The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, July 12, 2007, at 1:00 PM, in Room 154 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, Dan Kelly, Alice Forgy Kerr, Bob Leeper, Vernie McGaha, R. J. Palmer II, Robert Stivers II, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Royce W. Adams, Carolyn Belcher, Scott W. Brinkman, Dwight D. Butler, James R. Comer Jr, Jesse Crenshaw, Bob M DeWeese, Danny Ford, Derrick Graham, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Fred Nesler, Don Pasley, Marie Rader, Rick Rand, Charles Siler, Arnold Simpson, John Will Stacy, Tommy Turner, and Robin L. Webb.
Guests: Bradford Cowgill, Mary Lassiter, and John Hicks of the Office of the State Budget Director.
LRC Staff: Pam Thomas, Charlotte Quarles, John Scott, and Sheri Mahan.
Senator Boswell moved that the minutes from the previous meeting be approved. The motion was seconded by Representative Pasley. The motion carried by voice vote.
Mr. Bradford Cowgill, State Budget Director, provided a preliminary report of the fiscal year 2007 (FY07) closing results. Mr. Cowgill began by stating that the estimated General Fund surplus will be $138 million with the General Fund revenues exceeding the budget by $182 million. He said that General Fund revenues grew by 2.4%, which shows a slowing in revenues largely due to manufacturing concentration. He further discussed state economic growth, stating that non-farm employment hit a historic high in March 2007 and that unemployment is down .2%. He also stated that two of the three bond rating agencies have improved Kentucky's credit outlook.
Mr. Cowgill next discussed the General Fund receipts for FY07. He stated that the General Fund increased by 2.4%, which was $182.7 million more than FY06 enacted revenues, but $36.2 million less than estimated by the Consensus Forecasting Group. Mr. Cowgill stated that General Fund revenues were up by $197.7 million (2.4%) over FY06 General Fund revenues. The total General Fund receipts for FY07 are projected to be $8,573.8 million. The total budgeted for FY06 through FY08 is $8, 391.1 million and the total estimated receipts are $8,573.8 million which leaves $187.7 million in unbudgeted revenues. Mr. Cowgill discussed various conditions which contributed to the General Fund increase for FY07. These include the full implementation of the telecommunications tax, increased collection efforts by the Department of Revenue, improved state investment performance, and gains associated with legislation affecting abandoned property.
Senator Kelly asked how much revenue has been generated by the change in the abandoned property laws. Mr. Hicks stated that he did not have the exact figure, but he believes it to be $28 million and that this will be a one-time gain.
Next, Mr. Cowgill discussed the impact of various tax law changes on state revenue receipts. He discussed the impact of the tax modernization cuts, the 2005 and 2006 budget bills, federal conformity, and alternative minimum calculation relief.
Finally, Mr. Cowgill discussed various specific taxes and their effect on receipts. He provided an outline of the taxes that make up the total FY07 General Fund revenues receipts: individual income 35%; sales and use, 33%; corporation income and license, 12%; "other" 7%; property, 6%; coal severance, 3%, tobacco, 2% and lottery 2%.
Representative Lee asked if all bills for FY07 have been paid, or will any bills be carried over to FY08. Mr. Hicks replied that the surplus total presented is an estimate, because the state has finalized their receipts, but has not finalized spending. Mr. Hicks said that there is no plan to hold bills over until FY08 for payment.
Representative Webb asked how many state personnel vacancies are unfilled and what effect has privatization and contracting had on personnel spending. Mr. Hicks replied that he does not know the number of funded vacancies in agencies at present. Mr. Hicks stated that the Department of Mental Health/Mental Retardation has had a number of employees leave the state payroll in connection with the privatization of Oakwood. He said he would get the total number of positions which have been privatized for the committee.
Representative Pasley asked if the increase in Master Settlement Agreement revenue was reflected in the estimate of the revenue surplus. Mr. Hicks stated that no, these revenues are not reflected because any additional revenues are required to be budgeted and utilized according to the formula.
Mr. Hicks provided more detail regarding the General Fund estimate. He discussed the higher than estimated revenues and lower than budgeted expenditures which totaled $218.7 million. He stated that lower fund transfers, higher appropriations from dedicated revenues, 2007 Regular Session appropriations, unbudgeted expenses, and adjustments to the fund balance drew $80.7 million from the surplus. These expenditures when subtracted from the preliminary estimate leaves a total General Fund surplus estimate of $138 million.
Mr. Hicks discussed various additions and subtractions from the estimated revenue surplus. He discussed anticipated additional revenues from lapses, which include lapses of $21.4 million in debt service, $10.6 million in SEEK, and $4 million in K-12 health and life insurance. He also discussed unbudgeted expenditures from the General Fund surplus account which included Guardian Ad Litem payments, forest fire suppression, prior year claims, and Kentucky State Police extraordinary duty pay.
Next, Mr. Hicks discussed the executive order which addressed repairs to Wolf Creek Dam and the lowering of Lake Cumberland. The Governor's executive order invoked KRS Chapter 39A state emergency management functions and budgetary authority, and it also authorized up to $25 million from the General Fund surplus for disaster and emergency responses. The bulk of this money will be used to assist water districts in the Lake Cumberland area to modify their infrastructure so that they can continue to draw water from the lake. The executive order allows for the Commissioner for the Governor's Office for Local Development, in cooperation with the Kentucky Infrastructure Authority, to make recommendations on the use of these funds on relevant projects. Mr. Hicks stated that there are five drinking water projects that have been approved: Albany, Somerset, Monticello, Jamestown, and Bronston. These projects total $11.9 million and none of these projects have been paid. A reimbursements system has been set in place so that the projects are paid for by the water district and reimbursement requests will be paid as the project progresses.
Representative Moberly asked what is the budget document authority for this action. Mr. Hicks replied that located within the Department of Military Affairs appropriation unit there are two paragraphs which mention when the Governor may invoke KRS Chapter 39A powers for purposes of disaster and emergency response, the calling up of the national guard, and the ability to pay for those expenses from the General Fund surplus is authorized. Representative Moberly asked if these powers have traditionally been utilized for emergency response only, or have they ever been used to try to prevent a problem. Mr. Hicks replied that traditionally they have been used for emergency response. Also, this has been used in the calling up of the National Guard for other duty, such as extra security for the Kentucky Derby. Representative Moberly asked if the National Guard was called because of the Wolf Creek Dam issues. Mr. Hick replied that no the National Guard was not called into duty.
Representative Moberly asked if the approved water projects are to correct current problems, or are they anticipated problems. Mr. Hicks answered that most are to address anticipated problems.
Representative Webb asked how many applications have been submitted and who is approving the water projects. Mr. Hicks replied that that The Governor's Office of Local Government and the Kentucky Infrastructure Authority are reviewing the applications and are making recommendations to the State Budget Director. Mr. Hicks answered that he does not know the number of applications that have been submitted, but he would find and report back to the committee.
Representative Moberly asked if the Governor would be seeking ratification of this executive order during the next session. Mr. Cowgill stated he is uncertain.
Next, Mr. Hicks discussed the rainy day fund, stating that the balance is currently $231.5 million. No deposits were made in FY07 from the sale of escrows from Master Settlement Agreement non-participating manufacturers. He discussed the estimated General Fund cash balance, stating that the estimated carryforward is $803.7 million.
Finally, Mr. Hicks then discussed the status of the Road Fund. The Road Fund showed revenue growth of 5.2%, which is $12.7 million less than the enacted budget, but $10.8 million more than the January 2007 Consensus Forecast Group's estimate. He stated that there was 4% growth in the motor vehicle usage tax and an increase of 7.3% in motor fuels taxes. There was an overall increase of $60.5 million in FY 07 as compared to FY06. The estimated Road Fund surplus is $18 million.
Next, Ms. Lassiter discussed how the state's credit rating outlook has improved. She stated that two of the three rating agencies have raised the state's credit outlook due to improved liquidity through increasing reserved and unreserved fund balances and borrowing on an as-needed basis for authorized capital projects to manage debt ratios.
Finally, Ms. Lassiter discussed the FY08 outlook. The Consensus Forecasting Group's General Fund revenue surplus estimate for FY08 is $169 million. Adjustments to the FY08 budget are approximately $52 million because of dedicated revenues, appropriations in 2007 Regular Session, and tax cuts. The net projected increase in the balance is $85 million with approximately $138 million in unbudgeted surplus forwarded.
Representative Moberly asked what is the budgeted carry over from FY 07 to FY08. Ms. Lassiter responded that the carry over is $434 million. Representative Moberly asked if the budget is structurally imbalanced. Ms. Lassiter replied that yes, the budget is structurally imbalanced. She stated that these estimates are just a "cash view" at this point in time.
Senator Stivers asked what the structural imbalance has been over the past 10 years and what percentage is this amount as compared to our overall revenues. Mr. Cowgill stated he would provide that information to the committee.
Representative Stacy asked what is the customary procedure to pay ordinary, monthly bills, like electricity and vendor bills. Mr. Hicks stated that fix costs are paid on a regular basis. Representative Stacy stated that it is his understanding there has been some delay in payment to vendors and utilities. Mr. Hicks replied that he is not aware of any holding of any bill to the new fiscal year. Representative Stacy asked that Mr. Hicks check into this and report back to the committee.
Representative Lee stated that he has requested that Secretary Birdwhistell provide the amount of unpaid bills that are being carried forward to FY08 by the Department of Medicaid Services.
Representative Moberly asked if any of the unbudgeted expenditures were the result of having to restore money that was taken in the budget stability initiative. Mr. Hicks replied that yes in some cases they were related to the budget stability initiative.
There being no further business, the meeting was adjourned at 2:50 p.m.