The 4th meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, October 22, 2009, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Rick Rand, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Bob Leeper, Co-Chair; Representative Rick Rand, Co-Chair; Senators David E. Boswell, Tom Buford, Denise Harper Angel, Ernie Harris, Dan Kelly, Alice Forgy Kerr, R.J. Palmer II, Joey Pendleton, Brandon Smith, Robert Stivers II, Gary Tapp, Elizabeth Tori, and Jack Westwood; Representatives Royce W. Adams, John A. Arnold Jr., Scott W. Brinkman, Dwight D. Butler, James R. Comer Jr., Jesse Crenshaw, Mike Denham, Bob M. DeWeese, Danny Ford, Derrick Graham, Keith Hall, Jimmy Higdon, Jimmie Lee, Harry Moberly Jr., Lonnie Napier, Fred Nesler, Marie Rader, Jody Richards, Charles Siler, Arnold Simpson, Tommy Thompson, Tommy Turner, Jim Wayne, Ron Weston, and Brent Yonts.
Guests: Judge James Shake, Mr. David Nicholson, and Mr. Dan Albers, Jefferson County Circuit Court; Ms. Dana Jackson, Making Connections Network; Jeff Been, Executive Director, Legal Aid Society; Brenda Walker, Kentucky Housing Corporation; Mr. Daniel Bork, Vice-President of Tax for Lexmark International, Inc.; Mary Jean Riley, CFO at North American Stainless; Mr. Anthony Toups, Senior Vice President of Advantage Capital Community Development Fund; Mac Wall, Tim Bishop, Nancy Carpenter, Julie Schmitt, and Shay Hopkins, Kentucky Educational Television.
LRC Staff: Pam Thomas, Jennifer Hays, Charlotte Quarles, Sheri Mahan, Eric Kennedy, and Whitley Herndon
Chairman Rand entertained a motion from Representative Denham to approve the minutes from the September 24, 2009 meeting. The motion was seconded by Senator Buford and passed by voice vote.
Chairman Rand recognized Randy Smith from Budget Review. He welcomed Mr. Smith back from his service with the National Guard in Iraq.
Mr. David Nicholson, Circuit Court Clerk, Judge James Shake, Chief Judge, Mr. Dan Albers, Master Commissioner of the Jefferson County Circuit Court, Ms. Dana Jackson, Making Connections Network, Jeff Been, Executive Director, Legal Aid Society, and Brenda Walker, Kentucky Housing Corporation addressed the committee regarding the Residential Foreclosure Conciliation Project. Mr. Nicholson told the committee that the Jefferson County Circuit Court has created a pilot program which attempts to bring together the homeowner and lender to explore alternatives to foreclosure. Mr. Nicholson stated that the program also helps relieve the Jefferson County Circuit Court’s heavy workload, which has increased due to budget-related staff reductions. Judge Shake told the committee that 38.12 percent of the civil cases filed in the Jefferson County Circuit Court in 2009 are foreclosures.
Partners in the program include judges, the Circuit Clerk, the Master Commissioner, outreach workers, housing counselors, Legal Aid and pro bono attorneys, the Kentucky Homeowner Protections Center (KHC), and banks. The goal is to open the lines of communication and address both homeowner and lender frustration. This program is only available for owner-occupied properties. While not all foreclosures are resolved, positive outcomes can include a “graceful exit” from the home by allowing the homeowner more time.
Since the start of the pilot program in three divisions, fifty-five homeowners have returned hardship packets to the lender’s attorney. Of the twenty-five resolved cases, twelve ended with the homeowners negotiating a solution which allowed them to remain in the home. The remaining ten divisions joined the program in July, and Judge Shake anticipates an increase in resolved cases.
Chairman Rand asked if foreclosures have slowed since the implementation of this project. Mr. Albers said it was too soon to tell. Chairman Rand asked if there were a commonality in the foreclosures that have been successfully negotiated under the project. Mr. Albers stated that the homeowners who are successful in this process are generally the ones who have returned to work. Judge Shake added that many homeowners in the process had accelerated notes because of missed payments.
Representative Westin asked how willingly the lenders participate in the program. Judge Shake responded that lenders have become increasingly willing to participate. The program is attractive to lenders because it does not interrupt the foreclosure process. Since it is an “opt-in” program for the homeowners, it self-selects participants who have reason to believe they can work out a better arrangement to avoid foreclosure. Representative Westin asked about the biggest challenges to the success of the program. Judge Shake replied that the challenges are keeping on top of the process month-to-month, funding for the program, and outreach.
Representative Brinkman asked if there had been any problem because of the current trend of slicing up the ownership of mortgages and selling off pieces, which makes ownership difficult to track. Judge Shake replied that since the program was so new, they had not run into that issue yet but it has been discussed. When ownership is divided up, lenders sometimes owe fiduciary duties to the holders of the paper and cannot participate in the process. Mr. Albers added that in order for a plaintiff to receive a judgment in a foreclosure case, they have to trace the order of assignment to prove they are the owner of the paper.
Representative Denham asked about the response from regulatory agencies. Mr. Albers responded that there has been no negative feedback from agencies. Judge Shake has said that since the program emphasizes cooperation, agencies are able to be involved in the process. Representative Denham asked for the ratio of sales price to debt owed in houses foreclosed. Mr. Albers gave an educated guess of no more than 75 percent. He faulted the appraisal for the mortgage, saying they have been significantly higher than the court-ordered appraisal under the foreclosure. He attributed this over-valuation to the systemic problem in the lending industry at the time the loan was made. Representative Denham asked for the ratio between the sales price and the appraised price. Mr. Albers replied that it would vary, depending on the region, but with an estimated average of 80 percent. To defeat the right of redemption, bidding on the foreclosed house must start at two-thirds of the court-ordered appraisal value.
Senator Buford suggested that the program reach out to federal bank regulators to help them better understand the process and be more lenient to allow more flexibility.
Senator Tori asked for the average cost of the homes in the twelve resolved cases. Mr. Albers stated the value of homes varied widely. The majority are in the middle-income range. There has not been a great deal of upper-income homes going through the program and the majority of lower-income homes are not owner-occupied. Mr. Albers noted that in the short time period of the program, the response from homeowners has been very encouraging. In Jefferson County, there are between 6,000 and 7,000 vacant and dilapidated houses, the vast majority having gone through the foreclosure process. Mr. Nicholson added that in addition to having the Mayor’s office involved, Congressman Yarmuth’s office is also involved. Mr. Nicholson stated he would find the average value of the houses involved in the program and provide that information to Senator Tori.
Representative Simpson noted that when the property is mortgaged over its fair market value, there can be a deficiency judgment even after the foreclosure which can cause some homeowners to go into bankruptcy. Also, some banks fail to record the deeds of properties, which then become a nuisance to the community. He asked if the program encompassed good business protocols and what it does about deficiency judgments. Mr. Albers stated good business practices are part of the program protocol. Deed in lieu of foreclosure is only going to be available in cases where a graceful exit has been worked out. One of the solutions has been an agreed sale date, which allows the property to be sold through the court system free and clear of the other liens on the property. Representative Simpson asked about banks that sell the deficiencies to debt agencies, creating problems for the homeowner. Mr. Albers replied that it is something that can be negotiated in the program.
Next, Mr. Daniel Bork, Vice-President of Tax for Lexmark International, Inc., and Mary Jean Riley, CFO at North American Stainless, addressed the committee on behalf of the Kentucky Single Sales Factor Coalition. Mr. Bork introduced the single sales factor as an important economic development issue, driven by a national trend in changes to the corporate apportionment formula.
Mr. Bork noted that in 1998, a study concluded that the three factor formula is an implicit tax on each factor. Subsequent studies have found improvement in employment by eliminating the property and payroll factors. Mr. Bork said that studies have concluded that states that reduce the property and payroll factors will gain jobs at the expense of other states. Mr. Bork presented a map showing states differing sales factor weights. He also presented a sample of how the current factor apportionment works in Kentucky and how it would change under single sales factor.
Mr. Bork concluded by asserting that the single sales factor apportionment has become the standard among states today. Current “home-based” companies are paying higher taxes in other states that have adopted the single factor apportionment formula. Changing Kentucky’s formula will have no affect on small businesses that have all their sales within the state.
Chairman Rand asked how many states were using the single sales factor apportionment formula. Mr. Bork responded there were around twenty states under the single sales factor formula exclusively, a number more who are doing it for specific industries and more that are opting in. In total, there are approximately thirty states. Chairman Rand asked if states were using it as an economic development tool. Mr. Bork stated that economic development was the only reason he knew of why states were adopting the single sales factor formula. Chairman Rand asked if there would be any job growth associated with Kentucky adopting the single sales factor formula. Mr. Bork said there has been no direct tie to job growth but the possibility of job growth has been demonstrated in economic reports. Ms. Riley noted that existing business would take this into account when making decisions to expand and add job in Kentucky. Chairman Rand asked who the losers would be under a single sales factor formula. Mr. Bork answered the losers would be companies who do business in Kentucky but have no significant payroll or property in Kentucky.
Representative Wayne asked for the fiscal impact on the state. Mr. Bork responded that they did not currently have the data to determine the fiscal impact. He noted that other states fiscal impact have noted at 10-20 percent loss in short-term corporate revenue but that does not take into account a possible increase in employment.
Senator Leeper stated that Oregon’s Department of Revenue said adopting the single sales factor formula cost $77.6 million in fiscal year 2007. He asked for any fiscal impact of the factor when adopted by other states. Mr. Bork responded that he did not have data on other states. Ms. Riley noted there was one state which had an increase in revenue when a single sales factor formula was applied.
Representative Hall asked to see data about the seven surrounding states comparing the unemployment, specifically as regards manufacturing.
Senator Boswell asked how this would affect companies with headquarters in Kentucky, for example with a company like Toyota. Mr. Bork responded that it would depend how much payroll and property they had in the state. He guessed that they would be helped slightly because they have lots of payroll in other states, but that it is hard to know exactly.
Next, Mr. Anthony Toups, Senior Vice President of Advantage Capital Community Development Fund, spoke the committee about the New Market Proposal. The program is designed to create low cost capital for small businesses in poor communities throughout the state. It is modeled after a federal program. Upon passage of legislation, Mr. Toups explained that there would be immediately available pools of capital which would be lent out to businesses in low income communities. The legislation offered last year by Representative Webb would have created a pool of $300 million. Mr. Toups reported that in similar programs in other states, each dollar lent turns over once in the seven year loan period. There is significant demand for this program and many states have used it.
Mr. Toups stated that the private sector investors would receive future credit against Kentucky taxes from participating in the program, with a two year delay before credit can be claimed. Thus, the cost to the state would accrue only after the third year. Congress has excluded certain groups from participating, like horse racing, gambling, and liquor stores. Loans are also not for residential, but rather focus on operating companies. Mr. Toups showed the committee the geographic areas in Kentucky that would qualify for the program; these areas must have 20 percent or higher poverty level. Data to determine qualification is taken from the census reports.
The loan level is capped at $10 million and the credit level is capped at $25 million per year, with no refunds, and the credit is non-transferable. Since the program can rely on the federal program for data, administrative costs will be very low. The entities making the loans, community development entities (CDE), are monitored by level of compliance. If that compliance is not reached, the tax credits will not be redeemable.
Chairman Rand asked which companies in Kentucky are currently taking advantage of the federal program. Mr. Toups responded there are several CDEs operating in Kentucky. One example is Kentucky Highland Ventures, which will be working with Advantage Capital Community Development Fund. The law is intended to fund small businesses, as opposed to a specific project. Chairman Rand asked for the requirements of CDEs in terms of jobs. Mr. Toups replied that the federal government and other states have not put job creation requirements on the program, though experience has shown job creation. Mr. Toups noted the University of Kentucky School of Business will be doing an impact analysis, but other studies have shown that the program in other states was ultimately revenue positive.
Chairman Leeper asked if there are Kentucky entities currently participating in the federal program. Mr. Toups replied in the affirmative and said those entities would be eligible to participate in the Kentucky program. Chairman Leeper asked if there were any indication that there was large opportunity in Kentucky beyond what was already being served with the federal program. Mr. Toups replied that when similar programs have been enacted in other states, there was a huge demand. The federal program demand to availability is around five to one. The 2009 federal allocations, which will be released later this month, show a huge disparity between the amount of applications and the amount available to lend. Chairman Leeper asked if it were a finite, seven year program and, if the money is repaid back into the fund after seven years, what happens to that money. Mr. Toups explained the timeline of the program. Once the money is raised from investors, the CDE has twelve months to lend it out and must have all the money continuously out to qualified businesses. At the end, the money is returned to the investor. Chairman Leeper asked if any interest is paid. Mr. Toups replied that the borrowers pay interest on their loan. The federal program requires an interest of three to four basis points below prime, but the program is designed to have return to the investors. Finally, Chairman Leeper asked for any data on how this program has affected other state’s budgets. Mr. Toups showed the committee a slide of data from Missouri.
Representative Brinkman asked how often in other states this lender is the only one available for qualified businesses. Mr. Toups replied he did not know for sure, but his sense was about half the time. The smaller loans were the ones that typically local banks and financial institutions were not particularly interested and the CDE was the sole lender.
Finally, Mac Wall, Executive Director, Tim Bishop, Director of Marketing, Nancy Carpenter, Director of Education, Julie Schmitt, Director of Community Relations and Shay Hopkins, Deputy Director of Content, all at Kentucky Educational Television (KET), spoke to the committee about KET’s Educational Services. Chairman Rand announced that Mr. Wall is retiring after six years and asked the Secretary to read a Resolution Honoring Malcolm Wall. Chairman Rand entertained a motion from Representative Yonts to adopt the resolution. The motion was seconded by Representative Nesler and passed by voice vote.
Mr. Wall told the committee that, since 1968, KET has been providing state-of-the-art educational programs helping to break down the economic and geographic barriers of the state. KET includes three digital, over the air channels: KET, KET2, and KET KY. KET provides coverage of everything from the arts to the General Assembly. One million people use KET services each week. KET has been nationally recognized as the best model for a statewide educational television network. KET provides a wide variety of educational resources, from pre-school through higher education. Mr. Wall highlighted three of KET’s educational services: Instructional Resources, Teacher Professional Development and GED Preparation.
Ms. Carpenter told the committee that KET works with the Kentucky Department of Education (KDE), which helps KET produce instruction and professional development resources to address the specific needs of the Commonwealth, based on achievement data and areas of need identified by KDE. KET has planned and produced hundreds of instructional resources in all curriculum levels and all grade levels, all based on the specific needs of Kentucky students.
KET is producing instructional resources, for example, in the area of Science, Technology, Engineering and Mathematics (STEM). One of KET’s STEM instructional resources is the website Scale City. Scale City is produced in partnership with three other states and targets middle school math students.
Ms. Carpenter stated that KET’s High School Distance Learning has a twenty year history. Currently, there are over 3,000 students enrolled in the Distance Learning classes of German, Latin, physics, and Arts & Humanities. Distance Learning allows every student in Kentucky to take four years of a foreign language or AP Physics program. In partnership with Kentucky Virtual High School (KVHS), KET is creating additional courses in trigonometry and Arts & Humanities. All KET programs feature modern technology, such as video, virtual physics labs, telephone tutor and online social media to engage modern students.
At the same time KET started Distance Learning, it also started its professional development for Kentucky teachers. This professional development program has been key to the implementation of KERA by providing a state-wide network. For example, it demonstrates best practices by broadcasting video of outstanding teachers in Kentucky. Ms. Carpenter noted that KET looks forward to providing the extensive professional development necessary to implement SB 1.
Specifically, KET is looking to make its repositories of programs searchable. Every service is available on-demand and online, specifically through KET ED On Demand, KET EncycloMedia and PBS Digital Learning. Distance Learning programs are used in 98 percent of Kentucky schools and 100 percent of Kentucky Universities. One program, KET EncycloMedia, was introduced in 2005 and is about to hit five million discrete visits by a teacher or student. KET has a staff of five consultants to travel around the state, providing technical assistance and training. Ms. Carpenter showed a short video featuring a Kentucky teacher’s experience with KET EncycloMedia.
Representative Adkins asked if KET could track how many school districts take advantage of the Virtual Physics Labs on a regular basis. Ms. Carpenter said enrollment can be tracked because each student logs in separately. Last year, there was a high interest in the program, increasing enrollment by a thousand. Currently, there are between two and three hundred students using the labs. KET is working to provide better professional development around the labs to make everything more user-friendly. Representative Adkins asked, because of the need for technology in the classroom in order to take advantage of KET’s programs, how many school districts were using the programs. Ms. Carpenter responded that all school districts were using KET’s programs. Because teachers using KET’s resources register, KET can track how many classrooms around the state are using these programs. There around 50,000 teachers with accounts. As far as usage of resources, an estimate is difficult. KET encourages teachers to download videos directly onto their own computers and run local servers, to help reduce the bandwidth pressure on KET. The result is that KET is unable to track how often its videos are played. Mr. Walls noted that EncycloMedia has been an important resource used throughout the state, especially in coal county schools. Kentucky is the only state that is providing this kind of resource free of charge.
Representative Moberly thanked Mr. Walls for his service. He asked about the format for AP Physics. Ms. Carpenter responded that it was an online course, using technology like integrated videos and Pencast. There is a requirement there be a teacher at the location to help the student. Representative Moberly asked if there is a teacher physically at the location to assist the student. Ms. Carpenter said that there is a teacher on location for the whole class for supervision, though the teacher may not be well versed in the subject area of the class. The Virtual Classroom was designed twenty years ago to also be a professional development tool, so it was generally run by a teacher in the community. However, the program has evolved to be more student-oriented, rather than focused on professional development. Representative Moberly asked if there were enough capacity for all interested students. Ms. Carpenter said that KET has not had to cap participation in the courses. However, there is a limitation as to how many students can be in the classroom at a physical location where the program is being run. KET is working to increase staff for programs to ensure that all interested students can participate. Ms. Carpenter speculated that there would come a point where enrollment would have to be capped, but currently there is sufficient staff to accommodate demand. Representative Moberly asked if there are any dual credit courses. Ms. Carpenter replied that there were currently no dual credit courses but they were working on developing some dual credit courses.
Senator Harper Angel noted that she was currently serving on the Governor’s Taskforce for Unemployment Insurance and one of provisions being discussed is tying benefits to enrollment in a GED course, but there was concern that some would not be able to pass the program. Ms. Carpenter said that KET has GED preparation programs, but before enrollment in the program, there is an assessment of level of ability. If a person is assessed to be not ready for the GED program, there are pre-GED programs which provide more basic adult education materials. With the expansion of online services, KET is planning on providing more materials for the GED and pre-GED programs.
Chairman Rand announced the committee would meet next on November 12, 2009. The meeting was adjourned at 3:25 PM.