DIR Board Meeting | July 17, 2012

Cost-Recovery Fees and Fee Setting Methodology

Nick Villalpando

Chief Financial Officer

2

Budget Assumptions/Philosophy

DIR Board Meeting | July 17, 2012 Cost-Recovery Fees

Ninety-eight percent of DIR’s funding comes from fees charged to government entities who use DIR services.

Administrative (cost-recovery) fees are set at levels intended to be sufficient to recover DIR’s operating costs.

Due to inherent uncertainties with forecasting customer demand for DIR services, actual revenues may be more or less than amounts needed to recover costs for a given year.

Costs associated with overhead activities and other functions that DIR is mandated to perform are allocated to each cost- recovery program.

3

Indirect Cost Activities

DIR Board Meeting | July 17, 2012 Cost-Recovery Fees

Indirect Administration• Executive Administration• General Counsel• Human Resources• Finance and Accounting• Information Resources• Communications and Strategic Partnerships

Indirect Other• Information Technology Policy and Guideline Development• Statewide Technology Planning• Statewide Security

Indirect Costs are allocated to cost-recovery programs based on full time equivalent positions

4

Fee Evaluation and Setting Process

1. Determine total operating expenses to be recovered by administrative fees• Direct Program Costs and Indirect Costs (Administration and Other Costs)

2. Forecast customer demand for goods and services• Consider multiple factors that impact customer demand• Determine impact of vendor pricing on volume and estimated fee revenue

3. Set fees at levels that will recover operating costs based on forecasted customer consumption• Finance Division Recommendation• Executive Director Approval• DIR Board Approval

4. Monitor financial operating results throughout the year to determine if DIR is generating revenue at level needed to recover cost; take corrective action if necessary

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

5

Operating Expenses to Be Recovered

Cooperative Contracts

OPERATING EXPENSE FY 2013 FY 2012 VARIANCE $ VARIANCE %

Admin Fee Revenue $ 5.8$

5.3

$0.5 9%

Direct Expenses

Salaries 2.4 2.1 0.3 14%

Professional Fees 1.1 4.3 (3.2) (74%)

Software/Software Maintenance – – – –

Other – – – –

Indirect Expenses

Indirect Admin 1.9 2.0 (0.1) (5%)

Indirect Other 0.2 0.3 (0.1) (33%)

Total Expenses 5.6 8.7 (3.1) (36%)

Net Revenue $ 0.2 (3.4) 3.6 106%

Dollars in millionsNote: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.DIR Board Meeting | July 17, 2012

Cost-Recovery Fees

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Administrative Fees

Cooperative Contracts

Fees are paid to DIR by vendors who sell goods and services to eligible customers

Vendor prices charged to customers include the DIR fee

Current administrative fees range from 0.25% to 0.50% of vendor sales

Current FY13 revenue estimate is $5.8 million – based on $1.5 billion customer volume

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

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Operating Expenses to Be Recovered

Data Center Services

OPERATING EXPENSE FY 2013 FY 2012 VARIANCE $ VARIANCE %

Admin Fee Revenue $ 4.3$

4.5

$(0.2) (4%)

Direct Expenses

Salaries 2.2 2.4 (0.2) (8%)

Professional Fees – – – –

Software/Software Maintenance – – – –

Other – – – –

Indirect Expenses

Indirect Admin 1.7 1.8 (0.1) (6%)

Indirect Other 0.2 0.2 – –

Total Expenses 4.1 4.4 (0.3) (7%)

Net Revenue $ 0.2 $ 0.1 $ 0.1 100%Dollars in millions

Note: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

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Administrative Fees

Data Center Services

DIR charges a 2.95% administrative fee to DCS customers

The fee is applied to the monthly customer invoice based on amounts charged by DCS vendors

Current FY13 revenue estimate is $4.3 million – based on $152 million customer volume

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

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Operating Expenses to Be Recovered

Communications Technology Services

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

OPERATING EXPENSE FY 2013 FY 2012 VARIANCE $ VARIANCE %

Admin Fee Revenue $ 16.6$

17.3

$(0.7) (4%)

Direct Expenses

Salaries 4.1 4.8 (0.7) (15%)

Professional Fees 5.3 4.3 1.0 23%

Software/Software Maintenance 0.8 1.5 (0.7) (47%)

Other 2.3 2.7 (0.4) (15%)

Indirect Expenses

Indirect Admin 3.8 4.0 (0.2) (5%)

Indirect Other 0.5 0.5 – –

Total Expenses 16.8 17.8 (1.0) (6%)

Net Revenue $(0.2)

$(0.5) $ 0.3 60%

Dollars in millionsNote: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

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Administrative Fees

Communications Technology Services

CTS division delivers a range of services to customers• Capitol Complex Telephone System (CCTS)• TEX-AN Statewide Telecommunications• Wireless Services

Services are divided into three categories for fee setting• Vendor-provided services (voice minutes, circuits, wireless, etc.)• DIR-provided services (CCTS line charges, voice mail, data, etc.)• DIR-provided customer-specific solutions

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

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Current Administrative Fees

Communications Technology Services

Vendor-provided services• 2% to 12% administrative fees• Current FY13 revenue estimate is $10.1 million

DIR-provided services• Pricing varies based on service type• Current FY13 revenue estimate is $6.3 million

DIR-provided customer-specific solutions• Pricing varies based on service type• Current FY13 revenue estimate is $187 thousand

Total Current FY13 Administrative Fee Revenue Estimate is $16.6 million

Based on the following customer volumes (total $228.1 million):• CCTS – $4.3 million• TEX-AN – $74.1 million, • Wireless & Local Services – $149.7 million

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

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Operating Expenses to Be Recovered

Texas.gov

DIR Board Meeting | July 17, 2012Cost-Recovery Fees

OPERATING EXPENSE FY 2013 FY 2012 VARIANCE $ VARIANCE %

General Revenue $ 0.7 $ 0.7 $– –

Direct Expenses

Salaries 0.5 0.5 – –

Professional Fees 0.1 0.1 – –

Software/Software Maintenance – – – –

Other – – – –

Indirect Expenses

Indirect Admin 0.1 0.1 – –

Indirect Other – – – –

Total Expenses 0.7 0.7 – –

Net Revenue $ – $ – $ – –Dollars in millions

Note: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

Operating Expenses to Be Recovered

Indirect Expenses

OPERATING EXPENSE FY 2013 FY 2012 VARIANCE $ VARIANCE %

Salaries $ 5.3 $ 5.4 $ (0.1) (2%)

Professional Fees 1.9 2.1 (0.2) (10%)

Software/Software Maintenance 0.5 0.5 – –

Other 0.7 0.9 (0.2) (22%)

Total Indirect Expenses $ 8.4 $ 8.9 $ (0.5) (6%)Dollars in millions

Note: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

DIR Board Meeting | July 17, 2012Cost-Recovery Fees13

Operating Expenses to Be Recovered

Total Agency

DIR Board Meeting | July 17, 2012Cost-Recovery Fees14

OPERATING EXPENSE FY 2013 FY 2012 VARIANCE $ VARIANCE %

Revenue $ 27.4 $ 27.8 $(0.4) (1%)

Direct Expenses

Salaries 9.2 9.8 (0.6) (6%)

Professional Fees 6.5 8.7 (2.2) (25%)

Software/Software Maintenance 0.8 1.5 (0.7) (47%)

Other 2.3 2.7 (0.4) (15%)

Indirect Expenses

Indirect Admin 7.5 7.9 (0.4) (5%)

Indirect Other 0.9 1.0 (0.1) (10%)

Total Expenses 27.2 31.6 (4.4) (14%)

Net Revenue $ 0.2 $(3.8) $ 4.0 105%

Dollars in millionsNote: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

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Next Steps

DIR Finance team to prepare final administrative fee and FY2013 operating budget recommendations for Executive Director approval

Obtain DIR board approval at August 30 board meeting

DIR Board Meeting | July 17, 2012Cost-Recovery Fees