The 5th meeting of the Interim Joint Committee on Appropriations and Revenue was held on Wednesday, November 2, 2005, at 1:30 PM, in Room 131 of the Capitol Annex. Senator Charlie Borders, 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, Ernie Harris, Alice Kerr, Robert J (Bob) Leeper, Vernie McGaha, R J Palmer II, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Royce W Adams, John A Arnold Jr, Dwight D Butler, James R Comer Jr, Jesse Crenshaw, Bob M DeWeese, Jon Draud, W Keith Hall, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Fred Nesler, Stephen R Nunn, Don R Pasley, Marie L Rader, Charles L Siler, Arnold Simpson, John Will Stacy, Tommy Turner, John Vincent, Jim Wayne, Robin L Webb, and Rob Wilkey.
Guests: Mr. Bob Cox, Office of the State Budget Director; Dr. Larry Lynch, Consensus Forecasting Group; Kyna Koch, Associate Commissioner, Office of District Support Services, Department of Education; Mr. John Hicks, Office of the State Budget Director; Mr. John Rees Department of Corrections; William Hanes, Executive Director, Kentucky Retirement System; Ernie Lewis, Public Advocate; Department of Public Advocacy; Mr. Bob Ewalt, Chairman of the Public Advocacy Commission; Ms. Amy Spears, Mr. Brad Case and Ms. Linda Heitzman, Children's Alliance.
LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, and Sheri Mahan.
Senator Boswell moved that the minutes from the October 14, 2005 meeting be approved. Representative Wilkey seconded the motion. Minutes were approved by voice vote.
Senator Borders asked for a moment of silence in honor of the passing of Senator Stiver's father and Senator Scorsone's mother.
Senator Borders introduced a committee resolution honoring President King Alexander of Murray State University upon his departure. Representative Moberly read the resolution for the members then moved that the resolution be adopted. The motion was seconded by Representative Hall. Motion carried by voice vote.
Mr. Bob Cox of the Governor's Office for Economic Analysis and Dr. Larry Lynch of the Consensus Forecasting Group updated the committee regarding the October 2005 revenue estimates. Mr. Cox discussed the General Fund revenues for the first quarter of fiscal year 2006 (FY06). He stated that the total General Fund was $1,965.7 million and that the growth for the first quarter was 11.6 percent. This growth can be attributed to increases in corporate income and license taxes and cigarette floor stock tax. He then discussed the first quarter Road Fund revenue increase of $304.7 million, which is a 6.6 percent increase in the fund.
Dr. Lynch discussed the current economic outlook in Kentucky. He discussed the recent increase in employment in the state. Dr. Lynch detailed the stabilization of manufacturing jobs in the state and the FY05 increases in employment in every major industry. The Consensus Forecasting Group used two national forecast models to develop two economic forecasts for the state. The two results were averaged and that became the basis of the group's forecast. He then discussed the forecast which predicts a General Fund total of $8,184.9 million for FY 06, $8,262.6 million for FY 07, and $8,591.8 for FY 08. Dr. Lynch stated that of these totals, the groups estimates new revenues of $539.8 million for FY 06, $77.7 million for FY 07, and $329.2 for FY 08.
Dr. Lynch then discussed the possible effects of the tax modernization bill. He stated that revenue increases attributed to tax modernization will occur in FY 05 and FY 06, but that some of the tax decreases will have a negative effect on revenues in FY 07 and FY 08. These reductions will also negatively impact the economic growth rates during FY 07.
Dr. Lynch then gave the revenue estimates for the Road Fund, stating that the estimated totals for the Road Fund are of $1,185 million for FY 06, $1,245 for FY 07, and $1,252 in FY 08.
Senator Borders commented on the need to address escalating expenditures in certain areas in the upcoming Regular Session.
Next, Kyna Koch, Associate Commissioner of the Office of District Support Services in the Department of Education discussed the impact of fuel prices on school district budgets. Commissioner Koch stated that 9,586 buses are used daily to transport 378,330 students by local school districts. According to a department survey, 137 school districts expect diesel fuel costs per pupil to exceed the amount in their working budgets. Only 36 districts replied that they expect to have adequate budgeted amounts to cover increased fuel costs. The average invoice price per gallon for the most recent contract purchase for diesel fuel for the 2004 – 2005 school year was $1.84 per gallon. The most recent average for the 2005 – 2006 school year was $2.64 per gallon, with prices expected to increase to $2.78 per gallon for future contracts.
Senator Boswell asked if local school districts are beginning to utilizing biodiesel fuel to help lower fuel costs. Commissioner Koch replied that a few districts are using biodiesel on a trial basis in a few of their buses, but the expense for biodiesel blend fuels is currently about the same as regular diesel fuel. There are a few districts that have been using biodiesel for a few years. These districts have found that maintenance costs on the buses using biodiesel are significantly decreased.
Senator Borders asked how many school districts started four day school weeks because of increased fuel expenses. Commissioner Koch replied that only 1 district changed to a four day school week, but that district is currently considering returning to a five day week.
Commissioner Koch then discussed survey results for school district energy costs. It was found that 142 school districts expect the costs to operate facilities to exceed the amount in their working budgets.
Finally Commissioner Koch discussed the total transportation expenses for the department. The total transportation budget for the 2004 - 2005 school year is $282.1 million. Only nine percent of this total is allocated to fuel procurement.
Senator Tori asked if local school districts can cover their increased fuel costs with monies from their reserve accounts. Commissioner Koch replied that all districts are required to have a two percent reserve account, but districts that only have that two percent will find it difficult to absorb these increased fuel expenses.
Next, Mr. John Hicks from the Office of the State Budget Director and Commissioner John Rees of the Department of Corrections updated the committee regarding the current prison population and related funding issues. Mr. Hicks outlined the historical prison population from 1995 to present and provided population projections to the year 2015. He discussed how the projection was obtained. The current prison population is 19,558 and the forecasted population for the next biennium is 21,889 by FY 07. These numbers will be reflected in the department’s budget request. Mr. Hicks briefly discussed the impact that drug related incarcerations are having on the prison population. The current total bed capacity is 21,281, which is expected to be exceeded by 608 in FY 07. The current bed capacity is expected to be exceeded by 2,911 by FY 2010.
Senator Borders asked if the large increase in population is caused by drug related crimes. Commissioner Rees replied that yes, this has greatly impacted the prison population. Senator Borders then asked if it is more cost effective to add on to currently operating facilities. Commissioner Rees replied that yes that is the most cost effective way to add bed capacity to the state prison system.
Senator Boswell asked what the daily cost of housing an inmate is currently. Commissioner Rees replied that the average is currently $43 per day per inmate.
Representative Webb asked if there is phasing capacity for construction at local facilities. Commissioner Rees responded affirmatively and noted that this will be his recommendation which will be reflected in the department’s budget request.
Representative Nunn asked if the prison population numbers presented reflected both those convicted and incarcerated and also those awaiting trial. Commissioner Rees stated that the number reflect only those convicted and currently housed in the prison system.
Next, Mr. William Hanes, Executive Director, Mr. Don Mullis, CEO, and Mr. Brad Gross, Planning and Resource Director of the Kentucky Retirement System, provided the committee with an update regarding system funding. Mr. Hanes stated that the system has been examined by an actuary, comparing liabilities to assets. He stated that the actuary's analysis concluded that the retirement system is 47% funded, as compared to the national average of 90% funded. Mr. Hanes discussed appropriate funding levels for the retirement system. He said that the term "funding level" means the ratio of actual assets to actual liability. He explained how assets are assessed, which is with a five year smoothing method. He also discussed pre-funding retirement benefits, and debt amortization.
Mr. Hanes then discussed present funding levels for the system, stating that KERS (non-hazardous) is presently 60.3% funded, KERS (hazardous) is 71.8% funded, and SPRS is 65.5% funded. He discussed the unfunded liabilities of the system, stating that the unfunded pension liability is $2.14 billion and the unfunded insurance liability of $2.4 billion, for a total of $4.54 unfunded liabilities for the system.
Next, Mr. Hanes discussed the factors which have increased employer contribution rates. These include increased retirement rates, higher than anticipated insurance premiums, and increasing cost of living adjustments. He discussed the impact that reduced employer contribution has on the retirement system.
Finally, Mr. Hanes discussed the recent Governmental Accounting Standards Board (GASB) statements 43 and 45, prescribing new reporting and accounting standards for retiree health benefits. Bond rating agencies have announced that they will closely review the effects of these statements on governmental entities overall financial picture and this might negatively impact bond rating for the Commonwealth. An additional $113 million will be needed to fund the health insurance benefit for retirees at the level of GASB 43 and 45 standards.
Representative Moberly asked what additional funding the system needs to fund the contribution rate that KTS is recommending. Mr. Hanes replied that system needs $329 million General Fund dollars over the biennium.
Next, Mr. Ernie Lewis, Public Advocate, Department of Public Advocacy, discussed the recommendations of the Public Advocacy Commission. Mr. Lewis introduced Mr. Bob Ewalt, Chairman of the Public Advocacy Commission. Mr. Lewis discussed the increasing caseload among public defenders. He stated that the Public Advocacy Commission believes justice is being jeopardized by the excessive defender caseload. Kentucky public defenders currently carry 483 cases per lawyer, which is 189% above national standards. Case loads have increased by 37% since 2000 and presently, defenders have only 3.8 hours to devote to each case assigned. Mr. Lewis further discussed the national standards for public defenders.
Mr. Lewis discussed the ethical problems presented by the current public defender caseloads. The Commission recommended that public defenders caseloads should never be above 400 mixed cases per lawyer per year.
Next, Mr. Lewis discussed the effects drug enforcement efforts have had on the criminal justice system in the state. Public defender drug related cases have increased from 17,766 in 1995 to 40,793 in 2004. Indictments for methamphetamine manufacturing and trafficking have increased by 452% from 1998 to present. Mr. Lewis also discussed the 13 criteria used to determine indigency and eligibility for public defender services.
Finally, Mr. Lewis discussed the budget for the Department of Public Advocacy. He stated that Kentucky spends $233 per case, which is one of the lowest per case budgets in the nation. He said that the department will request $5.6 million in FY 06 and $9.4 million in FY 07.
Representative Lee asked if any of the forfeited money from drug arrests is forwarded to the Department of Public Advocacy. Mr. Lewis replied that according to statute all drug related forfeiture proceeds are directed to law enforcement and the Commonwealth Attorney's Office.
Finally, Ms. Amy Spears, Mr. Brad Case and Ms. Linda Heitzman of the Children's Alliance discussed child welfare in Kentucky. Ms. Spears discussed the Children's Alliance, which is made up of 37 organizations who partner with state agencies to provide care for 6,471 children in out-of-home care in the state. She discussed the types of children who are in out-of-home care, and stated that the number of these children have increased greatly over the past 5 years.
Ms. Spears stated that the Children's Alliance would like the legislature to support the cabinet's request for more funding for these children. Also, the Children's Alliance requests $6 million to support infrastructure in either outcome based payments or a general rate increase.
Ms. Heitzman and Mr. Case discussed the importance of positively influencing these troubled children's lives.
Representative Moberly asked what the average length of time is that these children stay in out-of-home care. Ms. Spears said that the length of stay can vary widely, but in general it is about 2 weeks. Representative Moberly then asked if the goal it is to move these children into foster care or adoptive homes. Ms. Spears responded yes, that is the goal.
Representative Lee stated how important the services are that these organizations provide.
Representative Stacy asked if Children Alliance organizations help place children into foster homes. Ms. Spears said that in some cases yes, but also these organization provide care for medically fragile children who need 24 hour nursing care.
Representative Webb asked if these agencies receive federal funds. Mr. Case stated that these organizations do receive federal money at a 50/50 match to state funds. Representative Webb stated that she believes more drug enforcement funds should be directed towards children assistance programs.
Representative Moberly thanked those who testified and stated that this would be the last meeting before the Regular Session. The meeting was adjourned at 4:25 p.m.