The 4th meeting of the Capital Planning Advisory Board (CPAB) was held on Friday, September 26, 2003, at 9:00 AM, in Room 327 of the Capitol. Representative Perry Clark, Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Albert Robinson, Co-Chair; Representative Perry Clark, Co-Chair; Senator Paul Herron Jr.; Representative Ron Crimm; James Deckard; Bill Hintze; Sherron Jackson; Lou Karibo; Cicely Lambert; William May; Glenn Mitchell; Norma Northern; Garlan Vanhook; and Judge William Wehr.
Guests: Senators Dan Kelly, Katie Stine, and Gary Tapp; Representatives Tom McKee, Brad Montell, and Marie Rader; Chief Justice Joseph Lambert, Kentucky Supreme Court; Aldona Valicenti, Chief Information Officer; Kevin Mason, LRC Economist’s Office; Gary Logsdon, Grayson County Judge Executive; Raymond Hurst, Wolfe County Judge Executive; Lawrence Kuhl, Laurel County Judge Executive; George Zubaty, Gallatin County Judge Executive; Henry Bertram, Pendleton County Judge Executive; Jerry Vaughn, Adair County Judge Executive; Darrell Link, Grant County Judge Executive; Paul Patton, Taylor County Judge Executive; Maryann Baron, Green County Judge Executive; Rob Rothenburger, Shelby County Judge Executive; Bradley Gifford, Robertson County Judge Executive; Curtis Wells, Magistrate, Grayson County; Will May and Sara Bell, Brighton Engineering; Carol Zolliver, Boyd County Commissioner; Debbie Shields, Department of Juvenile Justice; Randall Hancock, Cabinet for Families and Children; Gary Grogan, Kentucky Community and Technical College System; Gary Veirs, Pendleton County Fiscal Court; John Wright, Gallatin County Attorney; Tommy Slone; Mike Redden, Pendleton Circuit Clerk’s Office and Robert McGinnis, 18th District Circuit Judge; Vance Mitchell, Ann Sampson, Jim King, and Doug Teague, Administrative Office of the Courts; Judy Campbell, Department of Public Advocacy; Paul Johnson, Revenue Cabinet; Bobbie Hughes and John Drake, Department of Corrections; Brenda Sweatt, Office of State Treasurer; and Ken Schwendeman, Department of Criminal Justice Training.
LRC Staff: Pat Ingram, Staff Administrator; Mary Lynn Collins; Nancy Osborne; and Dawn Groves.
Representative Clark noted that minutes of both the July 31/August 1 and the August 18 meetings were included in the members’ folders. Senator Herron’s motion to approve both sets of minutes was seconded by Mr. Mitchell and passed without objection.
Representative Clark then asked CPAB Staff Administrator Pat Ingram to review the Information Items in the meeting folders. Ms. Ingram said the first item was a letter from Council on Postsecondary Education (CPE) staff transmitting two items: 1) a list of 16 specific construction projects proposed by the institutions which were being recommended as “2004-06 planning priorities” by CPE staff, and 2) the CPE staff review of the information technology projects with a list of 19 projects designated as having “high value”. The second Information Item was a letter from Dr. Bill Brundage, Commissioner of the Office for the New Economy, following up on questions asked during his presentation at the August 18 CPAB meeting. The third Information Item was an update on the hearing held on September 8 about the future of the federal Veterans Affairs Medical Center in Lexington. The final Information Item was a financial report on the EMPOWER Kentucky program, which reported an available balance of approximately $8 million at the end of FY 2002/03.
Representative Clark explained that this meeting would conclude the CPAB review of the six-year capital plans submitted by all state agencies on April 15. It focuses on the plan submitted by the Judicial Branch. Senator Robinson and Representative Clark noted the attendance of representatives – including county judges and legislators - of many of the counties where new courthouses are being proposed, and said the Board appreciated their presence and show of support for their projects.
At Representative Clark’s request, Ms. Ingram reviewed the materials provided to the members about the Judicial Branch plans. She also provided a brief overview of the court facilities planning, funding, and construction process, and a review of the status of projects recently completed or currently underway.
Chief Justice Joseph E. Lambert was then introduced to present the Judicial Branch capital plan for 2004-2010. Two brochures summarizing material in the Judicial Branch presentation were distributed to CPAB members.
Chief Justice Lambert noted that numerous courthouse projects have been undertaken since 1996, but more remain to be done. He said despite the tight budget situation, this is a period of opportunity for Kentucky to take advantage of historically low interest rates to issue bonds and fund desperately needed facilities. He specifically noted the need to address facilities that are not in compliance with the Americans with Disabilities Act.
Following his remarks, Chief Justice Lambert introduced Cicely Jaracz Lambert, Director of the Administrative Office of the Courts (AOC), to further discuss the Judicial Branch plan. She reviewed a series of slides addressing court projects that have been recently completed or are currently underway, then introduced Garlan Vanhook, AOC’s General Manager for Facilities. Mr. Vanhook described the Court of Justice Real Property Management System documents that have been developed, then reviewed the process used to assess existing court facilities, prioritize the needs, and prepare the capital plan.
Ms. Lambert said AOC has determined that after all court facilities have been brought up to current standards, there will be a need to address renovation and renewal of 10 percent of the facilities each biennium. She then reviewed slides showing the current courthouses in the counties in which new projects are being proposed for 2004-06.
Mr. Hintze said court facilities has been an area of emphasis that was not foreseen when CPAB was created in 1990. He further noted that the 2002-04 budget did not authorize any new court projects, and said he thinks this is an area for renewed attention. He also urged AOC to review the projects proposed in the pool since each has a $199,000 annual use allowance; an increase of just $1,000 would require the project to be separately authorized.
Noting the approximately $25 million annual use allowance being reported for the projects proposed for 2004-06, Representative Clark asked how much of that amount would be offset by the use allowance currently being paid to those counties. He also asked which of the counties are still paying on prior bond issues. Mr. Vanhook said the current use allowance payments to these counties are minimal due to the age of the existing facilities, and that few of them still have outstanding debt.
Senator Robinson said his experience in working with census data indicated that the figures were often lower than the actual population of an area. Since such figures are a factor in determining the need for a court facility, he urged AOC to review the figures they were using with the various county judge executives. Senator Robinson then called on Senator Katie Stine, and Representative Tom McKee to briefly address the Board. Both expressed support for the Judicial Branch proposals, particularly the project to address the Pendleton County facility, as contained in the Project Pool (Priority #7).
Following a brief recess, the meeting reconvened and Aldona Valicenti, the Commonwealth’s Chief Information Officer, was introduced to present a report on funding options or other approaches for addressing the large volume of information technology proposals contained in the agency capital plans. She distributed a handout to the Board which outlined the major topics in her presentation, and a draft of the Executive Summary for a new National Association of State Chief Information Officers report on Trends and New Approaches in Funding Technology.
Ms. Valicenti said investment options for obtaining technology include enterprise leasing, which is a good alternative to purchasing when the useful life of the equipment is very short. She said various Cabinets have already used this approach to some extent for workstations, and the Governor’s Office for Technology (GOT) is looking at whether it is also a viable option for servers and other equipment. She noted that Kentucky could get a better price by consolidating its leasing needs and leasing in larger volume. Ms. Valicenti said another option is for the state to lease government assets to the private sector. She said a Request for Information to do this with the KEWS towers received a mixed response, and was not pursued further by the state.
Representative Crimm said leasing seemed to be the logical approach to use for acquiring technology equipment.
Also presented as investment options were bonding, which is used heavily by Massachusetts, and the establishment of a Technology Fund, which is an approach used by Tennessee. Ms. Valicenti noted that bonding was particularly appropriate for infrastructure projects such as the need to upgrade KEWS to digital. She said agencies borrow from the Tennessee Technology Fund, and repayment is tied to expected project savings and/or the project lifecycle. The Fund was initially financed by a $15 million appropriation and ongoing funding is from a small surcharge on state agencies when they issue Requests for Proposals.
Ms. Valicenti next addressed efficiency opportunities, which involves doing things enterprisewide rather than on an agency-by-agency basis. She said Kentucky already has accomplished this in some areas including having a consolidated data center and a single e-mail system. Other possibilities in this category include cybersecurity and disaster recovery; consolidation of servers, services and telecommunications; and wireless (the public safety infrastructure).
Mr. Hintze asked if the Wireless Interoperability Committee established by House Bill 309 has sufficient authority to enforce standards and ensure compatibility when new radio systems, etc. are purchased. Ms. Valicenti said the Committee will seek additional authority in that regard from the next General Assembly.
Ms. Valicenti next identified opportunities and examples where common technology solutions and components might be used across state government. They include the areas of human resource systems (payroll and personnel), case management, licensing and regulation, the Commonwealth basemap (Geographic Information System Tools), the Unified Criminal Justice Information System (UCJIS), grants management, and the Management and Administrative Reporting System (MARS).
In response to a question from Mr. Hintze, Ms. Valicenti said the subcommittee of the Kentucky Criminal Justice Council that oversees the implementation of UCJIS could use additional authority to enforce standards and require compatibility.
Ms. Valicenti concluded her presentation by discussing partnerships and outsourcing. She said the state has already done this for the Kentucky Information Highway and the state’s website. She said there is a potential to consolidate and outsource desktop support functions (e.g., installation, management, and servicing). She asked Terry Thompson, GOT’s Executive Director for Administrative Services, to describe the state’s use of Strategic Alliance Service Contracts, rather than the RFP process to obtain various items such as application development. He said Kentucky has five full-service vendors and 14 niche vendors; agency requests for services are issued to the applicable vendors who then submit proposals to address the need. This is intended to make the process faster and more efficient. Ms. Valicenti said the vendors are asked to also propose novel funding mechanisms.
Representative Clark next introduced Kevin Mason, LRC Staff Economist, to provide an update to the Board on Kentucky’s bonded indebtedness. Members were referred to a memo included in their folders as well as to a handout relating to this presentation.
Mr. Mason said a total of $835 million in appropriation-supported debt was authorized in the 2002-04 budget and that appropriation-supported debt is expected to total $4.6 billion dollars if all of the authorized debt is issued in FY 2003/04. He noted that debt as a percent of state revenues is currently calculated to be over 6 percent at the end of FY 2003/04, but the figure may be lower if interest rates are favorable.
Representative Clark asked about the “6 percent of revenues” standard used by the Kentucky to limit its debt. Mr. Mason said the rating agencies do not specify what the limit should be, but do expect the states to adhere to whatever standards they self-impose. Responding to Senator Robinson’s questions, Mr. Mason added this is just one of the factors considered in rating debt.
Citing statistics from Moody’s Investors Service, Mr. Mason said they show Kentucky’s net tax support debt per capita to have been $1,095 in 2002 compared to a median for all states of $606. Also according to Moody’s, net tax supported debt as a percent of state personal income was 4.3 percent in Kentucky for 2002 compared to a median for all states of 2.1 percent.
Mr. Hintze asked if Mr. Mason would agree that the higher debt levels for Kentucky were due, in part, to some things being financed by bonds issued by the Commonwealth that elsewhere are handled at the local level. Mr. Mason said he agreed with this assessment.
Mr. Mason then reviewed changes in the Commonwealth’s Credit Profile since his last presentation to the Board in August 2001. In October 2001, Standard and Poor’s (S&P) changed Kentucky’s Issuer Outlook from Stable to Negative. In 2002, S&P and Moody’s placed Kentucky’s debt on their respective “watchlists” for possible downgrade. In August 2002, Moody’s removed the state from its watchlist. In October 2002, S&P downgraded the state’s issuer credit rating from AA to AA-, removed the state from its “CreditWatch” list, and removed the negative outlook.
Senator Robinson asked whether the increased cost of borrowing resulting from the lowered credit rating is offset by the currently low interest rates. Mr. Mason and Mr. Hintze said these are separate factors, but that has probably been the effect. Mr. Hintze added that because of the lower credit rating, the state did not benefit as much as it could have from the low interest rates.
In response to Mr. Hintze’s question about debt the state will be retiring in this biennium, Mr. Mason said the amount to be retired is approximately $700 million. However, it is not appropriate to say that is the amount of new debt the state can issue since the old debt was issued under different interest rates, terms, etc. He said Kentucky has also refunded a lot of debt due to the low interest rates.
Mr. Mason next reviewed the history and status of the Budget Reserve Trust Fund (BRTF). After reaching a record balance of $278.6 million at the beginning of FY 2000/01, the Fund was used to address budget reductions leaving a zero ($0) balance by the end of FY 2001/02. Appropriations in the 2002-04 budget would restore a balance of $54.8 million at the end of FY 2003/04; however, approximately $15 million of this is expected to be used to fund Necessary Government Expenses pursuant to the Appropriations Act.
The following were listed by Mr. Mason as factors which could affect new debt authorization in the upcoming budget: slow economic growth, a possible downward revision of revenue estimates, and the continued structural imbalance of the state budget. He then reviewed a series of general debt issuing guidelines including determining whether the project is an appropriate candidate for debt financing, and whether the additional debt the project represents causes the total debt outstanding to become a concern.
Mr. Mason concluded by stating various factors that suggest the amount of debt authorized in the upcoming budget should be carefully considered. Those factors are uncertainty about the upcoming budget (economic slowdown, recent revenue shortfalls and budget reductions, depletion of the BRTF, potential for a large deficit at the current fiscal year), the recent trend that has shown increases in the state’s debt balance, and Kentucky’s rank that is higher than most other state on various measures of debt burden.
Responding to Representative Clark’s question, Mr. Mason said the amount of debt being retired may cause the ratio of debt to revenues to drop below 6 percent at the end of FY 2003/04. However, Mr. Hintze noted that the equation also used revenue projections when the budget was developed and as those estimates decline – as it expected – the ratio is affected.
Noting that November 1 is the statutory deadline for CPAB to complete work on the statewide capital improvements plans, Representative Clark said staff has drafted several potential policy recommendations for the Board’s consideration. He said Ms. Ingram would provide an overview of each, and the Board would then need to discuss and provide direction to staff as to how to proceed with each item.
Ms. Ingram said the first two items address the Board’s long-standing interest in the issue of maintenance of state facilities. She noted that in its last plan the Board had recommended the establishment of mechanisms by which funds would be set aside to address major capital renewal and maintenance needs of existing and new state facilities. Legislation in that regard had been introduced by Representative Clark in the 2002 and 2003 General Assemblies, but failed to pass both chambers. She said the language being proposed for inclusion in the 2004-2010 plan is not specific. It recommends that legislation be enacted by the 2004 General Assembly to establish an approach for financing the major capital renewal and maintenance needs of state facilities.
Mr. Mitchell said he thought having the general language was good and would allow the specifics to be determined when the legislation is drafted. His motion to approve the recommendation was seconded by Representative Crimm, and passed without objection.
Ms. Ingram said the next maintenance-related recommendation addressed the agency maintenance pools used to finance projects costing less than $400,000 each. She noted the potential recommendation being presented was very similar to the one included in the last plan. It recommends that adequate and equitable funding be provided for the agency maintenance pools, and to accomplish that, the following actions should be taken: 1) each agency with responsibility for administering/managing state-owned facilities should be appropriated funding for a maintenance pool in the biennial executive branch budget; 2) funding recommended for agency maintenance pools should be calculated in an equitable manner across all agencies, with an appropriate offset to the calculated need for state funds for those agencies with restricted or facility-generated funds that are available for this purpose (e.g., The Kentucky Center, State Fair Board); 3) the Governor’s Office for Policy and Management and the Department for Facilities Management should develop a formula for maintenance pool funding that takes into account relevant factors such as square footage, age, and condition of facilities. This effort should be completed no later than July 2005, and quarterly progress reports should be made to the Capital Planning Advisory Board beginning in July 2004; and 4) when Investment Income revenues are insufficient to adequately finance the agency maintenance pools, the state General Fund or other appropriate revenues should be used.
Mr. Hintze expressed concern about the April 2004 date for the first progress report to CPAB on development of the formula since that would be at the end of the General Assembly Session. He asked that the date be changed to July 2004. Mr. Vanhook’s motion to make that change was seconded by Ms. Northern, and approved by voice vote. Representative Crimm’s motion to approve the recommendation as amended was seconded by Mr. Jackson, and passed without objection.
Ms. Ingram then reviewed the third potential recommendation which addressed implementation of the real properties / facilities management database for the executive branch. She noted that the statutory requirement for such a database was a recommendation of the Board in its last plan and that the Finance and Administration Cabinet is currently focusing on a pilot project within the Cabinet. She said statewide implementation will be a major undertaking. As such, the potential recommendation is that the Finance and Administration Cabinet work with appropriate executive branch agencies and postsecondary institutions to develop a plan for statewide implementation of the database as mandated by KRS 42.027. Written reports on development of the plan and implementation of the database should be submitted to the CPAB and to the Capital Projects and Bond Oversight Committee at least quarterly, beginning in January 2004. It further recommends that the Finance and Administration Cabinet seek funding and personnel levels required to expedite implementation of the real properties / facilities management database. Funding should be sought from any appropriate source(s) including, but not limited to, appropriations through the biennial budget process or allocations through the EMPOWER Kentucky program, the Capital Construction and Equipment Purchase Contingency Fund, or the state Planning Fund.
Mr. Mitchell said he had worked with Ms. Ingram on the language in the recommendation.
Representative Clark noted the earlier Information Item had reported an available balance of $8 million in the EMPOWER Kentucky program and suggested the database might be a good use for some of those funds.
The motion to accept the recommendation regarding implementation of the database, as presented, was made by Mr. Mitchell. It was seconded by Mr. Hintze, and approved without objection.
Ms. Ingram said the next item had not been addressed by the Board previously, but came directly from testimony and discussion with the Department of Military Affairs at the two-day meeting. Concerns about state funds being proposed to finance renovation of the infrastructure at Bluegrass Station had led to discussion about the unusual situation of the Department operating a business park. The potential recommendation was that a study be undertaken to review the operations and administrative placement within state government of the Bluegrass Station installation in Fayette County.
Following discussion of whether a specific entity should be identified to undertake the study, Representative Clark’s motion to accept the recommendation as initially worded was seconded by Mr. Mitchell, and approved without objection.
Ms. Ingram said the next issue, alternatives to incarceration, had also been addressed by the Board in prior plans. She said the background information summarized information provided by the Department of Corrections to the Board on July 31. It reported a projected inmate population increase of 4,700 by the end of the planning period (June 30, 2010). It also outlined the additional construction that would be required to address the increase including a Phase II of the new Elliott County prison now under construction and renovation of a currently vacant facility at Northpoint Training Center. The item also summarized discussion from the earlier meeting about drugs being a core problem and major factor in the population growth.
The proposed recommendation on this issue is that the executive, legislative, and judicial branches identify and implement alternatives to incarceration and adequate treatment options (where appropriate) – consistent with public safety and victims’ rights – that could reduce the prison population growth and the attendant need for the construction of new facilities.
Representative Clark reminded members that this issue has been discussed many times by the Board, and noted the importance of providing treatment options for those with substance abuse problems. Senator Robinson said public safety, and especially victims’ rights, must be a major consideration in proposing and implementing any alternatives.
Citing his experience in conducting a drug court and alternative programs, Judge Wehr said those approaches can be successful and said he agreed with Representative Clark’s comments. Judge Wehr also asked that the phrase “with input from county government” be added to the recommendation. His motion to accept the recommendation as amended, was seconded by Senator Herron, and approved without objection.
Ms. Ingram said the next item on allocations from the Office for the New Economy (ONE) was another new recommendation, and was based on testimony before the Board in August. She noted there were questions about New Economy funding that is being allocated to the postsecondary institutions without the CPE playing a formal role in that process. A particular concern was that some of the allocations might result in projects that need continued operations or maintenance funding through the institutional budgets. The potential recommendation was that any allocation of funding from the Office for the New Economy to a postsecondary education institution should be subject to review by the CPE board prior to acceptance of the funds by the institution.
Ms. Ingram added that the Board might also want to recommend that ONE formalize its stated intention or expectation that projects be self-supporting by the fifth year.
In response to Mr. Hintze’s question about the CPE’s position regarding the draft recommendation, Mr. Jackson said the CPE needs to have an opportunity to review and comment on the projects prior to action by the Kentucky Economic Development Finance Authority (KEDFA), but currently is not provided the information to do this. CPE would want to evaluate the projects to determine their compatibility with the goals of the postsecondary system, and because there may be future requests to CPE for maintenance and operations funding. Mr. Jackson agreed with Mr. Hintze’s comment that these objectives could probably be accomplished through CPE staff review rather than requiring CPE Board approval. They noted that there is a formal process for project approval already in place through KEDFA, and projects should not be delayed pending formal CPE action as well. It was decided that CPAB staff should work with the entities involved to revise the recommendation.
Ms. Ingram next presented a recommendation on the use of Contingency Account funds for moving expenses. She noted this is another item on which the Board made a recommendation in the last plan and for which legislation was introduced in the 2002 and 2003 General Assemblies, but was not enacted. The potential recommendation was that legislation be enacted to amend KRS 45.770 to allow the Capital Construction and Equipment Purchase Contingency Account to be used for nonrecurring moving expenses of state agencies when such moves are to address issues of public health and safety or governmental efficiency.
Ms. Ingram explained that the Department for Facilities Management had cited lack of funding for moving expenses as sometimes being an obstacle to housing agencies in the most efficient and effective manner. This use of the Contingency Fund would be subject to existing procedures and legislative oversight for allocations from the Fund.
Senator Robinson’s motion to accept the recommendation was seconded by Mr. Hintze, and approved without objection.
Ms. Ingram said the final item for consideration by the Board addresses the long-range plans for housing state agencies in the Frankfort area and in the metropolitan areas, which the Department for Facilities Management is required by statute to develop. She said the Frankfort plan has been developed, but its implementation is behind the initially proposed schedule. Additionally, data collection was done for the metropolitan areas, but the plans have not been developed. She noted that during this time of fiscal difficulty for the state, it is particularly important to continue such efforts, which can facilitate the efficient and effective housing of state agencies.
The potential recommendation is that, as directed by KRS 42.027, the Department for Facilities Management place a priority on continuing to review and update, as appropriate, the long-range plan for housing state agencies in Frankfort, and that it complete development of the long-range plans for housing state agencies in the metropolitan areas.
Mr. Hintze’s motion to accept the recommendation was seconded by Mr. Mitchell and approved without objection.
There being no further business to come before the Board, the meeting was adjourned at 12:10 PM.