Call to Order and Roll Call
The 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, June 27, 2013, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Bob Leeper, 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 Walter Blevins Jr., Tom Buford, Sara Beth Gregory, Denise Harper Angel, Ernie Harris, Stan Humphries, Ray S. Jones II, Alice Forgy Kerr, Gerald A. Neal, and Robin L. Webb; Representatives Dwight D. Butler, John Carney, Leslie Combs, Ron Crimm, Robert R. Damron, Mike Denham, Bob M. DeWeese, Myron Dossett, Kelly Flood, Martha Jane King, Jimmie Lee, Reginald Meeks, Marie Rader, Jody Richards, Sal Santoro, Arnold Simpson, Rita Smart, Tommy Turner, David Watkins, Jim Wayne, Susan Westrom, Addia Wuchner, and Jill York.
Guests: Margaret Gibbs, Executive Vice President and COO, Kentucky Lottery Corporation; Mary Harville, Senior Vice President & General Counsel, Kentucky Lottery Corporation; Todd Hollenbach, Kentucky State Treasurer; Jane C. Driskell, State Budget Director; John Hicks, Deputy State Budget Director, Office of Policy and Management; and Greg Harkenrider, Deputy Executive Director for Financial Analysis.
LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Eric Kennedy, Jennifer Hays, and Sheri Mahan.
New Kentucky Lottery games and projected revenues
Margaret Gibbs, Executive Vice President and COO and Mary Harville, Senior Vice President & General Counsel of the Kentucky Lottery Corporation, and Todd Hollenbach, Kentucky State Treasurer, discussed the implementation of new Kentucky Lottery games and projected revenues. Ms. Gibbs stated that net revenues from all lottery sales have increased steadily from $99.1 million in FY 93 to a projected $224.1 million in FY 13. The revenues are divided with 6.3 percent paid to retailers, 6.8 percent used for operating expenses, 26.8 percent paid to the Commonwealth, and 60.1 percent paid to lottery winners. The Kentucky Lottery Corporation has distributed revenues (from 1989 through May 2013) of $1.8 billion, including $214 million in SEEK funds, to the General Fund, $2.04 billion for grants and scholarships, $42 million for literacy development, and $20.8 million to the Affordable Housing Trust Fund (FY 99 through FY 03).
Ms. Gibbs discussed he implementation of Keno by the Kentucky Lottery Corporation. Keno will be played on the current terminal system at retail locations, with drawings conducted at five minute intervals. Thirteen other states offer Keno in the U.S., with $3 billion in sales annually. The game will be offered to current retailers and to newly recruited retailers in social settings, such as bars and restaurants. It should provide the corporation the ability to grow the player base to include younger players from higher economic and educational backgrounds. Keno will be included in current lottery products by amendment of the current GTECH contract, and is planned to start in November 2013. Estimated sales for Keno are $53 million in the first full year, growing to $110 million by the 5th year of operation, with annual dividends of $15 million in the first year, growing to $30 million in year five.
Ms. Gibbs discussed how Keno is played and gave detail of the amendment to the GTECH contract. Keno software and equipment installation will be completed by October 19, and sales should begin between October 19 and November 19. Ms. Harville stated that KRS 154A.020(1), KRS 154A.060, KRS 154A.063, and KRS 154.070(4) provide the statutory authority for Kentucky Lottery Corporation to provide Keno to its patrons.
Ms. Gibbs discussed the implementation of iLottery by the corporation. iLottery is a distribution channel for lottery games. This system will establish the foundation for internet lottery sales, including banking and player accounts, geo-location, age verification, time spent, and wagering limitations where appropriate. The iLottery system is expected to be implemented 9 to 12 months after the start of Keno. iLottery will provide a convenient way for customers to make purchases online. Implementation by other lotteries has not harmed lottery retailers. Projected proceeds from iLottery are $2.7 million in the first year, reaching $49 million by FY 23.
Ms. Gibbs and Ms. Harville discussed the statutory authority for the iLottery system, and Ms. Gibbs said the Kentucky Lottery Corporation has received several state and national awards for its efforts promoting social responsibility.
In response to a question from Senator Webb, Ms. Gibbs said there have been several federal legislative proposals to make changes to the Wire Act that may impact iLottery sales over the internet. No bill has been passed to date.
In response to questions from Senator Gregory, Ms. Gibbs stated the corporation is not aware of any potential litigation in association with the implementation of Keno. The corporation has no role in historical racing terminals and is not involved in any litigation concerning them. The only games anticipated to be offered through iLottery are the current games offered by the corporation. Future additions to games would also be offered through iLottery. Amendments to the GTECH contract or any bids would be presented to the Government Contract Review Committee.
In response to questions from Senator Leeper, Ms. Gibbs replied that projected revenues produced by the introduction of Keno were based on experience in other states, with patron migration from presently available games to Keno taken into account. The corporation tested an instant game several years ago, but issues with the equipment caused the game to be discontinued. The impact on horse track revenues was not considered in the decision to implement Keno.
In response to a question from Representative Wayne, it was stated that the Kentucky Lottery Corporation has won several awards for being socially responsible, and that no addiction epidemiological studies were reviewed when making the decision to implement Keno.
In response to a question from Representative York, Ms. Gibbs said that there are 2,800 licensed lottery vendors in Kentucky, with approximately 100 of those expected to offer Keno. About 300 new retailers are expected to offer Keno initially, growing to approximately 650 retailers after full implementation.
FY 2013 – 2014 projected revenues
Jane C. Driskell, State Budget Director, John Hicks, Deputy State Budget Director, Office of Policy and Management, and Greg Harkenrider, Deputy Executive Director for Financial Analysis provided a financial outlook report, focusing on FY 13 – 14 projected revenues. Ms. Driskell discussed current fiscal status, stating that tight fiscal conditions are expected in the immediate future. General Fund receipts have been flat or declining for three of the last four months. Sales and use tax receipts will likely end FY 13 lower than receipts for FY 12. Severance tax receipts are declining slightly due to slower coal production and lower natural gas prices. Kentucky’s slow fiscal growth is consistent with surrounding states and cannot make up for recession impacts and inflation. The official revenue growth estimate is 2.4 percent for FY 13 and 2.3 percent for FY 14.
Ms. Driskell gave a General Fund update, stating that 3rd quarter of FY 13 revenue data showed revenues flattening out to 0.2 percent growth, with receipts falling 2 percent in April 2013. April and June are typically the largest General Fund receipt months, and June 2013 collections need to equal $917.2 million to meet the enacted revenue estimates.
Ms. Driskell provided a Road Fund update, stating that data shows 3.4 percent growth in the 3rd quarter of FY 13. Road Fund receipts increased 18.3 percent in April, but were flat in May. Motor vehicle usage and motor fuels taxes show growth in the 4th quarter, but total receipts would need to grow 5.2 percent in June to equal the official estimate. She discussed the anticipated July statutory adjustment to the average wholesale price of fuel and the effects of falling fuel prices on the fund.
Ms. Driskell discussed the history of budget balancing measures during Governor Beshear’s administration, totaling $1.6 billion. Most agencies have had 8.4 percent cuts, with 6.4 percent to universities, 4.2 percent to Education and Workforce Development, and 2.2 percent to Justice and Public Safety agencies. Several critical areas have been exempt from cuts, including SEEK, Medicaid, debt service, health insurance and retirement, student financial aid, and some community based services. She discussed unforeseen budgetary impacts, such as higher inmate populations than budgeted and federal sequestration. Ms. Driskell highlighted future budgetary challenges for the state, including increases in education funding, pension obligations, and infrastructure.
Ms. Driskell discussed the next biennial budget. She addressed the structural imbalance in the current budget, which totals $157.5 million. There are potential increases in the next budget to fund teacher and state employee pensions, inflation in public employee health insurance, and inflation in Medicaid costs, which are expected to total approximately $420 million. Ms. Driskell discussed other critical needs such as SEEK funding increases, teacher raises, increased debt service for new capital projects, and a salary increment for state employees.
In response to questions from Representative Wayne, Ms. Driskell said that sales tax receipts have rebounded. Mr. Harkenrider stated that growth in sales tax is difficult because the base is narrow. Ms. Driskell stated that Governor Beshear is committed to tax reform and plans to continue those efforts in the 2014 legislative session.
In response to questions from Representative Rand, Mr. Harkenrider said that the recovery from the recession has been slow, with low wages and low salary growth. This negatively affects income withholdings and sales tax receipts, which together represent 74 percent of the General Fund. The narrow sales tax base and softening sales tax receipts could be considered a structural issue.
In response to a question from Representative Denham, Mr. Hicks said that interest rate increases have not affected state debt service because the state refinanced the debt when interest rates were lower.
In response to questions from Representative Lee, Mr. Hicks stated the state has received information from the federal government regarding the effects of sequestration on FY 13 state agency budgets.
Being no further business, the meeting was adjourned at 3:30 p.m.