Call to Order and Roll Call
The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, July 23, 2015, 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 Christian McDaniel, Co-Chair; Representative Rick Rand, Co-Chair; Senators Ralph Alvarado, Danny Carroll, Chris Girdler, Morgan McGarvey, Dennis Parrett and Robin L. Webb; Representatives John Carney, Ron Crimm, Mike Denham, Bob M. DeWeese, Jeffery Donohue, Myron Dossett, Joni L. Jenkins, Martha Jane King, Reginald Meeks, Terry Mills, Tanya Pullin, Marie Rader, Steven Rudy, Arnold Simpson, Rita Smart, Fitz Steele, Jim Stewart III, Wilson Stone, Tommy Turner, Susan Westrom and Jill York.
Guests: Jane Driskell, State Budget Director; John Hicks, Deputy State Budget Director; Janice Tomes, Deputy State Budget Director; Greg Harkenrider, Deputy Executive Director, Governor’s Office of Economic Analysis; and John Covington, Executive Director, Kentucky Infrastructure Authority.
LRC Staff: Pam Thomas, Jennifer Hays, Eric Kennedy, and Donna Harrod.
Approval of Minutes
Senator Parrett made a motion, seconded by Senator McDaniel, to approve the minutes of the June 18, 2015 meeting. The motion carried.
Budget Review and Update for end of Fiscal Year 2014-2015
Jane Driskell, State Budget Director and John Hicks, Deputy State Budget Director reviewed the budget and revenues for Fiscal Year 2014-2015 (FY 15), and the financial outlook for Fiscal Year 2015-2016 (FY 16).
Director Driskell said that actual general fund receipts for FY 15 exceeded the official estimate by 1.7 percent, generating a revenue surplus of $165,401,697. The growth in receipts was driven primarily by the individual income tax, sales tax, and business taxes (including the corporation income and limited liability entity taxes). These taxes provide the most elastic sources of revenue, and they performed well in creating a total of $504.6 million in “new” money when compared to FY 14.
Ms. Driskell reported that the remaining general fund revenue sources fell during the year. The under-producing areas included the property, coal severance, and cigarette taxes and lottery proceeds. Of these sources of revenue, cigarette taxes were in their fifth year of decline which is the national trend. Lottery receipts did not meet the budgeted estimate but did show some growth, with the under-producing areas being the national games, which have seen what the industry refers to as “jackpot fatigue” among players. Property tax receipts remained at the same level as 2008.
Director Driskell said that, overall, the general fund revenue growth rate for FY 15, compared to the prior year, was 5.3 percent. When examined on a quarterly basis during the year, the revenue growth is accelerating, which is a good indicator of economic momentum and a strengthening state economy.
Director Driskell stated that, based on current assumptions in revenue and expenditure growth, FY 16 is expected to be the first year the state will have a structurally balanced budget in many years.
Director Driskell discussed how the revenue surplus would be used. General fund revenues in excess of the official estimate equaled $165.4 million. After accounting for necessary government expenses (NGEs), a budgeted carryforward into FY 16, spending less than budgeted in debt service and other areas, and other expenditure-related issues, the general fund surplus equaled $139.1 million. Pursuant to the general fund surplus expenditure plan contained in 14 RS HB 235, the current state budget, $56.6 million of that total will be held for NGEs in FY 16. That leaves a total of $82.5 million to be deposited into the budget reserve trust fund, more commonly called the “rainy day fund.”
Ms. Driskell stated that, after making this deposit, the budget reserve trust fund stands at the highest balance in a decade. She said that this was a result not only of the FY 15 surplus, but is also due to the enactment of 15 RS HB 510, in which the General Assembly transferred $63.5 million from the Public Employee Health Insurance Trust Fund into the budget reserve trust fund. The current reserve balance equals $209.4 million, which is 2.1 percent of FY 16 general fund revenues.
Ms. Driskell presented information on road fund revenues for FY 15, which declined for the first time since FY 09, resulting in a revenue shortfall of almost $20 million or receipts of 1.3 percent below the official estimate. A large component of the decline in revenues was the motor fuels tax, due in large part to the falling average wholesale price of gasoline which led to a reduced tax rate. She discussed the impact of 15 RS HB 299, which fundamentally changed the manner in which the average wholesale price of gasoline is calculated for FY 16 and going forward. This change preserved approximately $20 million in revenues in FY 15, with an even larger impact in FY 16 and beyond. In FY 15, the number of taxable gallons of fuel purchased increased, but not enough to fully compensate for the effect of the lower tax rate.
In discussing the other road fund revenue sources, Ms. Driskell stated that after 5 years of growth the motor vehicle usage tax receipts fell 2.3 percent in FY 15, due in large part to the recently enacted trade-in allowance for new vehicle purchases, which reduced receipts by $45.8 million for the year. She cautioned that this allowance eliminates the elasticity of this tax, which is the second-largest road fund revenue source. Despite strong new car and truck purchases, the impact of this allowance led to a decrease in revenues.
Ms. Driskell discussed emerging trends in the economy and presented a preliminary outlook for FY 16 and the next biennial budget process. Kentucky has seen an increase in home prices in the Bowling Green, Louisville, Northern Kentucky, and Owensboro areas in recent months. Likewise, new home construction permits across the Commonwealth are rebounding. The unemployment rate in the Commonwealth is also down, and is below the national rate. This, combined with other strong labor statistics, indicates a strengthening state economy moving into the next biennium.
Ms. Driskell noted the upcoming work of the consensus forecasting group, which will meet in August to prepare planning revenue estimates, and release preliminary estimates in October and final official estimates in December, prior to the start of the 2016 budget session.
In response to a question by Representative Rudy, Ms. Driskell clarified that the SEEK shortfall was addressed by the General Assembly as an NGE through enactment of 15 RS HB 510.
In response to a question by Representative Donohue, Ms. Driskell stated that she did not have information on how Kentucky ranks nationally in terms of annual expenditure per inmate in the state correctional system, but that her staff would supply the committee with that information.
In response to a series of questions by Representative Denham, Ms. Driskell stated that the actuaries examining the Public Employee Health Insurance Trust Fund assured state officials that the amount remaining after the recently enacted $63.5 million transfer was sufficient for fund needs. In regards to the budget reserve trust fund, Ms. Driskell stated that the reserve balance is something that the credit rating agencies take into account when rating Kentucky. Mr. Hicks stated that he did not have information on the current state ratings from the various rating agencies, but that in June the agencies made note of several positive aspects in the state finances, as well as the creation of the task force to examine ways to strengthen the Kentucky Teachers’ Retirement System and address its unfunded liability.
In response to a question by Senator Parrett, Ms. Driskell stated that it was correct that at the time the new vehicle trade-in allowance was enacted, it was estimated that it would reduce revenues by $30 million annually, and that an increase in new vehicle sales accounts for the actual cost of the allowance exceeding the estimate.
In response to a series of questions by Representative Meeks, Ms. Driskell stated that she expects the coal severance tax to continue its decline for a number of years to come, and that cigarette sales are also expected to continue falling in the state and nationally into the future. The lottery proceeds are more difficult to predict. She went on to discuss the trend in NGE amounts, stating that the total amount is expected to increase next year, with a key driver being the $10 million appropriated for various initiatives to address heroin abuse in the state.
In response to a question by Senator McDaniel, Ms. Driskell reviewed the expected NGE categories for next year, which she stated would be similar to FY 15 other than the expenditures to address heroin abuse noted previously.
In response to a question by Representative Rand, Mr. Hicks stated that in the current budget, the General Assembly substantially reduced the amount of state appropriations to the Quality and Charity Care Trust Fund, but not to zero, and that these expenses were addressed as an NGE capped at $6 million in FY 15, and $4 million in FY 16. By comparison, the amount appropriated in FY 14 was $17 million. To receive state funding for charity care the University of Louisville must now demonstrate the charity care it provides in a new way, and it took some time to generate the necessary data in FY 15, which is why only $600,000 was spent in that year. FY 15 expenditures reflect only two quarters worth of care, with the other part of the year to be paid out in FY 16. When that occurs, the budgeted cap on appropriations for FY 16 may be reached.
In response to another question by Representative Rand, Ms. Driskell stated that the state has calculated the structural balance or imbalance the same way for many years. She explained that by saying the state is expected to have a structurally balanced budget next year, she means that recurring revenues received in that year will meet or exceed recurring expenditures paid in that year.
In response to a question by Senator McDaniel, Mr. Hicks explained that corrections is often one of the larger categories of NGE, because the state prison population is difficult to estimate and budget for each year. In FY 15, as in many years, the population was greater than estimated, requiring additional funding as an NGE. Regarding the guardian ad litem category, Mr. Hicks explained that before 2006, this program was funded with a separate line-item. Beginning in that year, the General Assembly deleted the line-item and has instead paid for guardian ad litem expenses as an NGE. Over the years, the amount paid has remained consistent, only it now appears as an NGE category.
As a follow-up on the guardian ad litem issue, Senator Webb requested a county-by-county breakdown of expenditures, and noted that she believes fees are often insufficient for the work performed, which can be complex. Furthermore, Sen. Webb stated that there may be a shortage of attorneys performing this work in some counties. Representative Simpson stated that he had been advised that some attorneys and law firms were making over $100,000 annually on guardian ad litem cases, and he asked if that information was true. Mr. Hicks responded by offering to gather and provide actual payment data by recipient, if possible.
In response to a question by Representative Stone, Ms. Driskell stated that her staff is now estimating the number of taxable gallons of motor fuels expected to be purchased in the current fiscal year, and next year, and that the consensus forecasting group will discuss this issue when it convenes.
Kentucky Infrastructure Authority
Executive Director John Covington explained the purpose, history, structure, and funding of the Kentucky Infrastructure Authority (KIA).
Mr. Covington said that, with the enactment of SB 409 in 2000, water and sewer infrastructure improvement became a top priority of state government, with three important components being a planning process to determine the best use of state funds, development of the best geographic information system (GIS) for water and sewer infrastructure in the nation, and increased funding for project construction.
Planning begins at the system level and is led by the fifteen regional water management councils whose geographic boundaries align with the area development districts. The councils are comprised of elected and appointed leaders, representatives of utilities and health departments and citizens-at-large. The councils establish planning areas, identify the needs within each area, and then rank specific water and sewer system construction projects based on those identified needs. State, federal, and other funding is then provided based on the rankings. Due to the capital intensive nature of water and sewer systems, the planning is very long-term.
Mr. Covington explained that KIA coordinates and reviews the council rankings, with priority given to projects that regionalize systems, have the highest impact in numbers of households served with the lowest average cost per customers, and that provide services in areas that have a median household income that is below the state average. After a project is ranked, the area development district approaches that utility to explore all possible funding sources.
Mr. Covington stated that KIA publishes the Kentucky Water Management Plan each year, which is a compilation of data from the Water Resource Information System (WRIS) and each council’s project rankings. The plan is publicly available on the KIA website, and includes summary data for the entire state, broken down by county, area development district, and legislative district. Each project in the plan is linked to the project’s entire profile in the WRIS. There are currently 719 ranked water projects and 482 ranked wastewater projects in the plan.
Mr. Covington demonstrated how to locate and use the WRIS on the KIA website, explaining the various search functions and information available for each project.
Moving to project funding available through KIA, Mr. Covington stated that there are four KIA loan programs, as follows: Clean Water State Revolving Fund (Fund A); Drinking Water State Revolving Fund (Fund F); Infrastructure Revolving Fund (Fund B); and Governmental Agencies Program Fund (Fund C). He reviewed the loan process and available balance for each fund, and informed members that only governmental agencies such as cities, counties and special districts are eligible to receive loans through any of KIA funds.
Funds A and F are federally-funded through the Clean Water Act, an environmental program, and the Safe Drinking Water Act, a public health program, respectively. Pursuant to federal law, all projects receiving loans through either of these federal sources are funded strictly in priority order. Funds B and C are state or KIA-funded programs.
Mr. Covington explained that to receive a loan from any of the funds, a project must be listed on the state revolving fund priority list during the annual call for projects made each fall. KIA staff reviews all loan applications, and the KIA board makes loan approvals. The interest rates for loans are set annually by the KIA board and repayment periods range from 20 to 30 years.
Mr. Covington then discussed the KIA budget. He stated that all KIA administrative expenses, including staff salaries and benefits, are paid through the administrative fee imposed on each loan, with no state general fund support.
Mr. Covington explained the KIA grant process, which differs from the various loan programs. In addition to administering the previously mentioned state and federally-funded loan programs, KIA is also charged with administering legislatively authorized grant projects which may be approved as line-items in the state budget. Since 2010, there has not been much new grant activity, especially in the single-county coal severance area due to a lack of available funds.
There are 103 closed grants with a balance of $734,803, and 180 open grants with a balance of $32,510,896.
Mr. Covington explained that KIA does not have the authority to reallocate grant funds from one project to another, even in the case of a closed project with a remaining balance, and that only the General Assembly may reallocate grant funds through legislation. In the case of a closed project with a balance of grant funds remaining unspent, funds will remain in that account until reallocated by the General Assembly.
Elaborating on points of common confusion relating to stalled grant projects, Mr. Covington stated that some projects with a balance of grant funds do not advance because even with those grant moneys, the project does not have enough other funding available to cover all expenses. Other reasons for a stalled grant project may be that the utility has abandoned that project for some reason, or that obtaining necessary easements has taken longer than anticipated.
Mr. Covington discussed the implications of reallocating grant funding from an open project. Some open projects may have taken on contractual obligations that contemplate the grant funds, and that if that money is reallocated, the obligation on the utility remains in place and must be satisfied with whatever other funding is available from other sources. Reallocating funds from an open project may also delay or end a project that was advancing or ready to begin construction.
Mr. Covington stated that nearly all of the recent project funding provided through KIA has been federal funding, and that ultimately utilizing loans rather than grants brings the state more value for what money is available, because KIA will use loan repayments to offer new loans.
In response to a question by Representative Rand, Mr. Covington said that many borrowers may be reluctant to officially close out grant projects with KIA for fear of losing any remaining funds that may be available for reallocation. Some of these borrowers may leave a grant project open at KIA to allow time to approach their state legislator to request the remaining balance to be reallocated in a certain way, for a certain project. In such an instance, the KIA reports would list the project as open, while the given borrower or utility may state that it is closed and the balance available for reallocation.
In response to a series of questions by Representative Westrom, Mr. Covington stated that all projects, both loan and grant, are required to be bid according to the applicable procurement law (either state, federal, or local), and that proper procurement procedures are in place. An area development district could be the actual recipient of a loan if the district itself was undertaking the qualifying project, but that does not happen. He explained that the entity administering a loan and making project payments varies, with some utilities, area development districts, engineering firms, or the governmental entity-recipient itself performing these functions.
In response to a question by Representative Carney, Mr. Covington explained that the WRIS website will not list each contractor that performs work on a project, partially because KIA does not directly pay contractors, and also because many projects involve multiple contractors and sub-contractors. Regarding the ability of a contractor to increase its payments using change orders after being awarded the initial contract on a low bid, Mr. Covington stated that change orders are allowed, unless they constitute a significant change in project scope. Change orders are always reviewed but not usually re-bid.
Other Business
The chair informed members that various documents were available in their folder for review, including a list of executive branch agency reports submitted to the committee and correspondence from Jennifer Anglin, Acting Deputy Director, Office of Budget Review, relating to interim appropriations increases, adjustments and revisions.
There being no further business, the meeting was adjourned at 2:52 P.M.