The third meeting of the Capital Planning Advisory Board (CPAB) of the 2001 calendar year was held on Friday, August 24, 2001, at 10:00 a.m., in Room 111 of the Capitol Annex. Representative Perry Clark, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Perry Clark, Chair; Bill Hintze, Vice Chair; Senator Albert Robinson, Representative Brian Crall; Susan Clary, Debra Gabbard (representing James Codell), Lou Karibo, Glenn Mitchell, Sam Newcomb, Norma Northern, Laurel True, Garlan Vanhook, and Judge Edwin White.
Guests: President Lee Todd, Jack Blanton, and Gene Williams, University of Kentucky; Angela Martin and Sherron Jackson, Council on Postsecondary Education; Aldona Valicenti, Mike Robinson and Doug Robinson, Governor's Office for Technology; and Kevin Mason, LRC Economist's Office.
LRC Staff: Pat Ingram, Staff Administrator; Mary Lynn Collins, Nancy Osborne, and Dawn Groves.
Representative Crall’s motion to approve the minutes of the July 24 and 25 meeting was seconded by Mr. Hintze and approved by voice vote.
Chairman Clark said this meeting is a continuation of the Board’s biennial process of developing a six-year statewide capital improvements plan. He asked the Board’s Staff Administrator, Pat Ingram, to review the Information Items provided in the members’ folders. Ms. Ingram said the first item was a series of follow-up items related to the July meeting including diagrams and drawings of the Capitol campus projects, cost per square foot data on recently-authorized or completed construction projects, and an update on Western Kentucky University’s proposal regarding the renovation of E.A. Diddle Arena. Three of the other Information Items reported amendments or anticipated amendments to the capital plans of the Department for Libraries and Archives (Education, Arts, and Humanities Cabinet), Kentucky State University, and Eastern Kentucky University. The final Information Item addressed the Council on Postsecondary Education’s action to revise the guidelines for calculating research space needs.
Chairman Clark then noted that the Board’s review of the University of Kentucky’s capital plan had been deferred until today because Dr. Todd had taken over as President only a few days before the July meeting. Following presentation of the CPAB staff overview of the University’s facilities and recently-authorized projects, UK President Lee Todd addressed the Board regarding the institution’s highest priority needs for the 2002-2008 planning period.
After noting that the Bucks for Brains program has affected UK’s space requirements, President Todd described the top five priorities in the UK plan. They are: “Construct Morgan (Biology) Building Addition,” “Expand the Pharmacy Building,” “Construct Gatton (Business) Building Complex,” “Construct Law School Building,” and “Expand Lexington Community College Campus.” Citing the difficult budget situation expected to face the 2002 General Assembly, if only the top two priorities could be funded for construction, President Todd said UK would like to have authorization at least to design the Business and Law building projects. He also said that the “Expand Early Childhood Education Lab” project will be raised from number 33 to within the top ten priorities, and an effort will be made to access funding sources in addition to state funds for it. President Todd introduced Jack Blanton, Senior Vice President for Administration, and Gene Williams, Vice President for Fiscal Affairs and Information Technology, to assist in responding to questions from the Board.
In response to Mr. Hintze’s question, President Todd said the proposed site for the new Business Building is currently a parking lot located on Euclid Avenue next to Memorial Coliseum and in front of Wildcat Lodge. He said UK would like to put an executive MBA program in the old L.R. Cooke Chevrolet building (on High Street) near downtown Lexington.
Mr. Hintze also noted that downtown had previously been mentioned as the site for expanding Lexington Community College (LCC). President Todd said a specific location has not been finalized, so that reference has been deleted from the current project description. However, a site above the Lexington Transit Center is one option for LCC and possibly a dormitory. Another possibility is the Central Kentucky Technical College (CKTC) property near the federal Veterans Affairs Medical Center on Leestown Road. Ms. Northern asked whether LCC might be able to use some of the existing classroom space at CKTC. President Todd said he does not think CKTC has existing space available, but LCC is looking at whether it should stop providing some programs that could be better handled by CKTC.
In response to Mr. Vanhook’s question about priority number six, “Construct Architecture Building,” President Todd said that program needs space, and possibilities include some of the old tobacco warehouses on Bolivar Avenue or a downtown location.
Mr. Hintze stated that a priority of CPAB has been the maintenance and upkeep of existing state facilities and asked the UK representatives to comment on projects of that type, which are listed below the new construction/expansion projects on the prioritized listing. Mr. Blanton said the maintenance pools appropriated to the Council on Postsecondary Education for distribution to the institutions had been very important, but some needs remain at UK (e.g., underground steam lines).
Representative Crall asked for information on how LCC students differ from students at other community colleges without a nearby four-year institution. He also suggested that instead of the proposed $4-$1 state-to-institution ratio of funding for a new law school building, it should be a $1-$1 match. He noted that alumni are very supportive of their law schools elsewhere.
Chairman Clark said the next item on the agenda was a review of the agency plan of the Council on Postsecondary Education (CPE), and the recommendations of the CPE, as requested by the Board, on postsecondary projects and issues. Following the CPAB staff overview, the CPE’s Vice President for Finance, Angela Martin, addressed the Board on behalf of President Gordon Davies who was out of town and could not attend. Ms. Martin reviewed a handout distributed to the members. The handout included information on enrollment and graduation goals, space planning guidelines, the distribution of postsecondary institutions across the state, the system’s capital priorities for 2002-04, and projected space needs based on the 2020 enrollment goals. Two other handouts distributed to members showed the status of state-funded new construction and major renovation projects authorized in the 1998-2000 and 2000-02 budgets, and the status of student housing fire safety projects.
Ms. Martin explained that the revised guidelines for research space approved by the CPE in July address the desire for UK and UL to increase their external fund raising. She acknowledged that the new guidelines are generous for the two institutions but explained that having space already available is important to attracting top researchers. These researchers will not come based on the promise of getting new space in the future.
Ms. Martin said the CPE staff is just now beginning to evaluate the projects being proposed by the institutions for 2002-04. They are using the space planning model/guidelines as well as the services of a consultant who is looking at the condition and fitness for use of space where a new or renovation project is being proposed and the institution shows a surplus in that category of space. Preliminary staff recommendations will be available for the CPE’s meeting on October 10, with final action to be taken by the CPE on November 5. The staff recommendations are expected to include a capital renewal and replacement pool ($30 million with a required match of institutional funds), an instructional and research equipment replacement pool ($20 million), state-funded renovations of existing facilities and construction of new education and general space, and a restricted agency funds bond pool.
Ms. Martin also listed the two projects being proposed in the CPE’s agency plan – Kentucky Postsecondary Education Network (KPEN) Enhancement and a Centralized Learning Services Project.
Citing President Todd’s earlier statement that only 2.5 percent of LCC students qualify for admission to UK, Mr. True suggested that students are not being adequately prepared to enter college. Ms. Martin said in some instances that is true and referenced some actions being taken by CPE to address the issue. She noted that the purpose of the community colleges is to provide open access, and that they do provide a lot of remedial education.
Referencing that the material provided to members uses a statistic of students graduating within six years, Mr. True asked for similar data for a five-year period, which is the standard that is usually applied. He also expressed concerns that the state cannot keep building university facilities to provide remedial education, as well as construct the facilities needed to address the research goals that have been set.
Ms. Clary said that each planning period the CPE is in a difficult position because the CPAB report is due on November 1, but the Council does not finalize its recommendations until after that date. She asked CPAB staff to look at possible changes to the due dates in the capital planning statutes that could address this problem.
Mr. Hintze referenced the 3,000,000 square feet of new space projected by the CPE guidelines to be needed by 2020. Ms. Martin explained that the approximately 2,800,000 square feet authorized in 1998 and 2000 address most of the raw space needs for 2020 as calculated by the guidelines, but there still may be needs related to special situations or the quality and utility of the existing space.
Mr. Hintze asked about the match that is required to access the maintenance pool funds appropriated for allocation by the CPE. Ms. Martin said the institutions are required to transfer agency funds to cover one-half of each project’s cost, then the CPE provides the other one-half of the cost. She said that to date the institutions have been able to provide the required match, but that is getting more difficult. As such, for 2002-04 the CPE may propose that other factors be taken into account. For example, if the mechanical system that is to be addressed has exceeded its expected useful life that would be an indication it had been well maintained, and the institution would be rewarded for its good stewardship by being allowed to provide a smaller match in order to access the CPE pool funds.
In response to Mr. Mitchell’s question, Ms. Martin said the data to be provided by the consultant will be qualitative, rather than quantitative. Mr. Mitchell noted that this Board had been interested in getting quantitative data, but it is also the Finance Cabinet’s experience that it is difficult to find such an approach.
Ms. Northern asked whether the model could be used to calculate the amount of space that is not needed due to students taking courses on-line. Ms. Martin said some of the institutions are beginning to look at how to subtract the students that are not physically on campus, but that is not currently a part of the model.
Chairman Clark said there were also two parts to the agenda item on information technology. They are the agency capital plan of the Governor’s Office for Technology (GOT), and the statewide project and policy recommendations of the state’s Chief Information Officer (CIO).
Following the CPAB staff overview, Ms. Aldona Valicenti, the state’s CIO, was introduced to make a presentation. Ms. Valicenti first provided an overview of information technology in Kentucky which referenced the 1997 EMPOWER Kentucky initiative, organizational changes, critical issues, and challenges and opportunities. She next provided a profile of GOT (personnel, budget, workload, infrastructure) and reviewed the strategic plan that GOT was preparing pursuant to the requirements of the 2000-02 budget bill.
Ms. Valicenti said the emphasis of the GOT capital plan was on support and protection of the enterprise infrastructure, expansion of major capital projects, maintenance of existing infrastructure, and continued investment in Geographic Information Systems data. She listed the items proposed to be financed from state funds and those proposed to be financed from restricted funds.
Ms. Valicenti also reviewed the information technology project and policy recommendations as contained in her report to the Board and included in the members’ folders. Additionally, she provided an option for a revised “system” definition as was recommended in her report. (The proposed wording had not been included in the printed report.)
Mr. True said he was very distressed that the Aging Client Tracking and Reporting System listed as a high priority by the Cabinet for Health Services did not appear on the CIO’s prioritized project listing. He said this system was important to Kentucky’s development of a plan for moving unnecessarily institutionalized persons into community placements pursuant to the Olmstead decision.
Mr. True explained that the Olmstead v. L.C. decision of the U.S. Supreme Court in 1999 addressed a case brought by two women against the Commissioner of Georgia’s Department of Human Resources (Olmstead). The women, who had mental illness and mental retardation, wanted to receive services in the community. Instead they remained confined to a state psychiatric hospital because of the state’s long waiting list for community placements. The Court said that the women’s continued institutionalization, when there was agreement that they were ready for discharge to the community, constituted discrimination and violated provisions of the Americans with Disabilities Act (ADA). It said that a state may have a defense to such lawsuits if it has a plan for placing qualified persons in less restrictive settings.
Ms. Valicenti said she could not disagree with any of Mr. True’s comments and had the prioritized list been longer, the Aging Client Tracking and Reporting System would have been included. Mr. True said he hopes this project will be considered and that a high priority for it will be communicated to the Governor and legislative leadership. In response to Mr. Hintze’s question, Ms. Valicenti confirmed that the intent would be to implement the proposed new personnel-payroll system in phases.
Chairman Clark said he was interested in the “pool” concept recommended in the CIO’s plan, and Ms. Valicenti said she would provide more details of the proposal for the Board’s next meeting in September.
Next, Kevin Mason of the LRC Economist’s Office reviewed his memorandum on the state’s bonded indebtedness as provided in the member’s folders. That presentation addressed historical, current and projected debt balances, debt authorized during recent legislative sessions, a comparison of Kentucky’s debt to that of other states, and recent rating reviews by credit rating agencies.
Senator Robinson asked for a listing of those projects that were partially funded in the 2000-02 budget with the expectation that additional amounts to complete the project would be authorized in the 2002-04. Mr. Hintze said the Governor’s Office for Policy and Management has begun to develop such a list, but it depends on how such projects are defined. One large example may be the School Facilities Construction Commission which was authorized to enter into agreements for $100 million of projects beyond those for which debt service was provided in the 2002-04 budget. Other examples are projects where design only or a Phase I project was funded. Mr. Hintze said, given the current structural imbalance in the budget (due to the revenue shortfalls) that needs to be corrected, it may be difficult to fund all of these projects.
Senator Robinson asked how close Kentucky is to having its bond rating changed. Mr. Mason said Kentucky's bond rating is the best it has ever been. Mr. Hintze confirmed this and said that the rating agencies are warning the state to move cautiously in the upcoming budget because of the revenue shortfalls this biennium, and the one-time funds that have been used to address them.
Ms. Clary said the Board may need to make a recommendation regarding the funding of projects in one biennium at a level that, in effect, necessitates the additional amounts to complete them be provided in the next biennium. Chairman Clark said that issue does need to be considered when the Board begins looking at policy recommendations later in the meeting.
Chairman Clark next introduced Deputy State Budget Director Bill Hintze to provide a report on Kentucky’s revenue and budget status and outlook. Mr. Hintze said that in FY 2000/01, a state budget reduction of $180 million was accomplished via actions that had minimal effect on programs and services, and no effect on capital projects. There was also no effect on education, which was the major protected priority. Approximately $38 million from the Budget Reserve Trust Fund was used to address the shortfall. The same protected priorities are being maintained for FY 2001/02, but the amount that must be reduced is larger ($326 million) so the effects will be felt in some places where the cuts are required. The plan is to use $120 from the Budget Reserve Trust Fund, which is 50 percent of the remaining balance.
Mr. Hintze said that having used one-time money to replace a recurring revenue shortfall has created a structural imbalance in the budget that will have to be addressed in the 2002-04 budget process. He said there will be a capital program in the budget, but it will be developed in a different context than in the recent past.
Representative Crall asked if any of the capital projects authorized in the 2000-02 budget will not be implemented. Mr. Hintze said there would probably be a few projects that will not proceed for a variety of reasons including the funds being insufficient to undertake the project, the recipient’s inability to provide the required matching funds, and, in the case of community development projects, the state’s inability to resolve with the local community the issue of the public purpose to be served by the project.
In response to Judge White’s question about the particular revenues involved in the shortfall, Mr. Hintze said in no instance are the revenues less than last year. The largest dollar shortages relative to the projections are in the sales tax and the personal and corporate income tax, and the largest percentage shortage is in some court-related revenues collected by the Circuit Clerks. The Executive Branch is working cooperatively with the Administrative Office of the Courts to address the courts-related revenue issue.
Mr. Hintze noted that several states, including Indiana, Tennessee, and North Carolina, are suffering worse shortfall problems than Kentucky. He said this is not a nationwide problem, but is focused in the southeast and middle America.
In response to Ms. Clary’s questions about the use of the Budget Reserve Trust Fund, Mr. Hintze said the FY 2001/02 withdrawal will take the Fund from an all-time high of over four percent of revenues down to between one and two percent of revenues. Pursuant to language in the budget bill, 50 percent is the maximum that can be taken from the Fund in the second year of the biennium. The balance after that withdrawal will be $120 million. Mr. Hintze said there will have to be a plan in the next budget to replenish the Fund to alleviate concerns of the bond rating agencies. He also noted that the currently planned FY 2001/02 reductions address only the shortfall anticipated at this time, and a contingency will have to be developed to address the situation if it worsens.
Chairman Clark said the Board would next begin discussing recommendations to be included in its 2002-2008 Statewide Capital Improvements Plan. He noted that in April, the Board had asked staff to work on a proposal for a Kentucky program based on the approach used in Nebraska to set aside funds for maintenance and renewal of state facilities. He asked Ms. Ingram to review the outline that had been provided to the members.
Ms. Ingram said the proposal calls for the establishment of two funds – a Facilities Maintenance and Renewal Fund for New Projects (FMRF-N) and a Maintenance and Renewal Fund for Existing Facilities (FMRF-E). The FMRF-N would apply to any new facility acquired by a state agency or postsecondary institution, or to any renovation of existing facility costing over 50 percent of the value of the facility. For each project, an amount equal to two percent of its value would be appropriated annually to an account specific to that project. So that sufficient funds could accumulate, no expenditures would be allowed until ten years after the initial project authorization. Funds from a given facility’s account could be used only for projects costing $400,000 or more for that facility, and such projects would have to be authorized through the usual capital planning and budgeting processes.
Ms. Ingram said the FMRF-E would cover all state-owned facilities with a value of $400,000 or more with various exceptions including postsecondary institutions and facilities of the Transportation Cabinet. Financing for the Fund would be from annual state General Fund appropriations equal to a percentage of the total value of the facilities covered. The program could be phased in, with a goal of appropriating two percent of the value in the fourth year. No expenditures from the Fund would be allowed until five years after the first appropriations, and a minimum balance would be required to be retained at the end of each biennium. The projects would have to follow the regular capital planning and budgeting processes. Since multiple facilities and projects would be competing for the same pool of funds, an expert panel would be established to review the projects and make prioritized recommendations as to which should be authorized each biennium.
Chairman Clark asked members to review this proposal prior to the next meeting.
Mr. True referenced a list of potential CPAB policy recommendations that had been provided to the members and asked that information on each item be made available for further discussion at the next meeting. Those items included development of the state facilities/real property management database, a more proactive role for the Department for Facilities Management, funding of the miscellaneous maintenance pools, the type of project authorizations included in the capital budget, and possible changes to the capital planning statutes.
In response to Ms. Clary’s question about the CIO’s recommendation for a change in the definition of an information technology system, Chairman Clark said that should also be discussed at the next meeting.
Chairman Clark next asked how the Board would like to proceed relative to developing its project recommendations. Senator Robinson said he thought the policy recommendation relative to which projects should be funded would be more important for the upcoming budget than the individual projects that are listed. Mr. Mitchell suggested that the Board could identify a total dollar amount for the projects to be selected, rather than a specific number of projects. Chairman Clark said that was a good consideration, but that perhaps members should set the amount individually rather than doing so as a group. Ms. Northern suggested that each member be asked to select projects at different intervals of funding. Chairman Clark said staff would send additional information to the members about making their project recommendations.
Mr. Hintze said he wanted to commend the staff for the work it has done to assist the Board.
There being no further business to discuss, Mr. Karibo’s motion to adjourn the meeting was approved by voice vote. The meeting was adjourned at 1:30 p.m.