Program Review and Investigations Committee




<MeetMDY1> November 14, 2013


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> November 14, 2013, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Christian McDaniel, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Christian McDaniel, Co-Chair; Senators Tom Buford, Perry B. Clark, Julie Denton, Ernie Harris, Jimmy Higdon, Dorsey Ridley, and Dan "Malano" Seum; Representatives Dwight D. Butler, Leslie Combs, Jim DeCesare, Martha Jane King, Terry Mills, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.


Legislative Guest: Representative Dennis Horlander.


Guests: Beth Jurek, Director; Jackie Watkins, Assistant Director; Office of Policy and Budget, Cabinet for Health and Family Services; Don Speer, Executive Director, Office of Procurement Services, Finance and Administration Cabinet; Alice Wilson, Executive Director; Peggy Stratton, Director; Mike Hill, Director; Todd Shipp, Special Assistant; Transportation Cabinet; Charles Harman, Director, Division of Budget and Financial Management, Department of Education; David Wicker, Counsel, Department of Fish and Wildlife.


LRC Staff: Greg Hager, Committee Staff Administrator; Chris Hall; Colleen Kennedy; Van Knowles; Lora Littleton; Jean Ann Myatt; William Spears; Joel Thomas; Stephanie Love, Jessica Sapp, Graduate Fellows; Kate Talley, Committee Assistant.


Senator McDaniel welcomed Rep. King as a member of the committee.


Response to recommendations in 2012 committee report Personal Care Homes in Kentucky.

Ms. Jurek summarized the written response of the Cabinet for Health and Family Services (CHFS) to four recommendations in the committee’s 2012 report Personal Care Homes in Kentucky. Recommendation 2.1 is that CHFS should propose a state supplementation rate-setting process that would involve a periodic financial audit of personal care homes accepting state supplementation recipients. Ms. Jurek said that such a rate setting process may exceed the authority of the Department for Community Based Services (DCBS) as administrator of the state supplementation program. If DCBS increased the benefit to state supplement recipients in personal care homes by 5 percent, the additional cost would be $2 million in General Funds per year. There would also be new costs for staff support for such a rate-setting process. Recommendation 2.2 is that CHFS should propose a method for setting the personal needs allowance for state supplementation recipients based on a periodic assessment of personal expenses. Ms. Jurek said that adjusting personal needs allowances each year to meet inflation through August 2013 would have cost $822,600 per year. Thereafter, every $5 increase would cost $160,000 per year. Recommendation 3.4 is that CHFS should develop a proposal to ensure community mental health centers demonstrate that their clients in personal care homes who have mental illness or intellectual or developmental disabilities achieve increased integration into the community and engage in more independent activities. Recommendation 3.6 is that CHFS should develop a proposal to identify and assess personal care home applicants and current residents who might qualify for one of the relevant Medicaid waiver programs or the new Medicaid program for people with severe and persistent mental illness and to divert anyone qualifying for those programs from a personal care home. The cabinet also should explore ways to assess all personal care home applicants and residents for appropriateness. Recommendations 3.4 and 3.6 are being addressed through the cabinet’s interim service agreement with Protection and Advocacy. Under the agreement, the cabinet will implement measures to provide up to 600 individuals access to community-based supported housing and community-based mental health services over 3 years. The cabinet has pledged $7 million in fiscal year 2014 and $6 million in FY 2015. The agreement with Protection and Advocacy requires the cabinet to implement procedures for ensuring that individuals residing in or at risk of entry into a personal care home will be accurately and fully informed in writing about community based options.


Senator Higdon asked for clarification that the agreement does not include a 5 percent increase in the supplement or an increased personal allowance. Ms. Jurek said that this was correct. These were not among the concerns expressed by Protection and Advocacy.


Senator Higdon said that there are bad and good personal care homes. Overall, personal care homes are doing a good job diverting mentally ill. More funding is needed. He noted his disappointment that this was not included in the agreement with Protection and Advocacy. Ms. Jurek replied that Protection and Advocacy is focused on community-based treatment.


In response to questions from Senator McDaniel, Ms. Jurek said the Medicaid expansion will result in additional federal funding for the cabinet. The cabinet is working to refine the estimate of the replacement of state funds with federal funds.


Rep. Horlander asked about the requirements for medical staff at personal care homes. Ms. Jurek said that they are required to have a nurse on site part of the time. She can provide a copy of the relevant regulations for personal care homes and nursing facilities.


Senator McDaniel welcomed Representative Horlander, co-chair of the Government Contract Review Committee, to the meeting.


Approve minutes for September 12, 2013

Upon motion made by Representative Combs and a second by Senator Ridley, the minutes of the September 12, 2013, meeting were approved by voice vote, without objection.


Upon motion to nominate by Representative Combs and second by Representative Rand, Representative King was nominated for the position of House Co-chair.


Upon motion that nominations cease by Representative Simpson and second by Representative Combs, Representative King was elected House Co-chair by acclamation, without objection.


Staff Report: Personal Service Contracting in Kentucky

Van Knowles, Joel Thomas, William Spears, and Jessica Sapp presented the report Personal Service Contracting in Kentucky.


Mr. Knowles said that general information was obtained about all agencies that are within the purview of the Finance and Administration Cabinet (FAC) and that use the statewide electronic accounting system. Agencies such as the court system, the retirement systems, and LRC were outside the scope of the study. Architectural and engineering contracts were excluded from the report. Staff obtained more detailed information from a few selected agencies.


A personal service contract (PSC) is an agreement between a state agency and a private entity to provide services requiring professional skill or professional judgment. The memorandum of agreement is a contract between a state agency and another governmental body or nonprofit organization.


According to the Kentucky Model Procurement Code in KRS Chapter 45A, contracts should be solicited through a competitive process whenever feasible, the secretary of the Finance and Administration Cabinet is the chief purchasing officer of the Commonwealth, and the Government Contract Review Committee (GCRC) oversees personal service contracts and memoranda of agreement.


All appropriated funds pass through eMARS, the statewide electronic accounting system. The system also contains electronic procurement documents like requests for proposals, proposal evaluations, contracts and amendments, payments, and vendor performance evaluations.


At the end of fiscal year 2013, 684 PSCs were open within the scope of the study. Spending on the Passport Medicaid contracts was typically around $800 million per year. In fiscal years 2010 to 2013, other PSCs in eMARS typically showed amounts spent of around $205 million. The amounts reported are incomplete, with over $54 million unrecorded in eMARS each of the past two fiscal years.


During fiscal years 2010 to 2013, GCRC voted to disapprove six PSCs from agencies within the scope of this study. Of those, three were overridden by the secretary of FAC and two were canceled by the agency after disapproval. One was completed and closed prior to disapproval.


Ms. Sapp said that in determining what type of contract to use, agencies are told to consider a state agency, university, or nonprofit organization before soliciting PSCs. FAC interprets the statute to include out-of-state agencies and non-profits as eligible for memoranda of agreement. However, the cabinet has indicated that the preference for memoranda of agreement is because it is preferable to keep state dollars within state agencies. The use of noncompetitive memoranda of agreement for out-of-state contracting could result in higher costs than would be achieved by using a competitive personal service contract process. Recommendation 2.1 is that the General Assembly may wish to consider clarifying whether contracts with public entities in other states should be memoranda of agreement or PSCs.


The Model Procurement Code does not define professional, professional skill, or professional judgment. FAC stated that there are no specific criteria for determining if a service requires professional skill or judgment. Recommendation 2.2 is that the General Assembly may wish to consider defining “professional skill” and “professional judgment” as they apply to PSCs.


Mr. Thomas said more than one fourth of the contracts awarded from FY 2010 to FY 2013 were competitive exemptions, procured as sole source or not feasible to bid. Recommendation 2.3 is that FAC and other contracting agencies should determine whether a contract is a PSC and whether it should be pursued competitively based solely on statutory criteria. When such a classification would violate a policy of GCRC, the contracting agency should seek an exemption from the committee.


Price contracts are PSCs for which the work is not specified at the time of the award. Multivendor price contracts have lists of potential vendors that may be revised throughout the life of the contract. Recommendation 2.4 is that personal service price contracts should have a formal policy for continuous advertisement and that agencies maintain updated vendor lists.


In eMARS, the evaluation process is detailed in the EV document. Hard copy evaluations often contain evaluator information and a determination and findings document summarizing the decision to award to a particular vendor. The eMARS EV document rarely contains meaningful information. Hard copy evaluation documents varied in the level of information on evaluators and evaluation methods. Of the 67 contracts reviewed, 21 did not indicate who conducted the evaluation. Recommendation 2.5 is that FAC should ensure that agencies use committees in the evaluation process; that the evaluation process be documented in writing with full explanations of criteria and scoring, along with individual evaluator information; and that a determination and findings be attached to the contract document.


In some cases, PSCs did not undergo review by GCRC until after work was started. Recommendation 2.6 is that FAC should implement a policy to ensure that all PSCS are entered timely in the system.


In eMARS, the proof of necessity is a section in the contract document. Description of work, contract monitoring activities, and justification for the contract are often vague and uninformative. The instructions are inconspicuous, so it is possible that eMARS users are unaware of the type of information that should be included. Recommendation 2.7 is FAC should encourage agencies to fill out the proof of necessity section in eMARS with greater detail, and demonstrate that in-house solutions were examined before deciding to contract for services.


Statutes do not clearly state that all contract amendments be filed and reviewed by the GCRC. Currently, FAC procedure states that all PSCs as well as all amendments be filed and reviewed by the Committee. Recommendation 2.8 is that the General Assembly may wish to consider making that requirement explicit.


Mr. Spears said that contract balances in the statewide accounting system do not reliably show the amounts spent. Most payments on personal service contracts appear to have been made properly, but there were some deficiencies in updating balances on the correct contract. Incomplete records are caused by nonreferencing payments that subtract funds from accounts and may not create a link with the contract. Hundreds of millions of dollars have been spent but not shown on contract balances. For example, the Impact Plus program spent $34.7 million in FY 2013 that was not shown on the contract balance. In addition, some PSCs have exceeded their spending limits without following the proper amendment process. Recommendation 3.1 is that FAC should promulgate polices that describe the methods of processing transactions that correctly update balances and require contract amendments to increase funds on a contract prior to exceeding its limits. FAC and its software vendor should discuss ways to accurately maintain contract balances.


For most personal service price contracts, there is no documentation in eMARS describing the specific work assignments that agencies negotiate with vendors. The duration, cost, location, and other necessary information are kept only in agency hard copy files. Recommendation 3.2 is that FAC should promulgate polices that require agencies to use contract commodity lines to document work assignments and to attach copies of the signed work agreement for each task.


Multivendor price contracts are required to list the vendors assigned to the contract but contracts vary in the location, accuracy, and contents of their vendor lists. If the vendor list does not include vendor codes, agency staff must attempt to determine the correct code needed for payments. The manual entry of vendor codes on multivendor payments opens the possibility of paying an incorrect vendor. Multivendor contracts displayed deficiencies in validating that the vendors paid were the vendors on the contract. Program Review staff discovered 270 payments made to vendors not listed on an attached vendor list. Recommendation 3.3 is that FAC should promulgate polices that standardize the location and contents of vendor lists. These lists should contain the vendor code for each vendor. The cabinet should require vendor lists to be updated soon after a vendor is added or removed and should establish controls to ensure each vendor paid was a party to the contract.


GCRC established an invoice form for PSC payments on August 10, 2010. Statute prohibits payment of PSC invoices not on the form. Vendors that work like a typical state employee and are paid through payroll are still required to submit invoices instead of timesheets but Program Review staff found some instances in which these payroll vendors were not correctly submitting invoices. It was not clear that all agencies were aware that PSC vendors paid through the state payroll system should submit statutory invoices for their time and expenses. Recommendation 3.4 is that FAC should direct all agencies to ensure that PSC vendors paid through the payroll system submit invoice forms for the services they provide.


It also appeared that invoiced service dates were not being entered properly on some payments for validation against the contract dates. Contracts have a service date range to indicate the times that services may be provided and payments have a date range to indicate when services were provided. Usually, payment service dates must fall within the contract service dates to be accepted but sometimes eMARS will not check the validity of contract service dates.


eMARS will automatically set an invoice’s date to the current day if service dates are not entered, causing incorrect information to be recorded. A manual search of payments found 10 instances of this. In a random sample of 538 payments, 20.1 percent of invoices did not provide service dates. Recommendation 3.5 is that FAC should promulgate a policy requiring agencies to pay only invoices for services performed during valid dates and to enter the service dates as they appear on the invoices. As soon as feasible, the cabinet should modify the statewide accounting system so that invoiced service dates are required on all payment lines and that the invoices dates must be entered manually.


During the review of randomly selected contracts, Program Review staff found that about 30 percent of invoices were not submitted on the statutory form. Invoices typically lacked information on vendor staff, with about a fourth providing vendor staff information and about a fourth providing vendor staff charges. Recommendation 3.6 is that FAC should ensure that agencies require vendors to use the statutory form when submitting invoices and that they reject invoices that do not include all required information.


Program Review staff asked the seven reviewed agencies to provide feedback about the statutory form. Agency staff found some questions to be useful, but generally they did not perceive the benefits of requiring the statutory invoice form. Multiple agencies indicated that some questions were unneeded or duplicated information already available to the agency. Some agencies indicated that payments have been delayed because of incorrectly completed forms. Recommendation 3.7 is that GCRC may wish to consider revising the invoice form after receiving additional feedback from a variety of agencies.


Only one agency could provide completed monitoring documents, suggesting that most of the agencies reviewed did not systematically monitor or evaluate vendor performance during or after the contract term. The few evaluation documents in the statewide accounting system strongly suggest that monitoring and evaluation are seldom performed in a formal manner and that past performance is seldom considered in future solicitations. Recommendation 3.8 is that, when feasible, FAC should require agencies to provide written evaluations of vendors’ work during and after the course of a contract. The cabinet should consider whether the accounting system’s performance evaluation documents could be used. The cabinet should provide guidance for including past vendor performance as a criterion for proposals.


Ms. Sapp said that there is confusion as to the definition of the term price contract. The Model Procurement Code does not define the term. FAC has stated that it no longer uses the term, but instead uses “master agreement.” However, a master agreement is a specific type of document in eMARS and is not used for PSCs that need to be filed with GCRC. Recommendation 4.1 is that the General Assembly may wish to consider defining the term “price contract” as used in the Model Procurement Code.


Mr. Knowles said a renewed contract, while it requires new signatures, remains the same contract except for the extension of time and, typically, the addition of funds for the new period. In the current system, once a personal service contract is renewed it receives a new identification number, creating what appears to be a new contract in eMARS and in agency procurement files. The electronic system has no automatic link between the two. Tracking the life cycle of a renewed contract is difficult in both eMARS and in the procurement file. There are many instances of PSCs for which agencies award successive noncompetitive contracts to the same vendor for the same scope of work. These contracts are not technically renewals, but they usually result in continuous work by the vendor on the same terms for an extended period of time. The electronic system has no link between the contracts. This lack of transparency severely limits auditing and oversight and raises the risk that a series of such contracts could continue for extended periods without appropriate justification. Recommendation 4.2 is that FAC should establish a reliable automated method in eMARS to trace all PSC procurement documents from the beginning through all renewals and vice versa, and any solution should be satisfactory to GCRC.


Some agencies use customized software or Microsoft Excel workbooks outside eMARS to keep track of document approvals, amounts, modifications, and payments. Agency and FAC officials agreed that approving draft documents in eMARS was cumbersome, and external systems were easier to use. Having all information about approvals, modifications, renewals, monitoring, and payments in one system is preferable to having parallel systems that do not communicate. Recommendation 4.3 is that, if feasible, FAC should enhance eMARS in ways that encourage its use for tracking draft documents and other tracking tasks.


Senator Higdon asked why contracts with the retirement systems and architectural and engineering contracts were not included in the study. The request was to review all personal service contracts, not just one segment. Mr. Knowles replied that excluded contracts were either not in eMARS or under the purview of the Finance and Administration Cabinet.


Referring to feedback on the statutory form, Senator McDaniel asked for examples. Mr. Spears said that feedback did not include specific examples.


Senator McDaniel asked if eMARS indicates the closeout amount on a contract. Mr. Spears replied that eMARS has estimates, which are not always reliable due to nonreferencing payments.


In response to questions from Senator McDaniel, Mr. Spears said that there are about 11 performance evaluation systems in eMARS but no one seems to be using them.


Senator McDaniel said that there seems to be a disconnect between purchasing and accounting. Money can be spent without the Government Contract Review Committee knowing it. Mr. Knowles said that approval of payments is delegated to the agencies, not through the Finance and Administration Cabinet. For the most part, eMARS includes payments.


In response to questions from Senator McDaniel, Mr. Knowles said that eMARS is operated by a vendor. The state has to pay for any changes to the system. The responsible agency for eMARS is the Finance and Administration Cabinet’s Office of the Controller.


In response to a question from Senator McDaniel, Mr. Knowles said that some of the recommendations in the report would require action by the General Assembly; others could be effected by regulatory change.


Representative Horlander agreed with Senator McDaniel’s suggestion that the report be sent to members of the Government Contract Review Committee, and that Program Review staff make a presentation to that committee.


Responding to the report, Mr. Speer confirmed that eMARS is under the purview of the Office of the Controller. The system was put in place in 2006 and upgraded in 2012. The Finance and Administration Cabinet agrees in whole or in part with 15 of 19 recommendations.


In response to a question from Senator McDaniel, Mr. Speer that there is no disconnect between accounting and purchasing steps. Agencies vary in size and competence. If eMARS is used correctly, the connection is there.


Senator McDaniel stated that it seems that reporting, tracking, and analysis of contracts are lacking. Mr. Speer said that the system does allow for them. The cabinet will continue to strongly recommend that agencies use the system to track vendor performance. Senator McDaniel suggested that consideration be given to evaluating personnel involved in contracting on how well they do this.


In response to questions from Rep. King, Mr. Speer said it is not necessarily cumbersome for agencies to use eMARS. Agencies can attach their own Excel documents to eMARS. He agreed that hard copy evaluations could be attached and that agencies will be encouraged to do so.


Ms. Jurek said that the report is accurate and fair. There are ways in which the Cabinet for Health and Family Services needs to improve contract procedures. Ms. Watkins said that since seeing the initial draft of the report, a notification has been sent to CHFS departments to use the LRC invoice form. The cabinet’s Check Writer system does not connect to eMARS.


Ms. Wilson said that the Transportation Cabinet does follow Finance and Administration Cabinet policy. She noted that Program Review staff did look at Transportation’s engineering contracts. The cabinet has a strong internal auditing group that audits internal contracts.


Mr. Harman said that the Department of Education uses an Excel spreadsheet for tracking personal service contracts. The department’s invoice forms that were not in eMARS are related to the Teachers’ Retirement System. These are payroll documents that go to KHRIS, not eMARS.


In response to questions from Senator McDaniel, Mr. Knowles said that Program Review staff would prepare a written comment on the response to the report for the December meeting.


Senator McDaniel asked Mr. Wicker to comment on the contract for the previous commissioner of the Department of Fish and Wildlife.


Mr. Wicker said that the previous commissioner was hired under a 4-year contract during a transition period, so some issues slipped through the cracks. It was a non-merit position appointed by the governor. The position is now under a personal service contract.


Rep. Simpson said that the representative from the Finance and Administration Cabinet had noted that it did not agree with four of the recommendations. He asked which ones and why.


Mr. Speer said that Recommendation 2.1 deals with the definition of a memorandum of agreement. The cabinet does not agree with the report’s interpretation of the relevant statute. He cited the example of an agreement with state of Indiana to build bridges. As with contracts, memoranda of agreement go before the Government Contract Review Committee.


Senator McDaniel said that the recommendations with which the cabinet disagrees are explained in the written response. Program Review staff should respond at the December meeting.


Sen. Higdon said that the scope of the study was not as broad as he wanted, but he complimented staff for a good report.


Upon motion by Senator Harris and second by Rep. Simpson, the report was adopted by roll call vote.


Senator McDaniel said that given the financial and accountability issues at stake, the recommendations in the report should be given particular attention.


The meeting adjourned at 11:20 a.m.