Call to Order and Roll Call
The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, July 22, 2010, 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, Jimmy Higdon, Alice Forgy Kerr, Vernie McGaha, R.J. Palmer II, Joey Pendleton, Tim Shaughnessy, Brandon Smith, Gary Tapp, Elizabeth Tori, and Jack Westwood; Representatives Royce W. Adams, Dwight D. Butler, Jesse Crenshaw, Mike Denham, Bob M. DeWeese, Danny Ford, Derrick Graham, Jimmie Lee, Lonnie Napier, Fred Nesler, Sannie Overly, Don Pasley, Marie Rader, Jody Richards, Charles Siler, Arnold Simpson, Tommy Thompson, Tommy Turner, Jim Wayne, Alecia Webb-Edgington, Ron Weston, and Brent Yonts.
Guests: Ms. Mary Lassiter, Secretary of the Governor's Executive Cabinet and State Budget Director, Mr. John Hicks, Deputy State Budget Director, and Mr. Greg Harkenrider, Deputy Executive Director for Financial Analysis, Office of the State Budget Director.
LRC Staff: Pam Thomas, Jennifer Hays, Charlotte Quarles, Eric Kennedy, John Scott, Brett Gabbard, and Sheri Mahan.
The agenda consisted of a summary of revenues and expenditures for the General Fund and Road fund for FY 10, necessary governmental expenses, and an update on state debt restructuring provided by Ms. Mary Lassiter, Secretary of the Governor's Executive Cabinet and State Budget Director.
General Fund FY 10 year end update
Secretary Lassiter reported that the General Fund declined 2.4% in FY 10, or $201.2 million. This decline represents the first time receipts have declined in two consecutive years since 1945. She provided historical data regarding revenue increases and decreases over the past decade, and average percentage General Fund growth by decade from 1945 to the present.
Secretary Lassiter stated that although revenues were down for FY 10, actual receipts increased by $27 million as compared to the official Consensus Forecast Group (CFG) estimate. The CFG estimate for FY 10 was $8,197 million and the actual revenues received for FY 10 were $8,225 million. The CFG estimates for FY 11 are $8,570 million and $8,871 for FY 12. The General Fund is not expected to recover to FY 08 levels until the close of FY 12.
Secretary Lassiter discussed the General Fund FY 10 yearend balance. The General Fund closed FY 10 with a surplus of $29.7 million. The surplus resulted from revenues in excess of enacted estimates, fund transfers in excess of those budgeted and various lapses. An overview was provided of the FY 10 shortfalls, and Secretary Lassiter stated that any surplus will be applied to necessary government expenses (NGE) and to replenish the Budget Reserve Trust Fund, which currently has a $0 balance.
Necessary Government Expenses
Secretary Lassiter discussed necessary government expenses (NGE), explaining that the executive branch has the authority to spend funds for certain expenses as provided in the budget, but that no actual funds have been appropriated for these purposes. Funds to cover NGE come from the General Fund Surplus Account, the Budget Reserve Trust Fund, or if these sources are insufficient, other cuts must be made to accommodate the expenses. Total NGE for FY 10 was $38.9 million, with $25.3 million of that amount within Military Affairs to cover expenses related to the ice storm and other disasters and emergencies. She then provided further details regarding the NGE relating to natural disasters in the state. Secretary Lassiter also provided a detailed accounting of authorized NGE for FY 10 – 12, which include funds for debt service for a 4th State Veteran’s nursing home, disaster match money, judgments, forest fire suppression, emergency repairs, and various other necessary state expenses. The unbudgeted lapses for FY 10 total $15.2 million.
Road Fund FY 10 year end update
Secretary Lassiter provided an update regarding the FY 10 Road Fund. The year end revenues were $1,206.6 million, which was an increase of 1.2% from FY 09. This was $7.5 million more than the CFG estimate of $1,199.1 million. The Road Fund is expected to return to FY 08 levels by FY 11. The ending balance for FY 10 resulted in a surplus of $41.9. These funds will be deposited into the State Construction Account in accordance with the HB 1 Road Fund Surplus Expenditure Plan.
General Fund and Road Fund debt restructuring
Secretary Lassiter discussed debt restructuring, stating that restructuring outstanding liabilities will realize debt service savings over the biennium. The principal only is amortized over the remaining life of the existing debt to gain upfront savings which can be used to keep from cutting priority expenditures. Secretary Lassiter noted that unfortunately, this strategy does increase costs in the long term and can be viewed negatively by debt rating agencies. Restructuring efforts will realize savings to the General Fund of $162.8 million in FY 10, $139.8million in FY 11, and approximately $130.0 million in FY 12. The Road Fund will realize savings of $81.4 million in FY 10, $52.0 million in FY 11, and $53.0 million in FY 12.
In response to a question from Representative Pasley, Secretary Lassiter stated that all savings gained from planned furloughs of Transportation Cabinet employees will remain within the Road Fund.
Secretary Lassiter replied to questions from Senator Boswell by saying that it is difficult to compare Kentucky’s economic status to other states because of differing government structures. Economic difficulties are being felt throughout the United States. As of yet, Kentucky has not had to make deep cuts to education or lay off large numbers of state employees, so Kentucky is relatively better off than many other states. She also noted that bond rating agencies will likely look negatively upon the state having a $0 balance in the Budget Reserve Trust Fund which could affect our bond rating, but currently the state bond rating is solid.
In response to a question from Representative Thompson, Secretary Lassiter stated that it is difficult to predict if or when the state will receive additional FMAP monies from the federal government. The impact of not receiving the expected $238 million would be severe.
In response to a question from Representative Adams, Secretary Lassiter noted that all NGE are reported by communication to the A & R committee but the expenditures do not go through the Contract Review committee process because most, in not all NGE are not done by contract.
In response to questions from Senator Shaughnessy, Secretary Lassiter replied that about $900,000 has been appropriated for security at the World Equestrian Games. These funds have been directly appropriated and will not count as NGE. She said that most state agencies have experienced cuts through budget reductions and have implemented efficiencies to the extent possible without dramatically affecting services.
Secretary Lassiter replied to questions by Chairman Rand stating that the total budget reduction for implemented efficiency measures has been $131 million and the executive branch is still actively trying to identify areas where additional efficiencies can be implemented. Mr. Harkenrider addressed a question regarding the gasoline tax stating that the total fuel rate has increased to 25.9 cents per gallon, but the increase will not show up until the August receipts. Secretary Lassiter then gave a brief overview of the economic indicators which her office will watch over the next biennium.
The meeting was adjourned at 2:15 p.m.