DIR Board Meeting | July 17, 2012 Cost-Recovery Fees and Fee Setting Methodology Nick Villalpando Chief Financial Officer

Budget Assumptions/Philosophy DIR Board Meeting | July 17, 2012 Cost-Recovery Fees 2 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.

Indirect Cost Activities DIR Board Meeting | July 17, 2012 Cost-Recovery Fees 3 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

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, 2012 Cost-Recovery Fees 4

Operating Expenses to Be Recovered Cooperative Contracts OPERATING EXPENSEFY 2013FY 2012VARIANCE $VARIANCE % Admin Fee Revenue$5.8$5.3$0.59% Direct Expenses Salaries % Professional Fees1.14.3(3.2)(74%) Software/Software Maintenance–––– Other–––– Indirect Expenses Indirect Admin1.92.0(0.1)(5%) Indirect Other0.20.3(0.1)(33%) Total Expenses (3.1)(36%) Net Revenue$0.2(3.4)3.6106% 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, 2012 Cost-Recovery Fees 5

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, 2012 Cost-Recovery Fees 6

Operating Expenses to Be Recovered Data Center Services OPERATING EXPENSEFY 2013FY 2012VARIANCE $VARIANCE % Admin Fee Revenue$4.3$4.5$(0.2)(4%) Direct Expenses Salaries2.22.4(0.2)(8%) Professional Fees–––– Software/Software Maintenance–––– Other–––– Indirect Expenses Indirect Admin1.71.8(0.1)(6%) Indirect Other0.2 –– Total Expenses (0.3)(7%) Net Revenue$0.2$ % 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, 2012 Cost-Recovery Fees 7

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, 2012 Cost-Recovery Fees 8

Operating Expenses to Be Recovered Communications Technology Services DIR Board Meeting | July 17, 2012 Cost-Recovery Fees 9 OPERATING EXPENSEFY 2013FY 2012VARIANCE $VARIANCE % Admin Fee Revenue$16.6$17.3$(0.7)(4%) Direct Expenses Salaries4.14.8(0.7)(15%) Professional Fees % Software/Software Maintenance0.81.5(0.7)(47%) Other2.32.7(0.4)(15%) Indirect Expenses Indirect Admin3.84.0(0.2)(5%) Indirect Other0.5 –– Total Expenses (1.0)(6%) Net Revenue$(0.2)$(0.5)$0.360% Dollars in millions Note: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

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, 2012 Cost-Recovery Fees 10

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, 2012 Cost-Recovery Fees 11

Operating Expenses to Be Recovered Texas.gov DIR Board Meeting | July 17, 2012 Cost-Recovery Fees 12 OPERATING EXPENSEFY 2013FY 2012VARIANCE $VARIANCE % General Revenue$0.7 $–$–– Direct Expenses Salaries0.5 –– Professional Fees0.1 –– Software/Software Maintenance–––– Other–––– Indirect Expenses Indirect Admin0.1 –– Indirect Other–––– Total Expenses0.7 –– 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 EXPENSEFY 2013FY 2012VARIANCE $VARIANCE % Salaries$5.3$5.4$(0.1)(2%) Professional Fees1.92.1(0.2)(10%) Software/Software Maintenance0.5 –– Other0.70.9(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, 2012 Cost-Recovery Fees 13

Operating Expenses to Be Recovered Total Agency DIR Board Meeting | July 17, 2012 Cost-Recovery Fees 14 OPERATING EXPENSEFY 2013FY 2012VARIANCE $VARIANCE % Revenue$27.4$27.8$(0.4)(1%) Direct Expenses Salaries9.29.8(0.6)(6%) Professional Fees6.58.7(2.2)(25%) Software/Software Maintenance0.81.5(0.7)(47%) Other2.32.7(0.4)(15%) Indirect Expenses Indirect Admin7.57.9(0.4)(5%) Indirect Other0.91.0(0.1)(10%) Total Expenses (4.4)(14%) Net Revenue$0.2$(3.8)$4.0105% Dollars in millions Note: Forecasted revenues and expenses continue to be revised and do not reflect potential FY2012 unexpended balances.

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, 2012 Cost-Recovery Fees 15