Call to Order and Roll Call
The fourth meeting of the Capital Planning Advisory Board was held on Friday, August 26, 2011, at 10:00 A.M., in Room 113 of the Capitol Annex. Representative Melvin Henley, 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 Paul Hornback, Representative Ron Crimm, David Buchta, Charles Byers, Laurie Dudgeon, Ben Fletcher, Carole Henderson, John Hicks, Bill Hintze, F. Ryan Keith, Mary Lassiter, Mark R. Overstreet, and Katie Shepherd.
Guests: John Covington and Denise Pitts, Kentucky Infrastructure Authority; Cabinet Secretary J. Michael Brown and Dr. Tracey Corey, Justice and Public Safety Cabinet; Laurie Dudgeon, Carole Henderson, and Charles Byers, Kentucky Court of Justice; Bob Wiseman and Steve Byars, University of Kentucky; Charles Bush, Finance and Administration Cabinet, Division of Real Properties; Sherron Jackson, Council on Postsecondary Education; and Janet Lile, Commonwealth Office of Technology.
LRC Staff: Shawn Bowen, Kristi Culpepper, and Jennifer Luttrell.
Approval of Minutes July 29, 2011
Mr. Hintze noted a correction to the July minutes. On page 5, paragraph 2, the last sentence should be corrected to read “Also, the Department would like to move the Emergency Operations Center from three locations in Frankfort to the Boone National Guard Center.”
There was a motion made by Representative Crimm, seconded by Mr. Hintze, and adopted by voice vote to approve the corrected minutes of the July 29, 2011 meeting.
Information Item
Ms. Bowen said there was one information item included in members’ binders pertaining to the Department of Military Affairs’ capital plan. The agency has amended certain portions of its plan to include seven additional General Fund priorities.
Review of agency capital plans
Representatives from the Kentucky Infrastructure Authority (KIA) gave a brief overview of the agency’s capital plan. Testifying before the board were John Covington, Executive Director and Denise Pitts, Treasurer.
KIA was created in 1988 and is administratively attached to the Department for Local Government. The agency’s mission is to fund infrastructure projects across the Commonwealth. Over the six-year period, KIA proposes funding in the amount of $906,840,000 for its loan and grant programs. Of this amount, $338,640,000 is General Funds, $193,200,000 is Federal Funds, and $375,000,000 is Agency Bonds.
In response to questions from Representative Henley, Mr. Covington said KIA can only fund projects for public governmental agencies, and most of the requests for broadband projects come from municipalities. KIA has funded broadband projects in Glasgow, Hopkinsville, and in the Green River Area Development District.
Noting recent concerns with the federal debt ceiling, Representative Henley asked if KIA anticipates any changes in the amount of federal funding it receives. Mr. Covington responded that there is a trend of reduced federal funding.
In response to a question from Senator Westwood, Mr. Covington said the Fund F program receives federal funds and requires a state match of 20 percent. KIA utilizes the funds to make loans to governmental agencies; the loan repayments from these agencies are then used to make loans of a similar nature to other utilities or systems.
In response to a question from Senator Westwood regarding an increase in Environmental Protection Agency (EPA) requirements for infrastructure projects, Mr. Covington explained that many of the water treatment plants are aging facilities in need of replacement and, in some cases, complying with EPA standards may require the facilities be upgraded.
In response to comments from Representative Henley regarding the use of outdated water treatment methodologies, Mr. Covington said there was a period of time in the 60s and 70s when the EPA encouraged innovation and new technologies for new water treatment plants. Some of those technologies worked and some did not, and most of those plants built using innovative technologies have either been replaced or taken out of service.
The next plan to be reviewed was for the Justice and Public Safety Cabinet. Representing the Cabinet were Secretary J. Michael Brown and Dr. Tracey Corey, Chief Medical Examiner. Secretary Brown gave a brief overview of the Cabinet’s capital plan, noting that the Kentucky State Police (KSP) had recently amended its capital plan. KSP has changed its number two priority from the “Construct Kentucky State Police Training Center” project ($34,683,000) to the “Renovation of New Academy Buildings and Grounds” project ($5,000,000).
KSP had initially planned to build a new training facility; however, with the recent closing of the Frankfort Career Development Center, KSP will assume title to the facility from the Department of Corrections and convert it to a training facility. The renovations are expected to cost $5,000,000 and will save the state approximately $29,000,000. The training center site is approximately 362 acres, and the renovations will be completed in phases.
Secretary Brown said the downward trend in the prison population, and the passage of House Bill 463 by the 2011 General Assembly, were cited as factors in the decision to close the Career Development Center. Employees were relocated to other facilities and the inmate force that provides the governmental service programs in Frankfort is operating out of Blackburn and the Franklin County Jail.
In response to questions from Senator Westwood, Secretary Brown said the Frankfort Career Development Center does not house inmates with substance abuse problems. Those inmates are housed in other facilities and jails throughout the state. The Frankfort facility houses the Department of Corrections’ minimum security population.
In response to a question from Representative Crimm regarding the use of inmates for carpentry work at state parks, Secretary Brown said the Department of Corrections administers programs whereby inmates work in the community. However, before a decision is made to place inmates in community work programs, the Department must perform a risk analysis and determine the transportation and security needs.
In response to a question from Representative Henley, Secretary Brown said the inmates in community work programs do not come from medium or high level security prisons, but from minimal security facilities. He said some of the issues with utilizing this kind of labor can be solved if the agency requesting the work pays the cost for transportation and security.
Secretary Brown next discussed the Cabinet’s number one priority, the construction of a $20,130,000 medical examiner’s office and crime lab in Jefferson County. KSP currently maintains leased space for a crime lab in Jefferson County. KSP did over 12,000 cases last year and the demand for cases in crime labs has risen. The most efficient way to meet this demand would be to co-locate the crime lab with the medical examiner's office. Many times they do not know if the cases that come into the medical examiner's office will develop into a criminal case, and combining these two offices will save a great deal of time and effort.
Dr. Corey said the Medical Examiner Division of the Justice and Public Safety Cabinet has four regional offices located in Frankfort, Ft. Thomas, Madisonville, and Louisville. There are a myriad of problems with the Louisville facility, including its location – on the seventh floor of a public building. Other issues with the facility include inadequate space due to high caseloads, HVAC problems, lack of privately controlled access, and roof leaks.
Mr. Hintze said when the state built the central lab in Frankfort, the State Police Central Crime Lab and the medical examiner’s Frankfort office were co-housed with the lab. When the central lab opened in the early 90s it was a national model. Mr. Hintze said the Louisville medical examiner’s office serves the state’s largest, most populous county, as well as a disproportionate number of jurisdictions throughout the state, and it is time to build a professional publicly-owned facility to house the medical examiner’s office.
Senator Westwood said it makes sense to put the medical examiner’s office and the crime lab together, as it would better facilitate the flow of information between the two agencies. He inquired as to whether any of the scientific evidence being processed could be at risk of loss because the two offices are not co-housed. Secretary Brown said the staff maintains a high degree of professionalism, and the scientific evidence being processed is not at risk. There could, however, be a delay in processing evidence due to the current space limitations of the facility. This delay in turn could cause a backlog at the trial court level.
In response to a question from Mr. Hicks, Dr. Corey said work space is very limited. The Medical Examiner Division occupies about 15,000 square feet through a free lease with the Louisville Metro Government. The Division is located in an old hospital and a lot of the space is hallway space, which is not usable due to fire codes. Dr. Corey said the Medical Examiner Division needs about 24,000 square feet in a new facility.
The next plan to be reviewed was for the Kentucky Court of Justice. Representing the Court of Justice were Laurie Dudgeon, Director, Administrative Office of the Courts (AOC); Carole Henderson, Budget Director, AOC; and Charles Byers, Chief Information Officer, AOC. Ms. Dudgeon said over the six-year period, the Court of Justice plans to request funding for six new judicial center projects. Projects are planned for Nicholas and Henry counties in 2012-14, Bath and Lee counties in 2014-16, and Fulton and Owsley counties in 2016-18.
Ms. Dudgeon discussed the Court of Justice’ number one priority, the E-Case and Docket Management System ($28,132,000). Funding for this three-phase project is also proposed in 2014-16 ($20,166,000) and 2016-18 ($14,650,000). The current case management system supports all 120 counties, and is over 20 years old. This system is well beyond its life expectancy and is functionally and technically obsolete. Both COT and the National Center have recognized the consequences of a catastrophic system failure, and have recommended replacement of the system as a high priority.
In response to a question from Mr. Hicks, Ms. Dudgeon said there are several state courts that have successfully transitioned from a patchwork system to an integrated system. Mr. Byers said Arkansas, Missouri, Oklahoma, and New Mexico are states either in the process of transitioning or have transitioned to an integrated casework system.
Staff Report on Kentucky’s Bonded Indebtedness
Kristi Culpepper, Committee Staff Administrator for the Capital Projects and Bond Oversight Committee, discussed a report on the state's debt position as part of the capital planning process. In summary, the report noted that Kentucky’s near-term financial picture has improved since the economic downturn. Revenues have returned to pre-recession levels and the state has begun replenishing the Budget Reserve Trust Fund. Kentucky has been penalized by the rating agencies, however, for a number of financial practices. Policymakers have enacted a series of structurally-imbalanced budgets that use non-recurring resources to offset recurring expenditures. The state has a large debt burden relative to other states using various debt indicators. Finally, the state has low pension funding levels that are expected to decline further. These issues will limit the resources available to support additional borrowing.
Senator Westwood noted that the state is currently under the six percent guideline, which calls for debt service on appropriation-supported debt to be no more than six percent of total General Fund, Road Fund, and Restricted Fund revenues. He asked if the six percent figure takes into account the debt restructuring transactions the state accomplished in FY 2011. Ms. Culpepper responded that the six percent ratio compares the state's debt service to revenues and the figure takes into account the debt restructuring transactions. She added that restructuring debt extends the state’s current debt service out to some future date. While this action reduces the state’s current commitments, it does not reduce the state’s long-range commitments.
Senator Westwood asked if agency bonds issued by the universities count against the state’s bond rating. Ms. Culpepper said the state has an intercept program in place and rating agencies, such as Moody's, view the intercept program as a credit enhancement the state is providing to the universities. If there is a situation where the universities will not be able to make a debt service payment, the state would intercept funds to make that payment on the universities’ behalf. The rating agencies recognize that there is some level of support there, but at the same time, it is not the same kind of commitment as general funds. The universities are treated as distinct credits by the rating agencies. All universities have underlying ratings from the rating agencies, and the ability to assume additional leverage depends on the characteristics and market position of each university.
Ms. Lassiter noted that the report was a comprehensive overview of the state’s past financial position and the implications of that. She said the state will continue to struggle budgetarily for several years and actions that the state has taken to weather the storm have increased its burden in the out years.
Ms. Lassiter said things are beginning to improve and, at the end of FY 2011, for the first time, the state made the largest deposit to its Rainy Day fund. Debt restructurings have been done in the last two budgets. Kentucky was not the only state that restructured its debt for budgetary relief. The restructuring was done to keep from cutting education, healthcare, and public safety more than necessary. Had the state not restructured its debt to lessen its obligations in the current period, and elected to use that money for something frivolous, that would have been viewed as negative from the rating agencies. The rating agencies acknowledge a good public policy reason for debt restructuring in troubled times.
Ms. Lassiter said the six percent rule is a Kentucky-only guidepost. The rating agencies have their own metrics they use to evaluate the state’s financial position. Those metrics include variables such as the state’s ability to respond to changes in the economy, whether the budget is structurally balanced, and the state’s debt position.
Mr. Hicks said the report provides a good historical framework. He said Kentucky has chosen not to put a lot of cash in capital projects, so the use of debt has become a primary source of funding. In reference to Table 4 on page 9 of the report, New Appropriation-Supported Debt Authorized in 1984-2012, Mr. Hicks noted that about 14 years ago the state began issuing more debt to support higher education and water and sewer infrastructure projects.
Mr. Hicks said rating agencies view the Commonwealth as whole then take into account the projects, and whether those projects generate revenue. In addition, rating agencies also review the economic status of the state.
Relative to Mr. Hicks’ comments regarding agency bonds as a moral obligation of the state and the school intercept program, Ms. Culpepper said there is a lot of moral obligation debt of the Commonwealth, such as the school intercept and the Kentucky Housing Corporation, that is not included in the six percent calculation. The six percent ratio does not necessarily mean that all of the debt captured there is supported by the same kinds of revenues and has the same kind of commitment.
Discussion - Statewide Plan Project and Policy Recommendations
Representative Henley said it is the practice of this board to include both policy and project recommendations in the statewide capital plan. The first three policy recommendations are based on discussions from meetings held this year. The last three policy recommendations are standard recommendations that have been included in past plans.
Relative to the policy recommendation to amend the current leasing statutes in 2012, Mr. Bob Wiseman, Vice-President for Facilities at the University of Kentucky, said the leasing statutes are well written and work fine when generic office space is being leased. However, some of the issues the university has with the current leasing laws include the 30-day cancellation clause, the advertising requirements, and the initial eight-year lease term. Medical and scientific facilities are unique in nature, and the university, when leasing this type of space, must utilize an exceptions clause contained within the statutes. In a public environment of accountability and transparency, requesting an exception to the current lease laws may create the appearance that the university is doing something that is not permissible.
Mr. Hicks said there has been an initial meeting with the Finance and Administration Cabinet, LRC staff, and other staff from the Office of State Budget Director to discuss this issue, and they are committed to continuing those discussions. Representative Henley said it may be a good idea for UK to work with staff of the Finance and Administration Cabinet to address the leasing issues and pursue legislative changes later.
In response to a question from Senator Westwood, Mr. Wiseman said there are occasions where sole source vendors should be recognized, particularly when leasing medical and scientific facilities.
Relative to the issue of maintenance and operational (M&O) funding related to agency bond projects, Steve Byars, Director of Government Relations, UK, said the university does not request M&O funding for agency bond funded projects. Funding for operational costs is built into the project budget.
In response to a question from Senator Westwood, Mr. Hicks said none of the universities request M & O funding for their agency bond funded projects.
Charles Bush, Director of the Division of Real Properties, Finance and Administration Cabinet, addressed the board regarding the potential policy recommendation to amend certain state leasing statutes. He said Finance Cabinet staff has met with the universities regarding this issue and they believe there are tools within the current statutes that would address the problems outlined here today. He said the staff is very comfortable working with the universities regarding this issue under the current leasing statutes.
Representative Henley said the next recommendation relates to the Council on Postsecondary Education (CPE). CPE is requesting the board's support for its new multi-biennia approach for financing capital needs for postsecondary institutions. He introduced Sherron Jackson, Associate Vice President of Budget, Planning, and Policy, CPE, to further discuss the issue.
Mr. Jackson said this new strategy is a unique concept that will allow CPE and the postsecondary institutions to address critical needs noted in the 2007 VFA Study. The new model would recommend that a pool of funds be established and administered by CPE, and funding be done in terms of an allocation of dollars to each university rather than all funds authorized on a per-project basis.
In response to a question from Representative Henley regarding the allocation of funds for Morehead and Murray, Mr. Jackson said the report that was developed by VFA, and the contractors reviewed all of the education and general facilities on the campus. Based on the age of the facilities and the time frame in which those facilities may or may not have been renovated and brought up to code, there appeared to be a need to address the existing facilities to a greater extent than it would be to expand the size of the campus solely based on the student body.
Ms. Lassiter said this board has held deferred maintenance as a priority for many years. The issue of deferred maintenance funding is not unique, and currently there is a study being conducted of primary and secondary schools throughout the state to determine what the needs are as well.
Ms. Lassiter noted that CPE’s new strategy calls for postsecondary capital funding decisions to be made by CPE and the institutions. Historically, these decisions have been made by the General Assembly. She encouraged CPE to discuss this process further with members of the General Assembly.
Mr. Jackson said since the early 1990s, the Executive Branch and the General Assembly have preferred to fund maintenance pools or have provided moneys in a pool predicated on a list of projects that have been identified from which the institutions have been able to spend those dollars without it being a line item in the budget. In this proposal, CPE would envision the same thing, except in this case, the Council wants to ensure that some of the expenditures for postsecondary education are directed towards asset preservation rather than new and expanded projects.
Representative Henley next discussed a policy recommendation relating to the Commonwealth Office of Technology (COT). As part of the capital planning process, COT reviews the information technology projects submitted by agencies. COT has requested that the board endorse its recommendation that information technology, or IT planning, should emphasize an approach that considers the Total Cost of Ownership (TCO). TCO which takes into account items such as servers, data storage, network, and communications, most of which would be delivered for state agencies by a central source as an operating cost. He introduced Janet Lile, Executive Director, COT, to further discuss the recommendation.
Ms. Lile said the maintenance, upkeep, and operating costs for IT systems are very important to consider before implementing an IT project, and it is a disservice to state agencies when a capital project is approved and they do not allow for the inclusion of operating costs upfront. To better formulate project cost estimates, COT has developed a form that will assist agencies identify the TCO for IT systems when preparing agency budget requests.
Mr. Hicks said steps are being taken to include the TCO in project cost estimates. The IT form for the capital planning system was revised this year to include the TCO over a five-year period. Also, the LRC budget instructions for the upcoming biennial budget include instructions for determining the TCO for all capital projects, not just IT.
In response to a question from Representative Henley, Ms. Lile said the state maintains contracts with independent companies that evaluate and provide ratings for hardware and other type of IT products available for purchase.
In response to a question from Mr. Overstreet, Ms. Lile said in the past, technology systems were sometimes contained to individual areas, such as an employee’s desktop or within their work areas. Now, due to the expansion of Internet and broadband service, the exchange of information is widespread.
Representative Henley said the three remaining recommendations have been included in past plans. Those recommendations include a study of the state’s debt policies and practices, funding for the Budget Reserve Trust Fund, and adequate funding for state agency maintenance pools.
Ms. Bowen next discussed the voting process for member project recommendations. The voting sheets will be e-mailed to members after the August 26 meeting. Responses are due September 9 and will be included in the meeting materials for the September 23 meeting.
With there being no further business, Representative Crimm made a motion to adjourn the meeting. The motion was seconded and the meeting adjourned at 12:00 P.M.