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In January of 2004 Dye Management presented their "Transportation Cabinet Management Review" which had been commissioned by the Legislative Research Commission. This is a comprehensive analysis examining all aspects of the Cabinets operations, funding, and management with specific recommendations to address problems.

The following areas of opportunity were identified:

• Organizational and Management Change
• Planning and Programming
• Construction Procurement
• Change Order Management
• Project Delivery Management 

Cabinet Secretary Maxwell Clay Bailey has moved quickly to implement a number of these recommendations. Particularly, he has focused on internal operations by improving the organizational alignment and reducing layers of management. He has also addressed problems with Construction Procurement by requiring more than one bid for projects. Change Order and Project Delivery Management improvements should arise from the range of organizational and management changes which have consolidated stand alone offices, limited one-on-one reporting relationships and aligned management with the workflow. Time will tell as to the effectiveness of these changes.

Recommended changes in Planning and Programming have proven to be the most difficult to address. This is because these decisions are made outside of the Cabinet at both state and local levels, often for political rather than system or need justified reasons.

The review of Planning and Programming is informative and the recommendations address the long term fiscal health of the Cabinet. "The Six-Year Highway Plan is substantially over programmed. A New, financially constrained plan should be developed. It is neither desirable nor is there much opportunity to debt finance the funding shortfall..." "Kentucky should establish an affordable plan for the future development, maintenance and operation of the highway system. In a situation in which needs greatly out strip financial resources, it is important that Kentucky establish a new, more financially constrained system level approach to planning and programming projects. This approach should be designed to insure that individual project decisions fit together to build and maintain a transportation system that meets the states economic and quality of life goals in the most cost-effective manner possible."*(ES-3)

"Our Analysis indicate the Commonwealth could not borrow an amount that would represent a significant portion of this shortfall ($1.94 Billion) without impinging upon at least one of the two current constraints on public debt: the maximum proportion of revenues that Kentucky's policymakers are willing to commit to debt service; and maintaining the Commonwealth's current credit ratings." (P.34)

The Management Review identifies the use of debt as an important part of the Cabinet's financial management but recommends that it should be used only for "projects that have a viable business case, i.e., they will yield tangible and realizable savings from reductions in maintenance expenditures and rehabilitation expenditures or significantly lower construction prices that are greater than the cost of interest."(P. 35)

The Management Review points out that annual debt service payments are currently about double what they need to be to maintain a constant level of debt. The Kentucky Turnpike Authority estimates that outstanding highway-related debt would be reduced from $750 million in 2002 to $400 million in 2007 if no new bonds are issued.

Instead of addressing this funding crises, Governor Fletcher is seeking to add significantly to Kentucky's highway debt. He has proposed $500 million in GARVEE Bonds to fund major portions of the 6 Year Plan despite the specific warnings in this document against doing so. These projects do not meet the criteria of a "viable business case". All projects funded with GARVEE will significantly add to the annual maintenance and preservation overhead.

There is another issue regarding debt in the Management Review that CART finds most timely. This regards the "risks inherent in committing revenues to debt service payments". (p. 37) Committing state revenues to long term debt service payments leaves less revenue available to respond to changing priorities. At this time, with the uncertainty of petroleum prices, reducing our ability to respond to changing priorities and needs seems an unwise course.

Petroleum prices have a tremendous impact on both highway revenues and expenses. The Management Review does not address this directly, but does address at length the issue of "risk" in managing Cabinet financial resources. The goal being to "minimize the probability of having to borrow." (p. 61) The Cabinet must decide on an "acceptable level of risk" which the report defines as "a funciton of : -The probability of an adverse event occurring. -The consequences of an adverse event on the organization's core busines. -The ability of the organization to absorb or mitigate the consequences." (p. 62)

The Review recommends that this "risk assessment" be incorporated into the re-analysis of the 6 year plan.

CART believes that the Risk Assessment is a critical planning element given the potential of oil prices to dramatically impact transportation needs and finances. Senator Richard Lugar and former CIA Director James Woolsey pointed out the inherent inflexibility of our highway system to adjust to disruptions in oil supply.(Foreign Affairs Magazine, Jan/Feb 2000) Continued price increases alone will constitute the "adverse event" mentioned above. Currently, the KYTC has not addressed this issue.

In summation, the Cabinet has moved aggressively to implement many of the recommendations of the Management Review. Major obstacles remain to putting the Cabinet on sound financial footing and developing a fiscally restrained six year plan. Some, but not all, of these are outside of the Cabinet. The Cabinet can and should insist on fiscal restraint and institute a risk management analysis and state wide needs assessment which can guide in project selection. Secretary Bailey has done well, but changes within the Cabinet's management and organization can't overcome the Governor's lack of resolve to address its financial and programming problems.

The full report is available online from the KYTC website.