December 17, 2013

Governor spins pension reform as No. 9 accomplishment

Today Gov. Beshear released a list of his Top 10 Accomplishments in 2013. Number 9 on the list was “Secured Pensions, Lean Government.”

Here’s what he said about public employee pensions. He is referring to Senate Bill 2, the pension reform bill enacted in April 2013.

This spring, Gov. Beshear led weeks of bipartisan negotiation which resulted in the passage of bills to stabilize and modernize the state’s pension system [emphasis is the governor’s]. The legislative package created funding to pay the state’s full (sic) recommended annual pension contribution without threatening key state services like education and public safety. The increased cost to fully fund the actuarially required contribution to the Kentucky Retirement Systems is estimated at $100 million per year from the General Fund.

“The looming pension liability threatened to gut funding for education and all other priorities. It demanded our immediate and bipartisan cooperation,” said Gov. Beshear. “No matter our political philosophies, none of us were willing to put our kids at risk of a stripped-down education.”

Well, I should tickle the governor before I pinch him. He should be congratulated with a great deal of enthusiasm for connecting the dots between public employees pensions and education, and for saying so in such a high-profile release.

Education is the best hope — no, the only hope — for a relatively poor state like Kentucky to become un-poor. And the most immediate threat to that opportunity right is now is the $33.7 billion public employee pension debt, which must be paid, and doing so is crowding out funds for education at a rapid pace.

Since 2008, base funding for K-12 is down 1 percent, funding for higher education is down 14 percent, while the cost of state employee pensions is up 63.5 percent.

Now the pinch: The governor boasts of “the passage of bills” (SB 2 and HB 440) to “stabilize and modernize” the state’s pension systems. SB 2 is the much ballyhooed and oversold pension reform bill. It did not stabilize the pension systems — certainly not in the short term, and probably not in the long term. Actually, SB 2 raises the employer (taxpayer) cost 44 percent in each year of the next two-year budget, and will continue to cost more than the present system through 2018. After that, the Kentucky Retirement Systems’ actuary projects that savings will kick in, and over the next decade save $10 billion.

There are two reasons why the purported $10 billion savings is hyperbole. The 20-year projections producing the savings is based on (a) “0” changes for two decades in the assumptions used in making the projection, such as medical inflation, market yields, size of the government payroll, and a variety of other factors; and (b) the projection is based on “0” benefit improvements for public employees for two decades — both defy logic.

Given the nature of politicians — and the subject of pensions is a public policy issue — and the culture in Frankfort in which they operate, a culture of double and triple dipping government pensions, there may be no savings at all from SB 2 after the next two decades, only rising costs.

There’s going to be a see-saw effect out of this — as medical inflation and other cost-drivers go up, savings go down; as employee benefits go up, savings go down. Every new cost will erode the savings a little bit more until possibly there are no savings.

Also in the governor’s release, he said the “increased cost” to fully fund the ARC payments to KRS is “estimated at $100 million per year from the General Fund. What he conveniently ignored (it’s called spin) is that not all of the increased cost for going to 100 percent of the ARC is paid out of the General Fund. Some agencies pay with fees; aquasi- and non-government entities pay directly and so on. The total increased cost for the biennium is about $450 million in additional revenue. Further, the governor’s $100 million ($200 million for the biennium) from the General Fund is low-balling it.

Besides, where will the $200 million extra that the governor is talking about come from, in an already very tight budget?  Well, lawmakers have three choices: raise taxes, borrow, or rob Peter to pay Paul — which means further crowding out of essential government services, and education is the biggest slice of the budget pie.

In the meantime, the red ink in rising in the public pension systems, and the cost of pensions will continue to devour funds for education —unless education leaders, together with taxpayers, revolt and demand of politicians that they get pension expenditures under control.

The pension crisis is not a revenue problem; it’s an expenditure problem. With apologies to James Carville: “It’s about the expenditures, stupid.”

December 6, 2013

Judge’s pay gives Stein gold-plated pension

When Gov. Beshear appointed state Sen. Kathy Stein, D-Lexington, to a judgeship in Fayette County in October it tripled her legislative pension by nearly $900,000. The windfall is the result of a little noticed bill when it was enacted in 2005 (HB 299) that allows legislators to switch salaries when calculating their legislative pension.

The three factors in a legislator’s pension formula are (1) salary, (2) years of service and (3) 2.75 percent. Thanks to the 2005 law, which legislative leaders — Republicans and Democrats — sneaked through the legislative process, Stein is able to use her judge’s salary of $124,618 instead of her pay as a legislator, which was $40,668. Stein did not vote on the bill.

Using the higher salary triples her legislative pension, and, based on a Social Security Life Expectancy Table, gives her a lifetime gain of an estimated $888,174 … on top of her regular legislative pension.

Stein is not the only one who left the General Assembly enriched from the 2005 bill. To name a few, former Rep. Harry Moberly, D-Richmond, quit with a legislative pension of at least $168,686 a year; former Rep. J.R. Gray, D-Benton, left with a legislative pension of about $136,500 a year; and when former Rep. James Comer resigned to take the oath as commissioner of agriculture it was a moment that spiked his legislative pension at least $467,369. Moberly, Gray and Comer in 2005 voted in favor of the self-enrichment.

Moberly and Gray also have a second pension in KERS, the pension system for state employees, in which they were enrolled automatically as a legislator once they “maxed out” in the legislators’ pension system, thanks to a 1998 law change that hardly anyone knows about.

So, Moberly’s government pensions for being a legislator is around $180,000 a year — and he almost surely has a third pension from his private-sector employer, Eastern Kentucky University, that puts him well over $200,000 a year from three government pensions.

Gray also has a second pension in KERS, under the 1998 law, putting his two government pensions at around $150,000 a year.

The list of super-rich pension (courtesy of the taxpayers) for a part-time as a legislator is long and growing. Reps. Bob Damron and Sen. Walter Blevins have announced they are running for county judge-executive next year — a move that would more than double their legislative pensions. Look for more legislators to run for judge-executive.

Pension abuse is embedded in the culture, especially in Frankfort. It is common for people in the capitol city to be drawing “two and three” pensions.

Oh, did I fail to say the pension system for state employees is so broke it’s on life-support, and that pension costs are crowding out essential government services?  

October 31, 2013

Shredded documents taint multi-million dollar state contract

Editor's note: The following story ran Oct. 2, 2013 in Kentucky Roll Call

A former governor of our state once told Kentucky Roll Call that a governor should always appoint as secretary of the Finance and Administration Cabinet a person who understands what he wants without having a conversation about it. That way, if trouble arises, the governor can say, “I had no part in that decision.” While that may or may not apply to this story, an appearance of telepathy colors it.

It’s about a state contract for printing services, and the bidding for it by Lexmark and Xerox, and the shredding of evidence by the Finance Cabinet.

There were two RFPs (Requests for Proposal) for this five-year, multi-million dollar contract: In the first go-round, in 2011, the contract was awarded to Xerox. Lexmark filed an administrative appeal (protest), which the Finance secretary ultimately upheld, reversing the award to Xerox, based on a discovery of “error and prejudice” — the scoring was called into question.

Consequently, the Cabinet secretary ordered, on March 20, 2013, that the RFP be rebid.

The second RFP, issued on May 14, 2012, is where we pick it up. The RFP covered “equipment [printers and copy machines], needs analysis, training, implementation and maintenance” for the printing needs for all of state government.

Xerox proposed a cost of $23.3 million, and Lexmark $15.8 million. For Xerox, that comes to $387,793 a month, and for Lexmark, $262,891 a month — a difference of $124,902 every month for five years, and possibly 10 years.

The total difference of $7.5 million over the initial term could eventually reach $15 million or more in the event the renewal options are exercised — for roughly the same product and roughly the same service.

Bidders were evaluated in three categories: (1) technical proposal, (2) cost proposal, and (3) oral presentation. Lexmark outscored Xerox in each of the first two categories by a total of 40 points (3,911 to 3,871).

But on the final and more “subjective” evaluation, the oral part, Xerox scored 480 out of 500 points to Lexmark’s 400, thus edging out Lexmark by 40 points to win the contract.

On Sept. 24, 2012, the Finance Cabinet awarded the contract to Xerox and, the next day, directed the members of the evaluation team to shred their score sheets and other evaluation documentations.

Xerox is a client of the Louisville-based law firm Stites & Harbison. Before becoming governor, Steve Beshear was a partner at the firm, and his son, Andrew, is now an attorney there.

Lexmark filed an administrative appeal on Oct. 13, 2012. That process would take four months, until Jan. 18, 2013, when the Finance secretary denied it, clearing the path for the Cabinet to proceed — to give the contract to Xerox.

Lexmark sued the commonwealth, the Finance secretary and Xerox in Franklin Circuit Court on Feb. 12, 2013 (Civil Action No. 13-CI-00158), claiming that the secretary’s decision giving the contract to Xerox was “unlawful, arbitrary, capricious and unsupported by the record.”

Where the story began
In early 2010, Gov. Beshear launched a program called Smart Government Initiative, an innovative effort in which employees would examine the efficiency of state government and then recommend ways to trim costs. The goal of SGI was “to save taxpayers dollars,” the governor reasoned.

The employees did their part; they identified ways to save $7.2 million in the first year alone. But Lexmark contends paying Xerox $7.5 million more than what it proffered canceled out the SGI savings.

Destruction of documents
Beyond the savings question, however, there is a larger issue: the destruction of documents.

On Sept. 25, 2012, Brenda Brown, an employee in the Commonwealth Office of Technology, an agency of the Finance Cabinet, sent an e-mail to the members of the evaluation team, which read, in part:

“The MPS contract has been awarded to Xerox. I have checked with Stephanie Williams, OPS, and Terry Stephens, Executive Director — OIS, you may now shed your evaluation documentation, including any response CDs, paper copies, scorecards and/or other notes. Don’t forget to delete electronic copies/emails, etc.”

One day after Brown’s e-mail, Lexmark, on Sept. 26, served its first open records request, asking for “any and all correspondence, emails, memoranda and other communications that refer to or relate in any way” to the RFP and the evaluation and scoring of the bidders.

By law, government agencies are required to respond to open records requests within three business days, and then may take an additional reasonable time to gather the information. In this case, the Brown e-mail would not be made known to Lexmark until three months later on Dec. 26.

Though the Cabinet provided an initial response to Lexmark’s open records request, dated Oct. 18, 2012, which included 12 pages of e-mails, it was not until three months later, after repeated inquiries by Lexmark seeking additional information that the Cabinet chose to reveal the existence of the Brown e-mail.

While the shredded score sheets and other evaluation documentation may have shown how Xerox came from behind down the stretch to win the evaluators’ hearts, and, therefore the contract, even though it was significantly higher than Lexmark’s, the Cabinet, by failing to preserve the full record of this multi-million procurement, prevented the Court, Lexmark and the public from knowing the full truth about the contract.

Cabinet defends the shredding
The Cabinet, in its filings with the Court vigorously defended its order to destroy the documents. And Donald Speer, an executive director in the Finance Cabinet, defended the records’ destruction in a story that ran in The
Kentucky Gazette earlier this year. Speer said, in effect, that the information from the individual scorers’ sheet, though not the actual score sheets, was used in the final consensus score, and, therefore, met the legal requirements for records preservation. Speer said the scorers were told they could get rid of the hefty documents that were taking up a lot of physical space on their desks and in their offices.

The judge was clearly ticked at the Cabinet
Circuit Judge Thomas D. Wingate ruled on Lexmark’s case on Aug. 22, 2013, and Lexmark lost the contract, but not its destruction of documents claim — the judge kept that part alive.

In his ruling, Wingate cited an Attorney General opinion, which in turn referenced a court opinion, contrary to the Cabinet’s view on preserving documents.

In 04-ORD-187, the Attorney General held that “[w]here the preliminary investigative report or records are adopted as the basis of the final action taken… [the] records forfeit their preliminary characterization and must be disclosed.” Preliminary notes lose their exempt status when “adopted or incorporated into agency action,” according to the AG opinion.

Further, Wingate cited a previous court opinion, West v. Goodyear Tire & Rubber Co., that said, in essence, when a party destroys evidence that could be significant “in pending or reasonably foreseeable litigation,” the jury is instructed that if it believes the missing evidence was destroyed “intentionally or in bad faith,” it may infer that the missing evidence would hurt those who destroyed it.

Such an instruction to a jury is generally appropriate only when three elements are satisfied: (1) the destroying party was “obligated” to preserve the evidence; (2) “the destruction involved greater culpability than mere negligence; and (3) the missing evidence was relevant to the action. Wingate held that Lexmark “presented sufficient evidence on all of these elements.”

And, according to administrative regulation 200 KAR 5:307, pertaining to the retention of records dealing with state procurements bids, “All evaluation documentation, scoring and summary conclusions shall be in writing, and made a part of the file records. …” Moreover, pursuant to the general records retention schedule for state agencies contained in 725 KAR 1:061, the Finance Cabinet was required to retain the “Bid Score Sheet File” for eight years.

The quicksand that the Cabinet stepped into, by destroying the documents, got deeper as the story unfolded. In his ruling, Wingate held that other retention schedules, and case law, require “the Finance Cabinet to retain any record required for current or pending legal action, or where the evidence may be required in a court case.”

He held that given the history of the Lexmark-Xerox battle for the contract, “it was reasonably foreseeable on the day following Xerox’s contract award that Lexmark would file a protest, as they had done after the first RFP. Litigation was expected.”

Therefore, in addition to the judge’s holding that the Cabinet violated the open records law and destroyed evidence “with a degree of culpability greater than mere negligence,” Wingate pointed out that the Cabinet should have expected that the missing documents would be required as evidence in court.

The ruling
In his support for allowing Xerox’s contract award to stand, Wingate cited the statutory authority of a Finance secretary to make contract decisions as provided in the Kentucky Model Procurement Code. He found no fault in
Finance following the procurement laws, except for the destruction of documents part, which he viewed as a serious but separate matter — it’s an Open Records issue, not a procurement code issue, he held.

The judge clearly rejected the Cabinet’s defense on the missing score sheets and other evaluation documentation to the degree that he SEVERED Lexmark’s claim about the destruction of documents, in effect, setting it aside to become a separate action, should Lexmark choose to pursue it.

That leaves Lexmark the options of appealing Wingate’s decision and also proceeding with a separate claim on the destruction of documents at the same time.

Wingate faulted Lexmark as part of his explanation for upholding the contract award to Xerox. He said Lexmark failed to exhaust its administrative appeal by not raising the destruction-of-documents issue in its protest with the Cabinet before filing the lawsuit.

Had Lexmark followed the judge’s logic and included the issue in its administrative protest, the Cabinet would have almost surely held that destroying the documents was not improper, and that would have established a situation entitling the Cabinet to great deference by the Court under Kentucky law, which provides that in procurement decisions, the Finance secretary “shall be entitled to a presumption of correctness.” (KRS 45A.280). So, it was a “Catch 22” for Lexmark.

Related to the whole process, including the administrative appeal process, the judge in his ruling seemed to be saying that he would not be first in reviewing the “destroying documents” issue — the Cabinet had to have the opportunity to review it first.

Lexmark had not made a decision as of our press time as to what its next steps will be.

Lexmark’s only remedy in terms of the Cabinet’s destruction of documents is through the Open Records Act, making it hardly worth the effort. At best, it might recoup part of its attorney fees. And appealing Wingate’s ruling to the Court of Appeals and state Supreme Court is uphill. The same as Wingate was required by law to grant the Cabinet secretary the “presumption of correction,” so it is with the different levels of the courts.

Outlook: We’ve probably heard the last of all of this, unless the attorney general, state auditor or the legislature develops an interest. #

October 2, 2013

Tragedy is a place called Appalachia

Note: I wrote this editorial for The Kentucky Gazette, July 14, 1998. It's still appropriate today, in some ways more than ever. — Lowell Reese

What do you think about when you think of Eastern Kentucky? Al Smith, moderator of KET’s public affairs program “Comment on Kentucky,” asked that question of three distinguished Kentuckians: historian Thomas Clark, author James Still and Courier-Journal editor David Hawpe. Their answers were indeed insightful, concise and...diplomatic.

     Clark noted the region’s natural beauty, rich timber and coal resources, and that Eastern Kentuckians feel an extraordinary and powerful sense of place—a deep emotion about their homeland, to the point that sometimes they are “almost militantly defensive and protective” of Appalachia. The 92-year-old Still said he has outlived all of the town folks and neighbors on Wolfpen Creek in Knott County, but he finds the “mindset somewhat just the same”—the pattern of attitudes toward the land, toward politics, toward religion hasn’t changed much.

     Hawpe also knows the region well (he was born in Pike County and spent summers there growing up, and he covered the mountains as a Courier reporter in Hazard). He said it’s a land of great contradictions: sweet-natured people prone to violence; suspicious-natured people who are “most open and welcoming” once they know you.

     No one said anything directly about abject poverty, forced migration and the region’s Li’l Abner image—which, by the way, many local leaders proudly perpetuate through the annual Hillbilly Days celebration held each April in Pikeville, seemingly under an illusion that someday Toyota might build a factory along the Big Sandy or Cumberland rivers and market the cars worldwide as “Made in Kentucky by hillbillies.”

     Nobody I know is smart enough to singularly figure out how to make Eastern Kentucky equal to the rest of the state in terms of material well-being. But one thing is certain: advertising the region’s workforce as “pork-chop consuming mattress testers” (Li’l Abner’s fortuitous vocation) won’t do it in the sophisticated global world we’re living in. Being a realist, Mammy Yocum might want to drag the Hillbilly Days organizers to the woodshed where Pappy Yocum sometimes took his lumps for lesser lapses.

     A tragedy is when something bad happens to a good person, or to good people; and tragedy is a place called Eastern Kentucky. These are good and decent people—still early American in much of what they believe about values, religion and work. But when it comes to having something to live on, as well as something to live for, the people of this region of our state have been left behind.

      For example, most of the eastern mountain range lies in the 5th Congressional District, represented by Congressman Hal Rogers (R-Somerset). Of the nation’s 435 congressional districts, Rogers’ district is the 7th poorest. In fact, he represents the poorest congressional district of any Republican in the United States. In every one of the 27 counties in the district, except Rogers’ home county of Pulaski, at least 19 percent of the people depend on food stamps to eat and feed their children.

     The people of the mountains are almost one-fourth poorer than the statewide average in terms of per capita income. For every dollar that people in Louisville have in their pockets, the people in Rogers’ district have 60 cents. But poverty is about more than money; it is a condition that breeds hopelessness. According to a national survey in 1994 based on how people felt about their standard of living, Kentucky’s Owsley County—in Rogers’ district—was ranked as the most pessimistic county (hopeless place) in the United States. The people of Eastern Kentucky have less hope about their future than any place in the nation, except some Indian reservations.

     One of the tragedies of Appalachia is that so many of its citizens have had to leave home over the past 50 years to find jobs—just one generation ago, more Eastern Kentuckians lived in Ohio, Indiana, Illinois and Michigan than the number that stayed behind. In 1971, 55 percent of all next-of-kin listed in obituary columns in Eastern Kentucky newspapers lived in those four states.

     Country music star Dolly Parton, in a song she wrote called “Appalachian Memories Keep Me Strong,” captures the soul of Appalachia and the struggle to keep hope alive:

            “Ya oughta go North, somebody told us/’Cause the air is filled with gold dust/and fortune falls like snowflakes in your hands./Now I don’t recall who said it/But we’d lived so long on credit/And so we headed out to find our promised land.... Just poor Appalachian farm folk/With nothing more than high hopes/We hitched our station wagon to a star./But our dreams all fell in on us/‘Cause there was no land of promise/And it’s a struggle keepin’ sight of who we are...Appalachian memories keep me strong.”

     Another tragedy is the dependency on government that the people of Eastern Kentucky have become victims of; a condition that many of the region’s local elite—doctors, lawyers, merchants—are content with, because they get their slice of the government check.

     But as the tissue of real wings is woven from invisibles—like self-reliance, self-government, hopes, dreams, expectations—instead of material things, the seeds of change are the early American values, which still lie deep in the hearts of most Kentucky Appalachians. #

September 21, 2013

'Poster boy' for the pension culture

Bobby Sherman’s resignation yesterday as staff director of the Legislative Research Commission should bring no tears over his pension. He walks off the stage with an annual pension in the neighborhood of $128,700 a year — more than $10,000 a month.

We have to apply the weasel phrase “in the neighborhood of” because, unlike public employee salaries, the pensions records of state workers (and legislators) are strictly guarded secrets. Therefore, we can only use the basic formula in calculating Sherman’s pension, which is “years of service X average salary X service credit rating (a % factor).”

If Sherman bought years of “air time” — which means exactly like it sounds, pulling years of service out of the air, up to five years — that would add about $20,000 each year to his pension draw; and if he served in the military, he could count those years, too.

All of this highlights once again, the serious need for transparency in all of Kentucky’s six state-administered public employee retirement systems. There is no federal law that says the pension records must be closed. Kentucky’s records are kept secret under a law enacted in 1972 under Gov. Wendell Ford, when governors totally dominated the legislative branch. Four states have opened their government employee pension records to the public: New Jersey, Ohio, Oregon and Pennsylvania.

The three factors explained

1. Years of Service
Sherman began work at LRC in 1978 and left the institution in 1995 — giving him 17 years of service. He then worked maybe two years in the Kentucky Department of Education, increasing his years of service to 19. He was then hired as LRC director in 1999, serving 14 years in that capacity —giving him a career total of 33 years for pension purposes.

2. Salary
Sherman’ salary when he resigned was $195,000 a year.  He apparently had not received any raises since 2008, when his salary was spiked from $132,000 to $195,000, by mainly then-Senate President David Williams, because Sherman threatened to retire through a narrow window of a temporary law that offered an incentive for public employees to retire early — under the incentive, early retirees were allowed to calculate their pension using a “Hi-3” instead of a “Hi-5” on the salary.

Negotiating a 47 percent salary hike was a brilliant move by Sherman, and a display of disrespect for the state treasury by Williams and the LRC leadership who went along with it — but then that’s an honored custom of legislators, disregarding the cost of pensions while bestowing super-rich pensions on themselves. To read more about this, click here.

By staying on an additional five years, with the higher salary, Sherman increased his pension an estimated $54,000 a year for the rest for the rest of his life

3. Serve credit rating
The percentage factor we used in calculating Sherman’s pension is 2 percent. That’s an approximation.

It is appropriate here to say that SB 2, the pension reform bill enacted in 2013, did not solve the pension crises, contrary to proponents' claims; state employees haven’t had a raise in years; and education funding is in decline — and a big reason for the latter two is, the pension cost is crowding out pay raises, and it’s also crowding out essential government services.

Bobby Sherman could be a “Poster Boy” for the Frankfort culture of milking the pension systems like a big chocolate milk cow.