Call to Order and Roll Call
The first meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, June 18, 2015, at 1:15 PM, at the METS Center in Erlanger, KY . Senator Christian McDaniel, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Christian McDaniel, Co-Chair; Representative Rick Rand, Co-Chair; Senators Ralph Alvarado, Danny Carroll, David P. Givens, Denise Harper Angel, Stan Humphries, Morgan McGarvey, Dennis Parrett, Wil Schroder, Brandon Smith, Robin L. Webb, and Stephen West; Representatives Denver Butler, John Carney, Larry Clark, Ron Crimm, Mike Denham, Myron Dossett, Kelly Flood, Joni L. Jenkins, Reginald Meeks, Tanya Pullin, Sal Santoro, Arnold Simpson, Rita Smart, Jim Stewart III, Wilson Stone, Tommy Turner, David Watkins, and Jill York.
Guests: Trey Grayson, President/CEO, Northern Kentucky Chamber of Commerce; Jane Driskell, State Budget Director; John Hicks, Assistant State Budget Director; Jeff Derouen, Executive Director, Public Service Commission; Stephanie Bell, Deputy Executive Director, Public Service Commission; David Dooley, Director HR, Public Service Commission; Robyn Bender, Assistant Deputy Attorney General; and Roger Thomas, Executive Director, Governor’s Office of Agricultural Policy.
LRC Staff: Pam Thomas, John Scott, Eric Kennedy, and Donna Harrod.
Public Service Commission Funding
Jane Driskell, State Budget Director and John Hicks, Deputy State Budget Director, Jeff Derouen, Executive Director, Public Service Commission; Stephanie Bell, Deputy Executive Director, Public Service Commission; and David Dooley, Director HR, provided information on the funding sources and budget for the Public Service Commission (PSC).
Mr. Derouen presented an overview of the operations of the PSC. The PSC was created by the Kentucky General Assembly in 1934 as an independent regulatory, quasi-judicial agency. Its mission is to ensure that utility rates are fair, just and reasonable for the services provided, and that those services are adequate, efficient, and reasonable. The PSC does not set energy policy or broad utility regulatory policy. The PSC operates in accordance with statutes, regulations and judicial precedent and is funded by assessment imposed against 1,550 regulated utilities which, the utilities recover from ratepayers.
Director Driskell discussed funding for the PSC. She informed the committee that amounts collected from the assessment are deposited in the General Fund, and that pursuant to KRS 278.150 unexpended amounts generated from the assessment at the close of a fiscal year do not lapse but instead remain credited to the account of the commission. Director Driskell noted that the budget of the PSC is set by the General Assembly through appropriations in the biennial budget. Deputy Director Hicks then reviewed the history of appropriations to the PSC from FY 2006 to FY 2016.
Director Derouen reviewed a chart illustrating the jurisdictional utilities intrastate gross receipts from 2001 to 2014. He noted that the recession impacted these receipts. He explained how the millage rate imposed against the utilities is established annually by the Department of Revenue and the Finance and Administration Cabinet. Currently the millage rate is 1.901 and is capped at 2.0. Mr. Derouen also reviewed the expenses of the PSC.
Mr. Derouen shared the PSC’s additional staffing needs for the next biennium.
Master Settlement Agreement
Robyn Bender, Assistant Deputy Attorney General and Roger Thomas, Executive Director, Governor’s Office of Agricultural Policy provided an update on the Master Settlement Agreement (MSA). Ms. Bender gave a historical overview of the MSA, including the circumstances surrounding the agreement as originally formulated, and the changes that have occurred since. The agreement settled lawsuits filed by 45 states seeking recovery of smoking-related public health costs. Under the agreement, the Participating Manufacturers (PMs) agreed to make annual payments to states in perpetuity to address these past and future expenses. PMs are subject to restrictions on marketing and advertising. Ms. Bender also reviewed legislation enacted in Kentucky to implement and enforce the MSA from 2000 to the present, including provisions enacted to require nonparticipating manufacturers (those that did not sign the MSA) to register with the state and make escrow payments. These provisions are referred to as the “model (escrow) statutes” and are intended to “level the playing field” between manufacturers that are making payments and are subject to advertising and marketing restrictions and those that are not.
Ms. Bender reviewed the different adjustments that can be made to the amounts paid by the PMs to states, focusing in particular on the Nonparticipating Manufacturer (NPM) adjustment that would occur if an economic firm determines that the MSA was a significant factor in market share loss of the PMs of at least 2 percent. States that were found to have not diligently enforced their model (escrow) statute by an arbitration panel would share in the payment reduction. In September of 2013, an arbitration panel found that Kentucky and five other states had not diligently enforced the model escrow statute in 2003. Twenty-two other states settled with the PMs prior to the arbitration hearing. Subsequent to the arbitration hearing, Kentucky appealed the panel’s decision to the Franklin Circuit Court, then subsequently settled the case, but Kentucky’s settlement was not as generous as the settlement the states settling before arbitration were able to negotiate. Kentucky is operating under a “term sheet” while the final details of the settlement are negotiated. The term sheet amends the way in which Kentucky will receive future MSA payments.
Ms. Bender reviewed the issues identified by the Attorney General’s office regarding the finding of the arbitration panel. Ms. Bender said that legislation passed during the 2015 session should assist the Attorney General in diligently enforcing the model escrow statutes in the future. There are still some threats to future MSA payments such as MSA brand sales decline, e-cigarettes/vapor products sales growth, and NPM adjustments.
Mr. Thomas discussed the history of MSA payments to Kentucky and what has been done with those funds. Kentucky has received $1.8 billion over 17 years. Each year, MSA funds have provided resources to support the Kentucky AG development fund, youth leadership programs, cancer research programs and childhood development programs. If an agreement to settle the NPM adjustment had not been reached, these programs would have suffered. There is no way to predict future payments and that based on the best estimates available currently, there could be up to a 4.5 percent decline in MSA payments over the next seven years. Mr. Thomas reviewed the historical funding chart included in the committee packets, noting the various programs and initiatives that have received funding over the years.
Representative Carney stated that he is looking for funds for the school nurses program and wondered if there is an option under the health care improvement fund to help that program. Mr. Thomas said funding provided under the Kentucky Access portion in previous years is no longer needed for the high risk pools. Disbursement of those funds would be a policy decision during the upcoming legislative session.
Senator Carroll asked what the benefits of winning the appeal would have been had Kentucky not settled. Ms. Bender stated that the appeal process would have taken years and still may have had a bad outcome. Programs would have suffered if the appeal process had continued.
As an additional response to Representative Carroll’s question, Mr. Thomas noted that funds from the MSA help fund the programs he discussed previously as well as providing almost $30 million in debt service for water and sewer projects that the state is obligated for, and if the appeal had gone several years with no MSA payment, those debt service payments would have had to come from the General Fund.
Representative Rand expressed concern about Kentucky’s monitoring process. Ms. Bender responded that there is a working group which meets quarterly to monitor the process. Better records are being kept.
Senator Parrett stated funding from the MSA has been very important to Kentucky’s agriculture infrastructure, Kentucky families, and counties, as well as farmers markets across the state.
Representative Stone asked if e-cigarettes are a threat to MSA. Mr. Thomas responded that most e-cigarettes are a tobacco product and since the MSA is a declining source of revenue, policy makers may want to look at e-cigarettes in the future as a source of revenue.
Senator Webb thanked Mr. Thomas and his staff for their leadership over the years.
Other Business
The chair informed members the following documents were available in their folders for their review:
1. Summary of Administrative Regulations referred on May 6, 2015
2. List of Committee Correspondence and Items referred to the Committee
3. Correspondence from Jennifer Anglin, Assistant Budget Director, Office of Budget (LRC)
Review Emergency Appropriations Increases for FY 2015
Interim Allotment Adjustments for FY 2015
Interim Appropriation Revisions for Fourth Quarter FY 2015
There being no further business, the meeting was adjourned at 2:50 P.M.