The 1st meeting of the Task Force on Economic Development of the Interim Joint Committee on Economic Development and Tourism was held on Thursday, September 20, 2007, at 10:00 AM, in Room 154 of the Capitol Annex. Representative Ruth Ann Palumbo, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Alice Forgy Kerr, Co-Chair; Representative Ruth Ann Palumbo, Co-Chair; Senators Julian M. Carroll, Julie Denton, Brett Guthrie, Jerry P. Rhoads, and Jack Westwood; Representatives Eddie Ballard, Mike Denham, Myron Dossett, Melvin B. Henley, Dennis Horlander, Dennis Keene, Fred Nesler, John Will Stacy, and Tommy Thompson.
Guests: John May, Commissioner, Department of Revenue; Darby Turner, Greenebaum, Doll & McDonald, PLLC; Jerry Deaton, Director of Governmental Affairs and J. D. Chaney, Counsel for Member Legal Services, Kentucky League of Cities; Bob Babbage, National Managing Partner, Babbage Cofounder; Ron Wolf, Intergovernmental Relations, Louisville Mayor's Office; and Roxann Fry, Community and Economic Development Division, Greater Louisville, Inc.
LRC Staff: John Buckner, CSA; Karen Armstrong-Cummings; Louis Pierce; and Dawn Johnson.
Chairwoman Palumbo welcomed the committee and gave a brief description of tax increment financing (TIF) in Kentucky.
Mr. Darby Turner of Greenebaum, Doll & McDonald, PLLC and counsel to the Lexington Downtown Development Authority explained the Lexington area's participation in TIF. Mr. Turner explained that downtown Lexington did not qualify for the TIF program until the 2007 legislation was passed. He said it was decided that they not pursue the Signature Project TIF in 2007 because the city was not ready. He said it was also necessary to educate the Lexington-Fayette Urban County Council members before proceeding. Two application submissions are expected in 2008.
Mr. Turner said efficiency is lost with TIF projects due to credit enhancement. The market evaluates risk–the bonds associated with them–to determine if there will be sufficient revenue through a coverage ratio of 2:1, or through interest rates. Mr. Turner said consideration of credit enhancement in the form of guarantees from the state and/or local government should be considered. He suggested that a bond pool might make the program more efficient.
Mr. Turner said there is time lag while waiting for project completion that needs to be financed which is an impediment in getting the project launched. He suggested using income tax relating to construction activities as some form of bridge financing. He also suggested adding technology, biotechnology, and health sciences to the "mixed use" list. Mr. Turner recommended removing the word "blighted" from the Urban Blighted Area TIF.
Commissioner John May, Department of Revenue and Don Guyer, Legal Counsel gave a brief overview of the state TIF process. Commissioner May said Kentucky was 49th in passing statewide TIF legislation. He explained that the 2007 TIF legislation created the Division of Tax Increment Financing in the Department of Revenue and created the Kentucky Tax Increment Financing Commission. Previously, the TIF program was administered by the Economic Development Cabinet. Commissioner May said TIF is a complicated financial proposal and a large education gap exists in communities. He said the Department's roll is to be a portal for applications and an education center for communities. He explained that the TIF program was placed in the Department of Revenue due to their audit function. Commissioner May said the Department will not forecast out particular projects from an economic standpoint–they serve from an audit and review standpoint only.
Commissioner May explained that once an application is reviewed and is deemed compliant, the Department refers it to the TIF Commission which is chaired by the Finance Secretary. The members of the Commission include: the state budget director, the Economic Development Cabinet secretary, the Commerce Cabinet secretary, the University of Kentucky and University of Louisville business school deans and the Kentucky Economic Development Finance Authority chair. The commission has not yet had the opportunity to consider a project; however, the Department has been sent applications for revue.
Chairwoman Palumbo asked that the Task Force members be notified of future TIF Commission meetings.
Representative Denham said there were concerns from his district about the four percent wage TIF being removed. He said local governments and rural areas are reluctant to pass an area-wide payroll tax.
Regarding blighted area TIFs, Senator Guthrie explained that the intent of the legislation was to avoid incentivizing development or lose tax increment on land that would otherwise be developed.
Commissioner May said one of the challenges for applicants is to estimate old revenue; therefore, they must estimate the sales and income tax revenue of a development area because however, because they do not have access to the information they must estimate based on the number of businesses and employees in a zone. He said Missouri has turned this task over to their revenue department for a more accurate estimate.
Next were Jerry Deaton, Director of Governmental Affairs; J.D. Chaney, Counsel for Member Legal Services; and Nancy Yelton of the Kentucky League of Cities. Mr. Deaton said the League conducted five statewide informational meetings on TIF. Mr. Chaney said an important component of TIF included a solid planning process that encouraged the partnership between developers and local governments. He said the local-only TIF is important to smaller communities. He said many cities have expressed an interest in TIFs. Mr. Chaney said the League is continuing to educate cities on the TIF legislation and they expect more interest in the future.
Representative Palumbo asked if local governments have defined their TIF districts. Mr. Chaney said Owensboro has but most were still working on it.
Bob Babbage, National Managing Partner, Babbage Cofounder; Ron Wolf Intergovernmental Relations, Louisville Mayor's Office; and Roxann Fry, Community and Economic Development Division, Greater Louisville, Inc. explained the Louisville area's TIF progress. Mr. Babbage said collectively a rural urban commitment is being carried out like never before. Mayors, business leaders, chambers and advocates are working closely together on many projects to utilize the TIF program.
Mr. Wolf said two entities, one from Orlando, Florida and the other from New York, New York have said that Kentucky's 2007 TIF legislation is currently the national model. He said some changes may be suggested during the 2008 Session to make the TIF legislation less cumbersome. Mr. Wolf offered three suggestions for legislative improvement. First, he suggested the TIF Commission be located in the Economic Development Cabinet due to the agency's background in incentives. He said The Department of Revenue should be involved in the process but not the lead agency. Second, he suggested changing the $20 million threshold for urban and blighted use. He said there is no opportunity for industrial use to be incorporated and listed the 18-acre Phillip Morris Plant in Louisville as an example. Also, structured parking should be eligible for TIF funding. Lastly, the compensating tax rate should be changed so that local governments are treated equal to state governments in relationship to House Bill 44. He said presently, local governments end up funding their portion of the TIF out of local general funds. He said some small communities will not be able to utilize TIF due to an inability to fund them.
Ms. Fry said it was important to educate communities on the TIF process and help them identify TIF opportunities. She agreed that the Cabinet for Economic Development should oversee the TIF program.
There being no further business, the meeting adjourned at 11:43 AM.