Capital Projects and Bond Oversight Committee

 

Minutes

 

<MeetMDY1> April 16, 2013

 

Call to Order and Roll Call

The<MeetNo2> Capital Projects and Bond Oversight Committee met on<Day> Tuesday, April 16, 2013<MeetMDY2>, at<MeetTime> 1 p.m., in<Room> Room 169 of the Capitol Annex. Kristi Culpepper, Committee Staff Administrator, called the meeting to order and the secretary called the roll.

 

Present were:

 

Members:<Members> Senators Julian Carroll, Bob Leeper, and Christian McDaniel; Representatives Robert Damron, Steven Rudy, Kevin Sinnette, and Jim Wayne.

 

Guest: Representative Dennis Horlander.

 

LRC Staff: Kristi Culpepper, Josh Nacey, and Jennifer Luttrell.

 

Election of House Co-Chair

Ms. Culpepper said that pursuant to KRS 45.790, an election was needed for the positions of House and Senate Co-Chairs. Representative Rudy nominated Representative Sinnette for the position of House Co-Chair. The motion was seconded by Representative Wayne. Representative Wayne then made a motion that nominations cease and that Representative Sinnette be elected as House Co-Chair by acclamation. The motion was seconded by Representative Rudy and approved by voice vote.

 

Election of Senate Co-Chair

Senator McDaniel nominated Senator Girdler for the position of Senate Co-Chair. The motion was seconded by Senator Leeper. Senator Leeper then made a motion that nominations cease and that Senator Girdler be elected as Senate Co-Chair by acclamation. The motion was seconded by Senator McDaniel and approved by voice vote.

 

Approval of Minutes

Representative Wayne made a motion to approve the minutes of the March 19, 2013, meeting. The motion was seconded by Representative Rudy and approved by voice vote.

 

Information Items

Ms. Culpepper said that there were five information items for members to review. The first item was a report from Moody’s Investors Service, one of the three major rating agencies in the municipal bond market, explaining that Moody’s regards the pension reform legislation passed by the General Assembly as a positive development from a credit perspective.

 

The next three information items were quarterly status reports on capital projects provided by the Finance and Administration Cabinet; the universities that manage their own capital construction programs; the Commonwealth Office of Technology; and the Administrative Office of the Courts.

 

The last information item was the Semi-Annual Report of the Kentucky Asset/Liability Commission, which discusses the state’s investment and debt portfolios and associated interest rate derivative contracts.

 

Project Reports Submitted by the University of Kentucky (UK)

Mr. Bob Wiseman, Vice President for Facilities Management, UK, presented four project reports. The first report involved the purchase of two pieces of scientific and medical research equipment. The first item purchased was a Small Channel Fischer-Tropsch Synthesis Reactor for $280,000, which will be paid from a grant award from the University of Wyoming (State of Wyoming funds). The second item purchased was an Echocardiology Ultrasound System for $254,114, which will be paid from restricted funds. No action was required.

 

The second report related to the consolidation of two capital project authorizations for the Renovate/Expand Gatton Building – Design Phase Only (authorized in 2012 HB 265) and Renovate/Expand Gatton Building (authorized in 2013 HB 7). This consolidation was done for accounting purposes to better track and report on the project uniformly as a whole. No action was required.

 

The third report was a request for a scope increase of $700,000 (10 percent) for the Renovate/Expand Soccer Facilities project, which received interim authorization from the committee at the September 18, 2012, meeting.

 

Senator McDaniel asked Mr. Wiseman to explain the rationale for the upgrades. Mr. Wiseman explained that this is a new facility and a scope increase will allow the complex to be fully completed, eliminating empty space. He said the project is funded by private athletic donations. Senator Carroll made a motion to approve the scope increase. The motion was seconded by Senator McDaniel and approved by roll call vote.

 

The fourth report was a request for a new unbudgeted capital project. The Upgrade/Relocate Pediatric Critical Care (UK Healthcare) project would renovate approximately 38,600 square feet of the Kentucky Children’s Hospital Acute Care Unit at the Chandler Medical Center. The project has an estimated scope of $6,000,000, which will be paid from private donations.

 

In response to questions from Senators McDaniel and Leeper, Mr. Wiseman explained that the project must also be approved by the Council on Postsecondary Education. He said if private donations are insufficient, the project will not proceed. The design phase of the project will serve as a kick-off to raise funds for construction. Senator Carroll made a motion to approve the new project contingent upon its approval by the Council on Postsecondary Education. The motion was seconded by Senator Leeper and approved by roll call vote.

 

Lease Reports Submitted by the Finance and Administration Cabinet

Scott Aubrey, Director, Division of Real Properties, presented two items. The first item was the quarterly lease modification report for October through December 2012. Nine properties required lease modifications resulting in an additional 4,335 square feet at an annual rental cost of $14,565.

 

In response to a question from Representative Wayne, Mr. Aubrey explained that the leased property for the Department of Military Affairs is for the Kentucky National Guard. In response to questions from Senator McDaniel, Mr. Aubrey clarified that the Department of Public Advocacy hired two new employees, and thus needed additional office and storage space. No action was required.

 

The second item was a report on the amortization of leasehold improvements for the Kentucky Real Estate Commission. The improvements will provide additional space to accommodate six additional staff and expand an existing boardroom. Two estimates were obtained for the improvements. The agency recommended accepting the lowest bid of $27,240 from Construction Services Inc. No action was required.

 

Kentucky Infrastructure Authority (KIA) Fund A Loan

Sandy Williams, Financial Analyst, KIA, presented a request for a $533,485 Fund A loan for the City of Pineville for Phase I of the Virginia Avenue Utility Replacement project. Phase I includes the construction of two sewage lift stations and an associated force main in order to comply with a consent judgment with the Energy and Environment Cabinet to reduce and eliminate sewer overflows that discharge to the Cumberland River. The twenty-year loan has an interest rate of 0.75 percent and an estimated annual debt service payment of $20,889. This is the first of three phases with an overall estimated cost of $8,200,000.

 

In response to questions from Representative Wayne, Ms. Williams said the city is in the process of applying for the Community Development Block Grant (CDBG) and Appalachian Regional Commission (ARC) grants. Representative Rudy made a motion to approve the Fund A loan. The motion was seconded by Representative Wayne and approved by roll call vote.

 

Kentucky Infrastructure Authority (KIA) Fund B Loans

Ms. Williams presented three Fund B loan requests. The first request was for the Graves County Water District to assume $247,668 in outstanding infrastructure debt of the Hickory Water District, which has merged with the Graves County Water District (effective January 1, 2013). The original assistance agreement was for $528,000 and was used to construct a 500,000 gallon water storage tank on property owned by an industrial park. The original loan was for twenty years with a 1.80 percent interest rate and an estimated annual debt service payment of $32,610. These terms will not change.

 

The second request was a $1,380,000 Fund B loan for the City of Pineville for the Radio Head Metering System project. The project involves the replacement of approximately 5,500 water meters with a radio read metering system. The project will reduce the amount spent on meter reading by approximately $85,000 (50 percent) and improve water usage accuracy. It is a twenty-year loan with an interest rate of 0.75 percent and an estimated annual debt service payment of $77,193.

 

In response to a question from Senator McDaniel, Ms. Williams explained that the required 15 percent rate increase relates to a previously approved loan for a different project.

 

The third request was a $1,175,000 Fund B loan for the Green River Valley Water District for the Rio Verde Dam Improvement project. This project involves a geotechnical evaluation and subsequent reconstruction of a twenty foot section of the Rio Verde Dam due to severe seepage through the dam’s foundation. It will include surface repairs of the concrete buttress dam and address erosion problems at the dam’s foundation. It is a twenty-year loan with an interest rate of 0.75 percent and an estimated annual debt service payment of $65,726.

 

Senator Carroll made a motion to approve the Fund B loans. The motion was seconded by Representative Rudy and approved by roll call vote.

 

Kentucky Infrastructure Authority (KIA) Fund F Loans

Ms. Williams presented a request for a $200,000 increase to an existing $230,000 Fund F loan to the City of Barlow. The increase was needed because of a discrepancy between the estimated cost per cubic yard of concrete at $600 per cubic yard and the actual bid price of concrete at $1,000 per cubic yard to be used in the construction of the clearwell. The project, which involves the construction of a new clearwell and the repair and refurbishment of a 100,000 gallon water storage tank, had been bid twice. On both occasions, bids exceeded the engineer’s estimates. The revised loan has a twenty-year term, an interest rate of 1 percent, and estimated annual debt service of $14,910.

 

This request had been presented at the March 16, 2013, meeting, but the committee postponed taking action until the committee received additional information about the factors driving project costs. According to information obtained by staff, the additional cost is due to the complexity of the clearwell structure, which requires vents, piping, and pouring a concrete lid.

 

Senator McDaniel said he spoke with the mayor and the engineer and is comfortable with the project.

 

Senator Leeper asked who at KIA was responsible for evaluating such project issues. Ms. Williams responded that KIA and the Division of Water work jointly on all loan requests. All loan and grant-funded projects are required to go through the public procurement process. All requests for loan increases are reviewed by KIA staff and by the KIA Board of Directors.

 

Representative Wayne asked why the original scope increase was attributed to the increase in the cost of concrete rather than the nature of the project. Ms. Williams responded that she was now better prepared to address the committee’s concerns. Senator McDaniel made a motion to approve the Fund F loan. The motion was seconded by Representative Wayne and approved by roll call vote.

 

New Bond Issues Submitted by the Office of Financial Management

Ryan Barrow, Executive Director, Office of Financial Management, presented a new bond issue: the Kentucky Public Transportation Infrastructure Authority (KPTIA) Downtown Crossing Project Revenue Bonds, Series 2013, and Downtown Crossing Transportation Infrastructure Finance and Innovation Act (TIFIA) Loan (expected 2013). The project is comprised of three components: 1) Kennedy Interchange in downtown Louisville at the convergence of I-64, I-65, and I-71; 2) construction of a new bridge over the Ohio River adjacent to and east of the existing I-65 Kennedy Bridge; and 3) reconfiguration of I-65 and associated ramps north of the new Downtown Bridge. Mr. Barrow said the financing structure of this project includes a cash component from the Kentucky Transportation Cabinet (KYTC); the securitization of federal highway appropriations through Grant Anticipation Revenue Vehicle (GARVEE) bonds; toll revenue bonds; and a direct loan through TIFIA. He said the credit review process is underway and two meetings with three of the rating agencies had been held. The bonds are scheduled to be sold on May 6, 2013; however, the TIFIA loan process will drive the process and may delay the sell date. The toll revenue bonds are estimated at approximately $375,000,000 and the TIFIA loan is approximately $375,000,000. The toll revenue bonds include three different series: Series A, which are current interest bonds; Series B, capital appreciation bonds (CABs); and Series C, which are convertible capital appreciation bonds.

 

In response to questions asked by Representative Wayne about the capital appreciation bonds, Mr. Barrow explained that CABs are similar to zero coupon bonds in that there is a period where no interest payments are made. He said they are commonly used in toll revenue bonds because the assets have a long usable life. In order not to overburden rate payers, there will be a gradual increase in toll rates that are tied to inflation. The gradual increase is also determined by the debt service on the bonds. The project financing will mirror the growth in the revenue stream over time. If a level structure were used instead, the toll rates would have to be substantially higher in the beginning.

 

Mr. Barrow said the estimated interest cost is approximately 5.5 percent, which is higher than what the state typically receives for appropriation-supported bonds because these bonds will be paid from toll revenues. The state will not provide credit enhancement on the senior bonds, which results in a premium on the CABs. The estimated total debt service for the toll revenue bonds is $1.3 billion and approximately $732 million for the TIFIA loan.

 

In response to questions from Representative Wayne, Mr. Barrow said that the plan of finance does not include tolls or work on the Sherman Minton Bridge. Mr. Barrow also said that the financial advisor on the project, David Miller, Managing Director, Public Financial Management, specializes in toll revenue bond structures. He said any additional bonding capacity will be driven by the revenue stream.

 

David Talley, Deputy Executive Director, KYTC, said toll rates will be determined by a tolling body, which is a joint venture between Kentucky and Indiana. He said the estimated rates listed in the traffic and revenue study that was conducted were: $1 for frequent-user traffic, $2 for commuter traffic, $5 for small trucks, and $10 for large trucks.

 

Senator McDaniel said that the 5.7 percent estimated true interest cost on the bonds was high. Mr. Barrow explained that the credit rating will be lower than state lease appropriation transactions and the toll revenue bonds will be longer in duration.

 

Senator McDaniel said that he had heard that the Indiana portion was being constructed without the use of prevailing wage, while the Kentucky portion is being constructed with the use of prevailing wage. Mr. Talley said that he would verify that information and report back to the committee.

 

Representative Damron asked if the issuance of bond anticipation notes (BANs) had been considered as an alternative to CABs and, if so, how would BANs compare with the structure decided upon. Mr. Barrow said that they had considered BANs and other options. He said there was concern about market access risk with the use of BANs. No action was required.

 

New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation

Mr. Barrow reported twelve local school districts with SFCC debt service participation with a total par amount of $138,015,000. The state portion of the annual debt service payment is $1,759,662 and the local portion is $8,438,993. Eight of the bond issues were refunding and four would finance improvements at existing facilities. None of the bond issues involved tax increases. Representative Wayne made a motion to approve the new school bond issues. The motion was seconded by Representative Damron and approved by voice vote.

 

New School Bond Issues with 100 Percent Locally Funded Debt Service Participation

Ms. Culpepper said nine local school bond issues were reported to the committee. These bond issues have 100 percent local debt service support and involve no SFCC participation. Additionally, none of the bond issues required tax increases. The purpose of four of the bond issues is to redeem outstanding Building America Bond (BAB) issues. Under sequestration, the federal subsidy provided for BABs has been reduced. Some BABs carry call provisions that allow for refunding in this situation.

 

With there being no further business, the meeting adjourned at 2:01 p.m.