Call to Order and Roll Call
The third meeting of the Interim Joint Committee on Local Government was held on Wednesday, October 23, 2013, at 10:00 AM, in Room 171 of the Capitol Annex. Representative Steve Riggs, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Joe Bowen, Co-Chair; Representative Steve Riggs, Co-Chair; Senators Walter Blevins Jr., Ernie Harris, Christian McDaniel, Morgan McGarvey, Gerald A. Neal, R.J. Palmer II, Albert Robinson, and Damon Thayer; Representatives Julie Raque Adams, Ron Crimm, Mike Denham, Richard Henderson, Adam Koenig, Stan Lee, Brian Linder, Tom McKee, Michael Meredith, Jody Richards, Arnold Simpson, Rita Smart, and Jim Wayne.
Guests: Michael Davis, Department of Housing, Buildings and Construction; Adam Edelen, Libby Carlin, and Tom Bennett, State Auditor of Public Accounts; Russell Salsman, Darren Sammons, Robert Brown, and Glenn Oldham, Department for Local Government; Mayor Tom Bozarth, City of Midway; Jonathan Steiner, J.D. Chaney, Bert May, and Bryanna Carroll, Kentucky League of Cities; Erik Jarboe, LearNet; Ron Wolf, Associated General Contractors of Kentucky; Shelley Hampton, Kentucky Association of Counties; Bryan Alvey, Kentucky Farm Bureau; Mayor Susan Barto, City of Lyndon; and Sara McGown, Louisville Metro Government
LRC Staff: Mark Mitchell, Joe Pinczewski-Lee, John Ryan, Jessica Causey, Mike Clark, Brian Traugott, Vaughn Murphy, Scott Kimmich, and Cheryl Walters.
Approval of Minutes
Upon the motion of Representative Crimm, seconded by Senator Thayer, the minutes of the September 25, 2013 meeting were approved.
Consideration of Referred Administrative Regulations
The committee considered referred Administrative Regulations 815 KAR 4:030 & E, which establishes the licensure requirements for elevator contractors, and 815 KAR 4:040 & E, which establishes the licensure requirements for elevator mechanics and procedures for license renewal. Representative Riggs stated that a written report of the review will be submitted to the LRC.
State Level monitoring of City and County Financial Conditions
Representative Riggs said that, in consideration of several local governments across the country being in fiscal distress and in some instances declaring bankruptcy, the committee should evaluate whether the statutes are comprehensive enough in their requirements for monitoring local government financial conditions.
Auditor of Public Accounts Adam Edelen said that his office conducts county audits or allows counties to hire out their audits. The Auditor audits the majority of sheriffs and clerks. His office does not have the statutory authority to require audits of cities. However, if there is a complaint made, then cities can be audited.
The Auditor’s Office has seen an increase in complaints to audit cities. There are increased financial strains on cities due to declining revenue and pension costs, as well as a significant loss of coal severance funds. There is also a lack of control and oversight by city councils. A lack of training can contribute to this. The Auditor conducts many different types of audits.
In response to a question from Representative Simpson, Auditor Edelen said that his office does not have an instrument to track the financial condition of cities.
Representative Simpson said he is surprised that no one scrutinizes the local smaller pension plans for outstanding obligations and proper funding. He suggested that the committee look into that.
In response to a question from Senator Bowen, Auditor Edelen stated that his office is at capacity and would need more resources if it were to take on more audit responsibilities.
In response to a question from Representative Riggs, Auditor Edelen said counties should be audited every year. His office should not retreat from that level of scrutiny.
Representative Smart cited concerns for her city in her experience and commented that financial oversight is needed for cities.
Representative Wayne commented that it might be helpful for the committee to work with the Auditor’s Office in crafting legislation for this session to address the small pension plans in cities and quasi-governmental agencies. Auditor Edelen said he welcomes that opportunity and welcomes reviewing improvements in the auditing process for cities.
In response to a question from Senator Robinson, Auditor Edelen said that his office does not find any problems with the majority of counties. Senator Robinson commented that perhaps the counties that comply do not need to be audited every year. The auditor expressed concerns that having the option to choose who to audit could itself be subject to abuse if that process itself were not checked.
Representative Crimm suggested the possibility of the auditor reviewing completed city audits for red flags.
Senator Thayer commented that special districts and cities undergo audits and report to the Department for Local Government. If a there is a red flag, it is assumed that it is sent to the Auditor’s Office for review.
In response to a question from Representative Lee, the Auditor stated that if it is determined that the Auditor's Office must audit each city every year, then an increase in resources would be required. A better system of insuring that the required audits for local governments are being conducted is warranted. Without a system of oversight, as was the case for special districts, laws do not get enforced. If the General Assembly decides to put a better system of oversight in place, and assigns that oversight to the auditor's office, then there should be sufficient funds to execute that duty.
Representative Linder said that he did not think the Auditor came necessarily to request more funds, but that the idea came from the course of the conversation. He urged caution that any additional oversight be carefully crafted so that it is not used in the future for political purposes.
Senator Thayer stated that citizens of cities have recourse, in that if they are not pleased with how their government is being run, they can vote new leaders in.
Representative Riggs commented that while local officials can be voted out of office, they still should be penalized when warranted.
Regarding the problems with city malfeasance and things of that nature, Representative Meredith commented that cities’ audits must be submitted to the Department for Local Government (DLG). If DLG is doing its job, then those problems will be found any way. There needs to be a push to get that to happen more.
Senator McGarvey commented that it is important to recognize the Auditor’s role is only activated when there is wrongdoing. The Auditor also has an enforcement mechanism that can uncover complex scenarios.
Auditor Edelen said the statutes relating to auditing and oversight should be tight.
Senator Palmer stated that it is important to remember that there is a different way of monitoring city and county governments. The Auditor has the responsibility for auditing county governments every year. He does not have that responsibility for city government. DLG is not the Auditor’s Office. It is a place where that information is housed, but DLG does not actually conduct the audit. DLG’s responsibility is to make sure that cities and counties are operating correctly, but not to get into the numbers as the Auditor would do. It is the legislature’s decision and responsibility to decide if city governments should have the same oversight as counties, which is currently not the case.
Mr. Russell Salsman, Chief of Staff for DLG, said DLG’s responsibilities over cities and counties are different. A county is a constitutionally established political subdivision of the state. The role of state government with respect to counties is much stronger that it is with cities.
Mr. Robert Brown, DLG’s State Local Finance Officer and Branch Manager of Counties, stated that DLG has the power to approve or disapprove all county budgets, with the exception of Lexington-Fayette Urban County Government and Louisville Metro Government. His staff has to approve a balanced budget of each county. Each county is required to submit four quarterly reports. If a county seems to come into financial distress, DLG can perform a financial analysis for that county. The State Local Debt Officer, which is currently the commissioner of the Department, approves debt of $500,000 or more. There is a hearing and an approval or disapproval process.
Mr. Glenn Oldham, DLG’s Branch Manager for Cities and Special Districts, said that DLG receives city audits and uniform financial information reports and compiles them into a useful database to share with the Legislative Research Commission, the U.S. Census Bureau, and the Kentucky League of Cities. DLG does not have the authority to review the audits, but simply houses them and passes them on to interstate parties. Also, DLG does not receive city budgets.
In response to a question from Representative Riggs, Mr. Oldham said that cities only notify DLG of debt they take on. DLG is just the repository for special district audits.
In response to a question from Senator Robinson, Mr. Oldham noted that Section 158 limits a county's debt capacity to two percent of the value of the taxable property within the county. The department notes the figures and takes that into account when approving debt.
In response to a question from Representative McKee, Mr. Oldham indicated that it is possible for counties to turn in projects in pieces to avoid having hearings for debt issuances that amount to $500,000 or more. The hearing process is for the benefit of the county.
Representative Smart commented that perhaps DLG should be required to receive city budgets. Also, more training is needed for local officials regarding finances.
In response to a question from Representative Simpson, Mr. Brown answered that DLG is not the repository for independent pension plans. Representative Simpson commented that someone should look at where the pension plans go for review. Representative Riggs asked staff to check into Representative Simpson’s concerns.
In response to a question from Representative Meredith, Mr. Oldham said DLG is statutorily required to house the city audits even if it cannot review them. Staff time would be required if DLG were tasked with reviewing, notifying, and passing on problematic city audits to the Auditor.
In response to a question from Representative Lee, Mr. Oldham clarified the city auditing process and the uniform financial information process, and noted that around 300 cities would file an annual audit with the department. Representative Lee indicated that the officials of cities would have copies of the audits conducted for their cities and should act on the recommendations therein.
City Reclassification
Representative Riggs said he is sponsoring a bill during the 2014 Session that would change the way cities are reclassified. Cities are currently classified by population, and the General Assembly must reclassify them by passing a bill. The proposed system would use the city’s governance model to be the classification system: Alderman Form (Louisville Metro still uses the powers assigned to this class); City Manager form (20 cities); and Mayor-Council and Commission form (398 cities). Class changes would be a change in the government form. To change the government form, the city must have a public vote. The General Assembly would no longer have to vote on reclassifications. The proposal does not seek to make substantive changes to hot-button issues, but some blending or unifying of city powers may make the system more efficient.
Kentucky League of Cities’ Legislative Platform for the Upcoming 2014 Session of the General Assembly
Mr. J.D. Chaney, KLC’s Chief Governmental Affairs Officer, said that cities are formed by the citizens of the city. Their auditing and budgeting procedures are public. Audits are performed every year except for cities of the sixth class. Cities have to publish components of those audits in the newspaper for the citizens to be able to look and analyze the audits, and the Auditor’s opinion letter is part of that publication. It comes at a significant expense and it is transparency that cities have traditionally supported and embraced, with the budget process as well. As cities adopt a budget, the budget has to be published in the form of an ordinance. The distinctions, as to any inadequacies in the city auditing or the budgeting process, probably have a good historical basis that traces the differences between cities and counties. City leadership is responsible to the people.
In response to a question from Representative Simpson, Mr. Chaney said he did not know how many pension plans are out there, but that actuarial analyses are required. There is no central repository for those plan reports.
Senator McDaniel said he will introduce a bill in the 2014 session that will involve pension repeal for those convicted or resigning due to breaches of public trust. The bill will also add increased ability for judges, when those crimes are committed, to actually call back pension employee pension contributions from employees who have committed financial crimes. He hoped that KLC would support that legislation.
Representative Linder commented that the legislature has to be careful as it proceeds down the road of centralizing some power on investigations because, in his opinion, it could be welded as a political hammer, and he could see future opponents running on investigations. Even though nothing is found, the word “investigation” puts a cloud over someone.
Representative Riggs stated that when malfeasance is discovered, people are walking away with no penalty or lawsuit. They should be penalized.
Mayor Tom Bozarth, President of the Kentucky League of Cities (KLC), told the committee that KLC’s 2014 legislative agenda is as follows: (1) city revenue diversification. KLC will seek to expand the authority to impose a restaurant tax to all cities, with adjustments to net profits and gross receipts taxes on restaurants in return. The League will support an amendment to the Kentucky Constitution to permit cities to ask voters to decide on a temporary local sales tax; (2) 911 funding. KLC will seek to increase the current commercial mobile radio services (CMRS) fees, require prepaid providers to remit the CMRS fee that postpaid mobile subscribers are required to pay each month, support the repeal of the cost recovery statutes that require taxpayers to pay for the costs of wireless providers for carrying 911 calls, continue to oppose any measure that removes the ability of local governments to impose local fees for the operation of 911 services, and oppose any proposal that would reduce the total amount of state-generated revenue from the wireless fees; and (3) city classification reform. The League will seek to create a new classification system based upon the form of government. The proposal would result in a reduction in the number of city classes and would largely eliminate arbitrary and illogical distinctions between classes.
Mr. Jonathan Steiner, Executive Director and CEO of KLC, continued with the League’s legislative agenda: (4) road aid formula modernization. KLC supports restructuring of road funding formulas for a fair allocation to local governments with higher traffic areas, and thus more frequent needs for repair and maintenance; (5) police officer personnel issues. KLC will continue to strongly oppose any legislation that expands the Police Officer Bill of Rights to make its provisions applicable to all internal matters. Depending upon whether the Supreme Court renders a decision in the pending litigation, KLC may seek legislation that clarifies the language and eliminates contradictions in a number of police personnel statutes; (6) retirement anti-spiking legislation. KLC will seek to clarify the meaning and application of the anti-spiking provisions to ensure it does not apply cumulatively and also provide for additional needed exemptions for increases that occur for other legitimate reasons rather than abuse; (7) prevailing wage. KLC will seek to either repeal the existing state prevailing wage law or make significant amendments to the statutes to raise the threshold or manner of calculating the rates; (8) newspaper publication reforms. Cities will work with the Kentucky Press Association to modernize the laws related to newspaper publications by incorporating online resources and other mediums to provide citizens more access to information about the operation of their city government in a more cost-efficient manner; (9) drug abuse. The League will continue to support legislation that addresses the destructive impact that addiction has on the quality of life in the communities through the examination of criminal penalties and opportunities for treatment and rehabilitation for those that become addicted; and (10) protect home rule and city budgets. City leaders will vigorously oppose any legislation that attempts to preempt local home rule authority or impose unfunded costs on city taxpayers.
Senator Thayer commented that he was glad that KLC was making prevailing wage one of its legislative priorities. He supports a complete repeal of the law. Local option sales tax projects would be subject to the prevailing wage law.
In response to a question from Senator Thayer, Mayor Bozarth said KLC has not addressed the “right to work law” because it has not seen legislation relating to it. Senator Thayer said he would like to see KLC take a position on the “right to work law.”
Representative Wayne said that the local option sales tax is a regressive tax that burdens lower income people. Local governments have not taken advantage of property taxes, which are progressive taxes. Sales tax revenues are eroding. Regarding prevailing wages, any removal of these laws will affect the pay for the working people. Right to work laws can also affect the ability of these people to organize and consolidate their social power.
Senator Thayer said that he wanted to create well-paying jobs for the people Representative Wayne mentioned. Kentucky should have an environment that is inviting for employers to locate in. States with right to work laws are recovering financially faster than those without.
There being no further business, the meeting was adjourned at 12:25 p.m.