The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Monday, August 28, 2006, at 1:00 PM, in Room 154 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, Dan Kelly, Alice Forgy Kerr, Robert J (Bob) Leeper, Vernie McGaha, R J Palmer II, Tim Shaughnessy, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Royce W Adams, John A Arnold Jr, Joe Barrows, Scott W Brinkman, Dwight D Butler, James R Comer Jr, Jesse Crenshaw, Bob M DeWeese, Jon Draud, Danny R Ford, 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, Robin L Webb, and Rob Wilkey.
Guests: Deputy Commissioner Colleen Chaney, Governor's Office for Local Development and Secretary Gene Strong, Cabinet for Economic Development.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott and Sheri Mahan.
Senator Borders welcomed the members. Senator Boswell introduced Mr. Roy Sallins of the University of Kentucky Louis Nunn History Center. The members welcomed Mr. Sallins.
Deputy Commissioner Colleen Chaney of the Governor's Office for Local Development (GOLD) discussed single county coal severance projects. She explained the single county coal severance program and discussed the process by which money is allocated to participating counties. She briefly discussed the Local Government Economic Development Fund (LGEDF) program, outlining how the money is dispersed. She stated that with the governor's vetoes of the coal severance line item project the money set aside for these projects in the budget reverted back to the LGEDF grant program. She discussed the grant application process, stating that currently communities can apply for the money in their accounts. By law, only fiscal courts may file an application for a grant by filing a letter of intent to GOLD. The letter of intent is reviewed to make sure it meets all statutory requirements, and if the proposed project is approved by GOLD the fiscal court submits a full application for the project. The Intergovernmental Coordination Group (ICG) reviews the full application and submits comments to the Commissioner. The Commissioner then makes the determination on rewarding those funds. The process is currently being amended to eliminate the letter of intent and full application projects. This will be replaced by a project scope and work report which describes the project, estimates costs and includes a resolution from the fiscal court.
Senator Borders asked if it is GOLD's policy to fund projects that were included in the budget if all the necessary paperwork is completed by the fiscal court. Deputy Commissioner Chaney replied that most of the line items were for operating costs which is an ineligible expense by statute. Not all line items that are applied for will necessarily be approved. But, as long as the application meets the criteria set out in statute, then the project will be approved. About twenty applications for budget line item projects have been submitted to GOLD and as long as they have met the criteria they have been approved.
Representative Moberly asked if GOLD is intending to fund all vetoed line item projects if they meet the appropriate criteria. Deputy Commissioner Chaney replied that the pattern has been that the ICG has recommended funding line item projects. Representative Moberly asked if local legislators are consulted regarding the line item projects. Commissioner Chaney answered that GOLD encourages legislative comments regarding these projects, but input is considered on a case by case basis. GOLD does not actively seek out legislative input on applications in their district, but they do welcome input if legislators provide it.
Representative Arnold referred to the listing of LGEDF grants provided to the members and asked what the designation "modified" meant. Deputy Commissioner Chaney replied that "modified" means that the fiscal court had modified the full application.
Representative Webb asked if in coal severance counties GOLD or any other group solicited projects to compete for funds with the vetoed line item projects. Deputy Commissioner Chaney replied no. Representative Webb asked if GOLD or any other agency has tried to convince entities to modify or exclude projects that were line itemed by the General Assembly. Deputy Commissioner Chaney replied no. Representative Webb asked if there are projects competing with the projects line itemed by the General Assembly for the same pool of funds. Deputy Commissioner Chaney responded that any project that might come to the attention of the fiscal court could compete with the line item vetoed projects. She then stated, with further clarification from Representative Webb, that yes the agency and administration has suggested projects that would be competing with vetoed line item projects. Deputy Commissioner Chaney stated that the office is following statutory language and established procedures.
Senator Boswell moved that the minutes from the previous meeting be approved. The motion was seconded by Representative Pasley. Motion carried by voice vote.
Next, Secretary Gene Strong of the Cabinet for Economic Development discussed Kentucky's economic development incentive programs. He provided a general overview of the tax incentive programs, economic development bond program, KEDFA direct and small loans program, economic impacts, and limitations on disclosure.
First, Secretary Strong discussed Kentucky's tax incentive programs. These are tax credit programs, with the three major programs being the Kentucky Industrial Development Act (KIDA), the Kentucky Rural Economic Development Act (KREDA), and the Kentucky Jobs Development Act (KJDA). He also discussed the Kentucky Economic Development Finance Authority (KEDFA), which is a board that approves incentive from the state. Secretary Strong then provided an outline of the tax incentive programs application process, project monitoring, and information submissions by companies receiving incentives. Secretary Strong provided data regarding jobs created through tax incentive programs. He stated that as of December 31, 2005, 1,062 projects have been approved which as created 125,943 verifiable jobs, which represents 99.1% of the created jobs promised by the approved companies. 85% of all companies ever approved by any tax incentive program are currently still in operation. He also provided information regarding how much the tax incentives have cost in tax revenue.
Representative Wilkey asked if there has been a cost/benefit analysis on a per job basis for the program and which programs are the most efficient. Secretary Strong replied that they do not have data on a per company basis. The cabinet does have information regarding pay range levels for the created jobs. The cabinet will provide the members information that they have access to regarding cost/benefits of the programs.
Senator Kelly asked if the 12% - 13% collection of credits taken is average for most companies. Secretary Strong stated that figure is relatively consistent. Senator Kelly then asked if the efforts to close loopholes on multistate companies has changed any company behavior and it is expected for companies to leave the state. Secretary Strong responded that he believes it will increase tax revenues for the state, but to date he has not seen a significant increase in companies leaving Kentucky. Senator Kelly asked if the changes in corporate tax law will effect the percentage of tax credits being utilized. Secretary Strong replied he does not believe the number of tax credits being used will change significantly.
Representative Moberly asked if the cabinet has information on the tax credits taken on a year to year basis. Secretary Strong answered that the cabinet receives a quarterly update from the Department of Revenue. Representative Moberly stated that he would like to receive the number of credits taken on a year to year basis to better assess the lost revenue to the General Fund. Representative Moberly asked if the Cabinet analyzes whether companies receiving tax credits would have produced the same jobs without the tax credits from the state. Secretary Strong replied that he believes that without the tax credit incentives Kentucky would lose company site selection to other states.
Next, Secretary Strong provided an overview of the Economic Development Bond program. He explained that this program provides economic development bonds through communities, then the community grants those monies to a company. He provided an outline of the program application process, project monitoring, and information submissions regarding the bond program. He discussed the total amount of bond grants approved which is $492 million. He stated that of this $492 million over $300 million was dispersed to state owned facilities. He discussed the monitoring process of the bond grant funds.
Secretary Strong next gave an overview of the KEDFA direct and small loans program. He stated as of December 31, 2005 there were $39.7 million in outstanding loans, with only 0.7% in past due status. Of this total, $29 million have been loans to industrial authorities, and the average loan size is approximately $692,912. He discussed the loan program's historical performance, stating the loan losses as a percentage of gross loans is 2.51%.
Secretary Strong provided the committee with an economic impact estimate based on the KEOZ, KIDA, KIRA, KJDA and KREDA programs. The analysis was based on the 12 months of 2005 showing jobs originated from incentive programs and took into account several factors. Secretary Strong stated that the direct employment from these programs of 125,943, indirect employment of 103,700, and induced employment of 137,000 for a total of 336,643 jobs. The total value added from these jobs is $24.5 billion. The total employee compensation was $16.6 billion. The average annual salary and benefits from these created jobs was $45,600 for 2005.
Senator Kelly asked about the total number of jobs in Kentucky. Secretary Strong replied that the total workforce to date is approximately 2 million. Senator Kelly stated that the 336,643 jobs created is a significant figure.
Secretary Strong discussed the upcoming tax incentive study to be conducted by the University of Kentucky's Center of Business and Economic Research. The study is currently being conducted to analyze the effectiveness and economic impact of incentive programs. The report should be completed by December 2006.
Representative Moberly asked if Secretary Strong feels that there is sufficient statutory authority for the cabinet to supply confidential information to LRC staff regarding companies which receive tax incentives: for example who the company is, what the tax incentives were, the amount of incentives utilized. Secretary Strong replied that the cabinet believes all information shared with the committee during this meeting is available to all General Assembly members. Also, the General Assembly has the statutory ability through the Program Review and Investigations committee to access any document in the cabinet's possession. Information that is proprietary to certain companies is not available. Financial and tax information is given to the cabinet by the Department of Revenue in the aggregate. The cabinet does not possess company specific tax information.
Representative Moberly discussed the information provided to the public by other states, such as the names of companies receiving tax incentives, the total incentives granted, and the total incentives taken by company and by program. North Carolina, Texas and Ohio all provide this information in a public access format. All of these states are ranked in the top 10 as business friendly states. Representative Moberly asked why it is the policy in Kentucky to be so restrictive with this same type of information in order to secure the kind of economic development the state desires. Holland Spade, cabinet staff attorney, replied that companies request confidentiality agreement. The cabinet reaffirms to the company the statutory exemption under the open records law for proprietary company information.
Representative Moberly discussed the possibility of allowing LRC staff access to Department of Revenue and Economic Development Cabinet data regarding tax incentive programs and company data for those companies receiving incentives. He discussed the importance of this data and analysis of this data to policy making by the General Assembly.
Secretary Strong stated that it is the cabinet's position to do what is believed to be in the best interest of Kentucky.
Being no further business, the meeting was adjourned at 3:05 p.m. A tape of this meeting and all meeting materials are available in the Legislative Research Commission library.