Call to Order and Roll Call
The sixth meeting of the Interim Joint Committee on State Government was held on Wednesday, November 29, 2017, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Joe Bowen, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Joe Bowen, Co-Chair and Representatives Jerry T. Miller, Co-Chair; Senators Ralph Alvarado, Denise Harper Angel, Christian McDaniel, Morgan McGarvey, Dorsey Ridley, and Wil Schroder; Representatives Lynn Bechler, Kevin Bratcher, Tom Burch, Will Coursey, Jim DeCesare, Joseph Fischer, Derrick Graham, Dan Johnson, DJ Johnson, Mary Lou Marzian, Reginald Meeks, Phil Moffett, C. Wesley Morgan, Jason Nemes, Sannie Overly, Jason Petrie, Rick Rand, Jody Richards, Bart Rowland, Attica Scott, Tommy Turner, Ken Upchurch, and Jim Wayne.
Guests: Allison Ball, Noah Friend, and O. J. Oleka - Kentucky State Treasury; Joe Bilby, Kentucky Department of Agriculture; Mike Harmon and Sara Beth Gregory, office of the Auditor of Public Accounts.
LRC Staff: Judy Fritz, Karen Powell, Kevin Devlin, Michael Callan, Roberta Kiser, and Peggy Sciantarelli.
Approval of Minutes
A motion to approve the minutes of the October 25 meeting was seconded and passed without objection.
Introductory Comments
Senator Bowen said that Secretary of State Allison Lundergan Grimes was invited to this meeting to discuss legislative priorities of her office but declined the invitation due to other commitments. He expressed disappointment that the meeting did not include testimony from her. The meeting folders include a copy of her November 22 response letter to the committee chairs in which she discussed the mission and activities of her office and of the State Board of Elections, plus legislative proposals for consideration in the 2018 Regular Session.
State Treasury - Status Report and Legislative Priorities
Guest speakers from the State Treasury were Allison Ball, State Treasurer; Noah Friend, General Counsel; and O. J. Oleka, Chief of Staff.
Treasurer Ball discussed activities at the Treasury and initiatives that she hopes will be accomplished in the coming year. She said her office was able to resolve IRS-related issues that potentially could have cost the state about $1 million. They worked with the Alabama state treasurer’s office to prevent an occurrence of wire fraud involving both Kentucky and Alabama. As a watchdog on spending, she is committed to using the Treasury’s budgeted funds in the best way. She cut the budget 4.5 percent when she assumed office and in 2017 cut it an additional 1 percent. For FY 2017-18, the Treasury so far has processed $227 billion in payments and receipts for the Commonwealth, 10 million ACH (automatic clearing house) transactions, and 5,000 or more wire transfers to the federal government totaling $37 billion. During last year’s snowstorm when state offices were closed the Treasury remained open in order to process 50,000 checks to retired teachers. In connection with their watchdog role, there have been instances when the Treasury has stopped checks, some of which are involved in pending lawsuits.
Treasurer Ball said that transparency has been a major focus. She worked with the Finance and Administration Cabinet to launch the Commonwealth’s transparency website (transparency.ky.gov). The state of Ohio spent over $1 million to create a transparency website that is viewed as the gold standard. By using existing relationships, contracts, and resources Kentucky’s website was launched without additional spending. STABLE Kentucky is a savings and investment program available to Kentuckians with disabilities. Kentucky is one of the first states to have this type program, and it was established without spending additional taxpayer dollars. It offers a tax-free savings plan for disability-related expenses. Account holders can save and invest without losing needs-based benefits, and family members and friends can also contribute to the accounts.
Treasurer Ball said the top priority for the 2018 legislative session is the Revised Uniform Unclaimed Property Act (RUUPA), which is an initiative to reform the Treasury’s unclaimed property division. RUUPA is a uniform code that is being developed by stakeholders and experts nationwide. Last year the Treasury returned $25 million in unclaimed property. The unclaimed property function has not had significant updates since the 1980s. Current law is unclear relating to unclaimed property in some respects. RUUPA includes ideas to save money and cut red tape to make it easier for businesses and individuals to make claims. Mr. Friend said that the RUUPA legislation will be very detailed. It is intended to clarify and update unclaimed property law. When the statute was written, bitcoin and online currency had not been anticipated. One example of proposed revisions is to no longer require businesses to send annual reports to the Treasury if they have nothing to report.
Improvements relating to 529 ABLE and STABLE accounts at both the state and federal level is another major interest. There are efforts at the federal level that would allow traditional 529 education accounts to roll over to Kentucky STABLE accounts if a child becomes disabled and college is no longer possible.
Senator Schroder sponsored SB 179, enacted in the 2016 Regular Session relating to ABLE accounts. He thanked Treasurer Ball for her efforts relating to the ABLE and STABLE Kentucky programs. He said they encourage savings and are important to the disability community. He also appreciates her efforts to meet with other state officials and to inform the citizenry about the programs.
Representative Wayne expressed appreciation to Treasurer Ball and her staff. Responding to his questions, she said she employs about 30 people and has had no retirements within the past six months. Her employees seem to have a “wait and see” attitude regarding recent proposed pension changes, and she does not see a reason to be alarmed. When Senator Bowen pointed out that the invited speakers were asked to discuss their legislative agendas for 2018, Representative Wayne agreed to withhold his inquiries relating to pension reform. There were no further questions, and Senator Bowen thanked Treasurer Ball and her staff.
Department of Agriculture - Status Report and Legislative Priorities
Joe Bilby, General Counsel, represented the Department of Agriculture (KDA) on behalf of Commissioner Ryan Quarles, who had a previous commitment out of town. Mr. Bilby said the Commissioner sends his apology and also extends invitations to two meetings—the State Board of Agriculture meeting at the Frankfort campus on December 12 and the first meeting of the Industrial Hemp Advisory Board (created by 2017 Senate Bill 218) on December 13. The application window has closed for the 2018 hemp growing season, and the number of applications received has increased slightly. The Commissioner also advises that Russell Coleman, U. S. Attorney for the Western District of Kentucky, recently at a press conference praised federal and state law enforcement agencies for their role in preventing theft of credit card information at gas station skimmers. As a result of KDA gas pump inspections, eight or nine persons have either pled guilty or been convicted of credit card theft, with projected savings of thousands of dollars. The Commissioner urges everyone to notify KDA about any concerns regarding theft at gas pumps.
Commissioner Quarles returned recently from China, where he met with the U. S. Ambassador to China Terry Branstad, representatives of the Kentucky thoroughbred industry, and Chinese government officials. After a year-long effort by him, the U. S. Department of Agriculture, and the thoroughbred industry, China has lifted the ban on importation of live horses from the United States, including quarterhorses and saddlebreds. This action has created economic opportunity for the Kentucky horse industry.
Mr. Bilby said KDA has three main legislative priorities for 2018. An executive reorganization order has just been finalized to update the organizational structure and office names, and KDA will propose a bill to codify the changes. KDA will also likely ask the General Assembly to consider other modernization efforts. Unlike most states, Kentucky does not have legislative authorization to issue Certificates of Free Sale, which are sometimes required for export of agricultural commodities. KDA believes it would be in the best interest of Kentucky industry to have that authorization clearly stated in statute. They may also propose revisions or updates to statutes relating to livestock safety and disease control and regulation of motor fuels.
The second main priority for 2018 relates to a transportation issue with significant impact on Kentucky agriculture. New federal regulations take effect in December 2017 relating to the electronic logging devices (ELDs) that are required for long distance truck operations. The devices track the number of hours that a vehicle/driver has been in service. The goal of the regulations is to ensure that companies and their employees are respecting hours-of-service limitations, as regulated by the federal Motor Carrier Safety Administration. Many agricultural producers in Kentucky cannot afford to install ELDs on their trucks. Agricultural producers are now exempt from the ELD requirement when carrying commodities and farm supplies distances up to 150 miles. The applicable Kentucky statute, which links to existing federal law, needs to be updated because it specifies 100 miles instead of 150. KDA has been working with Representative James Tipton to draft an expansion of the Kentucky statute. They are working with him also on a joint resolution asking Congress to expand the distance parameter to 200 miles, a change that would be helpful to agricultural producers in the state. When Senator Bowen asked why an exemption is needed for such a short distance, Mr. Bilby said that the federal regulations require hours of service restrictions and documentation for certain classes of vehicles.
KDA’s third legislative priority is a resolution relating to the Kentucky Hunger Initiative launched by Commissioner Quarles in 2016. The resolution would ask state agencies to perform a self-assessment of their food waste practices. Forty percent of food in the country is thrown away, often after large scale events, including some that are sponsored by state agencies. The self-assessment was Senator Rick Girdler’s idea, and KDA hopes to work with him on drafting the resolution.
Representative DeCesare inquired about regulations relating to zip lines and conversion of agricultural structures into event venues. He said he understands that new laws or regulations have become more stringent. He has heard from constituents, and he is interested in helping farm owners open event type facilities without compromising safety. Mr. Bilby said they worked with Representative Suzanne Miles on agri-tourism legislation enacted in 2017 (HB 360) that excused landowners from complying with some of the more stringent provisions of the building and housing codes. KDA would welcome the opportunity to discuss whether further changes may be needed. Representative DeCesare said that meeting required upgrades for certain size facilities can be difficult for landowners, such as requiring sprinklers when there is no available water source. He would like to see everyone involved discuss possible alternative solutions.
Regarding zip lines, Mr. Bilby said that in 2016 the General Assembly enacted a law requiring the Department of Agriculture to promulgate administrative regulations relating to aerial recreational devices and zip lines. In response to concerns raised at three open public meetings that were well attended in the summer of 2017, KDA made significant changes to the initial draft regulation. They have received quite a few comments since the regulation was promulgated and considered by the Administrative Regulation Review Subcommittee in early November. However, they would welcome any additional comments.
Representative Wayne asked whether KDA has met with representatives of amusement parks and is planning to develop legislation that would apply specifically to them. He said he has heard from representatives of the industry—the largest being Kentucky Kingdom—and they are concerned that some of the regulations and statutes relating to county fairs should not apply to amusement parks. Mr. Bilby said they have heard from representatives of Kentucky Kingdom about their desire to revisit the statutes to determine whether there should be different standards for county fairs and permanent structures like Kentucky Kingdom; however, they have not submitted any recommended changes at this time. He said the Department would welcome the opportunity to meet with Representative Wayne and industry representatives. Representative Wayne said he appreciates Mr. Bilby’s openness and will contact Ed Hart, CEO of Kentucky Kingdom.
Representative Wayne commended KDA for its work on the PACE (Purchase of Agricultural Conservation Easements) program. He said the program has languished under previous agriculture commissioners but has already been monitored twice since Commissioner Quarles assumed office.
Representative Scott said she is very interested in the Hunger Initiative. She asked what type questions might be on the self-assessment for state agencies and what subsequent action might be taken. Mr. Bilby said the actual questions have not been determined, and they have not yet met with Senator Girdler. However, they would not want the questions to create a huge new paperwork assignment for state agencies. He believes they will probably want to develop a list of 6-10 comments and questions for the assessment and would welcome any suggestions from Representative Scott. Hopefully, state agencies would make an effort to benefit local shelters with the extra food. Due to the nature of the business, the greatest waste often happens after events at large hotels like the Galt House. State agencies are sometimes involved in planning dinners for those events. There is opportunity for state government to consider best practices and set an example for the private sector. Senator Bowen agreed that it is a timely and important topic. He encouraged the involvement and participation of the committee members.
Representative Bechler, who represents House District 4, expressed thanks for Commissioner Quarles’ recent visit to that western Kentucky district.
There were no further questions, and Senator Bowen thanked Mr. Bilby for speaking to the Committee.
Auditor of Public Accounts - Status Report and Legislative Priorities
Guest speakers were Mike Harmon, Auditor of Public Accounts, and Sara Beth Gregory, chief of staff.
Mr. Harmon discussed past enacted legislation in which his office was involved—Senate Bill 63, "Sexual Assault Forensic Evidence (SAFE) Act of 2016"; Senate Bill 168 (2016 RS), which clarified the Auditor’s role in audits of city governments; and House Bill 189 (2017 RS), a transparency bill relating to area development districts. Going forward into 2018, he said the Auditor’s Office wants to ensure that its budget is sufficient to continue their work and be able to address additional concerns and questions that may be brought to their attention. His office tries to serve as a resource for county officials and has been looking at ways to help county governments save money.
Auditor Harmon said he will be recommending legislation to close a loophole in certain statutes. Cities that file a uniform financial report (UFR) are allowed to receive state road and other funds even if they have not been audited. Without an audit, it is unclear whether data in a UFR is accurate. The Kentucky League of Cities agrees with the Auditor’s recommendation to tighten up the governing statute. Some of the cities currently being examined have not been audited since 2009, and plans are underway to do those audits.
Auditor Harmon said his office generally performs about 600 audits annually, including the confidential annual financial report (CAFR) and the statewide single audit of Kentucky. They audit county and circuit clerks, sheriffs, fiscal courts, PVAs and others. His office recently released an audit of the Jackson County fiscal court for both FY 2015 and FY 2016 that resulted in 40 findings in the first year and three additional the second year. That audit also resulted in a referral to law enforcement relating to theft by the former Jackson County treasurer. They also perform special exams. After examination of the University of Louisville and the University of Louisville foundation, they subsequently proceeded with the audit opened by the previous state auditor. There were a number of findings, including a major lack of transparency and questionable use and management of endowment funds. Auditor Harmon said the audit was done at minimal cost to the taxpayer, and he believes it provided a good roadmap for the university going forward.
The Auditor’s Office also proceeded with a financial statement audit of the Louisville Arena Authority at the request of the Capital Projects and Bond Oversight Committee. It found that 75 percent of the revenue for the Arena Authority came from taxpayers and only 25 percent from arena revenue. It also found that the Arena Authority received 3 percent of suite licensing fees, while 97 percent went to the University of Louisville athletic association. Auditor Harmon said he is pleased that after the audit the Arena Authority’s bond rating rose from junk to investment grade, which will help save millions of dollars for the Authority and the taxpayers. The Auditor’s Office also did a special exam of the Kentucky Horse Park, at the request of Senator Damon Thayer and the secretaries of the Tourism Cabinet and the Finance and Administration Cabinet.
Auditor Harmon said that some of their current work is focusing on the Fire Commission, the Administrative Office of the Courts, and two city audits, At the beginning of next year they will be assisting the Commercial Mobile Radio Service Emergency Telecommunications Board (CMRS) to complete its FY 2014-2017 audits. He said his office has no shortage of requests. Concluding his presentation, he stated that last year the Auditor’s Office received the highest possible rating from its peers in the National Association of State Auditors, Comptrollers and Treasurers.
Senator Bowen inquired about potential penalties that might result from audit findings other than loss of a job. Auditor Harmon said indictments and guilty pleas have resulted in some instances, but they are not an enforcement agency. The lion’s share of their work is to help counties—and to certain extent cities—to “stay within the guardrails.”
Representative Nemes asked about follow-up to the University of Louisville audit and whether the new university administration had cooperated with the Auditor’s Office. Auditor Harmon said there have been discussions, and he believes the university administrators have made their best effort to use the initial judgment filing as a roadmap to move forward. Ms. Gregory said their office receives a 60-day corrective action plan as a follow-up on special examinations but, without doing additional work, they cannot assure that the university has complied with all recommendations and potential corrective actions. Representative Nemes said he would hope that the Auditor’s Office might be able to follow up to determine whether proper steps have been taken by the new administration.
Representative Nemes inquired about the audit of the Administrative Office of the Courts. Ms. Gregory said it is ongoing. As with any audit, if they see evidence of “red flags” or areas of concern that need further review, they will broaden the audit’s scope as needed.
Representative Moffett said he is concerned about the fiscal health of some counties and cities. He asked whether the Auditor’s Office does any financial tracking that might predict potential bankruptcy of those entities. Auditor Harmon said that financial statement audits can sometimes indicate concerns. Counties are required to pay for their audits, and his office tries to work with counties that are struggling to make their payments. Ms. Gregory said that audits by their nature are retroactive, and it is not necessarily in their bailiwick to make projections. They work closely with the Department for Local Government (DLG), the regulatory oversight body for counties. DLG staff work with the county treasurers and fiscal courts on budgetary problems. When an audit reveals serious financial concerns, they are brought to the attention of DLG so that they can be addressed on an ongoing basis. In response to another question from Representative Moffett, Auditor Harmon discussed the budgetary and fee structure of the Auditor’s Office.
Representative Scott inquired about the Auditor’s involvement with the rape kit issue. Auditor Harmon said that when he served in the General Assembly he supported SJR 20 (2015 RS), which directed the Auditor of Public Accounts to report on the number of untested sexual assault examination kits in the possession of Kentucky law enforcement and prosecutorial agencies. He said that during his campaign for Auditor, his predecessor Adam Edelen asked him to continue work on that issue if he won the election, and he said he would. Along with legislators and stakeholders, the Auditor’s Office has continued to lend its support. Ms. Gregory said that Senator Harper Angel and Senator Whitney Westerfield deserve credit also for clearing the way on pertinent legislation.
Representative Wayne said that the audit of the Louisville Arena Authority, which oversees the financial process of the KFC Yum! Center, revealed that the Yum! Center does not follow the state procurement code and is not subject to the Executive Branch Ethics Code. A private accounting firm is auditing both the Yum! Center and the Kentucky Exposition Center, and The Yum! Center owes a considerable amount of money to the Exposition Center. He asked whether the Auditor’s Office plans to follow up with the legislature to remedy problems that were exposed. Ms. Gregory said the items mentioned were incorporated in the original budget bill that approved creation of the Louisville Arena Authority. For some reason, that budget language was not included in subsequent budget bills and is also not codified in statute. It is a “murky” legal question whether noncodified budget language continues to be binding on an entity in the future. The Auditor’s Office has pointed out that the transparency measures originally put in place may have been allowed to lapse. They felt it was important to bring this to the attention of policymakers because it could happen again in the future. Whether those provisions have legal effect would have to be determined by the courts. She said it would be the legislature’s prerogative to address this, but she does not know the appropriate window of time, in view of the refinancing that is currently underway. Representative Wayne asked whether the Auditor’s Office would be able to assist in developing appropriate corrective legislation. Ms. Gregory said she does not have all the answers but would be happy to engage in the conversation and contribute to the dialogue. Representative Wayne said that the increase in the bond rating was only a fraction and, according to the Wall Street report, was based on the enthusiasm of Cardinal fans. He commended Auditor Harmon for doing a fine job in the audit examination.
There were no more questions, and Senator Bowen thanked the speakers. He said the state’s constitutional officers do important work and that receiving their testimony is valuable to the Committee.
Other Business
Senator Bowen recognized three members of the committee who had requested the opportunity for public comment.
Senator Schroder said he has had a good working relationship and good legislative policy discussions with Secretary of State Grimes in the past, but he is disappointed that no one from her office is present. He said he has a question about the legislative agenda mentioned in her November 22 letter to the committee chairs. He feels that early voting and “boots to business” are appropriate issues for proposed legislation by a secretary of state, but he does not understand how legalization of medical marijuana is a relevant issue for Secretary Grimes’ office. He is not aware of any constitutional or statutory authority that would include that issue within her purview. He said it is unfortunate that no one from her office is present and that he would welcome any answers from the Secretary’s office. Senator Bowen said he is also concerned that the Secretary is not present to discuss her legislative agenda.
Representative Graham said he wants the meeting record to reflect that Secretary Grimes sent a letter explaining that she could not attend today’s meeting because of a scheduling conflict and that the letter also included information about her legislative agenda for 2018.
Representative Nemes expressed thanks that Secretary Grimes sent a letter. He said he hopes she can be invited to a meeting in January so that she can answer questions about her legislative agenda. When he asked whether Attorney General Beshear had been invited to today’s meeting, Senator Bowen said that he was not.
There being no further business, the meeting was adjourned at 2:30 p.m.