Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee was held on Tuesday, June 17, 2014, at 1:00 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 Chris Girdler, Julian Carroll, Bob Leeper, and Christian McDaniel; Representatives Robert Damron, Steven Rudy, Kevin Sinnette, and Jim Wayne.
Guests Testifying Before the Committee: Mr. Larry Bryson, City Attorney, City of London; The Honorable Troy Rudder, Mayor, City of London; Mr. Steve Byars, Assistant Vice President for Government Relations, University of Kentucky (UK); Mr. Bill Harris, Chief Procurement Officer, UK; Mr. Rodney Andrews, Director of the Center for Applied Energy Research, UK; Mr. Kim Oatman, Chief Facilities Officer, Murray State University; Mr. Scott Aubrey, Director of Real Properties, Finance and Administration Cabinet; Mr. John Hicks, Deputy State Budget Director; Mr. John Covington, Executive Director, Kentucky Infrastructure Authority; and Mr. Ryan Barrow, Executive Director, Office of Financial Management.
LRC Staff: Josh Nacey, Katherine Halloran, and Angela Offerman.
Approval of Minutes
Senator Leeper moved to approve the minutes of the May 20, 2014, meeting. The motion was seconded by Representative Rudy and approved by voice vote.
Information Items
Mr. Josh Nacey, Committee Staff Administrator, presented three information items. The first item was a notice of advertisement for leased space from the Finance and Administration Cabinet for the Department of Public Advocacy in Franklin County.
The second item was Moody’s Investors Service’s annual state debt medians report. Moody’s publishes this report each year, ranking states according to various measures of their debt burden.
The third item was a follow-up discussion regarding a Kentucky Infrastructure Authority (KIA) Fund B loan for the City of London’s Sampson Branch Storm Water project. The loan was approved by the committee at the May 2014, meeting on the condition that representatives from the city appear before the committee to discuss the project, related litigation, and the city’s efforts to bring accountability to those responsible for damaging the pipe at issue.
In response to questions from Senator Carroll, Mr. Larry Bryson, City Attorney, said the city is insured through the Kentucky League of Cities (KLC) and upon discussion with KLC, the decision was made to not appeal the ruling, in part, due to the precedent set by a similar previous case.
Mr. Bryson said all responsible parties were named as a defendant in the case or were included in a third party complaint filed by the city. The only damages covered by KLC insurance were the affected private properties and attorney fees for the defense of the case.
Mayor Troy Rudder, City of London, said the city continues to incur approximately $15,000 per month in costs associated with pumping of the water from the affected properties and will continue to do so until necessary repairs are made.
Mr. Bryson said the city has bid the project, contingent upon committee approval; however, the judge’s ruling leaves no option but to make the repairs.
In response to questions from Senator McDaniel, Mr. Bryson said the city was not directly involved in the approval process of the initial project. The zoning and planning commission, which is a city and county joint commission, approved the subdivision plats that included the storm and sewer lines.
Senator Carroll made a motion to confirm the previous approval of the Fund B loan. The motion was seconded by Representative Wayne and approved by voice vote with one “no” vote.
Project Reports from the University of Kentucky (UK)
Mr. Steve Byars, Assistant Vice President for Government Relations, UK, presented five items. The first item was a notification of UK’s intention to use the construction manager-at-risk project delivery method for the Construct/Renovate Student Center project. The Student Center project has involved multiple authorizations across budget cycles dating to the 2004-06 budget. The total scope of the project is approximately $165,000,000.
The second item was a new capital project, Center for Applied Energy Research Slipstream project. The research project will test a carbon capture system at the Brown Generating Station in Mercer County. The $1,600,000 capital project will be funded with 50 percent federal funds. The UK Board of Trustees approved the project on June 10, 2014.
In response to a question from Representative Wayne, Mr. Rodney Andrews, Director of the Center for Applied Energy Research, UK, said the emissions control systems for the power plant have been upgraded and the carbon capture system is a first level demonstration project for a small slipstream.
Senator Leeper made a motion to approve the new capital project. The motion was seconded by Senator Carroll and approved by roll call vote.
The third item was a new capital project, Construct Student Dining Facility project, to transform campus dining and will involve a public private partnership with Aramark Corporation. The $35,000,000 capital project will be funded with private funds. The UK Board of Trustees approved the project on June 10, 2014.
In response to questions from Representative Wayne, Mr. Byars said prevailing wage laws will apply.
Mr. Bill Harris, Chief Procurement Officer, UK, said the university followed the model procurement code, but Aramark will not be required to do so for the purchase of its items. Key performance indicators will measure Aramark’s performance, and penalties will be assessed if it does not meet those performance standards. There are no bonding requirements for the contractor. The building, including all onsite assets, will be owned by UK.
Senator Carroll made a motion to approve the new capital project. The motion was seconded by Senator Girdler and approved by roll call vote.
The fourth item was a new lease for the UK College of Dentistry to relocate its oral and maxillofacial services, orthodontic services, and the general practice dentistry facilities. The lease was for 13,458 square feet (sq ft) at a cost of $19.35, plus $5.50 for common area maintenance, for an annual cost of $334,400. The lease will expire June 30, 2022.
Senator Carroll made a motion to approve the new lease. The motion was seconded by Representative Wayne and approved by roll call vote.
The fifth item was a new lease for the UK Center for Drug and Alcohol Research to relocate after the demolition of its current space. The lease was for 37,151 sq ft for an annual cost of $661,300 for years one-five and $426,324 for the remainder of the lease. The lease will expire June 30, 2022.
Senator Carroll made a motion to approve the new lease. The motion was seconded by Senator McDaniel and approved by roll call vote.
Project Report from Murray State University
Mr. Kim Oatman, Chief Facilities Officer, Murray State University, presented an emergency repair, maintenance, or replacement project to rebuild an electrical transformer that blew after a lighting strike in April 2014. The $418,050 Emergency Transformer Replacement project will be funded from restricted funds. No action was required.
Lease Reports from the Finance and Administration Cabinet
Mr. Scott Aubrey, Director of Real Properties, Finance and Administration Cabinet, presented three items. The first item was for a new lease for the Commonwealth Office of Technology in Franklin County to replace an existing lease not being renewed at the Fair Oaks complex. The lease was for 38,195 sq ft of office space at $12.39 per sq ft, for an annual cost of $473,236. The lease will expire June 30, 2021.
Senator McDaniel made a motion to approve the new lease. The motion was seconded by Senator Carroll and approved by roll call vote.
The second item was for a new lease for the Commonwealth Office of Technology in Franklin County to free up space for another agency. The lease was for 16,371 sq ft of office and warehouse space at $8.07 and $4.17 per sq ft, respectively, for an annual cost of $124,318. The lease will expire June 30, 2021.
Senator Carroll made a motion to approve the new lease. The motion was seconded by Representative Wayne and approved by roll call vote.
The third item was for a lease renewal for the Cabinet for Health and Family Services in Fayette County. The lease was for 49,275 sq ft of office space at $9.02 per sq ft, for an annual cost of $444,461. The lease will expire June 30, 2022.
Senator McDaniel made a motion to approve the lease renewal. The motion was seconded by Senator Leeper and approved by roll call vote.
Project Reports from the Finance and Administration Cabinet
Mr. John Hicks, Deputy State Budget Director, presented two items. The first item was a request from the Department of Military Affairs to increase the scope for a budgeted capital project, Expand State Emergency Operations Center, in Franklin County. The $25,900 increase was to address a construction change order for revisions to the facility’s electrical system. The increase was 100 percent federally funded.
Representative Damron made a motion to approve the scope increase. The motion was seconded by Senator Carroll and approved by roll call vote.
The second item was a request from the Department of Military Affairs to increase the scope for a budgeted capital project, Install Backup Generators – Bluegrass Station, in Fayette County. The $150,000 increase was for the installation of backup emergency generators in three buildings. The increase was from restricted funds.
Senator Carroll made a motion to approve the scope increase. The motion was seconded by Representative Damron and approved by roll call vote.
Kentucky Infrastructure Authority (KIA) Loans
Mr. John Covington, Executive Director, KIA, presented three items. The first item was for a Fund A loan increase for the City of Owensboro in Daviess County. The request was for an increase of $1,450,000 to a previously approved loan to accommodate increased costs, a slowed project cycle, and combined sewer projects. The loan will have a 20-year term, an interest rate of one percent, and a debt service payment of $325,228.
In response to a question from Senator McDaniel, Mr. Covington said the debt service will be paid from the Your Community Vision Fund.
In response to a question from Representative Damron, Mr. Covington said the balance of the Fund A funds are expended each year and the demands of consent decrees continue to grow.
Senator McDaniel made a motion to approve the Fund A loan increase. The motion was seconded by Senator Carroll and approved by roll call vote.
The second item was for a Fund F loan for the City of Hardinsburg in Breckinridge County. The request was for a $1,190,000 loan for the Water Storage Tank Improvements project, which involves the demolition of an existing tank and the construction of a 250,000-gallon storage tank. The loan will have a 20-year term, an interest rate of 0.75 percent, and a debt service payment of $33,580.
In response to a question from Senator McDaniel, Mr. Covington said the city enacted a rate increase and had adequate cash flow. KIA will review the audited financial statements and rates annually to ensure debt service is adequate to cover operations and maintenance. KIA may force a rate increase, if necessary.
Senator McDaniel made a motion to approve the Fund F loan. The motion was seconded by Representative Wayne and approved by roll call vote.
The third item was a report of an Infrastructure for Economic Development Fund Grant to the City of Scottsville in Allen County. The $102,500 non-coal grant was for the Spring Valley Sewer Extension project. No action was required.
Reports from the Office of Financial Management (OFM)
Mr. Ryan Barrow, Executive Director, OFM, presented four items. The first item was a new bond issue for University of Kentucky (UK) General Receipts Refunding Bonds, 2014 Series D. The $95,000,000 bond issue will partially advance refund Kentucky Asset Liability Commission, Series 2005A Notes; partially advance refund UK General Receipts Revenue Bonds, Series 2005A; partially current refund UK Consolidated Educational Buildings Refunding Bonds, Series P, Q, R (Second Series); and pay costs of issuance.
The estimated net present value savings will be $8,233,381. The bond issue will be competitively bid on June 26, 2014. The financing team consisted of Peck Shaffer & Williams, a division of Dinsmore & Shohl LLP, bond counsel; Hilliard Lyons, financial advisor; and U.S. Bank, trustee. The UK Board of Trustees approved the bond issue on June 10, 2014.
Representative Wayne made a motion to approve the new bond issue. The motion was seconded by Senator McDaniel and approved by roll call vote.
The second item was a new bond issue for Morehead State University General Receipts Refunding Bonds, 2014 Series A and B. The $30,110,000 bond issue will refund Morehead State University Consolidated Educational Buildings Refunding and Improvement Revenue Bonds, Series M; Morehead State University General Receipts, Taxable Build America Bonds, Series 2009A and 2010A; and pay costs of issuance.
The estimated net present value savings was $1,995,015. The bond issue will be competitively bid on June 25, 2014. The financing team consisted of Rubin & Hays, bond counsel; Hilliard Lyons, financial advisor; and U.S. Bank, trustee. The university’s Board of Regents approved the bond issue on June 5, 2014.
Senator McDaniel made a motion to approve the new bond issue. The motion was seconded by Representative Wayne and approved by roll call vote.
The third item was a follow-up report for a $10,485,000 State Property and Buildings Commission (SPBC) Road Fund Revenue Bonds, Project No. 107, 2014 Series A and B (Taxable) bond issue. The purpose of the bond issue was to finance the Aviation Development projects authorized by 2010 Extraordinary Session House Bill 3. The taxable portion of the bonds will reimburse expenditures for the airports.
The bond issue was competitively bid and the Series A and B bonds were purchased by Morgan Stanley and PNC Capital Markets, respectively. OFM and Acacia Financial Group served as financial advisor and U.S. Bank National Association as trustee. No action was required.
The fourth item was a follow-up report for a $21,650,000 Kentucky Higher Education Student Loan Corporation (KHESLC) Student Loan Revenue Bonds, Senior Series 2014 A (Tax-Exempt AMT Fixed Rate Bonds). The purpose of the bond issue was to fund Kentucky Advantage Education Loans (KAEL) and purchase Federal Family Education Loan Program (FFELP) loans. The bond issue was priced on May 8, 2014 and closed on May 21, 2014. The true interest cost was 3.918 percent and it was a negotiated transaction with Hawkins Delafield & Wood LLP, bond counsel; Bank of America Merrill Lynch, underwriter; OFM, financial advisor; and Bank of New York Mellon, trustee. No action was required.
In response to a question from Senator McDaniel, Mr. Barrow said the rating agency fees charged for this bond issue were higher because it was in a structured finance group which required an extensive cash flow analysis. The number of ratings obtained are dependent on the market requirements for the different type of bond issues.
New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation
Mr. Barrow reported 18 school bond issues with SFCC debt service participation with a total par amount of $61,265,000. The state portion of the annual debt service payment was $1,567,300 and the local contribution was $2,875,559. The bond issues did not involve tax increases.
Representative Rudy made a motion to approve the school bonds. The motion was seconded by Representative Wayne and approved by roll call vote.
New School Bond Issues with 100 Percent Locally Funded Debt Service Participation
Mr. Nacey said six local bond issues were reported to the committee. The bond issues were 100 percent locally funded and do not involve tax increases. No action was required.
With there being no further business, the meeting was adjourned at 2:17 p.m.