Interim Joint Committee on Appropriations and Revenue


Minutes of the<MeetNo1> 2nd Meeting

of the 2011 Interim


<MeetMDY1> July 28, 2011


Call to Order and Roll Call

The<MeetNo2> 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on<Day> Thursday,<MeetMDY2> July 28, 2011, at<MeetTime> 1:00 PM, in<Room> Room 154 of the Capitol Annex. Senator Bob Leeper, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Bob Leeper, Co-Chair; Representative Rick Rand, Co-Chair; Senators Walter Blevins Jr., Joe Bowen, Tom Buford, Jared Carpenter, Denise Harper Angel, Ernie Harris, Jimmy Higdon, Paul Hornback, Ray S. Jones II, Alice Forgy Kerr, Vernie McGaha, Gerald A. Neal, R.J. Palmer II, Joey Pendleton, Brandon Smith, Jack Westwood, and Mike Wilson; Representatives Royce W. Adams, John A. Arnold Jr., Dwight D. Butler, John "Bam" Carney, James R. Comer Jr., Jesse Crenshaw, Ron Crimm, Mike Denham, Kelly Flood, Danny Ford, Derrick Graham, Keith Hall, Jimmie Lee, Reginald Meeks, Lonnie Napier, Fred Nesler, Sannie Overly, Marie Rader, Sal Santoro, Arnold Simpson, Tommy Turner, Jim Wayne, Alecia Webb-Edgington, Susan Westrom, and Brent Yonts.


Guests: Ms. Mary Lassiter, Secretary of the Governor’s Executive Cabinet and State Budget Director; Mr. John Hicks, Deputy State Budget Director; Mr. Kevin Cardwell, Deputy State Budget Director; Mr. Greg Harkenrider, Deputy Executive Director, Governor’s Office of Economic Analysis; Ms. Janie Miller, Secretary of the Cabinet for Health and Family Services; Mr. Neville Wise, Acting Commissioner for the Department of Medicaid Services; and Mr. Don Speer, Executive Director of the Office of Procurement Services, Finance and Administration Cabinet.


LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Eric Kennedy, Jennifer Hays, Margot Royar, and Sheri Mahan.


Representative Lee moved for the approval of the minutes as written. The motion was seconded by Senator Bowen. The motion carried by voice vote.


            Fiscal Year 2011 Year-End Financial Report

            Secretary Mary Lassiter provided the committee with an overview of the Fiscal Year 2011 (FY 11) year-end totals for the General Fund and Road Fund. She updated the committee regarding incoming Tobacco Settlement funds and American Recovery and Reinvestment Act (ARRA) expenditures for FY 11. General Fund revenues increased by 6.5 percent for the year. There was growth in all of the major taxes, with 3.7 percent in sales tax, 8.3 percent in individual income tax, 26 percent in corporate income tax, and 47.8 percent in the limited liability entity tax.


            Secretary Lassiter discussed historic revenue growth rates, stating that the FY 11 General Fund revenues and growth have surpassed pre-recession FY 08 levels. The receipts exceeded the official FY 11 estimate by $166.1 million. After deduction for dedicated severance tax appropriations and adding in unbudgeted lapses, the total General Fund surplus is $156.8 million. In accordance with the HB 1 surplus expenditure plan, $35 million will be allotted to FY 12 necessary government expenses, and $121.8 million to the Budget Reserve Trust Fund.


            Secretary Lassiter then discussed FY 11 necessary government expenses (NGE). The total NGE for FY 11 was $29.8 million, and that the FY 10 General Fund Surplus to cover the FY 11 NGE was $29.7 million. She provided some recent historical NGE amounts and gave a historical overview of the Budget Reserve Trust Fund, and stated that the $121.8 million deposit into the fund is the largest since its inception. The fund has been used to buffer the impact of revenue shortfalls.


The secretary discussed executive branch FY 11 budget balancing measures. The FY 11 budget required a total of $193 million in reduced spending, which was divided between $62 million in enacted appropriation reductions and a $131 million budgeted gap. The measures mainly consisted of debt restructuring, operation cost reductions, state employee furloughs, non-merit personnel reductions, and asset sales and rebates. Additional measures included reduced contract spending, improved fleet management, reduced state leases, and reduced phone and information technology costs. She provided additional information on contract reductions, stating that $22 million of the reductions were accomplished with contract renegotiations. She outlined the reduction of 105 non-merit employee positions, and provided more detail of additional efficiency measures including the sale of assets and energy management in state-owned buildings.


            Secretary Lassiter briefly discussed FY 12 budget balancing plans, stating that most agencies have a 6 percent reduction from FY 10 appropriations levels and a budgeted gap for FY 12 of $189.9 million. The revenue outlook for FY 12 is improving, and FY 12 furlough plans have been halted.


            Secretary Lassiter provided the committee with an update of the FY 11 Road Fund revenues. The Road Fund increased by 11 percent in FY 11, primarily through increases in the motor fuels tax and motor vehicle usages tax receipts. Revenues exceeded the projected estimate by $73 million. The Road Fund finished FY 11 with a surplus of $67.5 million, with all surplus funds deposited into the State Construction Account.


            Secretary Lassiter discussed Tobacco Settlement Fund receipts for FY 11. The receipts were 10.3 percent less than budgeted so proportionate reductions were made in the Rural Development Fund, and areas of early childhood development and health care improvements.


            Secretary Lassiter provided an update regarding the American Recovery and Reinvestment Act (ARRA) expenditures for FY 11. Kentucky was awarded $3.5 billion, which includes funds that are distributed through state government. The total is comprised of 2,645 individual grants, 47 loans, and 916 federal contracts. Approximately $3 billion of the total was channeled through state government by formula, match, or competitive award. To date, 92 percent of the funds have been expended. She gave a brief accounting of the areas where ARRA funds have been distributed.


In response to a question from Chairman Leeper, Secretary Lassiter discussed the meaning of debt restructuring, stating that the goal is to try to achieve debt service savings with no extension in the term or change in principle amount, by restructuring the debt. Payments would be eliminated or significantly reduced during the current period to achieve budgetary relief. The principle is then spread over the remaining term of the debt. Restructuring does not add additional years to the term of the debt. Also, Secretary Lassiter stated that of the budget balancing measures taken, the reduction of non-merit employees and operational cost reduction will be recurring savings.


In response to a question from Senator Higdon, Secretary Lassiter stated that the state has received $72 million from the federal Early Retiree Reinsurance Program and the funds may only be spent to offset cost increases in state employee health insurance plans.


In response to a question from Senator Westwood, Mr. Hicks stated that the full appropriation for SEEK was expended. The difficulty was that at the end of the FY 11 school year once student attendance was compiled there were some school districts which had not received all the funds the SEEK formula would generate for that district. The same situation will occur for the FY 12 school year.


In response to a question from Senator Kerr, Secretary Lassiter stated that around $900 million has been borrowed from the Unemployment Insurance Fund. She stated that the interest payment is around $28 million and is due at the end of September 2011.


In response to a question from Senator Buford, Secretary Lassiter stated that all state contracts, including master agreements, are subject to open records laws.


In response to a question from Representative Rand, Secretary Lassiter replied that there was a 3.7 percent revenue increase in the sales tax, which represents healthy growth for FY 11. The total revenues did not meet anticipated levels, but there was positive upward growth in the tax. Secretary Lassiter stated that if the federal government does not increase the debt limit and shuts down, agencies which receive federal money would be evaluated on a case-by-case basis and state assistance would be given within these programs as available.


Medicaid Managed Care Contracts

Ms. Janie Miller, Secretary of the Cabinet for Health and Family services provided the committee with an update regarding the recently awarded Medicaid managed care contracts. Secretary Miller gave an overview of the history of the Medicaid managed care contracts, and discussed the budgeted shortfall and assumed program management savings for FY 12, which total $177 million. She discussed the cost containment measures implemented July 1 of FY 11, and stated that these would continue into FY 12 to cover the $97.3 million budgeted shortfall. Cost savings anticipated through the managed care contracts for FY 11 is $83.2 million. Additional cost savings of $10.5 million will be realized from Passport contract savings, and $2.4 million from long-term care cost containments. The total funds saved in FY 12 are $97.5, leaving a remainder of $200,000. This will allow the FY 12 Medicaid budget to balance.


Secretary Miller discussed the managed care organizations (MCO) who were awarded contracts. These were Coventry Cares of Kentucky, Kentucky Spirit Health Plan, and WellCare of Kentucky, servicing all regions of the state. The organizations will provide selected Medicaid covered benefits for selected recipients for a fixed per member per month price. The contracts are for a three year term, effective from July 6, 2011 through June 30, 2014. Services will begin starting October 1, 2011, reaching approximately 560,000 recipients throughout the state. The services exclude recipients in long term care waivers and nursing homes. The contracts will reduce expenditures and create an infrastructure to improve healthcare outcomes and quality of care.


Secretary Miller discussed the patient protection provisions included in the MCO contracts. The provisions include a grievance and appeals process, direct state fair hearings, robust reporting requirements, quality assessment and performance improvement programs, and an external quality review organization. Other contract provisions include a termination by the Commonwealth for convenience clause; provisions for termination of the contract for non-performance or non-reporting, financial disclosures regarding key management, caps administrative costs at 10 percent, and that MCOs must comply with open records and open meeting laws.


Secretary Miller provided estimates of MCO savings for the term of the contract. The estimated savings for FY 12 is $289.3 million, FY 13 is $464.1 million, and FY 14 is $552.5 million. The total estimated savings for the term of the MCO contract is $1.3 billion. She gave historical data regarding per member per month costs for FY 03 through FY 10. She provided projected costs for FY 11 through FY 14, and contrasted this projected cost with the lower contracted MCO rates for the same period. She also provided historical and projected data regarding numbers of MCO eligible population in the seven regions, and discussed projected growth rates within the regions.


Finally, Secretary Miller discussed the oversight of the MCOs which will be provided by the cabinet. An administrative unit has been established, staffed with individuals with health plan experience and technical skills. The unit will provide statutory accounting and financial analysis, contract monitoring, auditing and accounting, data analysis, and assess quality of care.


In response to a question from Senator Buford, Mr. Speer stated that the contracts are master agreements, which allows for a longer contract term than a standard government contract. The term “master agreement” is a term given to contracts that are longer than the normal two year governmental contract. These agreements can be for commodities or services provided to the Commonwealth.


In response to a question from Chairman Leeper, Secretary Miller stated that 7 companies responded to the RFP, with one being domiciled in Kentucky. There has been one protest to the contract awards, which was denied. The statutory deadline is within two weeks from the date the reasons for the denial were known to the company.


In response to a question from Senator McGaha, Mr. Speer replied that Passport has a one year contract. Secretary Miller discussed the reason for the contract only having a one year term and the negotiations carried out for the region three contract.


In response to questions from Senator Bowen and Senator Higdon, Secretary Miller stated that the additional cabinet staff is necessary to achieve quality Medicaid care and maximize cost savings. She stated that some cabinet reorganization will likely occur during implementation. Mr. Speer stated that the additional staff will oversee all MCOs and the Passport program. Secretary Miller stated that the cabinet, and not the MCOs, will determine eligibility.


In response to a question from Senator Buford, Secretary Miller replied that the MCOs must maintain the contracted rates for services for the three year term of the contract.


In response to a question from Senator Harris, Secretary Miller stated that eligibles will have two different chances to change MCO after initial enrollment. Mr. Speer discussed the Medicaid claims processing system currently used by the cabinet.


In response to a question from Chairman Leeper, Secretary Miller replied that the MCO contracts do not allow the same termination for convenience that was allowed the cabinet in the contracts. The MCOs cannot withdraw service and leave the state if they desire until the term is fulfilled. The only way the contract can be ended is if the MCO defaults or if the cabinet terminates the contract for non-performance.


In response to questions from Senator Buford, Secretary Miller and Mr. Wise discussed the clawback process and monies received by the cabinet due to clawback repayments. Providers who the cabinet is pursuing for clawback can provide the Department for Medicaid Services with documentation supporting their position, and if the outcome is not satisfactory, the provider may take the decision before an administrative appeals hearing.


Being no further business, the meeting was adjourned at 5:17 p.m.