Program Review and Investigations Committee




<MeetMDY1> May 12, 2005


The<MeetNo2> May 12, 2005 meeting of the Program Review and Investigations Committee was held at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Ernie Harris, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Ernie Harris, Co-Chair; Representative Tommy Thompson, Co-Chair; Senators, Brett Guthrie, Vernie McGaha, R. J. Palmer II, Joey Pendleton, Dan Seum, and Katie Stine; Representatives Adrian K. Arnold, Dwight D. Butler, Charlie Hoffman, and Susan Westrom.


Guests:  Mike Burnside, Executive Director of Materials and Procurements, Finance and Administration Cabinet.


LRC Staff:  Greg Hager, Committee Staff Administrator; Kara Daniel; Rick Graycarek; Jim Guinn; Tom Hewlett; Margaret Hurst; Van Knowles; Erin McNees; Cindy Upton; Susan Spoonamore, Committee Assistant; and Jonathan Roenker, LRC Staff Economist.


Minutes of December 9, 2004 were approved, without objection, by voice vote upon motion made by Sen. Pendleton and seconded by Rep. Hoffman.


Minutes of March 21, 2005 were approved, without objection, by voice vote upon motion made by Rep. Arnold and seconded by Rep. Thompson.


Sen. Harris welcomed Rep. Tommy Thompson, Sen. R.J. Palmer and Rep. Susan Westrom as the newest members of the committee.


Sen. Harris introduced new staff member Jim Guinn.


Greg Hager, Committee Staff Administrator for Program Review, and Jonathan Roenker, LRC Staff Economist, presented the report Offshore Outsourcing of Kentucky State Government Services: Direct Contracting Is Limited but the Amount of Subcontracting Is Unknown

Dr. Hager stated that on November 9, 2004, the Committee had asked staff to study the issue of offshore outsourcing. He said that the objectives for the report were to determine the level of offshore outsourcing through Kentucky state government contracts and to examine the relevant legislation of other states.

Dr. Hager explained that offshore outsourcing is the practice of contracting for services with an individual or firm that is located in a country other than the one in which the contracting organization is located. He said that some government outsourcing was done directly through contracts with offshore vendors. Offshore outsourcing of state government work could also occur when a domestic contractor subcontracted with a foreign firm. He said that an increasing number of service-sector tasks had been outsourced overseas, especially jobs that involve receiving product or service support over the phone. 

He said that recent work by economists indicated that for the economy as a whole, offshore outsourcing may change the composition of the jobs in the economy and not necessarily affect total employment negatively. He stated that some workers do lose their jobs to offshore outsourcing. The costs they bear might include long-term unemployment, retraining, and lower wages when they become employed again. He noted that in 2002 the total value of insourcing (goods and services provided to foreign entities by U.S. firms) was greater than the value of business services that were outsourced. He said that the available evidence indicated that direct outsourcing by state governments as a share of all contracting was very small.

Dr. Hager said that staff identified 40 offshore contracts between Kentucky state government and foreign firms since 1999 with a total cost of $5.67 million. He stated that more than half the contracts were with Canadian firms, usually for computer software, training, and support. Most of the total cost of overseas contracts was for economic development contracts in Japan and Belgium, which accounted for more than half and approximately a fourth, respectively, of total offshore contract costs.

Because information on the location of subcontractors is not routinely included in the database of Kentucky contracts, foreign subcontracts cannot be identified. Therefore, the number and financial value of offshore subcontracts are unknown. The inability to determine whether contracted work is being outsourced overseas is typical of other states.

Dr. Hager stated that for calendar year 2004, staff identified 138 pieces of legislation, introduced in 39 states, related to offshore outsourcing and contracting. Eight states enacted laws related to offshore outsourcing and contracting in 2004. Six of the laws provided for preferences of some sort for in-state or U.S. firms in the contracting process. He said that a New Jersey law from 2005 is the most restrictive state policy on offshore outsourcing of state contracts.

In conclusion, he stated that that it was possible that state legislation that banned or limited offshore outsourcing of state government contracts could be challenged as an barrier to trade under the terms of any international treaties to which the state is a party. 


Sen. McGaha asked if staff was able to determine the quality of jobs being insourced. 


Dr. Hager stated that staff was not able to do so. 


Mr. Roenker added that there was not a definitive answer due to lack of available research.


Sen. McGaha asked if the data contained in the contracts could raise a breach of privacy or security issue.


Dr. Hager stated that the information being released for direct routine contracts did not appear to create breach of privacy or security issues, but staff was unable to determine the level and nature of subcontracting with foreign firms.


Sen. Stine asked if 82 percent of Kentucky’s outsourced contracts were related to economic development.


Dr. Hager stated that since 1999, 82 percent of the total costs identified were for economic development contracts in Belgium and Japan.


Sen. Stine asked if staff had been  able to  obtain information from the Economic Development Cabinet that would show what the contracts had generated in terms of businesses being created. She also asked if the contracts for speakers and training were related to the World Horse Show competition that the Commonwealth was trying to get to come to the Horse Park. 


Dr. Hager stated that he did not know if the contracts were related to the competition but that he would provide that information.


Sen. Stine commented that at one point the presentation seemed to assume that new jobs for retrained workers would not be as good as previous employment. She noted that higher technology jobs pay better. She mentioned a center at Northern Kentucky University that helps people engage in lifetime learning. She said that the state should encourage the work force to be better trained. 


Sen. Stine asked if consideration was given to the likelihood of companies not wanting to come to a state that had restrictive provisions on contracting.


Dr. Hager stated staff did not see any mention of states’ policies on outsourcing affecting their economic development efforts. He added that because any such legislation was recently implemented, it would be too soon to find any information.


Sen. Stine asked if staff was able to determine if employment of illegal aliens in Kentucky was preventing legal residents from getting jobs.


Dr. Hager stated that staff did not look into that issue.


Rep. Butler asked staff to explain the Clawback Provisions and Business Incentive Accountability memorandum as to how Kentucky deals with the provisions and incentives.


Mr. Roenker stated that when contracts are granted to businesses, specific goals have to be met before any money can be released. If the goals are not met, then the tax incentives or loans are not made to that business. 


Rep. Butler asked if there was any type of agreement regarding the length of time that a business was required to remain in Kentucky in order to qualify for the incentives.


Mr. Roenker stated that some of the incentive programs did have some sort of timeline. He also said that in Kentucky and surrounding states, decisions regarding recoupment of incentives or loans were made on a case by case basis. 


Rep. Butler asked if there was any restriction on the length of time that a company had to remain in Kentucky before it would be required to pay back any incentive money. 


Mr. Roenker stated that most of the requirements revolved around the creation of new jobs or expansion of an existing business.


Rep. Butler stated that he was concerned about businesses coming into Kentucky, receiving incentives and then leaving whenever they wanted without repaying the incentives.


Rep. Hoffman asked what prompted New Jersey to develop the most stringent restrictive legislation regarding offshore outsourcing.


Dr. Hager speculated  that a factor was a controversy involving a state contractor that had subcontracted some call center jobs overseas. The contractor moved the jobs back to New Jersey in return for an increased payment on the contract.


Rep. Hoffman asked if other states had enacted legislation similar to Indiana’s that provided for a 1 to 5 percent price preference for in-state firms, and required that firms provide the state with documentation substantiating their in-state status before  preference is granted. 


Dr. Hager said that other states had enacted preferences in 2004, but it was too soon to tell if those preferences were having any significant effects.


Rep. Hoffman asked if staff had an opinion as to whether or not Kentucky was a victim of outsourcing or a benefactor of outsourcing.


Dr. Hager stated that staff did not have enough information to answer that. 


Sen. Harris stated that a recent television show gave an example of a California company that had outsourced several high tech jobs  to a foreign country, which enabled the company to expand its production in the United States.


Sen. Harris asked if the fact that other nations’ economics were catching up to that of the U.S. would affect the level of outsourcing and insourcing.


Mr. Roenker stated that other countries were seeing an increase in the levels of education, which could make their populations more capable of doing the kind of work that is outsourced.


Sen. Harris asked if there was any information to show how Kentucky benefited from the contracts with Belgium and Japan. He also asked if there was any data that would show the value of outsourced contracts as a percentage of all state contracting.


Dr. Hager stated that staff would provide the committee with that information, but he thought the percentage would be very small. He stated that the state has hundreds of millions of dollars of contracts each year, and the $5.67 million figure covered the period beginning in 1999.


Sen. Harris stated that was the point he was trying to make. If it is a very small percentage,  then outsourcing may not be that big of an issue. 


Sen. Stine asked staff to find out the types of businesses and income that have been derived from contracts regarding economic development.


Sen. Harris stated that he and Co-chairman Thompson would like staff to prepare snapshot responses to the members’ questions for follow-up. 


Mike Burnside, Executive Director for Material and Procurement Services, Finance and Administration Cabinet, stated that he and his staff agreed with the conclusions of the report. He explained that tracking subcontractors is very difficult because it not only involves subcontractors, but sub-subcontractors and even third party subcontractors. He said that his opinion was that at this time individual states do not have the ability to track subcontractors in sufficient detail to determine the economic impact.

Mr. Burnside briefly addressed New Jersey’s legislation. He said that when New Jersey was trying to keep their food stamp calls in the United States, approximately 80 percent of those calls were being handled by an interactive voice response with no human interaction. He explained that fewer than 5 percent of the calls being handled by a person were routed overseas. He said that in order to have that 5 percent remain in the United States, New Jersey was paying a surcharge per call, costing them a significant amount of money.

Mr. Burnside stated that he had talked to his counterparts in other states and there is a question as to whether in-state preferences violate agreements or protections for interstate commerce. He stated that when trying to award contracts with in-state preference it can be hard to determine in-state status. He said that a question arises about whether or not an international corporation with an office in Kentucky is considered a Kentucky company or is it an international company that would not qualify for an in-state preference even though it has employees here. He said the same question would apply for a firm located in this state but with its main headquarters in another state. Mr. Burnside stated that setting up the targets appropriately through preference laws is difficult. 


Sen. Stine asked for an explanation for one part of the presentation that seemed to indicate that outsourcing was positive for the economy and another part that indicated that outsourcing was negative for workers.


Dr. Hager stated that available research indicates outsourcing may increase productivity and may only change the composition of jobs, perhaps for the better. He said that outsourcing may not reduce total employment; it may increase employment. However, some people would bear an immediate impact. 


Sen. Stine asked if it could be assumed that higher paying jobs could be available if the work force had the proper training. She stated that instead of assuming a bleak outlook, we should be optimistic in the analysis.


Rep. Thompson asked if the Finance and Administration Cabinet had seen an increase in foreign companies trying to procure contracts.


Mr. Burnside stated that since 1999, when the Cabinet began posting bidding opportunities on the Internet, there had been an increase in the number of vendors from other countries bidding on contracts. He stated that even with the increase of foreign interest, there have been few contracts awarded to overseas companies. 


Rep. Arnold stated that all the blame could not be placed on state governments for the loss of jobs. He pointed out that Ford and General Motors are having problems because individuals are buying products from elsewhere. 


Sen. Harris asked for a motion to adopt the report.


Upon motion made by Rep. Arnold and seconded by Sen. McGaha, the report Offshore Outsourcing of Kentucky State Government Services: Direct Contracting Is Limited but the Amount of Subcontracting Is Unknown was adopted, without objection, upon roll call vote.


Rep. Butler stated that he would like more information regarding time limits for companies to remain in Kentucky after receiving incentives from state and local governments, and how money is recouped from companies that move out after receiving the incentives.


Sen. Harris asked Dr. Hager and Mr. Roenker to work with Rep. Butler on those issues. 


Sen. Harris asked Dr. Hager to go over the study proposal regarding Planning for Water and Sewer Projects.


Dr. Hager explained that the study proposal was based on examining the implementation of SB 409 and the usefulness of Kentucky’s Six-year Highway Plan as a potential model for a long-term plan for water and sewer facilities.

He stated that the proposed study has 3 major objectives:

1.  Describe SB 409 and the current process for water and sewer planning in Kentucky.

2.  Determine how SB 409 is being implemented.

3.  Describe Kentucky’s six-year highway planning model and describe any advantages and disadvantages of using the highway plan as a model for water and sewer projects.


Sen. Pendleton asked that staff look at ways other than using Kentucky’s current highway plan as a model for water and sewer planning.


 Rep. Westrom asked if any consideration had been given regarding the conditions of the locks and dams, and what impact that would have on the water systems throughout the state.


Dr. Hager stated that the study proposal did not cover that subject.


Sen. Harris stated that he thought that would be a separate subject from the proposed study topic.


Sen. Harris asked members to voice any changes or additions to the study proposal. There being no changes or additions, Sen. Harris asked staff to proceed with the study as outlined in the proposal.


Sen. Harris stated that he and Co-chair Thompson would meet before the next Program Review meeting to discuss future study topics. He asked that any changes or additions to the current list of study topics be sent to Dr. Hager before the next meeting.


Rep. Arnold requested that Study Topic 24-- Adult Education and Family Literacy Agencies: Duplication of Services be taken off the list since the Education Committee would be doing a study on that issue.


Sen. Harris stated that the June Program Review meeting would likely be held in Northern Kentucky on June 9th. He and Co-chair Thompson will be working with staff to determine a location, date, and time.


Meeting adjourned at 11:45.