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F I S C A L I M P A C T R E P O R T

SPONSOR Varela

ORIGINAL DATE

LAST UPDATED

1/31/08

2/05/08 HB 517/aHHGAC

SHORT TITLE Information Technology Equipment Replacement

SB

ANALYST Aubel

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

($1,002)*

($1,002)* Recurring Information

Technology Fund

($4,750)*

($4,750)* Recurring Communications

Fund

$5,752

$5,752 Recurring

Equipment

Replacement

Funds

(Parenthesis ( ) Indicate Revenue Decreases)

*Based on FY08 billing rates.

Relates to appropriations made to the Department of Information Technology in the General

Appropriation Act.

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)*

FY08

FY09 FY10 3 Year

Total

Cost

Recurring

or Non-Rec

Fund

Affected

Total

($3

,000

.0)

($3

,000

.0)

Non

-

Rec

u

r

ring

Communic

a

tion

Fund

$3

,000

.0

$3

,000

.0

Non

-

Rec

u

r

ring

Equipment

Replac

e

ment

Fund

s

(Parenthesis ( ) Indicate Expenditure Decreases)

*Updated to incorporate new information from the Department of Information Technology

SOURCES OF INFORMATION

LFC Files

House Bill 517/aHHGAC – Page

2

Responses Received From

Department of Information Technology (DoIT)

Higher Education Department (HED)

Department of Public Safety (DPS)

SUMMARY

Synopsis of HHGAC Amendment

The House Health and Government Affairs Committee Amendment adds the Information

Technology Commission to the list of agencies for reporting purposes.

Synopsis of Original Bill

House Bill 517 amends the Department of Technology Act to establish a method for equipment

replacement to ensure uninterrupted enterprise service delivery. The bill creates equipment

replacement funds for each enterprise function; requires the agency to prepare an equipment

replacement plan that is submitted to the Department of Finance (DFA) and to the Legislature by

December 1 of each year; authorizes expenditures from these revolving funds to be made,

subject to legislative appropriation, for acquiring and replacing capital equipment in accordance

with the equipment replacement plan; and requires a reconciliation report of the preceding fiscal

year reflecting the financial activity in each of the equipment replacement funds. HB 517

authorizes the department to make initial transfers from operating funds to establish beginning

equipment replacement fund balances on July 1, 2008.

FISCAL IMPLICATIONS

HB 517 directs DoIT to transfer the correct amount each fiscal year from the enterprise

function’s operating account to its equipment replacement revolving fund, based on the amount

of the depreciation applicable to each enterprise service as reflected in the department’s

published cost structures and service rates. The total estimated annual amount, which would

most likely increase as newer equipment replaces older equipment, is $5.8 million. This estimate

is based on the approximate FY08 depreciation amounts for information technology and

communications provided by DoIT.

Operating Funds Projected

Revenues/Billings

(In thousands)

Est. Depreciation %

(In thousands)

Est. Transfer

(In thousands)

IT

$18,929.3

5.4%

$1,002

Communications

$27,457.9

17.3%

$4,750

Total

$5,752

The appropriations of revenues collected for depreciation contained in this bill are a recurring

expense to the enterprise funds. Any unexpended or unencumbered balance remaining at the end

of fiscal year shall not revert to the enterprise funds.

This bill creates new funds and provides for continuing appropriations. The LFC has concerns

with including continuing appropriation language in the statutory provisions for newly created

funds, as earmarking reduces the ability of the legislature to establish spending priorities.

House Bill 517/aHHGAC – Page

3

However, this concern is mitigated by the requirement that expenditures from the fund shall only

be made pursuant to an appropriation from Legislature and only for the purpose specified. In

addition, the depreciation portion of revenues would be collected regardless of this bill. HB 517

allocates this amount to the purpose of equipment replacement rather than using these revenues

to fund operations.

The current operating budget for FY09 contained in House Bill 2 includes $3 million for

equipment replacement. Although the agency did not specify this would provide a beginning

fund ba

l

ance for the

Communications enterprise

revolving replacement fund

, it is a reasonable

assum

p

tion that the final a

p

propriation made for this purpose

may

be transferred.

Because the General Services Department (GSD) 2006 and 2007 audits have not yet been

completed, the amount of fund balances available to transfer to establish beginning equipment

replacement fund balance is uncertain.

SIGNIFICANT ISSUES

DoIT provided a list of equipment needs totaling $5.9 million for FY09 (Attachment A). A fund

was established at General Services Department in the mid-1980s with a $1

million appropriation. Monthly revenues, based on depreciation amounts, were deposited into the

fund and then used for equipment replacement. The fund was later dissolved, although the exact

details remain unknown. HED states that this bill would re-establish an equipment replacement

fund process as well establish the “best practice" of system life-cycle planning, including

equipment upgrades and replacements.

The equipment replacement funds would be started by transferring operating funds on July 1,

2008. Subsequent funding would occur from allocating the depreciation portion of the billed

rates to these funds. DoIT provides the following analysis regarding this process:

The basis for depreciation expense is the purchase price for the piece of equipment or

software that is being depreciated. The amount of the depreciation is a function of both

the purchase price and the useful life of the equipment or software. Most equipment and

software used by information processing and telecommunications enterprise services

have useful lives ranging from three to seven years, depending on the type of equipment

and how it is used. DoIT follows industry standards for determining useful life.

The amount of depreciation expensed in any given fiscal year is based on the “straight

line" method, which is simply the percent of useful life lost in a year. For example, a

piece of equipment that has a five year useful life would loose 20% of its useful life each

year for five years. The amount of depreciation expensed in one year would therefore be

20% of the original purchase price.

The actual amount of depreciation assessed to agencies is based on the un-depreciated

value of assets recorded on DoIT’s fixed asset records.

The DoIT assessment for FY08 includes approximately $1.0 million of depreciation

expense for information processing and $4.5 million for telecommunications. This

represents only 5.4 % of total information processing billings and 17.3 % of

telecommunications billings.

House Bill 517/aHHGAC – Page

4

The extremely low percentage for information processing depreciation expense is the

result of having old equipment that has substantially passed its useful life.

PERFORMANCE IMPLICATIONS

DoIT and HED suggest that creating equipment replacement funds as required by this legislation

should improve the planning process and make it more transparent. DPS maintains the bill does

not require DoIT to consult the user-agencies regarding future equipment replacement needs,

which may suggest an underlying assumption that only existing equipment needs to be replaced.

However, DPS points out that the communications field has experienced significant technology

changes in recent years and that needed replacements could be quite different than existing

equipment.

Furthermore, DPS suggests that the equipment replacement plan should be accompanied by a

mechanism that audits and assures that equipment replacement actually occurs in a measure

equal to the fees assessed by the DoIT.

ADMINISTRATIVE IMPLICATIONS

The State Treasurer would need to establish and account for the funds.

TECHNICAL ISSUES

Part (D) of the bill allows the department to make initial transfers from its operating funds to

establish the beginning fund balances as of July 1, 2008. It is unclear whether the language is

referring to fund balances or budgeted revenues. As noted above, availability of fund balances

will not be determined until General Services Department completes the audits for 2006 and

2007.

Another technical issue arises regarding the availability of the funds transferred to the new funds

as of July 1, 2008. This issue is whether they would be subject to legislative appropriation the

following 2009 Session or if DoIT has access to the funds for needed equipment replacement

prior to that time through appropriate Budget Adjustment Request (BAR) authority.

A similar issue arises for replacing equipment that was not included as part of the equipment

replacement plan submitted the prior year.

The FY09 operating budget utilizes almost all of the projected revenues for operations, with only

$3.0 million appropriated for equipment replacement -- $2.9 million short of identified needs.

ALTERNATIVES

DoIT notes it could establish a separate cost center within each enterprise fund and set aside the

amount of revenue realized by charging for depreciation expense in agency fees. The total

amount for equipment purchases would still have to be appropriated by the Legislature.

One option would be to appropriate sufficient general fund into the new funds directly. The

Information Technology replacement fund, in particular, appears to have insufficient funding

source.

House Bill 517/aHHGAC – Page

5

Another option would be to temporarily raise rates that agencies pay to “seed" the new funds.

The advantage to this option is that agencies pay these fees with various funding sources,

including general fund, federal funds and other state funds. DoIT suggests that using this indirect

method of establishing a fund balance would be less than a direct general fund appropriation,

assuming the total fund balance targets remained the same.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

DoIT would not be required to prepare an equipment replacement plan and would not be

required to report to the legislature on a regular basis on the department’s equipment needs or the

status of previous proposed purchases if this legislation is not enacted. In addition, the

transparency relating to equipment purchases would most likely be lost.

POSSIBLE QUESTIONS

1. How many equipment replacement funds will be established.

2. What are the projected operating funds that will be allocated to “seed" each fund.

3. How will the FY09 operating budget be impacted and re-aligned with any reduction in

budgeted revenues for operations due to the deposit of the depreciation amounts into the new

funds.

4. Will rates need to be raised to fund agency operations in FY09 to replace the depreciation

percentage of billings.

5. Will rates need to be raised to fund agency operations in subsequent years to replace

increasing depreciation percentage of billings (as newer equipment is brought on-line).

6. Will the $3.0 million appropriated to the DoIT budget in HAFC House Bill 2 for equipment

replacement be transferred. What will be the allocation to which fund.

7. Will DoIT need to wait until the annual plan is submitted in December 2008 and the

Legislature appropriates these funds, according to the plan, in the 2009 Session to replace any

equipment. Or will FY09 BAR language allow emergency transfers for equipment.

8. Will DoIT be able to replace equipment to continue uninterrupted services if the equipment is

not on the equipment replacement plan.

9. What are the latest projections for equipment replacement needs.

10. Will the operating funds provide sufficient funds to address these equipment needs or do the

equipment replacement funds require a general fund “start-up" capital.

11. How will the information technology (IT) replacement fund be initiated and then funded with

a low IT fund balance and low depreciation contributions.

12. Will the new funds be included as part of future HB 2 bills in a separate section from the

programs.

House Bill 517/aHHGAC – Page

6

13. How will DoIT assess agency equipment replacement needs and incorporate a prioritized list

as part of the plan.

14. Would a deadline date of September 1 for the annual equipment plan be more useful to make

it a part of the normal budget cycle analysis. What is the purpose of a December 1 date.

MA/bb

Program

Amount

Enterprise Operations 90.0

Enterprise Operations 200.0

Enterprise Operations 50.0

Enterprise Operations 34.0

Enterprise Operations 500.0

Enterprise Operations 500.0

Enterprise Operations 150.0

Enterprise Operations 500.0

Enterprise Operations 500.0

Enterprise Services

299.0

Program Support

15.3

Enterprise Operations 400.0

Enterprise Operations 1,000.0

Enterprise Operations 1,600.0

5,838.3

DOIT NEEDED HARDWARE PURCHASES FY09

Description

Storage Switches

Storage Core Switch

Operations Center Equipment

Integrity Networking Sun

Windows Hardware

Unix Hardware Replacement

DX Replacements

E-mail equipment

Disaster Recovery Equipment

Radio base stations

Routers and switches

Telephone equipment

Total Equipment

Switches at the front-end of networks that control and route traffic. These

switches balance the load to the network and distribute it in the most efficient

manner. If problems occur with these switches, applications being run by

agencies will slow down significantly or in some cases cease.

60 new Unix servers that maintain the state network core services

(

web

)

.

Existing servers past useful life and off warranty. Current servers are 4 to 5

years old. If any of these servers malfunctions, web services would be

interrupted.

Replace 10 servers and disc storage units that are four years old and are off-

warranty. Upgrade e-mail software from Exchange 2003 to Exchange 2007.

The use of e-mail is expanding. Additional storage units are needed to store

and backup e-mail and old servers need to be replace so that e-mail service is

not interrupted.

Redundant equipment for off-site disaster recover

y

for open s

y

stems includin

g

windows and Unix servers, backup, storage, etc. The current DR system

involves transferring backup tapes to Philadelphia, assembling necessary

equipment and running applications currently on the main frame. It would take

two to three weeks under this scenario and SHARE is currently not part of this

agreement with the vendor. Servers that run agency applications are not

properly backed up. This equipment (servers, switches, etc) would allow the

state to restart operations much faster than the current disaster recovery

model.

Replace 40 radio base stations (two-way) to conform to FCC standard to

operate at new narrow band frequencies. This equipment is used for radio

communications state-wide. If any of it fails, public safety could be

jeopardized.

Old routers and switches that support the state enterprise data network. This

equipment is the back-bone of the state system for data communications.

Existing routers and switches are old and off warranty and maintenance. Data

communications would be interrupted if any of the routers or switches fail.

PCs and IVR system for help desk. DoIT needs to provide more help desk

services to agencies. Without upgrading some PCs and acquiring an

Interactive Voice Response system, this will not be possible.

PCs

Telephones, telephone equipment including PBX switches and voice mail

equipment for the enterprise voice network. This equipment is needed to

maintain operation of the state's voice communication system. Much of the

existing equipment is old and unreliable. New equipment is needed so that the

state's voice communication system operates efficiently.

Justification

Three switches that connect servers to back-up units, storage units, other

servers and other switches. Current switches exceed useful life and

maintenance agreements. These fiber switches move data between machines

using only a single path. The additional switches will replace old switches and

provide a duplicate path . If these switches go down, many applications would

cease.

One new central Core Switch through which other switches flow. Provide

redundancy that currently does not exist. Nine agencies down for four days.

Maintenance agreement has expired on current Core Switch. If the core switch

goes down, so too will the entire network.

PCs, monitors, racks, console to monitor operations of servers mainframe, etc.

This will allow operators to see immediatel

y

if equipment fails, if the data cente

r

is at the correct temperature, etc. Without this equipment, equipment

malfunctions will result in operations bein

g

interrupted for lon

g

er period of time.

Additional equipment needed to operate existing STK backup system that is

currently idle. This equipment (servers) needed to move the robotic arms in the

backup systems that move the tape storage cartridges. DoIT currently does not

have this equipment and consequently the backup system is not operational.

60 new servers to support all Windows applications that are past useful life and

off warranty. All current servers are 4 to 5 years old. If any of these servers

malfunctions, agencies applications are affected.