The 3rd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, August 26, 2004, at 1:30 PM, at the Kentucky State Fairground in Louisville. 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, Alice Kerr, Robert Leeper, Vernie McGaha, Gerald Neal, R.J. Palmer II, Dan Seum, and Robert Stivers; Representatives Royce Adams, Joe Barrows, Scott Brinkman, 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, Stephen Nunn, Charles Siler, John Will Stacy, Tommy Turner, Robin L. Webb, and Rob Wilkey.
Guests: Mayor Jerry Abramson, Metro Louisville Government; President James Ramsey and Dana Mayton, University of Louisville; Secretary Jim Host, Commerce Cabinet; Secretary Gene Strong, Cabinet for Economic Development; Mr. Robert Cox, Deputy Executive Director, Governor's Office of Economic Analysis; Mr. John Parrish, Finance Cabinet.
LRC Staff: Pam Thomas, Louis Pierce, John Scott, and Sheri Mahan.
Senator Sanders welcomed the committee members and asked them to review the minutes from the previous meeting. Representative Nunn moved to approve the minutes with one correction on page 4. Representative DeWeese seconded the motion. The motion carried by voice vote.
Mayor Jerry Abramson welcomed the committee to Louisville. He highlighted the many contributions the Kentucky State Fair and the city of Louisville make to the state and its economic growth.
President James Ramsey of the University of Louisville also welcomed the committee members. He highlighted the positive role the University of Louisville has in Kentucky and thanked the members for the their continuing support of the university.
Secretary Jim Host discussed Kentucky's future in globalization and international trade. Secretary Host gave an overview of the Global Conference on the World Trade Organization (WTO) which he attended in June, along with five members of the legislature. He stated that there is $7 trillion in trade at stake and that international trade is growing at three times more than the internal US economic growth rate. HE also noted that international tourism brought in 715 million visitors worldwide in 2003 and that one fifth of world output is open to global competition. Within the next 30 years, four fifths of the world output will be open to global competition. He stated that energy is the key to Kentucky's competitiveness. In 1980, 30 percent of the United States was dependent on oil and this number has presently increased to 60 percent. A member of the Commerce Cabinet has been placed on the International Energy Task Force, and Kentucky is the only state that has representation on that task force.
Secretary Host said that Kentucky is one of only 11 states that has no oversight in how the WTO affects our state. He stated that there must be oversight in what rules are being established by the WTO. The cabinet has begun research to see what programs each cabinet, university, the league of cities, the chamber of commerce, and others have that impact the WTO. He stated that Kentucky must develop an international tourism marketing strategic plan. He added that the cabinet is in the process of developing an energy plan for the state, which they are reviewing with the chairmen of the special subcommittee on energy.
Secretary Host then discussed international tourism in Kentucky. He stated that tourism is down in the United States. He stated that in Kentucky there were 25, 000 international visitors in 2000, and 18,000 in 2003. There are no tourism offices internationally, and the cabinet is trying to place tourism officials in international economic development offices.
Next, Secretary Strong updated the committee on economic development efforts by the Cabinet. Secretary Strong discussed Kentucky's competitive advantages, stating that Kentucky is ranked 4th lowest in the overall cost of doing business in the US, has the lowest industrial electric power costs in the nation, is ranked 19th in worker's compensation costs, and has a workforce that is 5.1% more productive than the national average. Kentucky ranked 12th in overall business climate nationally. Modernization of the current business tax structure could improve this ranking.
Secretary Strong stated that Kentucky was ranked 12th per capita in exports, and was one of only two states ranked in the top 20 that do not border an ocean or another country. He discussed the net jobs gained over the past 25 years, stating that during the Fletcher administration 64,731 jobs have been gained in the state. This is a 3.5 % increase during 2004. Secretary Strong then provided an overview of the cabinet's global strategic planning initiatives since 1994. He discussed the need for having trade offices in foreign countries, and provided examples of the benefits of these offices. He highlighted the benefits of the trade office in Santiago, Chile, and discussed the many business opportunities in South American for Kentucky companies. Secretary Strong said that companies that export tend to pay higher wages and generate direct, indirect, and induced jobs throughout the state. About 120,000 jobs in Kentucky are directly related to exporting products into other countries. He discussed Kentucky's leading trading partners and types of goods exported to these countries.
Secretary Strong discussed foreign investment in Kentucky, stating that there are 343 foreign-owned facilities in the state, employing 71,580 full-time employees. He discussed the South American, European and Japanese economic development offices, and the activities of these offices. Foreign investment in Kentucky represents almost $23 billion. He outlined the financial incentives offered to foreign companies in Kentucky's nine economic regions.
Secretary Strong discussed Kentucky's dependence on manufacturing jobs as compared to the nation average. Nationally, the manufacturing sector makes up 14% of the gross national product, but this sector makes up 25.2% of Kentucky's gross state product. He discussed the top five growth industries in Kentucky. These are air transportation, industrial machinery, motor vehicle, business services and electronic equipment. Then, he outlined the top three factors which influence companies to select Kentucky sites over other areas. Kentucky ranks high in state and local incentives, labor costs, and availability of skilled labor. These factors give Kentucky an advantage over many other states in site selection.
Finally, Secretary Strong discussed the importance of education in enticing companies to locate in this state. Kentucky ranks 41st in adults with a high school degree or higher, and 21.6% of our population has a bachelors degree or higher. He outlined the income per capita for various degree achievement levels, and how this relates to lifetime earning estimates for these educational levels. He discusses student persistence at 2 and 4 year colleges in the state, and bachelor's degree completions in 5 and 6 years. Finally he discussed the declining value of a high school diploma as compared to the increasing value of a bachelor's degree.
Representative Webb asked how stable the manufacturing base is in the state. Secretary Strong replied that Kentucky is very dependent on its manufacturing base. Advanced, technology based manufacturing jobs are stable, but the low skill manufacturing jobs are decreasing and will soon be gone in the state. Kentucky can not compete with low cost foreign manufacturing and these jobs will never return.
Representative Draud asked why Kentucky is doing so well with such an undereducated workforce, and what the cabinet is doing to compensate for the lack of a highly educated workforce. Secretary Strong answered that Kentucky has a very capable, loyal and productive workforce and generally companies can utilize this workforce at lower cost than would be required in other states.
Representative Brinkman asked if the administration has plans to open economic development offices in China, Russia, and India, since demand for imports is increasing in those countries. Secretary Strong stated they will be spending time in China on their next trip to Japan. As more disposable income becomes available in those countries, a large consumer market will open up to Kentucky. Representative Brinkman emphasized the importance of having world class research universities in Kentucky to attract new business to the state.
Senator Kerr asked what advantages Kentucky has that makes its such a strong exporter. Secretary Strong replied that per capita, Kentucky has a large number of foreign companies. He noted that large portion of Kentucky's exports are in the transportation/equipment industry and that agricultural products are also a very strong export for the state. Senator Kerr stated the importance of the aluminum industry in Kentucky. Secretary Strong stated Kentucky is the third largest producer of aluminum in the United States.
Representative Wilkey asked what impact the new economy initiative has on investment in the state, and whether the cabinet will recommend continuing investment in that initiative. Secretary Strong replied that the Office of the New Economy has been changed to the Department of Innovation and Commercialization. The administration desires to continue to enhance research capability in the state and to bring developed research to the marketplace. Secretary Strong said that he believes the initiative will continue, and that the cabinet, in conjunction with the University of Kentucky, is studying the current return on investment for the various areas of the initiative.
Next, Chairman Sanders asked the committee to address the administrative regulation 907 KAR 1:019 while there was still a quorum. Mr. Stewart Owen, administrative regulation coordinator with the Department of Medicaid, explained the regulation and the proposed amendment to the regulation. The regulation addresses forms that must be filed by pharmacies. The amendment allow pharmacies to file their paperwork electronically with the Department of Medicaid Services. Representative Lee expressed his approval of the amendment and moved for the adoption of the amendment to the regulation, which was seconded by Representative Clark. The motion carried by voice vote. Representative Lee moved that the regulation be adopted as amended, which was seconded by Representative Draud. The motion carried by voice vote.
Secretary Strong returned to provide further testimony. Representative Damron asked if the cabinet is working with the universities to identify their needs to help drive research and economic effort within the university system. Secretary Strong stated that the cabinet is currently working with the universities to get them more actively involved in regional economic development efforts.
Senator Sanders asked what other factors besides education affect per capita income. Secretary Strong stated that he is not a proponent of per capita income and if you look at the statistics, Kentucky has had a higher personal income growth when compared to surrounding states. He stated that in his opinion, per capita income is not a good measure of economic growth. Senator Sanders then asked if universities should invest in venture funds. Secretary Strong stated that both the University of Kentucky and University of Louisville have already invested in venture funds and have hired professional investment managers. He discussed various venture capital efforts in the state.
Representative Moberly asked what the biggest hindrance is to economic development besides education. Secretary Strong replied that on the manufacturing side the issue is very complex. Several variables must be in place to entice a company to located in a community. Infrastructure investment is important, including road improvements and air access. Pro-business state and local government is also essential in attracting new business. Representative Moberly then asked if Secretary Strong believes that Kentucky is a low business tax state, as is stated on the cabinet's web site. Secretary Strong replied that he believes Kentucky is a low business cost state. Cost is factored in three areas: overall tax burden, utility cost, and labor cost. When all this is combined, Kentucky is a low cost state. He stated that he feels Kentucky is a "middle of the road" state in terms of corporate taxation and workers compensation, a low utility cost state, and a low labor cost state.
Finally, Mr. Robert Cox, deputy executive director of the Governor's Office for Economic Analysis, provided the committee with an update on the July receipts. The general fund receipts were $547 million for July of 2004, which represents a 10.5% increase over the same time period for 2003. The road fund receipts were down 3.7%, decreasing to $87.9 million for July 2004. There has been 26% growth in the coal severance tax receipts. He stated that the consensus forecasting group which met in June, predicted that FY 05 revenues would grow by 3.9%. They grew by 10.5% in July, and 3.4% growth can be expected for the rest of the fiscal year.
There being no further business, the meeting was adjourned at 3:30 p.m.
A cassette tape of the meeting in its entirety and all meeting handouts and information are available in the Legislative Research Commission library.