Call to Order and Roll Call
The 8th meeting of the Capital Projects and Bond Oversight Committee was held on Tuesday, September 27, 2011, at 10:30 AM, in Room 169 of the Capitol Annex. Senator Bob Leeper, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Bob Leeper, Co-Chair; Representative Jim Glenn, Co-Chair; Senator Julian M. Carroll; Representatives Robert Damron, Steven Rudy, and Jim Wayne.
Guests: Tom Denton, Vice President for Finance and Administrative Services, Mr. Kim Oatman, Chief Facilities Officer, and Dr. Brian VanHorn, Dean for Continuing Education, Extended Campuses, Murray State University; Bob Wiseman, Vice President for Facilities Management, University of Kentucky; Sam Ruth, Commissioner, Finance and Administration Cabinet; Deputy Commissioner Benjy Kinman, and Tony Wheatley, Land Acquisition Coordinator, Mr. Gerry Buynak, Assistant Director of the Fisheries Division, Department of Fish and Wildlife; Tim Sheehan, Division of Forestry, Department of Natural Resources; Charles Bush, Director, Division of Real Property, Finance and Administration Cabinet; Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority; Katie Smith, Deputy Commissioner, Cabinet for Economic Development; Mr. Greg Phillips, Hilliard Lyons; and Robin Brewer, Office of Financial Management.
LRC Staff: Kristi Culpepper and Jennifer Luttrell.
Approval of Minutes
Representative Rudy made a motion to approve the minutes of the August 16, 2011, meeting. The motion was seconded by Senator Carroll and approved by voice vote.
Correspondence Items
Senator Leeper asked Kristi Culpepper, Committee Staff Administrator, to present the correspondence items. Ms. Culpepper said there was one correspondence item for members to review, which was a letter from the Kentucky Infrastructure Authority (KIA) explaining actions the KIA board as taken related to various loans that the committee has already approved. The KIA board has re-approved a Fund C loan for the City of Bardstown for the Bardstown-Nelson County Industrial Park Transmission Project, which the committee approved in October of 2009. The city was unable to meet the terms of the conditional commitment letter issued by KIA because of delays in obtaining the proper easements. The city has since obtained all the easements and requested that the loan be re-approved. The board re-approved the loan with the original terms. KIA has also increased the amount of principal forgiveness for various Fund F loans including: the City of Hardinsburg, Breathitt County Water District, City of Barbourville and City of Barlow. KIA is required to provide a certain level of subsidy to borrowers under the terms of the federal capitalization grant that funds the program. KIA would not have been able to meet its subsidy requirements without providing additional principal forgiveness. The additional principal forgiveness benefits the borrowers.
Information Items
Senator Leeper asked Ms. Culpepper to present the information items. Ms. Culpepper said there were five information items for committee members to review. The first information item was a report on the state's debt position that Ms. Culpepper prepared for the Capital Planning and Advisory Board as part of the biennial of capital planning process. The report provides an estimate of the state's outstanding appropriation-supported debt, compares Kentucky's level of borrowing to other states according to various metrics, and discusses the impact various financial practices have had on the state's credit profile. The second information item was the Semi-Annual Report of the Kentucky Asset/Liability Commission. This report provides information on the state's bond and investment portfolios and cash management. The third information item was the Annual Report of Bonds Outstanding from the Office of Financial Management. The fourth information item was a study that was approved by the Program Review and Investigations Committee in September regarding how school construction affects employment in the state. The last information item was the monthly bond market update.
Project Report submitted by Murray State University
Mr. Tom Denton, Vice President for Finance and Administrative Services, Mr. Kim Oatman, Chief Facilities Officer, and Dr. Brian VanHorn, Dean for Continuing Education, Extended Campuses, presented two items for Murray State University (MSU). The first item was an update on the new Paducah campus. MSU, the McCracken County Fiscal Court, the City of Paducah, and the Paducah Greater Economic Development Authority have executed a memorandum of agreement (MOA), under which the county would issue $10 million of general obligation bonds to finance the design and construction of the new facility. The bonds are projected to have a required annual debt service of $790,000. The city and county will be responsible for paying $500,000 of the annual debt service. MSU will be responsible for paying about $290,000 per year. The bonds are scheduled to be issued on November 1, 2011. The General Assembly authorized $17.6 million of other funds for this project in the current budget.
In response to a question from Senator Carroll, Dr. Brian VanHorn explained that one of the things outlined in the MOA is an expected enrollment of about 2,000 per semester at the Paducah campus. Currently, there are about 1,000 enrollments per semester, but MSU is at capacity in the present building.
In response to another question from Senator Carroll, Dr. VanHorn explained that students can start in Paducah and go to West Kentucky Community Technical College, earn an associates of arts, associates of science, or applied associates degree, and then transfer over to MSU to complete a baccalaureate degree program. MSU opened the existing facility in the spring of 1998.
Mr. Denton said that MSU’s bond payment could be less than the estimated $290,000, and that $200,000 in operations and maintenance could be transferred from the Crisp Center to the budget for the new facility.
In response to a question from Representative Wayne about the location of the Paducah campus, Mr. Denton replied that it is to the south of Paducah, directly across the interstate from West Kentucky Community College, not in the downtown core.
Representative Wayne stated that it would be better for the community to invest in the downtown area.
Representative Rudy said that he appreciated Representative Wayne's sentiment, but believes this is the proper place for the Paducah campus because of its proximity to the West Kentucky Community and Technical College.
In response to a question from Representative Rudy, Dr. VanHorn explained that MSU has been at maximum capacity for a number of years.
In response to a question from Representative Damron about the existing lease at the Crisp Center, Mr. Denton replied that it is a 20-year lease at about $180,000 a year. MSU is examining possibilities for the Crisp Center, but MSU still has the option of returning the facility to the University of Kentucky (UK). The lease is a lease-purchase agreement, and MSU is in the 12th year of the lease.
In response to a question from Representative Damron about McCracken County Fiscal Court’s bond rating, Mr. Greg Phillips with Hilliard Lyons, the county’s financial advisor on the transaction, explained that the county has not done a standalone financing and thus does not yet have a bond rating. The county has applied for a rating from Moody's Investor Service. Mr. Phillips says he expects the county to receive an AA or A rating based on the rating of the City of Paducah and the area economy.
Representative Damron requested that MSU provide staff with the actual ratings and debt service cost once they are known so that staff could compare the cost of this transaction to a standard university General Receipts bond issue, which benefits from the state university intercept program. No committee action was necessary.
Mr. Denton discussed a change in funding source for the Renovate Elizabeth Hall project. The original authorization for the 2010-12 biennium was for $8.9 million. Murray issued $7.5 million of bonds in June to finance the project, which was lower than the amount authorized for the project based on internal estimates. Bids have come in over the bond amount. MSU has a pool of funds that could be used to make up that difference.
Representative Rudy made a motion to approve the project. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
Project Report submitted by University of Kentucky
Mr. Bob Wiseman, Vice President of Facilities Management for UK, reported on the purchase of the University Lofts, apartment complex adjacent to the UK campus at a price of $6.7 million. The purchase was authorized by the UK Board of Trustees at the June 14, 2011, meeting. The building, once renovated, will replace the existing Reynolds Building, which is used for Fine Arts programs.
Project Report submitted by the Finance and Administration Cabinet
Sam Ruth from the Finance and Administration Cabinet reported three projects. The first project was for the Department of Military Affairs to construct new latrines and a cold storage building at Field Maintenance Shop Number 5 at the Boone National Guard Center in Frankfort. The estimated project cost is $673,000 and will be paid from federal funds.
Representative Wayne stated that the bathrooms and storage facilities are being built at $210 a square foot, which seems a little high.
The second project, also for the Department of Military Affairs, is to construct a new Medical Command Facility at Boone Center. This building will replace the 60-year-old medical center located at Bluegrass Station in Lexington, which is beyond repair. The estimated project cost is $1,000,000, of which $750,000 will be paid from federal funds and $250,000 will be paid from restricted funds.
The third project was for the Department of Fish and Wildlife to increase the scope of the Pfeiffer Fish Hatchery project by $3.3 million. The increase is funded entirely with federal funds. The project will increase fish production and add heating and air conditioning to the building so that it can be used year-round. The new project scope will be $5.8 million.
Representative Rudy made a motion to approve the projects. The motion was seconded by Representative Glenn and passed unanimously by roll call vote.
In response to a question from Chairman Glenn about a second hatchery in Morehead, Mr. Gerry Buynak, Assistant Director of the Fisheries Division, stated that Morehead just invested a couple million dollars to renovate drain and supply lines.
Benjy Kinman, Deputy Commissioner, Department of Fish and Wildlife, reported the acquisition of a piece of property in Union County. The property will be co-owned by the Division of Forestry and Department of Fish and Wildlife. It will be used for hunting, fishing, and outdoor recreation. The total cost was $6.95 million, of which $3.25 million is from the federal Forest Legacy Program, $2.23 million is from the Department of Fish and Wildlife Land Acquisition Pool, and $1.47 million is from the Heritage Lane Conservation Fund.
In response to a question from Representative Rudy, Mr. Tim Sheehan, Division of Forestry, stated that he does not know the amount previously collected from property taxes on the property. Mr. Sheehan said the land had already been managed as a forestry property was some of the least desirable land in the area because it could not be used for agriculture.
Representative Damron stated that every time the state acquires lands it takes the land off the tax rolls for the local school districts. He also questioned why the state would be paying $2,700 per acre for undesirable land. No committee action was necessary.
Lease Report submitted by the Finance and Administration Cabinet
Charles Bush, Director, Division of Real Property, Finance and Administration Cabinet, reported two lease modifications under $50,000. These modifications represent an amortization of costs associated with leasehold improvements. The first lease modification was PR-1621 for the Cabinet for Health and Family Services in Franklin County. It included electrical work and minor structural changes to facilitate video-conferencing in the training room, along with the installation of some signage. Two estimates were obtained, one for $2,551 and the other for $3,770, and the low bid was selected. The next lease modification was PR-3920 for the Cabinet for Health and Family Services in Spencer County. This project included making security improvements to the reception area and the installation of metal doors and access control devices. The cabinet also converted a former smoking room into office space. Two estimates were obtained, one for $12,905 and the other for $13,594, and the low estimate was selected. No committee action was necessary.
Mr. Bush presented the quarterly lease modification report. The report involved three leases (PR-4487, PR-2112, and PR-5199) wherein the overall square footage and total annual rent had changed, but the rental rate per square foot remained the same. No committee action was necessary.
Report from the Office of Financial Management
Sandy Williams, KIA, reported that the first loan request was from the Oldham County Environmental Authority. The authority requested an increase of $900,000 to a previously approved KIA Fund A loan in the amount of $1.5 million for the construction of the Buckner Interceptor Sewer and Mockingbird Valley Wastewater Treatment Plan Elimination Projects. The increase brings the total Fund A commitment to $2.4 million. The increase was necessary due to an increase in the cost of PVC pipe, the need for a specialized inspector as required by the CSX Railroad for boring under a section of their railroad, and to address problems with the solids that enter the treatment plant from the Kentucky State Reformatory. The terms are the same as with the original loan.
Ms. Williams then presented a second loan request from the Oldham County Environmental Authority. The authority requested a Fund A loan in the amount of $400,000 for the Covered Bridge Waste Water Treatment Plant Decommissioning Project. The loan is for 20 years and has a two percent interest rate. This loan request was approved at KIA's July 4, 2011, meeting.
Representative Rudy made a motion to approve the project. The motion was seconded by Representative Glenn and passed unanimously by roll call vote.
Ms. Williams said that there was a coal grant in committee members’ packets to review. No committee action was required.
Katie Smith, Deputy Commissioner, Cabinet for Economic Development, reported a $500,000 Economic Development Bond (EDB) grant to the City of Augusta for the benefit of Clopay Plastics Products Company, Inc. Clopay is a global leader in specialty films, extrusion coatings, custom printing, and engineered laminations. The company's products are used in the hygienic healthcare protective apparel and industrial market. Clopay anticipates an expansion project including the construction and equipping of approximately 62,000 square feet of new space at its current facility. The proposed EDB grant funds will be used to offset the cost associated with the project. In consideration for the grant, the company will be required to maintain 290 full-time jobs at the Augusta facility for a period of three years following the effective date of the grant agreement. The company will be required to pay the 290 full-time jobs an average hourly wage of not less than $14.46 per hour excluding benefits. Repayment provisions are included in the grant agreement if the company fails to retain the jobs or pay the required wages at the appropriate measurement dates. Clopay will also be required to provide a letter of credit or another form of collateral satisfactory to the cabinet as security for re-payment of any of the grant proceeds. The project was approved by the State Property and Buildings Commission at its September 15, 2011, meeting.
In response to a question from Representative Glenn, Ms. Smith explained that the company was not willing to commit to additional jobs at this time.
Representative Denham said that he supports this project because it is the only plant in Bracken County. The grant will save 290 jobs in Bracken County, Kentucky, a county that has about 11 percent unemployment rate.
Representative Damron made a motion to approve the project. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
Representative Rudy stated that he fully supports this project, but questioned whether it was standard procedure to use EDB funds when a project is only saving, and not creating, jobs. Ms. Smith replied that each grant is negotiated individually.
Representative Denham noted that the city of Augusta and Bracken County contributed $600,000 to the project. A neighboring state offered the plant $4,000,000 in economic development incentives plus other perks.
Ms. Smith reported a $500,000 EDB grant to the City of Berea for the benefit of Hitachi Automotive System Americas, Inc. Hitachi will use the funds to acquire, improve, and equip an approximately 150,000 square-foot manufacturing facility in Berea, where Hitachi plans to manufacture electric drive motors for the next generation electric and hybrid electric vehicles. The proposed EDB grant funds will be used to offset the cost associated with the project. In addition to retaining the existing 946 full-time Kentucky resident workforce in Berea, the company will be required to create 130 new full-time jobs for Kentucky residents, for a total of 1,076 full time Kentucky resident jobs within three years of the date of approval. The company will also be required to pay the 130 new jobs an average hourly wage of not less than $13.50 including benefits. Repayment provisions will be included in the grant agreement. If the company fails to create or retain the jobs or pay the required wages, and the company will be required to provide a letter of credit or another form of collateral satisfactory to the cabinet as security for repayment of any of the grant proceeds. This project was approved by the State Property and Buildings Commission at its meeting on September 15, 2011.
Senator Carroll made a motion to approve the project. The motion was seconded by Representative Glenn and passed unanimously by roll call vote.
In response to a question from Representative Damron, Ms. Smith replied that Kentucky is not allowed to shift jobs from one site in Kentucky to another site and count them toward a project’s job requirements. She said the company is also expanding facilities in Harrodsburg, which will create additional jobs for Kentucky residents.
In response to a question from Representative Rudy, Ms. Smith replied that the unemployment rate is one factor the cabinet looks at when negotiating the packages with companies.
Robin Brewer with the Office of Financial Management reported a new conduit bond issue, Kentucky Economic Development Finance Authority Revenue Bonds (Catholic Health Initiatives), Series 2011, in an amount size of $336,000,000. This bond issue will refinance outstanding interim debt; pay certain future capital expenditures, and the cost of issuing the bonds. The proposed date of sale is October 15, 2011. The expected ratings are Aa2 by Moody's Investor’s Service and AA from both by Fitch and Standard and Poor’s (S&P). This bond issue is a general obligation of Catholic Health Initiatives. JP Morgan and Morgan Stanley are the underwriters for this transaction. Polsinelli Shughart is serving as bond counsel and Wells Fargo is the trustee.
Representative Wayne made a motion to approve the project. The motion was seconded by Representative Damron and passed unanimously by roll call vote.
Senator Leeper noted that there were follow-up reports for previously approved bond issues in member’s folders. No committee action was required.
Ms. Brewer reported there are 20 new school bond issues with School Facilities Construction Commission (SFCC) debt service participation. Eighteen of the bond issues are refunding and two provide new money for school projects.
In response to a question from Representative Damron about the total debt service savings to SFCC, Mr. Tom Howard, Executive Director, Office of Financial Management, replied that he did not know, but is sure it is fairly significant.
Representative Rudy made a motion to approve the project. The motion was seconded by Senator Carroll and passed unanimously by roll call vote.
New Local School Bond Issues without SFCC Debt Service Participation
Ms. Culpepper reported that there were four local school bond issues reported to the committee. One bond issue provides new money for projects and the other bond issues were refundings. None of the bond issues involved tax increases.
With there being no further business, Representative Wayne made a motion to adjourn the meeting. The motion was seconded by Representative Glenn and the meeting adjourned at 11:40 a.m.