The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, June 19, 2003, at 10:00 a.m., in the Ballroom at the University Center on the the campus of Northern Kentucky University. Representative Harry Moberly, Jr., Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Harry Moberly, Jr., Co-Chair; Senator Richard Sanders, Jr., Co-Chair; Senators Brett Guthrie, Paul Herron, Jr., Ray Jones, II, Alice Kerr, Robert Leeper, Vernie McGaha, R.J. Palmer, II, Joey Pendleton, Dan Seum, Robert Stivers, and Jack Westwood; Representatives Rocky Adkins, Joe Barrows, Dwight Butler, Jim Callahan, Mike Cherry, Larry Clark, Robert Damron, Bob DeWeese, Jon Draud, Danny Ford, Joni Jenkins, Jimmie Lee, Mary Lou Marzian, Thomas McKee, Lonnie Napier, Fred Nesler, Stephen Nunn, Charles Siler, John Will Stacy, John Vincent, Jim Wayne, Robin L. Webb, and Rob Wilkey.
Guests: James Jitter Allen; KCTA; Bill Hanes and D. Mulles, KY Retirement System; Sarah Nicholson, KHA; Eric Gregory, East Ky. Power Co-op; Rob Walker, Employment Services KY; Mike Ridenour, Lexington Chamber of Commerce; Addia Wuchner, NKHD, Board Member; and Barry Conley, ICN6.
LRC Staff: Terry K. Jones, Pam Thomas, Lou Pierce, Susan Gitzinger, and Kathy King.
Co-Chairman Moberly opened the meeting, welcomed members and guests, and thanked area representatives for the hospitality extended to members of the General Assembly during their stay in northern Kentucky. He recognized Senate President David Williams, House Speaker Jody Richards, and members of the Northern Kentucky legislative caucus for introductory remarks.
Dr. James Votruba, President of Northern Kentucky University (NKU), said NKU was established 35 years ago and is Kentucky's youngest university. Its current enrollment is over 14,000 students. NKU's progress and growth is reflected in the progress and growth of the northern Kentucky region over the last 25 to 30 years. Dr. Votruba said regional educators and community leaders firmly believe in the principles of House Bill 1 passed by the General Assembly in 1997. There is a commitment to sustain education at all levels from early childhood to post-secondary and adult to insure economic success and quality of life for Kentucky citizens. As a result of this commitment, educators and community leaders have formed a unique partnership that completely transcends any political or sector boundaries. The partnership, which represents every level of education, is working together to contain costs, to avoid duplication, and to expand educational opportunities. This partnership strongly believes that Kentucky's future depends on a strong educational continuum that supports learning across the life span. Dr. Votruba then introduced some of the members of the regional partnership: Dr. Edward Hughes, President of Gateway Community and Technical College; Dr. Patrick Clore, Superintendent of the Pendleton County School District, representing pre-school through high school for the Northern Kentucky Superintendent's Association; Rick Hulefeld, Executive Director of Children, Inc. representing early childhood services; Gary Toebben, with the Northern Kentucky Chamber of Commerce; Jessica Hoge, representing United Way; and Mike Hammonds, representing Forward Quest. In addition, Thomas More College is also a part of the "Partnership."
Dr. Votruba said comprehensive universities serve a much greater role in communities than just as teaching institutions. NKU recently conducted a five-year strategic plan and part of that planning process included interaction with community leaders and citizens in an eight-county area to find out how the regional university impacts their wants, needs and concerns for the area. The response from those citizens is that the university campus is an important part of the community. The university provides technical assistance, applied research, policy analysis, and economic development at the local level. The public wants and enjoys the performing arts and other intellectual sources that the university campus offers. The public also believes that it is important to begin recruitment for post-secondary education with elementary and middle school students rather than waiting until the students are juniors and seniors in high school. Dr. Votruba said beginning recruitment for post-secondary education in elementary and middle schools will mean additional costs to the university, and NKU is already the most underfunded university in the Commonwealth and is last among 19 benchmark universities in state resources. Without funding, NKU may be forced to cap enrollment and turn away students, increase class size, and continue double digit tuition increases just to provide current services without addressing any expansion of additional services. Dr. Votruba said in difficult financial times, there is a tendency to only consider revenue activity and growth but it is important to realize that there are some projects that are equally important and well worth the costs in the long run. He said at the top of its priority list of projects needing funding is renovation of the NKU Science Building.
Dr. Edward Hughes, President of Gateway Community and Technical College, said that prior to the passage of House Bill 1 in 1997, there were three separate vocational schools in the northern Kentucky region. In the last year, these institutions have been transformed into a single institution that is a premier community and technical college, nationally recognized for its education and service to the northern Kentucky region. NKU has been a prime factor in promoting the development of this comprehensive community and technical college. Gateway and NKU have collaborated to allow a joint admissions program so that if a student at Gateway wants to transfer to a four-year program, that student is automatically admitted to NKU. In addition, NKU and Gateway are partnering for Gateway to have full use of NKU's library resources. Dr. Hughes said Gateway is also partnering with area K-12 public and parochial schools to develop programs to increase access to post-secondary education. A goal is to build an urban learning center to provide education and training in the urban core of Covington and Newport. Dr. Hughes said the institution cannot be built on the backs of higher tuition fees because the key to access education is affordability. Dr. Hughes said Gateway has just broken ground for a campus in Boone County, which is located 18 miles from any of the other campuses. Boone County, one of the fastest growing counties in the country, is the hub for manufacturing companies and distribution centers in northern Kentucky. Manufacturing is a key component of northern Kentucky's economic engine and the industry must remain strong and viable. Dr. Hughes said Gateway's Boone campus is an excellent opportunity to focus on promoting economic development by providing a well-trained workforce.
Dr. Patrick Clore, Superintendent of the Pendleton County School District, and representing the Northern Kentucky Superintendent's Association, said education and the fundamentals of House Bill 1 must be kept a high priority. The current level of funding for education for grades P-12 is about $300 million short, and most communities cannot raise their local taxes to pick up the shortfall because they do not have the tax base. As a result, there have been cuts in regional service centers, school rewards money, and textbook money. Dr. Clore said education needs increased funding, or it may be necessary to drastically cut services to children.
Rick Hulefeld, Executive Director of Children, Inc., said that 35 percent of all children across the state of Kentucky arrive at the school door every day not ready to learn. In areas where there is a high density of low income children in both urban and rural areas, that number balloons to 70 percent. According to the 2000 census, there were 2,650,000 adults over the age of 25 in Kentucky and only 17.1 percent of that population had a four-year degree, or a professional degree. The national average is 26 percent. That differential means Kentucky is receiving $342 million less in state taxes every year. Mr. Hulefeld said an organization called Business Roundtable which represents Fortune 500 companies issued a report about five weeks ago declaring that many children enter school ill prepared to succeed. Business Roundtable is calling upon states and the federal government to make the development of high quality early education programs a top priority. The report points to research that describes a wide learning gap between lower and higher income children before they enter kindergarten and warns that many poor and middle class children who start out behind will fall even further behind. The evidence is compelling that high quality, early childhood education is cost-effective and pays big dividends in the long run. Another report done by the Federal Reserve Bank of Minneapolis this past March says that investment in human capital breeds economic success not only for those being educated but for the overall economy. Mr. Hulefeld said the business community supports high quality, early childhood education programs because they lead to improved education results, a world-class workforce, a healthier society and ultimately a stronger economy. The message is that education promotes economic development and any proposed economic development should have early childhood development at the top. Mr. Hulefeld said there are about 2,000 child care centers in the state of Kentucky. Five percent of those centers are rated good to excellent, and seven percent are rated average, but little is known about the remaining percentage of the child care centers. Kentucky currently spends about $150 million on child care. $125 million is from the federal government and $25 million is from state funds. Help with child care for working parents has been frozen and there is talk that when intake is reopened, eligibility will be cut to those making $8.50 per hour, or less. Mr. Hulefeld said if eligibility is cut, more working parents will not have access to high quality child care meaning their children will not be ready for school.
Representative Moberly asked what initiatives must be taken and what would it cost to provide a quality early child care program. Mr. Hulefeld said the most important thing is to raise the expectations of early childhood development and educate the general public that early child development requires educational enhancement rather than just custodial care. He said a quality early child care program would probably cost about 25 percent more than what is currently being spent.
Representative Moberly said northern Kentucky should be commended for its pioneering collaborative efforts, the P-16 Council, and the Early Math Program, which was legislation sponsored by Representative Draud.
Representative Moberly said there often is a traditional culture at higher education institutions whereby faculty do not believe in following public policy dictates, or dictates of policy makers, and oftentimes university presidents do not address the promotion and tenure reward system because they do not want to make their faculty mad. Dr. Votruba said the promotion and tenure criteria is the center of what motivates a campus to behave in certain ways. University presidents can give speeches about collaboration and the need to be involved in the community but if that isn't translated into salary, promotion and tenure criteria, very little of that is going to occur. On the NKU campus, the expectation is that faculty will work and unit departments will work across the full breadth of the mission. NKU has created an incentive fund called the Community Partnership Outreach Grant Program, which is a competitive grant program that allows a faculty member to come in with a community partner and propose a project to address a community need. It may be applied research, technical assistance, a demonstration project, policy analysis, or outcome assessment. On a competitive basis, 20 percent of the award goes to the department in order to encourage department chairs to do more of this kind of work. The incentive is for the institution to behave as a metropolitan university and to have a regional purpose. Dr. Votruba said NKU represents a model for institutionalizing a form of academic activity through incentives that reward certain types of work.
Representative Draud said that he has participated in a number of forums with community leaders in the northern Kentucky area and these communities want NKU to play a part in helping to improve the quality of life for all northern Kentuckians. He said a university is an academic institution that produces graduates but it is also necessary to understand that a university is an important area of productivity that promotes economic development by working with small and medium sized companies to get them up and going, or to help them expand; it means working with teachers and parents to improve education at the elementary, middle and high school levels; it means working with the local government to enhance decision-making; and it means working with strengthening the nonprofit sector. Representative Draud said NKU is already seriously underfunded and when a university provides a service that communities ask for and want, it is often the service that is sacrificed in budget times because it is a cost without the revenue to support it.
Representative Draud said northern Kentucky is very proud that it hosts an annual national conference on brain research. The partnership involving Children's Inc., NKU, Gateway, and P-12 invite authors and researchers on brain development from around the country. In the coming year, the research will focus on the most promising practices to help children arrive at school ready to do well. Representative Draud asked Mr. Hulefeld to explain research done on the brain development of young children. Mr. Hulefeld said brain research shows that intelligence is not fixed. A ten year old child who is bright, articulate, and energetic is not that way by accident, and it is not just because of genes. At birth, children have about one-third of the brain connections that adults have, and it is mainly the connections they need, such as eating, sleeping, and breathing. At the age of about 2 1/2 or 3 to about age 10, children have twice as many connections as adults have. They are able to learn quicker, faster and better. Between the ages of 10 and 18, the brain knows what it is going to use, or not use, and it will disconnect 500 trillion connections. Mr. Hulefeld said a child who hears a lot of words in the early years of his or her life is building that part of the brain that schools count on.
Gary Toebben, Northern Kentucky Chamber of Commerce, said the chamber is an active participant with the northern Kentucky partnership about Kentucky's education future. Educating Kentucky's citizens will increase Kentucky's tax base and expand job opportunities in the future. Mr. Toebben said northern Kentucky's population has grown but so has its unemployment rate. The tourism and visitor industry is still feeling the impact of 9/11, and manufacturing firms are fighting their way through a business slow-down that started almost three years ago. The northern Kentucky area is also greatly impacted by three casinos on the Indiana border that are drawing millions of dollars from northern Kentucky residents each week. Mr. Toebben said the area does face economic challenges, but it is excited about its future. The Northern Kentucky Consensus Committee includes nearly 100 representatives of business, government and education in its eight-county area development district. The Consensus Committee is requesting funding for three capital projects which have widespread support from the citizens of the region. The projects are: a 6,500 seat special event center to be located at NKU; land acquisition and infrastructure for Covington West; and an interpretative museum at Big Bone Lick State Park.
Mr. Toebben said the Northern Kentucky Chamber of Commerce is in support of expanded gambling at horse racing tracks and an increase in the cigarette tax. He said another important economic development issue is the retention of enterprise zones, and create new economic development legislation that saves what is good and successful about enterprise zones and expand those economic incentives to the entire state to stimulate business investment.
Senator Stivers asked about the infrastructure needed at Covington West. Mr. Toebben said the infrastructure calls for putting a hole in the flood wall.
Representative Adkins said it would be a boon to the area if NASCAR would commit to a Winston Cup race at Kentucky Speedway. Mr. Toebben said the community wants that race, however, NASCAR is a sport that is controlled by a very limited number of people.
Mary Lassiter, Acting State Budget Director, said May General Fund receipts were $433.4 million, a decline of 3.6 percent from May 2002. Year-to-date revenues rose by 3.8 percent for the 11-month period to total $6,146.8 million. The official consensus forecast upon which the budget was based requires growth for the fiscal year to be 4.6 percent. Based on year-to-date growth, General Fund receipts must rise by 12.0 percent in June to meet the consensus estimate. Ms. Lassiter said it is very unlikely that the consensus estimate will be reached. She said the State Budget Office predicted in April that revenues would fall short by approximately $80 million this fiscal year and May receipts have confirmed the expectations of poor revenue growth this spring, and are in line with the unofficial estimated shortfall of approximately $80 million. Ms. Lassiter said May's collections continue to reflect weakness in the individual income tax and the sales and use tax, the two largest taxes in the General Fund and the two taxes that most closely track economic activity in the state. She said both of these taxes did grow in May, the first time in many months that they have not both declined compared to last year. Individual income taxes were up by 1.8 percent in May, and the sales and use tax rose by 0.3 percent. However, the small increases in these two revenue sources were overwhelmed by losses in other General Fund revenues. The coal severance tax fell by 3.6 percent. Property taxes were down by 41.3 percent due to changes in the timing of payments. Timing differences also created a significant decline in the bank franchise tax, which is down 99.7 percent. Inheritance taxes were down 49.7 percent, and the lottery is unchanged. Road Fund revenues declined by 2.3 percent in May, totaling $97.5 million. Year-to-date revenues in the Road Fund stand at $1,016.6 million virtually unchanged from a year earlier. The revised official consensus estimate for FY03 Road Fund revenues requires an increase of 0.2 percent. Based on year-to-date growth, revenues in June must rise 2.0 percent to meet the consensus estimate. Among the major accounts, motor fuels taxes rose by 11.2 percent, but this was largely offset by a decline of 5.6 percent in the motor vehicle usage tax. Motor vehicle license taxes also fell in May, down 33.6 percent. The weight distance tax was up 4.6 percent, and nontax receipts were off 23.2 percent.
Ms. Lassiter said Congress just recently enacted The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act") which is providing states with $20 billion in temporary federal fiscal relief, $10 billion in the form of flexible grants to states to offset budget shortfalls, and another $10 billion in increased aid for Medicaid programs throughout the states. Kentucky, like most other states, is being challenged by its General Fund budget and its Medicaid program. Kentucky has already received its share of $68.7 million of grant money for federal fiscal year 2003, and that money has been deposited into a special segregated account within the General Fund. Ms. Lassiter said the plan is to closely monitor and evaluate the end of the fiscal year and use those funds, if necessary, to offset the projected revenue shortfall in the General Fund. It is unknown what the shortfall will be at this time. The next installment of $68.7 million for federal fiscal year 2004 will be received in October and it too will be deposited into a special segregated account within the General Fund to be available, or considered when the financial situation for 2004 has been determined. The state will also receive $138.8 million for its Medicaid program. There is an estimated shortfall of $169 million in the Medicaid program so these additional funds will lower that shortfall to approximately $30 million.
Ms. Lassiter said the Executive Branch has met with Moody's, Standard & Poore, and Fitch and all three rating agencies continue to rate Kentucky with a negative outlook. Their concerns are about flexibility, the budget reserve trust fund, poor revenue growth, and consistent poor revenue growth versus economic status. It is hoped that revenues will improve and that positive steps will be taken in the next session to continue to build the budget reserve trust fund so that any negative outlook can be changed to a positive rating. Unlike many other states, Kentucky does not issue general obligation debt. In a comparison with other states, Kentucky has a very good credit rating and is positioned well versus other states.
Ms. Lassiter said the budget adopted by the General Assembly called for an ending balance of $138.7 million to be carried forward and used as a resource for the next budget. The anticipated 4.6 percent growth for this year was based on a lot of one-time money that was collected and realized and the revenue growth assumption for next year is already modest. Actual revenue receipts and unbudgeted expenses are being monitored very closely. The Consensus Forecasting Group will present a planning estimate for FY 2004-2008 on August 15. The next official forecasting group meeting is October 15. The gubernatorial election is in November and agency budget requests are due November 15. In January, the Consensus Forecasting Group meets and presents its official revenue estimate, and the new governor must introduce the executive budget on the 15th legislative day.
Representative Moberly said that although the federal money will be very helpful, it is one-time money both for the General Fund and for Medicaid so it will not be available to the new Governor as he moves forward.
Senator Sanders asked Ms. Lassiter to notify the committee when the Executive Branch decides how it intends to spend the federal money. Ms. Lassiter said she would contact the chairs before any action is taken.
Representative Barrows said the General Assembly has typically passed legislation that says Kentucky will conform to the federal tax code. The consequences of the federal tax cuts is $100 million if conforming legislation is passed in the future. Ms. Lassiter said $100 million is the current estimate.
Representative Moberly asked Representative Adkins, Chair of the Budget Review Subcommittee on Transportation, to update members on spend-down reserves in the Road Fund. Representative Adkins said the spend-down account contains about $450 million. There are a number of projects ready to be let and it is anticipated that the money in the account will drop rapidly. Because of a fear that projects may have to be slowed, or even stopped, the account is being closely monitored and the Transportation Cabinet has been cautioned about allowing the account to get into a negative situation. Representative Adkins said there is language in the budget that requires the Transportation Cabinet and Finance Cabinet to set up a spending plan if the spend-down account gets to the $100 million level. He said the cabinet believes the account can be handled in a responsible way without getting into a crisis situation.
Senator Sanders asked if some needed projects could be bonded. Representative Adkins said bonding will be an alternative in a couple of years after current bond indebtedness is paid off.
Representative Moberly said it is appropropriate to build needed projects because the longer a project is delayed, the more expensive it becomes. He said it will be necessary to monitor cash reserves and think about how to proceed into the future so that there is not a road or highway to nowhere.
Representative Callahan recognized Steve Stevens and Northern Kentucky Chamber of Commerce staff, and Joe Winn and staff from Northern Kentucky University.
Following the meeting, members were invited for a tour of the campus of Northern Kentucky University and a box luncheon.
The meeting was adjourned at 12:10 p.m.