Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee met on Tuesday, June 18, 2013, at<MeetTime> 1 p.m., in Room 169 of the Capitol Annex. Representative Kevin Sinnette, Chair, called the meeting to order and the secretary called the roll.
Present were:
Members: Senators Julian Carroll, Chris Girdler, Bob Leeper, and Christian McDaniel; Representatives Steven Rudy, Kevin Sinnette, and Jim Wayne.
Guests Testifying Before the Committee: Bob Wiseman, Vice President for Facilities Management, University of Kentucky; Scott Aubrey, Director, Division of Real Properties; John Hicks, Deputy State Budget Director; Colonel Steve King, Construction and Facilities Management Officer, Kentucky Army National Guard; John Covington, Executive Director, Kentucky Infrastructure Authority; Brian Bingham, Regulatory Services Director, Louisville Metropolitan Sewer District; Sandy Gruzesky, Director, Division of Water; Ryan Barrow, Executive Director, Office of Financial Management; and David Talley, Deputy Executive Director, Budget and Fiscal Management, Kentucky Transportation Cabinet.
LRC Staff: Kristi Culpepper, Josh Nacey, and Angela Offerman.
Approval of Minutes
Representative Rudy made a motion to approve the minutes of the May 21, 2013, meeting. The motion was seconded by Senator Carroll and approved by voice vote.
Correspondence Items
Kristi Culpepper, Committee Staff Administrator, said that there were three correspondence items for members to review. The first item was a letter from the committee to the Kentucky Infrastructure Authority (KIA) with questions regarding the Oldham County Environmental Authority Orchard Grass Regional Wastewater Treatment Plant project. The second correspondence item was KIA’s response to the committee.
The third correspondence item was a letter from Kentucky Housing Corporation providing background information on the developer for the California Square II and Portland Plaza multifamily housing projects that the committee approved at the May 21, 2013, meeting.
Information Items
Ms. Culpepper said that there were two information items for review. The first information item was Moody’s Investors Service’s annual state debt medians report. The report ranks the states’ debt burdens according to several debt indicators and is often cited by the rating agency in justifying why it gives a specific rating to an issuer. According to Moody’s, Kentucky ranks 11th in the nation in debt per capita at $1,998; 8th in the nation in debt as a percent of personal income at 5.9 percent; and 7th in the nation in debt as a percent of gross state domestic product at 5.31 percent.
The second information item included notices of advertisements for leased space for the Cabinet for Health and Family Services (CHFS) in Kenton and Knox Counties.
Project Reports from the University of Kentucky (UK)
Mr. Bob Wiseman, Vice President for Facilities Management, UK, presented two items. The first item was a request to increase the scope of the Construct UK/Nicholasville Road Flood Mitigation project from $8,015,463 to $11,880,030. The increase included $2,898,426 from federal funds and $966,141 from an increase in the in-kind value of the university land designated for the project. The actual appraised value of the land was greater than originally anticipated when authorized by the committee in 2012.
Representative Rudy made a motion to approve the scope increase. The motion was seconded by Senator McDaniel and approved by roll call vote.
The second item was a report of a land purchase that was authorized by the UK Board of Trustees. UK acquired the Lexington Theological Seminary located at 631 South Limestone, Lexington, Kentucky. The acquisition included approximately 7.1 acres and 131,589 gross square feet (sq ft) of building space for four institutional buildings, forty-four apartments, sixteen townhomes, a maintenance building, a shell building, and approximately 250 parking spaces. The property acquisition will allow for growth and will provide temporary surge space for classrooms and offices as UK undertakes campus-wide construction projects. No action was required.
Lease Reports from the Finance and Administration Cabinet
Mr. Scott Aubrey, Director, Division of Real Properties, presented two items. The first item was for a lease modification and amortization of leasehold improvements for CHFS in Boyd County. The lease modification was to correct the amount of leased space. The amortization of leasehold improvements was to replace two existing sliding glass receptionist windows with voice ports and pass-through cutouts and to install carpet to convert a room for office space. Two estimates were obtained for the window replacements and carpet installation and the agency recommended accepting the lowest bids of $1,245 from Paul’s Door and Window and $239 from Ben Williamson Industrial Supply, respectively. The cost will be amortized through the term of the lease, which will expire June 30, 2017. No action was required.
The second item was a lease renewal for CHFS in Morgan County. The lease was renewed under the same terms and conditions for an annual rental cost of $138,530 through June 30, 2014.
Senator Carroll made a motion to approve the lease renewal. The motion was seconded by Senator McDaniel and approved by roll call vote.
Project Report from the Finance and Administration Cabinet
Mr. John Hicks, Deputy State Budget Director, presented a $33,000 scope increase to improve security and energy conservation for the Department of Military Affairs Construct CERF-P Facility-Boone National Guard Center capital project. The project is federally funded.
In response to a question from Representative Wayne, Colonel Steve King, Construction and Facilities Management Officer, Kentucky Army National Guard, said that the project was funded through the Kentucky Air National Guard and the scope of the project was based on a number of planning considerations, such as the types of vehicles and equipment provided and the number of personnel to be housed.
In response to a question from Senator McDaniel, Colonel King said that information will be provided to the committee regarding the breakdown of the amounts of the $78,000 increase for security and energy and the estimated savings realized from the energy conservation measures.
Senator Carroll made a motion to approve the scope increase. The motion was seconded by Representative Rudy and approved by roll call vote.
The second project report presented was for two pool projects in excess of $600,000. The first pool project was for the Department of Fish and Wildlife Resources Pool Elm Fork project, a new capital project, located in the Kleber Wildlife Management Area in Owen County. The project will be funded with $1,768,000 from the 2008-2010 and 2012-2014 Fees-In-Lieu Stream Mitigation Project pools. The project will address bank erosion, poor aquatic habitat, and improvements to an adjacent forest. No action was required.
The second pool project report was for the Finance and Administration Cabinet’s Department for Facilities and Support Services Lexington World Trade Center Garage Project for $2,369,936. The project will make concrete repairs and will be funded with $757,334 from the Economic Development Cabinet’s 2010-2012 Parking Garage Maintenance Pool, $1,500,000 from the Finance and Administration Cabinet’s 2010-2014 Parking Garage Maintenance Pool, and $112,602 from the Department for Facilities and Support Services 2012-2014 Maintenance Pool. The garage was originally constructed as a part of an Economic Development bond project and an arrangement was made with the Finance and Administration Cabinet to take over the responsibility for maintaining the parking garage.
In response to a question from Representative Rudy, Mr. Hicks said the state owns the garage, but has an operating agreement with a firm. In the agreement, the proceeds are divided with the firm for operating expenses and maintenance. The state receives the remainder of the proceeds. No action was required.
The third project report was for a new unbudgeted capital project for the Kentucky Department of Veterans’ Affairs Eastern Kentucky Veterans Center – HVAC Humidity project for $664,700. The project will be funded with $428,789 (65 percent federal funds) from a U.S. Department of Veterans’ Affairs grant, $207,261 from the 2012-2014 Maintenance Pool, and $28,650 from agency receipts (35 percent state funds). The project involves the removal of the existing outside air fans, ductwork, and the installation of a new air conditioning unit.
Senator Carroll made a motion to approve the new unbudgeted capital project. The motion was seconded by Representative Rudy and approved by roll call vote.
Kentucky Infrastructure Authority (KIA) Fund A Loans
Mr. John Covington, Executive Director, KIA, presented a $6,500,000 Fund A Loan for the Oldham County Environmental Authority (OCEA) Orchard Grass Regional Wastewater Treatment Plant project to fund the construction of a wastewater treatment plant to address environmental issues with the Orchard Grass and Willow Creek Wastewater Treatment Plants. Mr. Covington said the loan will have a 20-year term and an interest rate of two percent, with an estimated annual debt service payment of $408,923.
In response to a question from Representative Wayne, Mr. Covington explained the process in which projects are evaluated and funded. The Orchard Grass Regional Wastewater Treatment Plan project was included in the 2012 funding cycle priority list. The project was originally presented to the KIA Board in May 2012, where the Division of Water (DOW) expressed concerns about the project. The board made the decision to table the project to give OCEA opportunity to review options available, including a connection to Louisville MSD’s Hite Creek Wastewater Treatment Plant.
Mr. Covington said Louisville MSD (MSD) provided OCEA a cost to treat the flow from the Oldham County system. OCEA determined that it could construct a new treatment plant and treat the flow for less than what MSD would charge. MSD reviewed the OCEA assumptions and informed the KIA Board it was in agreement.
In response to additional questions from Representative Wayne regarding project debt, Mr. Covington explained that upon project completion, the total debt will be approximately $28,000,000 (nearly $5,000 per customer). KIA estimates that, in 2013, OCEA will realize a positive cash flow after debt service for the first time. Based on KIA’s projections, Oldham County will not need to raise rates to cover the cost of the project.
Mr. Brian Bingham, Regulatory Services Director, MSD, said MSD and OCEA had multiple meetings, but used differing economic assumptions in evaluating the cost of each alternative. MSD never formally approved OCEA’s assumptions. Mr. Bingham said that MSD is a strong advocate for regional growth, but it supports the ability of OCEA to make its own decision based on the best interest of its rate payers.
Mr. Covington clarified that he did not say that MSD supported the project, rather, they agreed that the assumptions, while different, were legitimate. Mr. Bingham said that OCEA was within the ranges used for financial evaluation. While higher, MSD believes that its assumptions were the best good faith effort and price that it could offer. As part of MSD’s consent decree, it projected up to a 5.5 percent operating rate increase each year through 2024.
In response to a question from Representative Wayne, Mr. Covington said MSD is projecting operating rate increases for the cost of operations and complying with the consent decree and to construct the project. OCEA will not require a rate increase because OCEA previously implemented a rate increase to fund the construction. However, if the cost of operations increased, then future rate increases may be implemented. The increase in debt was addressed by the previous rate increases, which increased cash flow. Mr. Covington said that the total debt is $6,500,000 for this project. He noted that KIA has made other loans with OCEA.
In response to a question from Representative Wayne, Mr. Covington said one public hearing was held in August 2012 when the project was half of the current scope, and a second public hearing will occur as part of the facility plan process. The loan agreement with KIA will not be made until the hearing is held. Representative Wayne said that the public should have an opportunity to provide input on projects as early as possible. Mr. Covington responded that because there is a significant expenditure of funds necessary to create a facility plan, the commitment of funding is done early in the process to justify the expense. Representative Wayne encouraged OCEA to have a public hearing as soon as possible so that residents are informed and their opinion is considered.
Representative Wayne asked if DOW supports the project and Mr. Covington said DOW had opportunity at two KIA board meetings to speak against the project. Ms. Sandy Gruzesky, Director, DOW, said that the OCEA facility plan is progressing and anticipates that it will be completed in one week. Until that time, DOW cannot say that it supports the project. When the facility plan is approved by DOW, there will be a public notice period for 30 days where public comments can be received. Ms. Gruzesky explained that the costs associated with each alternative must be evaluated as part of the facility plan and will be made available to the public for review. The facility plan will include two alternatives for the project: 1) OCEA to build a new plant; and 2) OCEA to partner with MSD. After the public notice period, OCEA can conduct the public hearing. Representative Wayne said that public involvement must be in place as early as possible, even if the facility plan and financing is not complete, and the purpose of the hearing is to get input from the public prior to the decisions.
Senator McDaniel said that the letter sent by KIA to the committee differs from Mr. Covington’s testimony regarding a rate increase. Mr. Covington said that this will not be the only project OCEA will have to do in the future and, at this time, KIA cannot forecast future projects. Based on KIA’s analysis, should OCEA assume additional debt, it will need to raise rates by $1.20 per $1 million of new debt, as described in KIA’s letter.
In response to additional questions from Senator McDaniel, Mr. Covington said the two percent rate was the median for that funding cycle. The project qualified as a regional project under KIA regulations because OCEA was consolidating two or more facilities. Mr. Covington said financial risk was not a consideration in setting interest rates on KIA loans. Projects receiving the discounted rate must meet established criteria, such as: 1) addressing environmental health issues; 2) serving low-income communities; 3) promoting regionalization; and 4) rectifying an enforcement action. In the event of default, the assistance agreements state that KIA may take action from forcing the utility to raise rates up to forcing the utility into receivership.
In response to a question from Representative Wayne, Mr. Covington said that OCEA had a negative debt service coverage ratio from 2010 to 2012. A positive ratio is projected for 2013. OCEA previously implemented a rate increase, which was necessary to fund this project based upon current operations. Representative Wayne said that OCEA rates were already increased to cover the project, which hasn’t had a public hearing in its current scope. Mr. Covington said that was true, but the impact of this or another project would be similar. If the decision were made to hook up with MSD, the cost would be comparable, but still significant.
Representative Wayne said he has two primary concerns about the project due to the amount of money involved, which involves a heavy debt burden being placed on the residents of Oldham County. The first concern was the financial history of OCEA, and the second was that the public has not been kept abreast through a series of public hearings.
Senator McDaniel made a motion to approve the Fund A Loan. The motion was seconded by Senator Leeper and approved by roll call vote with one “no” vote.
Mr. Covington reported two Infrastructure for Economic Development Fund (Coal) Grants for the City of Greenup in Greenup County. The first was for a sanitary or storm sewer rehabilitation for $13,000. The second was for a water intake structure on Little Sandy River for $40,000, which has a total project cost of $1,100,000.
In response to a question from Representative Rudy, Mr. Covington said that he would provide additional information to the committee about the remainder of financing for the second grant-funded project. No action was required.
New Bond Issues Submitted from the Office of Financial Management (OFM)
Mr. Ryan Barrow, Executive Director, OFM, presented a new bond issue for Kentucky Asset/Liability Commission Project Notes, 2013 Federal Highway Trust Fund First Series (GARVEEs) in an amount not to exceed $240 million. The purpose of the bonds is to provide permanent financing for approximately $210 million of the $236 million of authorized but unissued bonds authorized by the General Assembly in 2008 House Bill 410 and 2010 Extraordinary Session House Bill 3.
Mr. Barrow said the Louisville and Southern Indiana Ohio River Bridges Project has four funding sources: cash from the Road Fund, Grant Anticipation Revenue Vehicle (GARVEE) bonds, toll revenue bonds, and the Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. According to the federal Department of Transportation, the TIFIA loan has been delayed until later in 2013. In response to questions from Representative Wayne, Mr. Barrow said that the TIFIA process was not well defined due to new legislation. TIFIA regulations, including the application, have not been developed. The funding delay is due to the new changes. TIFIA had concerns about the GARVEE bonds being funded in the latter part of the transaction. The financing plan was revised to accelerate the issuance of the GARVEE bonds.
The estimated interest cost for the bonds is 2.83 percent with a final maturity date of September 1, 2025. It will be a negotiated transaction with Citi. Kutak Rock LLP will serve as bond counsel; Peck, Shaffer & Williams LLP as underwriters counsel; Bank of New York Mellon as trustee; and OFM as financial advisor.
Mr. David Talley, Deputy Executive Director, Budget and Fiscal Management, Kentucky Transportation Cabinet, said that by having GARVEE funds available, construction can continue during the environmental justice evaluation process.
In response to questions from Representative Wayne, Mr. Talley explained that the environmental justice issues raised involve a disparate impact of tolls on low-income and certain minority populations. The action required the Kentucky Transportation Cabinet and Indiana to review the impact of tolling to those residents and determine what mitigation efforts could be made. Input from impacted residents was included in the draft study. The environmental justice study will be made public in late summer or early fall 2013.
Senator Carroll made a motion to approve the new bond issue. The motion was seconded by Senator McDaniel and approved by roll call vote.
Follow-up Report from the Office of Financial Management
Mr. Barrow presented a follow-up report on the previously approved $17,210,000 State Property and Buildings Commission Agency Fund Revenue Bonds, Project No. 105 bond issue, which will provide permanent financing for the Dam 8 and Locks 1 and 2 projects, fund a debt service reserve and rate stabilization fund, and pay the costs of issuance. The transaction was priced on May 2, 2013, and closed on May 15, 2013. The all-in true interest cost was 3.247 percent and sold as a competitive transaction. The purchaser was PNC Capital Markets. No action was required.
New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation
Mr. Barrow reported 27 school bond issues with SFCC debt service participation with a total par amount of $141,850,000. The state portion of the annual debt service payment was $3,002,512 and the local contribution was $7,609,266. None of the bond issues involved tax increases.
Senator Carroll made a motion to approve the bond issues. The motion was seconded by Representative Rudy and approved by roll call vote.
New School Bond Issues with 100 Percent Locally Funded Debt Service Participation
Ms. Culpepper said five local school bonds have been reported. Two were refundings and three financed improvements to existing school facilities. None of the bond issues required tax increases.
With there being no further business, the meeting adjourned at 2:21 p.m.