Call to Order and Roll Call
The 6th meeting of the Capital Projects and Bond Oversight Committee was held on Tuesday, June 19, 2012, at<MeetTime> 1:00 PM, 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, Chairman; Senators Tom Buford, Jared Carpenter, and Julian M. Carroll; Representatives Steven Rudy, and Jim Wayne.
Guests: Larry Blake, Assistant Vice President for Facilities Management, Northern Kentucky University; John Hicks, Governor’s Office for Policy and Management; Scott Aubrey, Director, Division of Real Properties; Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority; David Cox, Executive Director, Kentucky State Board of Licensure for Professional Engineers and Land Surveyors; Julie Anderson, US Department of Agriculture Rural Development Office; John Covington, Executive Director, Kentucky Infrastructure Authority; Ed Basquill, Project Manager, Oldham County Environmental Authority; Brett Antle, Deputy Director, Office of Financial Management.
LRC Staff: Kristi Culpepper, Josh Nacey, and Christine Robertson.
Approval of Minutes
Representative Rudy made a motion to approve the minutes of the May 15, 2012, meeting. The motion was seconded by Senator Buford and approved by voice vote.
Information Items
Kristi Culpepper, Committee Staff Administrator, presented three items for members to review. The first item was a response to questions asked about the Schnellenberger Football Complex during the May 15, 2012, meeting. Members had asked how much money had been raised for the unbudgeted capital project, which is to be constructed using private funds. Larry Owsley, Vice President for Business Affairs at the University of Louisville, advised via email to committee staff that no funds had yet been raised, and construction would not begin without the funds in place.
The second item was a report from Moody’s Investor Service explaining the rating agency’s decision to downgrade the underlying credit rating on the Kentucky Economic Development Finance Authority Louisville Arena Project Revenue bond issue two notches to Ba2, which is considered a speculative grade or “junk bond” rating.
Senator Leeper said he would speak with Representative Rand and co-chair Glenn to see if they would be interested in discussing the matter at a future Appropriations and Revenue Committee meeting or next month’s Capital Project and Bond Oversight Committee meeting.
The third item was Moody’s annual state debt medians report.
Change in fund source, budgeted project
Larry Blake, Assistant Vice President for Facilities Management at Northern Kentucky University (NKU), addressed the committee regarding the university’s Renew/Renovate University Center Phase II project. Mr. Blake said that the project has a scope of $12 million in third party financing and that NKU intends to substitute 15 percent of that scope ($1,795,000) with institutional restricted funds. Funds are available for this purpose and were not specifically budgeted for another purpose. In response to questions from Senator Leeper, Mr. Blake said that the substitution was being made to avoid costs associated with financing the total scope and that the university had already secured financing for the remainder of the project with Fifth Third Bank at 1.68 percent. In response to a question from Representative Wayne, Mr. Blake said that the financing was obtained through a competitive process. No committee action was required.
Project reports from the Finance and Administration Cabinet
John Hicks, Deputy State Budget Director, presented two pool projects in excess of $600,000. The first project will replace two 500-ton chillers at the Transportation Cabinet Office Building and the State Office Building/Annex that have reached the end of their useful life with one 1,200-ton chiller. The appropriation is $800,000. The second project will replace and relocate the boiler plant that serves the L & N Building in downtown Louisville. The appropriation is $750,000. No committee action was required.
Lease reports submitted by the Finance and Administration Cabinet
Scott Aubrey, Director of the Division of Real Properties, presented two reports of amortization of leasehold improvements to state leased property. The first was for the Cabinet for Health and Family Services located at 102 Athletic Drive in Frankfort. The improvements include electrical outlets to support new equipment for the mail room, electrical and duct work to facilitate the installation of a temporary (backup) cooling unit in four network closets, and the creation of a raceway and installation of a conduit between the building and backup generator which would allow for connection to the agency’s security system. The low bid of $5,208 was accepted, and the cost will be amortized through the lease expiration date of June 30, 2014.
The second report was for the Cabinet for Health and Family Services located at 310 Whittington Parkway in Louisville. The improvements include construction of full-height walls in the staff break room to replace the half walls already present. The goal of the project is to reduce noise pollution in adjacent office areas. The low bid of $3,040 was accepted and the cost will be amortized through the lease expiration date of June 30, 2016. In response to a question from Representative Wayne, Mr. Aubrey said that he did not know if all the safety measures outlined by the Boni Bill (2007 SB 59) had been implemented, but he would check and report back to committee staff.
Mr. Aubrey presented two emergency leases. The first was for four acres of land in Magoffin County used for the temporary storage and destruction of debris due to weather events in February and March 2012. A termination of the agreement, which went into effect on April 6, 2012, has been sent to the lessor and is due to be cancelled on June 30, 2012. The second emergency lease was for the Cabinet for Health and Family Services in Scott County for lease of their current office space while advertisement for a new lease is being conducted. No committee action was required for any of the lease items presented.
Kentucky Infrastructure Authority (KIA) Presentation on Engineering Fees
Following several committee meetings at which members had questions regarding engineering fees on KIA projects, Sandy Williams, KIA Financial Analyst, arranged a panel to present a more in-depth explanation of the engineering fees associated with KIA projects. She was joined by John Covington, KIA Executive Director; David Cox, Executive Director, Kentucky State Board of Licensure for Professional Engineers; and Julie Anderson, US Department of Agriculture, Rural Development Office engineer.
Mr. Covington said that KIA bonds have received AAA ratings from all three ratings agencies, recently received a clean opinion from an independent auditor, and also received a positive report from the USEPA. Projects funded by KIA are reviewed twice publicly, once by the KIA Board and once by the committee.
Ms. Williams said that KIA and the Division of Water (DOW) work together to analyze a borrower’s loan application. The engineering fee is a summation of five subcategories and is not just the cost of design. The fee also includes items such as planning and research, cost to hire an on-site inspector, and cost of preparing environmental review. Only three are covered under guidelines of percentages in the Rural Development (RD) fee scale, which KIA uses to evaluate engineering fees. The other two subcategories are considered additional professional services and are negotiated separately. The need for additional services is project specific and can differ between projects that appear similar.
Mr. Cox told the committee about the requirements to obtain engineering licensure in Kentucky, the statutes governing engineering, and the engineer’s code of conduct. He explained that only a professional engineer is allowed by law to perform certain functions associated with projects.
Ms. Anderson presented information on the US Department of Agriculture’s Rural Development (RD) fee scale. The scale was designed to help streamline the process for obtaining fair and equitable engineering fees. It is based on a nationwide survey conducted by American Society of Civil Engineers and is also compared to the construction cost index published every ten years by ENR (Engineering News Record). The fee guideline is for a set number of deliverables, and on each project those items are the same. However, there are additional services on each project, such as preliminary study, that are not included in the fee scale. No project will fall exactly on the scale because the fee scale only covers design, construction administration, close out, and resident inspection as outlined in the agreement for engineering services.
In response to questions from Senator Buford regarding a project on the committee’s agenda, Ms. Anderson said an engineering-services-to-construction-costs ratio of 20 percent would not be unreasonable. Typically, modifications like the project Senator Buford referenced are more expensive depending on complexity, the discharge stream, and mitigating measures for environmental concerns. Ms. Anderson said she would ask for documentation as to why the costs are above the fee scale.
In response to a question from Senator Carroll, Ms. Williams said that the Division of Water requires the stamp of a professional engineer on all plans submitted. In response to follow up questions, Ms. Williams said that the resident inspector is typically not an engineer. Ms. Williams explained that the dollar amount listed in the engineering fees category is not money being paid directly to the engineer. It would also include all the planning, inspection and up front work that needs to be completed for the engineer to do the job. Senator Carroll suggested that the engineering line item could be broken down to show which fees are paid the engineer, and which are associated with the engineer but paid to other professionals so that fees paid directly to the engineer do not appear inflated. Mr. Covington said that engineering contracts are submitted to the Division of Water for review. In response to additional follow up questions, Ms. Williams said that KIA does receive a breakdown for each category of service in the engineering fees.
Senator Carpenter said that the reason for scrutinizing engineering costs is to keep costs down, where possible, so that user fees do not have to be raised more than necessary.
In response to a question from Representative Wayne, Mr. Covington said that KIA requires that borrowers follow whatever procurement code applies to for their jurisdiction. Mr. Covington said that where unforeseen costs arise, the procedure is similar to the way change orders are handled in construction projects. In response to follow up questions, Ms. Anderson said that the RD fee scale is just a guide for three of the five categories in the engineering fees component. Representative Wayne questioned whether there was favoritism in choosing engineering firms, who then charge inflated rates, the costs of which are passed on to consumers. Mr. Covington replied that KIA did not want to overstep its bounds and dictate to local jurisdictions who to hire as engineers. In response to another follow-up question, Mr. Covington said that KIA tries to ensure that the process is as fair and equitable as possible.
In response to a question from Senator Carpenter, Mr. Covington explained that there are separate fee schedules for design and inspection.
Senator Leeper commented that it would be helpful to the committee to see a breakdown in engineering fees on the Executive Summary that KIA provides on projects submitted for approval. He said it appears that in the majority of projects, the engineering-to-construction ratio is higher than the RD fee scale, even when design and inspection are factored in. He said that KIA does review projects for excess, but that the committee, in an oversight capacity, did not currently have enough information to make the same judgment. Senator Leeper asked staff to include the RD fee scale percentages on future committee analysis sheets. Senator Leeper also requested information about using the right people to perform the necessary work.
In response to a question from Senator Buford, Ms. Williams said that KIA asks borrowers to obtain at least two bids on each project. Mr. Covington said that borrowers go through a procurement process as described by law. Engineers are procured under a professional services contract and are not bid, but engineers submit proposals. Fees are determined after an engineer is selected. Mr. Cox said that if the borrower does not approve of the fees that an engineer proposes, the borrower is free to negotiate with another engineering firm of their choosing.
In response to a comment from Representative Wayne, Mr. Covington said KIA tries to educate utilities on the RD scale so they are knowledgeable when they negotiate with engineering firms. KIA also does not want to overstep its bounds. In response to a follow-up question, Mr. Covington said that KIA does not have the power to tell borrowers what to pay.
In response to a question from Representative Rudy, Mr. Covington said that KIA would provide the breakdown of engineering costs to the committee and that better information would answer a lot of questions the committee has.
Senator Leeper thanked the presenters for their information on engineering fees. In response to a question about median household income (MHI) figures being used by KIA, Mr. Covington said that KIA was using the figures they had available at the time for the current funding cycle. Ms. Williams said that going forward, KIA will use the most up-to-date MHI information available through the Kentucky State Data Center. In response to a question from Senator Carroll, Ms. Williams said MHI is used by KIA in determining interest rates, but the KIA Board does have discretion to lower rates for a particular project if the borrower is in dire financial stress and could not make a payment. The borrower could ask for interest rate relief if the financial condition exists.
Kentucky Infrastructure Authority (KIA) Fund A Loans
Sandy Williams presented nine Fund A loans for approval. The first was an increase of $86,751 to a previously approved loan for City of Warsaw, bringing the loan total to $2,146,907. The increase is necessary due to final engineering costs being over the estimate and to change orders.
The second item was an increase of $446,174 to a previously approved loan for the Oldham County Environmental Authority (OCEA) Buckner project, bringing the loan total to $2,846,174. The increase will fund a design change to the expanded headworks at the Kentucky State Reformatory waste water treatment plant. In response to a question from Senator Leeper, Ms. Williams said KIA gets very involved when multiple scope increases are sought from a borrower, as is the case with OCEA this month. This increase will address flushables coming from the reformatory that would not be common in standard household wastewater. In response to a question from Representative Wayne, Mr. Basquill, Project Manager with OCEA, said there was a long term lease agreement between OCEA and the reformatory, which has allowed OCEA to have 35 additional acres of land for expansion, and in return OCEA treats their wastewater. In response to a question from Senator Buford, Mr. Basquill said that OCEA received and reviewed proposals from seven different engineering firms and that each of their projects this month has a different engineer.
The third item was an increase of $478,420 to a previously approved loan for the OCEA Orchard Grass Willow Creek project, bringing the loan total to $2,601,420. The increase will fund additional inflow and infiltration work in the Ash Avenue collection area. KIA permitted an increase to the existing loan, rather than approve a new loan, because it will result in payments being made to KIA sooner, rather than delaying payments with a second loan. These projects are similar in scope, timeline, and end date. In response to a question from Senator Leeper, Mr. Basquill said that negotiations with MSD are still ongoing regarding Metropolitan Sewer District accepting flow from Oldham County and the two groups have met eight times in the past eight weeks. Regarding this loan increase for additional inflow and infiltration work, whether OCEA builds a new plant or ends up contracting with MSD, it will not be paying for storm water to be treated, only wastewater.
The fourth Fund A item was an increase of $710,000 to a previously approved loan to the City of Hopkinsville for the benefit of Hopkinsville Water Environment Authority, bringing the loan total to $7,810,000. The increase was necessary due to increased construction costs.
The fifth Fund A item was an increase of $270,588 to a previously approved loan for the Oldham County Environmental Authority Covered Bridge project, bringing the new loan total to $670,588. The increase is necessary to 2,200 linear feet of eight-inch force main to compensate for insufficient grade in the existing gravity line between two lift stations. In response to a question from Senator Leeper, Mr. Basquill said that OCEA has seen a 70 percent rate increase over four years. In response to a follow up question, Mr. Basquill said that rates will continue to go up, probably another six percent.
The sixth fund A loan request was for the City of Barbourville in the amount of $5,651,270 for expansion of the wastewater treatment plant from 1 million gallons per day to 1.5 million gallons of water per day. In response to a question from Senator Leeper, Ms. Williams said that residential rates will more than double as a result of this loan. In response to a follow-up question from Senator Leeper regarding median household income in Barbourville, Ms. Williams said that KIA does consider affordability when making loans and that sometimes when borrowers are told that they will have to increase rates as a condition of a loan from KIA, the local entities refuse. Mr. Covington said that when rate increases are significant, KIA requires a representative from the borrower to be present at the KIA board meeting and that rate increases are something KIA board members are concerned about. In response to a question from Senator Buford, Mr. Covington said that payroll taxes are not usually examined, only water and sewer rates are.
The seventh Fund A loan request was in the amount of $1,575,000 to the City of Earlington to make improvements in the existing sewer collection system.
The eighth Fund A loan request was in the amount of $970,000 to the City of Russell to construct facilities in order to comply with DOW’s regulations requiring treatment of wastewater.
The ninth Fund A loan request was in the amount of $2,000,000 to the city of Lawrenceburg for a sanitary sewer evaluation survey.
Representative Rudy made a motion to approve all nine Fund A loans and loan increases. The motion was seconded by Senator Buford and passed unanimously by roll call vote.
KIA Fund B Loan
Ms. Williams presented one Fund B loan in the amount of $92,000 to the Nebo Water District to enable the system to meet residual and turnover requirements in 2014. Senator Buford made a motion to approve the loan. The motion was seconded by Senator Carroll and passed unanimously by roll call vote.
KIA Fund C Loan
Ms. Williams presented one Fund C loan assumption in the amount of $40,000. The City of Paducah, for the benefit of Paducah Water Works, will assume the outstanding debt of the Hendron Water District as a result of a merger of the Hendron System into the Paducah system that was executed on April 16, 2012. Senator Carroll made a motion to approve the loan assumption. The motion was seconded by Representative Rudy and passed unanimously by roll call vote.
KIA Fund F Loans
Ms. Williams presented two Fund F loans. The first was in the amount of $2,000,000 to the Lyon County Water District for various water system improvements to reduce water loss. The second was an amended loan in the amount of $1,875,000 to the City of Campbellsville for the replacement of approximately 24,000 linear feet of piping. The amendment removes the requirement for a rate increase and a rate study. Representative Rudy made a motion to approve the Fund F loans. The motion was seconded by Senator Carpenter and passed unanimously by roll call vote.
KIA 2020 Program Grant
Ms. Williams presented one 2020 Program Grant in the amount of $69,262 to the City of Sebree to fund initial planning and preliminary engineering fees associated with replacement of water lines. This grant will exhaust the funds in the 2020 Grant account. Senator Carroll made a motion to approve the grant. The motion was seconded by Senator Buford and passed unanimously by roll call vote.
New School Bond Issues with School Facilities Construction Commission debt service participation
Brett Antle, Deputy Director of the Office of Financial Management, reported six new SFCC bond issues. The total estimated par amount of the bonds is $49.3 million. No local tax increases were anticipated to finance these projects. Representative Rudy made a motion to approve the school bond issues. The motion was seconded by Senator Carpenter and passed unanimously by roll call vote.
With there being no further business, a motion was made to adjourn the meeting. The motion was seconded by Senator Carroll, and the meeting adjourned at 3:02 PM.