The 1st meeting of the Interim Joint Committee on Economic Development and Tourism was held on Thursday, June 16, 2005, at 1:00 PM, in Room 149 of the Capitol Annex. Senator Alice Kerr, co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Alice Kerr, Co-Chair; Representative Eddie Ballard, Co-Chair; Senators Julian Carroll, Denise Harper Angel, Jerry Rhoads, Richie Sanders Jr., Jack Westwood, and Ken Winters; Representatives Royce Adams, Carolyn Belcher, Joe Bowen, Kevin Bratcher, Denver Butler, James Carr, Larry Clark, Perry Clark, Tim Couch, Jesse Crenshaw, Jim DeCesare, Milward Dedman Jr., Mike Denham, Bob DeWeese, Ted "Teddy" Edmonds, Jim Gooch Jr., Keith Hall, Mike Harmon, Mary Harper, Dennis Horlander, Dennis Keene, Thomas Kerr, Stan Lee, Gerry Lynn, Thomas McKee, Brad Montell, Ruth Ann Palumbo, Tanya Pullin, Ancel Smith, Brandon Smith, John Will Stacy, Tommy Thompson, and Mike Weaver.
Guests: Jane Stephenson, Appalachian Director, Steele-Reece Foundation; Kim Short, Executive Director, New Opportunity School for Women; Betty Gentry and Sheila Pruitt, Owners, Big Meadow Oil, Incorporated; Basha Roberts, President and Chief Executive Officer; LexTech, Incorporated; Kena Samuels, Chief Executive Officer, SKS Accounting & Consulting Firm; Lisa Howlett, President, Auburn Leather, Incorporated; and Melinda Karns, Certified Public Accountant, Dulworth, Breeding & Karns.
LRC Staff: John Buckner, Committee Staff Administrator; Karen Armstrong-Cummings; Lou Pierce; and Dawn Johnson.
Senator Kerr welcomed everyone to the meeting which would focus on the needs of women- and minority-owned businesses.
Senator Kerr introduced Ms. Jane Stephenson, Appalachian Director, Steele-Reece Foundation. Ms. Stephenson explained that 19 years ago while in Berea, she saw the need for help for low-income Appalachian women who needed employment training and education to enable them to support themselves. As a result, Ms. Stephenson founded the New Opportunity School for Women, an intensive three-week program that is completely funded by foundations and individual donors. The program also pays for childcare and transportation. Ms. Stephenson asked Kim Short, the current executive director to talk about the program. Ms. Short said the program is in its 38th session and has had 455 women complete it. Of those, 84 percent had incomes less than $10,000. Forty-three percent of those only had a General Education Development (G.E.D.) diploma or were trying to get their G.E.D. Ms. Short said that after completing the program, 74 percent of participants have gone to college or have gotten jobs with better training, two graduates have obtained masters degrees, two are working on masters degrees, 22 have obtained bachelors degrees and 14 have obtained associates degrees.
Ms. Stephenson said the program also teaches women self-esteem, job interviewing and technology skills. Women are taught how to think creatively to develop home-based businesses, specifically crafts and childcare, since employment in the area might not be readily available or they do not have transportation. She noted that due to an appearance on The Oprah Winfrey Show and a subsequent gift of $100,000, the program purchased new computers for training. Ms. Short noted that several participants in the program have their own businesses but are having problems. She said the program is helping them deal with such issues as record keeping and accounting.
Senator Kerr noted Ms. Stephenson's various accomplishments and awards and thanked her for appearing before the committee.
Next before the committee were Betty Gentry and Sheila Pruitt, owners of Big Meadow Oil, Incorporated, Glasgow, Kentucky. Senator Kerr noted the various accomplishments and awards won by Big Meadow Oil. Ms. Gentry and Ms. Pruitt said that in 1981, Big Meadow Oil was created in an effort to help their community of mostly farmers. Also at this time they began a farm supply business. Although they were very successful, they were not profitable. After reading an article regarding the Small Business Development Center (SBDC), Ms. Gentry and Ms. Pruitt began working with Mr. Rick Horn of the SBDC and were able to become profitable. Also at this time, they began working with the Office of Minority Affairs (OMA), now known as the Office for Business and Occupational Development. Through the OMA they became a certified Disadvantaged Business Enterprise (DBE) company which opened many doors for their business, Ms. Gentry said. They also were certified with the Transportation Cabinet.
Ms. Gentry said that currently the state has no goals in doing business with DBE firms. She said women and minority-owned businesses want the chance to compete--to level the playing field. She also said the Small Business Administration (SBA) standards are somewhat askew. Ms. Pruitt explained that, with sales of approximately $3 million per year and ten employees, their company is considered a small business but the SBA standard for a small fuel distributorship is $10.5 million in sales and under 500 employees. She said they cannot compete under those circumstances. Ms. Gentry noted that according to the Small Business & Entrepreneurship Council (SBEC), the most entrepreneur-friendly states under the Small Business Survival Index have the best economy. Ms. Gentry said that another problem that needs to be addressed is the lack of insurance companies in Kentucky that will write policies for small, women and minority-owned companies. Ms. Gentry said they are working with a new organization, the Kentucky Association of Disadvantaged Business Enterprise (KADBE) which offers help to the DBE after certification.
Representative Pullin asked if the health insurance problem was confined to Kentucky or is it widespread. Ms. Pruitt said it appeared to be mostly in Kentucky. She explained that when they attempted to find a more competitive insurance plan they found that Kentucky's rates were much higher and more limited on providers than other states.
Representative Pullin asked if they had any suggestions. Ms. Pruitt said the state should try to promote more insurance companies to come to Kentucky to create more competition.
Representative Palumbo noted that, as introduced, House Bill 278 of the 2005 General Assembly would have addressed this issue.
Next was Melinda Karns of Dulworth, Breeding & Karns. She explained that in 2002 the SBA classified 96.9 percent of Kentucky businesses as small (less than 500 employees). Between 1999 and 2000, small business created almost 31,000 employees, 70 percent of the non-farm jobs in Kentucky. In 2002, there were almost 50,000 self-employed women, equaling 35 percent of the self-employed. There were 66,000 women-owned businesses in Kentucky of which 16.4 percent had employees. They generated $9.9 billion in revenue in 1997.
Ms. Karns said tax theory proposes that nothing is more fundamental to the character of a successful democracy than its citizens' trust that both the judicial and legislative processes will protect their basic human rights and provide equal justice under the law. She said that tax policy has certain goals including equity, simplicity and efficiency. She explained that equity is horizontal (people in equal positions pay the same) or vertical (adjustments are made among non-equals). Ms. Karns explained that based on available information, under the Tax Modernization Plan, a single working mother making approximately $53,000 as a sole proprietor, with a level of home mortgage interest will pay approximately $1,800 in state income tax. If she conducts her business through a single member LLC she will pay over 20 percent more and if she conducts her business as part of a large partnership (but still a small business), she will pay over 75 percent more. Ms. Karns said this is not equitable. Also, she said that the Revenue Cabinet cannot answer some questions regarding the tax plan.
Representative Palumbo said she has received complaints that the Revenue Cabinet has been unable to answer certain questions regarding tax law. Ms. Karns said she, along with other accountants have been e-mailing questions to the Revenue Cabinet since March. She thought the difficulty lies in the state separating itself from the federal tax system. She said a deep understanding is required, especially relating to partnerships and the Cabinet does not have the resources to address this. She said there is a predominant tax treatise on state taxation which states it would be irresponsible to decouple from federal tax treatment for states because they do not have the resources to administer it.
The next presenter was Basha Roberts, President and Chief Executive Officer of LexTech, Incorporated, a 13-year-old technology company based in Lexington. Ms. Roberts said she was representing three different groups: 1.) Small business owners, who employ 50 percent of all private sector employees, pay 44.3 percent of the total United States (U.S.) private payroll, and who have generated 60-80 percent of the net new jobs annually over the last decade. They receive 23 percent of federal procurement dollars spent by the federal government; 2.) Woman business owner who represent 51 percent of the Kentucky and U.S. population. Although women are the majority in population they are the minority in getting business; 3.) Small technology companies who employ 39 percent of all high-tech workers in the U.S. Ms. Roberts said very few women are in the technology field and even fewer are business owners.
Ms. Roberts explained that in 1992 she decided to pursue her entrepreneurial instincts and started LexTech. She was thankful that several men in medium and large corporations took a chance and promoted her company. When given the opportunity by a large enterprise account to showcase the company's abilities, they performed well and were recommended to many other companies. She said these large accounts grew their business into 18 states. Ms. Roberts said that in some years over 75 percent of LexTech's business has been out-of-state. Ms. Roberts said that small business owners need a peer group so she joined the National Association of Women Business Owners (NAWBO). In 1996 she was elected to serve as a national representative on the NAWBO public policy council as a director. She explained that the national public policy focus at that time was on the Federal Bundling Procurement Policy that was initiated in 1992. NAWBO's fear that this would have a major negative impact on small businesses came true. From 1992 to 2001 large firms were winning 67 percent of all prime contracts and 75 percent of all bundled contracts. At the same time large corporations and state governments began following this philosophy. In 2001, the federal government policies were changed to focus on unbundling contracts. With the new emphasis on small, women, veteran, and minority-owned businesses large prime contractors began focusing on partnering with them. Ms. Roberts said she hoped the committee understood that Kentucky's government policies can make a difference for small businesses. She explained that Kentucky's small business concerns lie in several areas such as access to affordable health care insurance. She said they legislatively need major medical insurance made available. As a company owner with a few employees they are willing to pay and self-fund like the large companies. They also need increased government procurement opportunities for small, women and minority-owned companies. Fair and equitable tax treatment for small businesses is also needed as well as an educated workforce. She said the state should track the product and services procured from small, women and minority-owned businesses. Money spent with Kentucky firms creates jobs and creates revenue for state government. Ms. Roberts said in 1997, small, women and minority-owned business were left out of the loop during the creation of the Empower Kentucky plan. She said in 2002 the Strategic Plan for the New Economy was printed. She questioned if expenditures were being tracked and questioned whether the focus was only on starting new business or if they were looking for entrepreneurs who have experiences in driving a business to success.
Ms. Roberts suggested Kentucky might need its own matchmaking program. She said Kentucky needs to tie financial incentives for large companies to subcontracting and procurement to small businesses of all types. She said in the 1990s manufacturers in Kentucky used to buy products and services for their Kentucky facilities from Kentucky companies, including LexTech. However, by 2000 the purchasing had been bundled into the corporate offices and they are no longer their procurement companies. She noted that in Indiana, state financial incentives for casinos were tied to small, women and minority procurement. Procurement was tracked and at one time construction stopped at a facility for noncompliance. Indiana has continued contracting with small businesses in their daily operations because of this incident. Ms. Roberts said state policies can make a difference. She said creative policies are needed for small businesses to work with state government without it costing the state. She suggested Kentucky use the CCR system to certify ownership type--at federal government's expense. She said certifying existing small companies in their lines of expertise, setting prices, and letting departments work with whomever they want on the certified list would be a great way to grow Kentucky businesses. Ms. Roberts said large RFPs need to require subcontracting with small, women and/or minority firms. She said this helps train the small businesses and gives them references on large jobs. She said LexTech is currently active in a government bidding process with IBM that required small business subcontractors. She said the system does work. She urged the committee to make small business legislation a priority.
Representative Montell commented that he was frustrated that the Small Business Advocacy Commission has not been active and most of the state's economic development efforts are spent toward larger businesses in Kentucky. He said Kentucky needs to focus on the small businesses--the backbone of the state's economy. He would like to see a small business advocacy group emerge from state government and move small business forward.
Representative Palumbo commented that the SBAC was established to address these types of concerns and then placed under the governor's office. She said recently the SBAC was placed under the Cabinet for Economic Development diminishing its effectiveness. She said efforts are underway to get the SBAC back under the governor's office.
Referring to discussion on medical insurance, Representative Pullin asked if Big Meadow Oil was asking for the flexibility to buy a policy with fewer mandated coverages. Ms. Pruitt responded yes.
The next presenter was Kena Samuels, CEO of SKS Accounting and Consulting Firm. She explained that, after working for several large firms, she began her own company providing accounting services for small and medium-sized businesses in 1999. Her company assists businesses with the initial setup of their business plan and in-house accounting along with being their off-site accountant as needed. She explained that, through her trial and error experiences with her own business she was able to assist other companies in avoiding certain pitfalls. Currently, Ms. Samuels has two locations and a staff of 15 who provide monthly financial services for approximately 100 clients and approximately 2,000 tax returns during tax season. Ms. Samuels explained that her company consists of three different divisions: accounting and consulting, income tax, and payroll. She said began to focus on the payroll company to become a service bureau in order to get state contracts because of government-certified payrolls.
Ms. Samuels said one obstacle she has faced is the ability to acquire large clients and establish the company name. Networking and certifications do not always provide this. Ms. Samuels said there are two primary roadblocks that prevent women and minority-owned businesses from growth. In acquiring state contracts it is difficult to obtain required performance bonds because of the lack of experience and working capital. She recommended counseling or step-by-step bonding resource center. She said the second roadblock is certifications. Certifications help women and minority owned businesses and promote building business relationships with corporate companies wanting to do business with minorities. The Transportation certification, DBE, is strictly based on net worth and does not have a women or minority-owned designation. She would recommend a certification strictly for women and minority-owned businesses.
Senator Kerr introduced Lisa Howlett, President and CEO of Auburn Leather, and noted her various accomplishments and awards. Ms. Howlett said she is the fifth generation owner of Auburn Leather Company, formerly Caldwell Lace Leather which was started in 1863. She said the company has been owned or managed by her family for 142 years except for two--1983 to 1985 when it was bought by an outside interest who dismantled, sold or closed all the divisions with 500 employees in three states. The facility in Auburn was going to be sold at auction so Ms. Howlett and her father bought it back. They had no business plan, no backing, no customers and no product. They did have 11 employees left who had been leather craftsmen all their lives.
Ms. Howlett explained that in 1985 there were four major competitors in the shoelace business. All their customers were in the U.S. Now, Auburn Leather is one of two remaining U.S. suppliers. Eighty percent of their customers are in southeast China. Ms. Howlett said that, in 1989 with low interest Kentucky Economic Development Finance Authority (KEDFA) funds and the help of GRADD, her father relocated the coloring plant of his tannery company to Franklin, Kentucky from Florida. Around that time, with the help of the SBDC at Western Kentucky University, they put together a loan package to get SBA backing for plant improvements and machinery. They currently have 90 employees. Auburn Leather is now the manufacturer of Honda and Kawasaki motorcycle bags, half of the motorcycle bags for Polaris and many accessories on Suzuki motorcycles.
Ms. Howlett noted that Russellville used to have several apparel-related cut and sew plants, Bowling Green used to be the hub of Union Underwear Manufacturing, and Auburn just lost 300 jobs from the Auburn Hosiery Mill because it moved to Mexico. According to the American Apparel and Footwear Association, from 1975 to 2002 the U.S. has lost 670,000 jobs in leather, apparel and footwear. Ms. Howlett said according to the U.S. Department of Labor, from 2002 to 2012, an additional 245,000 jobs will be lost. She said the employees received benefits from the Dislocated Workers Program and extended unemployment and money for retraining. As a business owner committed to staying in Auburn, Kentucky, and the United States, Ms. Howlett said she is in need of programs that will help her company increase productivity via machinery, technology, and engineering. She must find ways to stay competitive with firms located in impoverished third world countries. She said she may be able to create 10 to 50 more jobs but her primary concern is saving the 90 jobs that exist. If the state can spend money to help the employees dislocated from plants who did move out of the country then she would like to see those companies committed to staying in Kentucky receive assistance so they can become more competitive globally. She explained that Auburn Leather has started a subcontracting production site in China as a marketing strategy to increase employment in Auburn. The average employee in China costs the company $5 per day. She stated there are a lot of efficiencies she has to make up with American workers making $10.50 per hour.
Representative Brandon Smith asked Ms. Howlett if her company did any work for Harley-Davidson. Ms. Howlett said they are in negotiations. They currently have four vendors--one having been with Harley-Davidson for 75 years and another is a $45 million per year company with extensive engineering capabilities, which is why she needs increased technology and engineering to be able to compete.
Representative Palumbo asked what percentage Auburn Leather supplies leather lace products worldwide. Ms. Howlett replied 65 percent and of that 80 percent goes to southeast China.
Representative Hall said as an entrepreneur in Appalachia with business in three states a major problem is liability insurance. Representative Hall told all presenters that he is open to any suggestions on legislation to solve this problem and the other issues mentioned during testimony.
Ms. Gentry replied that they are working with an Arkansas insurance company in forming a consortium of small businesses to obtain affordable insurance. Their current insurance company upon raising their rates by $10K per year told them they did not have a choice.
Senator Sanders noted that the relocation training money is actually federally funded and suggested getting help on the federal level. On the state level money is budgeted for Bluegrass State Skills Corporation for training. He said unfortunately there is never enough and perhaps the committee should look in to this. Regarding health insurance, Senator Sanders said tort reform is very important and needs to be looked at. Referring to a New York Times article, labor leaders, chambers of commerce and other organizations were meeting privately to, on a national level, come up with a solution for the health insurance dilemma. Senator Sanders said most of the health insurance problems will need to be addressed at the national level.
Representative Keene asked how Ms. Howlett came about opening their China facility. She responded that she had a sales agent she had worked with for approximately 10 years who was also dislocated. Together with Auburn Leather and several of his principles, he leased a building in Yonggun, China which is central to the footwear industry, and started some contract manufacturing. She said they put in a new product line that would complement the Auburn facility. She explained that it has reached a point that she wished she had gotten more help in the beginning that now she has to go backwards and get it organized correctly. Representative Keene asked if there was anyway for the jobs in China to come back to Kentucky or is it competition with China's low wages. Ms. Howlett responded that it was not a wage issue completely. They invented a new product that was labor-intensive. The product will also increase them from 65 percent marketshare to 100 percent, which will also increase production output in Auburn.
Representative DeWeese thanked everyone for their presentation and noted that the healthcare cost is an issue and that Kentucky may be affected a little more than other states because of legislation passed in the early 1990s when most insurance companies left the state. He said this has now been reversed with the promise from many insurance companies that they would come back but they have not for the most part. He agreed that the crux of the problem was on a national level.
Representative Gooch said as a small business owner he understood the problems mentioned. He said part of the problem is that while the legislature attempts to help, sometimes they end up hurting companies more than they help. He noted that a lot of companies were asking for catastrophic insurance and hoped that the legislature would work on this.
Senator Kerr and Representative Ballard thanked the presenters for their comments and insight.
Representative Ballard noted that Resolutions 05-02 and 05-03 will be passed over until the next meeting of the committee.
There being no further business the meeting adjourned at 2:45 PM.