The 4th meeting of the Capital Planning Advisory Board was held on Friday, September 18, 2009, at 1:00 PM, in Room 169 of the Capitol Annex. Senator Jack Westwood, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Jack Westwood, Co-Chair; Representative Melvin B. Henley, Co-Chair; Senator David E. Boswell, David Buchta, Ben Fletcher, Carole Henderson, John Hicks, Bill Hintze, Mary Lassiter, William May, Katie Quitter, Edmund Sauer, and Laurel True
Guests: Kristi Culpepper, Legislative Analyst, Capital Projects and Bond Oversight Committee; Phil Baughn, Commissioner, Steve Rucker, Executive Director of Office of Infrastructure Services; and Glenn Thomas, Director, Division of Information Technology Governance, Office of Enterprise Technology, Commonwealth Office of Technology (COT); John Hayek, Vice President, Finance, Planning and Performance; Allen Lind, Vice President for Information and Technology; Sherron Jackson, Assistant Vice President, EEO and Finance, Council on Postsecondary Education (CPE)
LRC Staff: Don Mullis, Shawn Bowen, and Jennifer Luttrell.
Co-Chair Westwood made a motion that the minutes of the August 21, 2009, meeting be approved. This motion was seconded by Mr. Buchta and approved by voice vote.
Mr. Mullis then reviewed one informational item included in members’ folders: an update of the state-owned buildings vs. leased buildings. This information was requested by members at a previous meeting. As of September 2009, the state utilizes approximately 6.6 million square feet of space; of this amount, approximately 5 million square feet is state-owned and 1.4 million is leased space.
The next item was a staff report on Kentucky’s Bonded Indebtedness. Ms. Kristi Culpepper, Legislative Committee Analyst, Capital Projects and Bond Oversight Committee, presented the report.
Ms. Culpepper discussed an in-depth analysis of the historic, current, and projected debt position of the Commonwealth, and addressed factors that influence the cost of issuing debt. A part of the analysis included a projection of the level of debt outstanding and the commitment of appropriations to that debt at the conclusion of the 2010-2012 biennium. The analysis was based on three scenarios about the type, timing, and cost of debt. Ms. Culpepper said Kentucky is not seen as having a structurally balanced budget and the state’s reliance on nonrecurring revenues is viewed as a negative credit factor, which could cause the state’s credit rating to be downgraded. She said the cost of financing a project is based largely on the market’s perception of the likelihood that the state will meet its obligations, with greater risk of not meeting those obligations requiring higher interest costs. Currently, Kentucky’s economy is under significant stress related to the national economic downturn. This stress, coupled with a pattern of using non-recurring revenues to fund on-going expenditures, the depletion of reserves, and three biennia of record levels of debt authorizations, has limited the resources available to fund additional borrowing and increased the state’s exposure to further deterioration in revenues.
Co-Chair Henley stated that the cigarette tax revenues have increased, and this should be a positive factor in determining the state’s credit rating.
Mr. True asked if any credit rating agencies discussed Kentucky’s tax structure or tax modernization. Ms. Culpepper said that she did not recall this being discussed.
Senator Boswell stated that there was an extensive study conducted on the tax modernization under the Patton administration that may be of some help.
Co-Chair Westwood stated that a study also occurred under the Fletcher administration. He inquired as to whether other states, besides California are faced with issues similar to Kentucky. Ms. Culpepper replied that Ohio and Michigan have recently had their bond rating downgraded and Florida was facing similar problems. She also stated that 14 states have an unemployment rate over 10 percent.
Co-Chair Henley commented that problems with the state’s tax structure can be attributed to two things: a shift from a manufacturing-based to a service-based economy wherein services are not taxed and increased internet sales which normally do not bring in any sales tax.
Ms. Lassiter said that the state should keep a conservative budget and that the template rate of six percent is reasonable to which Ms. Culpepper agreed.
Co-Chair Westwood asked Phil Baughn, Commissioner, COT to present the Report and Recommendations of Information Technology Projects of State Agencies. A total of 113 capital IT projects totaling more than $775 million were submitted by state agencies for consideration in the 2010-2016 planning cycle, and of that amount, 95 IT capital items/systems were proposed for the 2010-2012 biennium. Mr. Baugh explained the methodology used to generate a designation of high value used in the review process for these projects. Each proposed capital IT item and system was evaluated against two sets of independent criteria: Business Value and Risk Factors. The two criteria were comprised of seven components, each of which were numerically weighted with assigned ranking being explicitly defined. For the 2010-2012 biennium, a total of 29 postsecondary education institution projects, with a total value $123,388,000 (General Funds) were assigned a “High Value.”
Mr. True asked if there were any federal initiatives that would impact these projects. Mr. Baughn stated that this information was all that was presented to COT.
Mr. True stated that the state should focus on human value as opposed to business value by addressing the computerization of case management information, which is exchanged between mental health agencies and child support agencies. Co-Chair Westwood agreed with this statement. Mr. Baughn stated that how the agency delivers its services is up to each agency, but that he is willing to work with the Board to put some elements in this report that will push those elements to the front.
In response to a question from Mr. Hintze, Mr. Baughn said the ten high value projects in COT’s report were exclusive of CPE’s recommendations. He added that he would provide a list of current approved projects as requested by Mr. Hintze.
Mr. Hicks asked what COT’s opinion of the agencies planning process was and with COT’s infrastructure, how they could do a better job of synchronizing the two components. Mr. Baughn suggested that there be a more horizontal and long-term view in planning.
Co-Chair Westwood then asked John Hayek, Vice President, Finance, Planning and Performance; Allen Lind, Vice President for Information and Technology, and Sherron Jackson, Assistant Vice President, EEO and Finance, to present the Report and Recommendations of Postsecondary Education Construction and Information Technology Projects.
Mr. Hayek gave a brief overview of CPE’s priorities and recommendations, which will be narrowed down in the next month to reflect the current budget and fiscal environment. He said CPE will hold a special budget on October 1, 2009, and action will be taken on October 6 and submitted on October 15.
Mr. Lind briefly explained how each project received a “high value” rating. The model divided General Fund projects into five categories: 1) capital renewal, maintenance and infrastructure pool in which projects are unranked; 2) space adequacy/renovation; 3) new construction/expansion of education and general space; 4) research and economic development projects; and 5) information technology initiatives. Projects in categories 2-4 were ranked using five criteria, and projects in category 5 were ranked and submitted separately. Based on these criteria, 13 of 29 2010-2012 IT projects requesting general revenue funds were designated as high value.
In response to a question from Co-Chair Westwood, Mr. Hayek said there has been significant progress toward reaching the goals for 2020, including increased enrollment and graduation rates across the board in 2008 He said the state should be more aggressive over the next 11 years in order to meet these goals.
John Hicks, Deputy Director, Office of State Budget Director presented an update of the implementation of Senate Bill 189. SB 189 was passed by the 2008 General Assembly, and directed the Finance and Administration Cabinet and the Office of State Budget Director to produce and present to the Legislative Research Commission on or before December 1, 2008, a report with recommendations addressing the establishment and implementation of a process for funding deferred and future major capital renewal, maintenance, and renovation needs costing $600,000 or more each for facilities owned by the Commonwealth and operated by state agencies. CPE was also directed to assist in this effort in regard to establishing a process for funding deferred and future major capital renewal, maintenance, and renovation needs costing $600,000 or more each for facilities owned by the Commonwealth and operated by the postsecondary institutions.
Mr. Hicks said they have polled other states in regards to how they handle deferred maintenance needs. As an example, he said Utah sets a target each budget session of 1.1 percent of the asset value of each building. Florida’s Governmental Services Agency (GSA) charges for space occupancy, which builds a reserve that is devoted to deferred maintenance. Tennessee sets rates, which build up a depreciation pot. Virginia uses bond funds at higher levels, which go into deferred maintenance investments balanced against new construction projects. In the postsecondary education category, Nebraska has matching provisions for state bonds for deferred maintenance. Kentucky does this also, but does not finance it on an ongoing basis. In the early 90s, Minnesota started a sustained funding of deferred maintenance for postsecondary education, which provides more predictability for each budget.
Senator Boswell stated that sometimes asset preservation is more expensive than actually building a new facility. Mr. Hayek added that a good example of this is the Capital Plaza Tower. He said each project needs to be addressed individually. Mr. True stated that training for maintenance crews would help buildings last longer.
Mr. Mullis reminded the Board that the next meeting would be held on October 9 in Room 169 of the Annex starting at 1:00pm. He then briefly discussed the recommendation process for the statewide plan recommendations.
Mr. Hintze made a motion to add the Staff Report on Kentucky’s Bonded Indebtedness as an appendix in the 2010-2016 Statewide Capital Improvements Plan. The motion was seconded and approved by voice vote.
There being no further business, the meeting adjourned at 3:14pm.