Interim Joint Committee on Agriculture and Natural Resources


Minutes of the<MeetNo1> 5th Meeting

of the 2004 Interim


<MeetMDY1> November 10, 2004


The<MeetNo2> 5th meeting of the Interim Joint Committee on Agriculture and Natural Resources was held on<Day> Wednesday,<MeetMDY2> November 10, 2004, at<MeetTime> 1:00 PM, in<Room> Room 149 of the Capitol Annex. Representative Roger Thomas, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representatives James Gooch, Co-Chair, and Roger Thomas, Co-Chair; Senators David Boswell, Dan Kelly, Robert Leeper, Vernie McGaha, Joey Pendleton, and Damon Thayer; Representatives Royce Adams, Sheldon Baugh, Scott Brinkman, Dwight Butler, Hubert Collins, James Comer, Tim Couch, Mike Denham, Jimmy Higdon, Charlie Hoffman, Thomas McKee, Fred Nesler, Don Pasley, Marie Rader, Rick Rand, Dottie Sims, Brandon Smith, Jim Stewart, Tommy Turner, Ken Upchurch, Robin L. Webb, Susan Westrom, and Brent Yonts.


Guests:  Dr. Carolyn Orr, Council for State Governments; Michael Plumley, Office of the Attorney General; Angela Capporelli, Kentucky Department of Agriculture; Dr. Jim Tidwell, Kentucky State University; Keith Rogers, Brian Furnish, Angela Blank, and Tim Hughes, Governor's Office of Agricultural Policy.


LRC Staff:  Tanya Monsanto, Lowell Atchley, Hank Marks, Biff Baker, and Kelly Blevins.


Sen. McGaha remarked that Senator Tori would be absent.  Then, Rep. Thomas asked that the chairs provide subcommittee reports.  Rep. Collins gave the Natural Resources Subcommittee report.  He stated that the subcommittee heard from representatives of the Environmental and Public Protection Cabinet and from the Commerce Cabinet regarding the development of a comprehensive energy policy for Kentucky.  The subcommittee also heard from the Environmental and Public Protection Cabinet regarding the Safe Drinking Water Act.  There was a motion and a second to approve the subcommittee report.  It was adopted by voice vote.


Sen. Thayer then gave the Horse Farming Subcommittee report.  He discussed incentives given to horse farmers to breed their stock in Kentucky and then relocate to states like New York.  He also described tax and other incentives.  Rep. Westrom remarked that the Appropriations and Revenue Committee members were invited to attend the meeting.  There was a motion and a second to adopt the Horse Farming Subcommittee report.  The report was approved by voice vote.


Then, Chairman Gooch was recognized for remarks.  He stated that it was an honor to serve with Rep. Roger Thomas and that his departure from the General Assembly would be felt by himself and others.  Then, Rep. Gooch recognized Rep. Denham who asked staff to read resolutions honoring Rep. Roger Thomas and Rep. Dottie Sims.  Those resolutions were adopted by voice vote by the committee.  Rep. Thomas and Rep. Sims both thanked the members of the committee for the resolutions. 


Rep. Thomas then asked Dr. Carolyn Orr with the Council of State Governments to provide testimony on the American Jobs Creation Act.  Dr. Orr explained that the bill had many provisions other than the tobacco quota buyout provisions.  It also contained a 3 percent tax break for business in America.  It redefined manufacturing to include agricultural products.  It reformed S corporations, provided tax incentives for biodiesel, ethanol producers, and small crude oil producers.  There are also incentives for rural electric cooperatives, and crab fishermen.  Nearly every business segment across America received some sort of benefit from the bill, she said.  Then, Dr. Orr briefly described the tobacco buyout provisions.


Rep. Collins asked if Dr. Orr had additional comments regarding the Jobs Bill containing a $50 million tax break for Home Depot to import ceiling fans.  Dr. Orr remarked that, indeed, the bill contained that provision and that she didn't understand why Home Depot received exclusive treatment in the bill.


Rep. Sims asked about Dr. Orr's impressions of the tax break for Home Depot.  Dr. Orr stated that she mainly focused on agricultural aspects of the Jobs Bill, but she was a bit surprised by the measure.


Rep. Pasley asked Dr. Orr to expand her remarks about agricultural cooperatives.  Are they eligible for a 9 percent tax break he asked.  Dr. Orr stated that she did not currently know how IRS would define manufacturing; however,  one could presume that it will include feed. So, under the new law, a cooperative like Southern States will have up to five years to receive a 9 percent tax break on feed.


Sen. McGaha asked whether there is a final decision on the lump sum tobacco buyout provisions.  Dr. Orr stated that the lump sum buyout will be conducted through private financial institutions.  It will be a competitive, private industry process.  The buyout is paid for by the tobacco industry itself.  Tax dollars will not fund the buyout.


Rep. Thomas asked about the biodiesel and ethanol provisions.  Are they the same he asked.  Dr. Orr said no. The biodiesel received a tax break for two years and ethanol had the current tax break extended for a total of 10 years.


Rep. McKee asked a couple of questions.  He asked about specific breaks for biodiesel, whether the tax incentives are necessary.  Dr. Orr stated that biodiesel is one cent per percentage point of biodiesel in the fuel blend.  If the blend is 10 percent biodiesel then the producer will receive 0.10 cents.  Dr. Orr also remarked that the biodiesel tax break is currently only for two years.  This was how the ethanol break started out.  This tax break likely will be extended after the two year period has elapsed.


Rep. Thomas asked about the crab fisherman buyout provisions.  Dr. Orr remarked that the crab buyout is a very important provision in the Jobs Bill.  It is a $20 million buyout program for crab fishermen. 


Rep. Thomas thanked Dr. Orr for the presentation and asked Mr. Plumley from the Office of the Attorney General to provide an update on Phase II.  Mr. Plumley discussed how Phase II came into existence and that Phase II payments were envisioned to continue through 2010.  In 2003, three companies refused to make a Phase II payment, which led to a lawsuit by Kentucky, North Carolina and Virginia. 


The states managed to obtain the full Phase II distribution for 2003, but with the tobacco buyout provisions, there is concern that the companies will refuse to make their final payment for 2004.  In court, the states obtained an amendment that provided for payment protection. 


Mr. Plumley then explained that there is a provision whereby companies can seek a refund of the Phase II payment due to government imposed obligations being larger than the Phase II payment.  The companies have 30 days to make a repayment request.  Kentucky should obtain all of the Phase II payment for 2004 because the provisions of the tobacco buyout do not go into effect until January 2005, he said. 


Mr. Plumley stated that in early November, all the companies made refund requests.  There is a November 16 hearing scheduled to determine how the states will proceed.  The Office of the Attorney General will defend the receipt of the full Phase II payment for 2004.


Rep. Thomas asked if North Carolina and Virginia were signatories on the letter discussing the impact of losing Phase II dollars.  Mr. Plumley stated that they were not.  There was not enough time to obtain their signatures.


Rep. Thomas asked if all the companies have requested refunds.  Mr. Plumley stated that in early November there were requests for refunds.  The companies believe that payments under the Jobs Bill are due at the end of December.  However, the OAG believes differently.  The assessments for those Phase II payments cannot be completed for payment in December.  Even if a company volunteers a payment, under the trust, it cannot be recorded as received until the obligation actually comes due.


Rep. Denham asked if the court will decide the question of the Phase II payment for 2004.  Will the state be required to offset the Phase II payment with Phase I moneys in 2005 under the Master Settlement Agreement, he ased, adding that  there might not be enough money in Phase I to make up the loss if it falls below $114 million. Mr. Plumley said he did not know. 


Rep. Thomas then asked Keith Rogers with the Governor's Office of Agricultural Policy to present testimony.  Mr. Rogers stated that he does not know either.  The legislation says that the Phase I will supplement the Phase II and that the supplement will come from the Agriculture Development Fund.  Last year, there was $54 million in that fund and that may not be enough to supplement up to $114 million.  Also the Agricultural Development Fund supports both county and state projects.  Counties get 35 percent and the state projects get 65 percent.  The state share supports conservation projects and bonding of water and sewer projects.  The dollars support a variety of functions.


Rep. Denham repeated his question.  Under HB 611, if Phase II is below $114 million, then does the state have to supplement the shortfall, he asked.  Mr. Rogers indicated that it is unclear whether it is all or part of the Agriculture Development Fund.  It is also unclear whether the end of Phase II could also be interpreted to obviate the state's liability under the Master Settlement Agreement.  It currently is a great area of concern.


Rep. Pasley asked if the court rules that the companies only have to make three quarters of Phase II payments does HB 611 require the state to supplement that final Phase II payment for 2004?  Mr. Plumley stated yes,  it is possible.


Rep. Pasley stated if there is no payment and Phase II requires that the Phase I must supplement it, then payment will be required.  Are we confident this will be resolved in court before December 31, 2004, Rep. Pasley asked.  Mr. Plumley stated the companies may seek a stay or an injunction to limit the disbursements in 2004.  If the court's decision appealed, then the 2004 moneys could be tied up.  Then Kentucky will seek a quick decision, but this happened last year.  Sometimes it can be up to a year before a resolution is reached, he explained.


Rep. Pasley asked if the time involved in the case will impact the 611 funds.  Mr. Plumley stated that it depends on how Phase II is affected by the tobacco buyout.


Rep. Thomas observed if Kentucky has $97 million in Phase II payments which is $17 million short of the $114 million required and if Kentucky also has a carry forward of approximately $6 million from 2001, then the total needed to supplement is about $23 million.


Rep. McKee asked if there is a precedent to receive the 2004 payment. He said it seems if Kentucky was short on Phase II dollars, it would have paid from of Phase I before now.  He said he thought the buyout will end Phase II payments, too.


Mr. Plumley replied that theoretically the amount is bigger.  The Phase II Trust will likely cease to exist in the future.


Rep. Thomas stated if the Phase II trust doesn't end officially then there could be an impact.  Mr. Plumley remarked that hopefully the court will address it.


Sen. Boswell stated that there were many interesting comments.  Should Kentucky impose a "stop-gap" provision legislatively?  Taxpayers should be concerned with General fund liability.  Will the OAG continue looking into this issue and protect the public, he asked.  Mr. Plumley replied that the OAG will continue to provide any information to the committee or others as needed.


Rep. Thomas thanked Mr. Plumley and Mr. Rogers for their testimony.  Then Angela Capporelli and Dr. Jim Tidwell with the Kentucky Aquaculture Task Force gave an update on aquaculture in Kentucky.  The report stressed the need for more pond construction, continued diversification of products and a long-term commitment for generating growth in the industry.


Sen. Boswell thanked the presenters for their efforts and remarked that Southern states heavily promote aquaculture.  He asked if other states focus on diversification like Kentucky.  Dr. Tidwell replied that Kentucky is the most diversified in comparison with other states.  It is part of Kentucky's strength in this industry.  Kentucky State University is considered a strong force in promoting the aquaculture industry. 


There being no further business the meeting adjourned at approximately 2:45 p.m.