Interim Joint Committee on State Government


Minutes of the<MeetNo1> 2nd Meeting

of the 2014 Interim


<MeetMDY1> August 27, 2014


Call to Order and Roll Call

The<MeetNo2> second meeting of the Interim Joint Committee on State Government was held on<Day> Wednesday,<MeetMDY2> August 27, 2014, at<MeetTime> 10:00 AM (CDT), in Owensboro, KY, at the Owensboro Convention Center<Room>. The meeting was a joint meeting with the Interim Joint Committee on Local Government. Senator Joe Bowen, Co-Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Joe Bowen, Co-Chair; Representative Brent Yonts, Co-Chair; Senators Ernie Harris, Christian McDaniel, Morgan McGarvey, Albert Robinson, Dan "Malano" Seum, Damon Thayer, and Reginald Thomas; Representatives Dwight Butler, Jim Glenn, Derrick Graham, Mike Harmon, Kenny Imes, James Kay, Martha Jane King, Jimmie Lee, Mary Lou Marzian, David Meade, Suzanne Miles, Brad Montell, Darryl Owens, Tom Riner, Steven Rudy, Diane St. Onge, Tommy Thompson, John Tilley, Ken Upchurch, and Jim Wayne.


Guests: Representative Jim Gooch; Don Speer and Ryan Barrow, Finance and Administration Cabinet; Darrell Higginbotham, Independence Bank, Owensboro; Joyce Gruenewald, Malcolm Bryant Corporation; John Morton, Hampton Inn & Suites Downtown Owensboro/Waterfront; Al Mattingly, Daviess County Judge/Executive; and Ron Payne, Mayor, City of Owensboro.


LRC Staff: Alisha Miller, Karen Powell, Terrance Sullivan, and Peggy Sciantarelli.


Approval of Minutes

A motion to approve the minutes of the June 25 meeting was seconded and passed without objection.


Creating a Successful Public-Private Partnership

Representing the Finance and Administration Cabinet, Don Speer, Executive Director, Office of Procurement Services, and Ryan Barrow, Executive Director, Office of Financial Management, discussed public-private partnerships (P3s).


Mr. Speer and Mr. Barrow said that P3s are business relationships between government agencies and the private sector that provide new sources of project delivery and funding for public needs. P3s are typically used for transportation, housing, medical, and economic development projects and are predominantly procured through competitive bidding in a multi-phase process. Risk and success are shared, and transparency to the public is important. P3 contracts that include funding have an element of non-recourse financing, with the risk often on the private sector. Typically, new sources of equity financing by the private sector are more expensive than a traditional state bond transaction.


P3 projects are not new to Kentucky. The “Next Generation KY Information Highway” is a P3 project in the procurement process. The Commonwealth does not have sufficient or affordable statewide high-speed connectivity. Kentucky ranks 47th nationally in average broadband speed. An RFP has been issued for a vendor to design, build, and manage a new high-speed network and provide funding to bridge the gap between actual cost of the project and the amount provided by state and federal government. Another P3 project is for construction of a new office building in Frankfort under a lease/purchase arrangement approved by the legislature. The private sector will finance, construct, and operate the new building under a long term lease. At the end of the lease term, the Commonwealth will own the building. Private prisons, the state fuel testing lab, and Medicaid managed care are examples of other P3 projects.


A chief advantage of a P3 is the ability to assign risk to the private sector. P3s may accelerate project development, streamline strategies, and create jobs. They provide new sources of funding, and project timing and costs may be more certain and condensed. There also are disadvantages in that they involve complex negotiations and high transaction costs. Risks to the public entity may be difficult to determine. The private sector controls critical assets, and detailed termination arrangements may be necessary.


Mr. Speer and Mr. Barrow cited examples of P3 projects in other states that involved challenges. Chicago privatized its parking meters under a long-term lease with Morgan Stanley but sold its meters $1 billion under their value. Rates escalated, and the city lost a $61 million lawsuit filed by Morgan Stanley for street closures. A 2006 Indiana toll road project—a Spanish-Australian joint venture involving a 75-year lease—led to a heavy increase in tolls because traffic was less than projected. After Texas entered into a 50-year lease with private toll operator Cintra for State Highway 130, the highway did not attract enough traffic, and Cintra defaulted on its $686 million in bank debt. They said P3s are a great tool, but it is important to assess the risk and financing. Although P3s provide flexibility and a quicker delivery method, the requirement for additional approvals and processes may diminish the advantages.


In response to a question from Senator Bowen, Mr. Speer said the Finance and Administration Cabinet does not view P3s as cumbersome and is able to move forward with them under existing provisions of the procurement code and current law. He said he could not address local government or Transportation Cabinet issues because they may have different needs.


Senator Thomas discussed the use of public-private partnerships in his legislative district that enabled the University of Kentucky to construct new dormitories under a long-term lease arrangement.


Referring to the problematic P3 projects in Chicago and Indiana, Representative Yonts questioned whether there are adequate safeguards in the negotiation process. Mr. Barrow said contracts are complicated, predicated on feasibility studies and the best information available. It is difficult to predict the future. Contracts include safeguards such as termination provisions, but it may not be possible to build in enough safeguards. There will be problems if utilization is low or revenue is insufficient to maintain the project. When asked by Representative Yonts, Mr. Barrow said that protections against bankruptcy are built into contracts to the extent possible, but contractual provisions relating to project financing cannot account for the unknown.


Answering questions from Senator Seum, Mr. Barrow said that generally taxpayers would not be liable if the private entity fails to meet its obligations, but there may be a level of moral obligation and the likelihood of legislative action to address the problem. Financing or bonding of projects can be done several ways: shared, executed entirely by the private sector, or funded by the state through traditional bonding. Mr. Speer said that whether prevailing wage would apply to a P3 project would depend on the individual project and its location.


There was additional discussion of Chicago’s poorly structured parking meter P3, which Senator McDaniel said was apparently used to improve cash flow and address structural imbalances in the city’s operating budget. Mr. Barrow said his understanding is that the one-time revenue source from that P3 transaction was used to plug budgetary gaps. It was also directed in part toward the pension fund, infrastructure, and some long-term investment.


Representative Riggs said it was not the P3 concept that failed in the Chicago parking meter fiasco, but rather that the contract was poorly written and lacked necessary safeguards. He supports the P3 concept but stressed the importance of competitive bidding in the procurement process. Safeguards add to the complexity of a contract but also make it work. Inclusion of too many safeguards, though, may give the impression that risk is too high and may make it more difficult to create a partnership.


Responding to Representative Owens, Mr. Barrow said contracts must include termination arrangements to deal with situations if things do not go as planned. Negotiation of those provisions requires substantial due diligence. The reason for making a contract long term is generally to reduce risk for the parties involved.


Responding to Representative Wayne Mr. Speer said he cannot think of any occasion when a contract had been awarded without competitive bidding. If that were to occur, it would be an exception. The cabinet’s default position is to require competitive bidding. He believes the procurement code is working successfully and needs no improvement or additional statutory safeguards.


Darrell Higginbotham, Daviess County President of Independence Bank, Joyce Gruenewald, Customer Relations Manager, Malcolm Bryant Corporation, and John Morton, General Manager, Hampton Inn and Suites Downtown Owensboro/Waterfront, discussed how public-private partnerships have benefited the Owensboro area.


Mr. Higginbotham said Independence Bank is a $1.4 billion financial institution serving nine counties in western Kentucky, with Daviess County being the largest market. He has been president since 2005, served as chairman of the Greater Owensboro Economic Development Corporation (EDC) from January 2008 through June 2010, and currently serves on the EDC board and as chairman of the Greater Owensboro Chamber of Commerce.


Mr. Higginbotham described the timetable that led to the revitalization of downtown Owensboro. It was accomplished by combining local resources, commitment, and leadership to successfully create P3s. The Owensboro convention center facility would not exist without the success of a local P3. Around 2005, Owensboro was awarded $40 million in federal assistance to stabilize and protect the downtown riverfront. With a new riverfront on the horizon, local government and economic development leadership used the opportunity to investigate a downtown revitalization plan. EDC selected the nationally recognized firm, Gateway Printing Group of Austin TX, to develop the plan, and the public and private sectors partnered to fund it. This initial public-private partnership led to multiple P3s. EDC was not the only organization to contribute. The Public Life Foundation of Owensboro played a critical role in educating the community and seeking public input. Multiple meetings and forums were held. The top priority emanating from those discussions was to transform downtown. Overwhelming community participation and enthusiasm throughout the plan development propelled local government leaders and organizations like EDC and the Greater Owensboro Chamber of Commerce to fully invest in seeing the plan through. The Gateway Plan was released in November 2008. Although there were news reports of dire economic forecasts during much of the plan development, the city commission passed an insurance premium tax in February 2009 with only one dissenting vote. Commitment to the plan was buoyed by the community’s involvement and support and endorsements by the EDC, the Chamber, and the private sector. The Daviess County Fiscal Court was a critical partner and a significant financial investor, contributing $20 million for the construction of the convention center. The partnership and communication between city and county government was essential.


The economic recession was still having significant impact when the Gateway Plan needed private investment. Malcolm Bryant, a local developer and entrepreneur, had previously been selected to develop the hotel through an RFP process. During this time, the city acquired the former Executive Inn property, approximately 17 acres strategically located downtown. The city invested $1.6 million toward the purchase of a state office building. The city’s investment and desire to control important real estate were invaluable in creating P3s. Malcolm Bryant worked with Independence Bank as a financial partner to fund the construction of a $20 million state-of-the-art 150-room convention center hotel, at a time when some financial institutions had a moratorium on hospitality lending. The convention center was the cornerstone of the Gateway Plan since there could be no convention center without a new hotel.


A new market tax credit was identified as the most feasible financing structure, but it also became the greatest challenge. The complexity of the structure led to unanticipated legal and professional fees and time-consuming delays. The city of Owensboro, Malcolm Bryant Corporation, and Independence Bank were able to overcome significant hurdles to create a P3 for construction of the Hampton Inn and Suites Waterfront. Many credit this P3 as a stimulus to additional private investment and P3 creations. Joe Berry, Vice President of EDC, said it paved the way for the current Holiday Inn/Boardwalk project. Additional private investment has been announced, and more is anticipated. No state funds have been allocated in the construction of these projects.


Mr. Higginbotham said P3s can provide significant economic opportunity, especially when developed locally. Owensboro has demonstrated that successful P3s can lead to additional economic development. Streamlined business-friendly structures are needed, since complexities and cost could be a deterrent and make P3 formation difficult. He advised creating a framework in which decisions and control are at the local level. Local governments must work together with a joint commitment and engage the community early and often. Opportunities such as a local option sales tax can provide the means to fund projects and potentially create significant economic stimulus. Owensboro’s success was driven by a local entrepreneur, a local bank, and local government. The economic opportunity and promise overshadowed the risk and challenges of such a major endeavor. With a business-friendly P3 structure, local decision making, and funding options like a local option sales tax, other communities across the Commonwealth can replicate Owensboro’s success.


Ms. Gruenewald testified for Malcolm Bryant, owner of the Malcolm Bryant Corporation. She said ground was broken for the Hampton Inn and Suites and the convention center on March 13, 2012. These dual projects were the necessary links in the success of the downtown revitalization project. A strong foundation is of paramount importance to any building, and in the case of the Hampton Inn and Owensboro convention center, it was important to cement the public-private partnership with trust. It was evident that the residents of Owensboro were supportive of the Hampton Inn project, and the city favored the projects because they could advance the riverfront. The public entrusted the company to finance and build a quality hotel. By developing partnerships with private sector entities, government can offer improvements at minimal cost to taxpayers. Creative government leaders understand that partnering with private entities can improve operations and services without increasing taxes.


There were times when a more streamlined approach would have been preferred in working with public officials on the Hampton Inn project. Communication and planning can become cumbersome. The private community is usually more flexible in decision making, and the public side also needs flexibility. The private side can authorize one or two people to make decisions; the public side should strive for this also. Efficiency is a major driver in the creation of a successful P3. Bureaucracy is the enemy of entrepreneurism in that it stifles creativity and burdens the process. The public side needs an entrepreneurial spirit.


Early success of the venture has surpassed projections, and both the company and the community have benefited. Communication with the local community, trust in the partners, and simplicity in the process contributed to the success of the Hampton Inn and convention center projects. With cooperation of public and private interests, there should be many further partnership opportunities for business development in Owensboro in the housing, restaurant, retail, and entertainment industries. A key reason for the hotel’s success can be attributed to hotel manager John Morton and his management team.


Mr. Morton said more than 75,000 people attended over 123 events during the first 155 days of the convention center’s operation. Global Spectrum, the convention center’s management company, is bringing convention business back to the city. The center generated over 2,400 hotel room nights in the first six months. The two facilities need each other in order to prosper, and they are accomplishing exactly what was planned. The city and the private sector agreed that a high level of quality had to be achieved. Building a 150-room downtown hotel without an excellent convention center would not have been practical or feasible. Management of the convention center by General Manager Dean Dennis and staff has been superb. Business is coming from Indiana, Ohio, Illinois, and other states. Several state conventions have returned to Owensboro.


Hampton Inn and Suites is privately funded and run locally. It is a lead hotel, designed with solar generating capabilities and state-of-the-art energy efficient measures. It is dependent upon the public for some amenities. The airport has been expanded, the downtown continues to be revitalized, and soon there will be a Bluegrass museum. Many new people are visiting Owensboro and Kentucky for the first time due to the combined efforts of the public and private sectors.


The Convention and Visitors Bureau, headed by Shannon Wetzel, reported receipts of $49,255 in April and $56,130 in May from the three percent hotel tax. The Bureau had never before taken in more than $50,000 in a single month. Convention business and tourism is driving the increased revenue. Mr. Morton said this public-private partnership is working and he is pleased to be part of it. He commended the mayor, county judge/executive, Malcolm Bryant, and everyone involved for a job well done. He thanked Senator Bowen for his commitment to the state and city.


Senator Bowen said that a Holiday Inn is under construction on the west side of the convention center. He commended Matt Hayden, owner of Envision Contractors, and Glenn Higdon, CEO of LinGate, a company that develops and manages hotel properties, for their efforts to anchor the other side of the convention center with a new hotel to enhance Owensboro’s tourism business.


Area Local Government Issues

County Judge/Executive Al Mattingly said Owensboro is proud of what has been accomplished locally and regionally. The downtown has been transformed, and local government is being run like a business, keeping tax rates and service fees as low as possible. He supports the local option sales tax proposed by the LIFT (Local Investments for Transformation) Coalition. Revenue generated by the tax would be dedicated to funding specific projects chosen by a community-wide, citizen-driven process, and the tax would end when the projects are paid off. The LIFT process represents the essence of democracy because it would give local governments another option to pay for capital projects while involving local citizens in a democratic process. A similar initiative, Decision 2002, occurred in Owensboro in 1997. The city proposed a 50 percent increase in the occupational tax to fund needed capital improvement projects. An increase of .33 percent was proposed for public safety and drainage and a .17 percent increase for parks and other amenities. The initiative involved an unofficial vote by citizens on the tax increase. Nearly 50 percent of the unofficial ballots were returned, with 53 percent in favor of the increase for public safety projects. The .33 percent tax increase paid for projects wanted by the citizens and was rolled back at the end of five years. He urged the legislators to look favorably on LIFT legislation when it is again proposed to the General Assembly.


Judge Mattingly discussed KRS 91A.392, which was amended in 2000 to allow counties containing second class cities to add a special two percent transient room tax to finance fine arts centers. All money collected from the tax must be applied toward retirement of the bond indebtedness. In 2003, Daviess County issued a $2.27 million 25-year bond for work at the Riverpark Center and the Owensboro Museum of Fine Arts. By 2011, over $1 million had accrued in excess of the bond requirement. Through an agreement with the city of Owensboro, excess money was used to retire the bonded debt on the Riverpark Center building, thus meeting the statute’s requirement. Excess revenues are increasing again due mainly to the increase in tourism and refinancing of original bonds. Only Louisville, McCracken County, Boyd County, Warren County, and Daviess County have enacted the tax allowed by statute. Judge Mattingly asked that the General Assembly consider changing the law to permit excess money collected from the room tax to be used for projects without having to incur new debt. Daviess County projects that could benefit from this money include replacement of an elevator at the art museum, maintenance and renovation of a historic theater, and many other projects that meet the law’s intent and would promote tourism. The fiscal court does not want to incur new debt. It has lowered county debt nearly 20 percent in the past four years.


Judge Mattingly discussed the need to rehabilitate historic buildings in Daviess County to comply with current building standards and the international energy code. The cost of meeting those requirements can be prohibitive, and it can be cheaper to tear down a building and build a new one. Without compromising safety, allowances should be made for remodeling older buildings. He said the General Assembly should look at some form of relief from regulations. Larry Conder, a local developer, knows firsthand the extra cost these regulations add to historic building rehabilitation. He may provide additional information after the meeting.


Owensboro Mayor Ron Payne said that what has happened in the city is phenomenal. In 2013, Owensboro was one of only 10 cities in the United States designated an All-American city by the National Civic League. The downtown and riverfront have been revitalized. The new development includes hotels, the convention center, restaurants, retail stores, the Boardwalk office building, condominiums, sidewalk and street renovation, a $400 million state-of-the-art hospital, ice rink, National Guard armory, and highway improvements. The International Bluegrass Music Center and a new indoor tennis facility are under construction, and there are plans for a new senior center. The city is working with Owensboro’s second largest employer, U. S. Bank Mortgage, to construct new office buildings in the Airpark. All of this activity has occurred within the last six years and was made possible through public-private partnerships. Mayor Payne played a video highlighting the new development.


After taking office, the mayor proposed doubling the insurance tax from four percent to eight percent to generate $60 million for downtown improvements. The county partnered by doubling its tax to create an additional $20 million. This was during the recession, but the Chamber of Commerce, the newspaper, and the economic development community were supportive. Because of the recession, costs would be down but jobs would be created. The private sector invested a similar amount in downtown revitalization. Malcolm Bryant, Matt Hayden, Jack Wells, and Larry and Rosemary Conder were some of the local developers and investors who helped revitalize by contributing substantial dollars.


Mayor Payne expressed appreciation for inclusion of funding in the state budget for Phase II of the Owensboro Community and Technical College’s Advanced Technology Center. The city and county have each committed $1 million toward the project. He hopes the legislature will consider giving Owensboro the ability to levy both a restaurant tax and a local option sales tax. With respect to the sales tax, however, he prefers an optional public vote. Elected officials are sometimes forced to make decisions that are not popular with the public; for example, he believes the insurance tax increase that helped begin the downtown redevelopment would not have passed if put to vote.


Representative Graham applauded the beauty of the riverfront development and complimented Owensboro for what it has accomplished through the leadership of its elected officials and members of the community and Daviess County’s representatives in the General Assembly. He is glad that Owensboro is showcasing its revitalization by hosting meetings of legislative committees. The Interim Joint Committee on Education, which he chairs, will meet at the convention center in October. He commended the city and county government for working together. He favors granting Owensboro the right to implement a local option sales tax.


Representative Miles, who represents Daviess County’s House District 7, said that development of the riverfront, which was partially financed with federal funds, is a perfect example of how government can be an enabler and catalyst for great things to happen. Smothers Park and other parts of the revitalized riverfront are sources of local pride and have contributed to successful development in other areas of downtown. She called attention to the coal barges passing by on the Ohio River and emphasized the vital role of the coal industry and river in the county’s economic development.


Senator Thayer congratulated Mayor Payne and everyone involved in Owensboro’s successful renaissance. He spoke about the importance of western Kentucky coal in meeting the energy needs of the state and the nation and the importance of Kentucky’s inland waterways in meeting those needs.


Representative Wayne thanked Mayor Payne and Judge Mattingly for their leadership but cautioned that a local option sales tax could possibly be regressive. He said its use would need to be carefully assessed for its impact on lower income citizens. Judge Mattingly said that he views the local option sales tax as progressive because those who can afford to buy more would be paying more in sales tax. He thanked Representative Wayne for his comments and assured him that they will be considered by the committee that is promoting the sales tax.


Mayor Payne said he once worked in Tulsa, Oklahoma, where each year a LIFT project is proposed to voters, to be funded by a one cent sales tax. The program is called “a penny for progress” and was the impetus for the Decision 2002 initiative in Owensboro. He repeated his desire that the legislature consider giving Owensboro the ability to implement a local option sales tax.


Closing Comments and Adjournment

Representative Yonts thanked Owensboro city and county officials and community leaders for their good work and for the opportunity to meet in the convention center. He said his home of Muhlenberg County is engaged in a renaissance, though on a smaller scale than Owensboro.


Senator Bowen thanked his colleagues for coming to Owensboro. He said he and Daviess County’s other representatives in the General Assembly are team players and realize that what is good across the Commonwealth is good for Owensboro and Daviess County. He expressed appreciation to the Owensboro residents who were present.


There being no further business, the meeting was adjourned at 11:53 a.m.