Thesixth meeting of the Interim Joint Committee on State Government was held on Monday, November 24, 2003, at 1:00 PM, in Room 149 of the Capitol Annex. Co-Chairs Senator Albert Robinson and Representative Charles Geveden jointly chaired the meeting. Representative Geveden called the meeting to order, and the secretary called the roll.
Members:Senator Albert Robinson, Co-Chair; Representative Charles Geveden, Co-Chair; Senators Charlie Borders, Tom Buford, Julie Denton, Ernie Harris, Elizabeth Tori, and Ed Worley; Representatives John Adams, Adrian Arnold, Eddie Ballard, Carolyn Belcher, James Bruce, Buddy Buckingham, Dwight Butler, Larry Clark, Perry Clark, Tim Couch, Brian Crall, Tim Feeley, Derrick Graham, J. R. Gray, Mike Harmon, Charlie Hoffman, Jimmie Lee, Paul Marcotte, Tanya Pullin, Jon David Reinhardt, Tom Riner, and Jim Wayne .
Guests: Aldona Valicenti, Governor's Office for Technology; Arch Gleason and Bill May, Kentucky Lottery Corporation; Michael Childress, Kentucky Long-Term Policy Research Center; and Bill Hanes, Kentucky Retirement Systems.
LRC Staff: Joyce Crofts, Mark Roberts, Kathryn Walton, Stewart Willis, Alisha Miller, Laura Hendrix, Jim Roberts, and Peggy Sciantarelli.
The minutes of the October 22 meeting were approved without objection, upon motion by Representative Bruce. Representative Geveden announced that Representative Tommy Thompson was absent due to the death of his mother. He asked the members to keep Representative Thompson and his family in their thoughts and prayers.
Representative Geveden welcomed Aldona Valicenti, Chief Information Officer, Governor's Office for Technology (GOT), who briefed the Committee regarding the status of technology in Kentucky. Representative Geveden noted that Ms. Valicenti would be leaving her position at the end of the current administration. Ms. Valicenti said she would report in three categories: (1) policy and decision-making; (2) customers, infrastructure, and projects; and (3) comparison with other states.
In summary, Ms. Valicenti said that when she arrived in 1998, policy decisions were rarely made or were made on an individual basis. Through GOT there is now a structure for making decisions from a statewide perspective, there is a standards and architecture body to judge which products should be implemented, and a CIO advisory council has been instituted. Technology in Kentucky is now fairly standardized, which means that support costs less and service is faster. GOT's customers are no longer only state government agencies. The Office serves customers across the state—e.g., libraries, circuit and county clerks, and various not-for-profit organizations—and has the infrastructure to provide telecommunication, security, and many other services. State government and its information technology provide telecommunication network connectivity to schools and institutions of postsecondary education in all counties. As the customer base has widened, so also have demands on the infrastructure. The infrastructure is continually being attacked, and security is a big issue that will continue to be a challenge. As the infrastructure has been studied and reshaped, there is now a better way of providing security. There is now a formal way to initiate and review projects—e.g., implementing a new system or offering connectivity to a new area of the state—without misspending taxpayer monies. The Capital Planning Advisory Board has given the CIO the responsibility to prioritize all projects for the executive branch, and a good deal of time is spent deciding those priorities. Due to the budget situation, it is very important to make quick investment decisions. Kentucky now ranks among the top 10 states with respect to information technology, and the legislation that created GOT is considered a model for other states. The Commonwealth has a new image—that of a state that manages its technology in a fashion which allows for repeatability, fairness, and better services to the citizens, at a cost that is more affordable.
Representative Marcotte commended Ms. Valicenti for her service to the Commonwealth and said he believes there has been great progress under her leadership. He said that in northern Kentucky local governments utilize "reverse auctions," which reportedly achieve great savings and efficiencies. He said he would like to see this mechanism explored for possible use in state government and asked whether it could be done with the existing technology. Ms. Valicenti said that the technology is in place, through Kentucky's e-government portals. She said it would probably be best suited for commodity services and that the Kentucky League of Cities has used reverse auctions, as have a number of states.
Representative Geveden asked for advice on what direction the General Assembly should take with respect to the future of technology in Kentucky. Ms. Valicenti suggested preserving the advances of the past six years—i.e., the ability to make policy decisions across the enterprise. She said it would be a step backwards to reverse this progress and have individual agencies "doing their own thing." She said another consideration that should be at the forefront is self-service by individual citizens and businesses through the Internet, which is not only a convenience but, ultimately, a huge efficiency. She noted that Kentucky already has 140 on-line applications available to individuals and businesses.
Representative Geveden asked whether Ms. Valicenti would recommend retaining GOT as a "stand alone" office. She replied that, in reviewing the government structures of many other states, she believes the opportunity for greatest success is with the "stand alone" office, primarily because it allows for a horizontal view across all of state government.
Representative Pullin asked Ms. Valicenti whether she has any recommendations to ensure that rural areas do not fall behind in connectivity, since that is so important for the success of future generations. Ms. Valicenti said that in states that have been truly successful, the state has played a role in promoting connectivity. In most cases, however, states have not been directly involved in helping or building that connectivity. Rather, it has been done through the private sector, which probably has the most to gain long-term. She said that Kentucky should look at policies to foster connectivity. While parts of the state have tremendous capability, there are areas that still need it. Educating Kentuckians on the benefits of connectivity is also vitally important.
Representative Geveden expressed appreciation to Ms. Valicenti for her work and wished her success in the future. He welcomed the next speakers, Arch Gleason, President and CEO of the Kentucky Lottery Corporation (KLC), and Bill May, General Counsel for KLC, who had been invited to discuss the recent decision to offer keno as a lottery game.
Mr. Gleason said he welcomed the opportunity to speak to the Committee about the facts and circumstances surrounding the KLC Board's authorization for management to proceed toward implementation of an online keno game, in response to a recommendation of the outgoing governor. He explained that on the preceding Friday [November 21] the Governor-Elect had publicly stated his view that the Lottery does not have the constitutional or statutory authority to proceed and requested that KLC reconsider the decision, or at least allow the courts to rule in the matter. Mr. Gleason said that he and the Board Chairman had both indicated after the November 14 board meeting that if the Governor-Elect chose to take a position on the Board's action that KLC would listen and be responsive. He said that he spoke with the Chairman and the Vice-Chairman of the Board over the weekend and that they have directed him and the management to cease all efforts to implement keno.
Mr. Gleason said that he was prepared to give a presentation to answer questions about keno, if the Committee so desires. He went on to say that he believes keno is a moot issue—that the Board will not meet again until January and that it is clear from comments by members of the General Assembly that the policymakers of the state do not consider keno to be an appropriate game for Kentucky.
Senator Robinson noted that KLC would be required to receive approval of the General Assembly for purchase of single items of equipment in excess of $100,000 or multiple items in excess of $400,000. He asked what types of equipment would be required to implement a keno game. Mr. Gleason said that if KLC were to go forward with a keno game, it would be offered, basically, over the system that is in place, with results of drawings displayed on television monitors placed in locations offering keno.
Representative Marcotte said he is concerned that keno would be a "mess" from an operational standpoint—that people would be loitering in stores in between the frequent drawings, and that it would probably be necessary to have separate keno "parlors." He said that retailers not offering the game would not be competitive with other merchants and that he doubts many retailers would endorse the game. Mr. Gleason said he understands the concern about cluttering the retail environment, which is why most convenience store retailers in jurisdictions that offer the game opt out. He said the majority of keno tickets are sold by retailers in the hospitality industry—e.g., restaurants, bowling alleys, bars and taverns, and fraternal organizations.
Senator Borders said it is appropriate that KLC suspended action on keno, in response to the opinion expressed by the Governor-Elect, considering that the current administration will end soon, and that there is widespread opposition to expanded gambling. He urged KLC in its future decisions to consider the Constitution, the legislative branch, and the will of the people of the Commonwealth.
Representative Larry Clark noted that at the Licensing & Occupations Committee meeting a few months ago in Louisville, KLC had indicated that permitting the lottery to advertise which programs benefit from lottery proceeds would enhance sales. He said he thinks the legislature should consider this idea, in view of the competition from the new Tennessee lottery. He asked Mr. Gleason if he could suggest any other avenues to improve sales. Mr. Gleason said that lotteries that advertise how proceeds are used estimate that 3-5 percent of sales could be attributed to the advertising. He went on to say that the official estimate is that the Tennessee lottery will cause KLC to lose $71.6 million in sales over a three-year period. He knows of no product other than keno with the sales potential to replace the stream of lost revenue in a similar time frame. Estimates of sales and net revenues to the Commonwealth are somewhat bleak for the next six years. Once the impact of the Tennessee lottery is felt, KLC does not expect to be able to exceed $170 million of dividends beyond the year 2010—even assuming a modest growth of other lottery products. This is a significant concern to the lottery board and management.
Representative Pullin said that she has already filed a bill for the 2004 session to permit KLC to advertise how lottery revenue is spent, since she believes many Kentuckians want this information.
Representative Adams, who lives near the Tennessee border, said that Tennessee has a 9.34 percent sales tax, even on groceries, and that he does not believe the impact of the Tennessee lottery will be as damaging as projected because residents of Tennessee will still be coming into Kentucky to buy groceries.
Representative Geveden said he is glad that KLC has decided at this time not to proceed with keno. He said he firmly believes, from his conversations with committee members and other members of the General Assembly, that KLC lacks statutory authority to implement keno. Mr. Gleason said he respects that opinion.
Senator Buford inquired about the legal basis for the decision to implement keno. Mr. May said that his own analysis—and the long-standing position of the lottery—is that there is legal authority. He said that the opinion of the Attorney General [OAG 99-8] seems to indicate otherwise and that he respects that analysis and the opinion of the Governor-Elect. Mr. May said that in his analysis he looked to other state laws and consulted with KLC's outside counsel, Goldberg & Simpson. The law firm researched the issue but did not have time to prepare a written legal analysis. Senator Buford asked whether the Committee would be able to receive a copy of the law firm's position if it is put in writing. Mr. May said KLC has not yet instructed the firm to prepare a written document but that if that occurs they will be glad to provide it to the Committee.
Senator Worley asked whether the lottery board functions by action of the entire membership or by direction of the board Chairman. Mr. Gleason said the lottery operates upon direction of the Board as a whole. Senator Worley asked whether the decision to not proceed with keno was at the direction of one individual or in concert with deliberations of the entire Board. He said he supports the latest decision of the lottery and is not trying to put Mr. Gleason on the spot but that he is concerned about how the Board operated. Mr. Gleason said that he and the Chairman agreed that the best course of action was to suspend action on keno. He said he also spoke with the Vice-Chairman but did not poll the entire Board. He said he is comfortable that the full Board will support the decision when they meet in January, or they may choose to take no action. He added that he does not feel it is necessary for the Board to call a special meeting to formally rescind the decision to implement keno.
Representative Feeley inquired about the cost of implementing keno. Mr. Gleason said he could not give a formal estimate but that if the game had begun, KLC would have negotiated with the vendor to add it to the contract. He explained that the vendor is normally paid from revenues generated, as a percentage of sales. The cost of equipment for the game would have been borne by the vendor, who would have hoped to recover that expense through future sales. Currently, the vendor is paid just under three percent of online sales. keno sales were anticipated to measure within that range. When the contract with the vendor was signed in 1998, KLC sought the potential to have the hardware and infrastructure available if keno were to be offered in the future, but the contract was silent relating to revenue. To begin keno would have involved some materials cost, and advertising to introduce the game could have cost up to $1 million. In other states, however, keno has not required a consistent amount of advertising.
Representative Feeley asked whether, when the Board voted 6-1 to implement keno, there was discussion at that time of suspending action if the Governor-Elect voiced opposition. Mr. Gleason said he believes that was the general understanding of the Board, although it was not expressed in the public meeting. He said he and the Chairman expressed that position to the media following the meeting. Representative Feeley commended the lottery's discretion in suspending the game.
Representative Geveden said he understands that most states that offer keno received specific statutory authorization. He asked how many states other than California, Kansas, and Maryland offer the game. Mr. Gleason said it is his understanding that the majority of states that offer keno authorized it under their basic lottery legislation. He explained that he previously worked for the West Virginia lottery, which at that time had already begun keno without specific authorization. When the West Virginia legislature acted to authorize video lottery at racetracks, they also provided specific direction to limit the implementation of keno to facilities that sold alcoholic beverages for consumption on premises. Of the 11 states and the District of Columbia that offer keno today, eight or nine authorized their lottery by referendum or voter initiative. Missouri and Michigan recently implemented keno upon administrative direction without specific legislative authorization.
Representative Geveden thanked Mr. Gleason for answering members' questions. He also said he believes most members of the Committee applaud the lottery's decision to suspend implementation of keno, until such time that the Board meets again or further action is deemed necessary by either the executive branch or the General Assembly.
Senator Robinson assumed the chair and called on the next speaker, Michael Childress, Executive Director of the Kentucky Long-Term Policy Research Center. Mr. Childress gave a PowerPoint presentation relating to the Center's policy note No. 14, issued October 2003: "Retirement Systems Will Require a Bigger Share of State Funds." [Mr. Childress previously made this presentation to the Subcommittee on Public Employee Benefits on November 17, 2003.] The policy note presents an analysis of Kentucky's largest public employee retirement systems and some possible long-term fiscal consequences. As stated by Mr. Childress in his October 27 memorandum to the Co-Chairs of the State Government Committee, the analysis concludes that the share of the state General Fund and Road Fund revenues obligated to employee retirement funds could nearly double over the coming decade. The conclusion derives from one of two scenarios examined in forecasts of state obligations to employee retirement funds and their budget implications that assumes, among other factors, the persistence of current economic conditions. Under a second scenario that assumes robust growth in revenue and return on investments, it is estimated that retirement funds would consume only a slightly larger portion of the budget pie in 2014 than in 2004. In either scenario, however, real growth in the state's obligations to its retirement systems will increase significantly between 2004 and 2014. (Copies of the policy note and Mr. Childress' PowerPoint presentation are on file with committee staff.) A summary of the presentation follows.
The Pension Benefit Guarantee Corporation, a federal agency that insures private pension plans, has reported that private pensions are currently underfunded by approximately $300 billion, a substantial increase from the 1999 estimate of $23 billion. In a study of 123 state retirement systems, Wilshire Associates, a California consulting firm, estimated that 79 percent were underfunded (in 2002) by $180 billion. The Employee Benefit Research Institute, a national organization, has found that employer-funded pension plans—rather than Social Security benefits—will become the major source of retirement income for American workers. He went on to say that the Center's analysis focused on the Kentucky Teachers' Retirement System, the Kentucky Employees Retirement System, the State Police Retirement System, and the "school board" portion of the nonhazardous County Employees Retirement System. Estimates were generated under "low" (best-case) and "high" scenarios, based on two fundamental factors—employer contribution rates and covered payroll. Key assumptions used in the analysis were return on investment, covered payroll, and the Teachers' Retirement System medical insurance fund. Required employer contributions are expected to reach nearly $900 million in 2014 under the low scenario, and almost $1.2 billion under the high scenario. The low impact scenario projects about five percent of combined General and Road monies going to the retirement systems in 2014. The assumptions in that scenario are a higher return on retirement system investments, a slightly lower increase in covered payroll than in the 1990's, no additional money for the KTRS medical insurance fund, and a robust growth (about 5.8 percent annually) in General and Road Fund revenues. The high impact scenario projects 7.8 percent of General and Road Fund monies going to the retirement systems in 2014; that scenario assumes a lower return on investment, covered payroll increases similar to the 1990's, an additional 3.64 percent funding annually for the KTRS medical insurance fund, and annual growth in General and Road Fund revenues of only 3.8 percent. In conclusion, Mr. Childress explained that the pension underfunding issue is important now but could become much more important in the future because of the aging population and workforce, escalating health care costs, and the potential affect on other vital public services.
Representative Harmon asked whether inflation had been figured into the statistics on investment return. Mr. Childress said that the actuary, in generating the estimates for the employer contribution rate, takes into account the expected return on investment, which inherently incorporates other assumptions about the future behavior of the economy, including the inflation rate.
Representative Harmon asked about the type of investments made by the retirement systems. Bill Hanes, Executive Director of Kentucky Retirement Systems, said that the investments are very diversified, with approximately 40-60 percent concentrated in equities. He said the KRS Board and the actuary look at all the demographics to determine what investment strategy to adopt.
Representative Wayne asked whether Dr. Fox had the information about the projected increases in required employer contributions when he estimated in his February 2002 report that there would be a budget shortfall of $2.3 billion by the year 2010 ["Report to the Subcommittee on Tax Policy Issues" by William F. Fox, Director, Center for Business and Economic Research, University of Tennessee]. Mr. Childress said that Dr. Fox did not have that information, since the projections were not released by the KRS actuary until late 2002. Representative Wayne noted that under the low scenario presented by Mr. Childress that an additional $400 million would need to be added to the shortfall estimated by Dr. Fox.
Senator Robinson thanked Mr. Childress for his presentation. Next on the agenda was the report of the Subcommittee on Public Employee Benefits [co-chaired by Senator Robinson and Representative Geveden].
Representative Geveden spoke of the Subcommittee's purpose and reviewed their proposals to address Kentucky Retirement Systems funding issues. The proposals were outlined in a document entitled, "Proposed Changes to Benefits of the Kentucky Retirement Systems for Employees Hired August 1, 2004, or After". In summary, the proposals would set the benefit factor for all nonhazardous groups at the permanent KERS rate; establish a minimum retirement age; preclude purchased service from counting toward vesting; create a fixed dollar accrual amount for post-retirement health insurance; and change the formula for calculating disability benefits. Representative Geveden said that the Subcommittee has been working with various employee organizations and interested parties and that proposed changes will be presented in legislation for the 2004 session. Brief discussion followed regarding the need for change in order to protect the benefits of current employees and retirees.
Representative Arnold asked about the 401K approach being used by some states. Mr. Hanes said that Michigan and Florida changed from "defined benefit" to a "defined contribution" programs and that Virginia adopted a hybrid program. He said those states have not had good results. He added that defined contribution programs are common in the private sector but rare in the public sector.
Representative Graham raised concern about the possible circulation of misinformation about the proposed changes. Representative Geveden said it is important to ensure that accurate information is provided to all state employees and members of the General Assembly so that they can fully explain the issues to their constituents. He said that press releases could also help inform citizens throughout the state.
Mr. Hanes said that Kentucky Retirement Systems has many funding problems not found in other systems. He went on to say that if all the proposed changes were implemented, it would reduce costs but would not be a panacea. The biggest problem—which is unique to Kentucky Retirement Systems—is the inviolable contract to cover medical insurance for retirees. The Teachers' Retirement System and systems in other states are beginning to erode existing medical insurance benefits. Few public retirement systems provide full medical coverage, and many do not provide any medical insurance benefit for retirees.
Representative Pullin commended the efforts of the Subcommittee and the Long-Term Policy Research Center. She suggested to Mr. Childress that it might be helpful if the Center could spend some time researching why health care is so expensive in the United States, compared to other countries.
Next on the agenda, Representative Arnold reported on activities of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs. He noted that the Task Force would not meet in November but that he had recently attended the fall meeting of the County Clerks Association to discuss possible legislation for the 2004 session.
Business concluded, and the meeting was adjourned at 2:50 p.m.