The first meeting of the Interim Joint Committee on Appropriations and Revenue was held Monday, July 24, 2000, convening at 1:00 p.m., in Room 131 of the Capitol Annex. Senator Richie Sanders, Jr., Presiding Co-Chair, called the meeting to order, and the secretary called the roll.
Members: Senator Richie Sanders, Jr., Chair; Representative Harry Moberly, Jr., Co-Chair; Senators Brett Guthrie, Bob Jackson, Bob Leeper, Vernie McGaha, Joey Pendleton, Larry Saunders, Tim Shaughnessy, Robert Stivers, II, Jack Westwood, and Ed Worley; and Representatives Royce Adams, Rocky Adkins, Scott Alexander, Joe Barrows, Dwight Butler, Larry Clark, Jack Coleman, Jesse Crenshaw, Bob Damron, Bob DeWeese, Bob Heleringer, Susan Johns, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Fred Nesler, Stephen Nunn, Charles Siler, John Will Stacy, Mark Treesh, Jim Wayne, Rob Wilkey, and Pete Worthington.
Guests Appearing Before the Committee: Dr. Jim Ramsey, State Budget Director, Governor's Office for Policy and Management; Secretary John P. McCarty, Finance and Administration Cabinet; Dr. Merl Hackbart, Senior Policy Advisor to State Budget Director; Mike Haydon, Secretary, Revenue Cabinet; and William H. Hintze, Jr., Deputy Director, Governor's Office for Policy and Management.
Guests: Rick Peck, CFC; L. D. Cobb, Cobb & Associates; Randy Smith, Racing; Jerry Frantz, Economic Development; Bert May, KLC; Pat Arnold, Unified Prosecutorial System; and Steve Wilborn.
LRC Staff: Terry K. Jones, Louis Pierce, and Kathy King.
Chairman Sanders opened the meeting by recognizing Susan Dance, Secretary for the Budget Review Staff, upon her retirement.
Dr. Jim Ramsey, Secretary John McCarty, and Dr. Merl Hackbart, appeared before the committee to update members on revenue receipts.
Dr. Ramsey said that actual General Fund revenue receipts for FY 2000 are $6,478.4 million, an increase of 4.5 percent over FY 1999. In January 1998, the Consensus Forecasting Group projected that General Fund revenue receipts for FY 2000 would be $6,469.7 million. Their estimate was within $8.7 million, or less than two-tenths of one percent from reaching that target. Dr. Ramsey said that the forecast made by the Consensus Forecasting Group is a wonderful accomplishment since it is done 30 months in advance. Members of the Consensus Forecasting Group are Secretary John McCarty, Chair; Mark Berger and Dr. Merl Hackbart, with the University of Kentucky; Terry Jones, representing the Legislative Research Commission; Dr. Larry Lynch, with Transylvania University and consultant for the Appropriations and Revenue Committee; Jim McCabe, with the University of Louisville; Frank O'Connor, Eastern Kentucky University, and Jim Street, Independent Consultant.
Secretary McCarty said that the sales and use tax and the individual income tax are Kentucky's most important revenue sources and it is extremely important that these two taxes are successful. The sales and use tax totaled $2,171.4 million for a growth of 4.1 percent, $16 million more than projected. Individual income taxes totaled $2,701.6 million, an increase of 6.7 percent, for a total growth of $169.6 million from last year.
The corporation income tax and the coal severance tax have not shown any real growth throughout the 1990s and continue to decline. Corporation income tax receipts are at $306.4 million, down 1.8 percent, and coal severance tax receipts, which totaled $145.1 million, are down 6.0 percent, $22 million less than previously estimated. Secretary McCarty said that the coal industry is continuing to deal with a decline in price and volume of tonnage because of competition from western low sulfur coal.
Property tax receipts totaled $387.3 million and experienced a 4.6 percent growth rate, $16.9 million over FY 1999. The lottery rose slightly, up 1.6 percent or $2.5 million, and the "other" category registered a rise of 3.5 percent, or $20.6 million.
Secretary McCarty said that total General Fund revenues are an additional $280 million more than FY 1999, and the growth rate is 4.5 percent. The increase is mainly due to the individual income tax and the sales and use tax.
Road Fund revenues for FY 2000 are $1,090.8 million, $34 million over FY 1999, reflecting a growth rate of 3.2 percent. The major taxes of the Road Fund experienced varying growth rates. Motor fuels tax receipts declined by $3.9 million, or 0.9 percent. The motor vehicle usage tax rose by $33.8 million for a growth of 9.0 percent. This tax is collected on the sale of new cars and new car sales remain strong in Kentucky. Investment income fell by $6.2 million because the cabinet is spending down some of those funds.
Dr. Hackbart said that U.S. economy has remained strong. The U.S. real GDP was up 4.1 percent in 1999, and it is forecasted to hit 4.9 percent in 2000. Consumer confidence is at an all time high, the unemployment rate is 4.0 percent, interest rates are still relatively low, the federal budget is in surplus, and while gas prices did go up, they are beginning to slide back down. Forecasters are concerned, however, about the stock market, inflation, and debt. Inflation has been the focus of federal policy over the last several years due to an acceleration in employment costs for both wages and fringe benefits. Energy prices are also volatile. On the stock market front, consumer confidence is high because of the wealth from the market, but it is believed that equity is valued too high for technology stocks. Debt is another threat. The ratio of debt to book value is rising for corporations, and household debt exceeds after-tax income.
Dr. Hackbart said that Kentucky is going into its tenth year of sustaining good economic growth, but it does appear to be slowing down. The growth rate for FY 2000 is 3.5 percent. Kentucky's unemployment rate is the same as the national rate at 4.0 percent. Kentucky also continues to experience gains in income and employment, and industrial production is moving steadily. Transportation equipment and air transportation employment have also continued to increase. The sales and use tax did grow but could be impacted with the shift from consumer goods to consumer services. The individual income tax is also quite volatile. These two taxes are extremely important to Kentucky. Other problems that could cloud the economic outlook are growth in Medicaid and prison housing.
Dr. Hackbart said that state revenues have been very strong for most states across the nation for the last decade. As a result, many states have increased spending and cut taxes, which puts these states at a potential risk for the future. States also need to be concerned about demographics as the population ages.
Representative Barrows asked if the Revenue Cabinet returned income tax refunds on time. Dr. Ramsey said yes.
Representative Barrows asked how the loss of the tobacco industry will impact Kentucky's economy. Dr. Hackbart said that loss of the tobacco industry is a major concern and forecasters will be devoting their attention to this issue. It will also be necessary to consider federal changes as well as the recent Florida tobacco settlement.
Senator Guthrie asked if there are any forecasting benchmarks to help lawmakers keep abreast of Kentucky's economic situation. Secretary McCarty said the major economic drivers that need to be watched are employment rates, types of employment, and personal income.
Representative Damron said that the final conference report increased Kentucky's bond indebtedness. He asked how much Kentucky allots toward debt service and if the bond rating agencies have changed Kentucky's bond rating status. Dr. Ramsey said that Kentucky has allotted six percent of the General Fund towards debt service. He said there is not a specific report from the bond rating agencies on Kentucky's bond indetedness but that he and other Kentucky officials will be meeting with the rating agencies in New York in August.
Representative Damron asked how Kentucky compares with other states on bond indebtedness. Dr. Ramsey said that Kentucky has a "Double A Plus" ranking. There are seven or eight states with a "Triple" rating. Tennessee is a triple rated state but is losing that status.
Representative Damron commented that six percent is a fairly substantial increase marked for debt service. He said that programs can be cut back but there are no options when it comes to debt service.
Senator Stivers asked when Kentucky will know the impact of legislation passed in the 2000 session dealing with tax credits for power plants and thin seam coal mining. Dr. Ramsey said that the impact on Kentucky for the tax credit for power plants will be over the long-term. The thin seam mining tax credit will begin a little over a year from now in preparation for the 2002 budget. He said that he would not expect anything before that time.
Senator Stivers said that just prior to the legislative session, members of the General Assembly were told that revenues were short and did not meet the estimates, and that the budget would have to be trimmed. Now, members are being told that revenue is better than forecasted. He asked how the numbers could change so easily. Dr. Ramsey said that the budget is based on a forecast made by the Consensus Forecasting Group 30 months in advance. Estimates were revised in May 1998 and again in October 1999, but there are month-to-month fluctuations of realized revenues to reckon with when estimates are made. The Consensus Forecasting Group deals on a full fiscal year basis. He said that being as close as one percent of reaching that estimate is pretty significant.
Representative Coleman asked if the cabinet has done anything about purchases made over the internet. Mike Haydon, Secretary of the Revenue Cabinet, said that internet purchases are very difficult to track but the cabinet is working on voluntary compliance.
Representative DeWeese asked why the corporation tax continues to decline every year. He asked if fewer corporations are paying taxes in Kentucky. He also asked how Kentucky has been impacted by tax incentives given to corporations to locate to Kentucky. Dr. Ramsey said that some known factors affecting the corporate income tax are Kentucky's tax structure and the Nexus issue. The Revenue Cabinet is currently looking at the corporate income tax and the corporate license tax together as a business tax rather than on an individual basis. A report on these findings should be available over the next several months. Dr. Ramsey said that Dr. Larry Lynch, a member of the Consensus Forecasting Group and Consulting Economist for the Appropriations and Revenue Committee, has done a great deal of research on the corporation tax and could address these issues in more detail.
Senator Sanders asked when the Consensus Forecasting Group will meet to revise or increase the forecast for the next year since Kentucky's economy continues to remain stable. Secretary McCarty said that he schedules the meetings for the Consensus Forecasting Group and Dr. Jim Ramsey and his staff provide information to the Group to evaluate and make their recommendations. Early in the year last year and the previous year, or the first few months of the fiscal year, Kentucky did not have growth rates that looked sustainable to reach the Consensus Forecasting estimate. On the forecasting side and the reporting side, month-to-month information is not valid. For example, forecasters must take into account when tax payment dates fall in a given month versus the last month and the same month the previous year, and the number of working days in a given month versus the same month the previous year. The forecast is based on a broader period of time and growth rates would have to be substantially above what was projected before any revisions would be made. Secretary McCarty said that being within one and one-half percent plus or minus is on the mark from a projection perspective. He said that the Consensus Forecasting Group does tend to be conservative but it is done consciously. Forecasters are sensitive to the fact that when dollar amounts are put on paper, they become dollars that are going to be committed and appropriated and it is important to have enough for the appropriations.
William J. Hintze presented an update on community development projects. Mr. Hintze said there are 718 enumerated community development projects in the budget going to communities throughout the state for a variety of needs. The projects are predominantly funded with $272 million from state bonds and a few million dollars in cash funded projects. All of the projects were authorized by the General Assembly in the regular budget. The projects authorized two years ago were in the surplus expenditure plan and were contingent upon finishing out the fiscal year with the May 1998 revised estimate which was the trigger point for being able to move forward with those projects.
The cabinet is using the same approach to implement these community development projects as was done two years ago. It is currently assembling brief, narrative descriptions of what each project entails, what the project would accomplish, the public purpose of the project, what communities would be affected, and what cost breakdowns are involved. Through the Governor's Office of Constituent Services, many members of the legislature have been contacted about individual projects, local officials are being contacted, and legislative staff is being contacted. The cabinet must determine if the project is a local grant, which almost all of them are, or if it is a project that is by and for the use of a state agency, or a more conventional state construction project. There are several dozen that fit that characterization, principally in the Parks and Tourism area where the Parks Department is the implementing agent and not the local community.
All of the projects were initially assigned to the Finance and Administration Cabinet but budget language allows the Secretary of Finance to reassign the projects to a variety of other agencies where there might be some level of expertise more suited to an individual projects, or to link a new project with an ongoing older projects that an agency is already administering. Mr. Hintze said that this approach streamlines the process and it evens out the workload. The projects have been parceled out among seven key cabinets as well as some other cabinets which have just one or two projects. The agency who has the assigned project is the contact point for accessing the funds implementing the other steps that are needed prior to disbursement of the funds that were authorized.
An essential piece of the implementation process is to execute a Memorandum of Understanding between the Commonwealth, or the responsible agency to which a project has been assigned, and the recipient local government. In some instances, the end recipient may be a private, non profit organization. The cabinet has been advised by its attorneys to use a governmental entity as the conduit toward providing the funds if there is an ultimate third-party recipient. That governmental entity is typically a county, but depending on the character of the individual project, it may be a city, or in some cases, it may be a joint agreement. Funds must be spent for public purposes to comply with Kentucky's Constitutional strictures. Once the MOU is executed, it must be reviewed by the Government Contract Review Committee prior to the disbursement of any funds. The committee meets monthly and takes up MOUs as soon as they are provided to them in accordance with its schedule. Some projects require that the funds be disbursed in a lump sum, or it may be a full cash draw initially, or it may be a project where the money is spent over a period of months, or even years. In some cases, even a period that may span more than one biennium. A cash draw schedule must be negotiated with the assigned agency as part of the MOU process. If it is a sum of money of up to $200,000, the cabinet can accommodate a cash draw in a lump sum for a typical project if the money is going to be put to work immediately. If it is a disbursement where funds are authorized but they won't actually be used for a period of time, such as doing the major design, or having to raise matching funds, the funds will be disbursed on an as needed basis over a period of months, or even years.
Mr. Hintze said that the bonds cannot be issued until January 1, 2001. However, the General Assembly did give the cabinet the authority to do some interim financing when it is needed to achieve a project goal.
Next, Mr. Hintze explained a budget interpretation relating to court security and Sheriff's compensation. The interpretation was requested by the Administrative Office of the Courts (AOC) about specific language references in House Bill 502 and how circuit clerks should handle the $7.00 increase in court costs in both circuit and district court. Mr. Hintze said that the interpretation concluded that the $7.00 increase should be used by sheriffs through the County Costs section of the Finance and Administration Cabinet to reimburse for bailiff's expenses, but that it should not be provided for in duplicate fashion. He said there were two major parallel initiatives to increase funding for sheriff's offices for court security during the 2000 Regular Session. Senate Bill 326 was addressed and passed by the General Assembly prior to enactment of the budget bill, House Bill 502. Senate Bill 326 increased criminal court costs in both circuit and district court by $7.00 for the use of sheriff's offices for the provision of court security. House Bill 502 also included a substantial increase in county costs for the purpose of supporting enhanced court security rendered by sheriff's offices. These funds are provided in House Bill 502 to pay the $8.00 hourly fee for court security upon proper certification of court security needs through AOC. Sheriff's offices currently receive $5.00 from the court costs that are collected and that money is provided to the sheriff for the purpose of court security. Nothing that was done by the General Assembly during the 2000 Regular Session alters in any way the treatment of the existing $5.00 fee, nor does House Bill 502 alter the treatment of the $5.00 fee. House Bill 502 included approximately $4 million per year for increased court security costs. The full amount associated with the $7.00 increased fee is approximately $4 million per year, as verified by LRC fiscal note and AOC analysis, and that was the dollar amount used in balancing the budget. During the free conference committee on House Bill 502, it was determined that there was a duplication of effort. The Free Conference Committee, and ultimately the entire General Assembly adopted language stating, "Notwithstanding KRS 23A.205 as amended by Senate Bill 326 of the 2000 Regular Session of the General Assembly, KRS 64.092, or any other statute to the contrary, the Circuit Clerk shall monthly pay $7.00 from each court cost collected pursuant to KRS 23A.205(1) to the Finance and Administration Cabinet for the purpose of compensating sheriffs on a statewide basis for attending court and providing security services in compliance with KRS 64.092." Mr. Hintze said the budget bill can only suspend a law and cannot repeal or amend a law, so the purpose of the suspension is to provide approximately $4 million per year to the Finance and Administration Cabinet to support increased court security costs incurred by sheriff's offices from the $8.00 per hour bailiff charge paid by the County Costs appropriation unit. The source of the $4 million per year is from the additional $7.00 levied by Senate Bill 326 and collected by Court Clerks as part of court costs.
Representative Lee asked how the mechanism will work for those who have new Justice Centers where sheriffs have been asked to take on an increased burden by providing security with the new bailiffs and for the security in the court rooms. He said that sheriffs seem to have the understanding that that money would be coming back directly to them and that they would hire the bailiffs at whatever the cost is going to be to hire the bailiff and to keep them on the job and to provide them with training. He asked how sheriffs access the additional $7.00 for those costs. Mr. Hintze said it will not be an additional $7.00. It will be the additional costs of the bailiffs at the $8.00 per hour rate, and the money is accessed the same by submitting a certification of need to AOC. Upon approval by AOC, the certification is sent to the Finance and Administration Cabinet for payment. Representative Lee said that he would like to have further explanation.
Representative Royce Adams, Co-chair of the Budget Review Subcommittee on General Government, reported for the subcommittee which did not meet. Representative Adams said that appropriation increases #806, #808, #773, #578, #116, #644, and #700 are consistent with the interim appropriation revision authority granted under KRS 48.630. Representative Adams moved for approval of the appropriation increases. The motion was seconded by Representative Siler, and adopted by voice vote.
Representative Joe Barrows reported for the Budget Review Subcommittee on Education. Representative Barrows said the subcommittee did not meet but that appropriation increase #158 is consistent with the interim appropriation revision authority granted under KRS 48.630. Representative Barrows moved for approval of the appropriation increase. The motion was seconded by Representative Treesh, and adopted by voice vote.
Representative Jimmie Lee, Co-Chair of the Subcommittee on Human Resources, reported for the subcommittee which did not meet. Representative Lee said that appropriation increases #746 and #749 are consistent with the interim appropriation revision authority granted under KRS 48.630. Representative Lee moved for approval of the appropriation increases. The motion was seconded by Representative Crenshaw, and adopted by voice vote.
Senator Vernie McGaha, Co-Chair of the Budget Review Subcommittee on Economic Development, Natural Resources and Tourism, reported for the subcommittee which did not meet. Senator McGaha said that appropriation increase #778 is consistent with the interim appropriation revision authority granted under KRS 48.630. Senator McGaha moved for approval of the appropriation increase. The motion was seconded by Representative Barrows, and adopted by voice vote.
Senator Bob Leeper, Co-chair of the Budget Review Subcommittee on Transportation, reported for the subcommittee which did not meet. Senator Leeper said that appropriation increase #739 is consistent with the interim appropriation revision authority granted under KRS 48.630. Senator Leeper moved for approval of the appropriation increase. The motion was seconded by Senator Guthrie, and adopted by voice vote.
There being no further business, the meeting was adjourned at 2:50 p.m.