Program Review and Investigations Committee



2017 Interim


<MeetMDY1> August 11, 2017


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Friday,<MeetMDY2> August 11, 2017, at<MeetTime> 12:00 noon, in<Room> Room 131 of the Capitol Annex. Representative Lynn Bechler, Chair, called the meeting to order and led the audience in the Pledge of Allegiance. The secretary called the roll.


Present were:


Members:<Members> Senator Danny Carroll, Co-Chair; Representative Lynn Bechler, Co-Chair; Senators Wil Schroder, Reginald Thomas, and Stephen West; Representatives Brian Linder, Donna Mayfield, Rob Rothenburger, Arnold Simpson, and Walker Thomas.


Guests: Katie Smith, Executive Director, Office of Financial Services; Sarah Butler, Director, Financial Incentives Division; Bobby Aldridge, Assistant Director, Compliance Division; Cabinet for Economic Development.


LRC Staff: Greg Hager, Committee Staff Administrator; Chris Hall, Van Knowles, Jean Ann Myatt, Brandi Norton, William Spears, Shane Stevens, Joel Thomas; Dexter Horne, Graduate Fellow; and Jay Jacobs, Committee Assistant.


Introduction of Guests

Senator Carroll introduced Josh Gray from Paducah, who is a sophomore at Liberty University.


Senator West introduced constituents Eric and Michelle Crawford.


Minutes for July 13, 2017

Upon motion by Representative Rothenburger and second by Representative Simpson, the minutes for July 13, 2017 were approved by voice vote.


Presentation by Officials of the Cabinet for Economic Development


Ms. Smith said that the cabinetís mission is to create and maintain jobs and increase investment. The cabinet works with clients, consultants, local governments, the federal government, other state agencies, and utilities. She described the membership of the Partnership Board, the governing body for the cabinet.


She summarized the organizational structure of the cabinet. The Department for Business Development includes the Office of Research and Public Affairs and the Bluegrass State Skills Corporation. The Kentucky Economic Development Finance Authority (KEDFA) is attached to the Office of Financial Services. There is also an Office of Legal Services.


The cabinet can lower the cost of doing business through four main mechanisms: tax incentives, cash programs, other programs, and workforce programs. Tax incentive programs are performance-based. Staff review applications and present them to KEDFA for approval. Staff monitor companies for compliance annually.


Kentucky Business Investment Program (KBI) is the most popular tax incentive program. To qualify, the company must create at least 10 new full-time jobs with a minimum investment of $100,000. An incentive may be reduced if agreed-upon targets are not met. Since July 2009, there have been 446 approvals with a projected value of investment of more than $6 billion and nearly 40,000 new jobs to be created.


To qualify for incentives through the Kentucky Enterprise Initiative Act, there is a $500,000 minimum investment in eligible costs. There are statutory limits on total funding per fiscal year. Since the programís inception, there have been 577 approvals with a projected value of investment of more than $13 billion.


The Kentucky Reinvestment Act focuses on retaining jobs in Kentucky. To qualify, a firm must have a $2.5 million minimum investment in qualified costs and must retain at least 85 percent of existing full-time employment. Since July 2009, there have been 38 approvals with a projected value of investment of $1.1 billion and 9,800 jobs retained.


The Kentucky Small Business Tax Credit is for firms with fewer than 15 employees that are creating full-time jobs by investing in qualifying equipment or technology. Tax credits range from $3,500 to $25,000 per year. Since 2011, the credit has resulted in more than 1,200 new jobs and $13.1 million in investment. Total funding is up to $3 million per fiscal year.


The Angel Investment Tax Credit is available to individuals who invest in qualified small businesses with fewer than 100 employees. Investors provide startup capital and receive a tax credit of up to 50 percent of investments. Maximum total funding is $3 million per year. Since 2015, 383 investors and 138 small businesses have qualified. Investments of $23 million resulted in $9 million in tax credits.


There are other ongoing tax incentive programs and three older programs that are still being monitored.


The second mechanism for lowering business costs is cash programs, which include KEDFA loan and grant programs and the Kentucky Small Business Credit Initiative. The initiative is for support of loan requests that are just outside acceptable underwriting standards. Since inception, the initiative has provided $17.1 million in support for 180 loans.


Other programs to lower business costs include industrial revenue bonds and providing seed capital. The Bluegrass State Skills Corporation provides tax credits or cash reimbursement of up to 50 percent of eligible training costs for eligible employees. Total program funding is limited to $2.5 million per year. The cabinet also assists with the Education and Workforce Development Cabinetís Kentucky Work Ready Skills Initiative. Through the program, more than $200 million is being invested in workforce development.


The number of employees at the Cabinet for Economic Development has decreased from 115 in 2006 to 67 in 2017. The fiscal year 2017 budget for the cabinet is $22.6 million. The cabinet is likely to request additional funds for personnel, marketing, and foreign offices. The cabinetís goals are to be able to announce more than 17,000 new jobs in 2017, move Kentucky into the top quartile in business-friendly state rankings, establish a more integrated workforce delivery service, and build out the stateís entrepreneurial community. As of August 1, there has been nearly $7 billion in announced investment this year and more than 11,000 announced jobs.


In response to questions from Representative Simpson, Ms. Smith said KBI came about because of problems with other programs. Each company is measured annually for compliance. The cabinet is working on statistics for the program. Information on the status of each company meeting its targets is on the cabinetís website. The programs that are working best are KBI, the Kentucky Enterprise Initiative Act, the Kentucky Reinvestment Act, the Small Business Tax Credit, the Angel Investment Tax Credit, and the Small Business Credit Initiative. The cabinet is working to create a report with information on companies once they have located in Kentucky. Results vary by year. When incentives are not met, there is a claw back for those in the cash program, disbursements are reduced for performance-based incentives, and tax incentives are reduced.


In response to questions from Senator Carroll, Ms. Smith said companies must meet 90 percent of the job and wage requirements. Statute requires that a company be suspended from a program if it falls below the program minimum. The cabinet does not have any data to explain whether incentives provided to businesses is a cause of corporate income tax revenue being down. A company looking to locate in Kentucky provides details on its requirements. Companies can visit the cabinetís website to learn of available sites and options. Local governments provide information on local incentives and communicate with the cabinet frequently. The Small Business Program has been very successful with projects outside the golden triangle. The cabinet will provide a list of the sites of large-scale company locations or expansions over the past 5 to 10 years.


In response to questions from Senator West, Ms. Smith said local area districts are good about providing updated information on sites. Some companies contact local areas directly rather than the cabinet. Local area officials can contact Samantha Kendrick, the Assistant to the Commissioner of Business Development, to discuss their resources and potential opportunities.


In response to questions from Representative Rothenburger, Ms. Smith said the cabinet negotiates target wages higher than the federal minimum wage requirement within KBI, either 125 percent or 150 percent depending on location. If a city or county does not have an occupational or payroll tax, a donation of cash or land may meet the local participation provision for KBI. The cabinet will work with counties to find a way to meet the provision if the normal options will not work. Enhanced counties in the program do not require local support. The cabinet will review the process of notifying local governments once a company is ready to activate.


In response to a question from Representative Linder about key factors in whether companies locate in Kentucky or not, Ms. Smith said utility rates and available sites across the state are huge assets in recruiting. A shortage of qualified workers is a big obstacle.


In response to a question from Senator Schroder, Ms. Smith said the Commonwealth Seed Capital Fund focuses on making equity investments in Kentucky to get companies to settle here. There are several Japanese companies in Kentucky. Kentuckyís offices in Japan and Germany have been effective as a mechanism for working with companies that are looking to relocate and expand.


In response to questions from Representative Bechler, Ms. Smith said the cabinet is working on analyzing how much is given in tax incentives compared to taxes received. Hopefully, this information will be available this year. If a company locates or expands in Kentucky, it receives incentives under KBI. A company looking to grow may receive incentives under the Kentucky Reinvestment Act. A company cannot receive incentives from both programs simultaneously, but companies frequently receive incentives from both programs consecutively. Full communication with the cabinet is the best way for local areas to involve themselves in the process of attracting companies to locate to Kentucky. There is a vacancy on the Kentucky Economic Development Partnership Board that has not yet been filled.


In response to questions from Senator Carroll, Ms. Smith said regional marketing allows more marketing resources, such as financial and multiple influences, working together to attract companies. Compared to other states, Kentucky is growing and doing a good job. The cabinet needs to work on attracting technology and service companies. Companies want cash incentives more than tax incentives, so the General Assembly should consider this. The cabinet invested in the new aluminum facility locating in Eastern Kentucky. Other states also invest in companies.


In response to questions from Representative Simpson, Ms. Smith said the cabinet is not always notified of job losses, so it is difficult to makes comparisons to job gains. In Northern Kentucky, Delta has decreased its presence despite government investments in infrastructure. The cabinet is hopeful that the infrastructure assets will lure additional investments.


In response to a question from Representative Bechler, Ms. Smith said it is difficult to educate people about tax incentives, especially the distinction between new and existing tax revenue.


Representative Bechler said the Kentucky Reinvestment Act is very important. Knowing how many businesses have stayed once the incentives have expired would help people to know how well programs work.


The meeting was adjourned at 1:27 PM.