The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, August 25, 2005, at 1:00 PM, in the Brown and Williamson suite at Papa John's Stadium in Louisville. Representative Harry Moberly Jr, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Charlie Borders, Co-Chair; Representative Harry Moberly Jr, Co-Chair; Senators David E Boswell, Tom Buford, Carroll Gibson, Denise Harper Angel, Alice Kerr, Robert J (Bob) Leeper, Vernie McGaha, R J Palmer II, Tim Shaughnessy, Robert Stivers II, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives John A Arnold Jr, Joe Barrows, Scott W Brinkman, Dwight D Butler, Larry Clark, Jesse Crenshaw, Bob M DeWeese, Jon Draud, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Fred Nesler, Stephen R Nunn, Don R Pasley, Charles L Siler, John Will Stacy, Tommy Turner, John Vincent, Robin L Webb, and Rob Wilkey.
Guests: Mayor Jerry Abramson, Metro Louisville Government; President James Ramsey, University of Louisville; Mr. Bradford L. Cowgill, State Budget Director; Secretary Jim Host, Commerce Cabinet; Commissioner Mark Treesh, Department of Revenue, Richard Dobson, Executive Director, Office of Sales and Excise Tax; Mr. Brad Thomas, Executive Assistant to Commissioner Treesh; Wendell Butler, Director, Special Investigations Division; and Mr. Stuart Owen, Department of Medicaid Services.
LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Nicole Anderson, and Sheri Mahan.
Senator Boswell moved that the minutes from the previous meeting be approved as written. Second by Representative Butler. The motion carried by voice vote.
Representative Moberly recognized Speaker Jody Richards and Floor Majority Leader Rocky Adkins among those attending the meeting.
Representative Moberly then introduced a resolution honoring Mr. Bill Hintze for his years of dedicated service. Senator Borders read the resolution to the membership. Senator Boswell moved for the adoption of the resolution. Second by Senator Stivers. The motion carried by voice vote.
Mayor Jerry Abramson welcomed the members to Louisville and discussed the social and economic importance of Louisville to Kentucky.
President James Ramsey welcomed the members to the University of Louisville and discussed the accomplishments and progress being made by the university.
Next, State Budget Director Brad Cowgill presented the year end revenue report for the 2004 - 2005 fiscal year. Mr. Cowgill stated that the FY05 lapses were remarkably high, with an actual General Fund lapse of $65 million. This includes the $15 million lapse budgeted by the General Assembly. The Road Fund lapse for FY05 was $22 million. He then stated that in general tax modernization has not yet effected revenue receipts.
Mr. Cowgill stated that the General Fund revenue was up by $667 million (9.6 %) over FY04 and that revenues are expected to be even higher for FY06. The total General Fund receipts for FY05 is $7,645 million, which is $195 million over projected receipts. He then outlined the total General Fund surplus of $214 million for FY05 and discussed the budget bill's surplus spending plan, which allows the Governor to choose from five options. Mr. Cowgill said that the Governor plans to contribute $90 million to the Budget Reserve Trust Fund, leaving $124 million available for other options. The Governor is studying the options and evaluating the needs of the Medicaid program.
Mr. Cowgill discussed future budget challenges and expenditure pressures. He stated that revenues are coming in nicely, but that Medicaid, health insurance, pensions and corrections are competing with other items in the budget for increased appropriations. He said there is a structural imbalance on the spending side, with unsustainable rates of increase in cost for Medicaid and state heath insurance. This will eventually leave no additional funds to make appropriations for necessary government expenses. The increases in Medicaid alone could absorb the forecasted revenue increases for FY06 and FY07.
Representative Moberly asked if the administration might consider the option of holding the $124 million in surplus to possibly be appropriated in the FY 2007 budget. Mr. Cowgill replied that holding the money is an option, and he does not believe that there is language in the budget bill that requires the Governor to definitively choose an option for the $124 million. He then state that he believes that a valid choice could be no choice.
Representative Webb asked what kind of activities in the Transportation Cabinet yielded their $22 million savings. Mr. John Hicks replied that $13 million was debt service savings. The remainder was the result of personnel and operational savings. Representative Webb then asked if other agencies have implemented the same cost saving measures and what kinds of savings have resulted in these other areas. Mr. Hicks stated that he would provide that information to Representative Webb.
Next, Secretary Jim Host updated the committee on the redistribution of funds from the statewide lodging tax. Secretary Host provided a brief history regarding the 1% transient room (lodging) tax. This tax applies to every suite, room and cabin rented by all accommodation providers (with the exception of campgrounds) in the state. The receipts from this tax will be deposited into the Tourism, Meeting, and Convention Marketing Fund with is administered by the Commerce Cabinet. This fund shall be used for the sole purpose of marketing and promoting tourism in Kentucky, including expenditures to market and promote events and venues that bring tourists into the state. It is estimated that the first year of implementation will bring $8 million into this fund. The entirety of these funds are then proportionately redistributed to the various state regions. No monies in this fund are used to pay for administration of the fund.
Secretary Host then discussed the Kentucky Tourism Regional Marketing and Matching Funds program. This program provides local and regional non-profit tourism organizations with financial assistance to promote tourism in their areas. He described the various regions and discussed what kinds of projects would be eligible for matching funds.
Finally, Secretary Host discussed the expanding use of the "Unbridled Spirit" logo throughout the state. He outlined how this can be beneficial in promoting Kentucky tourism.
The committee then considered Medicaid administrative regulation 907 KAR 1:018 & E. Representative Lee introduced an amendment. Stuart Owen from the Department of Medicaid Services explained the amendment. Representative Lee moved for the incorporation of the amendment. Second by Senator Boswell. Motion carried by voice vote. Representative Lee then introduced a second amendment to this regulation and moved for its adoption. Second by Senator Boswell. Motion carried by voice vote.
Next, Commissioner Mark Treesh of the Department of Revenue discussed several topics. First, Commissioner Treesh and Director Wendell Butler discussed the creation of the Special Investigations Unit in the Department of Revenue. Director Wendell Butler stated that some of the goals of the Special Investigations Division are to serve as a fraud deterrent and a catalyst for increased taxpayer compliance. Its function is to maintain fair and impartial administration and enforcement. The division was not created as a policing entity, but rather as an investigations group and administrating body.
Representative Webb asked if this new division has any additional powers to investigate that the Department did not have before its creation. Director Butler stated no new powers have been given to the Special Investigations Unit. Representative Webb then asked if there is a definition of jurisdiction that specifically excludes any additional police powers for the division. Director Butler stated that no defined jurisdiction has changed.
Representative Moberly stated that in the future when reorganizations within the Cabinet occur, the committee or at least the Chairs should be informed of this so that questions that legislators may have might be addressed.
Next, Commissioner Treesh and Mr. Richard Dobson, Executive Director of the Sales Tax Division, provided the committee with an update regarding the Streamlined Sales Tax Project (SSTP). Mr. Dobson outlined development in the national project, stating that SSTP was ratified nationally on July 1, 2005. This agreement activates on a multi-state basis on October 1, 2005 with the creation of and the inaugural meeting of the Governing Board. He listed the states that were voted in as full members of the project, including Kentucky. Forty three of the forty six states with a sales tax (and the District of Columbia) are now participating entities in the SSTP. Several companies are currently being reviewed to become service providers for the new SSTP central registration system.
Representative Moberly asked if it is anticipated that participating states will be able to go before Congress next year to request SSTP legislation. Mr. Dobson replied that the feeling is that legislation will be introduced during the next Congress. While this agreement is voluntary at present, it is believed that eventually legislation will be passed by Congress mandating participation, collection and payment by remote vendors.
Commissioner Treesh then discussed the implementation of the telecommunication tax provisions in HB 272. Mr. Dobson stated that there is an issue regarding telecommunication tax implementation. He said that in replacing traditional local taxes with a centralized gross receipts tax and excise tax it is important to ensure that there is a sufficient hold harmless level. HB 272 provided for $36.4 million to be set aside as a hold harmless amount. The difficulty occurs in calculating how the total amount should be divided among the various jurisdictions. The statute provides that the amount paid to each jurisdiction is to be based upon how much the jurisdiction was receiving from local franchise fees, and the Public Service Commission property tax paid by telephone and cable companies. These fees are being repealed and will be replaced with the taxes collected at the state level. The difficulty in determining how to divide the funds arises because the property tax for franchise value has been centrally assessed and local jurisdictions do not have these figures. Therefore, local jurisdictions will not be able to certify these amounts as the law requires. To address this issue, the Department has the 2005 figures for local franchise values and they will take that amount and apply it to the local property rates of the various jurisdictions to determine the hold harmless amount based on assessments rather than actual collections. The Department is beginning the distribution of letter explaining the process to local jurisdictions.
Senator Tori asked if franchise value is an arbitrary amount. Commissioner Treesh replied that it is somewhat subjective, and that is why there are so many disputes. Franchise value is a source of constant debate between Department of Revenue and those being taxed.
Finally Commissioner Treesh and Mr. Dobson discussed the collection of the utility gross receipts tax for schools. Mr. Dobson discussed the history of the tax and how the Department of Revenue came to administer the tax. As of March 31, 2005 the Department has created a school tax website with the current school district boundaries. Internet registration and Intranet registration systems are not online. The filing and remittance piece of this legislation is now up and running. The first distribution to school districts is planned for September 10, 2005.
Representative Brinkman asked if any school districts have chosen to impose this tax, and if any districts elected to opt out. Mr. Dobson replied that if the district chose to opt out, they would also have to discontinue charging the tax to cable companies. No district has chosen to stop the collection of the tax. Five districts have changed their tax bases to either impose the tax on cable or increase their rate to the maximum of 3 percent. This decision to opt out was required to be made by the end of May.
Representative Moberly informed the members that the next meeting will be held at Kentucky State University on September 22, and that the committee will meet on October 14 at 9:00 a.m. on the University of Kentucky campus.
Being no further business, the meeting was adjourned at 3:15 p.m.