The 5th meeting of the Interim Joint Committee on Licensing and Occupations was held on Friday, November 14, 2008, at 10:00 AM, in Room 129 of the Capitol Annex. Senator Gary Tapp, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Gary Tapp, Chair; Senators Tom Buford, Julian M. Carroll, Perry B. Clark, Julie Denton, Carroll Gibson, Denise Harper Angel, Bob Leeper, Dan Seum, and Damon Thayer; Representatives Tom Burch, Larry Clark, Ron Crimm, Tim Firkins, Dennis Horlander, Dennis Keene, Adam Koenig, Reginald Meeks, Charles Miller, David Osborne, Ruth Ann Palumbo, Carl Rollins II, Sal Santoro, Arnold Simpson, and Ron Weston.
Guests: Mac Stone, Executive Director, Stacia Alford, Grape and Wine Marketing Specialist, Office of Agriculture Marketing and Product Promotion, Kentucky Department of Agriculture; Andre Brousseau, Old Crow Inn Farm and Winery; Bruce Kunze, Kentucky Grape and Wine Council; Crit Luallen, State Auditor, Brian Lykins, Director of the Office of Information Technology and Special Audits, Auditor of Public Accounts; Henry Lackey, Commissioner, Department of Charitable Gamine; Rodney Brewer, Commissioner, Kentucky State Police; Norman Brown, Executive Director, Lee Harris, General Counsel, Kentucky Real Estate Commission.
LRC Staff: Tom Hewlett, Bryce Amburgey, Michel Sanderson, Carrie Klaber, and Susan Cunningham.
Senator Tapp called the meeting to order and, before asking for a motion to adopt the minutes of the October meeting, welcomed Carrie Klaber, new committee analyst, to the committee. Afterwards Representative Meeks made a motion, seconded by Senator Harper-Angel and the minutes from the October 10, 2008 meeting were adopted.
First on the agenda, Mac Stone, Executive Director of the Office of Agriculture Marketing and Product Promotion, told committee members the Kentucky Department of Agriculture administers the marketing cost share program for the Kentucky Wine and Grape Council. He said that the marketing cost share program that wineries have access to is clearly defined. Mr. Stone said that the program was started both for marketing and distribution. Moneys were paid out of the fund based on production amounts. Larger wineries were absorbing all of their money early in the cycle, with the smaller wineries production leaving money unused. Mr. Stone said that Stacia Alford, Grape and Wine Marketing Specialist for the department, designed a "Program Opt-in card" which allows wineries to estimate their production to receive money earlier in the cycle, and kept the playing field level. He said this will adjust every six month period. Mr. Stone said that there was a six month lapse in the rollover of funds due to bills and invoices being received after December 31.
Mr. Stone said that there are six active Kentucky Small Farm Wholesale licenses. He said that the $12 reimbursement has been beneficial to the small businesses that have high expenses. He said that many wineries have full distributorship arrangements. Mr. Stone said that the department also works with the Tourism Department on a statewide marketing program, using Tourism's purchasing power to buy advertising. He said they have developed a "Z-card" which details a map of where the wineries are located as well as other pertinent information. He said these are located at welcome centers, wineries, retail outlets and at trade shows. He said they have been well received and the department is looking at more funds to update the card with wineries that have opened since the first printing. He said that working with the Department of Tourism, Stacia has developed a website that has information on all the wineries posted. The website will become more interactive as wine trails are developed in the future.
Mr. Stone said the grape growers only have limited contact with the department through county extension offices. This makes it difficult to determine an accurate number of grape growers and where they are located. He said as the Council begins to mature there will be more focus on the grape growers and the grapes grown. Mr. Stone said that the University of Kentucky has been helpful in locating the growers.
Regarding wine production, Mr. Stone said that a survey was sent to the 49 wineries that are licensed. He said responses were received from 25 wineries. He said that even though the data was incomplete there appeared to be an increase in production each year, beginning in 2004 through the first half of 2008. Mr. Stone said that 14 out-of-state wineries are licensed in the state, adding that there had been no complaints that these wineries were pushing in-state operations out of the market. Mr. Stone said that there were two types of wineries, one that depends on tours and the tasting room at the winery, while the other has less foot-traffic but expands to retail sales.
Mr. Stone said that this year there was a bumper crop of grapes; however, not all the grapes were purchased locally because the wineries were not prepared for the large harvest. He added that it was not clear if this was due to inventory not selling, or if wineries were buying grapes or grape juice out of state because it was cheaper. Mr. Stone said that the World Equestrian Games, coming to Kentucky in 2010 will be an opportunity for Kentucky wine to have international exposure. He added that in addition to a tasting room there will be a shipping station for visitors to have wine shipped to their home. Mr. Stone said that this year Kentucky hosted wine competitions at festivals and added a competition at the State Fair. He said wine judging is different because there are standards that must be met in order to be awarded a gold, silver or bronze medal. He said there were 165 medal winners at competitions across that state. Mr. Stone said that the Kentucky Grape and Wine Council is in the process of producing a video on the wine industry in the state to use for educational and promotional activities. He said that October is has been established as "Grape and Wine Month" and wineries are planning activities in conjunction with this month. Mr. Stone said that future goals of the Grape and Wine Council are to partner with "Kentucky Proud" to continue to improve marketing and wholesale reimbursement programs, to increase the Kentucky wine market and the recognition of Kentucky wine, and to continue to improve the quality of Kentucky wine. He said that working with the University of Kentucky viticulturist has been invaluable. Mr. Stone said that the council is looking at access to a fund for bird netting to protect the grapes when they are ready to harvest. He said that some wineries are considering Sunday precinct sales in order to expand their business since other states show that Sunday is the second biggest day for tourism. Mr. Stone also said that the brown Department of Transportation signs that have been posted on interstates and major highways have been a huge boost to wineries that are located in more rural areas.
Representative Crimm asked if the state was involved in the retail aspect of the wine industry. Mr. Stone said the department helped with point of purchase or promotional activities but not in retail activity. Representative Clark asked if it was necessary to request funds every budget cycle. Mr. Stone said the program was new and that at this time there was not a perpetual fund in place. Senator Leeper asked how the department determined who was on the wine trail map. Mr. Stone said the department used data from the Alcohol Beverage Control to determine who had a license and who had a tasting room to invite tourist. Senator Seum asked if grape growers contracted with wineries. Bruce Kunze, Kentucky Grape and Wine Council, said that growers do not work on contracts due to the evolution of the industry. He said that due to production from last year not being used some verbal contracts this year were not honored. Mr. Kunze said the council is working on identifying all the growers in the state to put together a system so that growers will have a contract to guarantee sales and will know who they are going to sell to. He said that a grading system will be put in place to assure quality of grapes. Senator Seum asked if there was a minimum number of acres a grower should cultivate. Mr. Kunze said he produced six to seven tons of grapes per year on an acre and one half and did not have problems selling his grapes. He added that he had established a good relationship with a winery who knew that he would sell them good grapes. Mr. Kunze added that the University of Kentucky was a good contact for information on producing grapes. Mr. Stone said that some of the grapes that produce wine people look for on the shelves do not grow well in Kentucky. Representative Keene asked if the department or the wine council had an estimate of the industry's growth in the next five years. Mr. Stone said that the department was more focused on the diversity of grape planting and improving the quality of wine in Kentucky. Andre Brousseau said he had been in touch with the county extension agent in Boyle County to ascertain how the office calculated agricultural statistics and was told the information is extrapolated from the number of responses received from surveys.
Next on the agenda, Crit Luallen, State Auditor, gave a report on an audit of Charitable Gaming in Kentucky performed by her office earlier this year. She said in 2007 Charitable Gaming produced $489 million making it second in Kentucky to the Lottery which brought in $744 million dollars and just ahead of horse racing which produced $470 million dollars. She said this ranks Kentucky fourth in the nation in charitable gaming receipts. Ms. Luallen said the amount of money generated is one reason that the auditor's office decided to issue this briefing report. She said they looked at various aspects of the industry; how Kentucky compared to other states in certain categories, and how Kentucky is regulating and providing oversight to the charitable gaming industry. She said the data in the report will hopefully serve as a resource to legislators and other policy makers looking at the area of gaming in Kentucky. Ms. Luallen said the report examined data ranging from 2001 through 2007. She said the conclusion was that the Department of Charitable Gaming should increase oversight and develop stronger controls of this significant industry. She said the first recommendation was that the department should conduct regular audits of charitable organizations. Currently Kentucky law does not require, nor has the department adopted a policy to perform scheduled audits to ensure that the more than 750 charitable organizations are consistently monitored. She said that currently audits or investigations are initiated only as a result of a gaming complaint.
In 2007, Kentucky licensed 758 organizations engaged in charitable gaming and the department's audit branch issued 16 reports. Additionally, as of April of 2008, when the field work ended, the investigation branch had 15 open cases from 2005, 48 open cases from 2006, and 44 open cases from 2007, and 10 cases from 2008 as of April, 2008. She said that investigations deal with issues that might result in criminal activity or wrong-doing rather than routine audits. Mrs. Luallen said that without an audit the financial data provided to the department is self-reported and not verified. In 2006, the department had 44 staff positions; including investigators, accountants, and attorneys to oversee charitable gaming state wide. Due to recent budget cuts the staff has been reduced to 42 employees. Auditor Luallen said that, according to the department, more staff could help decrease the continual backlog of investigative cases as well as ease the need for more regular auditing.
Ms. Luallen said another recommendation in the report was that the department should maintain a state registry of gaming volunteers. She said Kentucky law does not require the department to maintain a registry to properly track and monitor volunteer activities. Because some professional volunteers may be able to personally benefit by engaging in collusion or criminal activities, the reports recommends that the department better monitor volunteer information in order to protect the interest of the charities. She said the auditor's office also recommends that the department include a broader range of information in its annual report that would make the oversight of the industry more transparent. The report maintains that the department should provide additional information such as data analysis of several years of charitable gaming financial activity, statistics regarding various regulatory activity, and the names of organizations that do or do not return their legal amount of receipts to the charities. Mrs. Luallen said the auditor's office is also recommending that the department strengthen its guidelines for financial reporting by the organizations; which now have no deadlines toward making revisions to their financial statements. Additionally the report notes that Kentucky does not publically fund awareness and treatment of gaming problems as several other top ten gaming states do.
Auditor Luallen also said that, of the top ten states in charitable gaming, Kentucky is the only state that does not receive general fund dollars from charitable gaming receipts. Kentucky provides funding solely to fund the Department of Charitable Gaming and it is not structured, nor would it be allowed by current law, to provide additional revenue for other governmental purposes. She said the report shows that in the top ten states money provided from gaming receipts to state and local governments for other purposes ranges from approximately $600 thousand in Virginia, to as high as $51 million in Minnesota. Mrs. Luallen said in Kentucky the department is funded through a fee on gross receipts that is paid by the licensed organizations, and on July 1, 2008, the fee was increased from .53 percent to .60 percent. She said the report also notes that Kentucky has seen a decrease in receipts and attendance statewide in 2007, despite being one of the top ranked states nationally. She said gross receipts in 2001 were at $607 million but declined to $489 million by 2007. Attendance was 5.4 million in 2001, but decreased to 4.3 million in 2007. She said a declining economy, higher gas prices, and recent smoking bans are suggested by the department as reasons for the reduction in gaming activity. Auditor Luallen said the report included several tables that break down the information she had provided in more detail, in particular a county by county table. She said that during the process the auditor's office met and worked with the Department of Charitable Gaming and the staff was cooperative. She said there is a follow-up meeting scheduled with the department to discuss how the department can expand the auditing that it does using its existing resources.
Mrs. Luallen said that with the large number of charities relying on these gaming proceeds it is important that the state have strong controls and oversight of the charitable gaming industry to ensure that every possible dollar goes to the charitable causes that they support.
Senator Gibson asked if the .six-tenths percent fee taken from the charities gross receipts was enough to cover the department's expenses. Mrs. Luallen said that this money was the only revenue the department raised for its operation. Henry Lackey, Commissioner for the Department of Charitable Gaming said that the department's budget is just over three million dollars with the bulk of the money coming from the fee. He said that initial license fees and fines make up the other portion. He added that the department receives no general fund dollars. Senator Seum asked how much the net receipts have dropped since 2002. Mrs. Luallen said table three on page 12 had a chart that shows the proceeds to charities over time. Representative Burch asked if the auditor's office had looked at how the money was distributed by the charities. Mrs. Luallen said that was why her office suggested that there be more auditing oversight. She said if the department had more resources to do more auditing it would be possible to cover more charities and be sure that the money is going where it is meant to go. Senator Thayer asked if the increase in the fee for gross receipts was done by statute or administrative regulation. Commissioner Lackey replied by statute. Representative Firkins asked if the auditor's office was concerned with the 40 percent rule and who determined the payout level. Mrs. Luallen said that a large payout is necessary in order for charitable gaming to be competitive with the Lottery and gaming across the river. Commissioner Lackey said the 40 percent was mandated by the General Assembly. Senator Tapp said the 40 percent was a national standard. Senator Leeper asked if more money, to perform more auditing by the department, would have to come from the general fund. Commissioner Lackey said the General Assembly would have to take action to increase the sixteenths of a percent fee. Representative Clark said Representative Wayne had a bill in the last session to help addicted gamblers that was for charitable gamers only; however, it was his feeling that the Lottery and the thoroughbred industry should be included. Senator Denton asked if the counties received any money from the department. Commissioner Lackey replied they did not.
Next on the agenda, Rodney Brewer, Commissioner of the Kentucky State Police spoke to the committee regarding efforts to control illegal gambling in Kentucky. He said the state police do not have the resources to be pro-active in the area of illegal gambling. He said most cases opened are reactionary after receiving a complaint, usually through an anonymous call. He said, in 2007 the state police received approximately 79 gambling complaints. Through September 30 of this year, he said there have been about 81 gambling complaints. Commissioner Brewer said in 2007 the state police investigated 18 gambling cases; and to date in 2008 there are about 21 gambling cases. He said most of the gambling cases are worked by the Drug Enforcement Special Investigations Unit, even though many of the cases come in to the post dispatch. He said they are farmed out for obvious reasons. He said the investigations take quite a bit of time and usually require someone undercover to enter the facility to see if illegal activity is actually taking place. He said most of the cases investigated are in Veterans of Foreign War, American Legion posts, and truck stops. He said the ones that are in private entities, clubs such as VFW, often come in as an alcohol related complaint and upon further investigation illegal gambling is uncovered. He said this is not the case with truck stops, where a neighboring truck stop will call to complain. Commissioner Brewer said because the state police do not take a proactive stand discovering illegal gambling is often the result of investigating illegal drug activity or illegal alcohol use.
Senator Tapp asked, of all the crime committed in the state, how much crime committed in the state is drug related. Commissioner Brewer said in 1984, the state police used established criteria to study which crimes in Kentucky had some type of nexus to the drug world. He said the result was that the state police were using 18 to 20 percent of their resources to combat illegal drug activity. Using the same criteria in 1994 the result was well over 40 percent. He added that the state police resources have not increased exponentially. He said that according to some estimates today, depending on the part of the country reporting, 60 percent of property crime committed have a direct relationship to drug activity.
Senator Seum said, in Jefferson County, at any given time there are 15,000 outstanding felony warrants. Commissioner Brewer said that the state police have a pilot project called e-warrant; an electronic system that is an electronic file that all police officers have access to. He said it is being started in Jefferson County. Representative Burch asked what is being done to eliminate illegal gambling machines. Commissioner Brewer said that the statute is interpreted to say that the machines in and of themselves are not illegal, it is dependent upon the way that they are used and the payout of the machines that makes them illegal. He added that most are for fun and a game of chance with no reward at the end.
Next on the agenda, Norman Brown, Executive Director and Lee Harris, General Counsel from the Kentucky Real Estate Commission explained the commission's 2009 legislative initiative to committee members. Ms. Harris, General Counsel told members that the commission's complaint process is different than most professional licensure boards. She said the proposed changes to the process were taken from the Medical Licensure Board's process. Ms. Harris said this process would eliminate minor types of cases through an informal settlement process, and allow the commission to send a letter of concern rather than take action against a licensee. She said the complaint process would be left to the commissioners to vote, signed by Norman Brown, Executive Commissioner, and officially issued by the commission. She said this process would occur in the instance of escrow account theft and more serious grievances. Mr. Brown said there was a section to allow licensees to come to the commission to ask for a written opinion. He said the commission currently does this but in an unofficial capacity. He said a record is kept of the requested opinions and they are published so other licensees will know how the commission interprets certain statutes or regulations. Ms. Harris said there will also be a proposal to codify policies such as charges for a late renewal, charges for time share, and other fines and definitions that are not set in statutes. She said they would ask for statutory authority to issue cease and desist orders rather than requesting an injunction. The changes also include a proposal to make statute consistent with an agency form allowing principal brokers and managing brokers to act as dual agents in designated agency situations and asking sellers who are also licensees to disclose their status in the contract.
Senator Tapp asked how many grievances the commission received in a year's time. Ms. Harris said approximately 300 complaints; broken down into consumer complaints against licensees, investigations into applicants who have a criminal background, and unlicensed brokerage. One hundred-twenty complaints have been filed by a consumer against a licensee. Commissioner Brown said there have been two to four hearings in the past three years. He said most complaints are resolved through mediation. Senator Buford asked if the legislation had the support of the Kentucky Realtors Association. Ms. Harris said the commission had given both proposals to the association; however, they have not had a response from them to date. Senator Buford said some of the language was broad and that he was concerned that there was not a limit on the definition of moral turpitude. He asked if there would be a list to define this language. Ms. Harris said they would provide a definition.
There being no further business to come before the committee, with a motion and second the meeting was adjourned.