Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee meeting was held on Tuesday, October 20, 2015, at 1:03 p.m., in Room 169 of the Capitol Annex. Representative Linda Belcher, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Linda Belcher, Co-Chair; Senators Julian M. Carroll, Stan Humphries, and Christian McDaniel; Representative Will Coursey.
Guests: Chris Brummett, Interim Director of Asset Management, Kentucky Community and Technical College System; Larry Blake, Assistant Vice President for Facilities, Northern Kentucky University; Elizabeth Baker, Director of Planning, University of Kentucky; Mitchell Payne, J.D., Senior Associate Vice President for Business Affairs, University of Louisville; Scott Aubrey, Director of Real Properties; John Hicks, Deputy State Budget Director; J. Michael Brown, Secretary, Justice and Public Safety Cabinet; Brandi Norton, Financial Analyst, Kentucky Infrastructure Authority; Adam Scott, Staff Assistant, Kentucky Infrastructure Authority; Ryan Barrow, Executive Director, Office of Financial Management; Kristi Culpepper, Executive Director, School Facilities Construction Commission.
LRC Staff: Josh Nacey, Committee Staff Administrator; Katherine Halloran, Analyst; and Maurya Allen.
Approval of Minutes
Senator Carroll moved to approve the minutes of the August 18, 2015 meeting. The motion was seconded by Senator McDaniel and approved by voice vote.
Correspondence Items
Mr. Nacey presented two items of correspondence between the committee and the Finance and Administration Cabinet and Northern Kentucky University concerning the cancellation of the September 15, 2015 meeting due to lack of quorum. The Finance and Administration Cabinet and Northern Kentucky University each responded with their intention to either proceed with or withhold action on various projects or bond issues.
Information Items
Mr. Nacey also presented ten information items to the committee. The first two were advertisements for lease space, the first for the Cabinet for Health and Family Services in Clay County and the second for the Department of Alcoholic Beverage Control in Franklin County. The third item included the quarterly status reports on capital projects from the Administrative Office of the Courts, the Commonwealth Office of Technology, the Finance and Administration Cabinet, and the universities which manage their own capital construction programs. Mr. Nacey also provided an answer to a previous question from the committee regarding the length of time projects are reported. Staff had been informed that the budget office and the Department of Facilities and Support Services discussed the matter and agreed that some projects should have been closed out but had been listed as “not closed” in error. The Cabinet has begun the process of closing out various projects so the correct status will be recorded on future reports. It was noted that the supplement portion of the report contains information that explains the reasoning behind some projects remaining listed after being closed. The fourth item was the semi-annual report of the Kentucky Asset/Liability Commission (ALCo) discussing the state’s investment and debt portfolios and associated interest rate derivative contracts. The fifth item was a report on Kentucky’s Bonded Indebtedness, prepared by LRC staff and presented at the September 15, 2015 Capital Planning Advisory Board meeting.
The sixth item was another follow-up from the August meeting regarding the Business One-Stop Portal Phase II project and why it was listed as “no report given” in the quarterly status report. Mr. Nacey stated that the Commonwealth Office of Technology did not receive an update from the consortium of agencies working on the project so the quarterly report reflected the default answer. Staff has been assured that this occurrence will not be repeated. The seventh item was a follow-up regarding progress of litigation concerning the University of Kentucky (UK) Equine Isolation Facility. Committee staff was provided an update from university staff, which revealed that the case is currently pending in Franklin Circuit Court and regards a claim of faulty construction of the facility. Pursuant to the performance bond, UK gave notice of defective construction to the surety and eventually sued the surety for failure to pay on the bond among other grievances. The circuit court granted partial summary judgment in favor of UK but later vacated that ruling upon a motion to reconsider made by the surety. A bench trial was held in July but the ruling is still pending.
The eighth item was an update on the Louisville-Southern Indiana Ohio River Bridges (LSIORB) project and toll rates. Committee staff have received confirmation from the Transportation Cabinet that rate information in the environmental justice study reported earlier this year is still valid. Toll rates range from $1 for frequent users and passenger vehicles with a transponder to $12 for heavy trucks. Mr. Nacey informed the committee that more details were provided in the meeting materials. He then presented an update on the construction of the Downtown Ohio River Bridge where the Governor had announced the project as being ahead of schedule and on budget. A recent press release was included indicating the bridge would open for traffic before Christmas although an exact date has not been set. The final item was an update regarding the engineering fees for a Kentucky Infrastructure Authority (KIA) project, specifically why engineering fees for the Sherm Ditch Phase IV project for the City of Owensboro had been reduced from approximately $360,000 last year to approximately $144,000 currently. KIA informed committee staff that a portion of the original amount was inadvertently listed because the project plans had already been designed. The current budget reflects the actual bid amounts for the project, thus the engineering fees decreased while the construction amount increased.
Chairman Belcher asked, in regards to the tolls on the Louisville-Southern Indiana Ohio River Bridges, how emergency vehicles would be handled or if it was known. Mr. Nacey stated that he did not know, and because the Transportation Cabinet was unable to send a representative to the meeting, staff would have to contact the cabinet and report an answer at a later meeting.
Discussion Items
Mr. Nacey brought members’ attention to a discussion item tabled from previous meetings regarding whether the attendance of an agency representative should be required when the only items being presented are non-action/non-voting items. Chairman Belcher opened the floor for discussion from the members. Senator McDaniel stated that he appreciated that the committee had taken the time to fully consider the matter and it appeared that the committee would be well served to have a standing procedure where information items can be presented by staff, unless committee members would like a representative in attendance to answer specific questions. He did not feel it was necessary to ask individuals to leave their work in order to present non-action items before the committee. Senator Carroll agreed, adding that a shortage of personnel has led to heavy workloads in offices across the commonwealth and requiring a trip to Frankfort was an unnecessary burden on already overburdened state workers. Maximizing the time an employee has at their place of employment is critical and therefore he made a motion that agencies are not required to send a representative for informational items unless informed in advance by staff that they are needed to respond to specific questions from committee members. Senator McDaniel seconded the motion with an amendment that the motion apply to all non-action items, not specifically information items. The motion was passed by a roll call vote of 5 yeas, 0 nays. Chairman Belcher stated that this does not mean agencies are not welcome to attend, merely that they are not required to attend.
Project Reports from the Universities
Mr. Chris Brummett, Interim Director of Asset Management, Kentucky Community and Technical College System (KCTCS) was present seeking retroactive approval for a lease for Gateway Community and Technical College in Kenton County. The lease was between Gateway Community and Technical College and the Gateway Community and Technical College Foundation for approximately 54,000 sq. ft. of classroom and office space. The cost is $3.22 per sq. ft. coming to a total of $175,000 annually. The lease term began July 1, 2014 and Mr. Brummett sought to be on the agenda as soon as it was discovered that this lease was not reported to the committee last year. Senator McDaniel made a motion to approve the lease, seconded by Senator Carroll. The motion passed by a roll call vote of 5 yeas, 0 nays.
Mr. Larry Blake, Assistant Vice President for Facilities, Northern Kentucky University, presented a scope increase for the Replace Callahan Roof project. The request is for $180,000, a 15 percent increase from the $1.2 million authorized by the General Assembly in House Bill 235 of the 2014 Regular Session, to address additional repairs to the brick veneer which has come away from the structure. The increase would also cover the costs to repaint existing fascia rather than purchase new and replace drain leaders along the roof perimeter. Senator Carroll made a motion to approve, seconded by Senator McDaniel. The motion passed by a roll call vote of 5 yeas, 0 nays.
Ms. Elizabeth Baker, Planning Director, University of Kentucky, presented three items on behalf of the university. The first was a report of using the Construction Management at Risk protocol for the Good Samaritan Hospital renovation and upgrading project authorized by the General Assembly in House Bill 235 of the 2014 Regular Session. The second item was a report of five items of medical/research equipment purchased with restricted funds. These items were a hemodynamic monitoring system, a Philips digital diagnostic system, an integrated CT scanner, an afterloader for brachytherapy, and a SOMATOM force CT scanner. No action was required on these items.
Ms. Baker then presented a new lease for the UK Healthcare Interventional Pain Associates. The clinic is being moved to a larger facility to accommodate increasing numbers of staff. The lease is for 6,152 sq. ft. and will have an annual cost of $138,420. Senator Carroll moved to approve the lease. Representative Coursey seconded the motion and it passed by a roll call vote of 5 yeas, 0 nays.
Mr. Mitchell Payne, J.D., Senior Associate Vice President for Business Affairs, University of Louisville presented two items. The first was interim authorization for the Herman and Heddy Kurz Visitor Center and the second was interim authorization for a soccer practice field. These projects are interrelated in that the new visitor’s center will be built on the current practice soccer field. Senator Carroll moved to combine the two projects into a single item. Motion was seconded by Senator McDaniel and passed by voice vote. Senator Carroll then moved to approve the projects, seconded by Senator McDaniel. The motion passed by a roll call vote of 5 yeas, 0 nays.
Lease Reports from Finance and Administration Cabinet
Chairman Belcher stated that she would entertain a motion to combine the lease reports into a single item unless members had any objections. Hearing none, Senator Carroll made a motion to combine the lease reports into a single item. Motion was seconded by Representative Coursey and passed by voice vote.
Mr. Scott Aubrey, Director of Real Properties, was present to report 12 lease renewals, 2 new leases, and one lease modification amortization. Senator Carroll moved to approve all the lease reports, seconded by Representative Coursey. The motion passed by a roll call vote of 5 yeas, 0 nays.
Project Reports from the Finance and Administration Cabinet
Mr. John Hicks, Deputy State Budget Director, was present to report on projects from the Finance and Administration Cabinet. The first was a new project for KCTCS to appropriate $4.5 million for the Big Sandy Community and Technical College construction of a Pikeville Technology Center. Approximately $3.3 million will be funded through federal grants and the remaining approximately $1.2 million will be funded with KCTCS restricted funds. Senator Humphries made a motion to approve, seconded by Senator Carroll. The motion passed by a roll call vote of 5 yeas, 0 nays.
The second report was a new project for the Department of Military Affairs to install solar panels at the Richmond Armed Forces Reserve Center. The total project appropriation was $659,000 and will be 75 percent financed with federal funds. The remaining 25 percent will be financed with restricted funds. Senator Humphries moved to approve the project, seconded by Representative Coursey. The motion passed by a roll call vote of 5 yeas, 0 nays.
The third report was another for the Department of Military Affairs to install HVAC at the Lexington National Guard Armory. The project appropriation was $842,800 being financed half with federal funds and half through bond funds from the Department’s 2014-16 Maintenance Pool. Senator Humphries made a motion to approve the project. Senator Carroll seconded the motion and it passed by roll call vote of 5 yeas, 0 nays.
The fourth report was also for the Department of Military Affairs to construct a fire station storage building at the Wendell H. Ford Regional Training Center. The project is entirely financed with federal funds of $750,000. Senator Humphries moved to approve the project, seconded by Representative Coursey. The motion passed by a roll call vote of 5 yeas, 0 nays.
Secretary J. Michael Brown of the Justice and Public Safety Cabinet was present to speak regarding an emergency repair, maintenance, or replacement project to renovate the Bingham Building. The building is part of the Central State Hospital campus in Jefferson County. Mr. John Hicks stated that the secretary had approved $3.35 million from the emergency fund to renovate the building, which has been vacant for approximately three years, to relocate the office of the medical examiner from downtown Louisville. Secretary Brown added that the number one capital priority for the cabinet over the last few years has been a facility for the medical examiner’s office in Jefferson County where the State Police Crime Laboratory could also be co-located. The capital request has been most recently reported at $22 million, with costs rising each time fulfilling the request was delayed. The office of the chief medical examiner in downtown Louisville currently handles the largest number of cases in the state and is located in a very old building on Barrett Avenue. The building has reached a state of such disrepair, including containing dangerous levels of mold, that the medical examiner’s office has been asked to vacate as soon as possible. Senator Carroll stated that he was in support of the project and thanked Secretary Brown for his work on this matter. Chairman Belcher also stated her appreciation to the secretary for bringing this project before the committee. No action was required on this item.
Mr. Hicks presented another project for the Justice and Public Safety Cabinet, the upgrade to the failed HVAC system in the Funderburk building housing the Department of Criminal Justice Training. The project appropriation is $3,001,200 funded from unbudgeted receipts from the Kentucky Law Enforcement Foundation Program fund. No action was required for this item.
The seventh item was an appropriation increase for Eastern Kentucky University to improve/renovate athletics facilities. The original appropriation was for $15 million and the request is for an increase of $1 million from private funds to construct a weight room under new seating in Roy Kidd Stadium. Senator McDaniel moved to approve the increase, seconded by Senator Carroll. The motion passed by a roll call vote of 5 yeas, 0 nays.
The final item presented was a report of the purchase of two portable live fire training units for KCTCS. The total cost was $1,046,600 and was paid using KCTCS’s equipment pool. No action was required on this item.
Report from the Office of Financial Management
Ms. Brandi Norton, Financial Analyst, and Mr. Adam Scott, Staff Assistant, were present representing the Kentucky Infrastructure Authority (KIA). Mr. Scott reported that Mr. John Covington had retired September 30, 2015 as KIA Director. Currently, Commissioner Tony Wilder is serving as Director per his position as chairman of the board and Mr. Scott is handling day-to-day operations until a permanent director is hired.
Ms. Norton presented three items on behalf of KIA. The first was a Fund B Loan for the City of Hustonville in Lincoln County. The request was for an increase of $130,300 to an existing $476,400 Fund B Loan for the replacement of 16,000 linear feet of aged cast iron waterlines with four- and six-inch PVC lines. The bidding was very competitive and more than seven bids were reviewed. The increase will cover the overage required from the lowest bidder to complete the project. The loan will have a 20-year term, an interest rate of 1.75 percent, and a debt service payment of $37,297.
Senator McDaniel asked if the increase reflects a low engineering estimate on this project. Mr. Scott answered that yes, the engineer’s estimate was probably low because it was a highly competitive bidding process. Senator McDaniel commented that from his perspective it appeared that there is an industry-wide trend that the increase of pricing is greater than what engineers and architects can account for in their estimations. He mentioned that this may be something that will be seen more often over time as the market is changing and previous pricing models cannot keep pace. This runs the risk of having projects being significantly under budgeted in the upcoming budget cycle as well, and caution must be urged for borrowers. Senator Carroll contributed that in his experience delay may help prevent overspending for projects that are not critical and it might benefit borrowers to wait until the economy settles. Senator McDaniel made a motion to approve the loan, seconded by Senator Carroll. The motion passed by a roll call vote of 5 yeas, 0 nays.
The second item was for a Fund F loan for the Bath County Water District in Bath County. The request was for a $925,470 loan for the Scattered Site System Improvements 2015 project. The loan will have a 20-year term, an interest rate of 0.75 percent, and a debt service payment of $39,173. Senator Carroll made a motion to approve the loan. The motion was seconded by Senator McDaniel and approved by roll call vote of 5 yeas, 0 nays.
The third item was for a Fund F loan for Crittenden-Livingston County Water District in Livingston County. The request was for a $1,039,500 loan for the Moore Hill Tank project. The loan will have a 20-year term, an interest rate of 1.75 percent, and a debt service payment of $64,424. Senator Humphries made a motion to approve the loan. The motion was seconded by Senator McDaniel and approved by a roll call vote of 5 yeas, 0 nays.
Mr. Ryan Barrow, Executive Director, Office of Financial Management was present to report five items. The first was State Property and Buildings Commission (SPBC) General Fund Revenue and Refunding Revenue Bonds, Project Number 110 and Road Fund Revenue Bonds, Project Number 111. This bond issue will refund some KIA loans as well as provide $135 million for projects authorized by the General Assembly. It will be a negotiated transaction with Citi serving as underwriter. Senator Carroll moved to approve the bond issue, seconded by Representative Coursey. The motion passed by a roll call vote of 5 yeas, 0 nays.
The second item was a Kentucky Housing Corporation (KHC) Conduit Multifamily Housing Revenue Bonds (Volunteer Management & Development Portfolio) Series 2015 bond issue. Proceeds from this bond issue will finance the acquisition, rehabilitation, and equipping of various multifamily residential rental facilities in western Kentucky owned by BTT Development and pay associated costs of issuance. As a conduit issuer, the Commonwealth is not responsible for its repayment, which will be explicitly stated in the offering documents. Senator Carroll asked, when the Commonwealth is not responsible for repayment of the bond, if the bond is listed as an outstanding bond issue. Mr. Barrow stated that no, because it is a conduit issue and the state has no responsibility for repayment it is not considered a liability and is therefore not reported as an outstanding bond. Senator Carroll made a motion to approve, seconded by Senator Humphries. The motion passed by a roll call vote of 5 yeas, 0 nays.
The third item was Kentucky Economic Development Finance Authority (KEDFA) Revenue Bonds, Series 2015, for the benefit of the Next Generation Kentucky Information Highway Project. This is a conduit transaction as well as a lease and includes several series of bonds used to fund the project, totaling approximately $305 million. Kentucky Wired Operations Company (OpCo) was created to allow for tax-exempt borrowing for this transaction and this is a novel innovation in the United States for this asset class. The proceeds will be lent to Kentucky Wired OpCo for the development of the system and site-by-site turnover to the system. Senator McDaniel asked, regarding the availability payments expected to cover operating and maintenance costs plus 1.25 times senior debt service payments, if it is it correct to assume that the state is not responsible for debt service and Macquarie is responsible. Mr. Barrow answered that the state is not servicing the debt on the transaction, however there are still contractual financial liabilities because the state cannot walk away from the system once it is in place. Senator McDaniel then asked if after operations were paid and if Macquarie were unable to make debt service payments, would the state need to increase the availability payment to ensure that the debt service is paid. Mr. Barrow said that the availability payment will increase based on inflation, but cannot be increased arbitrarily based on not servicing debt or meeting coverage ratios. Mr. Hicks added that if Macquarie was unable to make debt service payments, they would be forced to default but it would not require the state to increase availability payments.
Senator McDaniel asked if, so long as internet services are provided, the Commonwealth would ensure that the debt service and operations were covered. Mr. Hicks stated that the Commonwealth is contractually obligated to an availability payment and as long as there is service and it meets agreed upon performance standards, the state will make payments. However, the state could pay less than the agreed payment if performance standards are not met. The only instance where the state would pay more would be covering the annual inflation-like increase. Senator McDaniel asked what would happen if Macquarie defaulted. Mr. Hicks said that if they defaulted, the state would find another provider to operate the system and cover the debt service payment. The state has the right to step in and operate the system in the event of default to ensure access to all users and seek another vender to take over long-term. Additionally, the lenders have the ability to step in prior to shut-down to ensure the system is working and payments are made. Senator McDaniel stated that in the Fitch ratings, it was implied that the Commonwealth would ensure the debt. Mr. Hicks answered that that was only true if the Commonwealth defaulted, not the vendor.
Senator McDaniel said that it was his understanding that Fitch assumed the Commonwealth was guaranteeing a revenue stream to the vendor and if that is not met, the Commonwealth would be responsible for debt service payments. He asked what would occur if Macquarie approached the Commonwealth stating that the revenue stream was not enough to meet debt service obligations and that they needed a greater payment. Mr. Hicks stated that Macquarie has no contractual right to make that claim. Senator McDaniel cautioned, based on recent events in Tennessee, that this is a risky model. Mr. Hicks answered that after much research into subscription based models, it was decided to provide guaranteed users (i.e. all state agencies) instead of being dependent upon future subscribers to make the debt service payment. Mr. Barrow agreed that this was the major distinction in the system as it is designed, because we are supplying an agreed-upon user base not dependent on usage, there is a reduction of risk. Barring large performance deductions, the availability payment will cover debt service.
Senator McDaniel asked if this meant the Commonwealth was guaranteeing the customer base to one entity in lieu of private sector carriers as is currently being done. Mr. Hicks and Mr. Barrow said that this was correct. Senator McDaniel then asked how customers would receive service, whether it would happen when previous contracts expire or when the services are available. Mr. Hicks stated that sites would be connected on a site-by-site basis as the service rings are in place. For each site, the state will exercise their 30-day contract termination notice with the existing carrier and the site will be connected to the new network. Senator McDaniel then asked if this would result in the large scale cancellation of contracts and what impact this will have on large and small carriers throughout the state. Mr. Hicks stated that it will result in cancellations on a site-by-site basis. Senator McDaniel finished by saying he still had some reservations about this project, including whether it would negatively impact the ability of educational institutions to competitively negotiate prices in the future, and would like to continue discussion in later meetings. No action was required on this item.
The fourth item was also for KEDFA for Owensboro Health, Inc. This issue was of Hospital Revenue Bonds, Series 2015A, and Hospital Revenue Refunding Bonds, Series 2015 B and was dated August 13, 2015. The proceeds will finance acquisition, construction, and equipping of five Healthplex outpatient facilities in Daviess, Hopkins, Muhlenberg, Henderson, and Hancock counties. No action was required on this item.
Mr. Barrow presented the fifth and final item, the Annual Report of Outstanding Bonds as of fiscal year ending June 30, 2015. He stated it is a statutory requirement to present the report to the committee each year and that he would welcome questions if there were any. Hearing none, no action was required on this item.
New School Bond Issues with School Facilities Construction Commission Debt Service Participation
Ms. Kristi Culpepper, Executive Director, School Facilities Construction Commission (SFCC), reported eleven school bond issues with SFCC debt service participation with a total par amount of $119,908,000. The state portion of the annual debt service payment was $5,995,476 and the local contribution was $2,808,491. All bond issues will finance new construction or improvements at existing school facilities. Boyd County, Corbin Independent, Kenton County, and Nicholas County were each required by House Bill 235 of the 2014 Regular Session to levy a five cent equivalent tax in order to qualify for project funding. Raceland-Worthington Independent enacted a recallable nickel tax increase, but it was not required to do so under House Bill 235. Otherwise, these bond issues did not involve tax increases. Senator Carroll made a motion to approve the school bond issues. The motion was seconded by Representative Coursey. The motion passed by a roll call vote of 5 yeas, 0 nays.
New School Bond Issues with 100 Percent Locally Funded Debt Service Participation
Mr. Nacey said eight local school bond issues were reported to the committee. Each bond issue had 100 percent local debt service support and involved no School Facilities Construction Commission participation. No tax increases were required for these issues. These bond issues will finance a variety of projects including roof improvements, energy conservation measures, football stadium improvements, and the purchase of a building for central office staff. Three of the issues refinance previous issues. No action was required on this item.
Mr. Nacey also said that included in members’ folders was the updated debt issuance calendar.
With there being no further business, the meeting was adjourned at 1:50 p.m. The next meeting of the committee will be November 17, 2015 at 1:00 p.m. in Capitol Annex Room 169.