Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee meeting was held on Tuesday, September 20, 2016, at 1:00 PM, in Room 169 of the Capitol Annex. Senator Stan Humphries, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Stan Humphries, Co-Chair; Representative Chris Harris, Co-Chair; Senators Chris Girdler, and Christian McDaniel; and Representatives Steven Rudy and Jim Wayne.
Guests: Mr. Scott Aubrey, Director of Real Properties, Finance and Administration Cabinet; Mr. Janice Tomes, Deputy State Budget Director; Ms. Sandy Williams, Executive Director, Office of Financial Management; Ms. Sarah Aitken, Financial Analyst, Kentucky Infrastructure Authority; Dr. Gary Ransdell, President, Western Kentucky University; Mr. Bryan Russell, Chief Facilities Officer, Western Kentucky University; Ms. Deborah Wilkins, General Counsel, Western Kentucky University; Ms. Robin Taylor, Vice President for Public Affairs, Western Kentucky University; Mr. David Norman, Division Director, Kentucky Horse Park; Mr. Chuck Ammons, Facilities Director, Kentucky Horse Park; Mr. Jeremy Ratliff, Managing Director of Multifamily Programs, Kentucky Housing Corporation; Mr. Jim Statler, Chief Financial Officer, Kentucky Housing Corporation; Ms. Evelyn Smith, Claims Manager, State Risk and Insurance, Office of the Controller; Mr. Michael Hales, Chief Financial Officer, Northern Kentucky University; Mr. Michael Gross, Project Manager/Team Leader, LDG MultiFamily, LLC; Mr. Luis Diaz, Bond Counsel, Dinsmore and Shohl; Ms. Dana Fohl, Deputy General Counsel, Eastern Kentucky University; Mr. Brad Compton, Executive Director of Accounting, Eastern Kentucky University; and Mr. Craig Turner, Chairman of the Board, Eastern Kentucky University.
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 August 16, 2016 meeting. The motion was seconded by Senator McDaniel and approved by voice vote.
Correspondence Items
Mr. Nacey reported on two correspondence items. The first item was correspondence from the CPBO Committee to the Finance and Administration Cabinet regarding the committee’s disapproval of the funding revision proposal for the Chiller Replacement project for the Kentucky Center for the Arts at its August 16, 2016 meeting. The second item was correspondence from the Finance and Administration Cabinet to the committee regarding its decision to approve and proceed with that project.
Information Items
Mr. Nacey reported on one informational item regarding the Kentucky Housing Corporation (KHC) Settlement with the Securities and Exchange Commission (SEC). On August 24, the SEC announced that it had settled enforcement actions against 71 municipal bond issuers across the county for violations of disclosure obligations. Of those 71 issues, two were in Kentucky; the Frankfort Plant Board and, more relevant to this committee, the Kentucky Housing Corporation (KHC). This was part of the nationwide effort known as the Municipalities Continuing Disclosure Corporation (MCDC) Initiative which is aimed at encouraging issuers and underwriters to self-report incidents in which they have made inaccurate statements in bond offerings about compliance with previous continuing disclosure agreements (CDAs). Under the MCDC initiative, the SEC will recommend standardized favorable settlement terms to those issuers who self-report such violations. In the action against KHC, the SEC said that, in the official statement for certain securities, KHC made material false and/or misleading statements about its prior compliance with previous CDAs. Those false and/or misleading statements involved six negotiated offerings between 2011 and 2013. In the agreement with the SEC, KHC neither admitted nor denied the findings therein. KHC was not subjected to a monetary penalty, but did agree to undertake certain remedial measures and to cease and desist from committing or causing any additional violations. KHC has adopted written disclosure procedures and has filed their 2014 audited financial statements and operating data.
In response to questions from Senator McDaniel, Mr. Jim Statler, Chief Financial Officer, Kentucky Housing Corporation (KHC) said that since KHC began issuing bonds, it agreed to supply continuing disclosure information to the secondary bond market which involves submitting KHC’s auditor financial statements to a central repository, EMMA. This repository is similar to the SEC’s EDGAR system. KHC posts on EMMA certain financial information that is in each one of KHC’s Official Statements (OSs) when it issues bonds and within a certain amount of time. Mr. Statler said that this disclosure requirement was generally accomplished by subsequent bond issues and that information was in the next OS sent out. In 2009, KHC did not issue bonds; KHC issued bonds in 2010, but not on the same recurrent schedule. Mr. Statler said that KHC was issuing bonds every four to six months and met the required timelines by submitting that information in the next OS. As a result, KHC was not filing information on a timely basis because it did not have the bonds that it would normally report certain financial information. The issue with the SEC is that KHC not only failed to comply with its own continuing disclosure agreements but also in subsequent bond issues, primarily in 2011, 2012, and 2013. KHC reported that it had complied and that is the basis for the false statement language from the SEC. Further, Mr. Statler said that KHC became aware of this in late 2013 and corrected this information for the 2014 bond issue in June, 2014, which brought KHC into compliance. KHC has adopted and rigidly adhere to new procedures. No action was required.
Project Report from the Universities
Mr. Nacey reported on one purchase of medical equipment for the University of Kentucky (UK), in excess of $200,000. The equipment purchase is for a Radon Digital X-Ray which will be located at the Emergency Department at UK Good Samaritan Hospital. The new digital x-ray system will be utilized for all patient imaging as it provides sharper images and immediate results for the doctors, and more ergonomic positioning translating into less wait time for the patients. The cost is $288,879 and was paid in cash with restricted funds. No action was required.
Dr. Gary Ransdell, President, Western Kentucky University (WKU), reported on one project which is for the construction of the Medical Center Health Sports Medicine Complex. Dr. Ransdell was accompanied by WKU staff Mr. Bryan Russell, Chief Facilities Officer, WKU, Ms. Deborah Wilkins, General Counsel, WKU, and Ms. Robin Taylor, Vice President for Public Affairs, WKU.
Dr. Ransdell said that WKU was seeking authorization for a construction project to build by private sector: a healthcare provider in Bowling Green, on land on WKU’s campus that the University would lease to that healthcare provider in order to build a $22 million dollar facility at their expense. There is no bond variable in this equation and the only expense to the university would be the expense of operation and maintenance of that facility going forward.
In response to questions from Senator McDaniel, Dr. Ransdell said that the Medical Center is going to build the $22 million facility on property owned by the Commonwealth. Dr. Ransdell further stated that the lease will cost the Medical Center $1 per year.
In response to another question by Senator McDaniel, Dr. Ransdell stated that the Medical Center will make money by having a sports medicine and an orthopedic presence on WKU’s campus. The Medical Center will be the official healthcare provider of WKU. Dr. Ransdell also stated that the Medical Center will have branding rights as well.
In response to several questions from Senator McDaniel, Dr. Ransdell stated that WKU would locate its physical therapy program in the Center. WKU is currently paying a lease of $500,000 a year to the Medical Center for the physical therapy program at its existing health science center on the Medical Center campus. When that program is relocated to this new building, the lease rate will remain the same. Dr. Ransdell further stated that WKU is not negotiating any leases until this committee and the Council on Postsecondary Education approve the new construction project. In sum, Dr. Ransdell stated that there are four leases involved in this project; (1) lease of the land for 99 years at $1 per year to the Medical Center, (2) the university’s Doctor of Physical Therapy program will lease space from the Center, (3) WKU will lease campus health center space to the Medical Center, and (4) the sublease to UK for the new medical school in the new Health Science Complex on the Medical Center campus.
In response to an additional question from Senator McDaniel, Dr. Ransdell stated that although the Medical Center will have an orthopedic presence, no surgeries will be performed in this facility.
In response to comments made by Senator McDaniel, Dr. Ransdell said the negative input received by the committee came from a competing, for-profit physicians group. The competing group, Western Kentucky Orthopedic & Neurological Association (WKONA) and their associates, have been providing the orthopedic care for WKU’s student athletes, without any bidding or any personal services contracts. Dr. Ransdell said that WKONA has been making about 1 million dollars a year in related surgeries with student athletes. Their concern is that the work that would be performed in this building would be done by the Medical Center of Bowling Green.
In response to Senator McDaniel’s comments about procurement code compliance, Dr. Ransdell further stated that compliance with the procurement code would not be required in this particular circumstance. This started out as a gift discussion and WKONA was approached first. Due to the expense, WKONA suggested that WKU approach two other healthcare providers in Bowling Green. These providers also declined. Ultimately, once the Medical School partnership was announced, the Medical Center agreed. Dr. Ransdell stated that WKU has followed, to the letter, every statute that pertained to the private construction of the project on state land.
In response to a question from Senator Humphries, Dr. Ransdell stated that the WKU Board of Regents approved the project by a 6-4 vote with one abstention. A physician on the WKU board who works for the Graves Gilbert Clinic in Bowling Green, which is a competitor of the Medical Center, abstained from the vote. The other dissenting board members were uneasy with a close partnership with one healthcare provider.
In response to questions from Senator Girdler, Dr. Randell said there had not been any legal action taken against the project and that, at this time, only a written dispute has been made on behalf of a potential competitor in the community lawsuit.
In response to another question from Senator Girdler, Dr. Ransdell said that WKU has the option of getting out of the lease and terminating the partnership if the university chooses to do so. At that point, WKU would have the option of coming back to this committee to acquire the facility at fair market value. If the Medical Center wants out, it would gift the asset to WKU at no costs or no terms. The Medical Center could continue to operate their portion of the space on one floor of the building, which is about 6,000 sq. ft. One option for the Medical Center would be to put another medical-related enterprise in there and terminate the relationship with WKU, which would continue to use the facility. Another option would be that the Medical Center would gift the entire asset to WKU which is preferable. If there is a dispute that may arise in 25 years or 50 years, the university would weigh those options and choose whatever will be in the best interest of WKU.
In response to several questions from Representative Harris, Dr. Ransdell stated that a formal protest has been filed with the Finance and Administration Cabinet.
In response to additional questions from Representative Harris, Ms. Deborah Wilkins, General Counsel, WKU, stated that WKU did not follow procurement code because it did not apply to this situation. Ms. Wilkins said that WKNOA has alleged that the Letter of Intent (LOI) violates Kentucky model procurement code because it contains commitments that constitute a contract for personal services. Ms. Wilkins stated that WKU is not contracting with the Medical Center for any personal services and is not paying the Medical Center for personal services; the procurement code is simply not applicable. Ms. Wilkins further said that the Medical Center would lease 2 acres from WKU on which to put a building and WKU is going to lease space in that building for the DPT program.
In response to another question from Representative Harris, Dr. Ransdell said that, as it pertains to sponsorships, WKU has never bid for those and it is not a personal services contract in that regard.
In response to Representative Harris’s comment that this committee’s function is to make sure that projects follow the mode procurement code and other laws, Dr. Ransdell said that the university had followed the law and that is why it sought the committee’s authorization. Further, Dr. Ransdell said that the model procurement code is not a variable in the dynamics that are part of this agreement.
In response to additional questions from Representative Harris, Ms. Wilkins stated that the ground lease to the Medical Center was not bid and it was her position that the lease would not have to be bid. Ms. Wilkins further stated that the lease for WKU’s DPT program would not be bid. Dr. Ransdell said that lease would not be bid because WKU was currently leasing space from the Medical Center for the DPT program in the building that the university currently occupies on the Medical Center campus. Dr. Ransdell said that the lease was not originally bid because the Health Science Complex on the Medical campus was a $20 million building that the Medical Center built and that WKU is leasing from them. That lease houses WKU’s School of Nursing, the DPT program, and the Doctor of Nursing Practice program. WKU plans to vacate one floor of that building to sublease to UK in which they will place their medical school. Dr. Ransdell stated that a fourth lease involves a campus health clinic which WKU is going to lease to the Medical Center. Additionally, Dr. Ransdell said that this particular lease was bid originally and that WKU is discontinuing the services contract with the Grave Gilbert Clinic because WKU is going to lease the space. WKU will no longer contract for healthcare services, but will simply lease the building to the Medical Center, which will then provide for WKU’s students.
In response to a question from Representative Wayne, Dr. Ransdell said that the project started out as a gift discussion and, accordingly, the bid process did not apply. Representative Wayne said that is not exactly what this is; the university received money to do a project but the project is a legal entity. There are some legal guidelines that must be followed and those guidelines were not followed. Representative Wayne further said that, in an email, Dr. Ransdell reminded members and other WKU staff who are working on the project, that absolute confidentiality is critical and to not engage any party in any discussion until the Medical Center Board acts and the WKU Board of Regents makes a decision; neither board can be placed in a position of public discussion until each has conducted its business. Representative Wayne said that this is a public university and all of its issues are transparent except when it goes behind closed doors for personnel issues. Additionally, Representative Wayne said he finds this appalling and does not understand the full context for this. Dr. Ransdell said that confidentiality was required because the university was dealing with a private board and that the private board had the right to discuss this project and determine whether it wanted to proceed. Representative Wayne said that the private board could discuss amongst themselves privately because it is not under state open records and meeting laws, but universities are. Dr. Ransdell said that as soon as the Medical Center Board acted, the university’s board discussed this in open session.
In response to a question from Representative Wayne, Dr. Ransdell said that the decision not to seek written bids could have resulted in efforts to lobby the Medical Center Board and the Medical Center did not want to be lobbied. Representative Wayne said that WKU would not have had to lobby them and that the procurement code is written with a great deal of wisdom and is intended to protect the university as well as the public.
Representative Wayne suggested that this project be rejected and have WKU start over and proceed through the bid process and do it right. Representative Wayne said that he feels it is too controversial and it has not been transparent. Dr. Randell said the university disagrees that it is controversial. Representative Wayne said that a protest as strong as this one makes it controversial.
Senator McDaniel said that he must take exception to the idea that WKU is not entering into a personal services contract. Senator McDaniel said that, according to the LOI, the Medical Center will be given the exclusive right to operate a WKU on-campus healthcare clinic in a reasonable customary manner similar to current operation. Further, the operation of the clinic will transition to Medical Center no later than January 1, 2017. The LOI also states that WKU agrees it will not enter into a relationship with another medical services provider for the provisions of health services to its employees, students, or faculty without first offering the opportunity to provide said services to the Medical Center. Further, Senator McDaniel said the LOI also says WKU agrees that Medical Center orthopedics will serve as exclusive team physicians for WKU sports programs. Lastly, Senator McDaniel said that the LOI states that an employee cost structure will be maintained so that employees pay reduced co-payments, reduced co-insurance, or other incentives when using the referenced providers. Senator McDaniel said that is more of a statement of concern because it becomes a cost item for WKU.
In response to Senator McDaniel’s questions about personal service contracts, Ms. Wilkins said that the Medical Center is going to lease space from WKU to operate a clinic. The Medical Center will not be managing WKU’s healthcare services; the university disbanded healthcare services years ago. Ms. Wilkins said that she did not this is a personal services contract, but is instead a lease. Ms. Wilkins said that if the Finance Cabinet comes back and says that WKU needs to do a personal services contract, the University will comply.
In response to an additional questions from Senator McDaniel, Ms. Wilkins said that WKU will not subsidize co-pays and deductibles and that the current structure will be maintained so that employees pay reduced co-pays. Dr. Ransdell said that WKU pays 70 percent of all its employees’ healthcare premiums and all employees pay the remaining 30 percent of premiums. Additionally, Dr. Ransdell said that WKU is self-insured with a health insurance program so all employees are treated the same. It is entirely up to the employee as to where the employee receives healthcare services.
Senator McDaniel made a motion that this project be tabled until the next month’s meeting at which time it would be taken up for a vote, seconded by Representative Harris.
Senator Humphries said that a lot of information had been exchanged at the meeting today and it is not the intent of this committee to undo what WKU has already done with the work that is on-going and to have a great facility at the campus.
Senator Girdler asked to explain his aye vote to table the project until the next month’s committee meeting. Senator Girdler thanked the people who came today from WKU and said he appreciated the passion of the members of the committee but did wish to remind everyone that is an oversight committee and members are here to scrutinize and to look over each and every item that comes in front of this committee. Further, Senator Girdler said that he did not want WKU to think this is anything directed at it specifically, but the project raised a lot of concerns and red flags.
The motion to table the construction of the WKU project until the October meeting passed by a roll call vote of 6 yeas, 0 nays.
Mr. Michael Hales, Chief Financial Officer, Northern Kentucky University (NKU), reported on one project which is for the purchase of Gateway Community College’s Highland Heights Facility.
Mr. Hales gave background and an overview of the Gateway acquisition that occurred in July 2016. Mr. Hales said the land that the Gateway construction was part of used to be owned by NKU and was located at the northern portion of the university’s campus. In 1975, the land was deeded to the Kentucky Department of Education at no consideration in order to allow the construction of the Northern Campbell Vocational Tech School. Mr. Hales said that in the spring 2008, Kentucky Community & Technical College System (KCTCS) approached NKU about acquiring the Gateway property. The University had interest in the property due to the need for space at that time and three appraisals were done. In the fall 2008, NKU came to an agreement for a lease with an option-to-purchase at a price of $3.4 million dollars. NKU presented it to the university’s board and received approval. On November 15, 2008, under the 2008-2010 budget, NKU entered into the lease. At the time it was for one year, through July 1, 2009, at a prorated amount of $77,000 with automatic renewal for up to 10 years with annual payments of $123,000 per year. All lease payments accrued to the purchase price. NKU, at the time, occupied 14,000 sq. ft. of the total 46,000 sq. ft. In the fall of 2015, NKU discussed completing the purchase option with Gateway. The university tentatively agreed to a $2 million dollar purchase price. Further, Mr. Hales said that in July 2016, under the Authority for Acquisition, the Acquired Land Masterplan 2010-2012 Additional reauthorization, as approved by the 2016 GA, NKU entered into an agreement to purchase the Gateway property. Mr. Hale said that the actual purchase price was $1,938,000 which included the total payments and lease payments that had been made. The total purchase price was $2,877,000. NKU paid cash which was authorized for up to $4 million dollars. Lastly, Mr. Hales said that the university notified the committee of the acquisition in August 2016.
In response to questions from Representative Wayne, Mr. Hales said that the reason this purchase was made before bringing it in front of the committee was due to a misunderstanding in the spring of 2008 when the actual lease agreement was signed. The understanding at the time, under the definition of a capital lease, was anything over $200,000 a year. NKU’s understanding was that because it was under that amount, the university was not required to report the project. Mr. Hales said that NKU thought that definition still applied and that notification was not received until after the acquisition was made, which is what NKU did in August.
Senator McDaniel said that, since this project has been brought up in the last two budget sessions and is part of the budget bill, no other discussions or retroactive vote is necessary by the committee for the Gateway project. No action was required.
Lease Reports from Finance and Administration Cabinet
Mr. Scott Aubrey, Director, Finance and Administration Cabinet, reported on four items. The first item is a lease modification, over $50,000 for the Unified Prosecutorial System, in Jefferson County. This modification includes an expansion of space by an additional 5,270 sq. ft. at a cost of $16.55 cents per sq. ft., an annual cost of $401,056, and the lease will expire June 30, 2018. The additional space will accommodate 15 agency employees funded by a grant initiative. This lease has been modified in the addendum to allow cancellation of the lease without terminating the entire lease. Representative Rudy moved to approve the lease modification, seconded by Representative Wayne. The motion passed by a roll call vote of 6 yeas, 0 nays.
The second item is a lease modification reduction, over $50,000, for the Energy & Environment Cabinet (EEC), in Franklin County. This lease is for a reduction in square footage by 141,900 sq. ft., keeping 3,401 sq. ft. under lease, and at an annual cost of $30,881. This lease will expire December 31, 2016.
In response to questions from Representatives Harris and Wayne, Mr. Aubrey said that the EEC vacated the 200 Fair Oaks to the 300 Building effective August 31, 2016, and is expected to relocate remaining staff at 150 Fair Oaks to the Central Laboratory Building by December 31, 2016. The lease agreement with Buffalo Trace Distillery for 150 and 200 Fair Oaks was amended to reflect this change and will expire at the end of the year.
Senator McDaniel moved to approve the lease modification, seconded by Representative Rudy. The motion passed by a roll call vote of 6 yeas, 0 nays.
The third item is a new lease, exceeding $100,000, for the Department of Education, in Franklin County. The agency is one of many located in the Capital Plaza Tower that will be relocating to a lease property which has been vacated by the Energy and Environment Cabinet. This lease is for 20,525 sq. ft., at a cost of $9.60 per sq. ft., and a total annual cost of $197,040. This lease is set to expire June 30, 2024. Senator McDaniel moved to approve the new lease, seconded by Representative Wayne. The motion passed by a roll call vote of 6 yeas, 0 nays.
The fourth item is a new lease, exceeding $100,000, for the Tourism, Arts, & Heritage Cabinet, Department of Parks, in Franklin County. The agency is located in the Capital Plaza Tower and will be relocating to a lease property which has been vacated by the Energy and Environment Cabinet. This lease is for 28,868 sq. ft., at a cost of $9.60 sq. ft., and a total annual cost of $277,133. This lease is set to expire June 30, 2024. Representative Harris moved to approve the new lease, seconded by Senator McDaniel. The motion passed by a roll call vote of 6 yeas, 0 nays.
Project Report from the Finance and Administration Cabinet
Ms. Janice Tomes, Deputy State Budget Director, reported on four items from the Finance and Administration Cabinet. The first item is a new project for Military Affairs, the Construct Bay Addition Field Maintenance Shop 4, located at the Bluegrass Army Depot, Richmond. The project appropriation is $1,103,700, using 100 percent federal funds from the Department of Defense cooperative agreement Army Operations and Maintenance 2016. This project will renovate and upgrade the existing facility, provide demolition for new restrooms and select demolition for the new addition and construction, and provide minor work related to plumbing, mechanical, and electrical work which will be done in the existing building. Senator McDaniel made a moved to approve the new project, seconded by Representative Rudy. The motion passed by a roll call vote of 6 yeas, 1 pass, and 0 nays.
The second item is for an appropriation increase for the Department of Highways, Traffic Response and Incident Management Assisting the River City (TRIMARC) Building Extension project. This project was originally reported in January 2016 in the amount of $955,500 to expand the existing TRIMARC building in Louisville due to increased workload related to the Louisville-Southern Indiana Ohio River Bridges project. The project will make improvements to the existing facility and add 1,634 sq. ft. of additional space. The addition will include electrical work, raised flooring, and specialized site work. The agency encountered unexpected costs increase of $25,100 due to additional architectural and structural engineering design work for unsuitable soil conditions and unforeseen underground obstacles. This project will be funded with two-thirds federal funds in the amount of $653,700, one-third Road Funds in the amount of $326,900, with a total appropriation of $980,600.
Senator McDaniel said that he had recently read a disturbing article in the Louisville Courier Journal regarding the placement of a tunnel, the purchase of historic property, and a multi-party arrangement which may have caused unnecessary boring and added approximately $35 million dollars to the overall scope of the project. Senators McDaniel and Humphries said they would like to hear more on this particular project and requested Ms. Tomes relay the message to the Transportation Cabinet and to work with staff to bring this to the attention of the committee.
Representative Wayne moved to approve the project, seconded by Senator McDaniel. The motion passed by a roll call vote of 6 yeas, 0 nays.
The third item is an Emergency, Repair, Maintenance or Replacement project for the Kentucky Horse Park, Alltech Boiler Replacement, in the amount of $711,400. This project will replace 10 boilers at the Alltech Arena and will be funded with insurance proceeds through the Fire and Tornado Fund.
In response to a question from Senator Humphries, Mr. Chuck Ammons, Facilities Director, Kentucky Horse Park (KHP), said that the 10 boilers are set up in a series that run through cycles and are identical. These boilers have been discontinued by Lochinvar. Mr. Ammons said that the Horse Park brought in a mechanical engineering firm, Staggs and Fisher Consulting Engineers, who noted that this particular boiler was problematic and prone to temperature surges and malfunctions that, over time, cause heat exchangers to fail. KHP had twelve, 2 of which are set up with domestic hot water, and 10 are set up for heating. A heat exchanger failed on one of the domestic hot water boilers and it was replaced. At that same time, KHP examined the other boilers. Two heat exchangers had already started to leak and, ultimately, all 10 are now leaking. Additionally, Mr. Ammons said that KHP will be using a different type of boiler as the previous ones were discontinued by Lochinvar in January 2012. They have gone through the bid process and the bid was awarded to Lagco, Inc., Lexington, KY.
In response to several more questions from Senator Humphries, Ms. Evelyn Smith, Claims Manager, State Risk and Insurance, Office of the Controller, said that her office implemented the boiler coverage within the Fire and Tornado Fund policy to be a part of the Alltech Arena building. Ms. Smith said that this amendment was added to the original policy, effective October 2015 and this (boiler claim) happened in December 2015.
In response to questions from Representative Wayne, Mr. Ammons said the boilers were installed in the 2008-2009 timeframe right before the World Equestrian Games (WEG) event. The maintenance agreements were with Water Chemical Controls, the former property managers. Mr. Ammons said that Staggs & Fisher Consulting Engineers, reported in their field report there was no neglect to be seen. The consulting firm reported that the problem was with the boilers themselves and noted similar problems with this particular type. Mr. Ammons said that the boilers are presently maintained on-site by employees of the Horse Park. Finally, Mr. Ammons said that the boilers should have lasted for many more years but had failed to do so.
Senator McDaniel commented that these boilers should have lasted at least 10 years. Ms. Smith said that she had the same question in the beginning. Out of 10, at least 6 boilers were replaceable. The others were repairable but, in the end, with the company going out of business, there was no place to get parts for those.
In response to several more questions from Senator McDaniel, Mr. Ammons said that the company discontinued this particular make and model of boilers. The Horse Park had already replaced multiple controls and three boilers had already had non-repairable heat exchangers with service parts. Mr. Ammons further said repairs of this nature should not have been necessary on boilers that were not very old. Ms. Smith made the comment that is probably why the manufacturer went out of business. No action was required.
The final item to report is a Pool Project in excess of $600,000, for the Department of Fish and Wildlife Resources for the Fees-in-Lieu of Stream Mitigation Pool (FILO), Myers Station in the amount of $2,900,000 and FILO, Big Farm in the amount of $4,290,000. The Myers Station project in Nicholas County will improve the stream habitat in the Clay Wildlife Management area by stabilizing 76,000 linear stream and tributaries to the Licking River that are currently experiencing erosion and instability. The Big Farm project in Bath County will restore several thousand feet of stream located in the Clay Wildlife Management Area-Indian Creek Tract on the Licking River and its tributaries. The project will involve constructing new stream channels, grade control structures, and reshaping the stream banks. It will also involve reforesting areas of one mile of the Licking River. The FILO program is administered by the Department of Fish and Wildlife. It is governed by an agreement with the US Army Corps of Engineers. The amount reported is the maximum amount the FILO credit rate will allow. No action is required.
Report from the Office of Financial Management
Ms. Sarah Aitken, Financial Analyst, Kentucky Infrastructure Authority (KIA), reported on five items. The first item was for a Fund A loan increase for the City of Morganfield in Union County. The request was for $425,000 for the Morganfield Combined Sewer Separation project, Phase II. The loan will have a 20 year term, an interest rate of 1.75 percent and an annual estimated debt service payment of $188,558.
The second item was for a Fund A loan for the Lexington-Fayette Urban County Government in Fayette County. The request was for $2,355,600 for the Lower Griffin Gate Trunk project. The loan will have a 20 year term, an interest rate of 1.75 percent and an annual estimated debt service payment of $144,812.
The third item was for a Fund A loan for the Lexington-Fayette Urban County Government in Fayette County. The request was for $16,888,634 for the Expansion Area Three Sanitary Sewer Infrastructure project. The loan will have a 20 year term, an interest rate of 1.75 percent and an estimated annual payment of $1,038,239.
The fourth item was for a Fund B loan to the City of Calvert City in Marshall County. The request was for $540,113 for the Calvert Heights Water Main Replacement project, Phase III. The loan will have a 20 year term, an interest rate of 2.75 percent and an annual payment of $36,370.
The final item was for a Fund C loan to the City of Mt. Washington in Bullitt County. The request was for $3,437,500 for the New Water Tower at Armstrong Lane project. The loan will have a 20 year term, an interest rate of 3.00 percent and an estimated annual payment of $236,686.
Representative Harris moved for all items to be considered as one vote, seconded by McDaniel. The motion was approved by voice vote.
Senator McDaniel moved to approve the items, seconded by Representative Wayne. The motion passed by a roll call vote of 6 yeas, 0 nays.
Report from the Office of Financial Management
Ms. Sandy Williams, Deputy Director, Office of Financial Management (OFM) reported on four items. The first item was the Kentucky Housing Corporation Tax-Exempt Multifamily Housing Revenue Bonds, Series 2016. Proceeds from this bond issue will finance the acquisition, rehabilitation, and equipping of the Bristol Bluffs Apartments project, a 216 unit property in 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 16 years, an interest rate of 4.33 percent and par amount of $22,540,000. The final maturity date will be July 2032.
In response to questions from Representative Wayne, Mr. Jeremy Ratliff, Managing Director of Multifamily Programs, KHC, said that the concerns regarding Overlook LLC, a certified Female Business Enterprise (FBE), arose out of a development called Frontgate in Louisville. The developer was LDG MultiFamily, LLC, who is also the developer on this particular project. Frontgate was to be funded with 9 percent tax credits, not involved in bond issuance, and was a conduit bond transaction. LDG had applied for status as a female or minority owned business from the city of Louisville and the city of Louisville granted the certification. LDG utilized its certification in the application for the tax credits and KHC awarded the tax credits points to LDG. Further, Mr. Ratliff stated that LDG and the Frontgate project encountered some opposition in Louisville and KHC subsequently investigated LDG’s FBE status. Mr. Ratliff said that it was determined that LDG should not have been awarded the status of an FBE. As a result, KHC and LDG came under some scrutiny. Additionally, Mr. Ratliff, stated that KHC took this matter into account in later funding rounds and explained that it is KHC’s policy to deduct points for applications from any party that has had some past compliance problem with KHC. Under this policy, LDG received a point deduction for a three year period which has been applied and is set to expire in October 2016. Lastly, Mr. Ratliff said that there was no determination that any fraud was involved. In the application that LDG submitted to Louisville for FBE status, the city of Louisville granted that status erroneously based on the application. LDG used a certification that was improperly granted to them. As a result of having used a status that was not appropriate, LDG received a point deduction for a three year period.
In response to further questions from Representative Wayne, Mr. Michael Gross, Project Manager/Team Leader, LDG MultiFamily, LLC, said that Frontgate Development received a 9 percent credit in a tax-exempt bond issue which came to this committee twice. LDG had committed five deals prior to Frontgate with KHC using the FBE certification. Mr. Gross stated that LDG did not lose its certification but chose not to renew it with Louisville Metro Government. Mr. Gross said that this particular project is for 216 units and is located at 6203 Gellhaus Lane, Louisville. LDG received a 4 million dollar allocation from the City of Louisville through the Louisville Cares funding source which has a bond issue for 12 million dollars to promote affordable housing throughout the community. Twenty percent of the development will be set aside for working families at 80 percent of the Area Medium Income (AMI); the remainder of the development will be set aside for families whose incomes are 60 percent AMI.
In response to another question from Representative Wayne, Mr. Ratliff and Mr. Gross both said that all the legislators in the district had been given written and telephone notifications of the project. Mr. Ratliff said that KHC possesses signed receipt acknowledgements from the legislators.
In response to several questions from Senator McDaniel, Mr. Gross said that LDG certification was coming up for renewal with the Human Relations Commission at the time it was going through the issues with Frontgate. LDG decided not to renew it or use the FBE on any future projects after Frontgate became such an issue. Further, Mr. Gross said that LDG was not found to be non-compliant in this instance because it did not renew the certification. Additionally, Mr. Gross said that KHC determined, since LDG was no longer a FBE, it no longer qualified for those points and took the points away which cause its tax credits get recaptured.
In response to several more question from Senator McDaniel, Mr. Gross said that when LDG applied and stated it was an FBE, there was no issue whatsoever. LDG had a female minority who owned 51 percent and who actively managed LDG. Mr. Gross said there was never a finding of LDG being a “shell” company and was in full compliance at the time. Mr. Luis Diaz, Dinsmore and Shohl, Bond Counsel for KHC, said that at the time, the development was a partnership between a husband and a wife and there was an allegation of impropriety but it was never evaluated. Mr. Diaz stated that it was his understanding that the city of Louisville felt it best to allow the Finance Cabinet to take care of the issue which is why the developer stopped seeking the designation from the city of Louisville.
Representative Wayne commented that he felt it should be mentioned as to how low income people gets their support for housing with lower rent as opposed to people who have a private mortgage on their residence and receive a tax break on the interest paid. There are a lot of ways that the government supports housing to create jobs and to have decent homes for the population. Lastly, Representative Wayne said that LDG is making a major contribution to affordable housing and thanked LDG for appearing today.
Senator McDaniel moved to approve the project, seconded by Representative Rudy. The motion passed by a roll call vote of 6 yeas, 0 nays.
The second item was the Western Kentucky University General Receipts Bonds, 2016 Series B and General Receipts Bonds, 2016 Series C. Proceeds from the 2016 Series B bonds will finance the “Construct Parking Structure III” as authorized in the 2016-2018 budget. Proceeds from Series C will be used to partially advance refund Western Kentucky University General Receipts Bonds, 2009 Series A at a net present value savings of 10.306 percent. Senator McDaniel moved to approve the bond issue, seconded by Representative Rudy. The motion passed by a roll call vote of 6 yeas, 0 nays.
The third item was the Northern Kentucky University General Receipts Refunding Bonds, 2016 Series B, dated August 25, 2016 which resulted in a net present value savings of $15,225,000, and a true interest cost of 10.2569 percent. No action was required.
The final item was the Annual Report of Bonds outstanding 2016. No action was required.
New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation
Ms. Sandy Williams reported on seventeen (17) school bond issues with SFCC debt service participation. Fifteen issues will refund previous bond issues, one issue will be for district wide energy improvements, and the remaining issue will construct a new high school. There were no local tax increases associated with 16 (sixteen) of these projects. Morgan County enacted a recallable nickel tax increase which was passed by the Morgan County Schools Board of Education in 2015 to finance the proposed bond and other projects. Representative Rudy moved to approve the school bond issues, seconded by Senator McDaniel. The motion passed by a roll call vote of 6 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 Lee County District will be used to refund the 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
Senator Humphries said the last item on the agenda would be a discussion on the Eastern Kentucky University (EKU) Grand Campus Housing property lease.
Senator Humphries said this project has been placed on today’s agenda for the members to better understand how this project evolved. Additionally, Senator Humphries said that today’s discussion would help clarify whether, and to what extent, this committee has an oversight role in projects when bonds are issued by out-of-state authorities for the benefit of a state agency when an authorized lease undergoes restructuring.
Ms. Dana Fohl, Deputy General Counsel, Eastern Kentucky University (EKU) said that the Grand Campus Apartment Complex is adjacent to the university. The university originally acquired the complex through a lease to bring it into EKU’s residential housing portfolio. Ms. Fohl stated that the lease was approved by the Legislature in the 2014 budget and, through the university’s Public/Private Partnership Request for Proposal (RFP) process, one of the bidders offered to refinance that lease. Ms. Fohl said that the term of the lease was extended from 20 years to 31 years and the payments did not change. Ultimately, the university became the land holder of the property which the Grand Campus Apartments were situated upon. Additionally, Ms. Fohl stated that EKU worked with the Finance Cabinet over several months as the university worked to restructure the deal and the Finance Cabinet had originally approved the lease. Ms. Fohl stated that the university has a letter from the Finance Cabinet, who had also worked with the State Budget Office. Ms. Fohl said that, with approvals in place for the university to proceed with the project and with the understanding that no additional approvals were required from the legislature or this body, EKU moved forward. The lease project was closed on March 17, 2016. Lastly, Ms. Fohl stated that the bonds were sold by one Phoenix Industrial Development Authority.
In response to a question from Senator McDaniel, Mr. Brad Compton, Executive Director of Accounting, EKU, said the bonds issued by Phoenix IDA were issued tax-free. The issuance of these bonds were how the private developer brought the capital to the project to purchase the Grand Campus Apartments from the original land owners and then to offer that deal to the university to restructure the lease. Ms. Fohl said that EKU was not involved in the issue of those bonds.
In response to questions from Representative Harris, Ms. Fohl said that EKU extended the term of the lease with the same lease payments and became record land owner as of March 17, 2016. Ms. Fohl said this deal also helped resolve a local property tax issue which had been ongoing between the university and local entities that receive property tax dollars regarding who was to pay the property taxes on that particular piece of land. Mr. Compton said that Grand Campus Properties was refinanced as part of the university’s on- campus P-3 Dormitory project and the new lease is with Municipal Acquisitions, a third party. Mr. Compton said that Municipal Acquisitions, as part of its proposal and response to the RFP for the P-3, stated that it would sell Grand Campus Apartments to the university. However, the university does not yet retain the property as owners on the original lease. Mr. Compton said the bonds issued by Phoenix IDA were issued by Municipal Acquisitions to purchase Grand Campus from the original developer and the bond issue by Phoenix IDA is still the responsibility of the private developer.
In response to two questions from Representative Rudy, Ms. Fohl said by the recorded deed, Municipal Acquisitions paid $46,125,100 for the property. Mr. Compton said that, at the end of the 31 year lease, that number will be approximately $115,000,000. Mr. Compton said that the university does not have the lease yet and it is now a lease purchase; before it was simply a 20 year lease.
In response to questions from Senator Humphries, Ms. Fohl said that in conversations between the university and the developer, there were attempts made to try and use some type of Kentucky entity to issue the bonds. Ms. Fohl said that the third party entity went with Phoenix IDA due to the financial complexity of the deal and this third party had completed deals in other states and had prior dealings with Phoenix IDA. Ms. Fohl further stated that, given the timeline the university had requested and the fact that the two groups had worked so well together previously, this also played a key role in the decision to work with Phoenix IDA.
Mr. Craig Turner, Chairman of the Board, EKU, said that Municipal Acquisitions has done a structure that is unique. In order to extend EKU’s lease from 20 years to 31 years, the incentive for EKU was that the university would own the property at the end of the 31 years. Mr. Turner said the discussions eventually turned into a deal to give the university title to the property now which is an asset to the university and also to the Commonwealth of Kentucky. Mr. Turner said that, in turn, EKU did an internal lease for 31 years with the same conditions prior to the deal. Further, Mr. Turner stated that it costs the university no more money on an annual basis.
In response to a question from Representative Harris, Mr. Turner said that the university did not bring the project before the committee since the lease was already on the books as a capital lease. Mr. Turner said that the university resubmitted it to the Finance Cabinet as a change to the term of the lease and received its approval to move forward with the transaction.
Representative Harris said that, in order to understand the complexity of what is going on in state-supported universities, this lease and all leases should be brought to the attention of the committee.
In response to questions from Representative Wayne concerning where approval was given in the budget for this purchase and as to what legal authority the university stands on to proceed with this transaction, Mr. Compton said that his information states this as being in the budget as being approved for a lease.
Representative Wayne said that, according to KRS 45.763, this transaction has to be specifically authorized in the budget as a line item. Representative Wayne said that the committee’s role in this transaction is to follow the laws which are written to protect the public as well as the universities. Further, Representative Wayne said that modern universities’ financial transactions are very complicated and the more the guidelines are followed the better off everyone is. Ms. Fohl said that the university had looked at KRS 45.763 in its discussions between the university and the Finance Cabinet and it is the understanding of EKU that the line item in the 2014 budget for a lease was the same for the lease going forward. Representative Wayne said that this is a lease purchase and he is not being picky but trying to follow the law. Mr. Compton said this transaction was part of a P-3 Dormitory deal which was authorized in the 2014-2016 and authorized under KRS 45.763. Lastly, Mr. Compton said that the university was under the impression that was part of the authorization for this project, as well, and is using the current line item authorization for the RFP for the project. Representative Wayne said that this is a good project and would like to move on.
Senator Humphries said that there have been concerns and questions in the last several months with projects. Senator Humphries said that some of the discussions could have been eliminated by bringing these projects and items to the committee with full disclosure and discussions on such transactions. Senator Humphries said that the committee cannot ignore projects brought to its attention and asked that projects be brought to the table ahead of time. Lastly, Senator Humphries expressed his appreciation to the universities for appearing today.
Representative Harris moved to adjourn the meeting, seconded by Senator McDaniel. The motion was approved by voice vote, and the meeting was adjourned at 3:15 p.m.