Interim Joint Committee on Appropriations and Revenue


Minutes of the<MeetNo1> 1st Meeting

of the 2014 Interim


<MeetMDY1> June 26, 2014


Call to Order and Roll Call

The<MeetNo2> 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on<Day> Thursday,<MeetMDY2> June 26, 2014, at<MeetTime> 1:00 PM, in<Room> Room 154 of the Capitol Annex. Representative Rick Rand, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Bob Leeper, Co-Chair; Representative Rick Rand, Co-Chair; Senators Walter Blevins Jr., Tom Buford, David P. Givens, Ernie Harris, Stan Humphries, Ray S. Jones II, Alice Forgy Kerr, and Robin L. Webb; Representatives Dwight D. Butler, Leslie Combs, Ron Crimm, Mike Denham, Bob M. DeWeese, Myron Dossett, Kelly Flood, Jimmie Lee, Reginald Meeks, Marie Rader, Jody Richards, Sal Santoro, Arnold Simpson, Rita Smart, John Will Stacy, Tommy Turner, Susan Westrom, Addia Wuchner, and Jill York.


Guests: Jack Conway, Kentucky Attorney General; Jane C. Driskell, State Budget Director; John Hicks, Deputy State Budget Director, Office of Policy and Management; Larry Hayes, Secretary, Cabinet for Economic Development; Shawn Rogers, Executive Staff Advisor, Office of Entrepreneurship; Edward C. Monahan, Public Advocate; Robert Walker, M.S.W., L.C.S.W., Assistant Professor, Department of Behavioral Science and Center on Drug and Alcohol Research, University of Kentucky; Kita Clement, M.S.W., C.S.W., Bowling Green Department of Public Advocacy.


LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Eric Kennedy, Jennifer Hays, and Sheri Mahan.


Discussion of the provisions and budgetary impact of the Master Settlement Agreement (MSA) arbitration settlement

Jack Conway, Kentucky Attorney General, discussed the Master Settlement Agreement (MSA) arbitration settlement, discussing the history and original provisions of the MSA. States are required to “diligently enforce” the collection of non-participating tobacco company taxes and deposit these into an escrow account for MSA payments to states. Since 2003, the participating companies have protested, claiming that this requirement has not been met by Kentucky. In 2013, this protest went before arbitration, and Kentucky was found to be one of six states that did not diligently enforce. The Office of the Attorney General began settlement negotiations in November 2013 with the participating tobacco companies. An agreement was reached which will give Kentucky $.45 on the dollar from disputed accounts, provide some certainty in receipt of payments owed the state in the future, and provide guidance to the state for future enforcement.


In response to a question from Senator Givens, Attorney General Conway stated that there is a dispute as to whether the remaining $.55 on the dollar from the escrow account reverts back to the participating tobacco companies. The money Kentucky will receive will be paid in one lump sum, settling the decade of disputed payments.


Ms. Jane C. Driskell, State Budget Director, and Mr. John Hicks, Deputy State Budget Director, Office of Policy and Management, discussed the budgetary impact of the MSA arbitration settlement. Ms. Driskell stated that the settlement prevents $42.5 million in budget cuts to tobacco programs in FY 14 and ensures that the enacted appropriations for FY 15 and FY 16 will be fully funded. The settlement provides an estimated $57.9 million over the next three fiscal years, removes the biggest element of uncertainty to Tobacco Fund receipts over the next 10 years, and saves the annual expense of litigation/arbitration. She outlined the enacted budget reduction plan and highlighted the areas where proposed cuts have been restored to full funding.


Ms. Driskell discussed additional funds anticipated from the settlement in FY 14 and how they will be utilized. The expected excess receipts of $68.6 million will be used to offset the estimated shortfall in FY 15 tobacco receipts of $26.6 million. The remaining $42 million from the FY 14 receipts will be reserved until the General Assembly takes further action to appropriate the funds. She gave an overview of tobacco settlement appropriations for the biennium in the following areas: agricultural development, early childhood development, and heath care improvement.


In response to a question from Chairman Rand, Ms. Driskell said that the presented receipts for FY 15 and FY 16 are estimates and the totals could potentially be larger. Mr. Hicks added that the payment amounts are still subject to the original MSA settlement formulas.


In response to a question from Senator Givens, Mr. Hicks answered that the excess funds from the settlement will cover the anticipated shortfall in FY 15. Ms. Driskell stated that any excess over that amount could be utilized within the budget by action of the General Assembly.


Update regarding activities of the Cabinet for Economic Development

Mr. Larry Hayes, Secretary of the Cabinet for Economic Development, and Ms. Shawn Rogers, Executive Staff Advisor for the Office of Entrepreneurship discussed current economic development activities in Kentucky. Secretary Hayes discussed the declining manufacturing projects coming to Kentucky and emphasized the importance of fostering small business development in the state.


Ms. Rogers discussed entrepreneurship and small business growth. According to data from the Bureau of Labor Statistics, Kentucky is ranked first in the percentage growth of new business establishments, and fifth in entrepreneurial activity. The cabinet has established the Kentucky Innovation Network, which provides more than 500 Kentucky companies support and free services, including idea assessment, market research, prototype development, business strategy, and capital access. The network has 13 offices statewide, including the newest office located in Pikeville.


Ms. Rogers discussed the importance of angel investors to small business growth. Angel investors, or those individuals who provide capital for business start-ups, put an average of $20 billion into new companies each year. The Kentucky Angel Investors Network was launched in November 2013, which brings new ventures and accredited investors together. This provides investors access to early-stage companies on a statewide basis. Membership is open to accredited investors within the state who are dedicated to investing in Kentucky companies. The network also sponsors a statewide “pitch” competition to engage local startups with potential investors. Regional winners will compete in November during the annual investment summit. She also discussed the small business credit initiative, which leverages funding from private lenders to help finance creditworthy small businesses which would fall short of traditional lenders’ underwriting standards. There are 34 participating lenders in the state, which have approved $4.9 million to date. Those funds have allowed the leveraging of $47.5 million in small business loans since the program’s inception, with a majority of the loans originating in low to moderate-income communities.


Ms. Rogers discussed recent angel investor tax credit legislation, which expands the Kentucky Investment Fund Act tax credit to allow individual investors to receive the credit. Investors will receive a tax credit of up to 40 percent of their investment (50 percent in enhanced counties) in a qualified Kentucky small business. The tax credit will be administered by the Cabinet for Economic Development and applications will be developed over the coming months. She discussed the small business tax credit, which is a non-refundable tax credit to eligible businesses that create one or more eligible full-time jobs and invest $5,000 or more in qualifying equipment or technology. The tax credit ranges from $3,500 to $25,000, dependent on the number of jobs created.


Ms. Rogers discussed the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Funds Program, which helps Kentucky small businesses, or those willing to relocate to Kentucky, leverage federal program funds. Since January 2013, 39 high-tech Kentucky companies have been awarded $8.8 million in state funds through the program, leveraging an additional $16.3 million in federal funds. Nearly $46 million has been awarded to 97 companies, leveraging $81 million federal funds.


Ms. Rogers discussed the Kentucky Export Initiative, which promotes Kentucky products globally. Kentucky’s exports reached $25.3 billion in 2013, with products and services going to nearly 200 countries. The state’s export growth rate ranked second nationally, increasing 14 percent compared to the national average of 2 percent. The state’s top export categories include aerospace products, motor vehicles and parts, and synthetic rubber and resins. The fastest growing export is aquaculture, increasing 362 percent.


Ms. Rogers discussed the Governor’s School for Entrepreneurs, which started in 2013. The school is a three week course where teams of high school students create a product or service, develop a business plan, and learn from some of the top business leaders in the nation. Students are accepted based on team skills, imaginations, and innovation. Grades and test scores are not considered, and more than 60 students are anticipated to participate this year.


In response to a question from Senator Humphries, Secretary Hayes stated that Toyota did not inform the cabinet that it intended to move operations from northern Kentucky to other states. He discussed some of Toyota’s reasons for moving.


Department of Public Advocacy Social Worker Program

Ed Monahan, Commissioner of the Department of Public Advocacy, Mr. Robert Walker, M.S.W., L.C.S.W., Assistant Professor, Department of Behavioral Science and Center on Drug and Alcohol Research, University of Kentucky discussed the Kentucky Alternative Sentencing Social Worker Program, along with Kita Clement, M.S.W., C.S.W., social worker for the Bowling Green Department of Public Advocacy. Mr. Monahan discussed Kentucky’s alternative sentencing and social worker program, stating that is it nationally recognized. He discussed the state’s prison problems, stating that rising substance abuse, high unemployment rates, and lower job skills have contributed to increased prosecution and incarceration. Deinstitutionalization of persons with mental illness has resulted in more people in prisons and jails with mental illness. Inmate populations have risen from 19,937 in July 2013 to 21,500 in July 2014.


Mr. Monahan discussed HB 463, which was enacted during the 2011 Regular Session to reduce unnecessary incarceration of individuals who present low risk of harm to the public and who could benefit from rehabilitation services. Attorneys must seek alternatives to incarceration for their clients. To further this goal, the Department of Public Advocacy has placed 8 social workers throughout the Commonwealth to assist defense attorneys in formulating alternative plans to incarceration. The 2014–2016 biennial budget provides funds for an additional 15 social worker in the program. Combining social worker and attorney costs, each alternative sentencing case costs about $825, which is significantly less than the cost of annual incarceration.


Mr. Walker discussed the Center on Drug and Alcohol Research’s (CDAR) study regarding alternative sentencing plans. The study followed 20 client records for twelve months after the court’s acceptance of an alternative sentencing plan. Each record included an estimate of the likely sentence that would have been issued for each case and the actual sentence from the disposition of the case. Each record also included the actual time served during the 12 months after the court’s decision. The study found that without alternative sentencing, the clients would have served an average of 153 days during the 12 months post-disposition of the court case. With alternative sentencing, the clients actually served only an average of 23.5 days in that same period. The net savings to the state per client for the year was between $3,687 and $5,608. The study showed that for every dollar spent on social worker alternative sentencing services there is a $4.47 to $6.80 savings to the state.


Mr. Walker discussed the cost savings from utilizing treatment and recovery services instead of incarceration. A year’s incarceration for an inmate costs an average of between $12,742 and $18,166 per year. One year of public substance abuse treatment expenditures averages $2,300 per client. A completed stay in a recovery center costs about $5,800. The study data for community based treatment and recovery programs show significant gains in the number of persons remaining drug and alcohol free 12 months after completion of treatment. Post-treatment success rates vary from 45 percent to 80 percent, with the higher percentage success rates show in long-term residential treatment centers.


Ms. Clement provided examples of the assistance that department social workers provide to clients in formulating alternative sentencing plans, and outcomes achieved from implementing these plans.


In response to a question from Chairman Rand, Mr. Walker replied that preliminary data shows a decrease in recidivism, but that the data collection as only recently begun and more solid trends will be available in the near future. Mr. Monahan stated that even if the recidivism rate remains the same, that the state gleans cost savings when persons complete alternative sentencing plans since those individuals have not been incarcerated. Mr. Walker said that the availability of treatment facilities for substance abuse is varied, and in urban areas access to treatment can be a challenge.


Being no further business, the meeting was adjourned at 3:15 p.m.