Call to Order and Roll Call
The 3rd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, August 27, 2015, at 1:00 PM, in Room 149 of the Capitol Annex. 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, Chris Girdler, David P. Givens, Stan Humphries, Morgan McGarvey, Dennis Parrett, Wil Schroder, and Brandon Smith; Representatives John Carney, Larry Clark, Ron Crimm, Mike Denham, Jeffery Donohue, Myron Dossett, Kelly Flood, Martha Jane King, Reginald Meeks, Terry Mills, Marie Rader, Sal Santoro, Arnold Simpson, Rita Smart, Fitz Steele, Jim Stewart III, Wilson Stone, Tommy Turner, David Watkins, Susan Westrom, Addia Wuchner, and Jill York.
Guests: Kristi Culpepper, Executive Director, Lisa Collins, Senior Financial Analyst, School Facilities Construction Commission; Hiren Desai, Associate Commissioner, Office of Administration and Support, Chay Ritter, Branch Manager, District Funding and Reporting Branch, Kentucky Department of Education; Arch Gleason, President and CEO, Howard Cline, Chief Financial Officer, and Mary Harville, General Counsel, Kentucky Lottery Corporation.
LRC Staff: Pam Thomas, John Scott, Charlotte Quarles, Eric Kennedy, Jennifer Hays, and Jennifer Beeler.
Approval of Minutes
Representative King made a motion, seconded by Senator Girdler, to approve the minutes of the July 23, 2015 meeting. The motion carried.
Overview of the School Facilities Construction Commission
Kristi Culpepper, Executive Director and Lisa Collins, Senior Financial Analyst gave a brief overview of the structure and operations of the School Facilities Construction Commission (SFCC).
Ms. Culpepper explained that the renovation and construction of facilities are funded through a school district’s unrestricted funds and restricted funds. Unrestricted funds would be money in the district’s general fund derived from the SEEK funding program. Restricted funds are those funds that are reserved for capital construction and renovation projects.
Ms. Culpepper stated that since the enactment of the Kentucky Education Reform Act (KERA) in 1990 the state has funded facilities through a three-pronged approach based on the size, wealth, and need of each district.
In discussing the funding further, Ms. Culpepper explained that the size component of the facility funding is the Capital Outlay Funds included in the SEEK formula. The formula is $100 x district’s average daily attendance.
Amounts from the Facilities Support Program of Kentucky (FSPK) make up the wealth component of the facilities funding. FSPK provides funding based on property assessments, and includes both local and state components. To participate in FSPK, school districts must levy a five-cent equivalent tax to pay for capital construction projects. These levies are often referred to as “nickel levies.”
Ms. Culpepper noted that districts can impose additional nickels subject to voter recall, and that the General Assembly (GA) has authorized districts meeting certain criteria to levy specific additional nickels to support construction projects in past budget cycles.
The state component of the FSPK program equalizes the local tax levy. Equalization funding is provided as a general fund appropriation in the state budget.
Ms. Culpepper stated that the need component is addressed through SFCC offers of assistance to districts for capital construction and renovation projects based on unmet facility need and to purchase new technology under the Kentucky Education Technology System (KETS) Program. The SFCC requests funding for construction offers of assistance in each fiscal biennium. Funding for the KETS program is included in the Kentucky Department of Education’s budget request, although the program is administered through the SFCC.
Ms. Culpepper explained that for a district to be eligible for SFCC assistance, they must meet certain eligibility requirements. Ms. Culpepper explained how funding is provided by the state and local districts. SFCC offers of assistance must be applied to a district’s first priority projects, or second priority projects if the district has already addressed all of its first priority projects.
The SFCC provides funding to school districts on an equitable basis using a formula that takes into account the appropriation made by the GA to the SFCC, multiplied by the district’s unmet facility need expressed as a fraction of the state’s total unmet facility need. Under the formula, the SFCC provides each district that has an unmet need its proportionate share of the amount the GA appropriates to the SFCC during each fiscal biennium.
In 2013, the state’s total unmet school facility need was $5.36 billion. This takes into account $5.98 billion of total facility needs and $627.6 million of total local available revenues.
Ms. Culpepper stated that for outstanding bonds with SFCC debt service participation, the current debt is $956 million total principal for the SFCC portion and $3.7 billion total principal for the local portion.
Ms. Culpepper explained that there are two policy hurdles that the SFCC has had to face when making offers of assistance during the current biennium. The first is a budget provision that gives districts flexibility in using capital outlay and FSPK funds. Districts are allowed to use capital outlay funds for operating expenses without forfeiting their eligibility to participate in the SFCC program. The language was originally intended to provide districts with additional financial flexibility during and immediately following the recession. This diversion of funds has resulted in more districts having unmet need for the purposes of calculating SFCC offers of assistance. Because the total appropriation for offers of assistance has remained static, the offers of assistance are smaller.
The second policy challenge noted by Ms. Culpepper is that the facility inventory and classification system (FICS) has not been maintained, and school districts often do not keep their facility plans up-to-date, resulting in incorrect or insufficient information being used to make policy decisions.
Moving onto technology, Ms. Culpepper said that the GA allocates funds for the KETS each biennium through the Department of Education’s budget, but that the program is administered through the SFCC. Funds are distributed to districts based on their average daily attendance. Since 2001, the state has spent $339,612,553 on education technology; these funds are then matched by districts on a dollar for dollar basis, so this investment equates to $679,225,106.
In response to a question from Chairman Rand, Ms. Culpepper explained that the emergency and targeted investment fund was established in 2014 RS HB 445. Because this fund was only recently capitalized through the fund lapse at the end of the fiscal year, there has not been any money expended out of the fund. The SFCC, at its June meeting, made an allocation from the fund to Carlisle County for the demolition of its elementary school that was addressed in the budget bill. The authorization of $7.3 million in the budget bill was insufficient to demolish and rebuild the school, so additional funds were needed for the demolition. An offer of assistance for this project is the first to be made out of this emergency fund. The fund balance is approximately $2.3 million.
In response to a question by Chairman Rand, Ms. Culpepper explained that most of the districts whose schools were listed as the top ten schools in need of assistance in certain language included in the 2014 budget bill were not anticipating funding for those projects. The list of schools was outdated and incorrect, and that some schools on the list had been closed or had already been renovated.
In response to a question from Senator Givens, Ms. Culpepper stated the districts provide updates to the Department of Education regarding unmet need for their schools and that is what the SFCC uses to make offers of assistance.
In response to a question from Representative Carney, Ms. Culpepper stated that in 2014 the SFCC lapsed $9.8 million, and in 2013 lapsed $3.5 million, back to the General Fund.
SEEK funding formula
Hiren Desai, Associate Commissioner, Office of Administration and Support, Kentucky Department of Education presented an overview of the Support Education Excellence in Kentucky (SEEK) funding program.
Mr. Desai explained that the formula for the SEEK program was enacted in 1990, and base funding is on a per-pupil basis. There are add-ons that increase the amount of funding each school receives, as well as transportation reimbursement and local effort impact.
Mr. Desai stated that the school funding formula was established to equalize the funding for schools, and that resources include both state and local funds. The required local contribution is based on the school district’s property assessment tax base, although revenues can be generated locally through a variety of taxes. The state provides funds necessary to make up shortfalls in local revenues. The per-pupil base amount is established by the General Assembly in the biennial budget. For FY 15-16 the per-pupil base is $3,981.
Mr. Desai explained that in addition to that base allocation, there are add-ons that will increase the total funding a school district receives per pupil. The add-on categories are: at risk, which is based on the number of students that qualify for the free or reduced lunch program; exceptional child; home or hospital; and limited English proficiency.
Mr. Desai noted that the department reimburses districts for transportation costs based on a complicated formula that includes several components. He described the components. Currently, districts receive reimbursement for only 49 percent of actual transportation expenses.
Mr. Desai explained that, to qualify for SEEK funding, a district must generate an amount equivalent to at least 30 centers per $100 in property assessments. All districts are making the required levies. A district can levy an additional 5 cents per $100 of assessed property to qualify for FSPK. To qualify for Tier 1 funding, a district can levy taxes that generate an amount equal to 15 percent of SEEK base plus add-ons.
He stated that the assessment base includes real estate, tangible property and motor vehicles, and that districts can generate funds from property taxes, utility gross receipts license taxes, occupational taxes, or excise taxes.
Mr. Desai explained that districts can impose additional levies and are eligible for Tier 1 funding receive equalization funds from the state at 150 percent of the state average per-pupil assessment.
In response to a question from Representative Flood, Mr. Desai stated that allowing districts to have funding flexibility with capital outlay funds during the recession was very positive. He said that he agrees with Ms. Culpepper, that the language allowing flexibility in the use of these funds should be revisited.
In response to a question from Representative Stone, Mr. Desai explained that a district can impose more than one nickel for capital construction and the state will continue to equalize in some cases, depending on the authority under which the levy was made.
In response to a question from Representative Smart, Chay Ritter, Branch Manager, District Funding and Reporting Branch, Kentucky Department of Education, stated that there are several school districts that receive funding in lieu of tax payments from entities that own property which is not included in the district assessment base, and that these payments are not considered as revenues for purposes of SEEK.
In response to a question from Chairman Rand, Mr. Ritter stated that quite a few districts have levied additional nickels. He explained that any district that wants an additional nickel at this point would be subject to voter recall.
In response to a question from Chairman Rand, Mr. Desai explained that districts can get reimbursed for having national board certified teachers on staff. There is a reimbursement for vocational schools as well.
Lottery Corporation’s sponsorship agreement with the Kentucky Executive Mansion Foundation and transfers to the General Fund
Arch Gleason, President and CEO, Howard Cline, Chief Financial Officer, and Mary Harville, General Counsel, Kentucky Lottery Corporation (KLC) discussed the Lottery’s sponsorship of the Kentucky Executive Mansion Foundation and Lottery transfers to the General Fund.
Mr. Cline explained the dividend transfers from the Lottery to the Commonwealth. He noted that in FY 15, $221.8 million was deposited in the lottery trust fund, and $9.4 million was transferred to the KEES reserve fund. KLC had record transfers to these funds over the last five years. The growth rate for KLC over the same five years was 3.1 percent, which closely mirrors the state’s growth rate for sales and use tax of 3.2 percent.
Mr. Cline briefly reviewed revenues from various games offered by the KLC. At the last Interim Joint Committee on Appropriations and Revenue meeting, the State Budget Director noted the issue of jackpot fatigue which has resulted in reduced revenues from some lottery jackpot games. He stated that because of jackpot fatigue the KLC experienced twenty-three weeks of Powerball sales below one million dollars in FY 15 compared to two weeks in FY 14. Changes are being made to hopefully grow jackpots and increase sales in future years.
Mr. Cline explained that the budget bill (2014 RS HB 235), required the KLC to transfer $11 million to the General Fund in FY 15. The language required that the funds be transferred from the net unrestricted reserves held by the KLC as identified in the Kentucky Lottery Annual Financial Report, dated June 30, 2013. Unrestricted reserves are retained or prior year undistributed earnings. They are used to pay obligations and include cash and other non-transferrable, non-liquid assets.
Mr. Cline stated that cash on hand fluctuates daily as obligations are paid and payments are received. KLC’s minimum month-end unrestricted cash balance was set by the board at $9.5 million to meet ongoing obligations. After subtracting the $9.5 million minimum balance, the $11 million obligation to the General Fund was never available. He explained that the unrestricted cash in the unrestricted net position is used to pay prizes and other critical operating expenses on a daily basis, and is necessary to continue successful operations.
Mr. Cline explained that after reviewing one year’s activity of uses and sources of cash, $2.5 million became available for transfer to the General Fund when the board approved a policy change to lower the balance of unrestricted cash from $9.5 million to $7 million. A $5 million transfer was approved by the board and occurred on June 30, 2015.
Mr. Gleason stated that KLC entered into a sponsorship agreement with the Kentucky Executive Mansion Foundation for a total sum of $15,000 for a period beginning June 1, 2015 and ending June 30, 2015. Under the agreement, KLC provided signage for display in the Capitol Education Center to promote the scholarship and grant programs. It was their understanding that the education center receives 60,000 visitors annually.
In response to a question from Chairman McDaniel, Mr. Gleason stated that the management and board of the KLC have a fiduciary responsibility to insure that there is sufficient cash on hand to pay ongoing obligations. He said that some of the cash reserves are for games that payout daily and that amount could be up to $1.5 million.
In response to a question from Chairman McDaniel, Mr. Gleason explained that in order to make up the $6 million the lottery was short in transfers to the General Fund, the KLC would need a surplus over their projected net income of $6 million. He stated that this is not likely.
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 2:35 p.m.