Interim Joint Committee on Appropriations and Revenue


Minutes of the 5th Meeting

of the 2003 Interim


November 25, 2003


The 5th meeting of the Interim Joint Committee on Appropriations and Revenue was held on Tuesday, November 25, 2003, at 10:00 a.m., in the Carl M. Hill Student Center, at Kentucky State University, in Frankfort. Senator Richard Sanders, Jr., Co-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 Paul Herron, Jr., Ray Jones II, Daniel Kelly, Alice Kerr, Vernie McGaha, Joey Pendleton, Dan Seum, Robert Stivers, and Jack Westwood; Representatives Rocky Adkins, Joe Barrows, Scott Brinkman, Jim Callahan, Mike Cherry, Larry Clark, Jack Coleman, Jesse Crenshaw, Bob DeWeese, Jon Draud, Danny Ford, Joni Jenkins, Jimmie Lee, Mary Lou Marzian, Thomas McKee, Fred Nesler, Charles Siler, John Will Stacy, Tommy Turner, Jim Wayne, Robin L. Webb, and Rob Wilkey.


Guests:  Jo Carole Ellis and Joe McCormick, KHEAA; William Reinart, Milliman; Karen Powell, Kentucky State University; K. Jones, KY-ASAP; Don Fornwalt, CMR; Steve Shannon, KARP; Sean Cutter, MML&K; Paul Neiner,; and David Vance, Cull, Hayden & Vance.


LRC Staff:  Terry Jones, Pam Thomas, Lou Pierce and Rhonda Carter.


Chairman Sanders asked for a motion to approve the minutes of the September 18, 2003 meeting. Representative Wilkey moved for approval of the minutes. The motion was seconded by Senator McGaha and adopted by voice vote.


Dr. William H. Turner, Interim President, Kentucky State University (KSU), welcomed members of the committee to KSU. Dr. Turner said he is proud to serve as interim president of KSU. Dr. Turner said the future of KSU is based on the Baker and Hostettler Report, a study done by KSU and the Council on Postsecondary Education. The study provides a basic blueprint for KSU to achieve its "renewed excellence." Dr. Turner said his personal focus is to return KSU to its excellence as a teacher's college because teachers are so badly needed in Kentucky. In conclusion, Dr. Turner asked members of the committee and the General Assembly to continue to consider the importance of postsecondary education to the state of Kentucky and to support the 2004-2006 budget recommendations of the Council on Postsecondary Education.


Mary Lassiter, Acting State Budget Director, reported on the national economy, the state economy, October consensus revenue estimates, and 2004 General Fund and Road Fund revenue receipts. Ms. Lassiter began by saying the economic outlook for the current fiscal year is worse both nationally and in Kentucky although economic activity is beginning to increase. The Consensus Forecasting Group met in October and adopted a forecast that assumes 0.7 percent growth for the current fiscal year. The enacted budget for FY 2004 is based on a 3.4 percent growth. Because of a $75.7 million revenue shortfall in FY 2003, actual growth needed over FY 2003 is 4.6 percent for the current year. The current budget was based upon a General Fund revenue estimate of $7.1 billion for FY 2004. The new estimate of $6.8 billion would result in a $262.4 million revenue shortfall. Two primary taxes, the sales and use tax and the individual income tax, have declined in performance. Because of some unbudgeted necessary expenses, unspecified budgeted lapses, and increased dedications, the total budget problem is approximately $300 million. Ms. Lassiter said there are some sources of additional funds that could be used to address part of the shortfall. There is $68.7 million in federal fiscal relief, $54.8 million in the Budget Reserve Trust Fund, funds from debt service savings, and funds from the unused salary compensation fund amounting to approximately $155.4 million. Ms. Lassiter said agency budget requests are currently being reviewed to look at restrictive funds, off-budget accounts, and potential General Fund lapses.


Ms. Lassiter said four percent revenue growth is predicted for each year of the upcoming biennium. Total revenue estimates for FY 2004 are $262 million less than the current year which means a $50 million growth over 2003. For 2005, a revenue estimate of $7.1 billion is $13.8 million more than what was budgeted for 2004, which is $276.2 million over the revised estimate for October. The consensus revenue forecasting estimate for FY 2006 is $7.4 billion, which amounts to a growth of $282.4 million over the projection for 2005. Year-to-date receipts through October are down two percent. Budgeted growth was 4.6 percent. To meet budgeted revenues, there must be 7.9 percent growth for the rest of the year.


Ms. Lassiter said statute requires the Consensus Forecasting Group to base its forecasting estimate on existing law. Current law calls for expiration of the enterprise zones and implementation of the court decision relating to the Illinois Tool Works (ITW) case. The consensus forecasting estimate includes these two measures in its estimates and if different policy decisions are made during the upcoming session, it would change the outcome of the estimates. The consensus revenue estimates do not include extensions of revenue policy decisions that were in the budget bill because they expire on June 30, 2004. These budget actions include elimination of the deduction of income tax paid to foreign countries, the sales tax on unbundled transmission of natural gas, and the limit on vendor compensation for the sales tax and the cigarette tax. In addition, abandoned property receipts have been treated differently in this revenue estimating process than they have been treated in the past. Ms. Lassiter said the revenue measures total $16 million in 2005, and $17.4 million in 2006.


Chairman Sanders asked about the impact of the ITW decision. Ms. Lassiter said there is $26.6 million assumed in the revenue estimate for increased collections as a reasult of ITW for the current year.


Ms. Lassiter said the revenue outlook for the Road Fund is projected at 0.3 percent for the current fiscal year, 1.8 percent for 2005, and 2.0 percent for 2006. The net result for the Road Fund for this current year is $13.1 million less than last year, which is primarily attributable to decreases in the motor fuels tax and removing tolls from former toll roads. The year-to-date receipts for the Road Fund are up two percent. The budgeted growth is 1.4 percent so there must be 1.2 percent growth for the rest of the year to meet budgeted revenues.


Senator Kelly asked if the October consensus revenue forecast is the official revenue forecast. Ms. Lassiter said the October forecast is a preliminary forecast. The official revenue estimate is due by the 15th legislative day of the regular session.


Senator Kelly asked why the consensus forecast wasn't made official so that the budget reduction provisions could go into effect. Ms. Lassiter said the Executive Branch and the Legislative Branch have the authority to call for an official consensus forecast. The Executive Branch did not call for an official forecast because the October forecast was so close to the administration change that it was felt that it would be more appropriate for the new leadership to deal with the issue.


Senator Kelly asked if the projection for 2006 was lower because it is anticipated that businesses may leave the state. Ms. Lassiter said the estimate is decreased in 2006 because of the Revenue Cabinet's expectation that businesses may address and mitigate their tax liability in other ways.


Representative Stacy asked how it was determined that the amount would be $70 million. Ms. Lassiter said the estimate is based on economic growth in the state as a whole and on the amount of taxes that would not be collected in enterprise zones.


Chairman Sanders asked why Kentucky is not keeping up with national economic growth trends. Ms. Lassiter said Dr. Fox's report to the 2001 LRC Subcommittee on Tax Policy Issues indicated that Kentucky's revenue generating system is not as responsive to the economy as it should be because of structural issues in the tax base.


Chairman Sanders asked why the Revenue Cabinet has said they do not know how much potential revenue would come in if enterprise zones are lapsed. Ms. Lassiter said there has been a data problem because the Revenue Cabinet gets reports on actual credits taken and the Cabinet for Economic Development collects data from the companies who are authorized to get the credits, and those numbers have not matched over time. Charlotte Quarles, with the Revenue Cabinet, said the only way the Revenue Cabinet can track the costs of enterprise zones is on the vendor side. Since 2000, the Economic Development Cabinet has been able to gather data from the qualified businesses and that data should be more reputable because the companies are showing the advantages of the exemption.


Senator McGaha asked if there is any type of auditing process that monitors whether or not a companies use materials in the enterprise zone, or if those purchased materials stay in the zone. Ms. Quarles stated monitoring is within the Revenue Cabinet's purview. She said the cabinet's auditing resources are limited, but it does check for patterns that are used for audit leads. The cabinet is doing the best it can with the resources it has.


Next, Ms. Debbra Gabbard, Budget Director for the Transportation Cabinet, discussed the Road Fund spend-out. She said the 2000 General Assembly and House Bill 502, the budget bill, passed the prefinancing language for road projects. It directed the Transportation Cabinet to develop and implement a program to expeditiously initiate and complete highway projects. The cabinet moved from an obligation basis to a cash basis which is a completely new way of doing business. Under the obligation method, the General Assembly appropriated a certain amount for highway construction projects and the cabinet could obligate the projects up to that level. Because highway projects typically are completed in a three to five year period, about 30 percent is expended in any given year. A sizable cash balance was built up over a number of years but it was not a free-cash balance, and it could not be spent on new projects. It was cash reserve to pay future bills.


Ms. Gabbard continued that the cabinet is currently operating under a cash-flow basis. The effect of that brought down the cash balance. The cabinet was depending on future appropriations to pay the bills as they became due. A billion dollars worth of highway projects were added to the program, but the proposed gas tax did not materialize. The projects, however, remained in the six-year plan. In hindsight, had the gas tax proposal not been there and had the one billion in projects not been added to the plan, 2000 was the opportune time for the General Assembly to implement the cash-flow program, but there was a downturn in the economy. State highway projects now will cost about $851 million, or a shortfall of $615 million.


Ms. Gabbard said projects already awarded have committed FY 2004 and FY 2005, and to some degree, FY 2006 new appropriations. She said new construction projects will be limited to resurfacing projects and maintenance projects and they will be done through revenue sharing and the contingency account. Federal projects will be continued with the use of toll credits. Instead of matching federal dollars with cash, the federal dollars are matched with toll credits, but toll credits have no purchasing power. For example, if there is a $500 million federal program and the match is $125 million in cash, the total federal program is $625 million.


The prefinancing program has been a very successful program. The General Assembly has given the cabinet the tools it needed to maximize cash resources. Following this acceleration period, there is going to be a significant slow-down of state construction projects. It is most likely there will not be any state construction projects awarded for a period of time. Current estimates predict the program will return to more normal levels at the end of FY 2006.


Representative Wayne asked if proposed work on the  I-66, I-69, the Cincinnati bridge, and the two bridges in Jefferson County would be continued. Mr. Hancock, Deputy State Highways, said where we are with the projects of that magnitude today is that fortunately the projects that you just mentioned are funded to the extent that moneys are moneys are available today with special federal appropriations and special federal moneys that we will continue to utilize to develop those projects as far as we can. To the extent that state funds would be applied to those projects is that we have some very grave concerns and will have to look at every one of those projects just as closely as we look at every project across the Commonwealth. Representative Wayne asked what the estimate is for those five projects at this point and what is the current estimate and total for those projects. Mr. Hancock said those projects is well into the billions of dollars. The precise total for those projects I would estimate somewhere in the neighborhood of $5 billion. Representative Wayne asked what portion of that would be state-matched once construction got going. Mr. Hancock said if we are able to pursue all of those to fruition and everything worked out perfectly, most likely those would be built on an 80/20 matching arrangement. 80 Percent federal and 20 percent state. Representative Wayne said so you are talking about a billion in state funds. To proceed with those projects in light of the structure that we have for building the Road Fund, we would have to siphon off money from other projects in the rural areas of the state to build these projects. Mr. Hancock said it is difficult to say what will happen because a lot hinges on Congress and how congressional appropriations are made and how the projects play out over time. As we sit down with this next six-year highway plan and work the next plan through the General Assembly, everyone will have an opportunity to look at the progress on all of those projects as well as a multitude of others across the state simultaneously. Representative Wayne said you are basically saying let's just wait and see.


Senator Seum said if the projects listed in the handout are contractually locked in. Mr. Hancock said yes. When projects are already awarded, there are two types of things there - one for a highway construction project that would be a project that is already contractually awarded for the construction phase. For pre-construction activities, what we are talking about is the funds are actually obligated to that phase. Senator Seum asked if the projects could be delayed. Mr. Hancock said yes.


Representative Brinkman asked if there are funds set aside for emergency road repairs. Ms. Gabbard said there routinely is a highway contingency account. It has been budgeted at $37.7 million and in the recent agency submitted budget, we requested that money to be left flat so $37.7 million is what we requested for FY 2005 and 2006 and that would be used to address emergencies. Representative Brinkman asked if that amount is part of the reserve fund. Ms. Gabbard said no. Representative Brinkman asked if the account is funded today or is it something that you will ask for prospectively. Ms. Gabbard said the account was funded in FY 2004. Representative Brinkman asked what the amount was budgeted. Ms. Gabbard said at the beginning of FY 2004, it was funded at $37.7 million. The General Assembly put some contingencies on how quickly it could be spent in this fiscal year. I am relying on memory but I think a little less than half of it remains. Representative Brinkman said so about $17 or $18 million is the current balance. Ms. Gabbard said yes, approximately.


Senator Jones said when there is a natural disaster, doesn't FEMA usually come in to help fund the repairs rather than having to use state money for those projects. Mr. Hancock said that is true, but, traditionally, FEMA will commit federal dollars but the state has to pay those bills initially and after the work is complete, FEMA auditors will evaluate the work and approve reimbursement so state dollars do have to fund those costs initially and we would seek reimbursement after the work is completed. Senator Jones said and we have $17 million or so in the contingency account at this point to pay for those types of emergencies. Ms. Gabbard said there is approximately $15 to $17 million in that range.


Senator Westwood asked if there are any current projects that we are waiting for FEMA reimbursements. Mr. Hancock said yes. He said the snow and ice storm damage last spring - there are still several projects there that have not yet been reimbursed. Senator Westwood asked if it is know what the reimbursement figure is. Mr. Hancock said he did not have the figure with him. He said he could provide; it. From memory, it is fairly small in the scheme of things. The overall damage assessment was in the $7 to $9 million range. We have received some reimbursement so I would guess it would be in the million range.


Next, the committee heard an explanation from Bill Hintze, Deputy State Budget Director, relating to a bond issue for the new south wing for the Kentucky State Fair Board which was authorized by the 2003 session from agency funds. Mr. Hintze said an issue was raised regarding the amount of funds that the General Assembly had authorized for the project. The literal language in HB 269 indicated that a certain sum of money of about $55 million was authorized to be bonded. The question was does that amount include, or total amount of the bond issue that would be taken to market such that you would not have that sum of money for the project itself but you would have to back down the amount of money for the project to also include cost of issuance, other costs of just going to market that are part of a normal bond issue. The interpretation that was made under KRS 48.500 by the Secretary of Finance was the amount authorized by the General Assembly in the language of the appropriations bill was that it was the amount you wanted expended on the project and that cost of issuance and normal marketing costs are on top of that and are regularly included in bond issues when we authorized that. To inform his decision, he looked at all of the bond issues that the General Assembly authorized and that same interpretation would apply to them. He looked at the budget request from the Fair Board and that is the way they had structured the request, and they looked at the scope of the project and the scope of the project required all of those funds to be project costs and not simply the cost of doing business in the bond market place. From our point of view, it was not a difficult decision to make to support that interpretation. The committee did not take any action on the budget interpretation.


Being no further business, the meeting was adjourned.


All meeting materials and a tape of the meeting in its entirety is available in the Legislative Research Commission library.