Interim Joint Committee on State Government


Minutes of the<MeetNo1> 4th Meeting

of the 2004 Interim


<MeetMDY1> November 22, 2004


The<MeetNo2> fourth meeting of the Interim Joint Committee on State Government was held on<Day> Monday,<MeetMDY2> November 22, 2004, at<MeetTime> 1:00 PM, in<Room> Room 149 of the Capitol Annex. Senator Alice Kerr and Representative Charles Geveden, Co-Chairs, jointly chaired the meeting. Senator Kerr called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Alice Kerr, Co-Chair; Representative Charles Geveden, Co-Chair; Senators Charlie Borders, Tom Buford, Julie Denton, David Karem, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Ed Worley; Representatives John Adams, Adrian Arnold, Eddie Ballard, Joe Barrows, Carolyn Belcher, James Bruce, Buddy Buckingham, Dwight Butler, Jim Callahan, Larry Clark, Perry Clark, Tim Feeley, Joseph Fischer, Derrick Graham, J. R. Gray, Mike Harmon, Charlie Hoffman, Jimmie Lee, Paul Marcotte, Tanya Pullin, Jon David Reinhardt, Tom Riner, John Will Stacy, Tommy Thompson, and Jim Wayne.


Guests: Crit Luallen and Brian Lykins, Office of the State Auditor; Jim Host, Commerce Cabinet; John Farris, Ed Ross, Mike Inman, Jim Abbott, and Mike Burnside – Finance & Administration Cabinet; Tierra Kavanaugh-Turner, Governor's Office for Minority Empowerment; and Rev. Louis Coleman, Justice Resource Center.


LRC Staff: Joyce Crofts, Alisha Miller, Mark Roberts, Stewart Willis, Clint Newman, Judy Fritz, Erica Warren, and Peggy Sciantarelli


The minutes of the September 22 meeting were approved without objection, upon motion by Senator Karem.


Senator Kerr welcomed Senator Tapp, who was appointed to the Committee in October. The Committee then adopted individual resolutions in honor of five members who will leave the General Assembly at the end of 2004: Representatives John Adams, Buddy Buckingham, Jim Callahan, Charles Geveden, and Senator David Karem. Senator Worley introduced and read the resolution for Senator Karem. Representative Ballard introduced the resolution for Representative Geveden, and Representative Larry Clark introduced the resolutions for Representatives Adams, Buckingham, and Callahan. Joyce Crofts, LRC staff, read the resolutions for the four House members. After comments of thanks and appreciation and a round of applause for each departing member, the ceremony concluded with a group photo of members and staff, along with Mrs. Geveden, Mrs. Buckingham, and former LRC staffer Joyce Honaker.


Next on the agenda was review of the state audit entitled, "Examination of the Commonwealth's Procurement Card Program Processes, Procedures, and Financial Controls." Crit Luallen, Auditor of Public Accounts, gave an overview of the audit, which was released in September 2004. In summary, Ms. Luallen said that the Commonwealth Procurement Card (ProCard) program was established in 1996 as part of the EMPOWER Kentucky initiative with the intent of assuring a more efficient, cost-effective approach to making small purchases across state government. The ProCard program replaced the cumbersome imprest cash system. The total estimated savings of the new program for the two fiscal years 1998 through 2000 was estimated to be $12 million, with approximately $6.5 million of that accruing to the General Fund. ProCard expenditures reached their height in FY 2001, with $51 million in purchases. As the state budgets were lowered and discretionary spending was curtailed, ProCard purchases decreased to $39.5 million in 2004—or 6.2 percent of total germane state purchases (page 12 of audit). In March 2004 Commerce Secretary Jim Host and Parks Commissioner George Ward cancelled 290 ProCards after concerns about their use came to light in the Parks Department. Subsequently, Governor Fletcher stated that his administration intended to review the use of ProCards throughout state government. Ms. Luallen said that at this point the Auditor's Office offered its support and assistance. It was also brought to her attention that former State Auditor Ed Hatchett began a review of the ProCard program but did not issue a formal report. She said she met with the Governor, Secretary Host, and Finance & Administration Secretary Robbie Rudolph and that it was decided that the Auditor's Office would conduct a thorough analysis of the program's controls and possible abuses. In a letter dated March 22, 2004, the Governor officially requested the Auditor's Office to do the review and designated Secretary Rudolph as the Administration's contact.


Ms. Luallen said that the objectives of the audit were threefold: determine whether necessary policies, procedures, and controls were in place; identify instances of noncompliance or abuse of the system; and offer recommendations for improving oversight of the program. The timeframe for the review—which was agreed to by the Finance Cabinet—was for the period July 1, 2002, through December 31, 2003. She noted that while the audit was underway, the Administration began to make improvements in the program.


Ms. Luallen went on to say that the audit was conducted by 29 of her staff, working over 3,900 hours under the direction of Brian Lykins, Director of Special Examinations. The audit focused on 22 agencies that either administered the highest dollar amount of expenditures or were identified as having potential issues that should be looked at. These agencies represented approximately 85 percent of all ProCard expenditures. The audit team specifically reviewed 3,878 individual ProCard transactions and found that a lack of adequate oversight had exposed the program to needless risk. In response to the findings, the audit proposed over 100 recommendations to strengthen the program. It was found that 820 transactions had insufficient documentation to determine whether the cardholder made the purchase; over 260 transactions were not supported by adequate documentation such as original receipts; more than 50 split purchases would have circumvented payment limits; and there were 28 instances of ProCards not being cancelled immediately when the cardholder left the agency. There was a lack of training for some ProCard administrators, and there were no consequences for employees who failed to adhere to established policies. Some of the audit's specific recommendations include: the Finance Cabinet should seek more favorable rebate terms from banks and should ensure that payments are made in a timely fashion; every cardholder and agency should supply supporting documentation for every purchase; cardholders should be adequately trained in use of the card; each cardholder's agreement should be updated, signed, and understood by the ProCard user; disciplinary action should be taken against those who consistently ignore ProCard rules; and, most importantly, transactions should not be approved until all documentation is completed. Ms. Luallen said that the audit found a pattern of lack of oversight by administrators who approved final transactions, even though documentation was inadequate in some cases. Out of the 3,878 transactions reviewed, only six instances of personal misuse were documented, totalling $245.41. The auditors used a combination of random, statistical sampling and judgmental samples that were selected because of questions of possible abuse.


Ms. Luallen said that having strong controls is only part of the solution to proper oversight of the ProCard program. She said that the procedures originally in place, additional ones implemented by the Administration, and those recommended in the audit report will only work if they are consistently applied over time by management. In addition to the audit's recommendations, the Auditor's Office has announced that review of ProCard transactions will be incorporated into the Office's annual financial audits of state government. She noted that the audit did not address potential savings that might be achieved through improved guidelines and oversight of purchases. Concluding her presentation, Ms. Luallen said her office has appreciated being able to work with the Finance Cabinet to improve the program. She encouraged the Administration to not only focus on providing strong oversight of the program but also to prevent a return to the days when it cost more to process some purchases than it actually cost to buy the product.


Jim Host, Secretary of the Commerce Cabinet, addressed the Committee regarding the audit. In summary, Secretary Host said that it is essential that the ProCard system be managed responsibly, with full accountability, in order to minimize the possibility of waste and abuse; sadly, that has not been the case in many instances. He added that Alex Whitenack, ProCard administrator currently and also in the previous administration, told him and Finance Secretary Rudolph in a meeting last February that the ProCard program was totally out of control.


Secretary Host said the ProCard program was brought to his attention when Parks Commissioner George Ward, who was appointed by Governor Fletcher, advised him of some troubling information. Commissioner Ward  said that Parks had issued 464 ProCards with a credit limit of $2,751,500 monthly. Secretary Host said that after studying some of the expenditures, it was obvious to him that the ProCard program had not been operated in accordance with standard business practices. He said that the previous State Auditor's draft report in 2000 concluded that the Finance & Administration Cabinet was not reviewing ProCard charges; and that if the Cabinet had established this control, it would have had the opportunity to identify improper or unusual purchases. He said the 2000 report, which was not made public, found coding errors totaling more than $25 million and also that supporting documentation did not provide enough information to allow a reasonable person to determine appropriateness of purchases. He questioned why something was not done about the ProCard program at that time. He went on to say he believes that the facts prove that the ProCard program has been subverted and undermined by the same mismanagement that has plagued state government for decades; that if data is fundamentally flawed or incomplete, an audit should be broadened to evaluate not just facts and figures but also the process, the climate, and the culture of management that was in place. In his judgement, this is where the Auditor's Office fell short in conducting the recent audit.


Secretary Host said that the Commerce Cabinet internal auditor found that from July 1, 2003, to February 29, 2004, Parks Department employees used 464 ProCards to make purchases of $1,306,284 million in 13,374 separate transactions. A closer inspection of transactions revealed a long-standing pattern of wrong practices. In FY 2000 alone, in the Department of Fish and Wildlife there were 3,401 transactions lacking supporting documentation, totaling $282,000. In addition, the Commerce Cabinet internal audit found at least 130 examples of questionable purchases for 2003. Most egregiously, there were 23 purchases of printers, fax machines, scanners, digital cameras, and related merchandise totaling $5,023. These purchases were not approved by the Finance Secretary, which was a direct violation of HB 269 [2003 budget bill].


Secretary Host said that one reason for the discrepancy between the current audit and those conducted by former Auditor Hatchett and the Parks internal auditor is that Auditor Luallen required the audit to have a narrow focus. He said that Mr. Lykins, the APA's lead auditor, told Commerce Cabinet officials that in more than 80 percent of its work, the State Auditor's office had used a "compliance" approach instead of one that took a hard look at business economy or efficiency. Secretary Host emphasized that he is not opposed to the ProCard program and cited the State Fair Board as proof that ProCards can be used efficiently and effectively if the proper checks and balances are in place.


Secretary Host said that the Commerce Cabinet has withdrawn many ProCards and established new systems of management and accountability. In the Parks Department, for example, the number of employees authorized to use ProCards has been reduced from 464 to 69, and rigid systems of checks and balances have been implemented—similar to those that have worked successfully at the University of Kentucky and the State Fair Board. All new ProCards must be approved by the central office of the Parks Department, and cards are not activated until cardholder agreements are signed and returned to the central office. Each cardholder must get approval before making any purchases and immediately turn in receipts. Employees who retire or transfer must turn in their ProCards immediately. Secretary Host said that, as a result, in only two agencies there has already been an estimated savings to taxpayers of $1,080,000 in ProCard expenditures less than a year after the new administration took office. In conclusion, he said that unless future audits are conducted in the spirit of exploring the culture of management and accountability in the ProCard system, instead of being narrowly limited to purchases that are impossible to track and identify, they will be just a waste of time and money.


Senator Tori questioned why the audit did not cover the entire period since the ProCard program began and why something was not done to stop the abuse that was discovered in the 2000 review. Ms. Luallen said that her staff and Secretary Rudolph's staff jointly determined the timeframe and scope of the audit. She said that improvements were made and controls were strengthened as a result of the review under the former State Auditor. That review, however, looked at only eight agencies extensively and for only a one-month period. This is one reason the current audit did a more thorough review, covering 22 agencies and the 18-month period that was considered to be most relevant.


In response to Secretary Host, Ms. Luallen said that she ran for, and is serving as, State Auditor based on her record of integrity and professionalism while serving in state government. She went on to say that the Governor officially asked that she do the audit, and the Secretary of Finance negotiated the details with her. The audit was done under professional auditing standards, and she is offended that Secretary Host would personally attack her professional staff, who have a record of integrity throughout their years of government service.


Secretary Host said he was not making a political attack but was just stating the facts—that his Cabinet's internal audit by a long-time state employee found a much higher incidence of abuse. He said his job is to run his Cabinet in the most efficient way possible and that he will continue examining the ProCard program until it is "cleaned up" across state government.


Representative Marcotte said he thinks there has been a climate of wastefulness in state government that has been costly to the taxpayers. He commended Secretary Host for his efforts and his businesslike attitude.


Responding to questions from Senator Buford, Brian Lykins of the Auditor's Office explained ProCard policies and procedures. Senator Buford asked whether the former state auditor's report on ProCards could be shared with the Committee. Ms. Luallen said she understands that Secretary Host shared the report with the press, although it was never finalized and is considered to be "preliminary work papers." Secretary Host said he would be glad to provide a copy.


Representative Feeley asked why the previous Auditor's report was not finalized and whether it was put to use internally. Ms. Luallen said some improvements were made as a result of that review but that neither she nor Mr. Lykins knows why the Auditor chose not to finalize the report or make it public. She said her auditors looked at everything in that report and that the current audit includes many of the same findings. She went on to say that she and Secretary Host agree on most of the current findings. The audit specifically addresses the ProCard program's significant lack of oversight and financial controls. The only area of disagreement is that the recent audit did not find more actual documented personal abuse of the program in the designated timeframe. The audit was based on a statistical sampling analysis—a standard auditing approach. It is important not to demean the audit but to use it to make the ProCard program even better. Ms. Luallen pointed out that several of the specific abuses brought out by Secretary Host in his first press conference had already been discovered in internal audits during the previous administration.


Representative Belcher commended the Auditor's Office for doing a very extensive job. She said the recommendations are very good, the audit accomplished its goal, and that it is important to move in a positive direction. She asked Secretary Host whether the Commerce Cabinet has a "checkoff" procedure in place for departing employees, and he confirmed that it does.


Responding to questions from Senator Worley, Mr. Lykins said that Secretary Rudolph's office was aware of the objectives of the audit, which 22 agencies would be examined, rationale for selection of the agencies, and the fact that the sampling would represent 85 percent of all ProCard transactions. John Farris, Deputy Secretary of the Finance and Administration Cabinet, said he is representing Secretary Rudolph, who could not attend today. He said he was not in the original meeting with Ms. Luallen and her staff, but he thinks Secretary Rudolph was aware of the time period of the audit, although not the specific methodology. He said the Cabinet on March 8, 2004, contacted the 22 agencies, asking them to review their ProCard procedures. Mr. Lykins said that a letter was sent to the agencies on April 19, 2004, requesting their full cooperation. Ed Ross, Controller for the Finance & Administration Cabinet, said that Finance agreed to the 18-month timeframe and that Secretary Rudolph had not objected to limiting the audit to 22 agencies.


Senator Worley said it appears that Secretary Host brings forth a significant issue—that the ProCard system needs to be examined and reexamined. By the same token, it appears the audit is being subjected to political criticism, although the Secretary of Finance—point person for the Administration—agreed to the audit's scope and timeframe. He suggested that the Committee reserve time in the future for Secretary Rudolph to testify regarding the audit.


Secretary Host said the issue is not political but is about trying to do the right thing with the proper business principles. He said he did a deeper examination than Auditor Luallen but that he does not question the numbers her office found. He went on to say that in his opinion the issue extends across state government. He challenged the Committee to provide oversight and said he is delighted that the Auditor will include the ProCard program in the annual audit process. He said that if it is done correctly, he believes there will be savings of $5-$10 million on an annualized basis.


Representative Geveden asked questions about the small-purchase process prior to use of ProCards and about the number of cardholders. Ms. Luallen said that small purchase procedures varied but that a number of steps were involved. When ProCards were first implemented, it was estimated that they could save as much as 68 minutes of time per purchase. She went on to say that one reason ProCards proliferated in the Department of Parks was because that Department is so widespread and has so many employees involved in various aspects of park operations. Mr. Farris said he did not know offhand how many cardholders are in the Finance Cabinet. There had been 5,600 cards across state government, and today there are 1,300 fewer. Representative Geveden asked whether Finance has changed procedures as a result of the audit. Mr. Farris said they had begun to change procedures prior to the audit and that some of the audit recommendations overlapped with those changes. Secretary Host said that the Commerce Cabinet had 1,252 cardholders as of January, 2004; today they have 134. He said they have cut the credit limit from $8,152,000 in January to $534,000 currently. Representative Geveden said it is commendable that the number of cards has been reduced. He added that the problems with the ProCard program have been largely a management issue and that the cards have a purpose as long as the program is properly managed. Secretary Host concurred.


Ms. Luallen said she would like to make an additional comment. She said she would have liked Secretary Host to have come forward and share his information in April, when Secretary Rudolph's letter went out to agency personnel, asking them to fully disclose to the auditors any pertinent information they had regarding fraud, waste, or abuse associated with ProCards.


Representative Geveden said that some of the comments and questions today indicate that the ProCard issue has become somewhat political. He said he would hope that in the future such issues would be viewed as governmental rather than political.


Representative Gray expressed appreciation to Ms. Luallen for doing a tremendous job in reviewing the ProCard issue and protecting the taxpayers of Kentucky. Senator Kerr added that it is imperative that legislators and state government officials act as good stewards of the taxpayers' dollars, regardless of political party or branch of government. She thanked both Ms. Luallen and Secretary Host.


Representative Geveden assumed the chair. Next on the agenda was a review of the Commonwealth Office of Technology (COT), Finance and Administration Cabinet. Commissioner Mike Inman gave a comprehensive overview of the Office, summarized as follows:


As part of Governor Fletcher's reorganization, the former Governor's Office of Technology was moved into the Finance and Administration Cabinet. At that time the Office had seven separate offices, 411 full-time employees, and 156 contractors to augment staff. Today COT has 398 full-time employees, including approximately 70 technical staff who transferred to COT from Finance and the former Revenue Cabinet as part of the reorganization and consolidation of functions. COT now has 85 contractors. The number of offices has been scaled down to three—the Office of Infrastructure Services, the Office of Consulting and Project Management, and the Office of Enterprise Policy and Planning. No positions have been abolished as a result of the reorganization, and no personnel have been let go; the reduction in the number of employees is due mainly to retirements. The mission of the Office continues unabated. That mission is to provide leadership in the area of information technology, promote efficiency, eliminate waste and duplication, and improve government services. A common theme in COT is continuity and continuing to build on the work that has been done before. The leadership and support of the State Government Committee has been key to past accomplishments and continues to be so. COT is simply building on the legacy of the previous administration.


COT has a five-point vision for progress in information technology (IT) in the Commonwealth: taking an enterprise approach to IT; providing IT as a service to state government; promoting enterprise architecture and standards; promoting technology in education; and promoting technology in the economy. As a reflection of the great work that has been done in the past, this year COT moved up from 25th to 12th on the list of digital governments, and the "" portal moved from 24th into 7th position in the top 10 portals in state government.


Cost is a major driver affecting technology today, and this is a big concern. It is not a matter of reducing what is expended on IT in state government but is rather a matter of trying to squeeze maximum efficiency out of budgeted funds. The Commonwealth needs to get more value from IT through reducing and reallocating staff, pooling resources for application development, purchasing of PC's in bulk, and enterprise software agreements. Security is a big concern. This year COT began a content security management program and is about to begin a spam-blocking program, as a direct result of the issues that arose about a year ago regarding acceptable use of state computers. The Commonwealth is constantly under attack from viruses and unauthorized attempts to enter the state network. All data is not stored in a central location, and the firewalls that protect the data are decentralized; patches to software are not uniformly applied. This creates vulnerabilities, which are exploited almost daily or weekly across state government. These things are leading the Commonwealth to take a much broader, enterprise approach to IT in order to protect critical resources—the computer systems themselves, the applications and the services they provide, and the data.


COT wants to take an enterprise approach to development, leverage innovative solutions, and provide world-class project management support across the cabinets. The Commonwealth needs to take an enterprise approach in treatment of the work force. Within the next few years, 35-40 percent of IT workers in the Commonwealth will be eligible to retire. It is important to move now to resolve issues relating to the aging work force. COT wants to recruit and retain the best and the brightest, invest in the right training for state workers, and reduce reliance on contractors. As COT moves toward a consolidation effort, the facility on Cold Harbor Drive—which is being underutilized—has tremendous capabilities to serve as a consolidated data center; however, the employees there would have to be relocated.


COT has influence over only about one-third of the state's IT budget—or $90 million out of $300 million. Much of the spending is going into infrastructure. A lot of efficiencies can be realized if some of that infrastructure is consolidated. Secretary Rudolph has directed COT to prepare a business case to study the idea of consolidating infrastructure within the executive cabinets. This would not necessarily reduce costs, but there is a strong likelihood that costs can be reallocated from infrastructure to building applications and providing services.


COT is continuing on the path of the previous administration in establishing enterprise standards and architecture. Most of the IT world is struggling with the issue of how to achieve standardization and efficiency from software. There are some standards that COT has not yet fully met, particularly in the area of legacy systems—for example, accessibility for disabled through the applications. Further, applications must be maintained over the life cycle, and without investment in worker training and software maintenance, problems will eventually occur. COT has an innovative approach in its belief that technology should be tied to solutions, as opposed to looking for solutions where a technology can be applied.


COT should be involved in promoting technology in Kentucky's educational systems and encouraging careers in technology. The Office has unique capabilities and a unique perspective because of its development capabilities and infrastructure. The "brain drain" in Kentucky needs to be stopped. Technologists with versatility are needed by both government and industry in order to go forward, and it is difficult to recruit and retain people like that. The Commonwealth needs to promote growth of technologists in its colleges and universities. It is also important for COT to be involved in attracting and retaining high-tech businesses in Kentucky. It is important to have an economy that supports people's ability to move from one career path to another. Many of the services that COT provides are services that require a more broad-based technology in the economy. The KyCARES program is a web-based application that COT built and maintains. It is an online services/information directory and guide to help people connect with providers which offer basic services; however, the people it is designed to help are less likely to have access to broadband. The KyCARES effort ties in closely with the Governor's broadband initiative to extend access to the Internet to all parts of the Commonwealth.


Concluding his presentation, Mr. Inman said he sees huge benefits from taking an enterprise approach to IT, although challenges remain in terms of recruitment, skills development, dependence on contractors, and the need to change some of the IT processes.


At Representative Geveden's request, Mr. Inman briefed the Committee regarding his background, which included 25 years in the military, primarily in a management role. He noted that most of his IT experience has been in federal government. Representative Geveden said he is concerned that placing COT under the Finance and Administration Cabinet diminished the emphasis on technology in Kentucky. He asked Mr. Inman his opinion. Mr. Inman first thanked Representative Geveden for his role in supporting the work of COT [formerly GOT]. He went on to say that other states are about evenly divided as to whether the CIO reports to the Governor or to the Finance Secretary. In the 1990s there was a trend for CIOs to report directly to the Governor. Beginning with the downturn and problems of the "" industry, this trend has backtracked considerably. The technology officers for most organizations today are now reporting to the finance officer again, as they were before. Mr. Inman said he thinks that what Kentucky is doing is very normal in that sense. He said that Ms. Valicenti [former CIO] left behind some great plans and ideas, but, because she did not have a "champion in the Executive Cabinet, she found it difficult to execute those plans and ideas. Secretary Rudolph believes firmly in the COT organization, its mission, and its commissioner. He serves as COT's "champion.". Mr. Inman said that he views not being a member of the Executive Cabinet as a positive, because he has Secretary Rudolph to represent him and provide needed access to the Governor's Office. He believes that under this arrangement COT will more likely be able to follow through with plans and initiatives. He assured Representative Geveden that he does not feel constrained by the current structure. He said that prior to the reorganization, his office had responsibility for the infrastructure for the Governor's Office and GOT; today COT has responsibility for the Governor's Office, COT, and also for all of Finance, including the former Revenue Cabinet. This is a tremendous change in responsibility in terms of infrastructure. COT is also making a lot of changes in the approach to applications and that Secretary Rudolph is very open to innovation.


Representative Geveden asked Mr. Inman whether he sees it the mission of COT to promote IT throughout the state, beyond state government. Mr. Inman said he does and that changing the name of the Office reflects this. He noted that he is not the primary person responsible for technology in the education system but that COT is very much in sync with efforts to promote technology in schools and is hosting a number of conferences around the state each year. He said he intends to be very involved in the education system, as well as in economic development in the state.


Representative Marcotte commended the work of the Office of Technology. He asked whether Mr. Inman had visited any of the "top 10" states and, if so, whether those states have capabilities that Kentucky lacks. Mr. Inman said he attended this year's conference of the National Association of State CIOs and also met with peers at a governing CIO conference. He said COT also has a relationship with Greg Jackson in Ohio, whose office is struggling with many of the same issues as Kentucky. He said that every CIO in the country is grappling with the issue of consolidating infrastructure, which is seen as probably the number one way to control IT costs.


Representative Buckingham asked about the Kentucky Information Highway (KIH) and the use of wireless technology. Mr. Inman said the responses to the RFP for the KIH contract are being evaluated. The contract will probably be awarded after the first of the year, with implementation to begin in July 2005. He said KIH is very important, so that Kentucky can take advantage of the resulting efficiencies that have come out of the market. He said he recused himself from the contract process and cannot answer questions about the type of providers who bid on the contract. He said that wireless is the fastest expanding aspect of telecommunications and that COT works closely with the Office of Homeland Security to promote interoperability for wireless for peacetime applications.


Representative Geveden thanked Mr. Inman for attending and for his good work. He also asked Mr. Inman to provide staff with a copy of the report he presented today.


Review of two Finance & Administration Cabinet administrative regulations was next on the agenda. At its October 12 meeting, the Administrative Regulation Review Subcommittee (ARRS) approved amendments to both regulations, without objection and with agreement of the agency.


The first regulation reviewed was 200 KAR 2:006 (Employees' reimbursement for travel). During brief discussion, Mr. Farris noted that the agency had reconsidered its original proposed amendment to require receipts for all meals and for expenses less than $10. The agency concurred in amendments approved by ARRS to restore the traditional receipt requirements. The Committee unanimously adopted a motion to approve the regulation.


The next regulation reviewed was 200 KAR 5:365 (Alternative project delivery methods for capital construction), a new regulation which sets forth standards and procedures for implementing alternative project delivery methods—that is, methods other than the conventional design-bid-build method. Jim Abbott, Commissioner, Department of Facilities Management, explained the regulation and answered questions from the Committee. He noted that the alternative delivery methods which have been explored for capital construction projects in the past several years are: design-build; construction-management; and construction-management-at-risk. He said the questions that arose most frequently in the public hearing dealt with stipends paid relative to the design-build process, and also the maximum weighted score for price.


There was an extended period of discussion, focusing primarily on the issue of paying stipends to design firms on the "short list" for a design-build project. Responding to questions from Senator Worley and Representative Larry Clark, Mr. Abbott said that the Commonwealth has not been using the stipend mechanism. Stipends are not prohibited by statute but would be permitted under this regulation. He went on to say that some states pay stipends but that none of the eight states represented at the recent Southern Conference of National Facility Administrators pay stipends to participants in design-build projects.


Representative Larry Clark expressed concern about the cost involved and lack of controls relative to payment of stipends. He asked for some examples of how the stipend mechanism would work. Mr. Abbott said he could provide the Committee with copies of federal guidelines. Representative Clark suggested that subcontractors of firms that are awarded stipends might come to expect stipends, too. Mr. Abbott said that is an excellent point. He added that industry representatives—namely, the architectural and engineering communities—asked that stipends be guaranteed but that the Cabinet chose to make them optional.


Representative Barrows said it seems that there should be standards in place for determining the amount of stipends and when to award them. Mr. Abbott said the Cabinet has policy guidelines, but he acknowledged that the regulation allows for flexibility. Representative Barrows asked whether information about payment of stipends would be made public and what percentage is normal for a stipend payment. Mr. Abbott said that if the Cabinet elected to pay stipends on a project, that information would be provided up front to all participants. He said he does not recall the payment percentage but can provide that to the Committee.


Senator Worley asked what percentage of projects are design-build. Mr. Abbott said that presently only four of about 1,000 projects are design-build. Senator Worley expressed concern that by paying stipends the state would be doing something unique for a very small percentage of participants in construction projects. Mr. Abbott said he agrees. He went on to say that his experience with alternative delivery methods has not been positive. He thinks Kentucky is doing a lot of things right, and he would hope the Commonwealth would stay with the typical design-bid-build delivery method. He noted that the litigation rate for capital construction in the Commonwealth is two-tenths of one percent, whereas Ohio, for example, has a litigation rate of approximately 80 percent.


Representative Geveden said he believes the Cabinet is "wading into deep water" and may encounter problems if it elects to pay the stipends. There would be the issue of public perception, for example, if a firm receiving a stipend was also a contributor to a political campaign. Mr. Abbott stressed that stipends are not prohibited. He added that if the Cabinet chooses to use an alternative delivery method, it is very unlikely that stipends will be paid.


The Committee unanimously adopted a motion to approve 200 KAR 5:365. Senator Worley thanked Mr. Abbott for his directness and said he feels comfortable that the ability to pay stipends will be used judiciously. Representative Geveden also thanked Mr. Abbott.


Senator Kerr resumed as Chair. Next on the agenda was an update regarding women and minority business participation in state contracts, to follow-up on the Committee's August meeting in Louisville, Kentucky. John Farris said that the Finance Cabinet is in the process of scheduling training sessions in the area development districts (ADDs), with the goal of increasing vendor participation in state contracts through use of the ADD networks. He went on to say that the Cabinet is planning for a future database to track minority participation in state contracts. In an effort to increase participation, they are also establishing a mentoring network with contracting firms, focusing on education about the contracting process, and considering legislation to amend KRS 45A.190 to increase the threshold for requiring performance bonds from $25,000 to $40,000.


Representative Larry Clark said that the largest base of minority contractors is in Louisville, which does not have an ADD. He suggested reaching out to the urban areas and working with Derwin Webb of the Kentuckiana Minority Business Council (KMBC).


Tierra Kavanaugh-Turner, Executive Director of the Governor's Office for Minority Empowerment (OME), said that her office is collaborating with KMBC, as well as the Lexington Chamber of Commerce and the Urban Leagues in Lexington and Louisville, which have a significant minority and women-owned database. She said her office is also looking at conducting a separate training seminar for this group. At the same time, they are trying to share databases in order to get the message out about what the Finance Cabinet is doing and how registered vendors can participate in the procurement process.


Representative Larry Clark said that he would appreciate it if the Finance Cabinet and OME would also consult with the state building trades—the nonorganized contractors. He said that working with the Chambers is fine but that the construction industry is not well represented in chamber membership. Mr. Farris said this is an excellent idea and that they look forward to collaborating with Representative Clark and others in signing up vendors. Ms. Kavanaugh-Turner also expressed her appreciation for the input.


Mike Burnside, Executive Director of the Finance Cabinet's Office of Material and Procurement Services, said that the Cabinet has been working with Mr. Webb and has sent him links to add to the KMBC web site to allow people to directly access state contract bid opportunities. He said they are also working with Mr. Webb to set up a reciprocal agreement so that applications for vendor certification can be accepted directly through KMBC.


Senator Worley asked whether there are currently any regulations relating to set-asides for women and minority-owned businesses. Ms. Turner said she has not thoroughly examined that possibility. Senator Worley suggested looking at this. He said that if Kentucky truly wants to grow participation, a pool of money set aside strictly for women and minority businesses would definitely improve their participation.


Representative Larry Clark asked whether there is a mechanism in place yet to track the dollar value and percentage of construction contracts awarded to minorities. Mr. Burnside said that the database has limitations. There are minority/small business vendors in the database who do not claim that status; similarly, there are probably vendors in the database who improperly claim minority status. He said he can provide statistics on what is currently in the database. He went on to say that at last count, about one percent of contracts issued over the last year went to minority vendors; however, one percent of the vendors in the database are minority vendors. The goal is to increase participation of minority vendors—and all Kentucky vendors—and get them properly registered in the system in order to improve tracking. Representative Clark suggested that the RFP could be used to solicit information regarding minority participation on construction contracts and thus serve as a tracking tool.


The final guest speaker was Rev. Louis Coleman of the Justice Resource Center. Rev. Coleman said that there is very little utilization of African-American-owned businesses in state contracts. He went on to say that in Louisville the state fairgrounds project is showing preference to white women contractors rather than African-Americans. The games of 40 years ago are still being played today in Kentucky. He maintained that the number of African-American and Latino contractors that are being used by the current administration is less than one percent. He said he would hope that the Committee would ask the Finance Cabinet to provide a list of how many African-American/Latino contracts have been awarded in state government. He further said that the Cabinet has no goals for minority participation and that no progress has been made since the August meeting in Louisville. One percent participation is not acceptable. There are sufficient African-American/Latino contractors in Louisville alone to impact state government, but they are not being utilized. In closing, Rev. Coleman said the Finance Cabinet should be held accountable for minority participation. He asked the Committee to monitor Cabinet activity closely on this issue.


Ms. Kavanaugh-Turner said she agrees with many of Rev. Coleman's sentiments regarding past participation. She said progress has been slow because of limitations of the database but that the issue is being addressed. She said that while it is important to educate minority business owners regarding participation in state contracts, it is of primary importance to get all minority business owners into the system.


Senator Kerr thanked the speakers and assured Rev. Coleman that the Committee wants to work with him on this issue. Business concluded, and the meeting was adjourned at 4:20 p.m.