The Capital Projects and Bond Oversight Committee met Tuesday,<MeetMDY2> February 16, 2010, at 1:00 PM, in Room 169 of the Capitol Annex. Senator Bob Leeper, Chair, called the meeting to order.
Present were:
Members: Senator Bob Leeper, Co-Chair; Senators Tom Buford and Julian M. Carroll; Representatives Steven Rudy and Jim Wayne.
Guests: Charles Bush, Division of Real Properties; John Hicks, Governor’s Office for Policy and Management; John Osborne, Western Kentucky University; Sandy Williams and John Covington, Kentucky Infrastructure Authority; Katie Smith, Economic Development Cabinet; Tom Howard, Office of Financial Management; Jim Ackinson and Edward Cunningham, Kentucky Higher Education Student Loan Corporation; Jerry Frantz, Kentucky State Fair Board; and John Egan, Frost, Brown and Todd.
LRC Staff: Don Mullis, Kristi Culpepper, Samantha Gange, and Jesse Fries.
Senator Leeper indicated that the committee did not have a quorum and asked Don Mullis, Committee Staff Administrator, to discuss correspondence and information items.
Mr. Mullis said members’ folders contained several correspondence items: correspondence from Brett Antle, Deputy Director, Office of Financial Management, regarding percentage of Federal Highway Trust Fund monies committed to GARVEE bonds; Auditor of Public Accounts Lease Law Compliance Report for Fiscal Year 2008-2009; a report of plan by the University of Kentucky to use the Construction Management-at-Risk project delivery method; a report of plan by the University of Louisville (UL) Athletics Association to use the Design-Build project delivery method; and a report from the Department of Commercialization and Innovation of a grant over $600,000 from the High Tech Investment Pool and High Tech Construction Pool Grants.
Mr. Mullis noted that members’ folders also contained several information items: Kentucky Higher Education Student Loan Corporation (KHESLC) 2004 Trust Restructuring memo from Kristi Culpepper, Committee Analyst; Kentucky Infrastructure Authority (KIA) Leveraged Bond Program memo from Ms. Culpepper; Western Kentucky University (WKU) Energy Savings Performance Contract; proposed legislation related to the jurisdiction of the Committee; and the staff and bond market updates.
Senator Carroll asked Mr. Mullis to review the proposed legislation related to the jurisdiction of the Committee. Mr. Mullis said that the only piece of legislation related to the Committee that has been signed by the Governor is House Bill 302, which authorizes $4 million in agency bonds for the Department of Military Affairs to construct a hangar at Bluegrass Station.
Mr. Mullis reported that UL has used available federal funds totaling $455,000 to acquire one item of scientific equipment. Purchases of unbudgeted equipment must be reported to the Committee, but no action is required.
Senator Leeper called on Charles Bush, Director, Division of Real Properties, Finance and Administration Cabinet, to report several items related to leases. Mr. Bush said the first item was a lease modification report for the Personnel Cabinet (Cabinet) in Franklin County (PR-4830). The Cabinet has requested improvements be made to the facility housing the Deferred Compensation Authority. The improvements will consist of an additional door and side panels to provide an airlock to the employee entrance. The cost of improvement is $2,045 and will be amortized over the remaining lease term (through June 30, 2014). No Committee action is required.
Mr. Bush reported one emergency lease. He said that the Finance and Administration Cabinet has declared an emergency under KRS 56.805 to allow for procurement of temporary storm debris storage sites for the Transportation Cabinet. He indicated that of the 89 storm debris sites, 63 sites have been closed out and 26 are still active sites. No action is required for emergency leases.
In response to a question from Senator Carroll, Mr. Bush said that the 26 properties have not been properly reclaimed.
Senator Leeper indicated that the Committee still did not have a quorum and asked the secretary to call the role.
Senator Leeper asked Mr. Bush to report several lease renewals. Mr. Bush said the first lease renewal was for the Department of Libraries and Archives (PR-3388) in Frankfort, Kentucky for space located at the Buffalo Trace Distillery. No square footage increase is necessary and the annual cost of the lease is $192,948 (no rent increase). The lease term is through June 30, 2011.
The second lease renewal was for the Cabinet for Health and Family Services (PR-4000) in Prestonsburg, Kentucky for space located on North Arnold Avenue. No square footage increase is necessary and the annual cost of the lease is $114,499 (no rent increase). The lease term is through June 30, 2018.
The third lease renewal was for the Cabinet for Health and Family Services (PR-4613) in Florence, Kentucky for space located on US 42. No square footage increase is necessary and the annual cost of the lease is $233,156 (no rent increase). The lease term is through June 30, 2013.
The fourth lease renewal was for the Department of Corrections (PR-3086) in Lexington, Kentucky for space located on West Main Street. No square footage increase is necessary and the annual cost of the lease is $116,908 (no rent increase). The lease term is through June 30, 2011.
The fifth lease renewal was for the Department of Housing, Buildings, and Construction (PR-4464) in Frankfort, Kentucky for space located on Sea Hero Road. No square footage increase is necessary and the annual cost of the lease is $361,931 (no rent increase). The lease term is through June 30, 2013.
The sixth lease renewal was for the Cabinet for Health and Family Services in Louisa, Kentucky for space located on Bulldog Lane. No square footage increase is necessary and the annual cost of the lease is $123,671 (no rent increase). The lease term is through June 30, 2018.
In response to a question from Senator Carroll, Mr. Bush said that none of the lease renewals had an increase cost in rent.
Senator Leeper asked John Osborne, Vice President, Campus Services and Facilities, Western Kentucky University (WKU), to come to the table. Mr. Osborne reported a scope increase for the Construct Chapel and Columbarium project. The scope increase is $255,000 for a revised scope of $1,955,000. Funding for the increase comes from private funds. The additional funds are needed due to receiving bid that were greater than the original estimate.
Action is required, however due to a lack of quorum, no action was taken.
In response to a question from Representative Wayne, Mr. Osborne said the WKU Chapel would be non-denominational.
Senator Leeper asked John Hicks, Deputy Director, Governor’s Office for Policy and Management, Finance and Administration Cabinet, to report several projects. Mr. Hicks said the Finance and Administration Cabinet is reporting its approval of a new Emergency, Repair, Maintenance, or Replacement project for the Tourism, Arts and Heritage Cabinet, Kentucky State Fair Board (Fair Board) Horse Barn Replacement and Arena Repair in the amount of $2,000,000. The project was necessitated by a fire which destroyed four horse barns and nearby support structures, and damaged a covered arena. Funding for this project is provided from a portion of the insurance proceeds.
Representative Wayne asked why the insurance proceeds did not cover the full value of the horse barns and structures. Mr. Hicks said that the Fair Board did not have full replacement coverage on the structures. As a result of this project, the Fair Board will subsequently insure the new horse barns at full replacement value.
In response to another question from Representative Wayne, Mr. Hicks said as a result of this project, the state is moving in the direction to have full replacement value insurance on other state structures.
Representative Rudy asked what caused the fire at the Fairgrounds. Mr. Hicks said that Jerry Frantz, Kentucky State Fair Board, could answer the question. Mr. Frantz responded that an investigation determined the fires were caused by arson.
Action is required, however due to a lack of quorum no action was taken.
Next Mr. Hicks said the Finance and Administration Cabinet is reporting its approval of a scope increase for Eastern Kentucky University to Renovate Residence Hall (Walters Hall). The scope increase is $500,000 for a revised scope of $10,500,000. Funding for this increase comes from restricted funds. The funds will be used to offset increased costs associated with unanticipated remedial action related to brick veneer on the building being attached, removal of interior partitions, and plumbing problems.
Action is required, however due to a lack of quorum no action was taken.
Mr. Hicks then reported that the Finance and Administration Cabinet approved an unbudgeted project for the Department of Military Affairs to Construct a New Armory Readiness Center in Owensboro. The project cost is $14 million and will be funded from a grant ($10,500,000) from the Department of Defense Army Military Construction program and $3,500,000 from restricted agency funds. The project will replace a 50-year-old facility that does not meet the requirements of the units which currently use it. The existing armory will be purchased by the City of Owensboro for $1 million. The new facility will be located on state leased property at the Owensboro-Daviess County Regional Airport and will consist of 58,318 square feet that includes an assembly hall, classrooms, kitchen, break area, and other related facilities.
Action is required, however due to a lack of quorum, no action was taken.
Next Senator Leeper called on Sandy Williams, Financial Analyst, KIA, to present several loans. Ms. Williams said the first loan request was a Fund A loan increase for the City of Prestonsburg in Floyd County. The City is requesting an increase in the amount of $41,900 to the $230,100 Fund A loan approved by the Committee at the October 2009 meeting. The increase was necessitated during the design phase when it was discovered that the potential for sewer overflows was reduced but not eliminated. The new loan amount is $272,000 with a 20-year loan term and an interest rate of one percent.
The second loan request was a Fund A loan increase for the City of Prestonsburg in Floyd County. The City is requesting an increase in the amount of $420,700 to the $365,300 Fund A loan approved by the Committee at the October 2009 meeting. The increase was necessitated during the surveying process when it was discovered that combined sewer overflow (CSO) problems were more severe than originally anticipated. The design area was extended to address the CSO of a large area of the City which feeds into the Westminster Street Sewer. The new loan amount is $786,000 with a 20-year term and an interest rate of one percent.
The third loan request was a $1,860,405 Fund A loan for the City of Prestonsburg in Floyd County to complement the $2,670,000 Fund A American Recovery and Reinvestment Act loan to modify the existing Wastewater Treatment Plant. The project also involves two additional treatment units and the conversion of an existing unit. The loan term is 20-years with an interest rate of one percent.
The fourth loan request was a Fund A loan increase for the City of Prestonsburg in Floyd County. The City is requesting an increase in the amount of $1,772,429 to the $897,571 Fund A loan approved by the Committee at the October 2009 meeting. The increase will replace the Fund B loan approved by the Committee in October 2009 for the same amount. Funding for this increase was made available by other American Recovery and Reinvestment Acts projects having lower than expected bids. The new loan amount is $2,670,000 with a 20-year term and an interest rate of one percent. The project represents $803,000 of Kentucky’s Green Reserve requirement. Funding for this loan comes from the American Recovery and Reinvestment Act.
Senator Leeper asked why KIA did not know about the two additional treatment units in October 2009. Ms. Williams indicated that this project was initially awarded a Fund B loan and that the City applied for a Fund A loan through the American Recovery and Reinvestment Act and when additional stimulus money became available KIA replaced the Fund B loan with the American Recovery and Reinvestment Act funds. Additionally, the increase was necessitated due to several changes required during the design process after the KIA application had been submitted.
The fifth loan request was a Fund A loan increase for the City of Princeton in Caldwell County. The City is requesting an increase in the amount of $174,256 to the $975,000 Fund A loan approved by the Committee at the December 2009 meeting. The loan increase was needed to allow for additional rehabilitation as a result of the inspection required with American Recovery and Reinvestment Act funding. The new loan amount is $1,149,256 with a 20-year term and an interest rate of one percent.
The sixth loan request was a Fund A loan increase for the City of Princeton in Caldwell County. The City is requesting an increase in the amount of $103,744 to the $1,000,000 Fund A loan approved by the Committee at the August 2009 meeting. The loan increase was needed to allow for additional rehabilitation as a result of the inspection required with American Recovery and Reinvestment Act funding. The new loan amount is $1,103,744 with a 20-year term and an interest rate of one percent. Funding for this loan comes from the American Recovery and Reinvestment Act.
The seventh loan request was a Fund A loan increase for the City of Warsaw in Gallatin County. The City is requesting a $60,156 increase to the $2,000,000 Fund A loan approved by the Committee at the December 2009 meeting. The loan increase resulted from bids higher than the estimated project costs. The new loan amount is $2,060,156 with a 20-year term and an interest rate of one percent. Funding for this loan comes from the American Recovery and Reinvestment Act.
The eighth loan request was an amended loan request for the Mountain Water District in Pike County. The Committee approved a $750,000 Fund A loan for the District in December 2009. It was noted that the District’s Repair and Maintenance Fund was underfunded by $560,948 because the District had not made the scheduled deposits to the reserve funds. KIA is bringing the loan request back to the Committee with amended loan conditions, whereby the District would make monthly payments of $11,340 to the reserve account until January 2016.
Representative Rudy asked how many of KIA’s outstanding loans currently have insufficient funds in their replacement reserves. Ms. Williams responded that to her knowledge the District was the only one.
Representative Wayne asked if KIA was aware that the State Auditor’s Office has initiated an audit of Mountain Water District at the request of Pike County Fiscal Court. Ms. Williams indicated that she was not aware of the audit.
Senator Carroll asked if KIA had copies of the outside audit information. Ms. Williams responded affirmatively.
In response to another question from Senator Carroll, Ms. Williams said the District used the reserve funds to offset increase costs due to growth in the area.
Senator Carroll asked if the District used the reserve funds to make a payment on a previous KIA loan. Ms. Williams said KIA received a letter from the District indicating that the District had been in full compliance with reserve requirements up until 2005. However, because of aggressive expansion, the District experienced challenges to operations and cash flows, which resulted in an underfunded reserve account. Additionally, Ms. Williams indicated that if the District would have notified KIA of the situation and have asked to use the reserve funds, KIA would have allowed them to.
Senator Carroll asked if it was KIA’s policy to allow borrower’s to use reserve funds to pay on other KIA loans. Ms. Williams responded affirmatively.
In response to another question from Senator Carroll, Ms. Williams indicated that KIA works with each borrower to allow them to repay the reserve account without having to increase customer rates.
Senator Carroll asked Ms. Williams if KIA could resubmit to the Committee the District’s amended loan condition request in March 2010. Ms. Williams responded affirmatively.
Representative Wayne commented that he was concerned about proceeding with this project and asked Ms. Williams if there was a rush on the project or if it could wait until further information was gathered concerning the status of the state audit. Ms. Williams responded that it could wait until next month.
The ninth loan request was a $36,600,000 Fund A loan for the Winchester Municipal Utilities through the City of Winchester in Clark County for construction of the Lower Howards Creek Wastewater System Improvements project. The loan term is 20-years with an interest rate of two percent.
Senator Leeper asked if the City had passed an ordinance for the rate increases. Ms. Williams responded affirmatively.
Action is required, however due to a lack of quorum no action was taken.
The tenth loan request was a $500,000 Fund B loan for the Bullitt County Sanitation District to acquire and repair a privately-owned wastewater treatment plant and collection system in Pioneer Village. The loan term is 20-years with an interest rate of three percent.
The eleventh loan request was a $1,000,000 Fund B loan for the Hart County Industrial Authority to expand an existing wastewater pre-treatment facility at Progress Park in Horse Cave, Kentucky. The expansion of the plant is necessary to accommodate the T. Marzetti Company. The loan term is 20-years with an interest rate of one percent.
Senator Leeper asked if the company’s expansion would create any new jobs for Kentucky residents. Ms. Williams said the company would create about 40 new jobs.
Action is required, however due to a lack of quorum, no action was taken.
The twelfth loan request was a Fund F loan increase for the Louisville Water Company in Jefferson County. The Company is requesting an increase in the amount of $173,200 to the $4,000,000 Fund F loan approved by the Committee in September 2009. This project involves construction of 5.4 miles of steel transmission pipeline along I-64, a 20 million-gallons-per-day booster pump station, and one storage tank. The increase will be paid for with American Recovery and Reinvestment Act funds made available from other projects receiving favorable bids. The new loan amount is $4,173,200 with a 20-year term and an interest rate of two percent.
Senator Carroll asked if the waterline will go to the Shelby County line and hook into the Shelby County Water District. Ms. Williams said she wasn’t sure and would provide the information to Committee staff.
Representative Wayne said information provided to the Committee by KIA indicated that the waterline would hook into the Shelby County Water District and eventually end up in Frankfort.
Senator Carroll asked when the waterline will end up in Frankfort. Ms. Williams indicated she would have to provide the information to Committee staff.
Action is required, however due to a lack of quorum, no action was taken.
Ms. Williams indicated that various coal and tobacco development grants authorized by the General Assembly were included members’ folders. Each project was authorized in a budget bill and no further Committee action was needed.
Senator Leeper called on Katie Smith, Deputy Commissioner, Department of Financial Incentives, Economic Development Cabinet, to discuss a few items. Ms. Smith asked the Committee for its approval of an Economic Development Bond (EDB) Pool grant in the amount of $250,000 for the Boone County Fiscal Court for the benefit of Coating Excellence International, LLC (CEI). The grant proceeds will offset the cost of the lease, improvements, and equipping of a 120,000 square foot building for a production and warehouse facility. Pursuant to the EDB grant, CEI will be required to create 71 new, full-time jobs within three years. Additionally, CEI will be required to pay the 71 new jobs an average hourly wage of not less than $17.53, excluding benefits.
Action is required, however due to a lack of quorum, no action was taken.
Next Ms. Smith reported an amendment to a previously approved EDB grant. The Committee approved a $450,000 EDB grant in June 2005 for Land O’ Frost, Inc. in Hopkins County to offset the cost of development, construction, and equipping of a 175,000 square foot USDA prepackaged lunchmeat production facility. The company was required to create a minimum of 300 new, full-time jobs within three year of completion and occupancy. However, due to a significant downward change in the economy, Land O’ Frost, Inc. has not been able to meet the job requirements. The company has requested an extension of the grant agreement from November 5, 2009 to January 1, 2013. The Kentucky Economic Development Finance Authority (KEDFA) approved the amendment to the grant agreement extending the first compliance measurement by one year. No action is required on EDB amendments.
Next Senator Leeper called Tom Howard, Executive Director, Office of Financial Management, to the table to report several items. Mr. Howard said the first item was a new bond issue for KIA Wastewater and Drinking Water Revolving Fund Revenue Bonds, Series 2010. Mr. Howard asked John Covington, Executive Director, KIA, to the table to discuss the new bond issue. These bond issues will leverage the loan repayments KIA receives under its Fund A and Fund F loan programs. [Authorized in the 2008-10 Budget.] Proceeds from the bond issue will be used to make loans to government agencies to finance wastewater and drinking water infrastructure projects. Mr. Howard indicated that an AA rating is anticipated.
Mr. Covington said KIA received legislative approval for $112 million for Fund A projects in 2009 and $131 million in 2010, and $23 million for Fund F projects in 2009 and $30 million in 2010. He indicated that over half of the funds have been committed and will be deemed spent when the bonds are issued. KIA will proceed with the balance of the funds before the end of the current fiscal year.
Senator Leeper asked what KIA’s capacity is to do additional leveraged bond issues in the future. Mr. Howard said it will depend on the rating target. He indicated if the bonds receive an AA rating, there may be additional capacity. Mr. Covington said when KIA looked at this bond issue, there was significant additional capacity above the targeted AA rate, since that time KIA did the initial capacity analysis and determined factors have moved in KIA’s favor. The estimated interest rate on the bonds has decreased and KIA also received an additional infusion of cash into the programs from the federal stimulus legislation, which generated another pool of capital that KIA could use to make loans that can be pledged.
Action is required, however due to a lack of quorum no action was taken.
Mr. Howard said the next two bond issues were for the Kentucky Higher Education Student Loan Corporation (KHESLC) and called Jim Ackinson, Chief Financial Officer, KHESLC, and Edward Cunningham, CEO, KHESLC, to the table to discuss the bond issues. Mr. Ackinson said the first bond issue was KHESLC Straight A Conduit (2004 Trust Restructuring). This transaction and the companion KHESLC LIBOR Floating Rate Notes transaction will refinance the failed auction rate securities issued under KHESLC’s 2004 General Bond Resolution. Mr. Ackinson said the standard for issuing debt in the student loan industry was auction rate securities (ARS), which began to fail in the marketplace in February 2008. The market was no longer interested in a collateralized loan product at that time and the investors that held the bonds could no longer liquidate their positions. Subsequently, the interest rates on those bonds where dictated by the terms of the bond document. Mr. Ackinson indicated that the memo prepared by Ms. Culpepper gives a thorough analysis of KHESLC’s status.
Mr. Ackinson said currently KHESLC has approximately $1.8 billion in failed ARS’s outstanding under two separate trust indentures. One of the indentures, dated 2004, is comprised of about $1 billion in outstanding debt. The solution KHESLC has identified involves a two-stage transaction. First, KHESLC would borrow, to the extent possible, under Straight A Conduit mechanism (2004 Trust Restructuring). This is a commercial paper product that was established under the federal Ensuring Continued Access to Student Loan Act. When liquidity dried up for the industry, those borrowers who still wanted to purchase student loans could not obtain liquidity through conventional sources. The federal government created a program to provide to liquidity. The federal program had two components. The first was the Participation and Put Program, which KHESLC has been very active in, and the second was the conduit program. The conduit program was designed to provide a short-term financing vehicle for student lenders who in the past had used bank lines of credit.
Mr. Ackinson said KHESLC did not consider the conduit program a viable financing alternative because it requires an equity contribution that KHESLC could not afford until this transaction came about. What KHESLC plans to do is transfer as many of the existing assets to a new trust within the asset-backed commercial paper program, receive the proceeds, and buy back bonds held by the original broker-dealer of the bonds. Over the past few years, broker-dealers agreed to buy back the debt from the original investors. KHESLC has a unique case, in which the broker-dealer holds 93 percent of those bonds. KHESLC will be allowed to buy back the bonds at a discount and retire the bonds. He said KHESLC cannot use only the conduit program, because not all of KHESLC’s loans are eligible collateral for the conduit. Therefore, KHESLC is planning a second financing.
In response to a question from Senator Carroll, Mr. Ackinson said the investment bankers were the ones that suggested these transactions.
Representative Wayne asked how stable the transactions are and what the future holds for student lending. Mr. Ackinson this is a refinancing transaction, so it only applies to KHESLC’s existing portfolio of student loans. He said there is a solid market for the conduit financing. The problems in the market have been created by two major risks: 1) credit risk, and 2) liquidity risk. In the case of the conduit program, the federal government is backing it and prepared to buy the paper if investors do not. With the second piece, the LIBOR Floating Rate Notes, KHESLC in effect is replacing a product that required new investment every 30 to 35 days through an auction process, rather than a long-term investor. Mr. Cunningham said the interest rates are compressed at this time and a failed ARS is a cash-flow investment for KHESLC. He said when interest rates start moving back up, the interest rate formula works to KHESLC’s disadvantage. KHESLC believes it is in front of the market at this time and not refinancing could create a serious problem.
Senator Carroll asked why student loans fell short in 2008-2009 and what happened to remedy the crisis. Mr. Ackinson said when KHESLC signed-up for the participation program, the federal government did not set up an ideal situation and would not advance the funds. The Commonwealth provided the money for the student loans through a $50 million bond.
Action is required, however due to a lack of quorum no action was taken.
Next, Mr. Howard said the last bond issue was for KEDFA Medical Center Revenue Bonds, Series 2010 (Ashland Hospital Corporation d/b/a King’s Daughters Medical Center Project). Proceeds from this bond issue will be used to make various improvements to the medical center in Ashland, Kentucky including adding two floors to the Heart and Vascular Center, renovating and expanding an operating room, inpatient, and outpatient facilities.
In response to a question from Senator Carroll, Mr. John Eagan, Frost, Brown Todd LLC., said that King’s Daughters is a non-profit organization and has been located in Ashland, Kentucky for many years.
Action is required, however due to a lack of quorum, no action was taken.
Mr. Howard then reported a follow-up report for State Property and Buildings Commission (SPBC) Road Fund Revenue Bonds, Project no. 73. Proceeds from this bond issue refunded outstanding bonds from SPBC Project No. 73. The refunding resulted in a net present value savings of $473,250, or 3.788% of the refunded bonds.
Senator Leeper asked Mr. Mullis to report one new local school bond issue. Mr. Mullis said the new school bond issue with 100 percent local debt support for Franklin Independent School District Finance Corporation. All disclosure information has been filed. No Committee action was needed.
Senator Leeper indicated that due to a lack of quorum, letters would be sent to the Finance Secretary and Western Kentucky University listing the items that required action.
With there being no further business, the meeting adjourned at 3:30 p.m.