Capital Planning Advisory Board


Minutes of the<MeetNo1> 4th Meeting

of the 2013 Calendar


<MeetMDY1> September 5, 2013


Call to Order and Roll Call

The<MeetNo2> 4th meeting of the Capital Planning Advisory Board was held on<Day> Thursday,<MeetMDY2> September 5, 2013, at<MeetTime> 3:00 PM, in<Room> Room 169 of the Capitol Annex. Senator Stan Humphries, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Stan Humphries, Co-Chair; Representative Terry Mills, Co-Chair; Senator Whitney Westerfield, Representative Tom Riner, Charles Byers, Jane Driskell on behalf of Mary Lassiter, Laurie Dudgeon, Carole Henderson, John Hicks, Sherron Jackson, and Katie Shepherd.


Guests testifying before the board: Laurie Dudgeon, Director, Administrative Office of the Courts; Kristi Culpepper, Staff Administrator of the LRC Capital Projects and Bond Oversight Committee, Legislative Research Commission; Ron Carson, Senior Fellow and Legislative Liaison, Allen Lind, Vice President of Technology and eLearning, and Shaun McKiernan, Senior Associate, Council on Postsecondary Education; and James Fowler, State Chief Information Officer, Commonwealth Office of Technology.


LRC Staff: Shawn Bowen, Josh Nacey, and Jennifer Luttrell.


Approval of Minutes

A motion to approve the minutes of the July 17, 2013, meeting was made by Sherron Jackson, seconded by Senator Westerfield, and approved by voice vote.


Senator Humphries and Representative Mills requested that the board observe a moment of silence in honor of Laurel True. Mr. True was a long-standing member of the Capital Planning Advisory Board, serving from 1990 until his term expired in April 2011.


Review of Agency Capital Plans

Ms. Dudgeon testified about the state agency capital plan for the Court of Justice. She said two new judicial centers are planned in the 2014-2016 biennium for Nicholas and Henry counties for $10,868,000 and $12,750,000, respectively. In the 2016-2018 biennium, new court facilities are planned for Bath and Lee counties, $13,579,000 and $11,079,000; and in 2018-2020, new facilities are planned for Fulton and Owsley counties, $11,876,000 for both.


Ms. Dudgeon said in May 2012, Chief Justice Minton signed new Administrative Procedures that govern the construction of judicial projects. Prior to construction, local project development boards now perform a feasibility study to determine if the county needs a new court facility, or if the existing court facility could be renovated.


Ms. Dudgeon said the judicial centers were last assessed in 2011 by the Administrative Office of the Courts (AOC). Those assessments were done on 48 courthouses statewide that have not had any major renovations since 1996.


Relative to comments from Senator Humphries regarding space occupancy in the new judicial centers, Ms. Dudgeon said newly authorized court facilities will include space to house agencies such as the County Attorney and the Commonwealth Attorney. The new court facilities will also provide space for staff from the Sheriff’s Office.


Senator Humphries asked how AOC manages the construction of new court facilities for counties that have historic courthouses. Ms. Dudgeon said the new Administrative Procedures would allow the architect to do a feasibility study and determine if the facility can be renovated, rather than build a new facility.


Staff Report on Kentucky’s Bonded Indebtedness

Ms. Culpepper discussed a report on the state’s debt position as part of the capital planning process. In summary, the report noted that Kentucky’s near-term financial picture has improved since the recession. The state has experienced three years of revenue growth, and the structural imbalance in the General Fund budget has been significantly reduced. Kentucky has been penalized by the rating agencies, however, for a number of financial practices. The state has a high debt burden and unfunded pension liabilities relative to other states using various debt indicators. Also, while the state has begun to rebuild reserves that were depleted during the recent economic downturn, the current balance in the Budget Reserve Trust Fund is well below the goal established in statute and the levels that market participants expect.


Relative to a question from Senator Westerfield, Ms. Culpepper said there are three different agencies that provide bond ratings to the state: Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings.


Relative to a question from Senator Humphries, Ms. Culpepper said the state has experienced historically record low interest rates in the bond market, which translates into lower borrowing costs for the state. As those rates climb, the amount of interest the state must pay increases, it becomes more expensive to borrow money, and the state’s debt capacity decreases. Kentucky has very little flexibility to deal with rising interest rates in the bond market due to the significant amount of debt the state has issued over the past few biennia. The current budget issues a low amount of debt, however, four previous budgets issued close to $2 billion in debt. The state is now close to the 6 percent threshold with the amount of debt that has been authorized to date at current market rates.


Council on Postsecondary Education Project Review

Mr. Carson, Mr. Lind, and Mr. McKiernan gave an overview of the Council on Postsecondary Education’s (CPE) report of postsecondary education projects to be financed with General Funds. The projects were grouped in three categories: asset preservation and renovation (94 projects), construction of new/expanded education and general research facilities (41 projects), and information technology initiatives (24 projects).


CPE has developed an approach and model to address the capital needs of postsecondary institutions. To fund this initiative, in its 2014-16 budget request due November 2013, CPE intends to request funding in the amount of $600 million for three biennia, or $1.8 billion in total. The model would recommend that a pool of funds be established and administered by CPE, and funding be done in terms of an allocation of dollars to each postsecondary institution, rather than on a per-project basis. Postsecondary institutions will select and rank their projects based on three priority areas: asset preservation, construction of new/expanded education and general research facilities, and information technology initiatives. Each institution must submit a project list to CPE in order to be eligible to receive an allocation of funds, and the institutions must agree to meet a certain balance of the expenditures on asset preservation.


This multi-biennia funding approach would provide a balanced investment as recommended by the VFA Study; allow more flexibility for institutions to implement capital projects; allow campuses to better plan for construction; and provide for stronger protection of state-owned assets.


Mr. Lind said the information technology projects selected by CPE are network-oriented projects. Network demands are increasing due to the increased number of devices students and classrooms are providing, and one of the best uses for scarce capital dollars, is the investment in IT networks for education.


Representative Mills said he supported CPE’s report and appreciated that CPE is striving to balance the need for new projects versus preserving existing state-owned facilities.


Mr. Jackson asked why postsecondary IT projects are not reviewed by the Commonwealth Office of Technology (COT) in its report to the board. Mr. Lind said the postsecondary IT projects’ nature is specialized and distinct, and the projects require specialized review and evaluation by CPE. Additionally, from a budgeting standpoint, CPE is responsible for submitting the capital and operational budgets of those institutions.


Relative to a question from Mr. Jackson regarding the use of the postsecondary IT pool, Mr. Lind said there has not been any capital IT money for a number of years. In 2006, there was a joint budget request from K-12 and postsecondary education, and money was provided. Technology deteriorates much more rapidly than buildings, and the current status of the state’s postsecondary IT infrastructure is not what it should be to deliver quality education. The technology projects include fiber optic cable and network-oriented projects. These assets will last 20 years or more, and are normally paid for with bond funds.


Senator Humphries commented that it is not always cost-effective to rehab an existing facility. Some of the older postsecondary facilities are used for research and science. New modern facilities may bring research opportunities and additional dollars to the state universities.


COT Information Technology Project Recommendations

James Fowler, State Chief Information Officer, discussed COT’s report on information technology projects. COT recommended 40 state agency IT projects for funding in the 2014-2016 Executive Budget. The projects had a value of $267.5 million from all funding sources. Ten General Fund projects, valued at $33.6 million, were identified as “High Value” projects.


The Chief Information Officer also recommended seven additional IT projects that address priority areas throughout state government, and are believed to have the potential for maximizing agency business value with properly applied risk management. The projects utilize $52 million General Funds and $56 million federal funds.


Relative to a question from Mr. Hicks regarding the Council on Postsecondary Education Expand Kentucky Regional Optical Network (KyRON) Infrastructure project, Mr. Fowler said this initiative complements the CPE initiatives discussed earlier. The project expands the infrastructure of KyRON, a fiber network of dedicated optical wavelengths between major concentration points. KyRON will connect community anchor institutions across the state to the national Internet2 100Gbps backbone, and to community anchor institutions in other states. If Kentucky does not have the availability of a high-speed network, the state will have a hard time attracting and retaining new business. As the state begins to offer more government services online, the state simultaneously begins to disenfranchise communities where broadband access is not available. The state needs to have broadband capability that will last the next 25 years.


Representative Mills asked what the expected useful life of the Kentucky State Police Replace AFIS Livescan Equipment project was. Mr. Fowler responded that he did not know, but he would find out.


Mr. Buyers asked if the federal dollars associated with the Cabinet for Health and Family Services Child Support System project (KASES III) are subject to expiration if state funding is not received. Mr. Fowler responded that he did not know, but he would find out.


Statewide Plan Policy and Project Recommendations

It is the practice of the board to include both policy and project recommendations in the statewide capital plan. Senator Humphries said that at the board’s July meeting, Mr. Hicks suggested that three policy recommendations included in the 2012-2018 Statewide Capital Improvements Plan be updated and included in the current plan. Those recommendations include funding for the Budget Reserve Trust Fund that represents 5 percent of General Fund revenues; adequate funding for state agency maintenance pools; and endorsement of CPE’s multi-biennia approach for financing capital needs of the postsecondary institutions. Copies of the recommendations were included in members’ binders.


Senator Humphries said there was one new policy recommendation submitted by Representative Mills relative to funding for the state’s information technology projects. The recommendation urges the Governor and the General Assembly to provide adequate and equitable funding in the 2014-2016 Executive Budget for agency information technology projects.


Representative Mills said the state’s information technology systems are inadequate, and increased funding for the backlog of IT projects will make it possible for the Commonwealth to more efficiently and effectively deliver services to citizens. Additionally, addressing the state’s IT needs on an ongoing basis, rather than allowing systems to become completely outdated, will reduce or eliminate the need for large dollar projects that require a major infusion of cash.


Senator Humphries said the voting sheets will be e-mailed to members after the meeting. Responses are due September 19, and will be included in the September 24 meeting materials.


With there being no further business, Representative Mills made a motion to adjourn the meeting. The motion was seconded, and the meeting adjourned at 5:00 PM.