The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, September 27, 2001, at 1:00 PM (CST), at the Paducah Community College, in Paducah, Kentucky. 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, Jr., Co-Chair; Senators Brett Guthrie, Daniel Kelly, Robert Leeper, Ed Miller, Johnny Turner, and Jack Westwood; Representatives Royce Adams, Dwight Butler, Jim Callahan, Mike Cherry, Larry Clark, Bob Heleringer, Jimmie Lee, Thomas McKee, Fred Nesler, Charles Siler, Mark Treesh, and Rob Wilkey.
Legislative Guests: Senator Bob Jackson, 1st Senate District, and Representative Frank Rasche, 3rd House District.
LRC Staff: Terry Jones, Louis Pierce, Susan Viers, and Kathy King.
Chairman Sanders thanked staff of the Chamber of Commerce and Paducah Community College and business leaders and citizens of the community. Chairman Sanders recognized Senator Bob Leeper, 2nd Senate District, Senator Bob Jackson, 1st Senate District, Representative Fred Nesler 2nd House District, and Representative Frank Rasche, 3rd House District.
Dr. Robert Tarvin, Executive Secretary of the School Facilities’ Construction Commission; Mark Ryles, Director of Facilities Management; and Kyna Koch, Associate Commissioner of District Support Service, presented an update on the status of local school facilities’ construction projects and the bonding potential of local school districts.
Dr. Tarvin said money for school facility construction is allocated according to the needs of a facility. There are three sources of state funding: Capital Outlay Funds, a direct appropriation at the rate of $100 per student; Facilities Support Program of Kentucky (FSPK), a state funded program based on assessed evaluation, which equalizes a five cent tax rate among all the districts across the state. (If a school district does not have enough debt service in place to need the five percent, it does not qualify for the assistance); and the School Facilities Construction Commission (SFCC), which is based on need and follows a specific formula to determine the amount of funds needed for the facility. Dr. Tarvin said each school district submits a facility plan, or unmet needs list, to the SFCC once every biennium. Projects funded by the SFCC are based upon the local district facility plan developed between the local Boards of Education and the Kentucky Board of Education. Projects are funded in the order of priority established by the local district plan.
Senator Miller said some school buildings built in recent years are in worse shape and have more needs than older school buildings. He asked what guidelines are used to determine the actual condition of a school building. Mr. Ryles said there are a number of variables used to determine the condition of a building. Inspection of the infrastructure, HVAC and roof systems are important, as well as the facility’s ability to support modern education programs.
Senator Kelly said the 1998 General Assembly increased school construction funds because a number of schools were very overcrowded, or in very poor condition. The General Assembly also gave the SFCC the ability to start on the planning process for school construction and to hire contractors for needed projects. Dr. Tarvin said the SFCC was authorized to make offers of $201 million in school construction dollars. The General Assembly provided enough actual General Fund money to fund $109 million of the $201 million, which was the first time the commission was permitted to make offers for a greater amount of bonding authority than it actually had dollars available to pay in that given year. It was implied, but there was no legal requirement, that the rest of the offers would probably be taken care of in the 2000 budget. In the 2000 budget, there was a statement that there was $100 million authorized for offers but no money provided for funding. There actually has been no new money during this biennium for schools to build except the remaining $92 million from the previous offer, and of that $92 million, $7 million was required to pay the debt on the $92 million. The commission intends to make those offers in December.
Mr. Ryles said there are about 600,000 students and approximately 1,230 school facilities across the state. About 76 percent of those school facilities are reported to be in good to new condition, and they are not scheduled for major renovation or replacement, which is above the national average. Kentucky has made a lot of progress and most of it has been in the last eight years with the help of appropriations from the General Assembly, and also local effort from school districts. Each of the 176 school districts has a long-range district facility plan with prioritized capital construction projects. Mr. Ryles said the 1998 appropriation made progress, but there are always new programs and declining infrastructure so the outlook for 2002 is not as dramatic as it was in the previous biennium. Mr. Ryles said there is about a $2.3 billion needs assessment for 2002. Bonding capacity is around $362 million so the unmet need will be around $1.9 billion. Mr. Ryles said the Kentucky Board of Education has an initiative to focus efforts to reduce, or eliminate, 62 of the poorest school buildings in Kentucky, which are rated category five facilities. There are 235 category four buildings scheduled for major renovation, and if funding were available, renovation would be started immediately. Mr. Ryles said these are buildings that are still in service, but the roofs are about to leak and the boilers are waiting to fail.
Chairman Sanders asked if the facilities that are in poor condition are scattered across the state, or if they are located in certain districts. Mr. Ryles said it is spread out, but there are patterns based on assessment. He said he would provide members with a county-by-county list of the facilities.
Representative Siler asked if there are funds set aside for schools to get back up and running quickly when there is a catastrophe, such as a fire or tornado. Mr. Ryles said the school buildings are required by statute to be properly insured. In those cases, the insurance has provided the cash flow not only to repair the building in a timely manner on an emergency basis, but also to provide housing to the students. He said there is also an Emergency School Loan Fund, under 702 KAR 4:100, but it is not funded enough to handle those types of disasters.
Representative Siler said the technology system at Williamsburg Independent School was improperly installed and students are suffering because somebody made a serious mistake. He said there should be a reserve fund set aside to handle this type of situation. Mr. Ryles said the department is aware of the faulty wiring situation in the Williamsburg School district. A project application has been approved and funds have been made available through the building fund to get that project underway as quickly as possible.
Ms. Koch said all maintenance money in local school districts is funded through the SEEK calculation. When a school district starts having financial trouble, the first things cut are building maintenance and bus replacement plans. Ms. Koch said these are very valuable assets that must be maintained. She said school districts must be urged to continue to maintain the investment Kentucky has made to their school districts. Mr. Ryles said Kentucky has just about all of the components of every successful national program with the exception of maintenance. He said some states offer capital construction funds as an incentive, or a requirement, to school districts to spend a certain amount on building maintenance.
Representative Nesler asked where a district would get the funds to repair a roof, or furnace if the school district has zero local available revenue and zero bond potential. Ms. Koch said the department discourages the use of General Funds in capital construction projects, but if a district has no bonding potential and has a dire need, and if they can demonstrate that they can maintain a proper level of instructional activity, the department will consider General Fund use. Mr. Ryles said most school districts have a 20 percent contingency in their capital outlay fund that can be used for certain types of emergencies.
Chairman Sanders asked if the cabinet tracks the maintenance of school facilities in local school districts. Ms. Koch said, “no,” unless a school district requests a management audit, which would include an assessment of their maintenance program. Mr. Ryles said national statistics have determined that a preventive maintenance program should be about 90 percent, with only ten percent of the facilities in any one district that would need replacement, or major renovation, which would be a very sustainable program. He said there are some programs in Kentucky that are at 90 percent, and their programs are sustainable barring any kind of unforeseen growth or change in programs.
Bill Beasley, General Manager, Purchase Area Regional Industrial Park, said eight western Kentucky counties have joined together in a unique, cooperative effort to form the Purchase Area Regional Industrial Park, which has been named the region’s top priority project. County judge executives and other county officials in Ballard, Calloway, Carlisle, Fulton, Graves, Hickman, Marshall, and McCracken counties have reached an interlocal agreement to share revenues generated by this project. Incentives for the park’s regional effort include sharing of future payroll tax revenues. A Board of Directors has been appointed from each of the eight participating counties in accordance with the Kentucky Cabinet for Economic Development guidelines, and support for development of a regional Industrial Park in the geographic center of the Jackson Purchase area continues to grow with unprecedented cooperation, excitement, and enthusiasm. The economic impact from this cooperative effort has the potential to create several thousand jobs with numerous satellite industries building facilities in other local industrial parks. The need is even more evident now, not only because of the restructuring of the Paducah Gaseous Diffusion Plant, but also because of the impact of plant closures and company layoffs in the area in the past year, with over 2,000 job losses. Mr. Beasley said Murray State University, the University of Kentucky, and the West Kentucky District of KCTCS, consisting of Paducah Community College and West Kentucky Technical College have committed to providing workforce training for potential industrial park clients, which is both vital and necessary to the success of the park. The partnering of these educational institutions, businesses, and industries would enhance and simplify training and recruitment efforts, and success of the park will be maximized with a coordinated approach. In addition to the eight counties working together, there is support from the Economic Development Cabinet, city mayors and commissioners, local Chambers of Commerce, and economic development groups and civic organizations throughout the entire region.
Mr. Beasley said other regional parks in Kentucky receive coal severance tax moneys, but the Purchase Area Regional Industrial Park does not. The Board is requesting $10 million from the federal government with a $10 million match from the state of Kentucky, for a $20 million funding request to be granted over a two to three year period. The primary focus of the initial start-up fund will be for land acquisition, and engineering and environmental studies. Mr. Beasley said the Board also requests support from the General Assembly on the Transportation Cabinet’s Outer Loop project that would connect I-24 to US Hwy 45, and the future construction of I-69. The Barkley Regional Airport will be requesting funds in 2002 for renovation of the terminal, installing a jetbridge, replacement of lighting transformers and taxiway repair. The airport is important and vital to the development of the Industrial Park and to the entire Purchase area. Finally, Mr. Beasley said a commitment from the General Assembly to the contributing public higher education institutions is also important to the success of the Industrial Park.
Senator Leeper said the Purchase Area has worked diligently over the last ten years in a unified effort to become a regional entity supporting projects of a regional nature. It is the number one project to keep the economic engine running for this area of the state. He said representatives from all of the participating counties and other surrounding counties are attending this meeting today to show their support for this unique economic development project.
Senator Kelly said it is helpful to meet with other communities and hear about their concerns. He said when a community comes together in a unified fashion with a well thought out plan, it is much easier for the legislature to respond to their needs.
Chairman Sanders said the Purchase Area is unique because so many counties and communities have united in support of this one project, and they should be commended for their cooperative effort. Mr. Beasley said it is truly an unprecedented effort for the eight counties to unify and work together towards a common goal. He said in the long-term, it is believed that even more counties will become involved and benefit from this project.
Larry G. Bland, President of Barkley FOP #60, said he is employed as a corrections officer at the state penitentiary in Eddyville, Kentucky, and a main concern of corrections officers is the high cost of health insurance. He said many new correctional officers go through their training and would be a valuable asset to the corrections system but leave because they cannot bear too many expenses to maintain the job as a career employee. Mr. Bland said the loss of employees creates a hardship on the officers as well as the administration.
Representative Cherry said he would be introducing legislation which will address career ladder bonuses for corrections officers for the 2002 Regular Session. He said Kentucky is well below the average in pay for its corrections officers. It is estimated that there is a loss of $6 million a year because of overtime, and training dollars lost due to personnel turnover. Representative Cherry said the legislation will cost approximately $1 million to implement, but it is believed that it will save money in the long run.
Senator Kelly said there is no question that correctional officers have been miserably underpaid. He said the legislature did focus on correctional officers’ salaries in 1998, and did provide some relief although it was not adequate. He said the health care legislation passed in 1994 created a hardship on public employees and school teachers, and the legislature is still dealing with the issue and is mindful of the plight of correctional officers, who are not being paid enough now for the services they provide.
Dr. Jim Ramsey, State Budget Director, said Kentucky’s economy has grown and prospered over the last 18 years, both in job growth and income growth, but in October and November 2000, Kentucky began to see a very dramatic slowdown in the economy. A couple of reasons for the slowdown in the economy were the tremendous drop in stock prices and high-energy prices. November and December 2000 were very cold months, and home heating bills and prices for propane and natural gas began to skyrocket. Consumers became uncertain about the economic future. When people began receiving their 401K statements and quarterly reports from their investment advisors for the last quarter of 2000, there was a tremendous drop in the value of their assets. Consumers cut back on their expenditures, particularly on big-ticket items, such as cars and home appliances. Dr. Ramsey said there has been a real plunge in consumer confidence over the past year. People are hearing and reading about layoffs. Industries are cutting back on their employee hours, and some industries that were paying bonuses before are not doing so now. Even more important, when the consumer loses confidence, there is a drop in business confidence and business spending plans, and as businesses become less confident, there is a drop in industrial production. Dr. Ramsey said the major impact on Kentucky has been in manufacturing employment. Kentucky has been losing some manufacturing jobs over the last several year primarily in the nondurable manufacturing area, which are important jobs, but they are not Kentucky’s highest paying jobs. Kentucky’s highest paying jobs are in durable manufacturing, an important sector of Kentucky’s economy. Manufacturing represents 25 percent greater employment in Kentucky than on the national average, and these jobs pay 30 percent more on the average than the normal job in Kentucky. When Kentucky starts losing its manufacturing jobs, it has a real impact on the economy. There were about 307,000 manufacturing jobs in Kentucky in 1994, and there was nice growth showing a positive trend until August 2001, when there was a dramatic drop. Dr. Ramsey said Kentucky is now where it was in 1994, with approximately 307,000 manufacturing jobs in the state.
Senator Kelly said some new plants just recently opened in his district and even though there have been job losses with Fruit of the Loom, employment has remained fairly stable. He asked if the job losses are from wholesale plants, or industries, or if it is from a general softening in the level of staff employed at existing plants. Dr. Ramsey said it is a combination. There have been announced layoffs and reductions in employees’ hours, and a decrease in employee overtime. Industries that have been hit the hardest are industrial machinery; the stone, clay and glass industry; fabricated metal products; and transportation equipment. Other industries that are down are the apparel industry, paper products, and rubber and plastics. Senator Kelly said there is a downturn in the level of employment in hours overall, but there has not been a drastic closing of industries, or industries moving out of state. Dr. Ramsey said there have been some layoffs in Kentucky but not nearly to the degree that other states have been experiencing. He said Kentucky is still adding jobs, but most of the growth is in the service industry, and these are not the better paying jobs.
Dr. Ramsey said transportation, communication and public utilities have been growth industries in Kentucky but have struggled over the last year. The transportation industry was already impacted by the ComAir strike, which has now been settled. A full workforce was expected to be in place by December of this year, but all airlines and the entire travel industry has been seriously impacted by the September 11th tragedy. The communications industry overbuilt, and even though there have been some mergers in the industry, there have been some layoffs. The public utilities industry is also experiencing difficulty. Dr. Ramsey said the Consensus Forecasting Group is still forecasting employment growth, but it is primarily in the service sector and lower paying sectors of the economy. The forecast was done August 14th by the Consensus Forecasting Group, as required by statute, and at that time they were expecting somewhat of an acceleration in 2003, and a return to a more normal growth rate for 2004 through 2006. Even at these growth rates, growth would be less than the average of the previous ten years.
Dr. Ramsey said the 2000 budget was enacted on a General Fund revenue estimate of $6,813 million. In March, the Consensus Forecasting Group revised the estimate downward to $6,721 million. Three months later, in June 2001, they revised downward again to $6,653 million. The original budget estimate for this year was $7,182 million, with a 5.4 percent growth rate, but another downward revision is anticipated.
Dr. Ramsey said the administration is following the same principles for budget cuts as it does in trying to reach a balanced budget. Education programs for K-12, higher education, and Medicaid will be exempt from General Fund cuts. Capital construction projects are also exempt. Dr. Ramsey said the capital construction projects were not cut because the feeling is that they create jobs and economic activity in local communities. The administration is utilizing lapses, fund transfers, and savings from Empower Kentucky to counter the budget shortfall. The administration has had to tap into the Budget Reserve Trust Fund, taking $40 million out in 2001, and $120 million this year. Dr. Ramsey said the administration is refinancing and trying to save money on everything that it can in an interest rate environment. The Judicial Branch has committed to a $1 million cut and the Legislative Branch $1.3 million, which leaves $57.4 million in nonexempt areas of the budget. Dr. Ramsey said there are about 100 cuts to be made and they will affect just about every area of state government.
Representative Heleringer said money could be captured by cutting some personal service contracts. He said the budget for spending on personal service contracts has doubled in eight years to $352 million a year, and for this month of September, $37 million was spent on personal service contracts. There is a lack of bidding in the contract process, and there is no accountability, or oversight. A recent study says an additional 8,600 people could be hired for the same amount that is spent on personal service contracts, and the state is paying four times as much through the contract process when an employee could be hired for half that amount.
Representative Heleringer said he is particularly concerned about a $4.2 million budget cut made in the Mental Health/Mental Retardation budget. He asked if more budget cuts are anticipated. Dr. Ramsey said the Consensus Forecasting Group is required to give another estimate to be used for budget purposes by October 15th, and there could be a second round of cuts. He said the September 11th tragedy will have an impact, but it is unknown at this time how it will affect the economy. Representative Heleringer said advocates for mental health and mental retardation have waited patiently for many years for some of these programs. They are worried about future budget cuts, and that they may still be on a target list for additional cuts. Dr. Ramsey said the administration did not directly mandate how cabinet secretaries would manage their cuts; however, it did put limitations and restrictions on such things as comp time, overtime, travel, and motor pools. Some cabinets have used the personal service contract area to come in line with their own budget cuts.
Representative Clark said the Judicial Branch made a $1 million cut in its budget, He asked if there was a certain percentage expected for a reduction plan from the other branches of government. Dr. Ramsey said there was a target guideline of 3.27 percent, and the Legislative Branch was pretty close to target. The Judicial Branch has about a $180 million budget, and they were targeted at around $4 million.
Senator Kelly said that in the last session the General Assembly empowered two studies regarding how services are provided to the mentally handicapped, persons with mental illness, and persons with substance abuse problems. It was a statewide, grassroots effort to try to draw attention to the fact that Kentucky is 49th in spending for mental health services. Senator Kelly said funding needs to be expanded to this area so that it can move forward rather than regress. Dr. Ramsey said in the first year of the biennium, the increased funding for mental health/mental retardation was 9.1 percent, and it was not cut in 2001. For 2002, the General Assembly approved an increase of 6.2 percent so they are still getting an increase of 3.8 percent.
Debra Gabbard, Executive Director, Policy and Budget, Transportation Cabinet, said there is a deficit in the Road Fund of $85.4 million. She said the cabinet did detailed analysis to decide where the cuts would be made. The first cut is from the revenue sharing program. The revenue sharing program receives 48 percent of all motor fuels taxes. If motor fuels come in over the estimate, the program benefits, but if it comes in under estimate, as it did this year, then the program has to share in the cut. Ms. Gabbard said it is done strictly by formula, and their cut was $12,580,200. Highways was cut $5.4 million and Vehicle Regulation was cut $601,200. Debt service, due to restructuring, is provided by the Finance Cabinet and was $201,000. General Administrative and Support was cut $7,984,000. Six million dollars of that is reoccurring and is due to the debt service on the new state office building. Capital construction projects for the year were budgeted at $6.6 million and they were exempted. The last cut of $58,326,300 came from the Biennial Highway State Construction Account.
Senator Kelly said bids for maintenance work and new construction have been coming in less than expected across the state. He asked if there has been a reduction in the cost of building because of increased competitiveness. Ms. Maggard said costs are actually coming in higher than expected, but Mike Hancock, with the Department of Highways, is the best person to address this issue.
Representative Heleringer urged members of the committee to review a resolution that was recently adopted by the Health and Welfare Committee. The resolution urges the Governor and his administration to reduce unnecessary and non-essential spending, and retain current spending levels for mental health and mental retardation programs. Representative Heleringer said he would offer the resolution at the committee’s next meeting.
The meeting was adjourned at 3:30 p.m.