The 1st meeting of the Interim Joint Committee on Economic Development and Tourism was held on Friday, August 25, 2006, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Eddie Ballard, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Representative Eddie Ballard, Co-Chair; Senators Julian M Carroll, Julie Denton, Brett Guthrie, Denise Harper Angel, Ray S Jones II, Katie Stine, and Ken Winters; Representatives Royce W Adams, Carolyn Belcher, Joe Bowen, Denver Butler, James Carr, Larry Clark, Tim Couch, Jesse Crenshaw, Jim DeCesare, Mike Denham, Bob M DeWeese, Ted "Teddy" Edmonds, Jim Gooch Jr, W Keith Hall, Mike Harmon, Mary Harper, Melvin B Henley, Dennis Horlander, Dennis Keene, Thomas Kerr, Stan Lee, Gerry Lynn, Thomas M McKee, Brad Montell, Fred Nesler, David Osborne, Ruth Ann Palumbo, Ancel Smith, Brandon D Smith, John Will Stacy, and Ron Weston.
Guests: Greg Harkenrider, Senior Economist, Governor's Office for Policy and Research, Office of the State Budget Director; Debbie King and Mark Wheeler, Chair, Board of Trustees, Louisville Zoo Foundation; and John Walczak, Executive Director, Louisville Zoo.
LRC Staff: John Buckner, Committee Staff Administrator; Karen Armstrong-Cummings and Louis Pierce, Legislative Analysts; and Dawn Johnson, Committee Assistant.
Chairman Ballard announced that the next committee meeting would be in Owensboro, Friday, September 22, pending LRC approval.
Chairman Ballard introduced Mr. Greg Harkenrider, senior economist with the Governor's Office for Policy Research, Office of the State Budget Director. Mr. Harkenrider gave an overview of tax increment financing (TIF). Mr. Harkenrider said TIF is consistent with the economic development strategy of the Commonwealth, which are performance-based incentive-type plans. He said that TIF is similar to the Cabinet's other tax incentive programs, which give a company the opportunity to get a portion of their taxes refunded if they meet certain performance requirements. Previously, grant-type programs were used. He said those programs were risky because if a project fell through, the money was spent before there was any performance. Performance-based programs are self-policing–if the development does not meet financial projections, then tax refunds do not materialize.
Mr. Harkenrider said that the state's TIF terms are consistent with other states. He explained that old revenues in a TIF program are the amount of money coming into Frankfort or local governments that existed before there is a TIF project. New revenues are the taxes that come in after a project is approved and the tax receipts start to come into Frankfort. "Baseline revenues" represent old revenues projected into the future. TIF deals are typically 20 years long. He said the most important part of tax increment financing is the "increment," new revenues coming in minus the baseline. This is the increment that goes back to the development. In Kentucky they receive 50 to 80 percent of the increment and up to 100 percent for property tax only.
Mr. Harkenrider said some of the TIF laws have "approved costs" that are approved by the Tourism Development Finance Authority or the Kentucky Economic Development Finance Authority Board. The funding mechanism is taxes that will be rebated to the project.
Referring to the Churchill Downs TIF project, Mr. Harkenrider said "old revenues" are sales and income taxes collected before a grant agreement was entered into. The specific law that Churchill Downs used allowed the Revenue Cabinet to use a three-year average of old revenues. He explained that baseline revenues are a projection based on the three-year average. "New revenues" are calculated when the agreement is activated and, is the actual money that flows into Frankfort. This is compared to the baseline and the increment is the difference between them. A percentage of this as set forth in the grant agreement can be returned to the developer.
Mr. Harkenrider said Kentucky's pilot TIFs were for cities of the first class, with the approving agency being the Office of the Governor. The remaining active pilot TIF is the Louisville Airport project. He said infrastructure TIFs are limited to ad valorem taxes for state participation. The approving agency is either the Commerce Cabinet or the Cabinet for Economic Development (CED). There are two project specific TIFs–Churchill Downs and the Marriott Convention Center in Louisville. He said project TIFs are approved through the CED or Commerce Cabinet. They have a wide array of funding mechanisms and are not restricted to cities of the first class.
Mr. Harkenrider explained the traditional arrangement of a TIF. He said typically there is a grant agreement which consists of three parties–the project developer, the Commonwealth, and a city or county development authority. The three parties enter into a grant agreement. Next, the city or county issues bonds which generate bond proceeds. The bond proceeds go through an agreement between the city and the project, and the money goes through a project so that it commence. All that is preactivation of the financial mechanisms as a TIF. Next, taxes within the TIF zone are paid into the Commonwealth or the city, depending on the grant agreement. Taxes paid to the Commonwealth, the incremental revenues, go to the city, and the city uses these to pay the debt service.
Mr. Harkenrider explained that a "local only" infrastructure TIF allows local governments to grant up to 100 percent of incremental local property tax, excluding school and special districts, from property located within the development area for up to 100 percent of infrastructure development costs. Each project can last up to 20 years. The projects require local government approval only with no oversight from the state. He said the development area must be at least 50 acres of undeveloped land, unless otherwise approved by the economic development authority, or contain at least one acre of brownfield, and must be under an agency as defined by KRS 65.680.
Mr. Harkenrider said that a "local and state" TIF has the same requirements as the local only infrastructure TIF but the state portion must be approved by the Kentucky Economic Development Finance Authority or the Tourism Development Finance Authority. The state percentage of the TIF revenue is limited to the same percentage as local government contribution and is limited to property tax only. Mr. Harkenrider noted that Kentucky is a relatively low property tax state which limits the benefit going to the project.
Mr. Harkenrider explained that project TIFs such as Churchill Downs and the Marriott Convention Center have extra requirements due to state involvement. The requirements include the need for new economic activity to the Commonwealth, there must be at least $10 million in capital investment, it must create 25 new jobs within the first two years, 25 percent of project revenues have to be attributable to sources outside the Commonwealth, there must be a unique contribution to the economic vitality of the state, and the project must not be primarily devoted to retail sales of goods.
Mr. Harkenrider said 49 states have TIF laws but there is a great disparity among them. He said some states only have property tax TIFs, some have sales tax TIFs and some have income tax TIFs. Mr. Harkenrider said that Kentucky is a relative new-comer to TIFs compared to other states but it now has some of the broadest funding mechanisms, the most permissive eligibility requirements, and it allows projects outside of blighted areas.
Mr. Harkenrider said there are many administrative hurdles with TIFs because of statutory requirements. He said sales and income taxes are more complicated because many sales tax payers file a combined return which makes it difficult to single out a specific project. All vendors within a TIF must submit disaggregated documentation to the project. He said renovation projects are more difficult because baseline revenues are not easy to project and the counterfactual is unclear–would the development of property within the TIF take place in the absence of a TIF arrangements.
Mr. Harkenrider said the obligation is on the TIF applicant and not on the state to ensure the paperwork is done. The applicant has to collect all the information from in the proposed zone then submit it to the Revenue Cabinet. The two complicating issues are ensuring that all companies file a separate return and certifying the baseline, which is a complicated task. He said local agencies must provide approved local ordinances establishing the development area the percentage of local TIF involvement, historical tax information, and project projections. The information is then submitted to the Cabinet for Economic Development or the Commerce Cabinet.
Representative Clark said the arena project consisted of four stacked TIFs, which was probably not the intent the statute and should be studied. He also expressed concern about the state paying more for undervalued property and suggested the six-mile TIF be limited to ensure that one developer does not have an advantage over others.
Representative Montell asked if a lag existed between bond issuance time and payments due, and the increment revenue flow. Mr. Harkenrider said projects have up to three years to be activated. He said bond issues can be structured differently. They can backload the payment of principle and interest and debt can be structured to minimize payments in the early years.
Representative Denham asked if it was possible to have an infrastructure TIF and a project-specific TIF on the same parcel of land. Mr. Harkenrider said the credit can only be given once. If there is a large infrastructure TIF, the ad velorem tax is already pledged.
Representative Denham asked if any rural area applications had been received or were they even aware of TIFs. Mr. Harkenrider said he is unaware of an infrastructure TIF in a rural area with state participation.
Senator Carroll asked if businesses in the six-mile radius of the Louisville Arena project had increased property taxes. Mr. Harkenrider said if the city participated, and they used the normal rate setting mechanism, the rates may not be increased but they would not decrease normally.
Representative Palumbo said that TIF legislation will be refined in the future.
Next, Ms. Debbie King, Louisville Zoo Foundation Board of Trustees, Mr. John Walczak, Executive Director of the Louisville Zoo, and Mr. Mark Wheeler, Chairman of the Foundation Board of Trustees, gave an update on the Zoo's Glacier Run Project. She said the University of Louisville completed an economic impact study of the project and a study has been provided to committee members. Ms. King explained that the Zoo has an economic impact of approximately $24 million annually, and that would increase to $32.5 million with the completion of Glacier Run. She said since the kick-off of their capital campaign earlier this year, they have raised nearly $8 million of the $25 million necessary for completion. She thanked the General Assembly for appropriating $6 million for Glacier Run in the 2006 session budget. She said although the previous appropriation was vetoed, in light of the state's current budget surplus and the urgency of their schedule, they requested the committee's support of a midterm budget adjustment to allow the Glacier Run Project to progress on schedule. She said this 5-acre addition to the Zoo will bring national and international attention to the Commonwealth. Ms. King said 100,000 school children and 650,000 adults visit the zoo annually.
Mr. Walczak gave an overview of the Glacier Run project. He said Glacier Run is modeled after a town in Churchill Canada where polar bears migrate through every year to get on the ice flows. He said the Louisville Zoo is known for its innovation. The last two major projects–the Islands Exhibit and Gorilla Forest–are the highest scoring exhibits in North America according to the American Zoo and Aquarium Association. Mr. Walczak said the classrooms in Glacier Run will seat approximately 60 students who will be next to the polar bears. The facility will also accommodate 120-150 students and adult sleepovers to experience the exhibit. Mr. Walczak presented a fly-through of the project via DVD.
Mr. Wheeler said the Louisville Zoo is the state zoo. He said through "Zoo To You", they are visiting students in every county in the state with some of the animals and staff. He said last year they visited 3,000 students through the program. He said that not only does the zoo provide an economic impact, it also has an important quality of life impact. He said the Glacier Run Project is a priority for the Zoo and the major component of their strategic initiative. On behalf of the board Mr. Wheeler asked for consideration of a midterm budget adjustment of $6 million.
Senator Carroll noted that despite the Committee's support of the project, budget restraints might make the Foundation's request difficult.
Responding to Representative DeCesare's question, Mr. Walczak said the estimated operation expense of Glacier Run is approximately $450,000. He said the $6 million is a one-time request.
There being no further business, the committee adjourned at 2:20 p.m.