Interim Joint Committee on State Government


Minutes of the<MeetNo1> 4th Meeting

of the 2006 Interim


<MeetMDY1> October 25, 2006


The<MeetNo2> fourth meeting of the Interim Joint Committee on State Government was held on<Day> Wednesday,<MeetMDY2> October 25, 2006, at<MeetTime> 1:00 p.m. in<Room> Room 154 of the Capitol Annex. Representative Mike Cherry, Co-Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Mike Cherry, Co-Chair; Senators Walter Blevins, Jr., Julian Carroll, Carroll Gibson, Ernie Harris, Dan Kelly, Alice Forgy Kerr, Elizabeth Tori, and Johnny Ray Turner; Representatives Adrian Arnold, Eddie Ballard, Joe Barrows, Sheldon Baugh, Carolyn Belcher, James Bruce, Dwight Butler, Tim Couch, Derrick Graham, J. R. Gray, Mike Harmon, Melvin Henley, Charlie Hoffman, Jimmie Lee, Gerry Lynn, Paul Marcotte, Mary Lou Marzian, Lonnie Napier, Darryl Owens, Tanya Pullin, Jon David Reinhardt, Tom Riner, John Will Stacy, Kathy Stein, Tommy Thompson, Jim Wayne, and Brent Yonts.


Guests:  Brian Crall, Penny Armstrong, Wayne Harman, Carla Hawkins, Scott McKenzie, Mary Elizabeth Harrod, and Thomas Stephens – Personnel Cabinet; John Cubine, David Pitts, and Brian Lykins – Auditor's Office; Jerry Deaton, Joe Ewalt, and Temple Juett – Kentucky League of Cities; Bill Hanes, Kentucky Retirement Systems.


LRC Staff:  Joyce Crofts, Alisha Miller, Stewart Willis, and Peggy Sciantarelli.


The minutes of the September 27 meeting were approved without objection.


Discussion of the statewide single audit of the Personnel Cabinet for the year ended June 30, 2005, was first on the agenda. The Auditor of Public Accounts' office was represented by John Cubine, Director, Division of Financial Audit; David Pitts, State Audit Manager; and Brian Lykins, Director, Division of Examination and Information Technology. Present from the Personnel Cabinet were Brian Crall, Secretary; Wayne Harman, Deputy Secretary; Carla Hawkins, Commissioner, Department for Personnel Administration; Scott McKenzie, Internal Auditor, Office of Administrative Services; Mary Elizabeth Harrod, Director, Division of Employee Management; and Thomas Stephens, Acting Director, Office of Legal Services.


Mr. Cubine gave a general overview of the audit and reviewed the first of the audit's three findings: "The Personnel Cabinet should strengthen controls to minimize potential abuse of voter leave." He explained that, when cross-referencing employee payroll files with data from the State Board of Elections in both the primary and general elections, the audit found that a significant number—approximately 10 percent—of employees who took voter leave may not have voted. The audit made several recommendations to the Personnel Cabinet for strengthening the process to oversee the use of voting leave in the future. Included were recommendations that  the Cabinet raise awareness of employees who request voter leave that they are obliged to vote, pursuant to KRS 118.035, and that the Cabinet should conduct periodic reviews with state agencies to determine whether there has been compliance with the statute.


Representative Ballard asked whether there is a penalty for employees who fail to vote after requesting leave. Mr. Cubine said that usually the employee would be required to take appropriate leave for the time charged to voter leave and would be reminded that any further violation could result in disciplinary action. Representative Ballard said he believes there should be a penalty.


Discussion turned to the second audit finding: "The Personnel Cabinet should have a written policy prohibiting the 'Block 50' payment of overtime to ineligible employees." The audit recommended that the Personnel Cabinet introduce and enforce a written policy to prohibit the "Block 50" overtime payments to employees in classifications which are prohibited from receiving a "Block 50" overtime payment. Mr. Cubine explained that eligible employees automatically receive payment for 50 hours when they accumulate 240 hours of overtime . Traditionally, employees in nonmerit, policy-making positions do not receive additional compensation for overtime hours above 240. The audit found four "Block 50" overtime payments to ineligible unclassified employees in policy-making positions during FY 2005. The audit recommended that any written policy prohibiting "Block 50" payments to certain classifications should be applied uniformly to all state agencies. He went on to say that rules governing overtime payments are based on the federal Fair Labor Standards Act (FLSA). The audit also asked the Personnel Cabinet to look at whether FLSA guidelines would permit the statutory maximum salary for state employees to be exceeded through the receipt of "Block 50" payments.


Mr. Lykins discussed the third audit finding: "The Personnel Cabinet should annually update its Business Continuity Plan (BCP) and maintain adequate insurance and inventory records of information technology (IT) equipment." Mr. Lykins explained the importance of the BCP, or disaster recovery plan. He said the audit found that the Personnel Cabinet plan had not been updated since the year 2000 and that it lacked sufficient contact lists and other items that the plan should include. The audit also found some minor discrepancies relating to fixed asset inventory keeping and that IT infrastructure was not adequately insured.


Mr. McKenzie discussed the Personnel Cabinet's response to the audit finding relating to voter leave. He said that the Personnel Cabinet stands ready to assist and cooperate in any way possible with the evaluation of voter leave. The Cabinet, by memorandum, will continue its practice of providing guidance to state agencies regarding the voter leave process. The Cabinet feels that voting leave must be monitored by each individual agency. Further, the Cabinet expects all agencies and employees to comply with KRS 118.035, which states that any qualified voter who exercises his right to voter leave but fails to cast his vote, under circumstances which did not prohibit him from voting, may be subject to disciplinary action.


Representative Cherry said that the use of voter leave was an issue looked at by a subcommittee of the Blue Ribbon Task Force on the Merit System. He said the Kentucky Constitution provides that employers shall allow employees at least four hours to vote but that the Task Force was not interested in amending the Constitution. Legislative remedies were discussed, such as requiring an employee to obtain written verification from a poll worker that the employee voted. The Task Force decided that voter leave should be left in the hands of individual state agencies and employees.


Representative Baugh asked whether an employee would be able to vote early and still be granted voter leave on election day. Ms. Hawkins acknowledged that this would be possible and that the agency would have to rely on honesty of the employee.


Representative Owens asked what inappropriate use of voter leave costs the state. Mr. Lykins said that in the two elections considered in the audit, more than $124,000 of work time was involved for individuals who took voter leave but could not be identified as actually having voted. Representative Owens asked whether any employees who used voter leave inappropriately have ever been disciplined. Mr. Harmon said he did not know and that the Cabinet would not necessarily have that information. Representative Owens asked whether the cost is not viewed as sufficient to warrant more stringent action than provided under current policy. Ms. Hawkins said it is not just a cost issue; there is also concern about the accuracy of the voter history data and concern that investigating voter leave beyond what has historically been done might be construed as illegal political influence. Representative Owens asked whether an employee could be required to certify in writing his intention to vote. Ms. Hawkins said that would be possible. Mr. Lykins stressed that the voter history data does not identify how any individual votes. Regarding the accuracy of the data, he said the audit found an error rate of about five percent. Representative Owens asked whether the inappropriate use of voter leave is considered a significant problem financially or otherwise. Mr. Lykins said that any abuse of employee benefits is a concern. Mr. McKenzie said it is a concern but that it needs to be handled at the agency level.


Secretary Crall said that the Cabinet wants to make sure that employees utilize leave time appropriately and that it is a concern if they do not. The question is what can and should be done with regard to the constitutionally protected right of an individual. He went on to say that when the subject of employee voter registration—which is public information—was discussed by the Merit System Task Force, there was a great deal of uneasiness. There have historically been instances of pressuring employees to vote certain ways. The Cabinet wants to avoid any appearance of undue influence and would be uncomfortable mandating that an employee furnish signed documentation of voting other than the standard leave request form. The Cabinet feels the matter should be handled at the agency level but is open to whatever direction the legislature feels is necessary.


Representative Napier said it was his impression that employees are entitled to a half-day of leave whether or not they vote, and he questioned whether an employee can be forced to vote when taking voter leave. He asked whether there have been instances of employees taking leave to vote in a primary election when their party of registration was not conducting a primary. Mr. Lykins said that the audit did not do any testing relating to county-specific primaries. Ms. Hawkins said that the Personnel Cabinet directs agencies and employees that they cannot take voter leave unless they are registered to vote in the election in question. Secretary Crall pointed out that the Cabinet does not know an employee's party registration and therefore would not be able to determine whether the employee was eligible to vote in a primary.


Senator Kelly said it appears to him that the data reviewed by the audit shows that state employees are generally faithful in exercising their voting privilege.


Representative Pullin said that safeguarding taxpayer dollars and the reputation of the many good state employees are two very good reasons for assuring that the voter leave benefit is not abused. She added that she did not think it would be a problem to use information found in public records if its use was equally applied throughout state government.


Senator Blevins said that one of his state employee constituents had felt ostracized when he was denied voter leave because his party was not having a primary. The constituent felt that he should have been granted the same leave as other state employees, some of whom may not have voted. He added that it is an issue that is sometimes difficult to address. Later in the meeting, Secretary Crall advised the Committee that he is going to send a memorandum to state employees by e-mail stating specifically the purpose of voter leave, who qualifies for the leave, and reminding them that it requires prior approval.


Representative Graham said he suspects that the inappropriate use of voter leave tends to occur more often in distant parts of the state and that employee travel time to the polls may be a factor. Mr. Lykins suggested that the overall process should allow the individual who uses voter leave inappropriately the opportunity to explain what occurred, so as not to unduly penalize an employee who was somehow prevented from voting.


In response to the second audit recommendation, Mr. McKenzie discussed the Cabinet's procedures relating to "Block 50" overtime payments. He explained that the audit's assertion that four employees who received "Block 50" payments were not eligible is incorrect. The individuals in question were not in policy-making positions at the time they earned the overtime payment and were therefore entitled to the payment. He said the Cabinet will abide by the governing statute and administrative regulation and will do everything possible to ensure that no one receives inappropriate "Block 50" payments.


Representative Cherry briefly discussed the merit system legislation he plans to introduce in 2007, which he noted will address the issue of compensatory payment.


Representative Owens asked whether the Auditor's Office agrees with the Personnel Cabinet's claim that the four employees identified in the audit were, in fact, eligible for "Block 50" payments. Mr. Cubine said that they are not in total agreement with the Cabinet's explanation. He said the audit staff believes that there was a problem in the system, which allowed the payments to be processed.


Representative Owens asked whether there is a list of individuals in each agency who are eligible for "Block 50s." Secretary Crall said the decision regarding who is eligible for "Block 50" payments is based on job classification. He went on to say that he believes the question is not whether individuals were inappropriately paid but whether they were properly classified. He said the audit found that the four individuals identified were, at the time, actually doing jobs that were policy-related but were in nonpolicy-related classifications. It has since been clarified that the individuals, by virtue of their classification, were eligible for "Block 50." He went on to say that the Auditor's Office is asking the Personnel Cabinet to make sure that there are internal checks within agencies to assure that individuals who apply for a "Block 50" based on job classification are technically in the correct classification. The Cabinet agrees that persons who are in nonmerit policymaking jobs should be properly classified and that agencies should exercise due diligence to ensure that employees are properly classified.


Senator Tori asked whether the state would realize a significant dollar savings if stricter internal controls are implemented. Secretary Crall said that the problem cases identified in the audit were small in scope but that every taxpayer dollar saved is significant. He said Personnel agrees with the Auditor's Office that employees should be classified appropriately and the Cabinet is working with agencies to ensure that this is done.


In response to the third audit finding, Ms. Hawkins said that both audit recommendations have been resolved or are in the process of being resolved. She said that the inventory and insurance has been updated. The business continuity plan is about 85 percent complete and will be maintained on an ongoing basis.


Representative Cherry thanked the speakers. Next on the agenda, Dr. Penny Armstrong, Executive Director of the Personnel Cabinet's Office for Employee and Organizational Development, reported on workforce planning that is underway, in anticipation of an expected surge in state retirements before January 1, 2009.


In summary, Dr. Armstrong said that the workforce planning initiative will hopefully assist agencies in dealing not only with a possible mass exodus of employees in 2008 but also in planning for the years beyond 2008. She said this is not just a 2008 issue for the state of Kentucky but also a nationwide issue. Statistics from the U. S. Office of Personnel Management reveal that 39 percent of the total workforce, over 50 percent of managers and supervisors, and 65 percent of the nation's senior executives are going to be eligible to retire in the next five years.


Dr. Armstrong went on to say that her office is focusing on development of guidelines for agencies to help them compile a comprehensive workforce plan. Her office will assist agencies in obtaining and organizing the necessary information and will also offer support in a variety of formats ranging from consultation to survey deployment. A workforce planning survey was deployed on the Personnel Cabinet web site from September 15-29, 2006. The survey was intended for the state's 5000-plus supervisors—i.e., anyone who conducts an annual performance evaluation for state employees. Initially, a 10 percent response rate was hoped for, but the response rate was approximately 30 percent. More than 1,500 total responses were received, and the results are currently being compiled. The Cabinet wants to get the message out that vacancies may occur for a variety of reasons and that workforce planning preparation for all organizational units should not be postponed, whether or not an agency anticipates retirements. Workforce planning will also assist agencies in developing internal strategies to deal with understaffing and other workforce issues.


Dr. Armstrong said that her office will utilize the survey responses in formulating training and technical assistance workshops to help state agencies develop their own workforce plans. Concluding, Dr. Armstrong said she anticipates that plans will be completed by the end of the first quarter of 2007. This will allow several months of preparation for not only potential mass retirements in 2008 but also for overall organization development.


Representative Cherry discussed estimates provided by Kentucky Retirement Systems relating to KERS nonhazardous executive branch employees eligible to retire (chart included in meeting folders). He noted that there are normally about 2,500-3,000 retirements annually. In January 2007, almost 6,500 employees will be eligible to retire; in January 2009, more than 8,600 will be eligible. [These totals include employees eligible to retire either with a reduced or unreduced benefit.] He added that the possibility of the legislature extending the January 2009 window has been discussed.


Bill Hanes, Executive Director of Kentucky Retirement Systems (KRS), addressed the Committee. Mr. Hanes pointed out that the data referred to by Representative Cherry does not include those who might qualify for retirement or window benefits because of accumulated sick leave or purchased service. He said the impact of the 2009 window will be very significant and that he believes the retirement estimates are on the conservative side. He went on to say that the KRS Board of Trustees has not taken a position on extending the retirement window. As far as cost to the retirement systems is concerned, it is mainly a health insurance issue. Extending the window for those already qualified under the window would delay KRS having to pay their health insurance benefit, but it would not significantly affect funding for pensions.


Mr. Hanes noted that extending the window might also eliminate the incentive to retire and then return to state employment. He said the potential cost to the Commonwealth if the window is not extended could be as much as $80 million, primarily to cover immediate payments to retirees for accumulated compensatory and annual leave and to pay KRS the cost to convert sick leave to service credit. He said he realizes there are arguments both for and against extending the window and that he is not advocating one way or the other. From an actuarial standpoint, the impact on the retirement systems would be neutral if the window were extended. However, it might be worthwhile in relation to succession planning in the workforce and the potential cost to the Commonwealth.


Representative Gray asked whether the window retirements would be mainly responsible for the $80 million cost. Mr. Hanes said that a large number of employees would be eligible for the enhanced benefits under the window. [The data indicates that in January 2009, 4,602 employees would be eligible for the 2.2% benefit factor, and 2,517 would be eligible for both the 2.2% benefit factor and high-3 final compensation.] Representative Gray said that, on the positive side, extending the window beyond 2009 for employees already eligible for the enhanced benefit would enable employees who are not ready to retire to continue working, and the Commonwealth would retain valuable experienced employees. Mr. Hanes said that is the idea behind possible legislation that is being discussed.


Secretary Crall said that extending the window would help normalize retirement patterns. He said there will be a larger number of retirements than usual anyway, due largely to "baby boomers" reaching retirement age. He went on to say that the Commonwealth would incur significant cost if employees eligible to retire by January 1, 2009, chose to retire during one budget cycle, and the retirement systems would incur their health insurance cost. To open the window without creating a new benefit for additional employees is probably the best answer from the standpoint of both the Commonwealth budget and the retirement systems. Mr. Hanes agreed.


Representative Graham said that today's testimony should remind the entire General Assembly of its constitutional responsibility to see that the retirement systems are soundly and equitably funded. He also emphasized the importance of the employee knowledge and expertise that the state will lose if the issue is not addressed.


Senator Carroll asked Dr. Armstrong what her study found with respect to the expertise that would remain in state agencies if there is a mass exodus of employees wanting to retire. Dr. Armstrong said that she cannot say now because the data is still being compiled. Senator Carroll said his greatest concern is that an experienced state government workforce will be greatly diminished.


Mr. Hanes said that when the actuary looked at an assumed number of eligible retirees and compared the cost of paying their health insurance prematurely, as opposed to allowing them to accrue more service and remain eligible for the enhanced benefits, the actuarial analysis, basically, resulted in a "wash." He repeated that the Board believes the issue should be left to the legislature and that he personally is not advocating any particular position, but he pointed out that the window will definitely have the impact of encouraging employees to retire early in the midst of their careers. He noted that one of his high-level KRS employees will retire at age 40 because of the window.


Senator Carroll suggested that Dr. Armstrong, after evaluating her information, advise the General Assembly what it can do to help state agencies prepare for the pending increase in retirements. Secretary Crall said that a critical goal of the workforce planning initiative is to encourage information sharing and mapping of office processes as much as possible for the benefit of future employees. He said that anything the legislature can do to promote the workforce planning process will be a great asset to the Commonwealth and its citizens.


Representative Cherry thanked the speakers. The final item on the agenda was a report on the 2007 legislative proposals of the Kentucky League of Cities (KLC). The agency was represented by Jerry Deaton, Director of Governmental Affairs; Joe Ewalt, Director of Policy Development; and Temple Juett, General Counsel. They provided the Committee with copies of the October 2006 issue of their agency publication, "KLC Direct."


Mr. Deaton gave examples of how costs are continuing to increase each year for both city and county government. He said that, as a result, it has been necessary to increase occupational, insurance premium, and property taxes. The revenue base needs to be expanded, but the Kentucky Constitution limits the options that are available to raise additional revenue. He said KLC hopes that the General Assembly will examine this issue in the 2007 regular session.


Mr. Ewalt said that an analysis of city financial reports for the last 10 years finds that for every dollar of increase in general city revenue, expenditures increased by $1.20. He said that costs are growing faster than revenue for a variety of reasons—e.g., health insurance and retirement benefits, environmental mandates, and homeland security spending. Costs for cities are expected to more than triple in 10 years. Based on conservative estimates, over the next 10 years Kentucky cities will be paying $2.5 billion for retirement and health insurance alone. He said that since 1998, local government indebtedness has increased about $4.7 billion.


Mr. Deaton said that KLC proposes to amend Section 181 of the Kentucky Constitution to give the General Assembly power to authorize local governments to establish a local option sales tax pending passage of a local referendum. He stressed that if a constitutional amendment were to pass, the General Assembly would still have to grant specific taxing authority to local governments by statute. He said KLC is not proposing any draft legislation at this point but is focusing only on passage of an amendment in order to "open the door" to allow more flexibility in local taxation.


Mr. Deaton said that KLC believes it would be beneficial to the Commonwealth if the constitutional amendment would also allow the General Assembly to authorize revenue sharing between state and local governments. He said that all of Kentucky's surrounding states allow cities to either collect local income or sales taxes or to share in state revenue. KLC also proposes to amend the Constitution to permit the General Assembly to decide what cities can do to raise revenue. Mr. Deaton repeated that nothing would change with passage of an amendment unless the General Assembly enacted specific legislation.


Representative Lee said that a January survey of his constituents indicated that 78 percent of them would not vote for any new taxes. He asked Mr. Deaton what language would go on the ballot, with any expectation of it passing, that would make it clear to the voter that passage of the amendment could result in cities having authority to tax their citizens. Mr. Deaton said that KLC is working on the wording and will probably do some polling to help determine the language. He said KLC has done polling in the past that mentioned the subjects of local option sales tax, referendum, projects, and things of that nature. As he recalls, about 65-70 percent of respondents indicated they could be in favor of a local option referendum sales tax. He agreed that people are concerned about taxes but said KLC is not discouraged about passage of an amendment if it is explained well. Representative Lee said he believes that the general perception is that people will not vote for new taxes unless government can demonstrate it is managing current tax dollars in a responsible way.


Representative Stein said she is interested in KLC's proposal and has been thinking about possible revenue options for Lexington. She said that in the past, Americans for Tax Reform (ATR) has caused people running for elective office to be fearful on the issue of taxing. She asked whether KLC has prepared for a likely onslaught from ATR. Mr. Ewalt said that KLC has begun to build a coalition of groups, such as chambers of commerce and educational organizations, to make people aware of the cost pressures on local governments. He noted that, without new options, Lexington does not have any ways to grant tax relief. Representative Stein said she would like to work on this issue with KLC.


Representative Hoffman said he is be opposed to the proposed local referendums. He said that KLC was not in favor of local referendums when participating in the work of the Local Taxation Task Force, but now that the Task Force has issued its final report, KLC has departed from its earlier position. He said he believes local referendum elections would be divisive, a bad use of local resources, and will split communities.


Representative Cherry announced that the final meeting of the interim will be Monday, November 20. Business concluded, and the meeting was adjourned at 3:05 p.m.