The second meeting of the Interim Joint Committee on Appropriations and Revenue was held Thursday, January 25, 2001, at 1:00 PM, in Room 131 of the Capitol Annex. Senator Richard Sanders Jr, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Richard Sanders Jr, Co-Chair; Representative Harry Moberly, Co-Chair; Senators Brett Guthrie, Daniel Kelly, Alice Kerr, Robert Leeper, Vernie McGaha, Ed Miller, Daniel Mongiardo, Gerald Neal, Dan Seum, Tim Shaughnessy, Robert Stivers, Johnny Turner, and Jack Westwood; Representatives Royce Adams, Rocky Adkins, Joe Barrows, Dwight Butler, Jim Callahan, Mike Cherry, Larry Clark, Barbara Colter, Jesse Crenshaw, Robert Damron, Bob DeWeese, Danny Ford, Bob Heleringer, Jimmie Lee, Thomas McKee, Lonnie Napier, Fred Nesler, Stephen Nunn, Charles Siler, John Will Stacy, Mark Treesh, John Vincent, Jim Wayne, Robin L. Webb, and Rob Wilkey.
Legislative Guest: Representative Greg Stumbo, 95th Legislative District.
Guests Appearing Before the Committee: Dr. Jim Ramsey, State Budget Director; Bill Hintze, Deputy Director, GOPM; Manoj Shanker, Governor’s Office for Economic Analysis; Secretary Mike Haydon, Commissioner Dana Mayton and Director Charlotte Quarles, Kentucky Revenue Cabinet.
Guests: Rachel Cox, Stan Maze, Ron Southworth, Patrick Mooney, and Steven Royalty, DMHMRS; Judy Campbell, DPA; Kathleen R. Marshall; Martin Denton, CHS-OJG; Gina Carey and Kim Furnish, OAG/UPS; Joe Lancaster, Kentucky Revenue Cabinet; Sherree Fuers and Jeanne Baldwin, CFC; L. D. Cobb, Cobb & Assoc.; Wade Helm, KCC; Janis Stewart, CHS; Larry Gruther, Justice; Ned Sheehy, KYTA; J Ellis, KHEAA; Jojunan Greene, KRC; Jim Carliss and John Cooper, Capital Link; Cathy Murphy; Bob Blackburn, CFC; Petie Day, KDG; Dietra Paris, CFC; Libby Marshall and Alicia Sells, KSBA; Joe Ewalt, Ky League of Cities; Mike Rodman, KAHCF; Bart Baldwin, Children’s Alliance; Chris Nolan, McBrayer McGinnis; and Doug Hall, Ky Youth Advocates.
LRC Staff: Terry K. Jones, Lou Pierce, Susan Viers, and Kathy King.
Senator Richie Sanders opened the meeting and asked for approval of the minutes from the July 24, 2000 meeting. A motion was made by Representative Lee, and seconded by Representative Stacy to approve the minutes. The motion was adopted by voice vote.
Senator Sanders welcomed new members to the committee: Senators Alice Kerr, Ed Miller, Daniel Mongiardo and Johnny Ray Turner; and Representatives Mike Cherry, Joni Jenkins, Tom McKee, and Robin Webb. Senator Sanders then informed the committee that prefiled legislation would be discussed.
Senator Sanders, sponsor of Senate Bill 29, AN ACT relating to budget submission, explained the bill. Senator Sanders said the bill when the Executive Branch submits the budget to the General Assembly. The bill only impacts a Governor who succeeds him or herself of the beginning of the second term. It requires that the budget be delivered to the General Assembly to the 10th legislative day rather than the 15th legislative day.
Next, Representative Harry Moberly, explained House Bill 79, AN ACT relating to the Support Education Excellence in Kentucky (SEEK) Program and making an appropriation therefor. Representative Moberly stated that the bill would distribute lapsed SEEK monies.
Senator Kelly asked if the bill also includes teachers in vocational schools. Representative Moberly said no it would not. Senator Kelly then asked if there are vocational teachers that are associated with the high schools, and if so, have these teachers been getting the state employee’s five percent salary increase or just the school increase. Representative Moberly replied that these teachers have been getting the same salary increases as the school personnel.
Senator Shaughnessy asked if the bill applies to all teachers across the state and not just schools that are targeted under the SEEK formula. Representative Moberly said that all public schools receive SEEK money.
Next, Dr. Jim Ramsey, State Budget Director, discussed different taxes and how they affect Kentucky’s General Fund. The primary source of revenue to the General Fund comes from the individual income tax, which is about 42 percent, and the sales tax, which is about 33 percent. Other major taxes are the coal several tax, property tax, and corporate income tax. The other category includes the lottery, corporate license tax, inheritance tax, and investment income.
Dr. Ramsey stated that individual income tax is the primary source or largest source of revenue to the General Fund. The second largest source of revenue to the General Fund and that is the sales tax. He discussed his concerns regarding the state sales tax, stating that returns have been behind during most of the last half of this fiscal year. He said that if this trend continues, it could have a significant impact on the General Fund. He then briefly discussed corporate income tax, coal severance tax, and property tax.
Dr. Ramsey discussed various factors affecting Kentucky's economy. He briefly discussed the national economic downturn and how it is affecting the state. He also discussed escalating energy costs and how those costs are affecting Kentucky. He stated that another factor affecting the economy is that the federal reserve system waited too long to lower interest rates. This has resulted in a drop in consumer confidence. Dr. Ramsey then discussed the implications of these factors to Kentucky. He stated that the state has lost manufacturing and construction jobs. When these types of jobs are lost, the state experiences a loss in state personal income tax and sales tax, which affects the tax base and the General Fund balance.
Dr. Ramsey then discussed the revenue estimates done in January 2000, which was $6,813.1 million. The latest preliminary estimate is $6,743.5 million, a difference of $69.6 million less in General Fund revenue this year. Dr. Ramsey said that the $69.6 million shortfall does not include the Murphy Camera court case. In the second year of the biennium, we again did not include any impact with regard to the Murphy Camera court case. We are saying that the shortfall in the second year of the biennium will be $135 million less than what the budget was based. If the Supreme Court rules in favor of Murphy Camera, the $69.6 million revenue shortfall in the current year would increase to $102 million and to $199 million in the second year of the biennium.
Representative Wayne asked what could the worst case scenario regarding the Murphy Camera case. Dr. Ramsey said there are two impacts, one would be whatever refunds we have to pay and the second impact would be the recurring impact year after year. He said the recurring impact would be ongoing.
Senator Stivers asked if the state had a budget deficit in the past year. Dr. Ramsey replied that yes, on the revenue side, but we had an overall surplus. Dr. Ramsey said that the state lapsed $68 million – that was $68 million that was unspent in SEEK. The state was also able to add $39 million to the Budget Reserve Trust Fund from last year.
Representative Treesh asked what the impact would be if the state changed the Nexus standard to a doing business standard in regards to internet taxation. Dr. Ramsey said there is Nexus standard on the corporate income tax and sales tax. Charlotte Quarles addressed the issue of Nexus standard for sales tax. The state sees some leakage in tax planning efforts for companies to spin off portions of their business into Dot.coms where they have no physical presence, therefore, being able to see over the internet or via catalogue in that Dot.com, having no physical presence and we are losing the sales tax there. I agree that we should try to strengthen the Nexus standards in sales tax and try to pick up that affiliated Nexus.
Representative Nunn asked Chairman Moberly if the excess funds in the SEEK fund are tied to the Education budget. Chairman Moberly said yes, as they have been in past bienniums. Representative Nunn asked if those funds could be used to help reduce the deficit in the General Fund. Chairman Moberly said it cannot be done unless the General Assembly takes action or unless it is allowed in the budget reduction plan.
Senator Seum asked if the SEEK funds for the first year of this biennium have been allocated. Dr. Ramsey replied they had, but the money has not been distributed.
Representative Damron asked if the administration is preparing any legislation on the streamlined sales tax for the 2001 session. Dr. Ramsey said the administration would like to have more time to study the issue and propose legislation at a later date.
Representative Adkins asked if the $39 million SEEK lapse funds will be redistributed to local school districts. Dr. Ramsey replied that a request has not been received from the Commissioner for distribution of those funds.
Representative Adkins asked how much money is in the Budget Reserve Trust Fund. Dr. Ramsey said $278 million. That includes the $39 million added from the surplus at the end of last year.
Representative Wilkey asked is we can expect any type of legislative proposal from the cabinet during this session to address the ambiguity raise in the Murphy case. Secretary Haydon said the Finance Cabinet does have some proposed legislation to address that issue. The cabinet is preparing legislation that would narrow the court’s interpretation in the Murphy case and allow the legislature to readdress the issue and to redefine what constitutes manufacturing for purposes of this exemption. Representative Wilkey asked when you expect a final decision from the court. Secretary Haydon said that the decision was just released by the court today at 2:00 and they did deny the cabinet’s position for rehearing.
Representative Wayne asked about the immediate implications of the Murphy decision and if the state any recourse. Dr. Ramsey answered that the company requested a tax refund and the cabinet denied this request. The case went all the way from the Board of Tax Appeals to the lower court to the Court of Appeals and we won every step, or the position of the cabinet was upheld every step of the way. When the Supreme Court came out with its decision on September 28th with a four to three decision, it caught us by surprise because we had won it every step of the way. The state's liability could be large. Representative Barrows said that in January, it’s a little early in terms of when that money would have gone out in previous years also. I would think in the past that we sent it out to kindergarten districts but that it probably did not go out in January. It would have gone out at some later date and the notion that it hadn’t yet gone out is not inconsistent with the way it has been handled in the past.
Representative Jimmie Lee, Co-Chair of the Budget Review Subcommittee on Human Resources, said that the subcommittee did meet and reviewed and approved three appropriation increases. Representative Lee moved for adoption of the subcommittee report. The motion was seconded by Representative Wayne, and adopted by voice.
Representative Jesse Crenshaw, Co-Chair of the Budget Review Subcommittee on Justice, Corrections, and Judiciary, said that the subcommittee did meet and reviewed and approved two appropriation increases. Representative Crenshaw moved for adoption of the subcommittee report. Senator Sanders said that his motion only applies to restricted funds and does not apply to the federal funds.
Senator Sanders said there were requests for some other fund transfers. In looking at the Budget Reduction Acts, part of that says that some of that can be captured in the Budget Reduction Plan. I would prefer to defer those until we meet here in February. The motion was seconded by Representative Wayne.
Senator Kelly said the restricted funds will be deferred until the next meeting but any federal fund increases without action by the committee will be approved.
Senator Sanders called for a voice vote on the motion. The motion was adopted by voice vote.
The meeting was adjourned at 3:20 p.m.
A cassette tape of the meeting in its entirety and all meeting materials are available in the Legislative Research Commission library.