Call to Order and Roll Call
The first meeting of the Interim Joint Committee on Local Government was held on Wednesday, June 27, 2012, at 10:00 AM, in Room 171 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Senators Walter Blevins Jr., Jimmy Higdon, Alice Forgy Kerr, and R.J. Palmer II; Representatives Julie Raque Adams, Ron Crimm, Mike Denham, Ted Edmonds, Richard Henderson, Brent Housman, Stan Lee, Tom McKee, Michael Meredith, Arnold Simpson, Kevin Sinnette, Rita Smart, and Jim Wayne.
Guests: Representatives Dennis Horlander and Mike Cherry; Adam Edelen and Tom Bennett, State Auditor of Public Accounts; LaRue County Judge/Executive Tommy Turner; Denny Nunnelley, Shellie Hampton, and Roger Recktenwald, Kentucky Association of Counties; Bert May, Kentucky League of Cities; Mike Kurtsinger, Kentucky Fire Commission; Jack Reckner, Kentucky Association of Fire Chiefs; Dan Walton, Labor Cabinet; Ron Wolf, Associated General Contractors of Kentucky; and Sara McGown, Louisville Metro Government.
LRC Staff: Mark Mitchell, John Ryan, Jessica Causey, Joe Pinczewski-Lee, and Cheryl Walters.
Kentucky Association of Counties’ (KACo) and the State Auditor’s perspectives of their priorities, issues, and challenges regarding special districts
Senator Thayer stated that the committee is discussing the issue of special districts because HCR 53, which passed during the session, sponsored by Representative Reginald Meeks, directed the committee to study them. Members were referred to background material, which included recommendations pertinent to special districts from the 2005 Task Force on Local Taxation, co-chaired by Senator Thayer. The recommendations called for the statutes to be amended to allow fiscal courts to eliminate special districts in a more streamlined and efficient manner; to create a centralized registry for special districts; have all rates and fees, including rate or fee changes, be approved by their respective fiscal courts; and to have special taxing districts’ budgets and tax rates be submitted to fiscal courts to comply with the county budgeting process. Since then, Senator Thayer has offered legislation that would require special districts to seek approval from fiscal courts anytime they seek a rate or tax increase. The crux of the problem is there are over 1,000 special districts located all over the Commonwealth comprised of individuals, the majority of which having been appointed, but not elected, and they are approving tax and rate increases. The State Auditor feels that the issue of special districts is important. Perhaps during the next session of the General Assembly, legislation can be agreed upon and passed to bring more accountability to the special districts to help protect the taxpayers.
Auditor of Public Accounts (APA) Adam Edelen told the committee that special districts represent the most prevalent level of government. There is not a single person in state government or in Kentucky who can tell the taxpayers precisely how many special districts there are, where they exist, how many tax dollars flow through them annually, and whether they are compliant with state law. The taxpayers are owed a level of accountability at every level of government. By the end of the year, the APA will have gone through a massive inventory process and will have made that information available to the taxpayers. The APA’s office knows there are 43 different categories in state statute governing special districts, both taxing and fee-based. There are 1,017 different statutes that govern these entities; some date back to 1912. There are between 1,000 and 1,800 of these entities, and between a half billion dollars and 1.5 billion dollars go through them annually. The APA’s office will communicate with the committee as well as the locally elected representatives. What the APA’s office is most excited about is that by the end of the year, the information will be put on-line. Kentucky has an historic opportunity to be a national leader in the area of good government. It is important to note that the commitment or the effectiveness of the people who are running the special districts is not being questioned.
A centralized registry would both simplify the process for being accountable to the special districts. It would also make sure that the taxpayer watchdogs would better have an ability to make sure that these special districts are doing precisely what they are supposed to do. The APA’s office is going to run a fact-based, data-driven investigation that is focused merely on making sure that those who are doing the right thing do not get lumped in with those who are not, and those who are doing the wrong thing get held accountable to the taxpayers.
In response to a question by Representative Wayne regarding procurement procedures of special districts, Mr. Edelen replied that the entire system is a mess. The issues brought to his office’s attention generally involve procurement or paying a contract. From what the APA’s office has seen from many diverse entities, there is a high potential for abuse of those tax dollars which is a result of a system that seems designed to ensure that there is very little oversight.
In response to another question by Representative Wayne, Mr. Edelen replied that the Indiana/Kentucky Bridges Authority is a non-taxing special district.
In response to a question by Representative Edmonds, Mike Kurtsinger, with the Kentucky Fire Commission, answered that if the fire department is a KRS Chapter 75 fire taxing district, which about 180 of them are, it must get a certificate of need to have an ambulance service. Then, the fire department could start the ambulance service, and the district’s members would pay up to 10 cents on $100 in addition to the existing fire tax. If the fire department is not a taxing district, then it cannot start its own ambulance service.
Representative Simpson commented that he has some concerns with his sanitation district’s spending practices, which could use additional oversight. The district does not have the ability to tax because it is a quasi-governmental entity. The district raises fees in order to provide services, but he has some concerns regarding how much the district has raised its fees and its spending practices. Representative Simpson said he is glad to hear that the APA’s office is going to scrutinize districts’ spending practices. Taxpayers do not care if it is a fee, tax, or toll—it is money coming out of their pockets and going into a quasi-governmental entity.
Representative McKee commented that getting some kind of a benchmark will be the APA’s biggest challenge. Mr. Edelen agreed.
In response to a question from Senator Kerr, Mr. Edelen stated that any big reform or comprehensive effort requires a broad base of support. This effort that the APA’s office is undertaking has been endorsed by more than two dozen entities ranging from every ADD to the county judges, KACo, KLC, magistrates, commissioners, county clerks, county attorneys, and sheriffs. There will be a political consequence, but that can be sorted out when it comes.
Senator Thayer commented that some pushback will come from board members and employees of special districts. There will be a balance though, because there are some who are not going to happy that this issue is being looked into, but the taxpayers, who the legislature serves, ultimately will be pleased that their government, executive branch, legislative branch, democrats, republicans, senators and representatives, are taking a serious look at this. Senator Thayer noted that he plans to sponsor a bill on this and is looking for members from both chambers and both parties to be partners with him and with the APA to try to exact some kind of change in the next session of the General Assembly regardless of who is angry and who is not.
In response to a question from Representative Crimm, Kentucky Association of Fire Chiefs’ representative Jack Reckner, replied that there is a wide diversity of opinion among attorneys for the fire districts regarding the payment of fees in addition to tax collection. The legality of what they are doing is not clear. Mr. Kurtsinger stated that the sections of KRS Chapter 75, which refer to the fees in question, actually refer to KRS Chapter 273 fire department fees. These are fire departments that are not taxing districts and charge subscription fees or membership charges, so the Chapter 75 fire districts cannot charge that fee. In Kentucky, there have not been any cases as to what Representative Crimm described of fire districts refusing to put out a fire of a person who has not paid a fee a district charges.
KACo President-elect Judge Tommy Turner told the committee that numerous county organizations, including KACo, supported HCR 53 during the session. KACo has also endorsed Auditor Edelen’s efforts. Counties are hopeful that these parallel efforts will in fact lead to what Auditor Edelen has referred to as a database of information on all districts, both taxing and non-taxing, to review the revenues, expeditures, and board oversight called for in HCR 53.
KRS 65.182 is the primary governing statute for the creation of a special district with taxing authority, but is not the only method. Scattered statutory provisions allow certain districts to be created by petition, referendum and annexation in some cases. Fiscal courts often play a major role in the creation of special districts. However, once created, special districts have a substantial amount of independence from the fiscal court. Memberships on district boards are, in most cases, required to be approved by the fiscal court, but the names submitted for membership often come from the special district itself.
Special taxing districts are imperative if counties are going to provide services. They help fill a revenue void and provide vital services for county constituents. While some errors brought to light in the last two years proved to be the impetus for action on reviewing special districts, it should be noted that the errors found involved two of the largest taxing districts in the state. KACo is hopeful that the majority of the remaining districts will be found to be in full compliance of financial standards, acting in a responsible and efficient manner. There will be errors found and this effort will enable new provisions to be implemented to make special districts more accountable and responsible.
KACo is always willing to collaborate with the committee on a local government tax reform package that would include these districts in the discussion. KACo stands ready to work with the General Assembly to review the findings of both the committee and the Auditor’s Office to make the work of special districts more transparent and accountable to the people they were created to serve.
In response to a question from Senator Thayer, Judge Turner said he personally would not have a problem with the General Assembly requiring more responsibility by the fiscal court where its members had to vote on tax increases, but some members would have a problem.
Senator Thayer announced that the committee would discuss special districts at some of its future meetings.
There being no further business, the meeting was adjourned at 11:20 a.m.