislative changes and discuss management and training issues for the deputies. She stated that deputy clerk training is done once a year. She stated that it was difficult for some offices to send their deputy clerks for training due to their ongoing duties. 


Sen. Stine asked if training could be done on a Saturday.


Ms. Wheeler stated that it could be on a Saturday, but many of the deputy clerks had second jobs and were single parents. Also, some of the clerks’ offices were open for a half day on Saturday.


Sen. Seum asked if most of the outstanding debt was criminal or civil debt.


Judge Davis stated that he thought all of it was criminal debt.


Rep. Butler asked how often clerks were audited.


Ms. Tucker stated that the AOC had six auditor positions, but two of the positions were vacant. She said that the auditors conducted procedural audits and were in counties every day making sure that the offices were complying with AOC procedures and  statutes. She stated that the Administrative Office of the Courts contracted with a CPA firm to conduct official audits of the circuit clerks’ offices. She said it was the goal of AOC to have 30 counties audited per year, which AOC exceeded last year by performing 37 audits.


Rep. Butler asked which CPA firm is doing the audits.


Ms. Tucker stated that the current CPA firm was Carpenter & Mountjoy, located in  Frankfort. 


Rep. Butler asked if having only four auditors was a problem for AOC.


Ms. Tucker stated that AOC was struggling with only four auditors for 120 counties.


Rep. Butler asked how long the two positions had been vacant.


Ms. Tucker stated that one person had just recently retired.  She said she misspoke earlier when she stated that there were two vacant positions. The AOC has five auditors with one vacancy. 


Rep. Hoffman introduced Secretary Robbie Rudolph, Finance and Administration Cabinet, and Mack Gillim, Deputy Commissioner, Division of Collections, Department of Revenue. 


Secretary Rudolph stated that he was happy to report that the Department of Revenue had collected approximately $16 million more this year compared to the same period last year.

He stated that the Finance and Administration Cabinet agreed with the draft report and would implement the recommendations contained in the report.

He said that the Cabinet might be able to help finance or provide AOC with some  assistance in meeting some of the unfunded mandates that are contained in HB 162 and SB 228. He stated that the Cabinet has the ability to attach liens, do refund offsets, and many other things that other agencies could not do. He stated that the Cabinet was in the process of upgrading the MARS accounting system with a program called Advantage Three, which contained a simple accounts receivable model. He stated that the Cabinet would be willing to work with AOC in implementing the model and perhaps send staff from the Cabinet to the clerks’ offices to help with training.

He also stated that the Cabinet charged a two and one-half  percent convenience fee on credit cards, and was willing to bring the AOC in under their umbrella to help the AOC implement credit card use for payments.

 He stated that the Cabinet was aggressive in seeing that child support debt was paid. He stated that a recent report from Medicaid indicated that there was $876,000 in overpayments to approximately 90 vendors. In addition, he stated that the Cabinet expected to collect another $8 million from other vendors not yet identified.

Secretary Rudolph stated that the Cabinet was also in the process of  assessing the principals of limited liability corporations. He stated that Ed Ross, the state controller, was in the process of examining the recommendations contained in the report. He stated that the Cabinet expected to collect between $30 million to $100 million of the $300 million to $400 million in past due fees and taxes.


Rep. Palumbo asked if the Cabinet expected to collect an extra $8 million in addition to the $876,000 of overpayments in Medicaid.


Secretary Rudolph stated that the extra $8 million would include several more vendors.


Rep. Palumbo asked if the vendors were given a specific amount of time in which to pay.


Mr. Gillim stated that once the Cabinet determined the amount owed, the vendor would typically get a 30-day notice to pay. If payment was not received after 30 days, then the Cabinet could levy on bank accounts, etc. 


Rep. Palumbo asked the Cabinet to see if any of the vendors were habitual in not making payments.


Mr. Gillim stated that the Cabinet would look at that.


Secretary Rudolph noted that the Cabinet could intercept payments to those vendors if necessary.


Greg Hager, Committee Staff Administrator, summarized the suggested list of study topics for the 2004 interim. He explained that study topic 6, whether ACT scores are going down as CATS scores go up, had been reported by staff last year and staff would be doing an update on those numbers. He stated that topic 5, impact of dropout age of 16 on ability of state to have trained workers, would require an economic estimate and staff would be able to provide a range of numbers. He said that topic 11, how are user fees determined and are they appropriate for services provided, would include two parts, an evaluation of an existing program and an economic analysis of what makes for an inappropriate user fee. He said that topic 14, comparison of teacher compensation to private sector employees, would also require an economic analysis.


Sen. Stine stated that if study topic 14 were selected, she would like to see staff ask questions regarding entry-level recruitment, salaries, and retention of teachers, and whether were there any areas in which incentives should be provided.


Rep. Arnold stated that he agreed that teachers should be paid as best as they could, but consideration should be given to the fact that teachers get three months off in the summer when other employees do not. 


Rep. Nelson stated that teachers get paid on a 185 day schedule and the money they are paid during the summer months is money already earned.


Rep Nelson suggested combining study topic 2, school districts’ administrative costs, and study topic 21, how Kentucky compares to other states in percent of school personnel in the classroom. 


Dr. Hager stated that the following topics would not be evaluations of existing programs, but more like analyses of potential policy changes: topic 7 (whether tax credits should be used to promote hardwood furniture building), topic 8 (whether abolishing the rule against perpetuities will bring more trust investment income into Kentucky),  and topic 9 (whether Kentucky should develop a long-term strategic plan for water and sewer facilities).


Sen. Stine stated that SB 409 addressed the issue in topic 9, but if that topic was selected, she would like for staff to ask if it was working, and if it was improving efficiency.


Dr. Hager stated that certain parts of topic 12 (Kentucky’s system of sex offender management) would be an analysis of potential changes.


Sen. Stine stated that for topic 16 (review reconciliation of bank accounts and make sure checks are accounted for) she would like a detailed explanation of the treasurer’s duties regarding payments and warrants.  Specifically, what are the procedures for paying off the warrant, are payments made pursuant to the budget or state laws, who is responsible for providing oversight, and who audits the payments made by the treasurer? 


Sen. Seum stated if topic 19 (study, evaluate, and make recommendations to improve the process for the issuance, tracking, and servicing of criminal warrants) were selected, he would like for AOC to determine the total amount of outstanding warrants in the state of Kentucky. He stated that Jefferson County had approximately 50,000 outstanding warrants, and 15,000 of those were felony warrants.


Rep. Arnold asked that topic 1 (Agricultural Development Board and the awarding of tobacco settlement funds pursuant to HB 611) be dropped from the list because the 611 Committee was now operating. He asked that if topic 22 (underground storage tanks) were being pursued by another committee, that it be dropped from the list.  


Sen. Harris stated that the Agriculture Committee would be receiving a report from the Underground Storage Tank Fund officials later in the year.


Meeting adjourned at 12:00 p.m.