The Capital Projects and Bond Oversight Committee meeting was held on Tuesday, June 19, 2007, at<MeetTime> 1:00 PM, in Room 169 of the Capitol Annex. Senator Elizabeth Tori, Chair, called the meeting to order.
Present were:
Members: Senator Elizabeth Tori, Co-Chair; Representative Mike Denham, Co-Chair; Senator Jerry Rhoads; and Representatives Robert Damron and Steven Rudy.
Guests testifying before the Committee: John Hicks, Governor's Office for Policy and Management; Donald Storm, Department of Military Affairs; Nancy Brownlee, Ken Marks and Paul Gannoe, Finance and Administration Cabinet; Bob Wiseman, Christine O'Brien, and Lance Broeking, University of Kentucky; Larry Blake, Northern Kentucky University; Tom Bloemer, Department of Agriculture; Sandy Williams, Kentucky Infrastructure Authority; Terri Fugate and Tom Howard, Office of Financial Management; and Dennis Humble, Kentucky Housing Corporation.
LRC Staff: Nancy Osborne, 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 there were three items of correspondence: correspondence from the Department of Commercialization and Innovation reporting three grants exceeding $400,000 from the High Tech Investment Pool for AllTranz LLC, Celerity Automation Inc., and ConnectKentucky; and correspondence from the University of Kentucky and the University of Louisville regarding the purchase of unbudgeted scientific research equipment.
Ms. Osborne then briefly reviewed various items in the monthly Staff Update. She noted that the Supreme Court has decided to hear the Davis v. Department of Revenue case which could occur during its fall term beginning October 1, 2007. [In this case the Kentucky Supreme Court decided not to review a lower court ruling, therefore letting stand the decision that Kentucky's method of taxing out-of-state municipal bonds while exempting in-state municipal bonds violated the commerce clause of the U.S. Constitution.]
Ms. Osborne also noted the groundbreaking of a Judicial Center in Boyd County. This is one of 18 court facility projects authorized in the 2004-06 budget. Another 17 projects were authorized in the 2006-08 budgets. Also noted were the following items: the groundbreaking of the University of Kentucky's new Albert B. Chandler Hospital and the University's purchase of Samaritan Hospital; a $23 million contract to IBM to implement a new Kentucky Human Resource Information System; the construction of a new Dam No. 9 on the Kentucky River in Jessamine County; and renovated tennis courts at several state parks.
Senator Tori noted that a quorum was present and asked that the secretary take the roll. Representative Damron made a motion to approve the minutes of the May 15, 2007meeting. The motion was seconded by Representative Denham and approved by voice vote.
Senator Tori asked John Hicks, Deputy Budget Director, Governor's Office for Policy and Management (GOPM), and Ken Marks, Deputy Commissioner, Department for Facilities and Support Services, to present the monthly project report submitted by the Finance and Administration Cabinet.
Mr. Hicks reported an unbudgeted project for the Department of Military Affairs to construct a Joint Operations Center in Laurel County. The Joint Operations Center will consolidate administrative and support operations for the Counter Drug Program that are currently located in leased space in Frankfort, Lexington (Bluegrass Station), and London. The project scope, $1,922,300, is 100% federally-funded.
The Center will be located at the London Airport, where Military Affairs leases ten acres of land for $1.00 a year. Mr. Hicks added that the increased operating costs of the Department of Military Affairs the new facility will be entirely offset by the cancellation of the current leases.
In response to questions from Representative Damron, General Donald Storm, (Ret), Department of Military Affairs, said the lease of land is state-funded. He noted that once the lease at Bluegrass Station in Lexington is cancelled, there will be another entity ready to occupy the space.
Representative Damron asked if there are any plans for future development at the Joint Operations Center. General Storm said additional phases of development, all federally-funded, are included in the agency's long-range plan. He said Phase II would include construction of an aircraft hanger, and Phase III would include construction of a maintenance facility.
In response to questions from Representative Damron, General Storm said the London airport's runway is approximately 6,500 feet in length, is the third largest runway in the state, and can handle commercial aircraft. He added that enough property is available for a commercial terminal as well.
Representative Denham made a motion to approve the project scope for the Department of Military Affairs, Construct Joint Operations Center project. The motion was seconded by Representative Rudy and passed by unanimous roll call vote. The revised scope is $1,922,000.
Mr. Hicks next reported an allocation of $5,760,000 from the Capital Construction and Equipment Purchase Contingency Account for the Kentucky Horse Park Indoor Arena project. He said this project has received to date $38.4 million in state funds for the planning, design, and construction, with the most recent appropriation being from the 2006 General Assembly.
Mr. Hicks said the bids received were significantly over the cost estimate, and this Contingency Account allocation will be used to award the low base bid and the bid alternates for all 5,600 permanent seats including nine private suites. The major reason for the difference between the estimate and the low bid revolved around the quantity of steel and concrete materials that were needed for the building more so than the price of those materials.
Mr. Hicks said the $5,760,000 Contingency Account allocation will enable the project to move forward on its planned schedule. He noted this will be the largest Contingency Account allocation in its history. The largest allocation previously was $3 million for the Pike County Civic Center. Mr. Hicks said in the 2007 Session, the Governor had proposed $4 million in additional funding for the Indoor Arena project, mainly to expand the amount of exhibit space that was deemed necessary. This Contingency Account allocation will not finance any part of that exhibit space.
In response to a question from Representative Denham, Mr. Hicks said in addition to the 5,600 permanent seats in the arena, another 3,600 floor seats can be added for other events.
Representative Denham inquired about the arena's layout. Mr. Paul Gannoe, Director, Division of Engineering and Contract Administration, Department for Facilities and Support Services, said he would see that the Committee receives a copy of the floor plan. Mr. Gannoe said the design addressed the needs of the Horse Park for the international competitions and also included the rounding of the arena floor to allow for different uses such as rodeos. Representative Denham said he was concerned that the arena be designed to accommodate not only the games, but future shows also.
Representative Denham noted that if this allocation is approved, the Contingency Account will have a historically low balance. He asked if there will be sufficient funds remaining to address future cost overruns given the large amount of projects authorized in 2005 and 2006. Mr. Hicks said in the 2006-08 budget, a new provision was added that enabled a draw down from the General Fund Surplus Account or the Budget Reserve Trust Fund if the Contingent Account funds are deemed insufficient. He added that they would be mindful of the balance of those accounts as they look to the next biennial budget process. There will likely be a need to return to the practice of a biennial deposit of funds into the account, which has been the case since its inception in the late 1970's. Mr. Hicks said in the short run, there is a mechanism to make available additional funds if the Contingency Account or the Emergency Repair and Replacement Account are deemed insufficient.
Representative Damron asked if the Governor had issued an emergency executive order funding to design the outdoor stadium. Mr. Hicks said the Governor and Secretary Ward of the Commerce Cabinet decided to revise allocations from the $35 million Parks Renovation Pool (2004-06 budget) to devote $900,000 to the initial design phase of the outdoor stadium so that it would be ready to move upon authorization of construction funding. Mr. Gannoe said the total project cost is estimated to be $24 million.
Representative Damron asked how many additional resources the state had obligated to the 2010 World Equestrian Games. Mr. Hicks said the state desires to devote another $10 million in road funds to update the road system throughout the Horse Park and add some necessary pedways that will initially be needed for the games but will also serve future events.
Representative Damron said since he represents a district in Central Kentucky, he has received calls from many citizens urging the legislature to fund projects for the 2010 World Equestrian Games. He said people need to understand that the legislature has already made a major capital investment in the games. He noted the General Assembly has already appropriated probably over half of the total of what is expected for the games and more funding requests are expected in the 2008 session.
Representative Damron asked if $75 million would be a good round figure for the amount of state funds needed for the event. Mr. Hicks said $75 million is a good figure for the needed capital investment, and there are no plans beyond the elements that have been described today on the capital side. He said the World Equestrian Games Foundation will handle the costs associated with operating the games so as not to draw down on the Horse Park's regular budget.
In response to another question from Representative Damron, Mr. Hicks said he did not know if the state or the World Equestrian Games Foundation would cover the cost of security for the games, but he would find out and let the Committee know.
Representative Denham noted that the lowest bid for the Indoor Arena project submitted by D.W. Wilburn was $38 million, yet the total project scope is reported as $44 million. He asked Mr. Hicks to reconcile the $6 million difference. Mr. Hicks said the base bid was $36,500,000, and two bid alternates for seating and the warm up barn were about $1,600,000. Additional cost components that were separately procured are chillers ($440,000), and equipment ($429,000), and a 5% project contingency budget ($1,900,000). He said separate from that is the design of the facility and related costs of $2.8 million.
Senator Tori asked if the project contingency amount, if not needed, would be returned to the State Contingency Account. Mr. Hicks said preceding a bid they normally estimate the project contingency at 10%. He said depending upon risk factors, after the construction contract is awarded, the contingency in the project budget may be reduced to 5%. A contingency is part of every construction project. The Capital Construction Contingency Account - a separate statutory entity - is the state's resource for all cost overruns.
Representative Denham made a motion to approve the allocation from the Contingency Account. The motion was seconded by Representative Damron and passed by unanimous roll call vote. The revised project scope is $44,160,000.
Mr. Hicks next reported that Northern Kentucky University plans to replace $60,000 in federal funds with $60,000 in private funds for the University's Natural Science Building project. The federal funds will now be used for programmatic expenses, and the private funds will be used to complete the planetarium space. The project scope, $40,125,000, will not change. No action by the Committee was required for this project.
Senator Tori invited Bob Wiseman, Vice President for Facilities Management; Lance Broeking, Campus Services Administrator; and Christine O'Brien, Manager, Properties Management Division, University of Kentucky (UK), to discuss two UK project reports.
Mr. Wiseman first reported an unbudgeted project to construct an Equine Isolation Facility for the College of Agriculture. Mr. Wiseman said the project scope is $1,100,000, and the funding sources are $689,000 in private funds and $411,000 in restricted funds specifically earmarked for equine research. The facility will include 12-stalls and laboratory space for infectious disease research. The new facility will be located on the UK Maine Chance Farm on Newtown Pike.
Representative Denham noted that the University plans to conduct a capital campaign to raise $10,000,000 for an equine campus at the Maine Chance farm. He asked if this facility is part of the overall project. Mr. Wiseman responded affirmatively.
Representative Denham asked when the University plans to expand the facility. Mr. Wiseman said they will expand as soon as the other $1,100,000 in private funds can be raised. He said the facility is being constructed to allow for future expansion, but there is no set timeframe as to when.
Representative Denham asked if this facility will have any connection to the diagnostic lab and will it be located in close proximity. Mr. Wiseman said it will have some connection to the diagnostic lab, but it will be isolated well within the farm given its work with infectious disease.
In response to a question from Senator Tori, Mr. Wiseman said these private funds are in-hand and they are ready to proceed with the project.
Senator Rhoads made a motion to approve the Equine Isolation Facility. The motion was seconded by Representative Rudy and passed by unanimous roll call vote.
Mr. Broeking next reported a new lease between the University of Kentucky College of Pharmacy and the University of Kentucky Federal Credit Union (PR-8303) in Fayette County. The lease has an annual cost of $137,106, which includes total renovation costs of $65,532 to be amortized over a five-year period.
Mr. Broeking said the University plans to lease 10,000 square feet of office and storage space, and the lease will run from August 1, 2007 to June 30, 2011, with a rental rate of $10 per sq. ft. for storage space and $14 per sq. ft. for office space. Mr. Broeking noted that this lease was advertised to the public. In addition to the winning bid, one proposal was received after the deadline and was not considered.
Representative Damron made a motion to approve the new lease with the University of Kentucky Federal Credit Union. The motion was seconded by Senator Rhoads and passed by unanimous roll call vote.
Mr. Wiseman noted that the Staff Update contained information pertaining to the University of Kentucky Hospital groundbreaking ceremony. He said he would like to return in August and brief the Committee as to the status of that project.
Larry Blake, Assistant Vice-President for Facilities Management, Northern Kentucky University (NKU), reported a $495,000 scope increase for the University's Construct Parking Garage #3 project. The funding source for the scope increase is surplus agency bond proceeds from a previous parking garage project. He said this garage will add approximately 876 parking spaces for the University community, and will be located directly across the street from the Bank of Kentucky Center so that it will also serve that facility during events.
Representative Damron made a motion to approve the Construct Parking Garage #3 scope increase. The motion was seconded by Representative Denham and passed by unanimous roll call vote.
Senator Tori next introduced Nancy Brownlee, Director, Division of Real Properties, to discuss four temporary emergency lease renewal reports and one new lease report. Ms. Brownlee said two agencies in Grayson County - the Cabinet for Health and Family Services, Division of Community Based Services (PR-3492) and the Department of Corrections, Division of Probation and Parole (PR-4519) - occupy space in the same facility. The leases for both agencies are being renewed as temporary emergency leases until suitable space for both agencies can be found.
Ms. Brownlee said after the project was advertised twice, CHFS advised that it would not approve the current lease arrangement under which the two agencies are housed together due to the potential for direct contact between Community Based Services' clients and offenders reporting to Probation and Parole. She said the new rate for the temporary emergency leases is $10.75 per sq. ft. through June 30, 2008, which will be $74,928 annually for PR-3492 and $22,941 annually for PR-4519. No action was required by the Committee.
Ms. Brownlee reported two temporary emergency lease renewals for agencies within the Cabinet for Health and Family Services in Butler County. The Division of Family Support Services (PR-2296) and Community Based Services (PR-3253) wish to consolidate their offices in one location. Both leases expire June 30, 2007; and rather than renew the leases individually, the leases are being renewed temporarily until suitable space can be found to house both agencies together. Ms. Brownlee said they are presently evaluating the feasibility of a facility offered by the Butler County Board of Education and will advertise the project if the Board of Education lease does not work out. The new rate for the temporary emergency leases is $10 per sq. ft. through June 30, 2009, which will be $21,840 annually for PR-2296 and $18,890 annually for PR-3253. No action was required by the Committee.
Ms. Brownlee next reported a new lease for the Department of Agriculture in Franklin County. She said the Department submitted a request to obtain 10,000 sq. ft. of combined office and lab space to use as a new state Fuels Testing Laboratory in Franklin County. The Department indicated a preference for space located in close proximity to its existing hay and grains testing laboratory that is in privately-owned lease space at 107 Corporate Drive.
Ms. Brownlee said since this lease request is atypical, the Division of Engineering within the Finance and Administration Cabinet, Department for Facilities and Support Services, retained Taylor-Whitney Architects to assist in developing plans and specifications for the facility. Advertisements for the space were run in August 2006, and the only proposal received was for new construction from Century Investments, LLC. Century Investments is a partnership owned by Jimmie Morgan, Tom Moon, Rodney Ratliff, and Art Montfort. The company proposed to build a new facility and lease 10,640 sq. ft. of space (5,818-dedicated lab space and 4,822-office and support areas) at a cost of $199,800 annually. The lease would be effective through June 30, 2011. The lessor has indicated an estimated construction time of approximately 30 weeks.
Tom Bloemer, Administrative Branch Manager, Weights and Measures Branch, Department of Agriculture, joined Ms. Brownlee at the table to respond to questions from Committee members.
In response to questions from Representative Damron, Mr. Brownlee said the state hired an architect-engineer to design the lab building and then bid the building based on those specifications.
Representative Damron asked what would have been the cost of the facility had the state built it. Mr. Bloemer said the total cost of the building was over $2 million and the equipment was $700,000.
Representative Damron asked if Century Investment Group, LLC. is providing any of the equipment for the facility. Mr. Bloemer said the lessor is not providing any equipment; the equipment will be purchased with state funds.
Representative Damron said he was looking at the cost of return to the taxpayers since they are paying for the facility. He asked if anyone has determined whether it would have been less expensive had the state built the building.
Mr. Bloemer said when the Department first started fuel quality testing, about 6,000 to 8,000 samples were tested annually at an out-of-state lab at a cost of about $50 a sample. Now, the Department is testing 500 samples a year at a cost of $130,000. He said when the Department came to the legislature asking for funding, the Department viewed leasing lab space to do in-house testing as a cost savings to the state. He added that he was filling in for the Department's Executive Director today and could not advise as to whether a complete cost analysis was prepared for this project.
Representative Damron said he thought the fuel testing was important; however, he questioned whether the state would have been better off building its own lab.
In response to another question from Representative Damron, Mr. Bloemer said this lab will be in close proximity to the existing lab to allow for the cross-utilization of equipment. The Department has built the cost of this new lease into its operating budget, and estimates it will pay for itself in three to five years. Upon completion, the lab will have the ability to test 20,000 samples, of which 10,000 samples will be designated for Kentucky and the balance offered to other states on a fee basis. He said they have already been contacted by Pennsylvania, Tennessee, Ohio, Indiana, and Illinois.
Representative Damron said he was totally in agreement with building a fuels testing lab, but he questioned the policy decision of leasing the facility as opposed to the state issuing tax-exempt bonds and building it. Representative Damron said he also did not remember KDA's submitting this lease project in its last budget cycle.
In response to a question from Senator Tori, Mr. Bloemer said once the lab is operational, the state will save at least $130,000 annually in contract testing fees.
Mr. Bloemer said the Revenue Cabinet reported consumers purchased 3.4 billion gallons of fuel in Kentucky in 2005, and the 600 samples currently tested are not representative of the amount purchased. He said the lab will have the capacity to test antifreeze, motor oil, gear oil, automatic transmission fluid, and propane. He concluded by saying that improved consumer protection will be provided on many levels, and the lab will generate additional revenue through contract testing.
Senator Rhoads made a motion to approve the new lease for the Department of Agriculture. The motion was seconded by Representative Rudy and passed by unanimous roll call vote.
Representative Damron explained his Yes vote. He said he would not vote to approve this lease if it would not have the impact of stopping the project. He said he had serious reservations about the management decisions regarding the construction of this facility. He questioned the state's return on investment when the state pays a consultant to do the design, the facility is built and owned by the private sector, and it is then leased by the state.
Representative Denham explained his Yes vote. He said that Representative Damron's comments are very well taken and should be considered.
Senator Tori explained her Yes vote. She said she was very concerned about the cost. She said she wanted the project to go forward but this is not a good way to do business.
Senator Tori next welcomed Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority (KIA). Ms. Williams presented a Fund B (Infrastructure Revolving Fund) loan for the City of Albany in Clinton County. The city is requesting a Fund B loan in the amount of $750,000 for a new raw water intake system on Lake Cumberland due to the lowering of Wolf Creek Dam. The loan will have a 30 year term and zero interest with an annual payment of $25,000. The Fund B loan will be combined with other funding for a total project scope of $7,366,000.
Representative Denham asked Ms. Williams what was the status of the Wolf Creek Dam Repair project. Ms. Williams said she was not up-to-date on this project at this time.
Ms. Williams next presented a Fund B loan of $849,154 to the South Graves County Water District. The funds will be used to refinance a Fund C loan. Ms. Williams said KIA has been working with this financially distressed water system to help improve its fiscal condition and encourage it to consolidate with other water systems in the area. [The initial Fund C loan for $492,680 was approved in July 1991. In January 1993, it was increased to $729,750. In September 2003, the loan was restructured upon the condition that the District contract with another area entity to operate the system.] She said as an incentive to help this financially strapped water district, KIA is offering it a $500,000 grant from the 2020 program that will reduce the amount of the Fund B from $849,154 to $349,154, if it merges with area water districts. The Fund B loan will have a 17 year term at 0.40% interest
The next loan was a Fund C loan of $393,250 for Mayfield Electric and Water Systems in Graves County. The loan is for the City to construct a 350-foot tower on three acres of land to provide wireless broadband Internet access to the area. The loan will have a 10 year term at 0.40% interest.
The last loan Ms. Williams presented was a Fund F loan for $4,400,000 for the City of Hardinsburg in Breckinridge County. The City is requesting a 10% increase in the $4,000,000 Fund F loan approved by the Committee in December 2005. The increase will be used to install security equipment and purchase an emergency generator at the plant. The loan will have a 20 year term at 1.00% interest. These funds will be combined with other project financing for a total project scope of $15,034,400.
Representative Denham made a motion to approve the four KIA loans. The motion was seconded by Senator Rhoads and passed by unanimous roll call vote.
Ms. Williams next presented various coal/tobacco development grants that were funded through line item appropriations from the General Assembly in 2005 and 2006. No committee action was required.
The next report was provided by Terri Fugate, Deputy Executive Director, and Tom Howard, Director, Office of Financial Management (OFM). Mr. Howard said there were five new debt issues to be presented. The first item was a new bond issue for Eastern Kentucky University General Receipts Revenue and Refunding Bonds, 2007 Series A for $13,965,000. Mr. Howard said the proceeds from the bond issue will be used to complete renovations to Clay Hall and to refund outstanding bonds.
Mr. Howard said in the current bond market it is questionable as to whether the state will be able to economically refund or break even on this transaction, which will be a requirement for OFM's approval. However, the ability to eliminate the Housing and Dining Indenture would be a major benefit for University in allowing some additional flexibility with its housing program. He noted that the bond market has become less volatile recently and hopefully the sell off was relatively orderly on the municipal side of the business versus the treasury market.
Representative Damron asked if any thought had been given to the impact on municipal bond interest rates if the Supreme Court does not rule in the state's favor in the Davis v. Department of Revenue case. Mr. Howard said the University of Kentucky had published an article that tried to determine the fiscal consequences of the case. He added he participated in the Chartered Financial Analysts organization meeting last week where some participants estimated an unfavorable ruling may increase the cost of borrowing 15 to 20 basis points. He said the market impact is difficult to determine because different states have different tax laws and may respond differently to an adverse ruling. He said it would be premature to quantify the market impact of the case.
Representative Damron said when universities move to a General Receipts indenture they pledge most of their revenues for the indenture. He asked if this is the intended effect. Mr. Howard said that is correct. The debt essentially becomes a general obligation of the University, with certain carved-out exceptions where various restrictions are placed on the use of a source of revenue. For example, a carve-out might be needed for federal purposes or for receipts previously pledged to an existing Housing and Dining indenture that could not be refunded.
In response to another question from Representative Damron, Mr. Howard explained that bonds may continue to be outstanding under prior indentures until the prior indentures are collapsed into the General Receipts indenture.
Representative Damron asked if the General Receipts indenture would create problems if universities had the flexibility to issue their own debt. Mr. Howard said the General Receipts indenture would not create problems; it would actually be beneficial for the university and give them much more flexibility. He said the old indentures were very cumbersome and required the universities to hold reserves that tied up funds. Mr. Howard said in any event, the General Receipts indenture is a general obligation to the university itself, and improves the university's credit regardless of what authorization process is required for projects.
Representative Damron said there had been some indication that the General Receipts indentures may have created some issues with legislation he has sponsored in past Regular Sessions. Mr. Howard said the idea is to improve the universities' credit and give them the benefit of not only the general receipts pledge but also the state intercept program, which Representative Damron proposed. The result can be seen in the ratings based on the intercept versus a university's previous ConEd rating that are typically a notch lower. Both the general receipts pledge and the state intercept have increased the creditworthiness of these projects and allowed them access to capital at a lower rate.
The second new bond issue Mr. Howard reported was Murray State University General Receipt Bonds, 2007 Series A, for $14,640,000. The proceeds will be used to construct a new residence hall to replace Richmond College dormitory. Mr. Howard noted that all but one of the university governing boards have now approved General Receipts indentures that have come before the committee. Morehead State University's Board of Regents is expected to approve this approach at their next meeting.
Ms. Fugate then presented two Kentucky Housing Corporation (KHC) Conduit bond issues to provide low-income housing. The first new issue was the KHC Multifamily Housing Revenue Bonds, Series 2007 (Woodside Village Apartments project), for $9,574,000. The proceeds will be used to rehabilitate two apartment complexes with 158 units located in Middletown, Jefferson County. The second bond issue was the KHC Multifamily Mortgage Revenue Bonds, Series 2007 (Carpenter's Apartments project), for $6,784,277. Proceeds will be used to acquire and rehabilitate a 160-unit apartment complex located in Louisville, KY.
Senator Tori asked if these bond issues were tax-exempt. Ms. Fugate responded affirmatively.
Senator Tori asked if the construction of these units will met the needs of low income families. Mr. Dennis Humble, Chief Financial Officer, KHC, said the apartments were acquired for rehabilitation, and no new construction is involved. He said there are a number of Section 8 units that are within these projects that currently have a waiting list; the Section 8 program is designed to meet the needs of low-income families. He said he would follow-up with a more comprehensive response.
Senator Tori commented that whether the projects are rehabilitation or new construction, it is vital for the Committee to know if the projects are helpful to the people that need it.
Ms. Fugate then presented a preliminary bond issue report for Kentucky Asset/Liability Commission (ALCo) General Fund Tax and Revenue Anticipation Notes (TRANs) 2007 Series A. Proceeds from this issue, $352,149,633, will be deposited into the General Fund to meet cash flow needs for fiscal year 2008.
Mr. Howard said the expected benefit from this transaction based on its current size and the current market is in excess of $5 million to the General Fund. He indicated that while the current fiscal year 2007 TRAN was projected to earn $2.5 million, the actual benefit will be approximately $3 million.
Senator Rhoads asked how this bond issue compares with what has been issued in the past several years. Ms. Fugate said the TRAN issue currently outstanding is $150 million. She explained that while ALCo has issued larger TRANs in the past, it was conservative in sizing the TRAN last year. Mr. Howard added ALCo issued as much as $600 million in TRANs in previous years. He said last year's TRAN was smaller because OFM projected that the General Fund would have a high ending balance to start the new fiscal year. Because of the level of expenditures in the first quarter of fiscal year 2007, the target deficit was reached in August.
Mr. Howard explained that OFM is taking a similarly conservative approach to projecting the deficit for fiscal year 2008 because the fiscal year 2007 ending balance has yet to be determined. He said ALCo felt comfortable with a size between the current TRAN's $150 million and the projection from the model for fiscal year 2007 that is closer to $500 million. He explained that the Internal Revenue Code imposes an expenditure test on TRAN borrowers. If the TRAN issued does not closely approximate the General Fund's actual deficit in the upcoming fiscal year, the state would have to forfeit all of the profits it had earned on the investment of TRAN proceeds. He said ALCo would prefer to make $5 million from the TRAN issue rather than gamble on earning $6 million and ending up earning zero.
Representative Damron made a motion to approve the five new bond issues. The motion was seconded by Senator Rhoads passed by unanimous roll call vote.
Ms. Fugate next presented one follow-up report for a previously approved bond issue: KHC Revenue Bonds, 2007 Series E (AMT) and Series F (Taxable) in the amount of $75,000,000. This bond issue was approved by the Committee at its January 2007 meeting, and no further Committee action was required.
Mr. Howard reported one follow-up report for a previously approved bond issue: Western Kentucky University General Receipts Bonds 2007 Series A in the amount of $43,180,000. This bond issue was approved by the Committee at its May 2007 meeting, and no further Committee action was required.
Representative Damron noted that universities carry as an underlying rating the A1 rating of the state's university intercept program. He also noted that Western's debt is rated A2, which is lower than A1. He asked if WKU's third-party financing arrangements to renovate its residential dorms and Diddle Arena prevented it from benefiting from the higher rating of the intercept program. Mr. Howard said that Western received an A1 enhanced rating under the intercept program. Its underlying rating, which is consistent with its ConEd Bonds, is A2 which is consistent with the other state university ratings. He said General Receipts ratings have typically been slightly higher than the university's existing rating for prior indentures, and in some cases are improved by the state intercept program.
Mr. Howard said Standard and Poor's has a different viewpoint and they tend to give the same rating as the state appropriation rating which is A+. He said Western's A2 rating is consistent with its existing ratings, as well as with the other universities.
Representative Damron asked if the other universities' A1 ratings were based upon their general receipts or if they were based on the state intercept. Mr. Howard said the A1 rating for other universities was based on the state intercept.
Senator Tori asked what is the distinction between an A1 and A2 rating. Mr. Howard responded that a university's rating impacts the premium paid to insure the bonds. He explained that the higher the rating a university gets, the lower the premium it will have to pay on the bonds, which translates into a lower interest rate. He said looking at Moody's global scale ratings, which is essentially their corporate equivalent ratings, an A1 in the municipal market would be the same as an AAA in the corporate market. Those two rating scales between taxable debt and municipal tax-exempt debt are not equivalent. An A1 municipal bond credit rating denotes a very strong credit and that perceived creditworthiness would be recognized in the insurance bids.
Ms. Fugate presented six new school bond issues with School Facilities Construction Commission (SFCC) debt service participation: Estill County, Ft. Thomas Independent (Campbell County), Hancock County, and Ludlow Independent (Kenton County).
Representative Damron made a motion to approve the new school bond issues with SFCC debt service participation. The motion was seconded by Representative Denham and was passed by unanimous roll call vote.
Ms. Osborne said there were two locally–funded school bond issues submitted to the Committee for review this month: Daviess County and Montgomery County. All disclosure information has been filed, and no further action on the bond issues was required.
With there being no further business, Representative Damron made a motion to adjourn the meeting. The motion was seconded and the meeting adjourned at 2:30 p.m.