The 5th meeting of the Interim Joint Committee on Licensing and Occupations was held on Friday, October 9, 2009, 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, Co-Chair; Representative Dennis Keene, Co-Chair; Senators Tom Buford, Julian M. Carroll, Julie Denton, Denise Harper Angel, John Schickel, Dan "Malano" Seum, Kathy W. Stein, Damon Thayer, and Robin L Webb; Representatives Tom Burch, Larry Clark, Ron Crimm, Tim Firkins, David Floyd, Dennis Horlander, Adam Koenig, Reginald Meeks, Charles Miller, Ruth Ann Palumbo, Carl Rollins II, Arnold Simpson, Ron Weston, and Susan Westrom.
Guests: Mac Stone, Executive Director, Office of Agricultural Marketing and Product Promotion, Department of Agriculture; Curtis Sigretto, Elk Creek Vineyards, Ed O'Daniel, President of the Kentucky Winery Association; Arch Gleason, President, Mary Harvell, General Counsel, Howard Kline, CFO, Kentucky Lottery Corporation; Denise Logsdon, Secretary, Kentucky Board for Massage Therapy; Pam Jenkins, Lobbyist, Kentucky Chapter of the American Massage Therapy Association.
LRC Staff: Tom Hewlett, Bryce Amburgey, Michel Sanderson, Carrie Klaber, and Susan Cunningham.
Minutes of the September 11, 2009, meeting were approved as submitted without dissent.
First on the agenda Senator Damon Thayer introduced a bill he is considering filing for the 2010 General Assembly to consider. He told members his bill was very simple. He said it only changes the cap on the amount of wine that a small farm winery is allowed to produce annually. He said the current cap is 50,000 gallons per year and his proposal raises the cap to 100,000 gallons per year. Senator Thayer said that when Senate Bill 82 was passed no one anticipated the rapid growth in the Kentucky wine industry and that there are some wineries getting close to producing 50,000 gallons of wine per year.
Curtis Sigretto, owner of Elk Creek Vineyards, told committee members that he moved to Kentucky in 1985 and opened Elk Creek Hunt Club and Sporting Clays. Mr. Sigretto said that he has held numerous tournaments with clays, including tournaments that have helped raise over two million dollars for the Boomer Esiason Foundation in eight years. He said that this year the U.S. Open shoot was held at Elk Creek with over 1,000 shooters from around the world. Mr. Sigretto said that as an entrepreneur he saw the need for fine wine and began construction for a winery in 2005. Thanksgiving weekend of 2006 Elk Creek Vineyards opened with a winery designed to produce 5,000 gallons of wine. He stated that currently Elk Creek is the largest winery in Kentucky with 36 acres planted and 14 varieties of wine. Mr. Sigretto said that the winery is now producing over 40,000 gallons and distributes to Ohio, Indiana and soon Illinois. He said over 50,000 people, per year, visit the winery. Also, Mr. Sigretto said he has three stores across the state, and has wine in the Kentucky Proud store at Rupp Arena. He said that the 50,000 gallon limit hinders his ability to grow his product line. He told the committee that a winery in Indiana sells over 25,000 cases of wine to Kentucky visitors on a yearly basis.
Representative Westrom asked why the industry had a 50,000 gallon cap. Senator Buford responded that the small farm wineries were exempt from paying the 11 percent wholesale tax and the wholesale distribution was subsidized, adding the wineries were afforded other privileges such as promotional money. Senator Buford said that there are 16 out-of-state licenses and that they would also be allowed to increase their gallonage if Kentucky changes the cap. Also, the number of wineries that could direct ship, avoiding the wholesale price, would increase. Senator Buford said perhaps a solution would be to make a license that would fit individual small farm winery needs.
Edward O'Daniel, President of the Kentucky Winery Association, said that raising the limit to 100,000 would bring parity between the state law and the federal law. He said a new license could be created for distributors or another type of winery license that would not allow for the advantages currently in place.
Senator Thayer said another consideration to raising the gallon cap was helping the grape growers who have crops they cannot sell since the small farm wineries are at capacity.
Representative Clark said Senator Buford's comments were to the point. He said that he would be reluctant to expand the gallonage cap knowing that out-of-state wineries would get the wholesale tax break. He said that Huber Wines would come into Kentucky and put the smaller farm wineries out of business.
Senator Thayer said he wanted to help the wineries grow their business. He added that he would work with Senator Buford and Representative Clark to draft legislation that would not be punitive to expanding wineries.
Mr. Sigretto added that he did not feel that out-of-state wine sales would hurt the Kentucky small farm wineries. He told the committee that he had marketing ideas that had "national legs," but if he could only produce 50,000 gallons in Kentucky he would have to produce wine in California. This would mean that he could not add the "Kentucky Proud" sticker to the back of his wine bottles. Also, with the current law he would lose his tasting room if he produced more than 50,000 gallons of wine.
Senator Carroll said that wine making was brought into Kentucky to supplement the decline of tobacco crops. He said he was concerned with the 100's of wineries around the United States that would come into Kentucky if the gallonage limit was increased above 50,000 gallons.
Senator Schickel said if the wineries were willing to pay the tax when their production rose above 50,000 gallons the legislature should help them.
Mac Stone, Executive Director for the Office of Agricultural Marketing and Product Promotions, explained to the committee members that Stacia Alford was responsible for the day-to-day business with the Grape and Wine Council and the distribution of the Small Farm Winery Fund. He said that there are currently 54 small farm wineries and most of those produce less than two or three thousand cases per year. He said even these small wineries cost hundreds of thousands of dollars to start up. Mr. Stone said that when the wineries were forced into the three-tier system the distribution fund was started to allow them to have some competitive advantage. He said that Elk Creek Vineyards has utilized the fund.
Mr. Stone said that the Departments of Agriculture and Tourism share a marketing position and have done very well attracting tourists to the farms. He said the enologist and viticulturist at the University of Kentucky have been invaluable. He said a quality certification program is being developed and they are holding competitions at the State Fair. Mr. Stone said the benefits of being in the small farm winery program are the $100,000 per year that the wineries share for marketing and promotion of their own individual winery. He said there is a formula that allows the larger wineries to have access to more funds and the smaller wineries who are not able to invest their half of a large amount to receive a lesser amount. There is also a prorated formula for the distribution funds.
Mr. Stone said there is a vintner's license that allows for production and wholesale distribution of wine. He said that tasting rooms and on-site sales, as well as off-site retail, are the way most of the small wineries will operate for a long time to come. He said that the issue of grape production and purchasing of grapes fluctuates from year to year. This year was a wet year and the vintners have problems with sugar and ph levels causing an off flavor.
Mr. Stone said the incentive has been lost to buy Kentucky grapes due to the higher cost of production. He said many wineries can purchase grape juice in a barrel rather than having grapes that were not the right quality. He said the wineries have noted that sales are holding their own even though the economy has been down. Mr. Stone said that the legislature could consider allowing for a larger gallonage limit while still offering incentives. He said that the tasting room is invaluable. He said the Grape and Wine Council is evaluating different methods to offer incentives as well.
Mr. Stone said the one area of growth has been expanded retail which will call for more production at a cheaper price. He said Sunday sales for the smaller winery is the single largest thing that would help their growth. He said that Sunday sales in the tasting room would increase a small farm winery's business by as much as fifty percent.
Representative Clark said the 50,000 gallon threshold was to protect the Kentucky wineries. Regarding retail sales, he said he was trying to pass legislation to sell wine in larger grocery stores; however, stores were reluctant to reserve floor space for Kentucky wine.
Senator Tapp said that due to the amount of money that was going into the Small Farm Winery fund the threshold was put in place to make sure there would be help with advertising and distribution and would be fair to all Kentucky wineries.
Senator Buford commented that Mr. Stone, Representative Clark and the winery owners might wish to meet with the distillers and distributors to draft language permissive.
Senator Tapp said that this upcoming session was going to be his last. However, he stated he would like to see the General Assembly do a better job of helping Kentucky businesses. He said construction projects all across the state, paid for with tax-payers dollars, are being done by out-of-state construction companies, electricians, architects. He said there are in-state vendors who can do the job.
Senator Tapp also took the opportunity to recognize and welcome Senator Robin Webb as the newest member to the committee.
The next item on the agenda was a presentation from the Kentucky Lottery Corporation. Arch Gleason, President of the Kentucky Lottery gave the annual report. He said lottery sales consistently have risen modestly since it began. He said the sales improvement last year was 4.2% with an increase in dividends to the Commonwealth at 6.4 percent. He said that a report issued by the Rockefeller Institute shows that, due to the recession, for the first time since 1970, gaming revenues to state governments will be down. He said other states that operate a lottery appear to be about 2% down.
Mr. Gleason said that since the Kentucky lottery went on line in 1989, sixty percent of lottery sales have gone to players; commissions paid to retailers was 6.2 percent of sales and the lottery's operating expenses have been 7.3 percent with the state getting 26.3 percent. He said that $1.66 billion was turned over to the General Fund and this figure included $214 million to Support Education Excellence in Kentucky, (SEEK). One point three billion dollars was dedicated to the Kentucky Educational Excellence Scholarships (KEES) Reserve Fund. Thirty million dollars was dedicated to the Literacy Development Fund, and $20.8 million to the Kentucky Affordable Housing Trust Fund (in the years 1999 through 2003). Mr. Gleason said that proceeds from the Lottery in FY 2010 are $3 million off the top goes to the Literacy Development Fund. Of the remaining funds, 78% goes to scholarship and grant programs; 45% is split out to KEES and 55% is to the College Access Program (CAP) and Kentucky Tuition Grants (KTG). Any unclaimed prize money, typically between $8 and $10 million, goes to the KEES Reserve Fund. He said that remaining proceeds, by statute, remain in the General Fund to be used to support restoration of higher education funds.
Mr. Gleason said that during the last five years the operating costs, including cash sales, prizes, operating expenses and dividend transfers have fluctuated but are typically in the range of 6 percent. Mr. Gleason said that in 2009 the Lottery made the decision to offer free tickets as prizes. He said offering free tickets kept the players interested in the game and allowed the Lottery to improve profitability, explaining that previously a winning two dollar ticket exchanged for cash and now the ticket is exchanged for another ticket. Mr. Gleason said that the Lottery reduced the limit per drawing on the Pick 3 and Pick 4 games from $3 million and $2 million to $1.5 million allowing the Lottery to achieve a $1.1 million higher gross profit sales for the year, on Pick 3 in particular. Mr. Gleason said the Lottery has reduced advertising expenses by $2 million; reduced salaries, wages and benefits by $1.6 million by eliminating 25 positions; restructured and minimally reduced retailer incentive compensation by $1.6 million; and reduced the cost for scratch-off ticket printing, contracted, and professional services by two percent. He said the Lottery is still delivering quality lottery services.
Mr. Gleason said the Lottery profits have increased by six percent in an industry that has seen a decrease in profits across the United States. He said that the economy in Kentucky has not yet rebounded. He added that most tickets sold are to the average citizens, between the ages of 25 and 55 with slightly greater than a high school education and an average income. Mr. Gleason said that currently on-line sales are up 11 percent compared with the previous year. He said this was driven by Power Ball.
Mr. Gleason told the committee that future challenges to the Lottery are; increasing instant ticket sales, Scratch-Off and Pull-tab, by $11.1 million; increasing sales of the online games, Pick 3, Pick 4, CashBall, Win for Life, 3 Line Lotto and Powerball by $7.3 million. Mr. Gleason said sales in these games have remained even, or flat, for several years. He said that current economic conditions, including the high unemployment rate, have a negative impact on disposable income. A maturing product mix and increased competition for gaming sales are being tracked. Mr. Gleason said that the expansion of more active forms of gaming in neighboring states poses a challenge for Kentucky sales. He said the Lottery is prepared to respond if Kentucky law is changed to expand gaming. Mr. Gleason said the possibility of internet wagering laws changing would have an impact on gaming in Kentucky as well.
Representative Keene asked why the Lottery cannot report to the public on where profits are dispersed. Mr. Gleason responded that the Lottery is prohibited by statute to mention programs that benefit from lottery sales. Senator Buford asked if it was possible to tax lottery tickets. Mr. Gleason said the tax would have to be included in the price of the lottery ticket. Senator Buford asked if there are statistics from other states on product sales when a neighboring state expands gaming beyond a lottery. Mr. Gleason said he was not aware of any report on this. Senator Buford asked if, in Mr. Gleason's opinion, the Governor could issue an Executive Order and have the Lottery control Video Lottery Terminals (VLTs) at race tracks. Mr. Gleason said that VLTs may not be the same as slot machines; but current law prohibits slot machines. Representative Meeks asked if upper management was among the staff reduction. Mr. Gleason said the lay-off involved 15 sales positions, closing one regional office, and mid-level management positions were reduced. Senator Webb said the legislature should be aware of future proposals that would undermine the integrity of the Lottery and public education. Representative Miller asked if there was a method to track winning scratch-off tickets that are redeemed for more scratch-off tickets. Mr. Gleason said the Lottery tracks the number of tickets printed and the overall sales of the game as well as validation of prizes claimed. Prizes are considered unclaimed 180 days after the game ends. He added that in an on-line game if no one claims the prize within 180 days the ticket is considered unclaimed.
Last on the agenda, there was a discussion of issues for the upcoming General Assembly regarding massage therapy. Pam Jenkins, representing the Kentucky Chapter of the American Massage Therapy Association and Denise Logsdon, Secretary for the Kentucky Board of Licensure for Massage Therapy spoke to members. Ms. Jenkins said that massage therapists have been licensed since 2003. Ms. Logsdon said the board would like to clarify the definition of massage therapist to help licensees better understand the law. She said specifically the practice of chair massage at kiosks in malls should be licensed to better protect the public. She said the board does not intend to raise fees but wants to clarify late renewal and reinstatement. She said the board is currently processing applications for certificate of good standing from schools, and are requesting to add a nominal processing fee to the schools.
There being no further business to come before the committee, the meeting was adjourned at 11:45 a.m.