The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, July 27, 2006, at 1:00 PM, in Room 131 of the Capitol Annex. 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, Ernie Harris, Alice Forgy Kerr, Robert J (Bob) Leeper, R J Palmer II, Tim Shaughnessy, Robert Stivers II, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Royce W Adams, John A Arnold Jr, Joe Barrows, Dwight D Butler, Larry Clark, James R Comer Jr, Jesse Crenshaw, Bob M DeWeese, Jon Draud, Danny R Ford, Joni L Jenkins, 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: Bradford Cowgill, John Hicks, and Greg Harkinrider, Office of the State Budget Director; Commissioner Jerry Miller, Kentucky Department of Parks; Secretary John Farris, Finance and Administration Cabinet; and Commissioner Marian Davis, Department of Revenue.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, Lauren Armstrong, and Sheri Mahan
Representative Moberly thanked the committee members for their dedication and service during the Special Session.
Mr. Bradford Cowgill, State Budget Director, provided the committee a report on state revenue receipts and a year-end financial report. Mr. Cowgill gave a brief overview of Kentucky's economic growth, stating that nonfarm employment has reached a record high. He stated that General Fund receipts increased by 9.6% in FY06 and all major taxes, with the exception of the individual income tax, showed strong growth. FY06 General Fund revenues over FY05 increased by $731.1 million, with the greatest growth show in the corporate license tax and tobacco tax.
Mr. Cowgill then outlined the reasons for the strong revenue increases in FY06. He stated that several factors contributed to the growth, including business confidence, increases in sales and use tax collections, increased cigarette tax collections, increased collection efforts by the Department of Revenue, and the tax modernization "hump". Mr. Cowgill further discussed the tax modernization hump, explaining that while HB 272 was basically revenue neutral, that a revenue spike had been expected for FY06. He stated that individual income tax receipts dropped 3.9% and that sales tax growth hit record levels, he noted that tobacco taxes increased by 447% during FY06.
Mr. Cowgill next discussed the General Fund surplus for FY06, stating that the surplus is $136.5 million. He noted that this surplus is mainly due to higher than estimated revenues and less than estimated expenditures. He told the committee that the Governor transferred $112.5 million into the Budget Reserve Trust Fund, $12 million into the Kentucky Employees Retirement System, and $12 million into the Kentucky Teacher's Retirement System Medical Insurance Fund, equaling the total $136.5 million surplus.
Next, Mr. Cowgill discussed the Road Fund revenues for FY06. He stated that the Road Fund totaled $1,165.4 million for FY06, an increase of $38.8 million over FY05. He said that the motor fuels tax was the major contributor, increasing 7.6% during FY06. While the Road Fund revenues showed an increase, the actual total was 4.3% less than the estimate for FY06.
Mr. Cowgill said that the state has an unprecedented cash balance, with a total carryforward of $800 million. The administration increased funding for K-12 education for FY06-07, raising the annual per pupil rate. He provided a general breakdown of how the General Fund is spent which is as follows: P-12 Education 43.8%, Postsecondary Education 14.7%, Criminal Justice System 10%, Medicaid 11.7%, Human Services 7.5% and all other expenditures 12.3%. Mr. Cowgill discussed the concept of structural imbalance. He then discussed how this concept affects carryover and year end balances for the state budget. Finally he briefly discussed where future new money will come from and how it will be used within the budget.
Senator Boswell asked how the receipt increases will effect the state's bond rating. Mr. Cowgill replied that Kentucky's strong economic outlook, and the large carryover, which will reduce the amount of money the state will need to borrow, will have a positive effect on our bond rating.
Representative Wayne asked if the anticipated lower revenue receipt in the future will be a strain on future budgets. Mr. Cowgill answered that yes, future lower revenue receipts will make the budgeting process more difficult.
Senator Stivers asked what the projected growth rate needed to balance the budgets. Mr. Cowgill replied that the current budget is balanced and Mr. Harkenrider stated that he does not have the projected future growth rates and he will forward that information to the committee. Senator Stivers then asked if the receipts for the motor fuels tax could be broken down into regular fuel, commercial diesel and non-commercial diesel. It was stated that the Department of Revenue has this information, but the Budget Director's office will make their best estimates and provide that information to the committee.
Next, Commissioner Jerry Miller of the Department of Parks addressed the committee about strengthening the state's park system and needed parks projects. Commissioner Miller compared Kentucky's park system to other states, stating that Kentucky ranks first in the number of resorts and lodge rooms. Kentucky ranks second in golf courses and third in the number of restaurants, marinas, pools and total revenue generated. Kentucky is one of only six states nationwide that do not charge access fees to visitors.
Commissioner Miller discussed the Department's five priorities, which are: 1) protecting the natural beauty and historical significance; 2) developing employees; 3) maintaining buildings and recreation facilities; 4) becoming more financially self-sufficient; and 5) attaining 100% visitor satisfaction. He discussed various ways Kentucky is promoting the state park system, including on-line reservations, state park gift cards, improved resort services such as wireless internet, increased group sales, and creative marketing partnerships with companies like Toyota and Pepsi.
Commissioner Miller discussed projects which have been funded out of the $35 million renovation pool that was included in the 2005 budget. He stated that $9 million had been spent on lodging renovations and upgrades, $2 million on technology improvement, $3 million on recreation equipment, $2 million on historical preservation, and $11 million on golf courses. Commissioner Miller stated that capital decisions affect future operating deficits. He said that the average resort park loses $580,000 per year and the average recreation park loses $288,000 per year. In 2006 overall revenues increased by 2.2% , but expenses have increased by 4.9%. To meet this imbalance, the Department took in a $2 million one time transfer. He discussed the park system's pressing need for $2.5 million to replace aging equipment, which is costly to maintain.
Commissioner Miller discussed the status of campgrounds in the state park system. Consultants hired by the Department have suggested the several ways to make state park campgrounds more profitable. He said that the consultants suggested raising the campsite rates and modernization of campsites to improve facilities and to accommodate larger recreational vehicles.
Commissioner Miller then discussed the Kentucky Horse Park hotel project. He stated this project is a dramatic display of how state money can be leveraged to attract private investment. It is anticipated that once the hotel opens the state will have received approximately $600,000 of infrastructure improvements.
Finally, Commissioner Miller discussed the department's $60 million development pool. He stated that the list of proposed projects will be evaluated based on criteria that includes the return on taxpayer investment, keeping existing facilities in good repair, providing assistance to private developers to build new facilities that fill a void in the market and will provide income to the park.
Senator Boswell asked if there is enough money budgeted to secure and maintain historic properties. Commissioner Miller replied that the department spent $2 million which covered many significant needs. My Old Kentucky Home is currently under restoration. This project is funded by private and federal funds, and no state money has been expended on the restoration.
Representative Webb asked to receive a copy of the consultant's report to the department. Representative Webb then asked if one of the recommendations was raising camp site rates and expanding the number of camp sites. Commissioner Miller responded that the consultant recommended enhancing 40% of the states campsites and raising rates on those sites. The remaining 60% should remain low cost. He stated that the department is investigating the possibility of increasing the number of sites in the state.
Representative Clark asked Commissioner Miller to send the committee a list of how the $35 million budget and $60 million development pool has been spent by the department. He also requested the department send more information to the committee regarding the privatization model being looked at by the department, and additional information regarding the privatization agreement for the Horse Park hotel.
Representative Pasley asked if line item projects will be given priority to receive funding from the $60 million development pool. Commissioner Miller said that the first priority is land acquisition at Big Bone Lick. The second priority is $1 million for a matching grant at E.P. Tom Sawyer park. Beyond this, the Lake Barkley and Kentucky Dam Village lodges are in desperate need of renovation. He stated that as much as possible will be done on the line items.
Representative Moberly asked if consideration is being given to the room rates charged by private hotels that are built on state park property. Commissioner Miller replied that room rates will be considered on state park property.
Representative Moberly informed the committee members that Secretary Strong will update the committee on economic development in the state at a later meeting.
Finally, Secretary John Farris of the Finance and Administration Cabinet and Commissioner Marian Davis of the Department of Revenue discussed the Department of Revenue reorganization. Commissioner Davis outlined the details of the reorganization, which will create a special investigations division, make changes in the ombudsman office, and abolish the Division of Legislative Services.
Representative Webb asked if the new Office of Special Investigation has police powers. Commissioner Davis replied they do not.
There being no further business, the meeting was adjourned at 3:10 p.m.