Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee was held on Tuesday, August 16, 2016, at 1:00 PM, in Room 169 of the Capitol Annex. Representative Chris Harris, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Chris Harris, Co-Chair; Senator Stan Humphries, Co-Chair; Senators Chris Girdler, and Christian McDaniel; and Representative Steven Rudy.
Guests: Mr. Scott Aubrey, Director of Real Properties, Finance and Administration Cabinet; Mr. Janice Tomes, Deputy State Budget Director; Mr. Ryan Barrow, Executive Director, Office of Financial Management; Ms. Jamie Johnson, Financial Analyst, Kentucky Infrastructure Authority; and Mr. Tony Yates, Project Manager, Finance and Administration Cabinet.
LRC Staff: Josh Nacey, Committee Staff Administrator; Julia Wang, Analyst; and Jenny Wells, Committee Assistant
Approval of Minutes
Representative Rudy moved to approve the minutes of the July 19, 2016 meeting. The motion was seconded by Senator Girdler and approved by voice vote.
Correspondence Items
Mr. Nacey reported on two correspondence items. The first item was correspondence from Mary Vosevich, Vice President for Facilities Management, University of Kentucky (UK), regarding UK’s decision to not proceed with the Alpha Gamma Rho Fraternity project as it had been proposed at the May 24, 2016 meeting. The committee did not approve that project and UK states in their correspondence that UK is reviewing other options for this project pursuant to the University’s authorized capital items in the current budget.
The second item was correspondence from the committee to Secretary William M. Landrum III, Secretary, Finance and Administration Cabinet, regarding the committee’s vote to table the appropriation increase for the Kentucky Center for the Arts Chiller Replacement project at the July 19, 2016 meeting until today’s meeting.
Project Report from the Universities
Mr. Nacey reported on four purchases of medical equipment for the University of Kentucky in excess of $200,000. The first equipment purchase is for an Olympus FV1200 Confocal Microscope. This device will be useful in areas of metabolomics and drug development research to study cancer metabolism. UK’s College of Pharmacy and the Center for Environmental and Systems Biochemistry will collaborate with the Markey Cancer Center to operate a National Institutes of Health Metabolism Center that will supply advanced analytical services to researchers in labs throughout the U.S. The microscope will be located at the Bio Pharm Complex. The cost is $252,405 and was paid in cash with restricted funds.
The second equipment purchase is for an Enhanced Confocal System Microscope and N-Sim/N-Storm Combination Super Resolution Microscope. This equipment will allow UK to perform modern microscopy with better resolution and speed. UK also believes that this equipment will enable the university to remain competitive for grant applications in basic biomedical, biological, and agricultural research. The equipment will be located at the Peter B. Bosomworth Health Sciences Research Building. The cost of the Enhanced Confocal Microscope is $495,071 and the Combination Super Resolution Microscope is $704,119. Both were paid in cash with restricted funds.
The third equipment purchase is for a Water Gas Shift Reactor and Fischer-Tropsch Synthesis Units. This equipment will satisfy capital requirements for UK’s existing Coal/Biomass-to-Liquids facility which will provide for a functional mini-refinery. The cost of the equipment is $2,125,042 and was paid in cash with federal funds.
The final equipment purchase is for a Wintersteiger Delta Plot Combine. This device will be used by the College of Agriculture, Department of Plant and Soil Sciences, to increase efficiency of soybean research and provide accurate harvest efficiency for the Soybean Variety Trials Program. The device will provide data to assist farmers in selecting the optimum soybean seeds for their region of the state. The plot combine costs $268,807 to be paid in cash with $100,000 in UK restricted funds and $168,807 in gift funds provided by U.S. seed companies. No action was required.
Lease Reports from Finance and Administration Cabinet
Mr. Scott Aubrey, Director, Finance and Administration Cabinet, reported on two items. The first item is a lease renewal for the Unified Prosecutorial System, exceeding $100,000, located in Jefferson County. This lease is being renewed under the same terms and conditions at $16.55 cents per sq. ft. for 18,963 sq. ft. of office space. The lease will expire June 30, 2017. Senator McDaniel moved to approve the lease renewal, seconded by Senator Humphries. The motion passed by a roll call vote of 5 yeas, 0 nays.
The second item is a lease renewal for the Cabinet for Health and Family Services, exceeding $100,000, located in Montgomery County. This lease is being renewed under the same terms and conditions at $13.50 per sq. ft. for 9,656 sq. ft. of office space. The lease will expire June 30, 2017. Representative Rudy moved to approve the lease renewal, seconded by Senator McDaniel. The motion passed by a roll call vote of 5 yeas, 0 nays.
Project Report from the Finance and Administration Cabinet
Ms. Janice Tomes, Deputy State Budget Director, reported on one project from the Finance and Administration Cabinet. This project is being brought back in front of the committee for an appropriation increase for the Kentucky Center for the Arts (KCA), Chiller Replacement, in Jefferson County. Pursuant to KRS 45.760(7), the Secretary of Finance and Administration has amended this project approval amount to $2,757,800, for a total restricted fund appropriation increase of $250,300, and will replace the existing chillers at KCA. This project will be funded with a grant awarded by Louisville-Jefferson County Metro Government (Metro Government) in the amount of $2,507,500, KCA’s 2014-2016 Maintenance Pool in the amount of $71,400, and with the remaining balance of $178,900 coming from KCA’s agency funds. The original appropriation was approved in December 2015 with 100 percent of private funds coming from Metro Government. After receiving bids, the appropriation must be amended in order to award the contracts.
Senator McDaniel said that, according to the information given to the committee, which included the chiller project, actual bids, and cost, there was a change in scope from two rebuilds to one rebuild and replace. Senator McDaniel further said that it appeared that, in order to make this balance, a contingency line was added, and the designs fees were deleted, $222,500 was taken out, and the balance of the differences were placed in contingencies so the scope amount could be increased. Senator McDaniel said that it appears that someone fudged the estimate in order to make the numbers fit. Senator McDaniel said that his concern at this time is about more than the appropriation increase for the project and asked Finance to comment on his concerns. Mr. Tony Yates, Project Manager, Finance and Administration Cabinet, said that design fees are always included in the estimate. The only thing that had changed was the decision was made to replace one of the chillers and the rest of the project involved replacing the original air handlers inside the KCA. Senator McDaniel said that from looking at the spreadsheet and information dated August 2, 2016 and provided to the committee, there were mechanical engineer and design fees, preliminary scope, and an original estimate of $222,500. Senator McDaniel further said that before the bid estimate, these items have been taken out. Mr. Yates said that he was unsure as to why it was done this way as the design fees are always included in the bid process.
In response to several more questions from Senator McDaniel, Mr. Yates said that the change order for the chiller rebuild resulted from the discovery of problems with the chiller due to one of the thermostats not working and some wiring needed to be replaced which amounted to $900. Mr. Yates said that this amount was not included in the bid. Mr. Yates further stated that additional shut-off valves were installed and the types of valves were changed at the request of KCA. Mr. Yates said that Bid Pack 1 is complete except for some punch lists items on the installation. Senator McDaniel said that in February 2016, there was an estimated contingency of $147,000 and currently that amount is $50,000. In response to Senator McDaniel’s’ questions regarding the amount of the work that remains to be completed, Mr. Yates said that the installation of the air handling units, Bid Pack 2, was just recently bid. Mr. Yates said that, if the committee approves this appropriation increase for the project, he feels certain the project will be completed for the amended amount of $2,757,800.
In response to several more questions from Senator McDaniel, Ms. Tomes said that the funds for the scope increase are coming from KCA restricted funds which are generated by ticket sales proceeds and from the Miscellaneous Pool Fund 2014-2016 Budget which is specifically for the KCA.
Senator McDaniel said that he thinks the overall procedures for estimating could be updated and also stated that it is bothersome when costs are shifted to adjust numbers with existing monies in order to make these types of projects work, along with making upgrades that were not included in the original bid process. Senator McDaniel concluded by saying that, while he appreciates the KCA’s efforts to stay within their existing funds, he feels that more accuracy of the process is needed as the committee appropriately monitors these projects and the flow of the requested funds.
Senator McDaniel moved to approve the scope increase for the KCA chiller replacement project, seconded by Senator Humphries.
Senator Girdler asked to explain his vote and said that he commended Senator McDaniel for bringing concerns to the table that many of the members of the committee have. Senator Girdler further said that he believes the numbers lack clarity and that a better and more defined process is needed. The motion failed to pass by a roll call vote of 4 yeas, 1 nay.
Report from the Office of Financial Management
Ms. Jami Johnson, Financial Analyst, Kentucky Infrastructure Authority (KIA), reported on seven items. The first item was for a Fund A loan for the City of Pineville f/b/o Pineville Utility Commission in Bell County. The request was for $533,485 for the Phase I of the Virginia Avenue Utility Replacement project. The loan will have a 20 year term, an interest rate of 0.75 percent and an annual estimated debt service payment of $20,889.
The second item was for a Fund A loan for the City of Hazard in Perry County. The request was for $100,000 for the Sanitary Trunk Rehabilitation Replacement project. The loan will have a 20 year term, an interest rate of 1.75 percent and an annual estimated debt service payment of $67,623.
The third item was for a Fund A loan for the Harrison County Sanitation District in Harrison County. The request was for $1,567,885 for the Northside Sewer Extension and for the Cedarbrook Replacement project. The loan will have a 30 year term, an interest rate of 0.75 percent and an estimated annual payment of $49,934.
The fourth item was for a Fund A planning and design loan for the City of Marion in Crittenden County. The request was for $587,200 for the New Wastewater Treatment Plant project. The loan will have a 5 year term, an interest rate of 2.75 percent and an annual payment of $127,678.
The Fund A loan items were considered as one roll call vote. Representative Rudy moved to approve the Fund A loan items. The motion was seconded by Senator Girdler.
Senator McDaniel asked to explain his vote and said he would like for KIA to explain how they will ensure adequate cash flow in situations in which customers of the current failing plants were being charged a flat rate and the utility had a monthly collection rate of about 50 to 60 percent. Lastly, Senator McDaniel said that it is his hope that the failing plants will improve upon that issue. The motion passed by a roll call vote of 5 yeas, 0 nays.
The fifth item was for a Fund B loan for the City of Hustonville in Lincoln County. The request was for $75,639 for the Water System Improvements project. The loan will have a 20 year term, an annual interest rate of $1.75 percent and an annual payment of $4,650. Senator Humphries moved to approve the Fund B loan, seconded by Senator Girdler. The motion passed by a roll call vote of 5 yeas, 0 nays.
The sixth item was for a Fund F loan for the Cave Run Water Commission in Menifee County. The request was for $700,000 for the Systems Improvement project. The loan will have a 20 year term, an annual interest rate of 0.75 percent and an annual payment of $39,506.
The final item was for a Fund F loan for the City of Evarts in Harlan County. The request was for $275,000 for the Water Supply Well and Treatment Plant Refurbishing project. The loan will have a 20 year term, an annual interest rate of 0.75 percent and an annual payment of $11,640.
The Fund F loan items were considered as one roll call vote. Senator McDaniel moved to approve the Fund F loan items, seconded by Senator Girdler. The motion passed by a roll call vote of 5 yeas, 0 nays.
Report from the Office of Financial Management
Mr. Ryan Barrow, Executive Director, Office of Financial Management (OFM) reported on two items. The first item was the Kentucky Housing Corporation (KHC) Tax-Exempt Conduit Multifamily Housing Revenue Bonds, Series 2016. Proceeds from this bond issue will finance the acquisition, rehabilitation, and equipping of the Arcadia Apartments project, a 432 unit property in Louisville. As a conduit issuer, the Commonwealth is not responsible for its repayment, which is explicitly stated in the offering documents. The anticipated net proceeds of the bond issue is for approximately $20,000,000.
In response from a question from Senator McDaniel, Mr. Barrow said that the benefits of these federal and state government grants to developers is that they incentivize multifamily housing through tax-exempt borrowing; however, the federal government has specific requirements for allowing municipalities to do so such as eminent domain, the policing, and the taxing powers.
In response to several more questions from Senator McDaniel, Mr. Barrow said this benefit is set by federal and state statutes and that, ultimately, it is the individual developer that assumes responsibility for repayment. Mr. Barrow said that this process includes a review by KHC as to the program criteria and by OFM who reviews the process to include all private activities in order to ensure that there are limits on the amount of these bonds that can be issued for the developer. Mr. Barrow further said that OFM monitors the appropriate use of the funds and ensures that there is no extension of Commonwealth credit; these bonds are completely developer financed and all debt service is on the developer’s book and that debt service is paid by them.
In response to questions from Representative Harris, Mr. Barrow said that 99 percent of these issues are pure conduit bond transactions; if the due diligence is conducted properly and legally, there should be no accountability to the municipalities or other entities that serves as conduits. Senator McDaniel moved to approve the bond issue, seconded by Representative Rudy. The motion passed by a roll call vote of 5 yeas, 0 nays.
The final item was the Kentucky Housing Corporation Multifamily Housing Revenue Bonds, Series 2016. Proceeds from this bond issue will finance the acquisition, rehabilitation, and equipping of a multifamily residential rental facility containing 184 units located at 3703 West Wheatmore Drive, Louisville. As a conduit issuer, the Commonwealth is not responsible for its repayment, which is explicitly stated in the offering documents. This bond issue will have a term of 24 months, an interest rate of 0.95 percent and par amount of $9,000,000. The final maturity date will be July 1, 2018. No action was required.
New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation
Mr. Ryan Barrow reported on twelve (12) school bond issues with SFCC debt service participation. Three issues will finance school renovation or constructions and the remaining nine will refinance previous bond issues. There were no local tax increases associated with these projects. Senator McDaniel moved to approve the school bond issues, seconded by Senator Humphries. 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 that one local school bond issue was reported to the committee. The bonds issued by the Scott County District will be used to refinance Series 2008 bonds. No tax increases were involved. No action was required on this item.
Debt Issuance Calendar
Mr. Nacey said that the updated debt issuance calendar was included in the members’ folders.
Discussion Item
Representative Harris said the last item on the agenda would be a discussion on the Louisville Arena Authority (LAA) funding process evaluation which the members asked to be placed on the agenda for the August meeting during the July meeting. Representative Harris said that, due to the confluence of events since last year such as the legislative session and the appointment of two new co-chairs to this committee, the committee staff thought it would be best to bring this issue back to the forefront for a renewed discussion; however, one of the main members of this committee who has pushed for this discussion is Representative Wayne from Louisville, and he was unable to attend this committee meeting or the next committee meeting. Representative Harris said that Representative Wayne has asked that any action taken by the committee be delayed until the October meeting when he is able to be present; Representative Wayne also wanted the members to proceed with particular matters of concern or interest. Representative Harris deferred to Mr. Nacey for additional comments and to provide historical background information to the committee.
Mr. Nacey said that in the summer of 2013, it was discovered that an agreement was reached between the LAA and the Kentucky State Fair Board (KSFB) in which it appeared as though KSFB had forgiven about $7 million dollars in reimbursement owed to it by the LAA. In September 2013, the KSFB and LAA officials were present at that month’s committee meeting to address the committees’ concerns. The KSFB stated that the bond indenture requires that the LAA operating fund, reserve account, and debt service be funded prior to the negative impact reimbursement to the KSFB. If funding is available, the reimbursement will be made to the KSFB after January 2014.
Mr. Nacey said that in the months that followed, committee staff continued to look into the matter. In early 2014, the office of the Auditor of Public Accounts (APA) performed a risk assessment of the situation and submitted a summary of their preliminary findings. While not finding any apparent problems, the APA was unable to fully address any conflicts of interests without further information in order to determine what expanded procedures would be needed. In April 2014, the KSFB submitted to the committee its calculation of the net-negative impact which totaled $7,471,391. In May 2014, the LAA responded to the KSFB by denying any obligation to reimburse KSFB for the net-negative impact.
Mr. Nacey further said that in July of 2014, the committee sent a written request to the Attorney General’s office (AG) seeking a legal opinion over whether the LAA is obligated to pay the KSFB for the net-negative impact, whether conflicts of interest have or did exist among the membership of the Authority, and whether the reduction in the TIF district size was legal. The AG responded in April 2015 with an informal opinion which stated the LAA was not obligated to repay the net-negative impact and that the reduction of the TIF district size was legal. The AG did not, however, have enough information with which to address the potential conflicts of interest.
Lastly, Mr. Nacey said that at the April 2015 committee meeting, the committee voted to seek LRC approval to spend funds to hire an independent consultant to evaluate the funding processes of the LAA. The LRC approved the request at its June 2015 meeting. Subsequently, a Request for Proposal (RFP) was released and responses were due in December 2015. Mr. Nacey said that only one firm responded to the RFP and no further action has been taken by the LRC.
Senator McDaniel and Representative Harris agreed that the committee would wait until Representative Wayne could be present for any action taken by the committee on the LAA discussion item. Further, both Senator McDaniel and Representative Harris agreed that the committee should make a decision soon on proceeding with the LAA item due to the amount of money involved which could result in an additional burden to the Commonwealth. Representative Harris said that, unless there is further discussion, the committee will address this issue when Representative Wayne is present at the October meeting. Hearing none, Representative Rudy moved to adjourn the meeting, seconded by Senator McDaniel. The motion was approved by voice vote, and the meeting was adjourned at 1:49 p.m.