Program Review and Investigations Committee





<MeetMDY1> October 8, 2015


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> October 8, 2015, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Martha Jane King, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Martha Jane King, Co-Chair; Senators Perry B. Clark, Christian McDaniel, Dan "Malano" Seum, Stephen West, and Whitney Westerfield; Representatives Leslie Combs, David Meade, Terry Mills, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.


Guests: Joan Graham, Deputy Executive Director, Office of Procurement Services, and Jennifer Linton, Director, Finance Facilities, Finance and Administration Cabinet; Crystal Staley, Executive Director, Center of Strategic Innovation, and Larry Gillis, Assistant Director, Division of Employee Management, Personnel Cabinet.


LRC Staff: Greg Hager, Committee Staff Administrator; Mike Clark, Chief Staff Economist; Colleen Kennedy; Van Knowles; Jean Ann Myatt; Chris Riley; Meredith Shores; William Spears; Shane Stevens; Joel Thomas; Ashleigh Hayes, Graduate Fellow; and Kate Talley, Committee Assistant.



Minutes for September 21, 2015

Upon motion by Representative Simpson and second by Senator McDaniel, the minutes for the September 21, 2015, meeting were approved by voice vote, without objection.


Staff Report: State Procurement: Requests For Proposals, Competitive Exemptions And Leaseback Agreements

Joel Thomas said that RFPs can result in either personal service contracts or master agreements. When an agency other than the Finance and Administration Cabinet (FAC) solicits via an RFP, it is for a personal service contract. Under certain circumstances FAC may establish a procurement through an RFP. The document used to communicate the intent to contract is called an EO1. At present the EO1 is being replaced by the strategic procurement request, or SPR1.


If an agency requires professional services that cannot be performed in house or by another state agency, nonprofit, or university, then an RFP is constructed. The RFP contains mostly template information specified by FAC. The initial action to establish an RFP is made by program staff at agencies. Often, this initial action is the scope of work.


Depending on an agency’s size, an internal policy analyst may be responsible for compiling the scope of work and the RFP template. The approval process goes through agency budget and legal staff, then to agency heads. The Office of Procurement Services (OPS) reviews the final RFP before it is posted to the Vendor Self Service. Each RFP contains technical and cost proposal sections that are evaluated separately and then combined for a total score. The relative importance of each section is not clear.


Recommendation 1.1 is the RFP template should more clearly emphasize that technical and cost components are both important and will be considered together when awarding a contract.


Agencies do not have a standard evaluation form for proposals. While discretion is a hallmark of the competitive process, documentation and tracking of scores and determinations is critical. eMARS, which is the statewide accounting system, is currently not a reliable source for proposal evaluation information. Furthermore, the 2013 study on personal service contracts revealed that some evaluations were being conducted by a single person and not by committee.


A summary of Recommendation 1.2, which is repeated here from the 2013 personal service contract study, is the Finance and Administration Cabinet should ensure that agencies use evaluation committees; that each evaluator provide written justification for scores; that the scores are recorded in the eMARS evaluation document along with a detailed scoring explanation; and that a determination and findings document also be attached to the eMARS evaluation document.


Expenditures are calculated for the first award made from an RFP, not the entire life of the contract. In each fiscal year analyzed, one award accounted for a large portion of expenditures. The majority of contracts awarded from RFPs were small, with 57 percent costing less than $20,000. RFPs are linked to their respective awards in the eMARS statewide accounting system. This link is vital in showing the full lifecycle of the procurement, including potential renewals. In some cases an RFP may fail to solicit responsive vendors, forcing the agency to cancel and resolicit another RFP. When this happens, it is possible that the original RFP is left in the system as an orphan; that is, it isn’t connected to an award or a procurement folder. This lack of documentation could be problematic when compiling a complete record of a procurement.


Recommendation 1.3 states the Finance and Administration Cabinet’s Office of Procurement Services should implement standards to link resolicited RFPs with the original RFPs.


Recommendation 1.4 states the Finance and Administration Cabinet’s Office of Procurement Services should implement standards that clearly link contract awards to requests for proposals when a contract is awarded in a different procurement folder.


Staff reviewed a sample of competitive exemptions for goods and nonprofessional services from fiscal year 2013 to May 2015. Over 3,000 competitive exemptions were submitted to OPS during that time. Personal service contracts can also be awarded through the noncompetitive process. From fiscal year 2013 to May 2015, 289 competitive exemption requests for personal service contracts were submitted to OPS.


William Spears sat that for three types of RFPs, Program Review staff analyzed random samples to determine if the RFPs possessed information required by statute. 74 personal service contracts were selected from FY 2013 to March of FY 2015. Staff reviewed both EO1 and RFP text. EO1s typically contained more detailed descriptions and justifications for contracting than RFPs. When reviewing the need for a service, any reason beyond stating “the service was needed” was accepted. The need for the service was not appropriately indicated on 7 of the 74 RFPs. When RFPs did not indicate a need, the justifications were absent or stated the service was needed with no explanation.


As a result, Recommendation 2.1 is the Finance and Administration Cabinet and other contracting agencies should ensure that the need for a contract is stated fully and clearly on RFP documents.


When reviewing contracts’ justifications for outside staff, Program Review staff accepted any explanation that went beyond stating extra staff was needed. Justifications for outside staff were insufficient in 28 RFPs. These justifications provided no explanation, stated only that external staff were needed, or stated internal staff could not provide the service.


Recommendation 2.2 is the Finance and Administration Cabinet and other contracting agencies should ensure that the justification for why services cannot be provided in house or by another state agency is stated fully and clearly on RFP documents.


Performance requirements were considered to be any required task or documents that may be used to evaluate progress after a vendor has been selected. Performance requirements in the sample included reports, audits, and financial statements. These requirements were not found in 24 RFPs. These contracts did not indicate how progress would be evaluated.


Every PSC reviewed met 5 requirements: they were issued for at least 7 days; they provided a time and location for responses, they indicated they were competitive procurements for personal services, they provided descriptions of the service, and they provided weights indicating the relative value of evaluation criteria.


Evaluation criteria are a list of characteristics used to evaluate responses and guide vendors in crafting proposals. Criteria typically include technical and cost proposals. Technical criteria will vary based on the service procured. This variance allows for flexibility in procurements but it causes similar services to be evaluated differently. For example, two legal service contracts in the sample had different technical criteria and scoring weights. Standardizing criteria and weights could make procurement clearer and more consistent for vendors.


The terms describing evaluation criteria varied between the Model Procurement Code, administrative regulations, and FAC policies. The Code and Administrative regulations use “evaluation factors.” FAC policy uses “technical provisions,” “evaluation criteria,” and “technical evaluation criteria” interchangeably. Defining evaluation criteria was problematic due to a lack of uniform terminology.


Recommendation 2.3 is the Finance and Administration Cabinet’s Manual of Policies and Procedures should conform with statutory and other administrative regulation language terms describing competitive and non-competitive negotiations.


The sampled RFPs resulted in 127 contracts. Approximately 70 percent were awarded within 60 days, with 20 percent being awarded within 30 days. Program Review staff intended to update the data to cover all RFPs for PSCs but updates to eMARS prevented the system from being available before the presentation.


When a vendor is selected, they receive a notification indicating they have won the award. Unsuccessful vendors must check the procurement website for updates. These vendors have 2 weeks to protest any award. The time limit starts on the day the award is posted to the website. Vendors must regularly check the website to determine when a contract is awarded. If the website is not regularly checked, vendors may become aware of the award after part or all of the 2 week protest period has passed.


Recommendation 2.4 is the Finance and Administration Cabinet should implement a method to directly inform all applicants when a vendor has been awarded a contract.


Program Review staff randomly sampled 15 master agreements from FY 2013 to March 2015. The criteria from the PSC review was also used on the master agreement sample. No agreements indicated why external staff were needed. 4 agreements didn’t provide a need for procurement. Master Agreements don’t use the EO1 document, so the contract text had to indicate a need for services and external staff. A third of the masters agreements did not provide performance requirements. The sampled master agreements were generally compliant in all other areas reviewed.


Program Review staff reviewed 15 contracts overseen by the Division of Engineering and Contract Administration (DECA). The need for external staff appeared in 2 RFPs and performance requirements did not appear in the sample. The entire sample of DECA RFPs was compliant in all other categories.


Mr. Thomas said noncompetitive negotiation is the term covering contracts established without the competitive process. Competitive exemption also describes this process. Agencies seeking a competitive exemption must provide a proper cited authority to justify why the procurement cannot be solicited competitively. OPS reviews competitive exemptions and either approves or rejects the request. The laws governing each cited authority are spelled out in statute and regulation. The three cited authorities for competitive exemption are competitive bidding exceptions specified by law or regulation; competitive bidding exceptions of standing determination of not practicable or feasible; and competitive bidding exceptions that are sole source. A review of procurement files showed that, while cited authorities were provided on all requests, supporting documentation was lacking.


Staff reviewed samples of EO1 documents and associated awards and found that 60 percent did not include adequate justification for needing the procurement. Implied reasoning may account for the lack of detailed justifications on some of the requests. That is, an agency may consider the reason for why a competitive exemption is necessary to be implicit in the cited authority.


Recommendation 3.1 states the Finance and Administration Cabinet and other contracting agencies should ensure that competitive exemption requests for nonprofessional services or goods clearly and fully state why the contract is needed, why the services cannot be performed in house or by another state agency, and why competitive exemption is necessary.


A review of expenditures for nonprofessional services and goods procured through a competitive exemption shows that, in each year, one or two contracts accounted for the majority of expenses. Most contracts within the sample had small expenditures with 62 percent falling under $1,000. A review of a sample of EO1s for personal service contract competitive exemptions revealed that nearly 36% had some kind of deficiency. Staff identified specific deficiencies as not justifying the use of a specific vendor, why competitive exemption was required, and not adequately indicating why the service was needed.


Recommendation 3.2 states the Finance and Administration Cabinet and other contracting agencies should ensure that competitive exemption requests for professional services clearly and fully state why the contract is needed, why the services cannot be performed in house or by another state agency, and why competitive exemption is required.


Single personal service contracts accounted for the majority of expenses in fiscal years 2013 and 2015. Most contract expenditures were concentrated under $40,000.


Leasebacks are transactions in which assets are sold to a third party and leased immediately to the original party. For example, the state could sell a building and then rent the building for 15 to 20 years from the new owner. Any asset can be sold in a leaseback but facilities seemed to be the most common assets used. The primary benefit of a leaseback is a single infusion of funds that can be used for any state need. Some research indicates that assets may sell for a higher price if a lease is part of the agreement. However, lease payments will be a long term mandatory expense like debt payments. If the state needs to own the facility in the future, the price of the facility may be greater than what it was sold for.


While the federal government and other states have used leasebacks, they are not used in Kentucky. DECA uses a similar practice called built-to-suit leases. In this contract, a vendor is selected for a construction project. If the project is on state land, ownership is transferred to the vendor, the vendor constructs a project on the land, leases the project back to the state, and transfers ownership of the land and the project back to the state at the end of the lease. If ownership of land is transferred, the contract must allow the state to extend the lease for 2 year terms. The lease ends when payments would amortize the cost of the project. The state must also be allowed to purchase the project at an earlier date by paying the difference between the cost of the project and the current total lease payments.


In recent years, four built-to-suit leases were used by the Department of Military Affairs. Vendors were required to finance, design, and construct the facilities. Lease payments were predetermined based on the square footage of the new facility. Vendors competed on the number of monthly payments needed before ownership transferred to the state.


Mr. Spears said built-to-suit leases and leasebacks will both result in long term mandatory costs, with monthly payments to continue using a facility. Compared to leasebacks, built-to-suit leases tend to introduce less risk. Built-to-suit establishes rates and time lengths while guaranteeing that the project will be owned by the state. Unless a leaseback establishes long-term rates, future payments on leasebacks are less certain. The new owner may also decide not to sell the asset. However, built-to-suit leases are less flexible because they are intended to fund capital projects. The initial funds from a leaseback agreement can be used to fund anything. Leaseback agreements can also be ended early if needed, ending monthly payments. If a built-to-suit lease is ended early, the state must pay the remaining costs or risk losing the original land.


In response to a question from Representative King, Mr. Thomas said the RFP template is standardized though agencies can plug in additional pieces. The biggest issues with the eMARS system is with the evaluation process. Evaluations are being done, but not easily accessible in eMARS. Proficiency with eMARS is highly variable.


In response to questions from Senator McDaniel, Mr. Spears said the amortization period of the Built to Suit leases is variable. DECA would have more information regarding if the state is responsible for the full cost after the lease agreement and if it includes overhead. The entity using the facility during the terms of the lease is responsible for upkeep of the facility.


In response to a question from Representative Simpson, Mr. Spears said that many of the contracts in built-to-suit leases are standardized.


Joan Graham appeared before the committee to respond to the recommendations made in the staff report. FAC agreed with all of the recommendations. In regards to Recommendation 1.1, OPS will continue to monitor that both technical and cost components are considered when awarding contracts. For Recommendation 1.2, they will strive to collect 3 to 5 scores from evaluation committees on future proposals. As part of the next generation of Smart Government, they are implementing the “Kentucky Procurement Manual.” They are also currently developing a training program based primarily on the contents of the manual which they hope to implement starting next year.


Both recommendations 1.3 and 1.4 are capable of being done in eMARS but need revisiting in training. There are tools and templates to available to address Recommendation 2.1. Recommendation 2.2 will need to be reviewed further. In regards to Recommendation 2.3, FAC has reviewed policy and procedures and will ensure terminology is consistent with statute.


Recommendation 2.4 would need to be a manual process. There is currently not a process available through eMARS. FAC will continue to emphasize Recommendation 3.1 to agencies. This recommendation will also be reviewed within the manual. Recommendation 3.2 will also be emphasized by FAC.


In response to questions from Representative King, Ms. Graham said FAC currently does not send out notification to vendors. Vendors are notified of a date that decisions will be made and they must check the agency website.


In response to a question from Representative Simpson, Jennifer Linton said the new state building be constructed on Sower Boulevard in Frankfort is a 35 year built to suit lease. It will almost certainly become state-owned at the end of the lease.


In response to a question from Representative Simpson, Ms. Linton said that she would need to review the contract to see who is responsible for improvements if the facility is in dire need of maintenance at the end of the lease agreement.


Upon motion by Representative Simpson and second by Senator McDaniel, the State Procurement: Requests For Proposals, Competitive Exemptions And Leaseback Agreements report was adopted by a roll call vote.


Staff Report: Comparisons Of Salaries Paid To State Executive Branch Supervisory And Nonsupervisory Employees And To School Administrators And Teachers

Ms. Shores said the Classification and Compensation plan for executive branch employees covers merit and non-merit positions. The classification plan groups similar positions into the same job classification. Each job classification is then assigned to 1 of 18 pay grades. Pay increases approximately 10 percent for each grade. Each pay grade has a defined minimum and midpoint. New employees are generally paid the minimum of a grade. Once an employee is hired, ways that salaries may be adjusted include annual increments, promotion, demotion, and reclassification of a position.


Benefits vary based on full- or part-time employment and not on whether an employee is in a managerial position. Part time positions require the employee work no more than 100 hours per month. All full time employees receive health insurance, life insurance, sick and annual leave, and retirement benefits. Some benefits are partially contingent on length of service and salary.


The Personnel Cabinet provided data on more than 33,000 executive branch employees as of December 2014. Some employees had to be excluded from the analysis, including those for whom there was insufficient information to make an accurate comparison between their wages and the wages of their immediate supervisor. Once exclusions were made, 30,549 individuals remained.


LRC staff calculated ratios of the pay of supervisors and those they directly supervised. Employees were separated into two groups for the analysis based on whether they received an hourly wage or monthly salary. Ms. Shores worked through an example of how ratios were calculated before presenting the results.


For salaried employees, supervisors earned 1.48 times more than their employees, which means the supervisors earned 48 percent more. Among cabinets, the highest ratio was for Economic Development (2.09), but the cabinet had only 67 employees. The lowest ratio was for Energy and Environment (1.36). For 9 of 12 cabinets, the ratios ranged from 1.44 to 1.59. Box and whiskers plots were used to summarize the distribution of ratios within each cabinet. The highest ratios appear to be for employees in clerical positions who report to high level officials.


About one-third of employees who receive an hourly wage are supervised by salaried employees. LRC staff converted the salaries of supervisors of hourly employees into an hourly wage so that comparisons could be made. Three cabinets were excluded from the analysis because they contained 2 or fewer hourly workers. For the nine remaining cabinets, the supervisors earned 71 percent more than their hourly employees, on average. Supervisors earned approximately twice as much as their hourly employees in the Energy and Environment, General Government, Justice and Public Safety, and Public Protection Cabinets. Smaller gap in pay between different managerial levels versus supervisors and non-supervisors.


Mr. Clark said that the Department of Education provided details on salaries paid to each school district’s certified employees for the 2013-2014 school year. Average total salary was $119,854 for superintendents, $85,801 for principals, $76,590 for vice principals, and $50,882 for teachers. One component of salaries for principals, vice principals, and teachers is base pay. Each district board of education adopts a salary schedule, which specifies the base pay for certified employees in the district. Base pay is based on experience and education, not position. Therefore, a principal and teacher with the same experience and education working in a district receive the same base pay. Across the state, average base pay is more than $58,000 for principals and vice principals and nearly $50,000 for teachers. Differences in base pay are due to principals and vice principals having more experience and education than teachers. Base pay compensates employees for working the 185 days. However, some employees are paid to work additional days. This pay is referred to as extended days pay. Principals who received extended days pay earned $15,000 on average, vice principals earned $10,000, and teachers earned $2,000. Almost all principals and vice principals were coded in the data as working extended days. Principals worked 49 additional days on average; vice principals worked 32. Less than 17 percent of teachers were paid for extended days—7 days on average.


Extra Duty Pay is pay for the additional responsibilities associated with the positions of principal and vice principal. Principals who received extra duty pay for their positions earned $12,500 on average; vice principals earned more than $8,000.


School districts may pay employees for taking on additional duties within the school. Principals who received pay for other extra duties earned over $5,000, vice principals earned $4,000, and teachers earned about $2,800. Only 13 percent of principals, 19 percent of vice principals, and 23 percent of teachers received this type of pay.


Of the $34,920 difference in the average salaries of principals and teachers, nearly 24 percent of the difference is due to principals having higher base pays, more than 42 percent is due to their higher pay for extended days, and extra pay principals received for their positions accounts for 34 percent of the difference. Of the $25,708 difference in the average salaries of vice principals and teachers, 33 percent is from the difference in base pay, 37 percent is from the difference in pay for extended days, and 30 percent is from the extra pay vice principals receive for the position. Pay for other extra duties such as coaching accounted for less than 1 percent of the total differences between principals and teachers and vice principals and teachers.


In response to a question from Representative Palumbo, Ms. Shores will research and provide the number of how many executive branch part-time workers, work fewer than 100 hours.


In response to a question from Senator Seum, Crystal Staley said that there is a single salary schedule that is variable by school district. As far as she knows, there is nothing in statute concerning a differentiation in pay based upon what one teaches or if they are employed by a troubled school.


Upon motion by Representative Palumbo and second by Representative Mills, the Comparison Of Salaries Paid To State Executive Branch Supervisory And Nonsupervisory Employees And To School Administrators And Teachers report was adopted by roll call vote.


The meeting was adjourned at 11:16 AM.