Call to Order and Roll Call
The3rd meeting of the Capital Planning Advisory Board was held on Friday, September 21, 2012, at 10:00 AM, on the campus of Bluegrass Community and Technical College (Leestown), in Lexington, Kentucky. Senator Jack Westwood, Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Jack Westwood, Co-Chair; Representative Melvin B. Henley, Co-Chair; Representative Ron Crimm; Charles Byers, John Hicks, Bill Hintze, Sherron Jackson, Mary Lassiter, James W. Link, Mark Overstreet, and Carol Palmore.
Guests testifying before the Board: Dr. Augusta Julian, President, Bluegrass Community and Technical College; Tom Denton, Vice President of Facilities and Administrative Services, Kim Oatman, Chief Facilities Officer, and Dr. Brian Van Horn, Murray State University; Bob Wiseman, Vice President for Facilities Management, Angela Martin, Vice President for Financial Operations and Treasurer, and Steve Byers, Director of Government Relations, University of Kentucky.
Welcome and Remarks
Senator Westwood thanked Dr. Julian and her staff for hosting the Capital Planning Advisory Board’s last meeting of the year. Dr. Julian briefed members and guests about the history of Bluegrass Community and Technical College (BCTC) and future projects the college is planning.
BCTC is one of 16 two-year colleges in the Kentucky Community and Technical College System (KCTCS). The college, currently operating in six locations in central Kentucky, is constructing a new campus on the site of Eastern State Hospital in Lexington. The Classroom Building - Lexington Community College - Planning and Design, was authorized in the 2000-2002 Executive Budget with $1 million restricted funds. The project was later transferred from Lexington Community College to KCTCS and redesigned to be the first building on the Newtown Campus. Subsequent budget appropriations included $35,741,000 bond funds and restricted fund authorizations totaling $17,800,000 for three related projects. No restricted funds for the related projects have been identified at this time.
The scope of work for Phase I includes construction of an approximately 90,000-square-foot facility that will house labs and faculty/staff offices, general education classrooms and other auxiliary spaces. Additional work will include renovation of the historic Administration and Laundry buildings, demolition of the remaining structures and cemetery improvements. The new facility is scheduled to be substantially complete by February 2013, and classes are scheduled to begin in August 2013.
The funding request of $45 million for half of Phase Two for BCTC’s Newtown Campus was not included in the 2012-14 biennial budget. Phase Two will include construction of three buildings at an estimated cost of approximately $100 million. The buildings will create new facilities for nursing and allied health, science, and mathematics. Additional renovations are planned to areas such as the Administration Building’s fourth floor ballroom to provide space for community activities.
In response to a question from Mr. Hintze, Dr. Julian stated that Eastern State Hospital should be completely off the Newtown Campus by April 15, 2013. [Eastern State Hospital will move to a new facility located on the Coldstream Campus of the University of Kentucky.]
In response to a question from Senator Westwood regarding the feasibility of demolishing versus constructing new buildings, Dr. Julian replied that BCTC and its community partners prepared an analysis two years ago in regards to which buildings at the new site should remain and which buildings should be demolished. To preserve the historic nature of the campus, it was decided the Administration and Laundry buildings should be renovated for adaptive use. The cemetery will also remain on the site. Other buildings considered not functional will be demolished.
In response to a question from Ms. Palmore, Dr. Julian stated that the BCTC Film Studies Program started five years ago and is a one-semester program. The program promotes awareness of America's place in the world through the viewing and discussion of films that represent unique perspectives from around the world. BCTC recently obtained approval to offer an Associate of Fine Arts degree, which will expand the program in an effort to bring film companies to Kentucky.
Resolutions for Retiring Board Members
Mr. Hicks and Mr. Hintze read resolutions honoring the Board’s two Co-Chairs, Representative Melvin Henley and Senator Jack Westwood. Both members will retire from the General Assembly at the end of the year. The resolutions were adopted by voice vote.
Approval of Minutes
A motion to approve the minutes of the May 22 and July 20, 2012 meetings was made by Representative Henley, seconded by Mr. Jackson, and approved by voice vote.
Amendment to the 2014-2020 Capital Planning Instructions
Shawn Bowen, Committee Staff Administrator for the Board, discussed an amendment to the 2014-2020 Capital Planning Instructions. This change applies to capital planning system online forms for proposed construction projects and equipment purchases. Agencies will now be required to estimate a proposed project’s impact on the agency operating budget for a five-year period rather than a two-year period. The agency capital planning instructions and Form SYP-P2 will be amended to reflect this change. The capital planning instructions were approved by the Board at its May 22, 2012, meeting and no further action was required. This change was requested by staff in the Governor’s Office for Policy Management to preserve the uniformity between the Kentucky Budgeting System and the Capital Planning System.
The Use of Third-Party Financing for Postsecondary Construction Projects
Murray State University – Construct Paducah Regional Campus Facility
Mr. Denton discussed the Construct Paducah Regional Campus Facility project. The 2010 Extraordinary Session HB 1 (2010-12 Budget) authorized $17,646,000 in other funds (third-party financing) for this project. This project involves the design and construction of a new regional campus facility on land at the intersection of I-24 and US 62 in Paducah. This property is also known as the Barkley Woods tract. It was purchased in late 2008 at the recommendation of a task force established to evaluate alternatives for establishing an extended campus in the area. The new facility will provide 50,000-square-feet of classroom space, administrative office space and computer laboratories, and will support programs offered through the Commonwealth Virtual University. The anticipated completion date is December 2013.
A Memorandum of Agreement (MOA) was executed by the University and the McCracken County Fiscal Court, the City of Paducah, and the Greater Paducah Economic Development Council. Under the MOA, the University will design, construct and assume responsibility for operation of the building and grounds, and the County will issue $10 million of general obligation bonds to finance the project. The projected annual debt service is $790,000, of which the City and the County will be responsible for $500,000, and the University will pay $290,000.
In response to a question from Mr. Hicks, Mr. Denton replied that the City of Paducah and McCracken County, in their past budgets, ensured funds were available for the project.
In response to a question from Mr. Hicks, Dr. Van Horn stated that Western Kentucky Community and Technical College (WKCTC) does not have a contractual role in this new facility, but because the purchased land is across the street from WKCTC, degree programs will not be duplicated at the new facility.
In response to a question from Mr. Jackson regarding the advantages of using third-party financing as opposed to the traditional state construction process, Mr. Denton said there are two benefits to financing construction projects in this manner. Projects are constructed at a faster rate and the University will pay less debt service over a 20-year period.
In response to a question from Ms. Palmore, Dr. Van Horn replied that the Paducah site will offer online degree programs will be offered in the fields of Nursing, Business Administration, Social Work, Education, and Computer Information Systems.
In response to a question from Representative Simpson, Mr. Denton said this is the first time the University has used third-party financing. Mr. Hicks added that this project is unique because third-party financing is being used to construct an academic facility rather than a sports facility.
Representative Henley said even though the universities are using private funds, the state is still responsible for the maintenance of these facilities, and this should not be the case. Senator Westwood added that another concern of the General Assembly is whether agency bonds affect the overall bond rating for the state.
University of Kentucky – Construct New Student Housing
Mr. Wiseman and Ms. Martin discussed the University’s plans to construct new student housing with third-party financing. The University of Kentucky (UK) has entered into a long-term ground lease with Education Realty Trust (EdR) to construct, expand and potentially manage student housing. The lease is for 2.167 acres located at the intersection of Huguelet Drive and University Drive.
The first project under the lease arrangement, entitled Lease-Purchase New Housing, was authorized in the 2010-2012 Executive Budget ($52.5 million, Other – Third Party Financing). The project includes construction of two residence hall facilities on Haggin Field near the William T. Young Library. The buildings comprise approximately 313,000-gross-square-feet and will contain classrooms, faculty offices and 601 undergraduate beds. The total cost of the project is estimated at $25.8 million, and construction should be complete by fall 2013.
EdR will provide 100 percent equity investment in UK’s student housing, and no state funding is involved in the project. Under the terms of the EdR/UK management agreement, EdR will receive a four percent management fee based on gross revenues derived from the annual revenue from the premises (student rents). The fee will be reduced to two percent upon execution of the contract to construct 2,500 beds or to manage student housing. EdR will also receive a minimum nine percent internal rate of return. Beginning at the rent commencement date and continuing throughout the term of the lease, EdR shall pay UK base rent in an amount equal to 10 percent of EdR’s total annual revenue from the premises. The base rent will increase by 2 points to 12 percent upon execution of the contract for EdR to construct at least 2,500 beds or to manage student housing. The University will receive 25 percent of net income in each year in which EdR achieves a nine percent internal rate of return. The initial lease term is 50 years, and contains the option to renew for successive periods of 10 and 15 years.
In response to questions from Representative Henley, Ms. Martin said the cost of capital construction is based on timing. EdR can construct the project faster than UK, and while it may not be the least expensive method of construction, the project is completed in a more efficient manner.
In response to questions from Representative Simpson, Ms. Martin replied that the management agreement with EdR stipulates that housing rental rates will start slightly above the University’s premium housing rate. The rates cannot be increased more than three percent for the next two years, and then to a maximum of four percent, or the two-year rolling average increase in the consumer price index. The University must approve any proposed rental rate changes. In addition, EdR must set aside $260 per bed annually to improve or replace these facilities. If EdR defaults on one building, the University may claim default on all of the facilities. The University will then have the option to cancel the agreement in total and, if there is a financial loss, the University can apply that loss against the purchase price of the facilities.
In response to a question from Ms. Palmore, Ms. Martin replied that the private contractor will pay prevailing wage.
In response to a question from Mr. Hintze, Ms. Martin replied that four dormitories constructed in 2006 still have debt associated with them. This debt cannot be refinanced until 2015.
In response to a question from Representative Henley, Ms. Martin said the variables included in the calculation of the Consumer Price Index Indicator included the cost of energy, labor, and supplies.
In response to a question from Senator Westwood, Ms. Martin stated there are also other buildings on campus, Page, Keeneland and the Towers, which have bonds issued against them.
Senator Westwood stated that the Board will not meet until the 2013 General Assembly adjourns. At that time, the focus will be the preparation of the 2014-2020 Six-Year Capital Improvements Plan. With there being no further business, Senator Westwood made a motion to adjourn the meeting. The motion was seconded by Representative Henley, and the meeting adjourned at 12:28 P.M.