Call to Order and Roll Call
The 2nd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Monday, August 1, 2016, 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 Danny Carroll, Chris Girdler, David P. Givens, Stan Humphries, Morgan McGarvey, Dennis Parrett, Wil Schroder, Brandon Smith, Robin L. Webb, Stephen West, and Max Wise; Representatives Linda Belcher, John Carney, Ron Crimm, Mike Denham, Bob M. DeWeese, Jeffery Donohue, Myron Dossett, Kelly Flood, Jim Glenn, Joni L. Jenkins, Martha Jane King, David Meade, Terry Mills, Brad Montell, Marie Rader, Bart Rowland, Steven Rudy, Sal Santoro, Dean Schamore, Arnold Simpson, Rita Smart, Jim Stewart III, Wilson Stone, Tommy Thompson, Tommy Turner, David Watkins, Susan Westrom, Addia Wuchner, and Jill York.
Guests: Steve Michael, Founder and Principal, Hudson Holdings; Craig Potts, Executive Director, Kentucky Heritage Council and State Historic Preservation Officer; Renee Kuhlman, Government Relations and Policy Specialist, National Trust for Historic Preservation; John Chilton, State Budget Director; Janice Tomes, Deputy State Budget Director; Greg Harkenrider, Deputy Executive Director for Financial Analysis
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LRC Staff: Jennifer Hays, Charlotte Quarles, Eric Kennedy, and Jennifer Beeler.
Approval of Minutes
Senator Parrett made a motion, seconded by Representative Crimm, to approve the minutes of the November 16, 2015 and June 23, 2016 meetings. The motion carried by voice vote.
Historic Preservation Discussion
Steve Michael with Hudson Holdings testified about, from a developer’s viewpoint, the use of historic tax credits and the benefits of rehabilitating historic buildings into functioning properties.
Mr. Michael explained that the process by which a developer would rehabilitate a property includes purchasing the under developing property, spending approximately five to ten times that amount in rehabilitation costs, resulting in hotels, apartments, retail restaurants, and other types of properties that bring revenue and life back to under-developing historic neighborhoods.
Renee Kuhlman explained that there are 33 states that offer historic tax incentives. Historic tax credits are on the rise with 12 states enacting or expanding their tax credits since 2011. The percentage of expenses allowed as a credit varies. In Kentucky, there is a 20 percent credit, but due to the proration process, the credit is approximately nine to ten percent with an annual program cap of $5 million and a project cap of $400,000. Historic tax incentives can be a catalyst for new business, new residents, and the possibility of new jobs and higher property values in areas that have been underdeveloping.
In response to a question from Representative Stone, Mr. Michael explained that the Starks Building in downtown Louisville that is being renovated will be converted into a 235 room hotel, with 120 apartments above the hotel. There will be a lobby with a bar and restaurant and, on the penthouse level, there will be another restaurant and bar. There will be a full service health club and spa in the basement. After many studies, there was determined to be only one other spa in Louisville.
In response to a question from Representative Montell, Mr. Potts explained that the historic tax incentive is an income tax incentive. The incentive is a dollar for dollar tax reduction in income tax, and banks can use this incentive for bank franchise tax.
In response to a question from Senator Givens, Ms. Kuhlman stated that most other states that have incentives do not have a credit cap. This feature of the other states will impact future year budgets for states. A state will budget for those future incentives by looking at the prior usage to determine the possible fiscal impact.
Budget Review and Update for end of Fiscal Year 2014-2015
John Chilton, State Budget Director, Janice Tomes, Deputy State Budget Director and Greg Harkenrider, Deputy Executive Director for Financial Analysis, reviewed the budget and revenues for Fiscal Year 2015-2016 (FY 16), and the financial outlook for Fiscal Year 2016-2017 (FY 17).
Mr. Harkenrider said that actual general fund receipts for FY 16 exceeded the official estimate by 0.5 percent, generating a revenue surplus of $48,984,795. The growth in receipts was driven primarily by the individual income tax and sales tax. These taxes provide the most elastic sources of revenue.
Mr. Harkenrider reported that many of the remaining general fund revenue sources fell during the year. The underproducing areas included coal severance, cigarette taxes, and limited liability entity tax (LLET).
Mr. Harkenrider said that, overall, general fund revenue growth rate for FY 16, compared to the prior year, was 3.7 percent. Even with that overall growth, the General Fund revenue sources, other than individual income and sales taxes, fell a collective $35.7 million.
The individual income tax (IIT) withholding grew by 4.8 percent, estimated payments grew by 10.2 percent, and the overall growth in FY 16 was 5.2 percent, after 8.5 percent growth in FY 15. The IIT contributed $212.6 million of the total $372.3 million in nominal General Fund growth.
Mr. Harkenrider stated that the sales tax growth in FY 16 was 6 percent following a 4.4 percent growth in FY 15 and a 3.6 percent growth in FY 14. The 6 percent mark in FY 16 was the highest growth since FY 06. The sales tax contributed $195.4 million of the total General Fund growth. Sales tax growth in excess of income growth is not sustainable.
Director Chilton explained the Governor’s Budget Stabilization Plan, the total planned lapse was $52,924,400, and the actual lapsed amount was $52,313,600, which is a difference of $610,800. This difference comes from $478,000 from the Attorney General’s office, $112,000 from the Department of Agriculture, and $20,800 from the Executive Branch Ethics Commission.
Janice Tomes discussed how the revenue surplus was determined. General Fund revenues in excess of the official estimate equaled $49.0 million. After accounting for necessary government expenses (NGEs) of $4.1 million, spending less than budgeted $2.5 million, fund transfers less than budgeted of ($2.7 million), and small reductions in other areas the general fund surplus equaled $52.7 million.
Director Chilton explained that pursuant to the General Fund surplus expenditure plan contained in 16 RS HB 303, the current state budget, $26.4 million of that total will be held for the Budget Reserve Trust Fund in FY 17. This leaves a total of $26.4 million to be deposited into the Kentucky Permanent Pension Fund.
Ms. Tomes discussed tobacco fund revenues for FY 16, which when enacted totaled $98 million and including the current year appropriation and additional receipts the FY 16 total revenue was $123,257,800. The budget bill sets forth how the additional receipts will be allocated, with 50 percent to the agricultural development fund, 36 percent to early childhood, and 14 percent to the healthcare improvement fund.
Mr. Harkenrider testified on FY 16 road fund revenues, which also had a surplus of $36.6 million, or 2.5 percent above the revised estimate. Even though there was a surplus, the difference between FY 15 and FY 16 resulted in a difference of negative $44.2 million. Receipts still fell but were above the estimate.
Mr. Harkenrider stated that the motor vehicle usage tax receipts were up in FY 16, and that, even with the trade-in allowance for new vehicle purchases, revenues still totaled $484.4 million. Motor fuels came in slightly higher than the estimate at $750 million, and motor vehicle license revenues was up with actual revenues at $113.1 million.
Mr. Harkenrider explained that the motor fuels tax rate that was in effect for all of FY 16 was 26 cents, of which 19.6 cents was the variable rate driven by a statutory formula. After the floor was frozen, the rate will remain at 19.6 cents until the wholesale price reaches $2.17 a gallon, which would require the pump price to reach $2.80 to $2.90 a gallon sustained for a period of time. The rate can only be changed once per year.
Ms. Tomes explained that the road fund had a surplus of $38 million, which statutorily is required to be deposited into the state highway construction account.
Mr. Harkenrider discussed the outlook for FY 17. The consensus forecasting group in December called for growth of 3.2 percent, but due to receipts in excess of the revenue estimates in FY 16 growth needed to hit the FY 17 estimate, falls to 2.7 percent. Nationally, the United Kingdom’s exit from the European Union will continue to have a small negative impact on the U.S. economy via trade channels. Uncertainty in the UK leads to a weaker UK currency against the U.S. dollar. A strong dollar leads to a weaker demand for US exports, which is a concern for Kentucky’s economy. Professional forecasters and economic experts have consistently lowered their forecasts for GDP growth to around 2 percent.
Mr. Harkenrider said FY 16 was a very favorable year for the Kentucky economy, but it is not immune from external shocks. The Kentucky Cabinet for Economic Development recently expressed concerns about export growth due to the strong dollar and weaker international economies. The UK has traditionally been the Commonwealth’s second-largest destination for exports. Aside from export concerns, economic conditions remain fairly solid.
In response to a question from Chairman Rand, Director Chilton stated that the interpretation of 16 RS HB 303 and the formula contained therein on what to do with the budget surplus gives the state authorization to apply the carryover from FY 16 to FY 17. Ms. Tomes explained that the budgeted lapse in FY 16 debt service is $43.3 million.
In response to a question from Chairman McDaniel, Mr. Harkenrider explained that, to avoid any possible downfall when the sales and use tax fails to perform, as much as possible should be deposited into the budget reserve during a good economy to give a buffer when things are not as good.
There being no further business, the meeting was adjourned.