The 4th meeting of the Interim Joint Committee on Economic Development and Tourism was held on Thursday, September 16, 2004, at 1:00 PM, at Toyota Motor Manufacturing Kentucky, Inc., Georgetown, Kentucky. Senator Katie Stine and Representative Eddie Ballard, Co-Chairs, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Katie Stine, Co-Chair; Representative Eddie Ballard, Co-Chair; Senators Julie Denton, Brett Guthrie, Vernie McGaha, Joey Pendleton, Richard Roeding, and Damon Thayer; Representatives Carolyn Belcher, Ted "Teddy" Edmonds, Bill Farmer, Mike Harmon, Mary Harper, Thomas Kerr, Thomas McKee, Charles E. Meade, Brad Montell, Ruth Ann Palumbo, Tanya Pullin, Ancel Smith, Brandon Smith, John Will Stacy, Charles Walton, and Robin L. Webb.
Guests: Kim Minke, Manager of Community Relations, Toyota Motor Manufacturing, Kentucky, Inc.; Steve Jones, Director of Tax Incentives and Donna Duncan, Commissioner, Financial Incentives, Kentucky Cabinet for Economic Development; and Alan McCoy, Vice President of Government and Public Relations, AK Steel Corporation.
LRC Staff: John Buckner, Committee Staff Administrator; Karen Armstrong-Cummings; Lou Pierce and Dawn Groves.
Senator Stine and Representative Ballard thanked Toyota Motor Manufacturing representatives for hosting the meeting and for the scheduled tour of the facility.
Senator Stine asked for the subcommittee report from the Task Force on Economic Development meeting that was held earlier. Senator Thayer replied the Task Force heard a presentation by Claria Shadwick, Executive Director of the Kentucky Equine Education Project (KEEP). Ms. Shadwick explained the economic aspects and impact of the horse industry on Kentucky’s economy. She also described the threats facing the industry, what other states are doing, and KEEP’s mission to maintain Kentucky’s position as horse capital of the world.
Next, Kim Menke, Manager of Community Relations, Toyota Motor Manufacturing, Kentucky, Inc. (TMMK) welcomed the committee members to Toyota and thanked them for coming to see the facility. Mr. Menke said he would discuss the economic impact and the tourism aspects of TMMK. He said over 30,000 people visited the plant last year from every state and territory, and 70 different countries. He said TMMK is the largest plant Toyota has outside of Japan. It is the first wholly owned and operated facility, and the most complete, in North America. TMMK was established in 1986 with production beginning in 1988. Mr. Menke said the plant has over 7,000 employees who reside in 76 different counties. Investment in the Georgetown facility is $5.3 billion with an annual payroll of $519 million. He said TMMK also has numerous contract and service suppliers. There are over 10,000 people on site everyday. TMMK builds the Solara, convertible Solara, Camry, and the Avalon.
Mr. Menke noted there are two other Toyota facilities in Kentucky. Toyota Motor Manufacturing, North America in Erlanger, which employs approximately 1,000 is the headquarters for all of Toyota’s manufacturing operations in Canada, the United States (U.S.) and Mexico. He said the Erlanger facility centralizes purchasing, production control and strategic planning operations with an investment of over $223 million. The other facility, he said, is the North American Parts Operations in Hebron. It is the largest parts center in the country, storing over three million parts. It employs over 300 people with an investment of $65 million.
Mr. Menke said there are over 70 Toyota suppliers employing 35,000 people at 106 locations around the state. Toyota spends $2.5 billion through these suppliers.
Mr. Menke noted TMMK has nearly doubled the local tax base which provides for many community improvements. TMMK has a corporate contributions program with philanthropic contributions in Kentucky of $22 million. The plant is also ISO 14001 certified.
Across the U.S., Toyota is responsible for nearly 100,000 jobs because of the Georgetown facility, Mr. Menke said. There are ten manufacturing plants in the U.S. with 13 across North America, having a total investment of $16.3 billion and an annual payroll of $2.4 billion.
Mr. Menke said Toyota has recently built a cross dock which is similar to an airport hub. He explained that it is a new concept in just-in-time delivery that helps suppliers in Kentucky which in turn keeps inventories at a minimum. It also allows suppliers in Kentucky supply Toyota facilities in other states as well.
Mr. Menke noted that Toyota has partnered with the city of Georgetown to build a business park in an effort to bring new companies into the area.
Mr. Menke said Kentucky and Toyota have been good for each other. He said the mutual success is possible because of good teamwork between local and state government as well as the outstanding local workforce. Mr. Menke said that twenty years ago when Toyota considered the area, Georgetown had a good infrastructure and Toyota would like to maintain that. He added that Toyota is working to constantly improve and will be bringing in new and exciting products in the future. Mr Menke concluded, saying Toyota looks forward to being in Kentucky a long time.
Senator Thayer presented a citation, on behalf of the Kentucky Senate, to TMMK for their 2004 Earth Day Award given by the Kentucky Environmental Quality Commission.
Senator Pendleton asked how many acres the plant occupied to which Mr. Menke replied 1,300.
Representative Ballard commented that when the incentive package was awarded to Toyota 20 years ago it was not common practice but it became the forerunner of the state’s current incentive program.
Representative Webb noted she was a staff member for staff leadership and did the legal analyst for the TMMK project and stated she was proud to be a small part of it.
Next, Donna Duncan, Commissioner of Financial Incentives and Steve Jones, Director of Tax Incentives for the Kentucky Economic Development Cabinet (KEDC) outlined the Kentucky Industrial Revitalization Act (KIRA). Ms. Duncan said KIRA was enacted in 1992 and amended in 1994, 1996, 2000, 2001 and 2004. She said it is targeted solely for existing industries that are at risk of eminent closure who must update their operations in order to retain existing jobs. She noted most tax incentive programs are available to induce new investment for the purpose of creating new jobs. She said KIRA is structured differently than the other programs and has unique requirements.
Mr. Jones explained that in 1992, when the program began, its premise was to assist manufacturing companies in serious danger of closing their facilities. There had not been reinvestment in the companies’ operations to the point where productivity and efficiency had declined significantly. To qualify, a company must employ or plan to employ 25 people. KIRA was amended in 2000 to include coal mining and processing companies of sufficient size.
Mr. Jones said expenditures made for fixed assets such as outdated equipment, structural issues and infrastructure costs are eligible for tax incentives, or “recovery” under KIRA. The incentives are threefold, Mr. Jones explained. First, a company can recover income tax credit tied to the state income tax liability generated from the facility. Second, recovery of credit against a corporation license tax dealing with the actual project. Third, the company can realize five percent of the facility payroll through the Job Revitalization Assessment Fee. Mr. Jones pointed out that the Cabinet does not like to use the KIRA program.
Mr. Jones next explained the KIRA process. First, an application is filed after discussions with the company. Once the KEDC reviews the application for possible approval it is then presented to the Kentucky Economic Development Finance Authority (KEDFA). Once KEDFA has acted on the application it grants preliminary approval. Preliminary approval begins the process. One of the statutory requirements is that an independent third party consultant examine the validity of the company’s claim that they are in fact looking at closing their facility. Mr. Jones said typically larger accounting firms performing the review and payment to them is made by the applicant companies.
Once the consulting report is done, the findings are reported back to KEDFA, Mr. Jones explained. A public hearing is then held to solicit public comments. Then, the applicant would meet with local cities and counties that impose occupational taxes because both are affected. He said there is a five percent wage assessment. The state’s participation is four percent; local government’s one percent. Once local jurisdictions agree to participate at that level the paperwork returns to KEDFA where a final agreement (Revitalization Agreement) is drafted. Mr. Jones explained that the state is contractually obligating these incentives to the companies if in fact they perform. He said there are clauses whereby reductions in incentives will be made if employment levels decline and provisions that terminate the agreement if employment falls below a certain level.
After the final agreement, Mr. Jones explained, companies have a ten-year period to use the incentives to offset the costs, a maximum of 75 percent of the total project costs, depending on the agreement. For mining operations, the base contract requires annual delivery of four million tons and must employ 500 people within the state.
Mr. Jones said KIRA has been operational for approximately 13 years. Currently, there are nine active projects under final agreement that date back to 1994. KEDC is very careful with the use of KIRA. It is not always successful and is considered a last ditch effort to help companies remain viable.
Representative Ballard asked what percentage of companies are awarded KIRA incentives but still close. Mr. Jones replied one company has failed.
Representative Brandon Smith inquired as to the length of the process. Mr. Jones replied that the time from initial application to final agreement varies mainly because of the consultant’s review.
Representative Brandon Smith asked how many coal companies have been successful with the KIRA program. Mr. Jones said the Cabinet has had one application which was approved.
Representative Brandon Smith said he was concerned with the amount of time needed to complete the process as a failing company has very little time to recover. Representative Smith said most of the coal industry has been under long-term contracts and are just getting by, therefore, KIRA would be helpful.
Representative Brandon Smith asked how the coal companies should initiate the KIRA process and also if company information would remain private. Mr. Jones said that until an application has been filed and presented to KEDFA at a public meeting there is no disclosure by the Cabinet. He said there is an exemption in the Open Records Act that preliminary discussions remain confidential.
Representative Brandon Smith asked if KIRA has replaced the Kentucky Rural Economic Development Act (KREDA). Mr Jones said KREDA is separate and apart from KIRA.
Representative Brandon Smith asked for an update on coal severance monies for training. Ms. Duncan said there are now two funds—single county accounts which, under the new administration was moved to the Department for Local Government and the KEDC-administered multi-county accounts with funds primarily being used for attracting industry to industrial parks.
Senator Roeding asked about other programs for companies not facing difficult times. Mr. Jones said the Kentucky Industrial Development Act has been used extensively for existing companies doing expansions, and the KREDA program targets the less-economically-advantaged counties by assisting growing companies. Senator Roeding said the state must help companies in need but also must encourage growth, higher production and additional jobs for the other existing companies in Kentucky.
Next, Representative Ballard introduced Alan McCoy, Vice President of Government and Public Relations, AK Steel Corporation. Mr. McCoy said AK Steel, after a number of years leading the industry, has become a victim of its own success. Most of AK Steel’s competitors have gone bankrupt, shed their pension and retiree healthcare legacies and have reemerged at significantly lower costs than AK Steel. As a result AK Steel is trying to protect its employees, still compete, and lower company costs. He said the financing provided by KIRA has helped AK Steel in accomplishing this. The company has very solid customers, including TMMK. Mr. McCoy noted AK Steel has won awards for delivery and quality at Toyota’s supplier award conference for the past ten years.
Mr. McCoy said for the last two years AK Steel wavered on the future of carbon steel making at both their plants. Over the last year there have been several changes in the company and they are now recommitted to carbon steel making. The state’s investment in helping finance the Ashland project is a part of that commitment. AK Steel currently employs approximately 1,200, they have an annual payroll of approximately $70 million, and a total economic impact of approximately $250 million in the region. Mr. McCoy said AK Steel is very committed to the Ashland plant and is grateful for the state’s assistance through the KIRA program.
There being no further business the committee adjourned at 2:00 p.m. to tour the Toyota facility.