Division of Telecommunications

Transcription

1 Division of Telecommunications Rick Scott, Governor Craig J. Nichols, Secretary B U I L D R I G H T W I T H E X C E L L E N C E C O M M I T M E N T S C E S S E G I E S, B U I L D A P P LY W I T H E G I E S, B U I L D W I T H TO D AY TO - S T R AT- D M S AG E N D A O P E R - D E L I V E R TO D AY B U S I N E S S TO G O V E R N O R S O N S U C - & TO T E A M O P E R - PA R T N E R A P P LY D E L I V E R P R O C E S S & A C U M E N S U P P O R T D M S G O V E R N O R S E X C E L L E N C E TO - S T R AT- B U S I N E S S R I G H T S U C - AG E N D A T E A M O N & TO PA R T N E R A R C H I T E C T M O R R O W E G I E S, B U S I N E S S R I G H T A P P LY C O M M I T M E N T S C E S S TO D AY P R O C E S S & A C U M E N S U P P O R T G O V E R N O R S A R C H I T E C T M O R R O W AT E E X C E L L E N C E C O M M I T M E N T S D E L I V E R P R O C E S S & A C U M E N S U P P O R T C E S S O P E R AT E PA R T N E R A R C H I T E C T M O R R O W AT E T E A M Annual Financial Report to the Governor and Legislature for the period January 211 through December 211 O N S U C - & TO - S T R AT- D M S AG E N D A

2 Table of Contents Purpose of this Report... 4 Current Issues in the Division of Telecommunications... 4 Broadband Initiatives... 4 E911 Fees... 4 and Its Users... 4 Billable Services... 5 Voice... 5 Centrex Local Phone Service... 5 Hosted VoIP Phone Service... 5 Long-Distance Phone Services... 5 Toll-Free Phone Services... 5 STEPS... 6 Data... 6 MyFloridaNet (MFN)... 6 Remote Broadband Services (RBS)... 6 Florida Information Resource Network (FIRN)... 6 Southwood Shared Resource Center (SSRC) Local and Wide Area Network... 6 Other Data Services... 7 Conferencing... 7 Reservationless Voice Conference Services... 7 Video Conference Services... 7 Web Conference Services... 7 Telecommunications Infrastructure Project Services (TIPS)... 7 Wireless Data Services... 7 Smartphones... 8 Un-billable Support of the Florida Government Enterprise... 8 State Directory Information... 8 State Emergency Services Telecommunications (ESF-2)... 8 Expanding Broadband Access... 8 Data Center Consolidation Project... 9 Cost Accounting... 9 The Cost-Plus Chargeback Model... 9 Catalyst for Technological Transition... 9 Self-Funded Investments... 9 Buffering Costs Outside the Mainstream... 9 Cost Avoidance Versus Cost Reductions... 1 Annual Financial Report to Governor and Legislature July 9, 212 2

3 Cost Reductions... 1 Cost Avoidance... 1 Rate Adjustments and Rebates Rate Reductions Rebates Rate Increases The Cost Allocation Model Cost Allocation Basics Explained Cost Allocation by Service: Calendar Year Non-Revenue-Generating Activities: Calendar Year Key Elements of the Cost Allocation Model Communications Working Capital Trust Fund: Annual Performance Cash Basis Future Conditions and Plans Affecting Net Revenues Local Phone Service STEPS MyFloridaNet Mobile Communications Services Annual Financial Report to Governor and Legislature July 9, 212 3

4 Purpose of this Report This report is submitted in compliance with subsection (15), Florida Statutes, which states: The department shall annually submit to the Governor, the President of the Senate, and the Speaker of the House of Representatives a report that describes each service and its cost, the billing methodology for recovering the cost of the service, and, if applicable, the identity of those services that are subsidized. Because that subsection addresses s telecommunications services, the subject of this report is limited to the Division of Telecommunications (DivTel) duties outlined in sections and , Florida Statutes, which address services. Current Issues in the Division of Telecommunications Broadband Initiatives The Division of Telecommunications (DivTel) was authorized by section , Florida Statutes, to request and receive federal grant funds to fund Broadband-related initiatives benefiting the state of Florida. In 21, DivTel was awarded $8.8 million for this purpose; as of July 1, 212, the balance of that grant will be approximately $4.4 million. In the 211 legislative session, a bill was signed by the Governor transferring DivTel s Broadband office to the Department of Economic Opportunity (DEO). DivTel is currently working with DEO staff to assist them in developing the grant application and formal transfer request that is required by the awarding federal agency. The federal government must provide final authorization to make the transfer from the Department of Management Services (DMS) to DEO. Via a Memorandum of Understanding, administrative steps are being taken to maintain the integrity of the grant and to permit DivTel to follow the directives prescribed by statute. E911 Fees The E911 Board administers and collects E911 fee revenues from wireless providers that fund county E911 programs. The E911 Board has authority to distribute these funds to counties and the industry within the confines of statutory limits. The Board s office is administratively housed within the DivTel and DivTel s Director is the Board s Chair. The collection of the fee for prepaid wireless, where users buy phones or phone cards preloaded with usage credits, was suspended during the 27 legislative session because of the challenges related to how and when the fees should be collected. Meanwhile, wireless subscribers who pay for usage in the preceding month, continue to pay the fee. This moratorium will sunset on June 3, 213. Working with the industry and the Department of Revenue, DivTel is formulating recommendations for policy-makers to address this in the coming legislative session. and Its Users s primary purpose is to reduce costs and minimize unnecessary usage of telecommunications services for the State of Florida. It achieves this from economies of scale, volume discounts, reducing vendor costs and risks, pooling services, and providing focused expertise to get the best value. Using product design and cost accounting techniques and a robust inventory/billing system, brings transparency, accountability and incentives to motivate and empower government customers to save. provides a variety of voice, data, and conferencing telecommunications services over wires and wirelessly for a wide range of public sector customers. Florida state agencies are required by Florida Statutes to use, and, while not required, the legislature, judiciary, counties, cities, universities and some private nonprofits are patrons as well. For users of its services, establishes interoperability and security standards both formally through Florida Administrative Code and informally Annual Financial Report to Governor and Legislature July 9, 212 4

5 through consolidation of common services. also acts as a catalyst for bringing the benefits of technological change through self-funded investments without incurring the cost premiums of early adopters and delayed progress. has brought long-term savings, innovation, and standardization to Florida government since Its strategies have included use of a dedicated backbone when the market was restricted and expensive, then dismantling that backbone as competition grew. continues to enhance its contribution through extension of Internet Protocol (IP) technology, its inventory and invoicing system, and further aggregation of government telecommunications, such as mobile services. Billable Services Voice Centrex Local Phone Service provides local phone access primarily through a service known as CENTREX. In addition to providing toll-free local calling within a region known as Local Access Transport Area (LATA), CENTREX provides features and options, such as access to s long-distance service, caller ID, voic , call forwarding, etc. Incumbent Local Exchange Carriers (ILECs), such as AT&T, CenturyLink, and Verizon, provide this Local Service within their designated LATAs. s local service also provides alternatives to CENTREX for customers who own and maintain switching equipment on site, known as Private Branch Exchanges (PBXs). PBXs move some of the functions and features from telephone company facilities to the customers site, thus allowing customers to use shared access lines provided by. Charges for each of these local phone services and features are fixed monthly fees invoiced through. Hosted VoIP Phone Service also now offers a Voice Over Internet Protocol (VoIP) alternative to traditional phone service through its telecommunications company partners; AT&T and CenturyLink both offer their versions of hosted VoIP phone service, which provides standard features of traditional local phone service and some benefits from VoIP at lower cost. VoIP phone calls use data circuits, rather than traditional dedicated phone circuits, to place phone calls. This not only reduces the cost of circuits by using them for both computers and phones, it also provides more robust features (such as unified messaging, where voic becomes attachments). Hosted VoIP is an alternative to STEPS (see below) for customers that do not need PBX equipment on site and want to avoid term purchase/rental commitments, given that hosted VoIP is a month-to-month service. Long-Distance Phone Services Long-Distance Phone Service allows local service customers to place calls outside a local area (known as a Local Access and Transport Area or LATA) throughout the United States and internationally. For large customers, can provide Dedicated circuits to make long-distance calls. Smaller customers use s Switched Long Distance at a slightly higher price. Long-distance telephone calls are charged incrementally (per minute) on monthly invoices through. Toll-Free Phone Services offers customers the ability to establish in-bound toll-free services. Customers can designate toll-free numbers for in-state, national and (limited) international toll-free calls. Offered with many enhanced service feature options, this service terminates on local telephone lines/trunks where it is handled like any other incoming telephone call. Annual Financial Report to Governor and Legislature July 9, 212 5

6 Toll-free telephone calls are charged incrementally (per minute) on monthly invoices through. STEPS The Telephony Equipment Premise-based Services (STEPS) offers telephone switching equipment known as Private Branch Exchanges (PBXs) at the customer s site. PBXs move some of the functions and features from telephone company facilities to the customer s premise. This allows customers to use fewer access lines, or trunk lines, that share access among their staff. PBXs also give customers more direct control over features such as voic and call routing within their organization. PBXs have been around from near the beginning of telephone services but modern PBXs almost exclusively provide Voice over Internet Protocol (VoIP). STEPS equipment is purchased through state term contracts and is not invoiced through. Ongoing support and rental of STEPS equipment are invoiced through. Associated trunk lines and data circuits are also invoiced through for many customers. Data MyFloridaNet (MFN) The technology at the core of MFN, known as Multi-Protocol Label Switching (MPLS) is considered the current standard for the best enterprise data networks. When MFN was implemented through, it combined all of the best features of several of s existing data services into one, with more features, better security, and higher reliability at lower cost. Through MFN, customers can get equipment and local access to a dedicated enterprise network and the Internet with the independent ability to design and manage their sub-networks, make connections, and monitor their security, regardless of their location within the state. Tallahassee Metropolitan Area Network (MAN) connections are also now included as a part of MFN services. This gives state agencies high-speed networking/connectivity between user local area networks (LANs) with controlled gateways to common state applications Charges for data communications circuits and features are fixed monthly fees invoiced through. Remote Broadband Services (RBS) s Remote Broadband Service (RBS) provides customers with access to the Internet from locations outside large customer offices. RBS uses the latest consumer grade, rather than business grade broadband transport. RBS provides cost-effective remote broadband access via Digital Subscriber Lines (DSLs), which is digital data transmission over local telephone wires. Charges for RBS circuits are fixed monthly fees invoiced through. Florida Information Resource Network (FIRN) FIRN provides data communications to K-12 schools. Schools pay for FIRN services almost exclusively through federal subsidies known as E-Rate (averaging 7 percent). E-Rate subsidies come from the Universal Service Fund (USF), which is financed through fixed fees charged to every user of telecommunications services throughout the USA. FIRN also includes some E-Rate qualified features, such as and special filtering. Charges for FIRN services are fixed monthly fees invoiced through. Southwood Shared Resource Center (SSRC) Local and Wide Area Network provides internal data communications hardware maintenance to the SSRC (Local Area Network; LAN) and its customers and provides them access to networks outside the SSRC facility (Wide Area Network; WAN). These services are unique because s statutory authority and business model do not include services beyond the point (the router) where a building or campus connects to the state network. This exception was codified in the 21 General Appropriations Act. 1 1 _ 21 GAA, line item 2936, The division shall work with the SSRC to track utilization of the network during the fiscal Annual Financial Report to Governor and Legislature July 9, 212 6

7 SSRC Local Area Network Charges for SSRC LAN services consist of flat fees invoiced by. This enables servers on the SSRC floor to connect to other hardware on the SSRC floor, including routers that connect beyond the SSRC if customers buy WAN services. SSRC Wide Area Network Access Almost all servers in the SSRC need to communicate outside the building. This requires a WAN connection. Prior to 211, many SSRC customers obtained WAN access through dedicated circuits into the SSRC. This meant there were 2 unshared circuits with far more bandwidth than necessary. Per a suggestion from DivTel, a requirement was established in the 21 General Appropriations Act that directed consolidation of the 2 circuits. Through DivTel software development and a joint project with the SSRC, DivTel consolidated these 2 circuits and now meters usage by each customer to achieve substantial enterprise savings and equitable chargeback. Other Data Services also provides other services that are small and/or near end of life, such as Hosted Fax and Local Area Network port management at the Capital Center Office Complex (where DMS is housed). All of these are invoiced through fixed monthly fees. Conferencing Reservationless Voice Conference Services Reservationless Voice Conference Services give on-demand voice conferencing, 24 hours a day, 7 days a week, for up to 125 participants without the need to make a reservation. Reservationless sessions are charged incrementally (per user/per minute) on monthly invoices through. Video Conference Services provides video bridging and gateway services, which enable real-time audio and video interaction between three or more locations equipped with video conference equipment. The few customers using this service today are invoiced per hourly session through. Many customers pay fixed monthly fees to for this service rather than pay per minute; however, many state agencies video teleconference using (MFN) data circuits and their own equipment. Web Conference Services Web Conferencing is used to conduct live meetings, training, or presentations via the Internet. This enables customers to share projects, data, presentations, and ideas from and to any computer connected to the Internet and a telephone. Charges for Web Conferencing are fixed monthly fees to conference sponsors invoiced through. Telecommunications Infrastructure Project Services (TIPS) TIPS assists customers in procuring, installing, and project managing telecommunications infrastructure (e.g., cabling and wires) for telecommunication services, including voice, data, video, closed-circuit TV, imaging and wireless LAN within a building or campus. TIPS also establishes contracts, monitors performance of vendor installations, and simplifies contracting and project management with a single point of contact from start to finish. invoices customers for the time and material for the entire job. Wireless Data Services s Aircard service gives laptop computers mobile access the Internet or the state network through s secure and encrypted Virtual Private Network service. Charges consist of fixed monthly fees through. year for the purpose of developing a utilization based cost allocation model for implementation by July 1, 211. Annual Financial Report to Governor and Legislature July 9, 212 7

8 Smartphones s Smartphone contracts provide more robust -sanctioned alternatives to the state term contract for cell phones. s vendors invoice customers directly with monthly flat fees. Un-billable Support of the Florida Government Enterprise Among DivTel s other legal obligations is support for some ongoing public services and periodic projects for which there is no specific billable customer or direct appropriations. Because DivTel must incur costs to perform these functions without any specific funding source, DivTel must recover these costs from customers through payments for billable services. While these activities are important and valued, the associated subsidies inflate charges. State Directory Information Starting in 1986, published lists of state telephone numbers and staffed an information line ( toll free or from within Tallahassee) to help callers contact state offices and employees. was also the source of Florida government listings to all local telephone book publishers throughout the state. is required to perform this function per subsection (4), Florida Statutes. 2 The printed telephone book was replaced in 1996 by a website ( apps/411/tel411.public_411), but personnel continue to answer callers questions when they call State Information and provide local phone number listings in accordance with statutory requirements. These individuals also work as lobby receptionists, checking in visitors for two buildings in the Capital Center Office Complex for the Department of Management Services. The costs associated with these activities are comprised of contracted services, rent, supplies, and the salaries associated with administration and oversight of the function; the total cost is approximately $327, annually. State Emergency Services Telecommunications (ESF-2) DivTel is assigned responsibility for Emergency Support Function-2 (ESF-2) by the Division of Emergency Management s Comprehensive Emergency Plan. This means that any and all of DivTel s staff, services and assets, are available to help during a disaster and that DivTel must sustain disaster preparedness. These activities include planning, preparation, and coordination within DivTel and with other entities at a cost of approximately $75, annually. When disasters occur, DivTel is often able to obtain some compensation through federal disaster grants, but receives no compensation for ongoing preparation and support of this duty. Expanding Broadband Access The 29 Legislature enacted section , Florida Statutes, designating DMS as the lead agency to promote broadband deployment. This legislation was written in conjunction with Federal programs and grants to foster wider availability to broadband in unserved and underserved regions. Among its duties, DMS is to encourage the use of broadband Internet service through grant programs. DivTel received no initial funding for the effort 3 but is meeting its statutory obligation. DivTel s ongoing efforts will be funded mostly from federal grants but DivTel must continue satisfying a matching contribution requirement to be eligible. These matching contributions are primarily in-kind activities that are congruent with other duties. 2_ (4), Florida Statutes, The department shall maintain a directory of information and services which provides the names, phone numbers, and addresses for employees, agencies, and network devices that are served, in whole or in part, by the Network. State agencies and political subdivisions of the state shall cooperate with the department by providing timely and accurate directory information in the manner established by the department. 3 _ For a more detailed explanation of DivTel s broadband initiatives, see the Division of Telecommunications Business Model and Value, the section on Enhancing Florida Economic Competitiveness with Broadband, at divtel_business_model_value). Annual Financial Report to Governor and Legislature July 9, 212 8

9 Data Center Consolidation Project In 27, the State of Florida began to consolidate computing services. In most cases, this requires moving servers and mainframes from office buildings where computer users are located to one of three Primary Data Centers in Tallahassee. When users are co-located with this equipment, use of circuits outside of the building is not required. After the equipment is moved across town however, circuits must then carry these communications and the circuits must be high-capacity to meet the daily demand of users. has expended substantial effort during data center consolidation to design, implement and test the new IT environment for each affected customer. No funding was provided to for this effort. Cost Accounting The Cost-Plus Chargeback Model uses a cost-plus method to establish rates for each service. This is most appropriate for internal providers, such as, that primarily buy (rather than build) services, which are in turn resold to enterprise customers. Approximately 93 percent of s costs are such payments to vendors. Most of the remaining 7 percent pays for the costs of designing, procuring, and managing these services and the enterprise networking model. Administrative costs are added to vendor charges for services ( cost plus ). Some specific services bear more than others based upon the share of administrative resources committed to offering the service and other factors, such as the cross subsidies mentioned below. Payments to Other State Enes 2% Paid to Private Sector 93% Catalyst for Technological Transition Internal Operaons 5% Self-Funded Investments receives no direct General Revenue appropriations or other tax revenues. Rather, it is self-funded through charges to customers for the telecommunications services provides. This model is also used to preclude the need for the Legislature to provide cash infusions to keep Florida s government current with telecommunications progress. Instead, makes enterprise contractual commitments to pay for services over time. This offsets vendor investment risks while allowing the state to reap the rewards of new technology with minimal penalties from early adoption. Buffering Costs Outside the Mainstream New and obsolete technologies incur premium costs. Early-adopter prices are higher due to the lack of economies of scale and the need to recover development costs. At the other extreme, when a technology becomes obsolete, economies of scale are lost again; many vendors stop supporting them; and competitive pressures diminish. However, adopting new technologies can produce cost savings that far exceed these premium costs both in long-term pricing and productivity gains. Adopting new technologies is also the only way to avoid the costs of becoming obsolete. Figure 1 buffers the transition with subsidies from mainstream service revenues so customers can adopt new technologies at affordable prices and avoid the trap of paying premiums for old technologies. 4 4 _ Perhaps the best recent example of a self-funded investment came from establishment of the MyFlorida Network (MFN), which is now used by all state agencies. Through a contract with AT&T, transitioned all state agencies in one year to cutting-edge technology known as Multi Protocol Label Switching under a robust service at considerable savings over the preceding technology. All this was done without any additional appropriation. revenues for MFN did not break even until enough customers began using the service. MFN has since saved an estimated $14 million annually for the state. Annual Financial Report to Governor and Legislature July 9, 212 9

10 Figure 2 is a conceptual model of how pricing is affordable so agencies can adopt emerging technologies and use limited resources to make the next transition at a technology s end-of-life. In both cases, prices are below costs. This is only possible if other revenues are above costs and thus high enough to subsidize these transitions. Net Revenue $ Service A Service B Service C Service D Mature services Time New & Old services FIGURE 2 Cost Avoidance Versus Cost Reductions Cost savings come in two forms: Cost Reductions and Cost Avoidance. Cost Reductions Cost reductions occur periodically when there is a change to services that enables lowering prices to customers. Derived from technological advancements, marketplace changes, new or amended contracts and redesigning services, they are realized once and then become unseen, perpetual cost avoidance thereafter. Achieving cost reductions requires vigilant study, innovation, and a constant stream of new and/or amended contracts. Cost Avoidance The daily cost avoidance delivered by is more subtle, yet far greater. Conservatively estimated to be more than seven times the annual administrative costs, these savings are derived from the costs that would be incurred if did not exist. Without, all of the services it provides would be purchased individually by separate government entities without the expertise, negotiating leverage, and economies of scale that delivers. Because cost avoidance is an estimate of what was not spent, it is intangible. The question what would it have cost if it had been bought another way? is nearly impossible to answer without actually duplicating the purchase. 5 5 _ There actually is one tangible example of cost avoidance. In October of 29, the Florida Department of Education (DOE) alone sought to replace the statewide education network known as the Florida Information Resource Network (FIRN). FIRN is used primarily by K-12 schools, which are subsidized by a federal grant program known as E-Rate. Prior to DOE s attempt to replace FIRN, it was a service. Because the bids to DOE were significantly higher than existing services, DOE ultimately came back to for those services. At DOE s request, established a new FIRN contract to meet specific DOE requirements rather than use existing services. The resulting prices are 4 percent lower than the best offer to DOE even when s mark-ups that recover administrative costs are included. Extrapolating these 4 percent savings to all of s services suggests savings of approximately $71.8 million annually. This is over seven times s administrative costs, meaning the state receives at least a 7 percent return on its annual investment in. Annual Financial Report to Governor and Legislature July 9, 212 1

11 Rate Adjustments and Rebates In keeping with one of its essential purposes, continuously strives to achieve enterprise telecommunications savings. These come through new procurements and contract amendments to leverage market competition, technological cost reductions, and operational efficiency improvements. Figure 3 is a list of 211 rate reductions with explanations. Rate Reductions Service 1 Description Reduction Effective Date 2 Switched Long Distance Switched Long Distance service was awarded to Earthlink; negotiated reduced rates 11% 1/211 Reservationless Voice Conferencing Rate reduction based on market analysis 22% 1/211 MyFloridaNet Renewal of the MFN contract through 216, further consolidation of data services, and renegotiation of service rates. 6% overall 2/211 FIGURE 3 Rebates A rebate is a one-time liquidation of surplus cash balances without any associated permanent rate reduction. Rebates are issued when the trust fund achieves unanticipated positive net revenues that are not expected to continue. implemented a rebate of $1 million for toll-free service in June 211 based on the service s 21 net income. This rebate was a result of unusually high usage volume for the service resulting from the economic recession. (Citizens in need of financial assistance, such as unemployment compensation, utilize this service). Given that the usage volume increase is temporary, a permanent rate reduction was not warranted; thus, DivTel provided the rebate to agencies in proportion to their use of the service. Rate Increases As a policy, DivTel avoids increasing service rates unless it is for the purpose of achieving a specific objective. This is primarily because the state budgeting process is not flexible enough to accommodate them. However, rate increases are implemented to inspire customers to discontinue use of services that DivTel has targeted for elimination; these services are typically antiquated and/or subsidized by income from other services. Higher rates are used to encourage migration away from them to more-modern, less-costly services. also provided low-cost modern alternatives to these services and provided migration assistance. No such rate increases were implemented during 211. Annual Financial Report to Governor and Legislature July 9,

12 The Cost Allocation Model All costs must be attributable directly to a service, an employee, or a group of employees, but employees time and their respective salaries are the primary drivers of cost in the model. On a quarterly basis, each employee submits the percentage of his or her time that will be spent on each service or un-billable activity. These figures are approved by their respective supervisors. Any time allocated to a revenue-generating service is categorized as direct time. Because the only mechanisms for recovering costs are services, any time allocated to an unbillable activity must ultimately be reallocated to a service using a secondary process. Time reallocated in this manner is subsequently categorized as indirect time. The table below is a description of how this is done. The figures in the table are also used in the graphical explanation that follows. Category ==> Service A Billable Services Service B Service C All Billable Services Unbillable Activity 1 Unbillable Activity 2 All Subsidized Activities Employee 1 6% 25% 55% 85% 8% 7% 15% 1% Employee 2 3% 3% 25% 85% 6% 9% 15% 1% Average of All Employees' Time 18% 27% 4% 85% 7% 8% 15% 1% Indirect Time Allocated To Billable Service 3% 5% 7% 15% Percentage of Total Allocated 21% 32% 47% 1% Directly to a Billable Service Unbillable Activities Unbillable acfvity cost distributed across billable services. Total FIGURE 4 Annual Financial Report to Governor and Legislature July 9,

13 Cost Allocation Basics Explained In Figure 5, costs are attributable to three revenue generating activities (Services A, B, and C). But there are also costs attributed to unbillable activities that are not directly related to services or designated customers. They include administrative and operating costs and the Unbillable Support of the Florida Government Enterprise listed above. Without redistributing these unbillable costs to billable services, DivTel will be unable to attribute 1 percent of its costs. All Unbillable Ac6vi6es, 15% Service C, 4% Service A, 18% Service B, 27% FIGURE 5 Unbillable Ac8vi8es, 7% Service A, 17.5% Unbillable Ac8vi8es, 3% As shown in Figure 6, the costs of unbillable activities are broken into shares, which are proportional to the cost shares that have already been attributed to each service. Service C, 4% Service B, 27.5% Unbillable Ac8vi8es, 5% FIGURE 6 The unbillable activity costs are then combined in Figure 7 with the services costs so that 1 percent of s costs will be attributed to billable services. These total service costs are the primary factors in determining the price of these services. The net revenues for each service are then determined by comparing costs with customer payments as shown in Figure 8. Service C, 47% Service A, 21% Service B, 32% FIGURE 7 Annual Financial Report to Governor and Legislature July 9,

14 Cost Allocation by Service: Calendar Year (Toll Free) Call Center Services Local Area Network Svc. for the CCOC FIRN Hosted Fax IP Centrex Local Service Long Distance Mobile Communications Services MyFloridaNet Remote Broadband Services Local Area NetworkSvc at the SSRC Usage-Based Network Svc at the SSRC Telephone Equip. Premise- Based Svc. Telecomm Infrastructure Project Services Voice Conferencing Web Conferencing Video Conferencing Virtual Private Network Svc Wireless Data Services Total Total Invoiced Utilization Billed to 95/96 Billed to 7C Vendor Disbursements/Other Interest Earned 12,31,422 (4,298) (2,99) 81,92 1,674,947 13,45 275,688 (1,512) 1,16 4,937,688 17, ,65 98,131 36,636,712 (142,59) (31,247) 63,53 4,96,97 86,679 29,376 42,57,858 (57,881) 28 19,54 95, ,868 (12) (1,332) 347,986 (38,34) 8,734 1,74,756 (319,932) (1,483) 21,844 3,17,811 1,379,964 (695) 2,73 1,58,429 (95,416) (48,19) 15, , ,28 (1,16) 359,885 (72) (3,488) 117,982 4,776,155 (2) (9,254) 974,358 24, ,287,48 (658,264) (138,251) 1,216, ,939 Earned Revenue 12,339,37 1,688, ,282 4,956,387 94,65 98,131 36,525,93 5,23,26 42,627,93 245, ,38 775,185 3,17,811 1,381,971 1,452, ,728 7, ,659 5,765,31 118,64,856 Salary & Benefit; inc staff-aug&ops Direct Indirect Vendor Payments Vendor Credit/Adjustment Applied Redisrbution of 95 Charges 156, ,634 1,281,823 (19,48) 25,447 18,93 1,63,53 28,88 126,4 88,239 12,213 17,39 131,339 4,833,877 (78,199) 38,226 3,66 75,518 5, ,391 92, ,194 3, ,92 637,698 34,727,829 16,113 42,712 39,72 3,59,798 17,58 114,757 59,232 6, , ,672 4,727,65 (288,538) 62,955 58, ,183 2,73 133,66 66,78 (2,197) 8,264 39,582 3,529 27, ,535 2,784,487 9,35 116, ,28 1,254,999 13,961 64,483 63,5 1,151,732 (71,47) 41,419 28,525 28,5 32,445 18,887 16,46 37,635 1,189 11,161 18, ,757 24, , ,59 5,13,92 1,92 3,439,677 2,787,837 17,568,81 25 Common Cost; Admin, Ins, HR, Rent & Myflorida Portal Non-Salary Overhead; inclueds non-rent Exp, OCO, and DP Direct Indirect 68,33 11,63 52,92 77,721 17,353 52, , ,914 42,95 32,379 34,396 38,493 24,92 89,661 67,735 36,91 17,845 1,316 66,518 79,491 1,646,679 91,181 16, ,385 4,378 12,571 5,11 18, ,481 2,763 13,652 24,96 91,263 18,491 42,47 5,61 6,745 37,424 73,95 2,28 8,314 9,461 9,532 1,872 5,726 3,756 21,17 9,245 16,13 1,645 8,64 3,28 4,284 6,747 2,29 2,543 14,762 5,73 18, , ,374 Contractual Services; includes equip maint, background checks, etc. Direct Indirect , , ,877 3,652 5,936 1, ,987 2,956 Net Income; Blended Accrual Basis $1,624,757 ($28,987) ($32,567) ($24,15) ($78,39) $242,323) $51,98 $448,892 ($235,512) $513,272 ($138,95 $47,118 $284,86 ($249,335) ($211,513 $196,73 ($31,741) ($25,7) ($112,378) $283,324 $1,86, FIGURE 8 33, , , , ,512 15, toll-free services customers will be receiving a refund based upon their payments for this reported period because of unexpectedly high income for the service. 8 Mobile Communication Services was added to the portfolio of services effective July 1, 211, although $ revenue was generated during the reported period. Prior to then, costs associated with development of Mobile Services were captured and reported as research and development. 9 is presently involved in a billing dispute with AT&T that, upon resolution, will increase the net income associated with Local Service by as much as $22, for this period. 14 Annual Financial Report to Governor and Legislature Annual July 9, 212 Financial Report to Governor and Legislature July 3,

15 Non-Revenue-Generating Activities: Calendar Year 211 Device Mgmt, $69,185 Domain Name Mgmt, $54,6 Non- Exec. Support, $255,923 ESF2, $69,41 Special Projects, $478,612 Direct Costs, $112,671,25 Indirect Costs, $3,533,84 Business Support, $2,241,687 R&D, $5, / Directory Svs, $25,191 ARRA; Broaband, $64,395 FIGURE 9 Annual Financial Report to Governor and Legislature July 9,

16 Key Elements of the Cost Allocation Model 1) Collectable Income All billed charges to customers based on actual utilization. a. Accounts receivable are disregarded for this report. b. Billed charges are net of any credits, refunds, or rebates issued to customers during reported period. c. Charges include disbursements from vendors for those customers who are billed directly. Actual interest earned on trust fund assets for the reported period; this income is allocated to services based on their respective proportion of the Net Collectable Income 2) Salary & Benefits (Direct & Indirect Costs) Actual payments to employees (salaried, OPS, and contract) for the reported period a. Includes benefits, overtime, or comp hours paid and leave payouts posted to FLAIR for salaried and OPS employees during the reported period b. Includes invoiced hours of all contract staff during the reported period 3) Vendor Payments (Direct Cost) Amount due to the vendor based on actual utilization for the reported period including any relevant vendor credits or refunds Occasionally, one service utilizes another service. In such an instance, entries are made in the row titled Redistribution of Vendor Charges to move the associated vendor costs to the appropriate column. 4) Common Costs (Direct & Indirect Costs) Charges assessed by the Department of Management Services for Administration, Risk Management Insurance, Human Resource Management, Building Rent, and Fire/Police Insurance Premiums These costs are first divided into 12 equal installments then divided by the total number of employees on staff (both salaried and contract) for each month. a. Each employee s allocation of time drives the allocation of these charges among services as described above. 5) Non-Salary Overhead (Direct & Indirect Costs) Expenditures in the following appropriation categories posted to FLAIR during the reported period: Expense (excluding building rent), Other Personal Services, and Operating Capital Outlay Invoiced Data Processing charges for the reported period; these charges are assessed by the Southwood Shared Resource Center. 6) Contractual Services (Direct & Indirect Costs) Represents expenditures posted in FLAIR against the Contracted Services appropriation category (excluding contract employees/staff augmentation) 7) Net Collectable Income Here is the formula for determining Net Collectable Income: Collectable Income (Section 1) (All Sections 2-6) Net Collectable Income Annual Financial Report to Governor and Legislature July 9,

17 Communications Working Capital Trust Fund: Annual Performance Cash Basis The graphs below depict the relative health of s trust fund (the Communications Working Capital Trust Fund) with associated spending and revenue trends. 134,672,81 Annual Revenue 14,, 13,79, ,786,198 12,, 117,411,885 1,, 8,, 6,, 4,, 2,, Annual Expenditures Dec '8 Dec '9 Dec '1 Dec '11 FIGURE 1 14,, 12,, $133,663,991 $12,94,343 $122,333,19 $118,133,242 1,, 8,, 6,, 4,, 2,, Trust Fund Balance Dec '8 Dec '9 Dec '1 Dec '11 4,, FIGURE 11 35,768,674 35,, 3,, 25,, 26,274,632 22,289,99 28,687,412 27,531,743 2,, 17,368,786 19,21,742 15,, 12,521,7 1,, 5,, Dec '8 Dec '9 Dec '1 Dec '11 Cash Balance Total Fund Asets FIGURE 12 Annual Financial Report to Governor and Legislature July 9,

18 Future Conditions and Plans Affecting Net Revenues Changes to technologies, the marketplace, and customer demand can affect all of the above net revenue amounts in the future in ways that are not perfectly predictable. However, there are known historical conditions and broadly predictable changes related to some of these services that warrant comment here. Local Phone Service Local phones have long been an anchor service for. While there will be services akin to it over the next 2 years, it is now rapidly changing in form. Voice over Internet Protocol (VoIP) has been replacing traditional phone services at state agencies for the last five years. This trend is gaining momentum today, and as vendors offer more services and as more investment funds become available with recovery of the economy, VoIP displacement of traditional phone services will continue. For these reasons, s base of traditional local service customers will shrink as they displace it with more competitive and potentially lower-cost ways of making phone calls. DivTel s economies of scale will shrink, and its bulk-purchasing leverage will be diluted by the various options available to customers. Therefore, the net revenue for Local Phone Service will naturally diminish to the extent that it will no longer be an anchor service for. STEPS The Telephony Equipment Premise-based Services (STEPS) is an example where DivTel has attempted to offer local phone service under the new VoIP paradigm. Most business VoIP systems today use locally installed equipment that place calls through data communications lines (such as MFN) rather than traditional phone lines. Prior to STEPS, it was very difficult for to ensure best pricing, verify functionality and compatibility, and sustain maintenance on premise switches (Private Branch Exchanges) because agencies bought them off of state term contracts (outside of ) or dedicated procurements. DivTel established STEPS to address these problems. More importantly, by enabling to offer VoIP through these switches, DivTel will be able to effectively bring them together into a cohesive network to get the most savings and functionality out of this technology as it replaces traditional phone services. With the change making a provider rather than a regulator of these systems, DivTel has been very successful in working with customers to save money on these procurements. But to date, the STEPS contract has been very complex to implement and not conducive to recovering the associated administrative costs. DivTel is formulating proposals to resolve these conditions and save the state money that will likely require support of policy makers. MyFloridaNet On December 28, 21, DivTel signed an amendment to the MyFloridaNet (MFN) contract, effectively extending the contract for five years (ending in September 216). That amendment included numerous rate reductions that will save customers a projected $2.5 million annually. Despite the lead time this extension gives DivTel, the magnitude, complexity, and importance of this data transport contract warrants lengthy and careful planning, development, and migration. DivTel has begun designing the replacement for MFN to include new technologies, new business processes and a carefully choreographed migration for thousands of circuits. Mobile Communications Services In January of 212, DivTel signed a new contract for mobile communications services with three vendors: AT&T Mobility, Verizon Wireless, and Sprint. Prior to these contracts, the State of Florida bought these Annual Financial Report to Governor and Legislature July 9,

19 services through a state term contract with Verizon and various other public-sector contracts (e.g., the Western States Contracting Alliance). None of those contracts provided Florida government centralized accountability over mobile services usage and spending, and thus the state could not identify associated costs or savings opportunities. In addition to the substantial discounts these new contracts obtained, DivTel will centralize all mobile service orders, inventory, and billing to achieve complete transparency and robust accountability. The three vendors listed above will deliver perpetual competition under contract terms with the flexibility to offer emerging technologies as they become available. But the highly automated process that makes this possible required substantial cooperative software development from DivTel and these vendor partners (while legacy contract terms applied during the interim). As of this writing, each vendor is racing to complete the software and appears to be weeks away from implementing new pricing discounts with robust service management. Annual Financial Report to Governor and Legislature July 9,

20 U I L D W I T H R I G H T E S S G I E S, B U I L D W I T H G I E S, B U I L D W I T H TO D AY TO - S T R AT- D M S AG E N D A O P E R - D E L I V E R TO D AY B U S I N E S S TO G O V E R N O R S O N S U C - & TO T E A M O P E R - PA R T N E R A P P LY D E L I V E R P R O C E S S & A C U M E N U P P O R T D M S G O V E R N O R S E X C E L L E N C E TO - S T R AT- B U S I N E S S R I G H T S U C - AG E N D A T E A M O N & TO PA R T N E R A R C H I T E C T O R R O W G I E S, B U S I N E S S R I G H T A P P LY O M M I T M E N T S E S S TO D AY P R O C E S S & A C U M E N U P P O R T G O V E R N O R S A R C H I T E C T O R R O W T E E X C E L L E N C E O M M I T M E N T S PA R T N E R A P P LY O P E R AT E D E L I V E R P R O C E S S & A C U M E N U P P O R T E S S A R C H I T E C T O R R O W T E E X C E L L E N C E O M M I T M E N T S T E A M O N S U C - & TO - S T R AT- D M S AG E N D A