Call to Order and Roll Call
The Capital Projects and Bond Oversight Committee meeting was held on Tuesday, October 17, 2017, 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 Phil Moffett, Co-Chair; Senators Julian M. Carroll, Rick Girdler, and Christian McDaniel; Representatives Larry Brown and Will Coursey.
Guests: Ms. Janice Tomes, Deputy State Budget Director; Mr. Scott Aubrey, Director, Real Properties; Mr. Ryan Barrow, Executive Director, Office of Financial Management; Mr. Eric Rockhold, Bank of America Merrill Lynch; Mr. Chip Sutherland, Hilliard Lyons; and Mr. Scott Cox, Chairman, Louisville Arena Authority.
LRC Staff: Katherine Halloran, Committee Staff Administrator; Julia Wang, Legislative Analyst; and Jenny Wells Lathrem, Committee Assistant.
Approval of Minutes (September 19, 2017)
A motion was made by Senator Carroll to approve the minutes of the September 19, 2017 meeting. The motion was seconded by Representative Brown and approved by voice vote.
Information Items
Ms. Halloran reported three information items for review: the quarterly status reports on capital projects from the Administrative Office of the Courts, the Finance and Administration Cabinet (with the Commonwealth Office of Technology reporting independently), and the universities managing their own capital construction programs; the Semi-Annual Report of the Kentucky Asset/Liability Commission; and Moody’s Investor’s Service ratings review of the Commonwealth’s public postsecondary institutions. No action was required.
Project Report from the University of Kentucky
Ms. Halloran said the University of Kentucky reported the purchase of a digital x-ray totaling $259,873 in restricted funds for orthopedic and sports medicine patients at UK’s Good Samaritan Hospital.
Project Report from the Finance and Administration Cabinet
Ms. Tomes submitted three projects from the Department of Military Affairs. The first was for $1,273,737 for the Range Operations Expansion (about 3,800 square feet for a central security check point) at Wendell H. Ford Regional Training Center in Greenville, Kentucky; funded with 100 percent federal funds.
The second was for $1,056,245 for the Record Holding Facility (archival and storage of military records for the Kentucky National Guard and mail operations) at the Boone National Guard Center in Frankfort, Kentucky; funded with 75 percent federal funds and 25 percent agency restricted funds from the Combined Clothing Distribution Facility (CCDF). The facility will consist of administrative and storage areas, mechanical/electrical room, communications closet, HVAC, and plumbing and lighting systems.
The third was for $1,379,097 for the Interior Renovation Wellman Armory at the Boone National Guard Center; funded with 75 percent federal funds and 25 percent agency restricted funds from the CCDF.
A motion was made by Senator Carroll to roll the three projects into one roll call vote. The motion was seconded by Representative Moffett and approved by voice vote.
A motion was made by Senator Carroll to approve the three projects, seconded by Representative Moffett, and approved by unanimous roll call vote.
Ms. Tomes reported one pool project in excess of $600,000 for Minor’s Creek, Owen County from the Fees-In-Lieu-Of (FILO) Stream Mitigation Projects Pool. The $4,442,429 was 100 percent funded from the Kentucky Wetland and Stream Mitigation Fund pursuant to KRS 150.255. This project is a headwater stream restoration with rock/wood structures to reduce erosion. The property was acquired and permanently protected via deed restrictions as required by the U.S. Army Corp of Engineers, which has authority over the FILO program. No action was required.
Lease Report from the Finance and Administration Cabinet
Mr. Aubrey reported two Cabinet for Health and Family Services (CHFS) renewals for privately leased space with an annual cost exceeding $100,000. Both leases will be renewed under the same terms and conditions: Franklin County, $7.55 per square foot for 15,465 square feet of office space through June 30, 2021, and Hardin County, $9.25 per square foot for 31,534 square feet of office space, through June 30, 2022.
A motion was made by Representative Moffett to roll the lease renewals into one roll call vote. The motion was seconded by Representative Brown and approved by voice vote.
A motion was made by Representative Moffett to approve the lease renewals, seconded by Representative Brown, and approved by unanimous roll call vote.
Mr. Aubrey lastly reported one lease modification for the Department of Alcoholic Beverage Control in Franklin County to complete safety, security, and ADA improvements. The one estimate obtained was for $15,000 from Michael B. Oerther. The cost will be amortized to the current lease term expiring June 30, 2019. No action was required.
Report from the Office of Financial Management
Mr. Barrow submitted two new conduit bond issues for approval. The first was the Kentucky Economic Development Authority (KEDFA), Louisville Arena Project Refunding Revenue Bonds, Series 2017 (Louisville Arena Authority, Inc.) in an aggregate principal amount not to exceed $450 million. The bond issue will restructure KEDFA’s current outstanding bonds issued on behalf of the Louisville Arena Authority (LAA) and be issued in three series (Series 2017A, Taxable Series 2017B, and Taxable Subordinate Series 2017C). Pricing is tentatively scheduled for mid-November. Revenue sources for debt service include tax increment financing (TIF) revenues, payments from Metro Louisville as well as contractually obligated and event-generated income through the lease agreement with the University of Louisville Athletic Association (ULAA).
In response to questions from Senator McDaniel, Mr. Sutherland clarified that there are present value savings with a traditional refinancing. Rather than a traditional financing, the submitted transaction was a restructuring, where the maturity schedule is lengthened to lower debt service payments, to avert a potential default [due to the impending increased payments on the current bonds]. Mr. Sutherland confirmed that the term of a pilot TIF was extended in order to execute the restructuring.
Senator McDaniel voiced his hope that potential impact on ticket sales due to recent events would have minimal effect on overall revenues as ticket sales are a small percentage of those revenues. He stated that he thought that Dr. Postel was on the right path; that Dr. Postel had taken some good steps for the University of Louisville (UofL); and that, although there may be pain in the short term, steps taken over the life of these bonds will prove to be worthwhile.
In response to a question from Senator Carroll, Mr. Sutherland referenced the efforts of the legislative body [House Bill 330] as well as the UofL’s and Metro Louisville’s commitment in extending and increasing payments. He said that all of partners: the legislature, Metro Louisville, UofL, LAA as well as the sponsors have assisted and that the goals were to enable the Arena, a state asset, to generate revenues to pay debt service; to invest in the Arena for it to remain a top-tier facility; and to complete the refinancing.
In response to a question from Senator Carroll, Mr. Rockhold stated that current market conditions are very favorable and there are potential improvements in the credit ratings and in the positioning in the marketplace.
In response to questions from Representative Moffett, Mr. Rockhold mentioned that the market continues to be very good for transactions at the lower end of the ratings scale. He referenced meetings with Assured Guaranty, a credit enhancement provider, and its potential participation in the forthcoming transaction as it insured the current outstanding bonds. With credit enhancement, the transaction could proceed without an improved credit rating.
In response to questions from Representative Moffett, Mr. Cox said that UofL agreed to pay $2.42 million in cash per year in addition to its annual current payments for rent and its percentage of concessions, etc. for the life of the bonds. In addition, LAA was hosting the UofL women’s volleyball team at a loss of $80,000 a year and the team moved out of the Arena. Therefore, there will be a $2.5 million dollar annual swing in LAA’s favor, regardless of what happens with the NCAA. In a worst case scenario, with UofL going on the “death penalty” and unable to compete for at least a season, Mr. Cox said that, while not an expert on UofL, he believed that UofL could continue to make the $2.42 million annual payment.
LAA has been reassured by individuals, including attorneys representing schools and individuals before the NCAA, that the death penalty will not occur. The NCAA is believed to factor UofL’s decisive personnel moves, demonstrating strong institutional control. Mr. Cox stated that he did not know that Adidas’s new $160 million sponsorship contract was in the works when the $2.42 million annual payment was negotiated with UofL.
In response to a question from Senator McDaniel, Mr. Cox said that there was an agreement with the Kentucky State Fair Board (KSFB) in which $100,000 per year would be paid [towards the $1,471,900 settlement negotiated in May 2013; the amount remaining, $921,900, will be paid from bond proceeds] for KSFB’s lost management fee when AEG took over management of the Arena. Mr. Cox stated that his predecessor believed the agreement settled everything and that there was an [informal] Attorney General’s opinion that nothing further was owed. Mr. Cox said that the issue was not discussed during his approximately 14 month tenure on LAA’s Board.
Senator McDaniel commented that, based on his conversations with KSFB, KSFB believed LAA’s obligations are both lost revenue and owed management fees and that KSFB doesn’t view the matter as settled.
Senator Humphries stated that the committee appreciated the time those testifying took in clarifying the transaction.
A motion was made by Senator Carroll to approve the bond issue, seconded by Senator McDaniel, and approved by unanimous roll call vote.
The second new conduit bond issue was for the Kentucky Housing Corporation (KHC) Tax-Exempt Conduit Multifamily Housing Revenue Bonds (Henry Green Apartments Project), Series 2017. The project is located on Jefferson Street, Louisville, Kentucky. The anticipated date of the unrated private placement is in November with net proceeds of about $10.5 million. Mr. Barrow stated that as a conduit transaction, the Commonwealth’s balance sheet will not be extended and referenced information about the conduit borrower in the meeting materials.
A motion was made by Senator Carroll to approve the bond issue, seconded by Representative Moffett, and approved by unanimous roll call vote.
Mr. Barrow reported one previously approved conduit note issue, the Kentucky Housing Corporation (KHC) Tax-Exempt Conduit Multifamily Housing Revenue Note (Bristol Bluffs Project), Series 2017. Bristol Bluffs is located in Louisville, Kentucky. The date of the unrated private placement with Citibank was September 7 for about $35 million. No action was required.
Mr. Barrow reported thirteen school district bond issues submitted with School Facilities Construction Commission (SFCC) debt service participation. Four of the bond issues were to finance projects in the following school districts: Clay County, Harlan Independent (Harlan County), Paintsville Independent (Johnson County), and Rockcastle County; 42 percent SFCC funded for a principal amount of around $13 million. Except for Clay County, which passed a recallable nickel tax in 2017; no tax increases were necessary to finance the projects.
There were nine refunding bond issues: Barren County, Boone County, Boyle County (2), Caldwell County, Estill County, Hardin County, and Ohio County (2); about 20 percent SFCC, 75 percent local, and 5 percent urgent need. The estimated total savings is $1.4 million with a principal amount of around $29.5 million.
A motion was made by Senator Carroll to approve the school bond issues, seconded by Representative Brown, and approved by unanimous roll call vote.
New School Bond Issues with 100 Percent Locally-Funded Debt Service
Ms. Halloran reported the submitted local school bond issues: Bardstown Independent (Nelson County), Clinton County, Hardin County, Henderson County, Newport Independent (Campbell County), and Knox County. Two of the issues were refundings. Three of the four issues for new projects, two for district-wide energy improvements and [one for the purchase of a building to house the Area Technology Center and superintendent offices] did not involve tax increases. The renovations to the intermediate and high school in the Newport Independent School District did involve the passage of a recallable nickel tax in 2017. No action was required.
Updated Debt Issuance Calendar
Also included in the members’ folders was the debt issuance calendar. No action was required.
With there being no further business the meeting was adjourned at 1:35 p.m.