The Capital Projects and Bond Oversight Committee met on Tuesday, February 20, 2007, at 1:00 PM, in Room 113 of the Capitol Annex. Senator Elizabeth Tori, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Elizabeth Tori, Co-Chair; Representative Mike Denham, Co-Chair; Senator Jerry Rhoads; and Representatives Steven Rudy and Jim Wayne.
Guests testifying before the Committee: John Hicks, Governor's Office for Policy and Management; Jim Abbott and Nancy Brownlee, Finance and Administration Cabinet; Shelby Lawson, Jr., Kentucky State Police; Dr. Steven Davis, Department for Public Health; Sandy Williams, Kentucky Infrastructure Authority; and Terri Fugate and Tom Howard, Office of Financial Management.
LRC Staff: Nancy Osborne, Pat Ingram, Shawn Bowen, Kristi Culpepper, and Lesa Prewitt.
Senator Tori asked Nancy Osborne, Committee Staff Administrator, to review the correspondence and information items included in members' folders. Ms Osborne said three items of correspondence were provided for members in response to questions raised by the Committee at its January meeting: from the Department of Financial Incentives, Cabinet for Economic Development, relating to county minimum wage requirements; from the School Facilities Construction Commission regarding its role in the issuance of state and local school bonds; and from the Division of Real Properties, Finance and Administration Cabinet, relating to the insurance claim associated with the September 2006 flooding of leased space at Building #3 Ash Complex located in Frankfort. Also included as correspondence was the Kentucky Lottery Corporation's monthly financial report for December 2006.
Ms. Osborne then discussed information items included in members' folders, including the monthly staff update on various capital projects and a report on proposed legislation relating to the jurisdiction of the Capital Projects and Bond Oversight Committee. She also noted that Northern Kentucky University is in the process of promulgating the administrative regulation required under 1982 HB 622 (codified at KRS 164A.555 to 164.630) to elect to manage its own capital construction program. Currently, there are four postsecondary institutions that have made this election: University of Kentucky (1990), University of Louisville (1992), Murray State University (1998), and Western Kentucky University (2003). The Finance and Administration Cabinet manages the capital construction programs of Eastern Kentucky University, Kentucky State University, Morehead State University, and the Kentucky Community and Technical College System.
Other information items included a staff update to the Committee on the 2007 Private Activity Bond Cap allocated by the Kentucky Private Activity Bond Allocation Committee; a report of the reimbursement of $1,000,000 to the Capital Construction and Equipment Purchase Contingency Account from the Commerce Cabinet, Kentucky Sports Authority (the allocation for a feasibility study for a new Louisville Arena was reported to the Committee in September 2005); and the monthly and weekly debt issuance calendar. The last two items were a staff update on interim financing of capital projects through the sale of a $100 million tranche of Project Notes on January 25, 2007, and a report dated January 19, 2007, by Standards & Poor's and Moody's Investor Services which affirmed their respective Kentucky issuer credit ratings and their upward revisions of the outlook for Kentucky's credit rating.
Senator Tori asked John Hicks, Deputy Budget Director, Governor's Office for Policy and Management (GOPM), and Jim Abbott, Commissioner, Department for Facilities and Support Services, to present the monthly project report submitted by the Finance and Administration Cabinet. Mr. Hicks first discussed an unbudgeted $990,000 federally funded project for the Kentucky State Police (KSP) entitled Upgrade Statewide Communications System - 2. This project will involve the purchase of radio repeater/base station equipment, test equipment to optimize and repair the system, and equipment necessary to complete the associated tower work.
Mr. Hicks said last year KSP undertook a $3.1 million federally funded project for the first upgrade of KSP's communications system. The second upgrade, being reported today, will provide further upgrades to the system and will also be funded with federal Homeland Security funds. He noted that no state match was required.
In response to Representative Wayne's question as to whether this upgrade will complete the project, Lt. Colonel Shelby Lawson, KSP, responded that if any additional funds are needed, the KSP will apply for additional federal Homeland Security grants.
Representative Wayne asked if there were any local costs associated with this project. Lt. Colonel Lawson responded that there are no local costs involved with this project; the KSP will be responsible for the total cost of the project.
Representative Denham made a motion to approve the KSP project. The motion was seconded by Senator Rhoads and passed by unanimous roll call vote.
Mr. Hicks next reported the allocation of the $10,000,000 Health Departments Infrastructure Pool. The Health Departments Infrastructure Pool was established by the 2006 General Assembly to address construction, expansion, and renovation needs of aging and outdated local health departments throughout the state. The Pool is administered by the Department for Public Health (DPH).
Mr. Hicks noted that although the budget language requires reporting of projects costing over $400,000 from the Pool, today's report included all allocations. He said several allocations were for the maximum amount of $500,000 that was available for each grantee.
Representative Rudy asked how many applicants applied for funding. Dr. Steven Davis, Commissioner of the Department for Public Health, said 45 applicants of the total 56 administrative units representing Kentucky's 120 counties applied for funding. Of those applicants, 24 were selected to receive funding.
Senator Tori said project allocations over $400,000 from the Pool must be reported to the Committee, and no further Committee action was required.
Mr. Hicks next reported the allocation of $562,000 from the Department for Facilities and Support Services Maintenance Pool for a project entitled EM Fenestration Upgrade 2006. Mr. Hicks said this project will involve the repair, restoration, and replacement of windows and exterior doors in the Governor's Mansion.
Representative Wayne asked if this amount will be sufficient to replace all the windows. Mr. Hicks responded that when a renovation is done on a structure that is of this age, it was always uncertain what types of construction issues may be encountered. However, there is a contingency built into the project budget that would be available to address issues that may be discovered when the work begins.
Senator Tori asked when the renovations are expected to be complete. Mr. Abbott responded that the window replacement project should be completed by June 2007. He noted the HVAC portion of the project had already been completed.
Representative Wayne inquired about the participation in the restoration project by the Governor's Mansion Preservation Foundation, a private non-profit 501(c) (3) entity, which was to raise private funds for the renovation. Mr. Abbott responded that private funds were being raised and applied to portions of the overall renovation project, but that the HVAC and window/door replacement projects were being undertaken with state funds and managed by the Finance and Administration Cabinet.
Representative Wayne asked whether funds were being allocated from the Cabinet's maintenance pool because the amount appropriated by the General Assembly was insufficient. Mr. Hicks said that was effectively the case.
Representative Wayne further inquired about the remaining balance in the Cabinet's $7.5 million maintenance pool after this allocation. Mr. Abbott responded that a number of projects had been undertaken from that pool, some of which were under the $400,000 threshold and some over. He said he would provide the Committee with more information on the use of the Cabinet's maintenance pool.
Senator Tori said when an additional $90,000 was allocated in the 2006-08 budget for this project, it was her understanding that the remaining funds needed would come from private donations or efforts would be made to obtain private donations. No Committee action was required for this report of the maintenance pool allocation.
With a quorum being present, Representative Denham made a motion to approve the minutes of the January 16, 2007 meeting. The motion was seconded by Representative Wayne and passed by voice vote.
Representative Denham introduced several guests who were attending the meeting.
Senator Tori asked Nancy Brownlee, Director of the Division of Real Properties, to discuss four lease reports. Ms. Brownlee reported a new lease for the Personnel Cabinet, Deferred Compensation Authority (PR-4830), in Franklin County. She said the Deferred Compensation Authority needed supplemental space for the expansion of its existing programs located at 107 Sea Hero in Frankfort. The agency's space request indicated a need for 13,134 square feet (SF) and the lessor had a suite available in the same complex containing 13,091 SF. The Division of Real Properties attempted to secure that space at Personnel's existing $7.95 per SF rental rate but the required renovations to the new space necessitated an $8.50 per SF rental rate proposed by the lessor. This rental rate is the same rate assessed for space currently leased by the Department of Housing, Buildings and Construction in the same building.
Ms. Brownlee said the Deferred Compensation Authority's annual rental rate for this lease will be $111,274 for a term of seven years. It is anticipated that the space will be ready in April, as renovations will take approximately 60-90 days to complete. Once this action is completed, the existing lease for the Deferred Compensation Authority (PR-4318) will be cancelled.
Senator Tori asked Ms. Brownlee why this project did not go through the normal bidding process. Ms. Brownlee said there are three different state agency leases in the complex, and the Deferred Compensation Authority wanted to remain in the complex rather than relocate to new leased space. She explained that the lessor had space available and could make the accommodation for the agency to expand into the space, but because the space required additional renovations, the lessor wanted to raise the rental rate. Also, because of programmatic issues and its central location, the agency preferred to remain at the Sea Hero complex.
In response to another question from Senator Tori, Ms. Brownlee said when agencies request additional space, rather than advertise for that space, in the past leases have been modified to include additional space in the same building. She said had the space not been available at the same complex, they would have advertised this lease. Representative Rudy made a motion to approve the new lease. The motion was seconded by Representative Denham and passed unanimously by roll call vote.
The second item Ms. Brownlee addressed was the report of a lease renewal for the Unified Prosecutorial System in Jefferson County. The agency is renewing its lease with the Louisville Metro Government at an annual cost of $313,838. She said the lessor originally requested a rate increase to $18.28 per SF during efforts to renew the lease in 2006, but due to several unaddressed maintenance issues cited by the using agency, the lessor agreed to extend the lease at the same term ($15 per SF) for a six-month period and address the problems. The maintenance issues were completed in fall 2006, and after negotiating with the lessor the State agreed to a renewal rental rate of $16.55 per SF effective January 1, 2007, for a term of three years. The lessor, Louisville Metro Government, is a political subdivision of the Commonwealth and, in accordance with KRS 56.805(20), the Division of Real Properties is not required to advertise as a result of the request for a rate increase.
Senator Tori asked if the cost of this lease included utilities. Ms. Brownlee responded that the cost of the lease did include utilities. She said the average $11.59 per SF does not include utilities and it is an overall base rate for Jefferson County office space that includes all leases for office space in Jefferson County, some of which are potentially 6-8 years old. Ms. Brownlee said she reviewed several more recent lease agreements in Jefferson County to better compare current rates, and in 2006 four leases were renewed with rates ranging from $14 - $17 per SF including utilities.
Representative Denham made a motion to approve the lease renewal report. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
Ms. Brownlee next discussed a lease modification report for the Department of Corrections, Division of Probation and Parole (PR-2968), in Oldham County. She said this lease modification will amortize $1,310 for improvements to increase office security and control access to various areas of the building. The cost of the renovations will be amortized over the remaining lease term which ends June 30, 2008. No action was required by the Committee for this project.
Ms. Brownlee next reported three leases with square footage modifications for the period of October through December 2006. She said the report reflects a net increase of 5,212 SF in the amount of office space leased and an increase of $47,396 in annual rent. No action was required by the Committee for this report.
Senator Tori next welcomed Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority (KIA). Ms. Williams said members’ folders included information regarding 51 projects representing grants that were funded through line items of the General Assembly from the 2003 through 2006 sessions. No action was required from the Committee.
The next report was provided by Tom Howard, Executive Director, Office of Financial Management (OFM), and Terri Fugate, Deputy Executive Director, OFM. Ms. Fugate presented one new bond issue report: Kentucky Housing Corporation (KHC) Single Family Housing Revenue Bonds, 2007 Series E & F, not to exceed $120 million. The proceeds of the bond issue will be used to provide mortgage financing for first-time low and moderate income Kentucky homebuyers.
Ms. Fugate said they are requesting approval to issue the balance of the $200 million in bonds authorized by the KHC Board of Directors in December 2006. She said $80 million of the $200 million authorized by the KHC Board, Series C ($50 million) and Series D ($30 million), were issued in early February and will be reported to the Committee as a follow-up report in March.
Mr. Howard added that KHC made approximately $500 million in single family loans last year. He noted that KHC's statutory debt cap is $2.5 billion, and as of last month, KHC had over $1.8 billion outstanding. He said HB 262, which has been introduced in this Session of the General Assembly, would effectively raise KHC's debt cap to $5 billion.
Senator Tori asked Mr. Howard what was the average dollar amount for a single family housing loan. Mr. Howard estimated that the average single family housing loan is approximately $100,000.
Representative Denham asked Mr. Howard how the yield curve and an improvement in the state's bond rating would affect interest rates. Mr. Howard said the flat yield curve is positive for financing projects. He explained that when the proceeds from bond issues are invested, the state has either a positive carry or a carry equal to the cost of funding until that money can be completely spent. Mr. Howard said a change in the state's bond rating outlook is favorable for the state and noted in the marketplace, as the rating agencies have noted several trends over recent years such as budget balancing measures and the commitment to replace and build-up reserves. He said it is always better to have improving credit as opposed to credit that is not improving.
In response to another question from Representative Denham, Mr. Howard said that the interest rate market had been very volatile in the past, and OFM actually used some hedges in January 2006. At one point in time, those hedges were worth a lot of money as interest rates increased in conjunction with the Federal Reserve raising rates. He said rates have decreased now and the state is still near the lower end of the interest rate spectrum.
Representative Rudy made a motion to approve the new bond issue. The motion was seconded by Representative Wayne and passed by unanimous roll call vote.
Senator Tori asked if state bonds that had lost value due to interest rate increases will regain value within the next eighteen months. Mr. Howard responded that the state experienced a period of time where longer term interest rates rose, but they have since come back down to a level that is commensurate with an increase in value of the underlying bonds. He said they are close to all time lows as far as interest rates are concerned, so the bond market appears to be fully valued on the long and intermediate ends. Mr. Howard said if the Federal Reserve sees the economy starting to slow they will begin to lower those short term rates, which may produce a steeper yield curve. He said in terms of the state's financing in general, these current rates are exceptionally attractive.
Ms. Fugate next presented one follow-up report for a previously approved bond issue: KHC Single Family Housing Revenue Bonds, 2007 Series A & B, $77,545,000. This bond issue was approved by the Committee at its November 2006 meeting, and no further Committee action was required.
Ms. Fugate presented six new school bond issues with School Facilities Construction Commission (SFCC) debt service participation: Floyd County, Franklin County, Lewis County, Muhlenberg County, Oldham County and Scott County.
Senator Rhoads made a motion to approve the school bond issues. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
Ms. Osborne said there were five locally-funded school bond issues submitted to the Committee for review this month: Boone County, Grant County, Paducah Independent (McCracken Co.), Russell County, and Whitley County. She said all disclosure information has been filed, and no further action on the bond issues is required.
With there being no further business, the meeting adjourned at 1:45 p.m.