Interim Joint Committee on State Government


Minutes of the<MeetNo1> 1st Meeting

of the 2009 Interim


<MeetMDY1> July 29, 2009


The<MeetNo2> first meeting of the Interim Joint Committee on State Government was held on<Day> Wednesday,<MeetMDY2> July 29, 2009, at<MeetTime> 1:00 PM, in<Room> Room 154 of the Capitol Annex. Representative Mike Cherry, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Walter Blevins Jr., Ernie Harris, Mike Reynolds, John Schickel, Elizabeth Tori, Johnny Ray Turner, and Ed Worley; Representatives Eddie Ballard, Johnny Bell, Dwight Butler, John "Bam" Carney, Larry Clark, James Comer Jr., Will Coursey, Danny Ford, Jim Glenn, Derrick Graham, Mike Harmon, Charlie Hoffman, Jimmie Lee, Brad Montell, Lonnie Napier, Sannie Overly, Tanya Pullin, Tom Riner, Carl Rollins II, Steven Rudy, Sal Santoro, Kent Stevens, Tommy Thompson, John Tilley, and Jim Wayne.


Guests:  Arch Gleason and Howard Kline, Kentucky Lottery Corporation (KLC); Stephanie Marshall and Tracie Meyer, Personnel Cabinet; Mike Burnside and Jennifer Jones, Kentucky Retirement Systems; Hiren Desai and Paul Gannoe, Finance and Administration Cabinet.


LRC Staff:  Judy Fritz, Kevin Devlin, Brian McCoy, Karen Powell, Bill VanArsdall, and Peggy Sciantarelli.


Representative Cherry recognized new members of the interim committee, Senators Mike Reynolds and John Schickel, and Representatives James Comer and Ron Weston (absent). He also recognized the newest members of staff, Kevin Devlin and Brian McCoy.


First on the agenda was a status report on the Kentucky Lottery, presented by Arch Gleason, President and CEO, and Howard Kline, Chief Financial Officer. The meeting materials included copies of their PowerPoint presentation.


Mr. Gleason gave an overview of Lottery operations. The discussion focused on sales and dividends history, where the money goes, distribution of proceeds, operating results, KLC restructuring in FY 2009, dividend distributions, and future challenges. Following are highlights of his presentation.


Mr. Gleason said that since 1993, annual sales have risen from just under $500 million to more than $800 million for FY 2009, an increase of about 60 percent. He said for that same period annual profits have risen from $100 million to $204 million. Sales performance for the online games has been flat for the past several years and totaled about $292 million in each of the last two years. Of the $778 million sales in FY 2008, about $486 million was for instant tickets. As a result of budget concerns for FY 2009, KLC made the decision to begin awarding free instant tickets for some low tier prizes in lieu of cash. As a result, from an accounting standpoint, of the $810.5 million total sales in FY 2009, actual cash sales were approximately $765 million. KLC initially had concerns about changing the prize structure to give free tickets in lieu of cash; however, the change apparently has not had a negative impact on players.


Mr. Gleason said that total sales since the inception of the Lottery in 1989 through June 2009 amounted to $11.7 billion. Of that, operating expenses were $846.1 million (7.3 percent); $725.6 million, or 6.2 percent, was paid to retailers; $7.03 billion, about 60.2 percent, was paid to winners; and $3.07 billion—26.3 percent—was returned to the Commonwealth from lottery profits. The $3.07 billion proceeds were distributed as follows: $1.663 billion to the General Fund, including $214 million to the SEEK (Support Education Excellence in Kentucky) funding program; $1.333 billion for grants, scholarships, and the KEES (Kentucky Educational Excellence Scholarship) Reserve Fund; $30 million for literacy development; and $20.8 million to the Affordable Housing Trust Fund (FY 1999 through FY 2003).


Mr. Gleason stated that in FY 2010, the first $3 million in proceeds will go toward literacy development. Also, the statutes now specifically designate unclaimed prize moneys for the KEES Reserve Fund. Unclaimed prizes normally range from $8 to $10 million each year but reached $10.9 million last year. Budget actions now provide that after those distributions, 78 percent of the remaining funds will go to scholarship and grant programs—45 percent for KEES, and 55 percent for the College Access Program (CAP) and Kentucky Tuition Grants (KTG). The current budget (HB 406, Part III, Sec. 34) states that the remaining 22 percent “shall remain in the General Fund to be used to support restoration of higher education funds.”


Mr. Gleason reviewed operating results for FY 2004 through projections for FY 2010. He noted that FY 2005 was dubbed the “year of the player” because an unexpectedly high 64.7 percent of sales was paid in prizes. In the following fiscal year prize payout decreased to 59.9 percent. In FY 2009, prize payout amounted to 61.5 percent of sales. Operating expenses since FY 2004 have been fairly constant and decreased from $46.5 million in FY 2008 to $42.1 million in FY 2009. Dividend transfers generally have ranged from 25 to 26 percent of sales and were 26.7 percent last fiscal year. It is expected that dividend transfers will be approximately 28 percent of sales in FY 2010.


Mr. Gleason stated that KLC restructuring was prompted by the FY 2009 budget direction. In addition to reducing instant ticket cash prizes by substituting free tickets for low tier scratch-off ticket prizes, KLC reduced per-drawing liability limits for the Pick-3 and Pick-4 games. He explained that the change in liability limits should, over the long term, stabilize the percent of payout, although in FY 2009 the payout was 63.3 percent. KLC also restructured and slightly reduced retailer incentive compensation in order to keep it at a manageable level. Nevertheless, KLC was pleased to see that retailers achieved a slightly better level of compensation in FY 2009 than the previous year.


Mr. Gleason went on to say that as part of the restructuring, KLC eliminated 28 staff positions and displaced or laid off 25 staff, which reduced operating expenses by $1.6 million. Advertising expenses were reduced to $8.4 million, which was $2 million (18.7 percent) less than the previous fiscal year. KLC was able to achieve a cost savings of $200,000 for instant ticket printing and other contracted services, even though instant ticket production increased 7-8 percent. Capital and other operating expenditures were significantly reduced, with an overall savings of $4.2 million (11.2 percent) from the previous fiscal year. Mr. Gleason said the changes were not easy to absorb. He said he is proud of the way KLC made these significant changes, and he commended the employees for their efforts throughout the process.


Mr. Gleason discussed future challenges of the Lottery. He said KLC is projecting a two percent increase in instant ticket sales—a more modest increase than in previous years. Historically, KLC has been able to compound a six or seven percent annual growth rate in sale of instant tickets, but being able to increase any ticket sales in the current economic environment will be difficult. KLC also hopes to increase online game sales by 2.5 percent, or $7.3 million. Sales in this game category have remained flat or have fallen for several years. Other challenges include the current economic conditions, high unemployment, a maturing product mix, increased competition for gaming sales, and expansion of more active forms of gaming in neighboring states. He said that coming up with games that fit within the parameters deemed acceptable by the General Assembly is another factor that somewhat limits results. Surrounding states have continued to expand into more active forms of gaming. Most recently, the state of Ohio, through executive order, is planning to implement slot machine operations at its racing facilities, although this will likely face a court challenge. Mr. Gleason concluded his presentation and offered to answer questions.


Representative Cherry said there was talk a few years ago that KLC would not be able to continue meeting KEES costs but, apparently, this has not been the case, and students are still receiving the full awards. Mr. Gleason said that is correct, so far as he knows, and that funds have been available to meet the level of KEES funding as originally implemented. He said the matter could be better answered, however, by the Kentucky Higher Education Assistance Authority. Representative Cherry said he is unsure whether General Fund monies have been used to supplement KEES. Mr. Gleason said he did not believe any monies have been taken from the General Fund but that it is his understanding that the KEES Reserve Fund has been used to some extent. Representative Cherry said he views scholarship programs, including KEES, as a priority. He also noted that the KEES portion of lottery proceeds going to scholarship and grant programs is fixed by law and would require legislative action in order to be changed.


Representative Rollins said that the current budget cycle is the first time that 22 percent of the proceeds has been designated to remain in the General Fund for use in supporting restoration of higher education funds—which means less money available for need-based scholarships. He said, too, that the Reserve Fund is used almost every year to meet KEES obligations. Representative Cherry noted, then, that he is correct when he tells people that 100 percent of lottery proceeds are still directed toward education, even though 22 percent of proceeds is deposited in the General Fund.


Representative Pullin asked which programs receive the $3 million designated for literacy development. Mr. Gleason said that KLC does not track how the money is used after it is turned over to the Commonwealth. Representative Pullin also asked whether colleges and universities are including proceeds from the lottery when they refer to state funding. Mr. Gleason said he believes they are only speaking of appropriations in the budget but that he cannot authoritatively answer that question.


At Representative Pullin’s request, Mr. Gleason discussed past attempts to offer the Keno game. He said that KLC attempted to implement Keno in 1990 but were ordered by then Governor Wilkinson to halt the implementation the night before the game was to begin. The first president of KLC was summarily dismissed over that issue. He went on to say it is KLC’s view that Keno could be offered legally under the current lottery statutes. In late 2004, Governor Patton directed KLC’s Board of Directors to authorize Keno. It was expected at that time that Keno could possibly realize $100 to $125 million sales and about $30-$40 million profit annually. The Board authorized the game, but immediately after the Board meeting, Governor Fletcher, House Speaker Richards, and Senate President Williams expressed opposition. Mr. Gleason said he then conferred with the Board Chairman, and it was decided to not go forward with Keno. The Board did not actually rescind the earlier direction to implement Keno but chose to not act upon it, and there has been not been any subsequent action by the Board regarding Keno.


Senator Thayer congratulated Mr. Gleason for his recent contract renewal and commended KLC for doing a good job. He asked what amount KLC is required by statute to pay to the Commonwealth and what amount is currently being paid. Mr. Gleason said the current statutory amount is 28 percent and that KLC is now paying 26.7 percent. When Senator Thayer asked why the 28 percent is not being paid, Mr. Gleason said it was the result of a management decision. He explained that an additional one percent could have been earned potentially at the time the prize payout for instant tickets was changed; however, it was decided not to pull the unexpired cash-prize instant games from the marketplace because it was felt it would be far more damaging to suffer the loss of those sales. Senator Thayer said he understands the difficulties faced by KLC and that a compromise in the budget negotiations allowed the KLC Board to make the changes, but he questioned why the statutory amount has not been complied with over the years. Mr. Gleason explained that the statute [154A.130], which was enacted in the 1980s in a different competitive environment, specifies a goal of 35 percent. Prize payout at that time was commonly about 50 percent. Today across the country lotteries are usually paying 60 to 70 percent on scratch-off tickets. He stated that it is a classic argument. Members of the General Assembly basically accepted the premise put forward by former KLC president James Hosker, former executive director of the Massachusetts lottery—which makes a per capita profit of $55, twice the national average. The Kentucky lottery makes about $50 per capita. Mr. Gleason said it is a matter of balance. KLC now has a clear mandate of 28 percent in the budget bill. He said KLC is making as strong an effort as possible and that he had concluded it would have been a worse outcome to meet the 28 percent and realize less net sales revenue and thus less profit for the Commonwealth. He said KLC believes it can reach 28 percent next year if the economy holds up but that there is also an element of luck involved. He added that, from a budget perspective, the payout expectation has been raised to 61 percent for the next year, based on this year’s experience. Mr. Kline said that they have seen better profitability from the instant games in the last quarter. Senator Thayer thanked them for the report.


Representative Carney said the presentation has been very informative. He asked about operating expenses today relative to past years. Mr. Gleason explained that some expenses—e. g., printing of instant tickets, retailer commissions, and the cost of computerized games—are tied to actual sales production and will increase in dollars as sales increase. The computer system had a much higher cost two years ago, but KLC was able to reduce that cost by getting a substantial rate reduction when the contract was extended. Generally, expenses are lower now than they have ever been in dollar terms. When the computer system is replaced in 2011, costs may be driven up. Representative Carney said he is sorry that some lottery staff lost their jobs but glad that KLC was able to achieve a cost savings. He asked how many are currently employed at KLC and how much of operating expense goes for salaries. Mr. Gleason said there were previously about 200 employees but, roughly, 165 today. Mr. Kline said that last year salaries and benefits totaled $13 million.


Representative Wayne said he is concerned about the 28 persons who lost their jobs. He asked whether it is reasonable to say that maintaining the level of staff could have been considered a business investment that would lead to increased sales. He asked, too, whether the jobs were eliminated because the Governor requested KLC to cut its budget, as he did with state agencies. Mr. Gleason said the decision to cut staff was in response to the budget mandate of the General Assembly that KLC return 28 percent to the Commonwealth and that there was no specific direction from the Governor. He said they looked at the entire operation to see what could be done to reduce expenses. In addition to the staff reductions, they took the risk of reducing prizes to the players and reducing retailer commissions by about $750,000. Advertising expenses were reduced by about $2 million, which could carry some risk by having a negative impact on sales. KLC also closed the Bowling Green office. Mr. Gleason added that he did not believe the workforce reduction negatively affected sales. Representative Wayne said that job loss is a large policy issue for legislators to consider. He questioned whether it is reasonable for KLC to cut jobs—with the resultant loss of tax income from the families involved—when the Economic Development Cabinet is offering tax subsidies and incentives to private corporations to create jobs in depressed areas. Mr. Gleason said they share Representative Wayne’s concern but had tried to make the wisest decisions they could that would have the least negative effect on sales. He said they have worked very hard to ensure the same quality of operation and delivery of service.


Representative Cherry expressed appreciation to Mr. Gleason and Mr. Kline. He also thanked Mr. Gleason for changing his vacation plans in order to speak to the Committee.


Next on the agenda was a briefing on the Kentucky Employees Health Plan wellness program by Stephanie Marshall, State Wellness Director in the Personnel Cabinet. She was accompanied by Tracie Meyer, State Wellness Specialist. They provided copies of their PowerPoint presentation to the Committee. Ms. Marshall gave an overview of the program, summarized as follows.


Ms. Marshall said that health care costs in America amount to $1.7 trillion annually. Only 30 percent of that cost is actual health care expenditure; 70 percent is tied to productivity losses, absenteeism, and presenteeism [when employees come to work in spite of illness]. She said that 133 million Americans have one or more chronic health conditions, which accounts for 75 percent of all spending on health care. Statistics indicate that 80 percent of all heart disease and 40 percent of all cancers are preventable.


Ms. Marshall said that Kentucky’s program, “Journey to Wellness,” is a voluntary program that serves all state agency employees. At present she and Ms. Meyer are the only staff, but there is also a wellness coalition of about 25 active members who represent various state agencies, primarily in Frankfort. There are plans to potentially partner with the Health Department to assist in channeling the program throughout the state. She said the program focuses on building a culture that supports wellness.  It is also a business strategy for the state. On average, for every dollar of medical costs, about $2.30 or more is spent through lost productivity and absenteeism.


Ms. Marshall said “Journey to Wellness” started as a pilot program in the Personnel Cabinet last summer. At Governor Beshear’s request, it was launched agency wide January 1, 2009. The program has four phases: Know Your Numbers; Fitness Challenge; Weight Management Challenge; and Prevention. The program focuses on relationship/support building on multiple levels; promoting awareness and education; engagement and empowerment; and utilization of Humana and Virgin HealthMiles products. The program creatively markets activities such as the Wear Red Day campaign, presentations on heart health; St. Patrick’s Day Parade, summit screenings, fitness challenge, Farmers’ Market event, and cafeteria intervention. She said the fitness challenge just concluded, with score cards being returned from all across the state. The statewide Weight Management Phase of the 2009 program will launch at the end of August with 12 weeks of weight-loss competition, in partnership with the Frankfort Chamber of Commerce and will include Weight Watchers programs. The final phase for 2009 is the Prevention Phase, which will focus on stress management, offering flu shots through the Cabinet for Health and Family Services, cancer awareness, and the Great American Smoke Out. A smoking cessation program will launch in January 2010.


Ms. Marshall discussed progress in meeting the program’s goals. She said that summit screenings have been offered to 8,020 employees (49 percent of goal), and to date 634 participants have been screened (19 percent of goal). The goal to offer a minimum of three awareness building activities has already been satisfied, and the goal to successfully implement at least two cultural changes has been partially met by the cafeteria intervention. Another goal is to have at least 15 percent of the state agency employee population participate in at least one Journey to Wellness/Humana activity. So far there have been about 2,000 participants. Ongoing goals include reducing the number of people in moderate and high risk categories and increasing employee engagement in the wellness program. Ms. Marshall noted that Journey to Wellness is a finalist for a feature in a fall issue of People magazine.


Ms. Marshall spoke at length about Virgin HealthMiles, an incentive based program that is available to over 160,000 health plan members (employees, adult dependants, and retirees), as well as friends and family. Participants receive rewards for multiple activities. She said the goal is to enroll 10,000 people. So far there are 6,318 participants, who have taken more than three billion steps—equivalent to 1,674,597 miles. Over 97 percent have completed the Virgin HealthMiles health assessment, and over 83 percent visit the website more than eight times monthly. In September, Virgin HealthMiles will partner with the STOP Obesity Alliance for the National Employee Wellness Month Challenge—a three-week step challenge among all participating organizations. HealthZone kiosks will also be installed at various locations in the next few months where persons can have their blood pressure and Body Mass Index (BMI) measured, whether a Virgin participant or not. Concluding her presentation, Ms. Marshall said that feedback on Virgin HealthMiles has been very positive, with 97.5 percent indicating they are very satisfied or delighted with the program.


Representative Graham applauded the wellness program and said he hopes many more state employees will participate. He asked how many Virgin HealthMiles participants are from outside Frankfort. Ms. Marshall said they do not have a breakdown by location but that she could provide a breakdown by state agency and school system. Representative Graham inquired also about the cultural change goal and wellness initiatives in other state governments. Ms. Marshall said that one example of cultural change is the “painting of stairwells” project, which is designed to encourage the use of stairs rather than elevators. It has been approved as a pilot project in the State Office Building but is not yet funded. She said that Mississippi and Alabama have strong wellness initiatives underway and that she plans to contact those states to learn about their programs. Representative Graham said he encourages an idea previously offered by Senator Julian Carroll—that workout facilities might eventually be provided for state employees in conjunction with the wellness program.


Representative Clark commended the good job being done in the wellness program. He suggested to Ms. Marshall that it would be helpful in securing funding if she would provide the General Assembly with a cost analysis and potential cost savings for the various program initiatives. He said, too, it might be a good idea to contact LG&E in Louisville and other large employers in Kentucky that offer wellness programs for their employees. He further suggested that the wellness program focus more aggressively on preventive measures. Ms. Marshall thanked Representative Clark and said that they would work on this.


The final item on the agenda was review of administrative regulations referred to the Committee on July 1, 2009. Reviewed first was Kentucky Retirement Systems administrative regulation 105 KAR 1:130, relating to hazardous duty coverage. The Administrative Regulation Review Subcommittee approved 105 KAR 1:130 at its June 2008 meeting. Mike Burnside, Executive Director, explained the administrative regulation. Jennifer Jones, Assistant General Counsel, accompanied him.


Mr. Burnside said that 105 KAR 1:130 implements provisions in House Bill 1, enacted in the June 2008 special session on pension reform. He stated that House Bill 1 limited the definition of hazardous duty coverage for anyone hired in the County Employees Retirement System after September 1, 2008. The administrative regulation requires that any employer who wishes to provide hazardous duty coverage for an employee hired after that date in a position that meets the statutory definition of hazardous may do so only after petitioning the Board of Trustees of Kentucky Retirement Systems and obtaining board approval for hazardous coverage for that position. He explained that after enactment of House Bill 1, there was some controversy about whether it would be necessary to recertify a position as hazardous if it was already designated as hazardous prior to September 1. An Attorney General opinion stated that 105 KAR 1:130 complies with statutory intent. It also opined that there may be statutes outside KRS Chapter 61 that require employers to provide hazardous coverage for certain positions, and that clarification is found in Section 8 of the administrative regulation. Mr. Burnside noted that once a position is recertified as hazardous after September 1, from that point forward, anyone hired in that position will be eligible for hazardous coverage. There were no questions, and Representative Cherry thanked Mr. Burnside and Ms. Jones. He also advised the Committee that the August meeting will include an in-depth report on Kentucky Retirement Systems, including the Systems’ unfunded liability, investment return, and other issues.


Reviewed next was the Finance and Administration Cabinet’s administrative regulation 200 KAR 6:070, relating to high performance building standards. The Administrative Regulation Review Subcommittee approved 200 KAR 6:070 at its June 2009 meeting. Present today from the agency were Hiren Desai, Deputy General Counsel, and Paul Gannoe, Director of the Division of Engineering and Contract Administration. Mr. Desai said the administrative regulation is a direct result of House Bill 2, enacted in the 2008 regular session, which required the Cabinet to promulgate an administrative regulation to establish high performance building standards. He went on to explain that the statute specifically requires the administrative regulation to apply to state agencies and state universities that manage their own capital construction projects. House Bill 2 required the Cabinet to promulgate administrative regulations and develop standards and criteria. It also established an advisory committee composed of several members from state government, local government, and industry to make recommendations to the Finance and Administration Cabinet.


Representative Cherry questioned why the definitions section of 200 KAR 6:070 defines some of the terms only through statutory reference. Mr. Desai explained that the terms are defined in that manner in order to comply with drafting rules. There were no questions from the Committee, and Representative Cherry thanked Mr. Desai and Mr. Gannoe.


Business concluded, and the meeting was adjourned at 2:45 p.m.