Call to Order and Roll Call
The 2nd meeting of the Capital Projects and Bond Oversight Committee was held on Thursday, February 23, 2012, at 8:00 AM, in Room 149 of the Capitol Annex. Representative Jim Glenn, 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 Jared Carpenter; and Representatives Robert R. Damron and Jim Wayne.
Guests testifying before the Committee: Bob Wiseman, Vice President of Facilities, University of Kentucky; Larry Owsley, Vice President for Business Affairs, University of Louisville; Scott Aubrey, Director, Division of Real Properties; John Hicks, Deputy Director, Governor’s Office for Policy and Management; Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority; Brett Antle, Office of Financial Management; Laurie Dudgeon, Director, Administrative Office of the Courts; Carole Henderson, Budget Director, Administrative Office of the Courts; and Marc Theriault, General Counsel, Administrative Office of the Courts.
LRC Staff: Shawn Bowen, Josh Nacey, and Christine Robertson.
Approval of Minutes
Representative Damron made a motion to approve the minutes of the January 19, 2012, meeting. The motion was seconded by Representative Wayne and approved by voice vote.
Information Items
Shawn Bowen, Committee Staff Administrator for the Capital Planning Advisory Board, said four information items were included in members’ folders. The information items included correspondence from the Department of Fish and Wildlife Resources addressing members’ questions regarding a recent Scott County land purchase; a Standard and Poor’s research report regarding a revised outlook for the Louisville Arena bonds; a list of proposed legislation related to the Capital Projects and Bond Oversight Committee; and information regarding the recent purchase of the vacant Home Depot building by the Administrative Office of the Courts (AOC).
Ms. Dudgeon presented background information on the lease-purchase of the Home Depot building. On January 30, 2012, AOC announced that it had entered into a lease-to-purchase agreement to acquire the vacant Home Depot building in Frankfort. The sales price is $5.9 million and payments are structured as a series of quarterly installments of $211,250 ($845,000 annually) over a seven-year period. AOC plans to pay off the lease in less than seven years to reduce the purchase price. AOC’s planned renovations will include conversion of 62,000 square feet of the building’s 94,900 square feet into office space, with the remaining square footage to be used for warehouse space. At the conclusion of the lease-purchase, AOC will save $1.1 million per year.
In response to a question from Representative Damron, Ms. Dudgeon said that AOC originally approached the General Assembly in 2010 for authority to purchase the building as a capital project. When the General Assembly did not authorize the capital project, AOC notified the House and Senate that it intended to lease-purchase the Home Depot building using the money currently appropriated for leasing facilities at Mill Creek Park.
In response to a comment from Representative Damron, Ms. Dudgeon replied that AOC believes it has the constitutional authority to proceed with the transaction. She also said that AOC did not raise fees to fund the lease-purchase, but that an increase in hiring in the state led to an increase in background check revenues for AOC.
In response to questions from Representative Damron, Ms. Dudgeon replied that AOC anticipates having $22 million in restricted funds at the end of the current budgetary cycle. It will provide to the committee the estimates, projections, and restricted fund totals for 2010-2014. AOC did a feasibility study for the Home Depot lease-purchase, and there are no extra pots of money to fund the project. The court system is structurally imbalanced and the restricted funds have kept the court system going. Restricted funds are reported to the General Assembly, and all funds are statutorily authorized funds, except for the records fund.
In response to a question from Representative Damron, Ms. Dudgeon said that the General Assembly makes the ultimate decision for spending for each branch, and AOC respects the separation of powers of the three branches of government.
In response to a question from Senator Carpenter, Ms. Dudgeon responded that money for the lease-purchase comes from a line item in the budget for leased space. The annual lease payment will be $845,000 for the Home Depot building. AOC currently pays $1.1 million annually in leasing costs. AOC intends to occupy the Home Depot building in late spring 2013, and there will be a lease overlap at both properties of approximately six months.
In response to a question from Representative Wayne, Ms. Dudgeon said AOC currently leases 139,000 square feet at Mill Creek, including office space, conference space, warehouse space, and storage space. The Home Depot building will have 95,000 total square feet. Representative Wayne asked about the cost per square foot after renovations. Ms. Dudgeon replied that she would provide this information to members.
In response to a question from Representative Glenn, Ms. Dudgeon replied that the lease-purchase was presented to the Budget Review Subcommittee on Justice and Judiciary and did not receive a negative response.
In response to a question from Representative Damron, Ms. Dudgeon replied that this project will be subject to open records and will go through the appropriate contract review process.
Project Reports from the University of Kentucky
Mr. Wiseman presented two new unbudgeted capital projects: the Renovate/Upgrade Softball Complex project, a $7.5 million privately-funded project, and the Construct UK/Nicholasville Road Flood Mitigation project, an $8,015,463 federal and privately funded project. Both projects were approved by the UK Board of Trustees at its December 13, 2011 meeting and by the Council on Postsecondary Education at its February 10, 2012 meeting.
In response to a question from Representative Wayne, Mr. Wiseman said the University has private money for the projects. Prevailing wage and state wage rates will apply. For the flood mitigation project, the federal Davis-Bacon wage rates will apply. Representative Damron made a motion to approve the projects. The motion was seconded by Senator Leeper, and it passed unanimously by roll call vote.
Lease Report-University of Louisville
Mr. Owsley reported a new lease of 40,000 square feet at $18.65 a square foot, for medical and office space in the MedCenter building. The space will be utilized by the Department of Medicine, Division of Infectious Diseases. Senator Leeper made a motion to approve the lease. Representative Wayne seconded the motion, and it passed unanimously by roll call vote.
Lease Report from the Finance and Administration Cabinet
Ms. Aubrey presented one lease renewal in the amount of $439,028 for the Cabinet for Health and Family Services in Fayette County. Representative Wayne made a motion to approve the lease renewal. The motion was seconded by Senator Leeper, but it did not pass due to the lack of a quorum. [As an advisory member of Employment Solutions, Representative Damron abstained from the vote.]
Project Report from the Finance and Administration Cabinet
Mr. Hicks reported a $300,000 federally funded scope increase for the Enhance Kentucky Statewide Longitudinal Data System project. The funds will be used to expand the pre-kindergarten data within the database from one year of data to three years of data. Representative Wayne made a motion to approve the project scope increase. Representative Damron seconded the motion, and it passed unanimously by roll call vote. The revised project scope is $3,469,400.
Kentucky Infrastructure Authority (KIA) Fund A loans
Ms. Williams presented seven Fund A loans: the City of Hodgenville in Larue County, $1,635,000; two loans to Sanitation District 1 in Kenton County, $851,857 and $959,000; the City of Jamestown in Russell County, $2,500,000; the City of Winchester in Clark County, $1,000,000; the City of Harrodsburg in Mercer County, $706,000; and the Paducah-McCracken Joint Sewer Agency, $8,000,000.
In response to a question from Senator Leeper, Ms. Williams said KIA does take into consideration the percentage of fees being paid for engineering fees and KIA encourages borrowers to follow US Rural Development guidelines, an industry standard for construction of water and sewer projects. Engineering fees include not only design fees, but also inspection costs while the project is being constructed. In response to another question from Senator Leeper, Ms. Williams said the smaller projects have a higher percentage of engineering costs.
Senator Leeper made a motion to approve the Fund A loans. The motion was seconded by Representative Damron and passed unanimously by voice vote.
KIA Fund C Loans
Ms. Williams presented one Fund C loan in the amount of $3,173,049 for the MuniNet Fiber Agency in McCracken County for the Fiber Optic Cable Build #2 project. The project entails construction and acquisition of 144 count fiber that will extend from Paducah to the TVA Paradise Fossil Plant. It will also include the acquisition of Indefeasible Rights to Use from member utilities which include Hopkinsville, Glasgow, Russellville and Princeton to connect and expand their networks.
In response to questions from Senator Leeper, Ms. Williams said that the debt service for this loan will be paid with user charges and that MuniNet will not compete with other Internet service providers.
In response to a question from Representative Wayne, Ms. Williams explained that Paducah is a member of MuniNet and the other owners are also government entities. MuniNet Fiber Agency was formed as a joint agency pursuant to Section 65.210 to 65.300 of the Kentucky Revised Statutes, as amended, known as the Interlocal Cooperation Act. An Interlocal Agreement dated October 25, 2010 was executed between the Electric Plant Board of the City of Paducah and Electric Plant Board of the City of Murray to form the agency. MuniNet is governed by a Board of Directors composed of two Directors designated by each member of the Agency (one designee must be the Chief Executive Officer). Since its formation, the cities of Glasgow, Hopkinsville, Mayfield, Princeton and Russellville have joined as members of MuniNet.
In response to another question from Senator Leeper, Ms. Williams said that no one came forward at KIA meetings to oppose the loan to MuniNet. Representative Wayne made a motion to approve the Fund C loan. The motion was seconded by Senator Leeper, and it passed unanimously by roll call vote.
KIA Fund F loans
Ms. Williams presented two Fund F loans: the Adair County Water District, $1,500,000; and the City of Hodgenville in Larue County, $774,183. Representative Damron made a motion to approve the loans. The motion was seconded by Representative Wayne, and it passed unanimously by roll call vote.
Ms. Williams then presented a Fund F loan for the City of Nicholasville that was first presented to the Committee at the November 2011 meeting. At that meeting, members voted to table the loan until more information could be obtained for members regarding potential rate increases. Representative Damron commented that he and Senator Buford had met with the city director and mayor who assured them that rates would not be raised to fund this loan.
Representative Damron expressed a concern that some municipalities have reached out into the rural areas of the counties to run water and sewer lines and that city residents subsidize those. The people in those expanded service areas have no vote to keep rates under control, and municipalities have no regulatory oversight by the Public Service Commission.
Representative Damron made a motion to approve the Nicholasville Fund F loan. The motion was seconded by Representative Wayne, and it passed unanimously by roll call vote.
Representative Damron requested that KIA provide to the Committee an accounting of how much money is available in each loan fund, to which Ms. Williams responded that she would.
Ms. Williams said KIA expects the federal capitalization grant amount to be reduced for 2013 and 2014. KIA offered additional funds to local governments by leveraging repayment funds and using some of the interest earned to supplement a bond issue. This bond issue does not contribute to state’s debt level and is instead an agency supported bond issue that is fully supported by the loans. In each of the past two years, there were $50 million in Fund A loans, and $12.5 million in Fund F loans that would not have been awarded if KIA did not receive leveraging authority. Ms. Williams agreed with Representative Damron that these bond issues are not a part of the state’s bonded indebtedness and are exempt from the percentage cap proposed in 2012 RS Senate Bill 1.
In response to a question from Representative Wayne, Ms. Williams stated that the KIA does not use a reserve fund model, but rather a hybrid of a cash flow model and reserve fund model. She said it had 1.8 times coverage available.
Ms. Williams presented four line item grants appropriated in previous sessions of the General Assembly. No action was required on those items. She then presented information regarding amendments to previously approved Fund A loans for the Oldham County Environmental Authority.
Economic Development Bond (EDB) Pool Project
Katie Smith presented information on a second amendment to a previously approved EDB grant for the City of Madisonville to benefit Land O’ Frost. In exchange for a $450,000 grant, the company agreed to create a minimum of 300 full-time jobs at certain anniversary dates of the grant. Due to a reduction in orders, the downturn in the economy, and record raw material prices, the company has not met the 2011 jobs requirement goal of 220 jobs. The Kentucky Economic Development Finance Authority (KEDFA) approved the request for a second extension and indicated that this would be the final extension. The company will be required to have 220 new, full-time jobs for Kentucky residents by November 5, 2012.
In response to a question from Representative Glenn, if the job requirements are not met, KEDFA will request repayment of the grant funds from the company. If the company does not repay, KEDFA will call the letter of credit for the amount due. In response to a question from Representative Wayne, Ms. Smith said there is a wage requirement and that she would provide wage information to committee staff.
New bond issues-Office of Financial Management
Brett Antle presented one new bond issue: University of Louisville General Receipts Revenue Refunding Bonds, 2012 Series A, $17.5 million. This bond issue will refund Series N and Series O Consolidated Educational Building Revenue Bonds in the amounts of $12,523,744 and $4,976,255, respectively. Senator Leeper made a motion to approve the bond issue. Representative Damron seconded the motion, and it passed unanimously by roll call vote.
Mr. Antle presented a bond issue for the Turnpike Authority of Kentucky. The purpose of this issue is to permanently finance the remaining balance of $200 million in Road Fund-supported projects authorized by the 2009 General Assembly in House Bill 536 and $56 million in Base Realignment and Closure (BRAC) projects approved by the 2010 General Assembly. This bond issue also includes an advance refunding of approximately $86.6 million of the Authority’s Economic Development Road Revenue bonds (Revitalization Projects), 2005 Series B bonds. No action was required on this item. [KRS 45.810 exempts the Kentucky Turnpike Authority from the requirement for state agencies to submit proposed bond issues to the Committee for its determination prior to the issuance of the bonds. However, KRS 45.816 requires agencies, including the Kentucky Turnpike Authority, to provide the Committee with a listing of all costs associated with the issuance of revenue bonds, prior to the issuance of the bonds.]
In response to a question from Senator Leeper, Mr. Antle said that Kentucky’s pension liability is the biggest concern of rating agencies in making rating determinations. In response to a question from Representative Damron, Mr. Antle said that there is a very small percentage of defaults in the municipal bond community, and those are generally special revenue types of transactions. In response to a question from Representative Damron, Mr. Antle said in regard to advance refundings, present value savings should be at least 3 percent. He added that the agency is sensitive to the amount of negative carry in the escrow and, if negative arbitrage is more than 50 percent of the present value savings, it takes a very close look at it.
Mr. Antle said there were 23 new school bond issues with SFCC debt service participation. Representative Damron made a motion to approve the bond issues. The motion was seconded by Representative Wayne, and it passed unanimously by roll call.
Ms. Bowen said there were 18 new local school bond issues with 100 percent locally-funded debt service. All disclosure information has been submitted, and no further action was required.
There being no further business, Senator Leeper made a motion to adjourn. Representative Damron seconded the motion, and the meeting adjourned at 9:30 AM.