Program Review and Investigations Committee

Minutes

<MeetMDY1> October 9, 2014

Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee meeting was held on<Day> Thursday,<MeetMDY2> October 9, 2014, at<MeetTime> 1:00 PM, in<Room> Room 131 of the Capitol Annex. Senator Christian McDaniel, Chair, called the meeting to order, and the secretary called the roll.

Present were:

Members:<Members> Senator Christian McDaniel, Co-Chair; Representative Martha Jane King, Co-Chair; Senators Ernie Harris, Dorsey Ridley, Dan "Malano" Seum, and Whitney Westerfield; Representatives Leslie Combs, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.

Guests: Clifford “Rip” Rippetoe, President, Kentucky State Fair Board

LRC Staff: Greg Hager, Committee Staff Administrator; Christopher Hall; Colleen Kennedy; Van Knowles; Jean Ann Myatt; William Spears; Shane Stevens; Joel Thomas; Kate Talley, Committee Assistant.

Staff Report: Kentucky State Fair Board

Mr. Hall said that the Kentucky State Fair Board (KSFB), an agency of the Tourism, Arts, and Heritage Cabinet, owns and operates two event facilities in Louisville. The Kentucky International Convention Center, located downtown, has 200,000 square feet of contiguous exhibit space. Built in 1977 and renovated in 1999, it hosts events such as national and international conventions, trade shows, and seminars.

The Kentucky Exposition Center opened in 1956 as a multi-purpose complex for hosting major tradeshows, conventions, concerts, sporting events, and agricultural shows. It is the sixth largest facility of its kind in the country, with 1.2 million square feet of exhibit space.

The Convention Center was booked year-round in 2013, hosting 166 events. One half of the events were meetings and seminars, with trade shows and conventions representing an additional quarter of events held last year.

The Exposition Center was also booked year-round, hosting 217 events. More than half of these were sports events, meetings, public expositions, and catered affairs. The Exposition Center is also home to four in-house-produced shows: the State Fair, the National Farm Machinery Show, the North American International Livestock Exposition, and the World’s Championship Horse Show, which is held as part of the State Fair.

By statute, the Fair Board is governed by a 15-member board composed of the governor, the Commissioner of Agriculture, the dean of the College of Agriculture at the University of Kentucky, and 12 governor-appointed members. The governor, commissioner, and dean are ex officio members and the remaining 12 are appointed to 4-year renewable terms, all with full voting rights. The 12 governor-appointed seats must include one representative each from the American Saddlebred Horse Association, the Kentucky Association of Fairs and Horse Shows, the Kentucky Farm Bureau Federation, the Kentucky Livestock Improvement Association, and the Kentucky State National Farmers Organization.

On October 6, 2014, the Governor issued an executive order to reorganize [WS1] KSFB. The number of voting members is increased from 15 to 17, and two nonvoting members are added. Remaining on the board are the governor, the Commissioner of Agriculture, the dean of the College of Agriculture at the University of Kentucky, and gubernatorial appointees representing the Kentucky Association of Fairs and Horse Shows, the American Saddlebred Horse Association, and the Kentucky Farm Bureau Federation.

A gubernatorial appointee representing the Louisville Convention and Visitors Bureau is added. The governor also appoints 10 state-at-large members, including one who is experienced in animal agriculture and another who is experienced in agribusiness. The added nonvoting members are the state presidents of the Kentucky FFA Association and the Kentucky 4-H Organization. Removed from the board were representatives of the Kentucky Livestock Improvement Association and the Kentucky State National Farmers Organization because these organizations were not locally active or no longer existed.

By statute, KSFB elects a chairman and vice chairman from its governor-appointed members. Under the executive order, the governor appoints the chairman and vice chairman. By statute, a quorum of the board consists of five members and a majority of those present at any meeting for the transaction of business. Under the executive order, a majority of voting members (nine) constitutes a quorum.

KRS Chapter 247 requires KSFB to promote the progress of the state and stimulate public interest in the advantages and development of the state by providing the agency-owned facilities for hosting events that are calculated to advance the visitor industry, the economy, and the cultural and educational interests of the public.

To fulfill this mandate, the statute allows KSFB to acquire and hold property and to have custody and control of any such property, including the Convention Center and the Exposition Center. [WS2] It also establishes that KSFB has exclusive control of concessions, exhibitions, shows, entertainment, and attractions on its properties.

The only event KSFB is required by statute to host is the North American International Livestock Exposition. The production of the annual State Fair is not mandated.

KSFB is also responsible for hiring a president from outside its membership to serve as the chief executive officer of the board. The board determines the terms, conditions, and compensation of its president, who serves at the pleasure of the board under a contract not to exceed four years without renewal.

KSFB meets monthly in Louisville to establish and revise agency policies. The board has no written bylaws or document showing items that require board approval. KSFB staff explained that they rely on provisions of KRS Chapter 247 to determine when board approval is required for a particular matter. They noted that the board approves policies related to the operation and management of agency-owned facilities, including the biennial and monthly operating budget, long-term lease agreements, personal service contracts, fee and rate changes, capital improvements, and certain personnel matters.

KSFB’s workload is divided among five standing committees. Committee members work directly with relevant staff and report their findings and recommendations at monthly meetings for discussion or final approval.

As of August 2014, KSFB employed 225 full-time staff and more than 700 temporary staff.

Although not required by statute, KSFB staff produce an annual report that provides an overview of the agency and summarizes events held at the convention center and the exposition center each year, including estimates of the impact these events had on local and state economies.

They also publish a two-year business plan, which provides a more detailed financial picture of the agency, including KSFB’s strategies for moving forward by providing goal-oriented benchmarks for improving revenue, efficiency of operations, and infrastructure.

KRS Chapter 247 mandates the Auditor of Public Accounts to conduct an annual audit of KSFB. The auditor’s office has had no major findings or recommendations for KSFB over the past four years.

Mr. Spears said that KSFB’s short-term costs are funded by event revenue and land leases. Vendors pay to rent facility space, to participate in events, and to use services such as freight handling, Internet technology services, and catering. Revenue is also generated by leasing space to businesses.

KSFB may request appropriations if it is unable to meet its budget or if it requires bonds to finance a project. Statute also allows it to receive appropriations for insurance premiums.

Kentucky statute requires fair board revenue to be spent on expenses and operations. Any remaining funds must be used to reduce admission fees and charges for attending the state fair or using fair board facilities. Fair board revenue may not be appropriated to other agencies or functions.

Program Review staff reviewed KSFB finances over a 7-year period. In fiscal year 2013, KSFB generated $45.8 million in revenue and spent $54.6 million. KSFB had a deficit over the period except for fiscal year 2012, in which revenues exceeded expenditures by $1.1 million, largely due to a $5.5 million appropriation.

The primary source of KSFB revenue was direct event income, more than $40 million in FY 2013. Direct event income was earned from events held at facilities, including rental fees, providing services, and concession commissions.

Restricted income—$2.4 million in FY 2013—was received from insurance benefits, sales of bonds, or financial guarantees related to debt service payments. Restricted income peaked in 2012 when the Hyatt Regency bought out its lease. Lease rental income—$1.6 million in FY 2013—was generated by renting land to businesses. From FY 2007 to FY 2012, lease income decreased 50 percent due to the closing of businesses such as the Hyatt Regency and the Executive Inn East.

Other operating income includes any income not related to events held at fair board facilities, such as advertising on billboards and payments for recycling products.

The Kentucky Exposition Center had deficits in 4 years from FY 2007 to FY 2013. In two of the years in which revenues exceeded expenditures, the exposition center received appropriations: almost $400,000 in FY 2007 and almost $250,000 in FY 2008.

The International Convention Center operated at a deficit, which peaked in FY 2011, from FY 2007 to FY 2013.

Program Review staff estimated profit earned per dollar spent for the two most recent years of data for KSFB-produced events. A dollar spent on the World’s Championship Horse Show generated profits of 52 cents in 2012 and 37 cents in 2013. A dollar spent on the National Farm Machinery Show generated profits of $4.73 in 2013 and $5.13 in 2014. A dollar spent on the State Fair resulted in losses of 5 cents in 2012 and 7 cents in 2013. A dollar spent on the North American International Livestock Exposition resulted in losses of 22 cents in 2012 and 17 cents in 2013.

Economic impact refers to the effect that events held at the two centers have on the local economy and on the state and local tax base. The effect is from out-of-state visitors spending money that would have been spent elsewhere had the events not occurred.

Impact estimates are provided by the Louisville Convention and Visitors Bureau based on the number of hotel room nights booked and the number of exhibitor booths at shows. These estimates do not include tax revenue and secondary spending. Estimates were provided for approximately 53 percent of events hosted at KSFB facilities in 2013.

The 112 Exposition Center events contributed to an estimated $204 million economic impact. Conventions provided the largest impact, primarily due to the National FFA convention, which provided an estimated $40 million of economic impact.

The 95 International Convention Center events contributed to an estimated $73 million economic impact. Conventions provided more economic impact than all other categories combined. The largest event held in 2013 was a National Association for Healthcare Quality convention with a $16.3 million estimated economic impact.

The first major conclusion is that KSFB events impact local and state economies by attracting out-of-state visitors. The Louisville Convention and Visitors Bureau calculated economic impact [WS3] for approximately half of the events held at KSFB facilities in 2013 to be $277 million.

KSFB debt decreased to less than $63 million in fiscal year 2013, more than $40 million of which did not have to be paid in the current year. From FY 2007 to FY 2013, debt has decreased by almost 4 percent.

KSFB identified financial challenges in its 2014-2016 business plan. Six Flags Kentucky Kingdom filed for bankruptcy after 2009, and the Executive East Hotel was demolished. Retirement costs are expected to increase by $2.1 million through FY 2015 and FY 2016. Health care costs are expected to increase by almost $244,000 through the same period. Debt service for construction was estimated to be almost $7.4 million over FY 2015 and FY 2016. Cardinal Stadium was declared unsafe and portions used for storage could not be used for state fairs. KSFB estimated it lost $2.2 million in annual revenue because basketball programs moved to the KFC Yum! Center.

Kentucky’s 2006-2008 budget bill provided state-supported bond funds for the KFC Yum! Center’s construction. The bill specified KSFB was required to manage the center and KSFB would be reimbursed for any business that moved to the center. KSFB operated the center from October 2010 to July 2012. The operating agreement between KSFB and the Louisville Arena Authority established that the reimbursement could be funded only if the center’s operations account possessed excess funds and debt payments could be made. When the agreement was terminated on July 1, 2012, no funds had been set aside for reimbursement.

A May 7, 2013, KSFB invoice to the Arena Authority provided a summary of charges totaling $1.47 million, which included costs for labor, management fees, parking, and office charges. In May 2013, the Arena Authority drafted a resolution agreeing to pay it “in full satisfaction and discharge of all obligations of” the Arena Authority to KSFB. KSFB issued a statement saying the invoice did not relieve the authority of monies that may be due in the future. A March 13, 2014, Arena Authority memorandum took the position that the Arena Authority had no financial obligation beyond the $1.47 million. An April 2014 correspondence from the[WS4] KSFB president to Capital Projects and Bond Oversight Committee staff estimated KSFB lost approximately $7.5 million in business to the center for 2011 through 2013.

Program Review staff collected revenue information on 53 event facilities to determine how KSFB facilities compared to other event facilities in the US. There did not appear to be a connection between net income and event space. More than 80 percent of sampled facilities had a net income of less than $1 million in FY 2013. There were 34 sampled facilities, 64 percent, with net losses in FY 2013.

Almost 50 percent of the 53 facilities with financial reports received assistance in FY 2013. Facilities that generated significant profits received financial assistance such as tax revenue or state appropriations.

The second major conclusion is that from FY 2007 to FY 2013, KSFB’s net income ranged from an $11.1 million deficit to a $1.1 million surplus. Low or negative net income is typical of US event facilities.

Mr. Hall said that to gain a better understanding of the industry as a whole, Program Review staff compiled a list of 165 event facilities in 45 states with at least 100,000 square feet of indoor exhibit space. More than half of the facilities, including the Kentucky International Convention Center, have less than 250,000 square feet of exhibit space. Only 12 facilities, including the Kentucky Exposition Center, have more than 1 million square feet of exhibit space. Staff were able to determine the owner and operations manager for 156 of these facilities. More than 90 percent were owned by a government agency. Of these, nearly 65 percent are also managed by that same agency. Less than 10 percent of the sampled facilities were owned and operated by a private company.

Staff sent a questionnaire to all 165 facilities asking about contracted services and government oversight, with 77 of the facilities responding. Contracted services included those related to maintenance such as grounds keeping, custodial care, and building maintenance, and those related to client services such as audio-visual, food, and event security.

The three basic models of ownership and operations found among the surveyed facilities were publicly owned and operated, publicly owned and privately operated, and privately owned and operated.

More than three-quarters of the surveyed facilities are publicly owned and operated, ranging in size from 100,000 to 1.4 million square feet of exhibit space. The most common arrangement among publicly owned and operated facilities is using government employees to provide some services but contracting with private firms for others. Nearly two-thirds of the facilities in this group contract out one or more client services and nearly one-half contract out one or more maintenance services. For example, KSFB facilities contract out grounds keeping, custodial care, audio/visual, and food services, but use in-house staff for grounds keeping and event security.

All of the facilities in this group have some level of government oversight. Nine, including the Kentucky International Convention Center and the Kentucky Exposition Center, were overseen by a board, were included in a state or city annual audit, and submitted an annual report. The remaining 42 facilities had at least one type of oversight, having a board being the most common.

The third major conclusion is that KSFB has a comparatively high level of oversight. It is governed by a board, is included in the annual statewide audit, and voluntarily produces an annual report.

Five of the publicly owned and operated facilities use in-house staff to provide all maintenance and client services. All five were governed by a board and one facility was also included in an annual audit and another facility was required to submit an annual report. Two of the publicly owned and operated facilities contracted out all maintenance and client services. One of them was overseen by a governor-appointed board and the other reported to the mayor of the city in which it was located.

Nearly one-quarter of the facilities that responded to staff’s questionnaire were publicly owned and operated by a private company. These facilities were located in 15 states and ranged in size from 102,000 to 1.1 million square feet of exhibit space.

Of the 16 publicly owned and privately operated facilities, three of the management companies used their own employees to meet all services. Most contracted out at least one client service, with food service the most common. Grounds keeping was the most commonly contracted maintenance service. All of the facilities in this group had some government oversight.

Two facilities operated in much the same manner as those just described but had no government oversight. A nonprofit organization managed operations at one facility and a venue management company ran operations for the other.

Only one privately owned and operated facility responded to staff’s questionnaire. The company responsible for managing operations at this 166,000 square feet facility used its own employees to provide all maintenance and client services except audio/visual. There was no government oversight.

Staff reviewed five contracts between publicly owned facilities and SMG, a venue management company. Each contract specified that SMG was hired to be the sole manager of the facility and was responsible for managing operations, maintaining the buildings, promoting events, and providing concessions for the facility. SMG was not required to use its own funds for the operation and maintenance of the facilities, and was reimbursed for any emergency work.

In each contract, SMG was authorized to receive an annual base management fee, which ranged from $150,000 to $350,000, regardless of performance. SMG was also able to earn an incentive fee based on performance. Performance measures varied between contracts, but most were tied to either revenue or some measure of economic impact, such as local lodging nights. Oversight of SMG’s operations was through yearly audits and monthly reports.

The fourth major conclusion is that the ownership and management of KSFB facilities, and the degree to which it privatize services, is typical of US event facilities. The International Convention Center and the Exposition Center are publically owned and operated, use public employees to provide some services, but contract with private companies for others.

Minutes for September 11, 2014

Upon motion by Representative Simpson and second by Senator Westerfield, the minutes for the September 11, 2014, meeting were approved by voice vote, without objection.

Response to Staff Report

Mr. Rippetoe stated that KSFB is an economic driver. In 2005, an economic impact study conducted by the University of Louisville indicated a $435 million impact. Another study is being conducted.

He clarified that the Kentucky International Convention Center has 146,000 contiguous square feet, not 200,000 as indicated in the report.

In response to a question from Senator Harris, Mr. Hall explained that the governor has the authority to supersede statute with an executive order.

In response to a question from Senator Harris regarding the relationship between KSFB and Kentucky Kingdom, Mr. Rippetoe explained that the contract is based on performance. They share revenue on parking. People who attend Kentucky Kingdom may participate in other events on campus. Now that the first season is complete, they will analyze the impact.

In response to questions from Senator Harris, Mr. Rippetoe said that a study indicates that there is a need for a hotel near the South Wing. FFA has shown interest and KSFB is working on a master plan. The loss of Cardinal Stadium had a huge impact on KSFB.

Convention centers are being constructed across the US. Many convention centers now compete with each other for shows, with more square footage available than shows. Currently, KSFB competes with Nashville, Indianapolis, Columbus, and Charlotte. Shows for 2021 and 2022 are being booked now.

In response to a question from Senator Harris, Mr. Rippetoe stated that Cardinal Stadium was declared unsafe in 2013. The field was found to be safe and KSFB used it for its “turf shows” concert series. Money spent on renovations to the stadium would be poorly spent; the stadium should be razed.

In response to a question from Senator Seum on the number of events at KSFB facilities, Mr. Rippetoe explained that KSFB measures “event days” and “utilizations days.” Program Review staff will look into the number of days both KSFB facilities were in use and send the information to him.

In response to a question from Senator Seum about the International Convention Center being an economic drag to KSFB, Mr. Rippetoe replied that both facility operations have losses, but the economic impact must be considered[ck5] . [WS6]

Senator Seum asked if KSFB members were paid. Mr. Rippetoe replied that members receive a $100 stipend for each meeting they attend.

In response to questions from Senator Westerfield, Mr. Hall replied that KSFB’s minutes over the last three years showed their practices and policies to be consistent. He clarified that the management company SMG was used by other facilities reviewed in the study, but it is not used by KSFB.

In response to a question from Representative King on the status of the payment owed by the Louisville Arena Authority, Mr. Rippetoe clarified that the amount owed on outstanding management fees was $1.47 million. KSFB has received $100,000 in cash and $150,000 worth of tables and chairs so far. The remaining balance will be paid incrementally.

In response to a question from Representative King, Mr. Rippetoe said that every event KSFB holds has an economic impact, although it is hard to directly relate it to a specific event.

In response to questions from Representative Simpson, Mr. Rippetoe said the major competitors for KSFB facilities are Kansas City, St. Louis, Columbus, Charlotte, and Nashville. Louisville’s convention center is too small. Non-contiguous space is a problem and the planned renovation will open 25 percent more of the market. The idea of closing the street between the convention center spaces is not part of the current request for proposals and is impractical due to cost.

In response to a question from Representative Arnold regarding financing for the renovation project, Mr. Rippetoe said that the state has already approved $56 million in bonding , which will be added to $124 million in bonding provided through a partnership with the Louisville Convention and Visitors Bureau and the hotel bed tax. KSFB is interviewing architects and construction will hopefully start in the summer of 2016.

In response to a question from Senator Westerfield, Mr. Rippetoe said the five larger facilities are located in Las Vegas, Orlando, Chicago, New Orleans, and New York City.

In response to a question from Senator Westerfield on how the economic impact is determined, Mr. Hall said that the Louisville Convention and Visitors Bureau uses the number of hotel nights and booths reserved during events to determine the impact. The 2005 study done by the University of Louisville used more comprehensive data to determine the economic impact.

Senator McDaniel commented that these estimates used [WS7] pre-show numbers to determine the economic impact.

In response to a question from Senator Rand, Mr. Rippetoe said that the budget has solidified, but the economy, weather, and competition affect revenue. KSFB cannot sacrifice on service or it will gain a reputation for poor customer service and lose business.

In response to a question from Senator Rand, Mr. Rippetoe said that creating a master plan will take 8 to 9 months. KSFB will meet with market groups to gain feedback and build relationships.

In response to a question from Senator Rand regarding the FFA Convention, Mr. Rippetoe said that the National FFA Convention will be held in Louisville in two weeks and again in 2015. For 2016 and 2017, the National FFA convention will be held in Indianapolis. KSFB will negotiate for future events.

Senator McDaniel expressed disappointment that the Louisville Arena Authority sent only a written response to the committee’s request to appear at the meeting. The response was read aloud and distributed to the committee members. He mentioned using the committee’s subpoena power to require the Louisville Arena Authority to appear, if necessary.

In response to questions from Senator McDaniel regarding the profits and losses of events produced by KSFB, Mr. Rippetoe said that show costs were calculated with direct event expense and income being separated from overhead. Specific overhead information was not known, but will be sent.

In response to questions from Senator McDaniel, Mr. Rippetoe said that both garages in downtown Louisville are profitable. Mr. Rippetoe said that he is unaware of another state that manages and operates four shows. KSFB is looking at adding an additional show in its master plan.

In response to a question from Senator Seum, Mr. Rippetoe said that the Hyatt was sold, but the attached parking garage was retained by KSFB.

Upon motion by Representative Simpson and second by Senator Westerfield, the report was voted on to be approved. The report was not adopted due to the lack of a quorum, but it will be reconsidered at the next committee meeting.

The meeting was adjourned at 2:12 PM.