Program Review and Investigations Committee




<MeetMDY1> October 25, 2005


The<MeetNo2> October 25, 2005 meeting of the Program Review and Investigations Committee was at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Tommy Thompson, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Ernie Harris, Co-chair; Representative Tommy Thompson, Co-chair; Senators Charlie Borders, Brett Guthrie, Vernie McGaha, R. J. Palmer II, Joey Pendleton, Dan Seum, and Katie Stine; Representatives Adrian K. Arnold, Sheldon E. Baugh, Dwight D. Butler, Charlie Hoffman, Ruth Ann Palumbo, and Susan Westrom.


Guests:† Jody E. Hughes, Executive Director; John Tapp, Executive Assistant; Kentucky Infrastructure Authority.


LRC Staff:† Greg Hager, Committee Staff Administrator; Kara Daniel; Rick Graycarek; Jim Guinn; Tom Hewlett; Margaret Hurst; Van Knowles; Erin McNees; Nadezda Nikolova; Rkia Rhrib; Cindy Upton; John Foster, Graduate Fellow, and Susan Spoonamore, Committee Assistant.


Minutes of the September 8, 2005 meeting were approved, without objection, by voice vote upon motion made by Rep. Palumbo and seconded by Rep. Arnold.

Rep. Thompson called upon staff persons Jim Guinn and Rick Graycarek to present the report Planning for Water Projects in Kentucky: The Implementation of Senate Bill 409.


Mr. Guinn stated that in November 2004 the Committee voted to initiate a study of the implementation of Senate Bill 409 and the usefulness of Kentuckyís Six-Year Highway Plan as a model for planning for water facilities. Mr. Guinn said that the report has three objectives:† describe Senate Bill 409 and the current water project planning process; describe how SB 409 is being implemented; and describe Kentuckyís highway planning process and how it compares to water project planning. Mr. Guinn stated that the report had seven major conclusions:

1.      The process for water planning established by SB 409 is a bottom up process. At this time, projects are prioritized within each area development district, but the Kentucky Infrastructure Authority (KIA) does not prioritize projects on a statewide basis. In the past two biennia, projects also received funding through the budgetary process without having already gone through the procedures established in SB 409.

2.      Four of the 12 mandates assigned to KIA by SB 409 have been fully implemented. Most of the remaining mandates have been partially implemented.

3.      Kentucky has fewer water systems than most states and the number of systems, especially smaller ones, continues to decrease. SB 409 appears to have accentuated the ongoing trend toward regionalization and consolidation of water systems.

4.      Compared to other states, Kentucky already ranks high in terms of the percentage of its population with potable water. The percentage appears to be increasing, but there are still areas of the state in which many residents lack access. It is too early to evaluate SB 409ís impact on access to potable water.

5.      KIA is generally meeting the needs of local and regional entities, but many planning entities perceive that the funding application process could be improved.

6.      Compared to selected other states, Kentucky ranks at the top in terms of planning for water projects, encouraging regionalization, and encouraging expansion of water supply to unserved or underserved populations.

7.      There are different time frames for planning for types of highway projects and water projects. Highway plans are updated over time, but not all types of plans for water projects are. At the state level, planning for highway projects seems more centralized than planning for water projects.


Mr. Guinn stated that SB 409 establishes a planning process in which local and regional planning bodies prioritize water projects and pass them on to the state level for final ranking and funding. SB 409 designates KIA as the state agency responsible for developing a program to make potable water available to all Kentuckians by 2020. He said that SB 409 mandates the creation of water management planning councils and water management areas. There are 27 councils consisting of local elected officials, water utility staff, and local health department officials.


Mr. Guinn stated that SB 409 requires the creation of water management area plans by area development districts (ADD) and it also requires the 15 ADDs to review and prioritize water management planning councilsí plans for needy areas. He stated that KIA was also required to create the 2020 Water Service Account within the Fund B Infrastructure Revolving Loan Fund to finance water projects that provide water service to underserved and unserved households. He said that KIA is directed to establish incentive programs to encourage consolidation and to encourage projects in the needy areas.


Mr. Guinn explained that SB 409 moved KIA from the Finance and Administration Cabinet to the Office of the Governor. KIA is now administratively attached to the Governorís Office for Local Development. He stated that SB 409 transferred to KIA responsibility for maintaining and annually updating the Water Resource Information System.†


Mr. Guinn provided an overview of the process established in SB 409 for funding water projects. He stated that each ADDís water coordinator enters proposed projects into project profile forms as prescribed by KIA. A water management planning council then reviews and prioritizes projects. He said that after the area development district prioritizes the projects, it submits a regional plan to KIA by October 30 each year. Under the water project planning process, KIA is supposed to review and consolidate the 15 separate ADD plans, prioritizing water projects on a statewide basis. Project proposals for which federal or state funding is being sought then go to the automated electronic system eClearinghouse for an initial regulatory review. He said that endorsed and conditionally endorsed projects are then forwarded to financing agencies for review and possible collaborative funding. He stated that funding decisions flow back through the eClearinghouse to KIA and the ADDs. He explained that final regulatory approval comes after funding has been approved. Projects are also sent to the KIA Board of Directors for review.


Mr. Guinn stated that the Capital Projects and Bond Oversight Committee reviews KIA-approved projects, but does not take action on projects that have already received line-item funding through the budget.


Mr. Guinn stated that in FY 2001, House Bill 502 provided $50 million in initial funding for water and wastewater projects that were selected by KIA. He stated that the General Assembly has since authorized more than $300 million for water and wastewater projects though line-item appropriations for designated projects.


Mr. Guinn explained that each community water system is granted one seat on its local water management planning council.† Water systems that merge lose seats. He stated that Recommendation 1.1. was that KIA should examine water management planning council procedures and recommend improvements to minimize the short-term impact on systems that lose membership on a council due to merger.


Mr. Guinn described the highway planning process. Regional planning bodies such as metropolitan planning organizations, area development districts, and highway district offices prioritize highway projects and forward them to the Transportation Cabinet for statewide prioritization and funding. The cabinet considers the recommendations of the regional planning bodies.† The governor and the Transportation Cabinet then propose a comprehensive six-year highway plan that may incorporate some or all of the regional recommendations. The General Assembly then makes adjustments to the highway plan in the budgeting process and can add projects that were not part of the proposed plan.†


Mr. Guinn stated that there are no widely used standardized criteria for prioritization of projects. He stated that highway projects involve short-, middle-, and long-term planning.


Mr. Guinn stated that planning for highway and water projects is similar in that both processes involve input from local and regional entities, with prioritization and approval of projects at the state level. Highway and water projects can have multiple sources of funding involving the state and federal governments. Each type of project has a long-term plan. The Statewide Transportation Plan covers a 20-year period. The goals established in SB 409 can be considered the long-term plan for water projects.


Mr. Guinn stated that there are several differences between water and highway planning. The long-term Statewide Transportation Plan is updated periodically, but unless the General Assembly enacts new legislation, the long-term goals of SB 409 are set. He explained that highway projects involve middle-term planning, but there is no equivalent to the six-year highway plan for water projects. He said that there appeared to be more local and regional actors involved in planning for highway projects. He stated that highway planning is centralized in the Transportation Cabinet, but planning for water projects involves KIA and the Division of Water.† He stated that there are key differences in the nature of the highway and water projects. Highway projects have dedicated government revenue sources, but water projects do not. Water projects provide services that are usually paid for by consumers; highway projects usually do not.


Mr. Guinn stated that staff compared Kentuckyís water and sewer planning process to the processes of six states: Alabama, Arkansas, Illinois, Tennessee, Texas and West Virginia. Five of the states were chosen for their proximity and/or similarity to Kentucky. Texas was selected because many experts regard its water planning and financing policies as models. He said that Kentucky and three of the states have policies encouraging water service expansion to unserved and underserved areas. Kentucky and two other states have policies promoting regionalization. He said that in Kentucky and three other states, the highest level of planning is at the state or regional level. Kentucky and Texas are the only two states that encourage service expansion and promote regionalization, as well as prioritize funding from multiple federal/state funds to do so.


Rep. Palumbo asked why Texas was chosen and why staff did not include other states such as Mississippi, Georgia, North Carolina, South Carolina, or Louisiana in the comparison.


Mr. Guinn stated that Texas was chosen because many experts consider it a model state for water planning. He said that staff tried to get information on water project planning in other states that seemed comparable to Kentucky, but officials did not reply to staffís inquiries.


Rep. Palumbo asked if Kentucky was considered to be in the forefront, along with Texas, regarding the planning process and why other states did not seem to plan as well.


Mr. Guinn stated that based on the criteria analyzed in the report, Kentucky was similar to Texas. He said that staff did not explore the reasons why states had different policies and procedures.


Sen. McGaha asked for confirmation that membership on the regional planning councils ranged from 20 to more than 100.†


Mr. Guinn stated that those numbers were correct.


Sen. McGaha asked if the membership on the regional planing councils was defined.


Mr. Graycarek stated that defined membership is composed of representatives from water utilities, local governments, and county health departments. He added that some councils encompass many counties, which would typically mean more governments and water utilities to be represented on the council.


Sen. McGaha asked if council membership included members of the general public.


Mr. Graycarek stated that there were no designated public members on the councils. The local judge/executive or mayor has the option of appointing someone from an area of the county that is unrepresented. He said it was unclear whether the person could be a member of the general public.


Rep. Baugh asked if the Capital Projects and Bond Oversight Committee could approve or disapprove a project request from a county that wanted to expand water to an unserved portion of the county.


Mr. Graycarek stated that if the projects are approved by KIA, but do not receive line-item appropriations through the budget process, then those projects go before the Capital Projects and Bond Oversight Committee for approval or nonapproval.


†Sen. Borders said that the Buffalo Trace Area Development District is a useful model of what should be done. He said that county judge/executives and mayors work together, do their homework, and consistently produce prioritized project lists that can be used by legislators. Sen. Borders said that as a result he had never heard any complaints when projects were selected based on the prioritized lists. He added that FIVCO plans to proceed in a similar way.††


Sen. Stine asked if SB 409 also took into consideration the needs of metropolitan areas that must deal with population growth and aging water systems.


Mr. Graycarek responded that an area can be underserved based on the condition of the system. He said the projects that staff analyzed included projects for better meeting the needs of areas with existing water and sewer service. He added that staff did not analyze the extent to which projects were remedies for failing versus inadequate infrastructure.


Sen. Stine said that this would be a good opportunity to remind the other members of the General Assembly that Kentucky competes in a global economy. To compete successfully with other states and countries, we should be cognizant of the needs of the rural areas, but also the needs of our metropolitan areas.


Continuing with the staff presentation, Mr. Graycarek stated that the report discussed KIAís role in the SB 409 planning process, the number and type of water systems, and access to potable water.

He stated that all state and federally funded water and wastewater project requests pass through KIA and that some water coordinators indicated that the application process took too long. He said that projects must be submitted, reviewed, and prioritized by water management planning councils, and because councils generally only meet a few times each year, the process can be time consuming. Another factor for taking so long is the fact that KIA has only three staff members who review applications, despite an increase in water and wastewater funding and the number of projects funded.

Mr. Graycarek stated that Recommendation 2.1 was that KIA, in consultation with the Division of Water, water utilities, and water coordinators, should, if feasible, streamline the funding application process.


Mr. Graycarek identified three problems with how projects were prioritized and classified: area development districts use different methods for prioritizing projects,† projects are classified as regional inconsistently, and KIA no longer prioritizes projects on a statewide basis.

He stated that these issues are addressed by recommendations 2.5, 2.2, and 2.3:

        KIA should work with district officials to establish and maintain a standardized set of prioritization criteria for all ADDs to use in ranking water projects (2.5).

        KIA should clearly define the characteristics required for a project to be classified as regional and closely monitor how projects are classified (2.2).

        KIA should consider producing an annual statewide funding prioritization schedule according to 200 KAR 17:080 for all water project proposals (2.3).


Mr. Graycarek continued by explaining that a public water system is defined as one that provides water service to at least 15 households or 25 people for at least part of the year. He elaborated that among public systems community water systems provide service to the same people year-round; noncommunity systems provide service for part of the year.† He stated that in 2004 there were 532 public water systems in Kentucky; only four states had fewer systems. Over the past five years, the number of public water systems in Kentucky decreased more than in other states. He stated that a side effect of the greater decrease has been a reduction in Kentuckyís share of a federal grant. He stated that from 2000 to 2004, the number of noncommunity systems in Kentucky decreased by 130. The number of community water systems also decreased, but less significantly. Since 1995, 250 of 374 inactivated public water systems merged with another system. He stated that SB 409 may have accentuated the merger trend, but did not start it. He stated that large water systems were more likely to merge than smaller systems, and community water systems were more likely to merge than noncommunity systems.


Rep. Arnold asked if Kentucky was losing federal money by consolidating systems.


Mr. Graycarek stated that Kentucky was losing money from one federal grant, which is based on the number of public water systems.


Rep. Arnold asked if losing federal grant money would discourage consolidation.


Rep. Palumbo asked if the water company in Lexington/Fayette County was eligible to receive federal grant money.


Mr. Graycarek stated that the grant in question goes to the state, so water utilities are not directly impacted by the loss of federal funds.


Rep. Palumbo asked if the 532 systems included public and private water systems.


Mr. Graycarek stated that was correct.


Mr. Graycarek explained that staff examined projects funded from the 2000-2002 and 2002-2004 biennia. He said that the General Assembly appropriated $50 million in 2000-2002 for water projects. The appropriation was distributed among 133 projects selected by KIA. He stated that most projects were classified as nonregional. As of June 2005, 40 of the projects had been constructed. He stated that in the 2002-2004 budget, the General Assembly appropriated $110 million for water and wastewater projects, distributed among 265 projects through line-item appropriations. Again, most of the projects were nonregional. He stated that 43 of the projects had been completed.


Mr. Graycarek stated that the last section of the report addressed SB 409ís goal of† providing access to potable water to all Kentuckians by 2020.† He said that based on state government data and a survey of ADDs, staff estimated that 10 percent of Kentuckians did not have potable water in 2004. The national average was approximately 30 percent. Using a map, he showed that there were areas of the state in which relatively higher percentages of residents did not have access to potable water.


Mr. Graycarek said that water system officials offered different interpretations of how access to potable water is defined. Recommendation 2.4 was that for the purpose of implementing SB 409ís goal of making potable water available to all Kentuckians, KIA should take the lead in clarifying what potable and availability mean.


Rep. Palumbo asked if the number shown in parentheses on the map shown earlier represented fewer water systems.


Mr. Graycarek confirmed that the map indicated that from 2000 to 2004 the number of public water systems decreased in each ADD.


Sen. Seum asked for clarification and context regarding how much federal funding Kentucky had lost.


Mr. Graycarek stated that Kentucky had lost approximately $47,000 in federal grant funds due to the above-average decline in the number of water systems. He said that Kentucky received approximately $800,000 each year in federal funds through this grant.† He added that the federal funds were not included in figures presented earlier on appropriations for water projects.


Sen. Seum asked what agency receives the federal funds.


Mr. Graycarek stated that it is the Division of Water.


Sen. Seum asked if other states were receiving more than $800,000 and whether Kentucky was required to apply for the grant.


Mr. Graycarek stated that federal funding is automatic and is based on a formula.† He said that under the formula some states get more funding than Kentucky.


Sen. Borders stated that Kentucky needs to prioritize and accurately project the amount of state dollars it will take to complete a project.†


Rep. Arnold asked if SB 409 addressed the issue of supplying water.


Mr. Graycarek stated that SB 409 does require water supply planning over a 20 year period.††


Rep. Thompson asked if staff were able to determine why the Kentucky River and Gateway ADDs had the highest percentages of people without potable water.


Mr. Graycarek stated that geography and dispersion of residents in rural areas are likely factors.


Rep. Thompson introduced Jody E. Hughes, Executive Director; and John Tapp, Executive Assistant; Kentucky Infrastructure Authority.


Mr. Hughes stated that this yearís contracts with the area development districts require the development and use of a common project ranking system, which is now being used by the water management planning councils. KIA will use the regional lists to formulate the projects into a statewide list in accordance with SB 409.

He stated that in order to comply with the 2020 goal of providing water to all Kentuckians, KIA would be conducting a survey of all water systems to determine the accessibility of public water as a result of the projects that have been funded through the past three legislative sessions.† He said that KIA would work with the ADDs to produce a consistent statewide assessment.


Mr. Hughes stated that the report pointed out dissatisfaction among utilities with the funding processes administered by KIA. He said that the involvement of federal funds is a factor. He said that with board approval, KIA intends to file new regulations pertaining to these loan funds.


Mr. Hughes stated that in response to the reportís discussion of how water management planning council membership could affect consolidation, while KIA did not see this as a significant problem, it would work with others to develop appropriate solutions.


Mr.† Hughes stated that a more detailed definition of a regional project has been included in the new priority criteria procedures. For clarification, Mr. Hughes stated that regional projects are projects involving two or more systems that through shared or consolidated resources improve services to consumers and achieve economy of scale.


Mr. Hughes also stated the report raised the question of what constitutes availability of potable water. He said that according to regulation, any water approved by the Division of Water for public consumption must be from a public water system. He explained that KIA has defined availability as access to public water at a reasonable cost. He said that KIA agrees that the definition may need to be refined as we get closer to 2020.


Mr. Hughes said that the report questioned KIAís marketing of Fund B. He† stated that after the initial appropriation of $50 million to the 2020 Account, the General Assembly had not made any further appropriations. Therefore, there were insufficient funds in Fund B to warrant the continuation of the marketing effort.


Mr. Hughes stated that confusion exists about how SB 409 relates to wastewater. He stated that based on the rationale for the legislation, KIA encourages water management planning councils to include wastewater agencies and wastewater projects as full partners in the planning process dictated by SB 409. He said that as more counties provide access to public water, the role of wastewater will become more significant to the counties. He said that KIA would work to clear up any confusion.


Mr. Hughes proposed that the General Assembly move away from the line-item funding. He said that the 2020 Account should be funded primarily as a revolving loan fund to supplement other federally supported revolving loan funds managed by KIA. He stated that he was recommending placing the funding in the 2007-2008 budget for water and sewer projects in a 2020 Account Revolving Loan Fund to begin the transition of state funding for water and sewer projects from a grant program to a long-term, sustainable revolving loan program. He recommended a funding level of $50 million to $70 million for the account for the 2007-2008 budget. He said that the interest rate for the state revolving fund should be below market rate. He concluded by saying that a designated portion of the funds could also be used for other activities, including provisions of SB 409 that the staff report noted had not been fully implemented.


Dr. Tapp discussed the task of compiling a comprehensive study of the stateís existing water and wastewater infrastructure and the additional details that would help to determine the needs of a particular area.† He said that this information would help local officials, water management planning councils, state agencies, and the General Assembly make informed decisions.


In response to Sen. Borderís previous comment, Mr. Hughes stated that KIA is updating the project profile form and it will include information on secured funding.


The report Planning for Water Projects in Kentucky: The Implementation of Senate Bill 409, was adopted, without objection, by roll call vote upon motion made by Sen. Pendleton and seconded by Rep. Hoffman.


Rep. Thompson introduced new staff member Rkia Rhrib.


Meeting adjourned at 11: 50 A.M.