Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee meeting was held on Tuesday, October 18, 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; Senators Julian Carroll, Chris Girdler, Stan Humphries, and Christian McDaniel; and Representatives Steven Rudy and Jim Wayne.
Guests: Ms. Elizabeth Baker, Planning Director, University of Kentucky; Mr. Scott Aubrey, Director of Real Properties, Finance and Administration Cabinet; Mr. Ryan Barrow, Executive Director, Office of Financial Management; Mr. Denis Frankenberger, Louisville-based businessman; and Mr. J. Bruce Miller, Senior Partner/CEO, J. Bruce Miller Law Group, Louisville.
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 September 20, 2016 meeting. The motion was seconded by Senator Carroll and approved by voice vote.
Correspondence Items
Mr. Nacey reported on one correspondence item which is a letter from the committee to Western Kentucky University (WKU) stating that the committee tabled the proposed Med Center Health Sports Medicine Complex at the September meeting.
Information Items
Mr. Nacey reported on six informational items. The first two items relate to the same WKU Med Center project. The first item is a copy of the Request for Proposals (RFP) that WKU issued for the project. The cover letter to the committee notes that the pre-existing Letter of Intent (LOI) has been rendered null and void.
The second item is a letter from the Finance Cabinet to Mr. Jonathan Miller of Frost Brown Todd, LLC. Mr. Miller had filed a protest against the proposed WKU Med Center project on behalf of a group of doctors in Bowling Green. The letter is the cabinet’s adjudication of the protest which states: (1) the cabinet did not have jurisdiction over the protest because the Letter of Intent between WKU and the Medical Center was non-binding between the parties; and (2) since the project is now being competitively bid, the controversy is moot.
The third item is the semi-annual report of the Kentucky Asset/Liability Commission (ALCo) which discusses the state’s investment and debt portfolios and associated interest rate derivative contracts.
The fourth item includes the quarterly status reports on capital projects for the Administrative Office of the Courts, the Commonwealth Office of Technology, the Finance and Administration Cabinet, and the universities that manage their own capital construction programs.
The fifth item is an article recently published from the Bond Buyer stating that the recent Kentucky Supreme Court ruling against the Governor’s cuts to the universities budgets is considered by Moody’s credit agency to be a credit-negative.
The final information item is an update to a question posed in the September meeting. During that meeting, additional information was requested on a tunneling project near a historic property in Jefferson County. The request was made in light of recent articles in the Courier Journal about the Drumanard estate. According to the Courier Journal, the 50-acre property sits in the path of the East End Bridge. Twin tunnels have been built underneath the property as a connection to the new span that is set to open by the end of the year. The Transportation Cabinet has since provided staff some background information on the matter.
The property is listed on the National Register of Historic Places. The tunnel was constructed to go beneath this property so as to avoid problems with Section 4(f) of the U.S. Department of Transportation Act of 1966. The state purchased the property for $8.3 million. The appraised value was $6.8 million. Since the time that the state bought the property, an historic preservation easement was placed on the land. The easement restricts what owners can do with the property. No development or other major changes are allowed without the consent of the State Historic Preservation Officer. So far, that office has spent approximately $250,000 in repairs as a result of easement inspections and yearly reviews. No action was required.
Representative Harris commented that he would like to know why the state would pay $8.3 million for a property that was appraised for $6.8 million and whether Transportation funds were used for the project.
Senator McDaniel commented that, when the project began, this property was not an historic property on the register, but it achieved that designation when the project moved forward. Senator McDaniel said that he did not know if this process was approved by the Commonwealth or if it was a federal issue.
Representative Harris requested that staff provide further information based on the questions and comments in regards to the project.
Project Report from the Universities
Ms. Elizabeth Baker, Planning Director, University of Kentucky (UK), reported the purchase of two items of medical equipment in excess of $200,000. The first item is the purchase of the Selenia Dimensions Genius Mammography System, 3D. This device will offer high-resolution digital images from inside the body. This equipment’s breast screening capabilities is expected to increase breast cancer detection by up to 41 percent and reduce false positives by up to 40 percent. The mammography system will be located at the Markey Cancer Center. The cost is $413,100 and was paid in cash with restricted funds. No action was required.
The second item is the purchase of the Zeiss LightSheet Microscope. This equipment will be used for imaging of thick or living biological specimens. There is no other dedicated lightsheet instrument at UK or elsewhere in Kentucky. The equipment will be located at the Don and Cathy Jacobs Science Building Biology Imaging Center. The cost of the microscope is $599,697 and was paid in cash with $597,054 in NIH funds and $2,643 in UK restricted funds. No action was required.
Lease Reports from Finance and Administration Cabinet
Mr. Scott Aubrey, Director, Finance and Administration Cabinet, reported on one item which is for a leasehold modification on behalf of the Energy and Environment Cabinet, the Education and Workforce Development Cabinet, and the Department of Education. These modifications will be at the new state office building which is also known as the “300 Building.” The building was originally proposed to accommodate 1,500 staff from various state offices located at Fair Oaks and the Capital Plaza Tower. The actual staff and office that would move into the new office building were not identified until after the design was complete. Since those agencies have moved, they have identified the improvements that are needed to meet their programmatic needs. The modifications included installation of additional electrical and data outlets for training rooms, conference room, and other areas. The total cost of these improvements is $46,840. Due to the funding arrangements of the project, the Finance Cabinet was unable to modify the lease agreement. However, the executed document still allowed for a Tenant Improvement Fund to be utilized for the tenant agencies to allow them to operate more effectively.
Representative Harris said that, although action is not required under the statute, action is recommended due to the culmination of these projects exceeding the statutory limits of $50,000. Additionally, Representative Harris said that, for transparency and full disclosure to the members and to the public, the committee will treat the leasehold modification as an action item.
Senator Humphries moved to approve the leasehold modification, and the motion was seconded by Senator McDaniel. The motion passed by a roll call vote of 7 yeas, 0 nays.
Project Report from the Finance and Administration Cabinet
Mr. Nacey reported on three new, unbudgeted projects, from the Department of Military Affairs. The first project is for the Construct Range Bypass Road at Wendell H. Ford Regional Training Center located in Greenville, KY. The cost of the project is $831,700 and is 100 percent federally funded from the Department of Defense (DoD). The project consists of constructing approximately 2,630 feet of gravel roadway, including earthwork, grading, debris removal, seeding, erosion control, and instillation of roadway culverts and headwalls. The road will have a 2 inch thick asphalt surface layer on a 4 inch thick asphalt base layer along the length of the roadway.
The second project is for the Medical Command Building Expansion (MEDCOM) at Boone National Guard Center located in Frankfort, KY. The $1,079,600 appropriation is 75 percent federally funded from the Department of Defense (DoD) and 25 percent funding from Agency restricted funds from the Combined Clothing Distribution Facility. The project involves the expansion of approximately 3,000 sq. ft. for housing the medical command unit. The work consists of, among other things, exterior work, interior work, bathroom facilities, and a high efficiency heat pump.
The final project is for the Convert Former Army Support Facility (AASF) to Readiness Center at the Boone National Guard Center located in Frankfort, KY. The $1,254,400 appropriation is 75 percent federally funded from the DoD and 25 percent funded by restricted funds from the Combined Clothing Distribution Facility. The building was constructed in the 1970s and has been replaced by the new AASF building. The renovation will convert the old building for administrative use and will allow Military Affairs to relocate from leased office space into the Boone National Guard Center. The project consists of replacing existing finishes, mechanical and electrical systems, new masonry walls, new carpet and tile, new cast-in-place concrete weapons vault, and replace overhead doors with insulating metal wall panels.
Senator McDaniel moved for all projects to be considered as one vote, and the motion was seconded by Senator Humphries. The motion was approved by voice vote.
Senator McDaniel moved to approve the three projects, and the motion was seconded by Representative Rudy. The motion passed by a roll call vote of 7 yeas, 0 nays.
Report from the Office of Financial Management
Mr. Ryan Barrow, Executive Director, Office of Financial Management (OFM) reported on one item for the Cabinet for Economic Development which was for the Kentucky Economic Development Finance Authority (KEDFA) Healthcare Facilities Revenue Bonds, Series 2016 (Masonic Homes Independent Living II, Inc.) project located in Louisville, KY. Proceeds from this bond issue will finance the acquisition, construction, installation, and equipping of healthcare and health related facilities consisting of independent and assisted living units to be located on the Masonic Homes campus in Louisville, and to refund bonds previously issued for similar facilities in the same location. Proceeds from this bond issue are $140,000,000, an interest rate of 4.67 percent, and final maturity date of October, 2051.
Representative Wayne moved to approve the bond issue, and the motion was seconded by Senator McDaniel. The motion passed by a roll call vote of 7 years, 0 nays.
Mr. Barrow reported on three items for the Office of Financial Management. The first item was for the Kentucky Housing Corporation (KHC) Tax-Exempt Multifamily Housing Revenue Bonds, Series 2016. Proceeds from this bond issue will finance the acquisition, rehabilitation, and equipping of Downing Place Apartments, a 193 unit property located in Lexington, KY. A public hearing was conducted September 14, 2016 and the estimated date of sale is December 3, 2016. Proceeds from this bond issue are $13,000,000, an interest rate of .95 percent, and it has a term of 2 years.
Senator McDaniel moved to approve the bond issue, and the motion was seconded by Representative Rudy. The motion passed by a roll call vote of 7 yeas and 0 nays.
The second item was for Morehead State University General Receipts Bonds, 2016 Series B. Proceeds from this bond issue will be used to finance the “Construct Food Service/Retail & Parking” as authorized in HB 303 of the 2016 Regular Session. This is a $6.6 million general receipts transaction, multi-phase project, in which this is the final phase. The interest rate of this bond issue is 2.916 percent, the estimated date of sale is November 9, 2016, and the closing date is November 30, 2016.
Senator Carroll moved to approve the bond issue, and the motion was seconded by Senator McDaniel. The motion passed by a roll call vote of 7 yeas, 0 nays.
The final item was for the Turnpike Authority of Kentucky (TAK) Economic Development Road Revenue and Revenue Refunding Bonds (Revitalization Projects), Series B and Series C. Proceeds from the 2016 Series B bonds will permanently finance up to $125 million in Road Fund-supported projects authorized by the 2010 Extraordinary Session of the GA in HB 3, and the Series C bonds will advance refund potentially $50,945,000 of the Authority’s Economic Development Road Revenue Bonds (Revitalization Projects), 2011 Series A Bonds. These issues will have a 20 year amortization and an interest rate of 2.91 percent. No action was required.
In response to questions from Representative Wayne, Mr. Barrow said that the debt service will be paid by the state Road Fund to fund projects that were in various budget bills for state funded projects and will allow those projects to go forward. While the GA has authorized a full $125 million for those projects, the Transportation Cabinet estimates approximately $50 million in needs over the next several months. Several of these projects are Cabinet projects while others are federal projects.
In response to questions from Representative Harris, Mr. Barrow said that there was a time when Kentucky had a number of turnpikes and collectors, which is no longer the case, with the exception being the Louisville-Southern Indiana Ohio River Bridge. TAK can be compared as a sister agency of the State Property and Buildings Commission which routinely is used for issuing bonds as a legal entity in regards to general funds and agency funds.
New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation
Mr. Barrow reported on nine (9) school bond issues with SFCC debt service participation. One issue will finance school renovations and the remaining eight will refinance previous bond issues. No tax increase is necessary to finance these projects. Representative Rudy moved to approve the bond issues, and the motion was seconded by Senator McDaniel. The motion passed by a roll call vote of 7 yeas, 0 nays.
New School Bond Issues with 100 Percent Locally Funded Debt Service Participation
Mr. Nacey said that four local school bond issues were reported to the committee. The bonds are 100 percent locally funded. One issue will fund a new high school construction and the remaining three will refinance previous school bonds. All of these school bond issues are supported by 100 percent local debt service. 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). In August, this committee decided to wait until today’s meeting in order to include Representative Wayne who could not attend the August meeting in which the LAA was brought up for discussion regarding the financing of the arena. The topic has been an issue with this committee several times over the last three years. The event that triggered such an interest was the apparent forgiveness in 2013 of several million dollars of negative impact reimbursement from the LAA to the Kentucky State Fair Board (KSFB). Representative Harris said that last year, an informal opinion by the Attorney General (AG) indicated, among other things, that the LAA was not obligated to repay the negative impact reimbursement to the KSFB. In addition, the full LRC issued an RFP in an attempt to hire an independent consultant to review the financing of the arena. No action has been taken by LRC on the request for the RFP. Representative Harris said that, given the confluence of events since late last year, such as the legislative session and the appointment of new co-chairs of this committee, the members thought it would be best to bring this issue back to the forefront to renew the discussion.
Representative Wayne commented further by stating that, after seeking an opinion from the former AG and also requesting a state audit of the arena’s finances by the former state auditor, the issue before the committee still has not been resolved. Under the requirements of the budget bill that authorized the arena, the LAA was required to pay for the losses incurred by KSFB due to the loss of activities to the arena. In the fall of 2013, testimony was given in front of this committee from the LAA stating the debt would be paid and this has not been done. Representative Wayne said that there remain several concerns and questions that needs to be addressed and answered: (1) the status of the arena’s finances and whether complete audit by the state auditor is needed to determine the arena’s fiscal stability, (2) whether state-run authorities, such as the KSFB, have legal authority to forgive a debt that has been required by the legislature. Representative Wayne said that the committee should ask the new state auditor to review the issue once again, other than an outside source, in order to determine the stability of the LAA’s budget. Lastly, Representative Wayne said that the committee should seek a new AG opinion regarding KSFB’s forgiveness of the negative impact reimbursement.
Mr. Denis Frankenberger, a Louisville-based businessman said that, according to the most recent financial statement of the LAA for 2015, the two subsidies, Louisville Metro Government and the state TIF, amounted to $9.8 million and 8.1 million, respectively. An analysis of the actual operating revenues of the arena amount is $8.3 million. Mr. Frankenberger said that the arena lost $17.2 million last year which equates to approximately $1.4 million per month. Mr. Frankenberger said that amount has been consistent each year since the inception of the arena in 2010 and these losses are largely covered by the public subsidies. Mr. Frankenberger commented that he unsure as to why the state would want to do an audit or pay for an outside firm. Under the terms and conditions of the Louisville Metro Government subsidy of the LAA, which is included in the bond prospectus, if there are two consecutive years of the maximum amount that the Louisville Metro Government pays, Louisville Metro Government has the right and the responsibility to require the LAA to have an outside audit conducted by a national firm familiar with arenas. Mr. Frankenberger said that, to date, more than $100 million of KY tax payer funds have gone to subsidize the arena, which is a privately owned corporation, along with $349 million worth of bondholder capital having built the arena. This amount was in addition to the $75 million that the state paid as a grant to purchase the property. The Arena cost $403 million to build, including land and equipment, and the lease with the University of Louisville (U of L) appears to be the problem. The lease contains provisions where U of L receives up to 88 percent of all the revenues. Further, Mr. Frankenberger said that it seems unrealistic that a $403 million arena has a tenant receive up to 88 percent of all the revenues. Lastly, Mr. Frankenberger said that, with $17.2 million of loss this past year, in addition to the university’s profits of more than $20 million a year on arena-related activities net of expenses, it appears the arena is a conduit by which taxpayer dollars are funneled through and into the U of L Athletic Association. It is a taxpayer scam.
In response to questions from Senator Carroll, Mr. Frankenberger said that each year, the state TIF and the Louisville Metro Government use taxpayer dollars to subsidize the operation of the arena. The arena lost $17.2 million this past year while the public subsidies were approximately $17.9 million. Mr. Frankenberger said that he believes the agreement between U of L and the arena is invalid because there were many unreported conflicts of interest in regards to the directors of the LAA; more than half were closely associated with the university and some were directors of the university. Mr. Frankenberger said that U of L’s attorney was on the board of the tenant and more than 50 percent of the original directors were closely associated with the university. Additionally, Mr. Frankenberger said the bond debt itself is $839 million. To date, there has been 2.3 percent of $171 million paid in bond debt-service and applied to the principle; 98 percent of principle is still owed. Further, Mr. Frankenberger said that this year and every succeeding year, the principle is approximately $23 million in bond debt-service. By the year 2020, that bond debt will increase by $6.2 million. Lastly, Mr. Frankenberger said that, within the next 24 months or sooner, the arena will default.
In response to more questions from Senator Carroll, Mr. Frankenberger said that in order to preserve the arena, the lease must be renegotiated. Under the current conditions of the lease, wherein the arena loses $17 million and the university receives most of the profits, the arena cannot survive financially. The arena has done everything possible to pay bond debt even to the point that it has exhausted the Maintenance and Renovation Account, which is supposed to be at $3 million and is presently at zero.
Mr. J. Bruce Miller, Senior Partner and CEO, J. Bruce Miller
Law Group, spoke of the difficulty of bringing an NBA team to Louisville.
Recently, CBS Sports indicated that Seattle and Louisville were the two most
likely candidates for NBA expansion franchises. Mr. Miller said that, according
to CBS Sports, the main problem was the lease that the university has with the arena
and the gross revenue that U of L takes from the arena. Mr. Miller said he had
been in discussions with other individuals who have concluded that the arena is
going to go bankrupt. Mr. Miller said that the arena’s YUM! Brands corporate
headquarters has moved to Plano, TX, with some office facilities remaining in
Louisville. YUM! Brands $13 million, 10-year commitment for naming rights,
which amounts to $1.3 million per year, will expire in a year and a half. Additionally,
Mr. Miller said that Section 47 of the lease, provides that if the arena goes
bankrupt, the university has the right of first refusal to purchase the arena.
The concern is that no bankruptcy judge will allow the university to purchase
the arena. Mr. Miller said that he has had discussions with a person interested
in renovating Freedom Hall to avoid state bonding capacity. However, the
renovation of Freedom Hall would not alleviate the issue of having a bankrupt
arena in downtown Louisville. In conclusion, Mr. Miller stated that, in
addition to a remodeled Freedom Hall, the city of Louisville and the state of
Kentucky would have a bankrupt arena that cannot be sold. In addition, bondholders
could possibly sue in an adversarial proceeding, the arena and the state
for allowing a situation where the bondholders have invested in a bond issue
where 88 percent of the revenues were taken by U of L. This action could
potentially affect the bond holders’ tax status for the reason that some of
these bonds are tax-exempt bonds.
In response to several questions from Representative Harris. Mr. Frankenberger said that U of L receives a percentage from all activities at the arena, including concerts and other activities, with the NCAA providing 50 percent of each of its events. Mr. Miller said that the university’s basketball team pays $10,000 per game for rent on a building that cost $350 million to build.
Mr. Frankenberger said that the public is subsidizing the
losses at the present time. Louisville Metro Government puts in its maximum of $9.8
million per year and the state TIF was $8.1 million in 2015. Adding the two
amounts together equals to the loss this past year. Mr. Frankenberger
said that the TIF was overstated in the original bond prospectus and was
virtually double what the actual amount has been over the course of the past 8
years. Originally, the TIF was a 6 sq. mile area and, which was not recognized
until later, a negative due to other companies moving out and taking the totals
of sales taxes and property taxes down. Mr. Frankenberger said that a plan was
put in place which reduced the 6 sq. miles to 2 sq. miles. This amounted to an 86
percent reduction in size of the TIF district. Mr. Frankenberger said that by
having made the reduction retroactive to the previous fiscal year, the TIF
increased. The TIF of the first year was projected to be $4.5 million and it was
actually $618,000; the second years’ projection was $6.6 million, but was
actually $2.1 million. Every year the shortfall is between $4 and $6 million
from what was projected with the result being that the state TIF has produced $35
million less than projected.
Mr. Frankenberger said that the LAA has said it is not going to pay the state the negative impact reimbursement. The LAA’s 2015 financial statement, in addition to the last 2 to 3 years, specifically states that it intends to honor its agreement with the KSFB to settle all debts for a total of $1.47 million. The out-of-pocket expenses showing due on the statement $1.9 million. After several arguments about that amount, the KSFB discounted $555,000 which brought that amount down to $1.47 million. At the time, the terms with the arena were that this amount be paid promptly to the KSFB. Lastly, Mr. Frankenberger said that, in these three and half years, the LAA has paid $200,000 of this $1.47 million.
In response to a question from Senator McDaniel, Mr. Frankenberger said that the $1.4 million that was agreed upon by the LAA to be paid to the KSFB for providing management and staffing of the arena, to date, has not been paid. The argument was that the KSFB did not do a good job at managing the arena causing it to lose money.
In response to another question from Senator McDaniel, Mr. Frankenberger said that the revenues from the arena’s activities goes to the U of L Athletics Association specifically.
Senator McDaniel commented that he recalls that as a result of the loss to the university, to the Commonwealth, and to the KSFB and Freedom Hall, in Budget Session 2014, the legislature had to authorize additional funding because the KSFB could not make debt service.
Representative Wayne said that, while he respects Mr. Jim Host, under whose leadership the arena was built, and in recognizing Mr. Frankenberg’s request for an independent audit, he believes that the seriousness of the arena’s finances calls for the committee to first write a letter to the state auditor, Mr. Mike Harmon, asking for a complete financial audit of the LAA. Lastly, Representative Wayne said that this committee, as the overseer of capital projects and bond issues, is the proper authority to seek an audit.
Senator McDaniel moved that staff draft a letter to the Auditor requesting a complete financial audit of the LAA and bring the letter to the next meeting for approval, and the motion was seconded by Senator Carroll. The motion was approved by roll call vote of 5 yeas, 0 nays.
Senator Carroll commented that getting an investor that is interested in investing in the arena, rather than Freedom Hall, and by providing leadership to save the state the embarrassment that would come from the bankruptcy of the Arena, would be an advantage of saving the arena. Senator Carroll said that speaking with the Governor could be the leadership that is needed in this instance.
With there being no further business, the meeting adjourned at 1:10 p.m.