Question and Answer Log for Proposed FY 2008 Utility Rates

IPERS is opposed to the proposed FY08 I3 rate setting methodology, just as we were opposed to the FY07 methodology. IPERS has seen a dramatic rise in I3 fees from $9,151 in FY06 to $86,598 in FY07 to $204,433 in FY08 and do not believe that the costs are being allocated on an equitable basis. The DAS letter dated 30 Jun 06 asking for these comments provided no information about how DAS arrived at the projected FY08 costs therefore it is impossible to know your methodology. I will assume that you used a similar methodology as last year. Following are our major concerns:

1. Cost factors are not linked to expenditures. Your methodology targets those entities that process large dollar amounts through I3 regardless of the effort/cost incurred by I3 to process those transactions. Specifically, the factors used for the financial and budget components of the formula do not have a relationship to the costs associated with those same components. It appears that you have used the volume of dollars passed through I3 regardless of how many transactions or how much effort is needed by I3 or your support staff to process those dollars. An entity such as IPERS that internally manages the detailed member and employer accounting on our own system and then automatically processes a few big dollar transactions through I3 unfairly pays a disproportionate cost for those few large transactions. Conversely, entities that manually process large numbers of small dollar transactions using I3 as their only financial system utilize significantly more I3 resources. A transaction based methodology would be a much more fair way of distributing costs. By not utilizing a transaction based methodology you provide no incentive for entities to become as efficient as possible.

2. Non-general funds subsidize the system. We especially disagree with the Revenue Dollars factor of the budget component as you have excluded General Fund appropriations from the data. This severely skews the counts and results in IPERS share being dramatically overstated. This results in IPERS being asked to unfairly subsidize the I3 system. IPERS and other non-general fund entities are being targeted and asked to pay significantly more than general fund entities. IPERS has a fiduciary responsibility to protect the IPERS Trust Fund monies and can not allow expenditures to be used as a subsidy from IPERS for the I3 system beyond our actual usage.

3. Very old data used in the formula. We do not believe that the actual costs for FY08 should be based on volumes and counts from several years in the past. We understand the desire of DAS to ensure the stability of their income stream and the desire of agencies to have advance knowledge of their exact expenses. However, there may be a huge disconnect between the reality of the services provided in FY07 and the many year old cost basis. Also, by using old data for the cost basis there is little incentive to change behavior to a more efficient method for either DAS or the agencies. All DAS costs and rates should be based on actual usage of service provided when the service is provided. That is the standard method in the private sector where you pay for the services used when you use them. Within an entrepreneurial model there are going to be both potential risks and rewards.

We do not believe that if IPERS were to purchase these services from a private sector provider that we would be charged $204,000 annually. What research was conducted to identify the cost basis for these types of services in the private sector. There are many outsourcing providers for these types of services. Do they charge by the person, by transactions, by volume, by a fixed fee? Do any of them charge similarly to the I3 rate?

We propose that a fair methodology would be to identify the number of transactions processed through the system and build a rate structure on that basis. The number of transactions is a much closer measure of the amount of effort expended by DAS in support of I3. Also, there is no incentive in the rate structure to improve efficiency with your proposed methodology. If you charged by transaction there would be an effort by agencies to ensure that they were doing things in the most efficient manner to keep costs low.

Based on the information available and our understanding of that information IPERS may not be allowed to pay the full proposed rates due to our fiduciary responsibility. However, IPERS does plan to and will certainly pay for the actual usage and value we receive from the I3 system.

Thank You.

Thank you for your e-mailed comments of July 27, 2006, regarding the I/3 rate and methodology, and its impact on your agency. It is important to us to be able to answer and address your concerns, and we appreciate the opportunity to do. The memo sent by DAS on June 30 did only provide brief summaries on how methodologies were determined. Hopefully the following information will better explain all of the factors taken into consideration when the I/3 allocation methodology was established. We will address your questions in the order you presented them:

1) Cost factors are not linked to expenditures - Extensive discussions were held to try and determine if there was a way to establish a transaction-based allocation for I/3. Because of the numerous ways that information is inputted into the system, and the very complex array of entries that occur when each type of document is processed, it was determined there was no logical method of establishing a transaction-based allocation. Instead, after a discussion with our federal cognizant agency, the Department of Health and Human Services (DHHS), it was determined that an allocation of costs based upon several factors would be more appropriate. A sub-committee of the I/3 Customer Council proposed a methodology of using a combination of revenues, expenditures and FTE counts to allocate the costs. In discussions with DHHS an agreement was made that would allocate costs for the system for payroll based on 100% FTE counts, the budget portion would be based on 50% revenues and 50% expenditures, and the finance portion would be based on 25% revenues, 25% expenditures and 50% FTE counts. These allocations for the budget and finance section were split to try and even out inconsistencies that arise due to the way departments process information. This method was determined by the I/3 Council to be the fairest way to allocate the cost of the I/3 system to a wide variety of users.

2) Non-general funds subsidize the system – General fund revenues are a very difficult issue when determining the revenue side of the equation. General fund revenues are all deposited in appropriable receipts that are not accountable to any one agency. There was discussion of using appropriations by department, but that was not truly revenue, nor could that amount be tied back to appropriable receipts. After discussion with DHHS it was determined that revenues should be a small portion of the finance module with the understanding that appropriable receipts were not a portion of the formula. Because of that the decision was to use the multiple step formula with FTE counts making up the largest percentage at 50%.

3) Very old data used in the formula – The data used to make these determinations is the most current complete data available to the Council for a fiscal year. Because the budget process requires the I/3 rate (as well as other utility rates) to be set about a year in advance, the most complete data available at the time is used, which in this case is a year old. This issue was discussed in detail at the June 2006 Council meeting when it was raised by another department. The FTE counts are the most current available and the revenue and expenditure information is for the last complete fiscal year. The Council determined it was very important to provide an allocation that the departments could rely upon when they prepared their FY08 budget, therefore they determined this information should be used.

The allocation of I/3 costs is a very complex and controversial process. The I/3 Customer Council has strived to find the methodology that is most fair to all of the agencies, but we realize that the current process does not satisfy all departments. The Council will review your questions and discuss the rate-setting process at their next meeting on Thursday, August 10.

Thank you again for taking the time to share your concerns. If you have any other questions we might be able to answer or give further clarification on, please do not hesitate to contact us again. If you feel it would be helpful to discuss any of your issues in person, I am willing to convene a meeting with the appropriate I/3 customer council members. Let me know. Thanks again for sharing your concerns.

Mollie

I have a question about the FY 07 rates for IDPH. Per the information I received from Julie Sterk on 6/30/06, we will pay a total of $438,692.92 for office/storage/lab space in 07 ($252,571.68+6,867.50+179,253.74). However, per the spreadsheet that Barbara Bendon provided me on 7/10/06, IDPH will pay a total fee of $440,127.77.

Can you have someone verify which figure is correct? Thanks.

Thanks for your question and the opportunity to clarify. The information contained in the 6/30/06 memo from Mollie Anderson (e-mailed by Julie Sterk) used the FY07 rates originally approved by the Customer Councils in the tables. As you may recall, at the May 12, 2006, GSE Customer Council meeting, the Council approved combining the office and storage lease rates into one universal rate of $3.425/square foot – effective for FY2007. Originally the FY07 lease rates had been set at $3.44/sq ft for office space and $2.50/sq ft for storage space, so the estimates that were sent to you last year would have been based on those rates. The information prepared by DAS Finance for the Rates Communication uses the information that was sent to you last year for budgeting purposes (the rates originally set), and not the amounts estimated after any mid-year adjustments to the rates. We provided notations where appropriate of rates that were changed by the Customer Councils from the originally approved amount.

Therefore, the number provided to you by Barbara Bendon on 7/10/06 ($440,127.77) is the updated fee amount that you should expect to pay for FY07. $438,692.92 would have been the estimate we provided IDPH at this time last year for budgeting purposes.

It is confusing when some rates are adjusted from the level originally set and communicated to agencies. We are still looking for ways to communicate such changes in a clearer manner; if you have any suggestions, please let us know!

Again, thanks for contacting us.