Program Review and Investigations Committee




<MeetMDY1> July 8, 2010


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> July 8, 2010, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Kelly Flood, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Kelly Flood, Co-Chair; Senators Jimmy Higdon, Vernie McGaha, R.J. Palmer II, Joey Pendleton, Brandon Smith, and Katie Kratz Stine; Representatives Dwight D. Butler, Leslie Combs, Terry Mills, David Osborne, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.


Legislative Guest:  Representative Derrick Graham.


Guests: Bill Scott, Executive Director; Teresa Combs, Director of Legal Training Services; Kentucky School Boards Association (KSBA). Debra Keelan, Parent; Caren Gardner, Parent; Kentucky Families with Food Allergies. Bob Babbage; Leslie Scott, Assistant Professor, University of Kentucky College of Nursing; American Diabetes Association.  Sharon Mercer, Practice Consultant, Kentucky Board of Nursing.  Mike Burnside, Executive Director; Brent Aldridge, Director of Alternative Investments and Interim Chief Investment Officer; Kentucky Retirement Systems.  Jim Voytko, President and Senior Consultant; Tony Johnson, Senior Consultant; RVKuhns & Associates, Inc.  Don Dampier, Retired Kentucky State worker.


LRC Staff:  Greg Hager, Committee Staff Administrator; Rick Graycarek; Christopher Hall; Colleen Kennedy; Van Knowles; Lora Littleton; Jean Ann Myatt; Sarah Spaulding; Katherine Thomas; Cindy Upton; Stella Mountain, Committee Assistant.


Staff Report:  School Health Services for Students With Chronic Health Conditions in Kentucky

Van Knowles summarized the updates to the report. He said that questions were raised at the June 10 meeting about some aspects of the report. The committee requested feedback from interested parties.


There are several policy issues and statutory clarifications regarding legal requirements for school health services that the General Assembly might wish to address. There is misunderstanding about the schools’ responsibilities and deficiency in how they are carried out. Recommendation 3.3 asks the Kentucky Department of Education (KDE) to monitor how schools carry out their responsibilities.  The recommendation is also key because it calls on the regulatory agencies and other stakeholders to provide clear guidance and to advise the General Assembly if statutory changes are necessary.


Funding is complex and most districts do not have a way to separate school health from other services. Much of the funding is outside the scope of the report because it includes services beyond chronic health conditions.


Additional information from Medicaid indicates that health department nurses would not be able to bill for services if school districts contracted for the nurses to work under district supervision. Therefore, the arrangement is not a practical solution to the problem of sharing information. The description of the problems with sharing health and educational records was updated accordingly.


Staff reviewed model policies and procedures from the Kentucky School Boards Association. Some aspects of the models are commendable and others need improvement.  Regardless of the written policies and procedures, Chapter 3 demonstrates the need to better implement school district responsibilities. The association could be especially helpful by joining with regulatory agencies and other parties in carrying out Recommendation 3.3.


The Department of Insurance and other sources identified barriers to a state mandate for coverage of school health services in addition to the discussion in the previous draft report.  Chapter 4 was modified to describe the federal laws, such as ERISA [Employee Retirement Income Security Act], that limit the state’s options. Considering the barriers and potential costs, the General Assembly might consider whether it remains worthwhile to act. The formal recommendation was removed.


Information about grants from Passport Health Plan was added to the report. Staff calculated that an amount roughly comparable to the health department reimbursements in the rest of Kentucky would be $10.8 million annually for the Passport region.


An explanation was added to address the question of possible surpluses in health department school health programs. Health departments receive an enhanced reimbursement rate in order to support other public health programs. This permits the state to apply $2.33 in federal funds for every $1 in state funds based on the 70 percent federal match prior to the American Recovery and Reinvestment Act (ARRA).


Information was added about a funding approach used in South Carolina, which permits school districts to contract with the state health department. Using the health department’s Title V status, school districts bill Medicaid. Federal Medicaid authorities have questioned this arrangement because the schools actually receive no Title V funds. Depending on the outcome of the federal review, this might be a model for Kentucky to consider.


Mr. Knowles concluded by saying that there was a recent change in Medicaid reimbursement that did not make it into the revised draft. On July 1, Kentucky Medicaid ceased paying the state share of health department claims. The health departments will have to cover that portion, which currently is 20 percent and may revert to 30 percent unless Congress extends the enhanced federal match. It is not clear what effect this will have on health departments’ school nursing services.


In response to questions from Senator Stine, Mr. Knowles said that the issue of who takes calls in the evening was not covered in the report. The school is only responsible for services during the school day or during school activities. School nurses should communicate with the primary provider when something happens at school. This was not discussed specifically in the report but is covered by Recommendation 3.3. The report addressed the medical home issue but that the issue has not been resolved.


Senator Higdon said that in most instances Passport works well but that Kentucky should not have a model that excludes the 16 counties in the Passport region. He would like to see that problem addressed.  In response, Mr. Knowles said that the report has a recommendation that the parties get together to resolve this issue.


Senator McGaha said that prior to ARRA the Medicaid matching rate was $2.33 per $1. In response to a question from Senator McGaha, Mr. Knowles said that under ARRA the federal government pays 80 percent and the state pays 20 percent. There is no mention of the Medicaid matching rate in the healthcare reform, so the rate would go back to $2.33 per $1.


Bill Scott, Executive Director of the Kentucky School Boards Association (KSBA) gave an overview of the association and introduced Teresa Combs, Director of Legal Training Services.


Ms. Combs said KSBA assists school districts in seeking reimbursement for covered health services listed in Individual Education Plans (IEP) for children who are eligible under both IDEA [Individuals with Disabilities Education Act] and Medicaid. KSBA has 136 districts enrolled that recovered $3.8 million last fiscal year.  She gave an overview of the types of services that the districts are allowed to bill Medicaid for reimbursement.


KSBA provides guidance on policy and procedures to school districts with the primary purpose of keeping them in compliance with federal and state law.  Many policies and procedures are in place for the 173 school districts participating in the policy service.  KSBA’s policy and procedure service provides updates for school districts as new laws and regulations are created and school personnel are trained accordingly.  The model policy has been updated to cover KDE’s new regulation on administration of medication.


According to federal law, school districts need to provide health services in schools for which a physician is not needed. KRS 156.502 allows health services to be delegated by licensed personnel who have trained unlicensed personnel to perform these health services in the school setting.


Special Education and Section 504 law are very complicated.  KSBA has a Special Education Service under the KSBA Training Services, which is a subscription service to which all the school districts belong.  Districts have unlimited access to legal consultation and receive training and updated information as the law changes.  Ms. Combs explained IDEA and Section 504.


A finding in the Program Review report is that there should be more appropriate care and fewer limitations with school nurses. The Kentucky Board of Nursing’s advisory opinion is that a nurse shall not delegate injections such as for diabetes to someone who is unlicensed. KRS 156.502 generally says that licensed medical staff may train and delegate these functions to unlicensed school personnel.  Without adequate funding from the legislature it would be extremely burdensome to school districts to have a specific ratio of nurses to students. School districts need maximum flexibility to provide school health services.  Lack of funds prevents school districts from having enough licensed personnel in the schools.


Representative Flood asked Debra Keelen and Caren Gardner from Kentucky Families with Food Allergies to respond to the report. Ms. Keelen said that they support standardized guidelines and minimum guidelines for food allergies. They are also supportive of nurses in schools but realize more funding is needed.


Bob Babbage said he represents ADA. He introduced Dr. Leslie Scott, an assistant professor at the University of Kentucky College of Nursing and a nurse practitioner.


Dr. Scott said she has witnessed the struggles and injustices families of children with diabetes endure when it comes to ensuring safe and proper care of their child’s diabetes while in school and school-related activities.  Dr. Scott strongly supports the ADA’s goals of ensuring that all students with diabetes are able to effectively manage their disease at school and at school-related activities and most importantly, have equal access to all educational opportunities.


The inequity of healthcare services provided to Kentucky children with diabetes as well as the lack of equal access to all educational opportunities has been particularly problematic for the past decade.  This is primarily due to the fact that at that time a significant change in diabetes-care regimens was implemented in the care of children due to advancements in available insulin and delivery devices/systems. 


The Program Review report should incorporate more explicit and forceful recommendations on how the needs of students with diabetes are to be met.  For example, the report needs to make stronger recommendations on how to resolve inconsistencies in services among districts.


One of the biggest obstacles yet to be overcome is having appropriate personnel to administer insulin, particularly for those children who are too young or unable to self-administer insulin.


According to the report, state law does not allow unlicensed personnel to administer insulin at school.  The proper reading of the statute is that medication administration should be considered a nursing function only if it requires substantial specialized knowledge, judgment and nursing skill.  The Board of Nursing advises that injectables such as insulin and the task of carbohydrate counting can only be performed by licensed personnel, but insulin administration and carbohydrates counting by unlicensed personnel are safe and do not require this level of specialized knowledge or skill.  These particular opinion statements from the board are the crux of many children in Kentucky schools not having adequate access to their diabetes medications and adequately trained school personnel.


Insulin delivery devices such as pens and pumps are designed to be used by nonmedical lay persons.  Laypeople commonly administer insulin safely and accurately and can be trained quickly and easily.  Carbohydrate counting cannot be said to require specific nursing judgment or skill; all that is required is reading a food label or guide and performing simple arithmetic.


If the state law cannot be interpreted to allow administration by unlicensed personnel, then the law needs to be changed. The report provides a great deal of useful information about the care being provided to students with diabetes in Kentucky schools and the policies in place to govern this care, but it does not go far enough in recommending what specific changes need to be implemented.  The report should be revised accordingly or the legislature should adopt these needed changes into law.


Sharon Mercer from the Board of Nursing said she was concerned about the delegation process. [This topic is covered in the Board of Nursing’s latest response to the report.]


In response to a question from Representative Flood, Ms. Mercer indicated that she had not been referring to the administration of insulin. Advisory opinion statements do not have the force of law and can be changed by the board. She would recommend someone ask the board to revisit this issue.


Representative Palumbo explained that she does not want her child’s health to go before a committee.


In response to a question from Senator Stine, Representative Flood replied that there was no fiscal note or a source of funding.


Upon motion made by Representative Palumbo and seconded by Senator Palmer, the School Health Services for Students With Chronic Health Conditions in Kentucky report was approved by roll call vote.


Approve Minutes for June 10, 2010

Upon motion made by Senator Pendleton and seconded by Representative Simpson, the minutes of the June 10, 2010 meeting were approved by voice vote, without objection.


Presentation on Kentucky Employee Retirement Systems Asset/Liability Studies

Mike Burnside introduced Brent Aldridge, Jim Voytko, and Tony Johnson.


Mr. Voytko said they are investment consultants under contract to the Kentucky Retirement System (KRS), Board of Trustees. Asset liability studies were done for the four state plans. Today’s presentation covers the study for the Kentucky Employee Retirement System only.


The bottom line of the studies is that the current benefit program; existing accumulated unfunded obligations that the system has; the growing retirement population; the savings policy in place in House Bill 1, which controls contribution levels; and growing restrictions that negative cash flows place on the fund’s investment program results in a large current pension funding problem for Kentucky.  This is likely to grow considerably over the next 5 to 15 years.  Each plan is different but this equation applies to all plans studied.


Mr. Voytko illustrated House Bill 1 through the example of paying off a mortgage on a bridge over time.  A normal mortgage payment is constant over a period of time, paying off the interest and amount borrowed at the same time.  Using a payment schedule based on HB 1, initial payments are lower but the unpaid interest in the initial period is added to the balance, resulting in a significantly higher total cost compared to making the same payment each time period.


In response to a question from Representative Graham, Mr. Voytko said benefits in the presentation means the nonhazardous defined pension plan.


In response to a question from Representative Graham, Mr. Burnside said that at the time when HB 1 [2008 Special Session] was discussed, the KRS’s actuary had said that HB 1 would have an effect but not for several years. He was not sure if KRS was asked to comment on the payment schedule.


In response to questions from Representative Flood, Mr. Burnside said that the actuary looks at 30-year window when making projections. The actuary assumed a 3.5 percent increase annually in payroll over 30 years. No money had ever been borrowed from KRS, but the system was underfunded for 17 years.


Mr. Voytko said that the next generation is when you will see benefits of a new tier of controlling contributions.  He noted that the asset liability study is not an actuarial study of the system’s liabilities, a prescription for plan benefits, or an assessment of the affordability of contribution levels.


A pension fund’s funding comes from a savings program and an investment program, which can only work if there are assets to invest.  The savings program is by far the largest driver of the financial future for these plans. The analysis of the future outcome of the plans presented today assumes investments returns are guaranteed, the board’s goal being 7.75 percent. 


Over the next 20 years, money flowing out of the fund will increase steadily with the retired population growing, yet the money flowing in by contribution will stay steady.  This pattern is not unusual and is seen in retirement plans across the country. Cash flow will be negative until 2020, at which point contributions and payouts will be the same. Contributions increase from the year 2020 because HB 1 reaches the actuarially required amount. By that time, the required amount has grown because of shortfalls in the previous 10 years.  In the later years, the contribution rates as a percentage of payroll increase dramatically.


This pattern creates problems.  First, assuming that 7.75 percent is earned on investments, the payout ratio is very high, almost 50 percent, which makes it very hard to run an investment program.


In response to a question from Senator McGaha, Mr. Voytko said that earned income is not included directly on the slide showing projected contributions and benefit payments.


In response to a question from Representative Rand about the 7.75 percent goal ever having been achieved historically, Mr. Burnside said in the fiscal year to date, they had earned 17.73 percent; in the year ended in May 2010, 17.84 percent; - 2.6 percent for the past 3 years; 3.85 percent for the past 5 years; and 3.59 percent for the past 10 years.


Representative Rand said that there have been good investment years but performance does not seem to be what it should have been. In response, Mr. Burnside said that the 10-year performance is below the 7.75 percent assumed rate of return but that it was above this rate for 15 years. The actuary’s assumptions are based on 30 years.


Mr. Voytko said there was nothing unusual nationally with a return of 3 percent over the past 3 years; the 7.75 percent return was not available to anyone due to the economy.


In response to a statement from Representative Rand, Mr. Voytko said he would not describe the system as unsustainable but that it might be surprising as to how expensive it gets. Representative Rand replied he was already surprised.


In response to questions from Senator McGaha, Mr. Voytko said the KRS Board of Trustees sets the allocation of assets. The board typically accepts their recommendations and monitors the allocation of assets.


In response to questions from Senator McGaha, Mr. Burnside said that KRS has an internal compliance officer who monitors and reports on a monthly basis. KRS’s fiduciary bank also has responsibility for monitoring. Changes in asset allocation do not require changes in statute or regulation; the board makes those changes. Target allocations have not changed since 2006.


Representative Flood noted that this topic was covered in the committee’s Research Report 352.


In response to a question from Representative Graham, Mr. Burnside said the report came out just before the 2008 Special Session in which HB 1 was adopted.


In response to a question from Representative Graham, Mr. Voytko returned to his presentation. The first problem is that the liquidity ratio of the fund becomes high.  The second problem is that contribution rates rise to over 40 percent of salary or higher. The third problem is a growing unfunded liability. The fourth problem is that the funding ratio – the percentage of assets that are in place versus the percentage that your actuary says you need in place to fund benefits that are accrued and due – is the same at the end of the period as it was at the beginning.  The second part to the study, which is much more complicated, is what happens if 7.75 percent is not fixed.  [This part was not covered due to time constraints.]


Mr. Dampier, who is retired from state government, submitted a written statement. He summarized by noting that retirees are a renewable resource. As state employees, they were taxpayers and as retirees they continue to pay taxes and contribute to the economy and society.  It is essential that each retiree has a reasonable retirement income that is steady and reliable.


In response to a question from Senator Higdon, Mr. Voytko said that the slide covering projected contributions as a percentage of salary did not include the insurance fund; there is a separate study for that. Including insurance would add 22 percentage points of salary to the peak 48 percent projected contributions reached in 2029.


In response to Representative Graham’s earlier question about the equation, Mr. Voytko said the benefits are as written.  Changes in new hires and their pension benefits will take the better part of a generation to have a material effect.  Accumulated unfunded obligations cannot be changed.  Nothing can be done about the growing retirement population. The savings policy in HB1 is the legislature’s decision and is under its control. The growing restrictions on the fund’s investment program will largely depend on the cash flow. More cash flow in gives investment staff more assets to work with.


Representative Rand said benefit levels should be of concern. In response to a question from Representative Rand, Mr. Burnside said benefit levels are set in statute. Based on the inviolable contract, benefits cannot be decreased once a person begins employment.


Representative Rand said the General Assembly has honored its commitment under HB 1 in a difficult budget year. He is not advocating cuts in benefits but it is not possible to address pension funding without considering benefits. In response, Mr. Burnside said he did not disagree. It is a difficult situation. Stopping spending is not an option due to the inviolable contract. The unfunded COLA [cost of living adjustment/allowance] is an issue. HB 1 reduced it to 1.5 percent, but even 1.5 percent increases the unfunded liability.


Representative Rand said that he had not been told that HB 1 would increase the unfunded liability.


Representative Graham said that many state employees retired having made relatively low salaries and that reducing the COLA hurts them. It is not just an investment issue; the system was underfunded for 17 years.


Senator Smith said he wanted to change his “yes” vote for approving the report to “not voting.” He understands this issue as a parent but also from the perspective of schools that may face additional costs.


Mr. Voytko concluded by saying that the board faces decisions in the coming years relating to the tradeoff between long term investments to increase returns and having sufficient assets to pay ongoing obligations to beneficiaries.


Meeting adjourned at 12:18 p.m.