Capital Projects and Bond Oversight Committee




<MeetMDY1> May 18, 2006


The<MeetNo2> Capital Projects and Bond Oversight Committee met on<Day> Thursday,<MeetMDY2> May 18, 2006, at<MeetTime> 1:00 PM, in<Room> Room 129 of the Capitol Annex. Senator Elizabeth Tori, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Elizabeth Tori, Co-Chair; Representative Mike Denham, Co-Chair; Senators Tom Buford and Jerry Rhoads; and Representatives Robert Damron, Paul Marcotte, and Jim Wayne.


Guests testifying before the Committee: Jim Abbott and Steven Biven, Finance and Administration Cabinet; Bruce Hendrickson, Mayor of Pineville; Doug Teague and  Garlan Vanhook, Administrative Office of the Courts; Robert Brooks, Boehl Stopher & Graves, LLP; Grant Satterly, Kentucky Association of Counties; Larry Owsley, University of Louisville; Doug Ault, Western Kentucky University; Sandy Williams, Kentucky Infrastructure Authority; Walter Clare, Kentucky Housing Corporation; and Tom Howard and Teri Fugate, Office of Financial Management.


LRC Staff: Mary Lynn Collins, Pat Ingram, Nancy Osborne, Bart Hardin, Kristi Culpepper, and Shawn Bowen.


Senator Buford made a motion to approve the minutes of the April 10, 2006 meeting. The motion was seconded by Representative Marcotte and approved by voice vote.


Senator Tori called on Ms. Mary Lynn Collins, Committee Staff Administrator, to review correspondence and information items included in members' folders. Ms. Collins said the folders included correspondence submitted by the Department of Commercialization and Innovation, reporting four grants exceeding $400,000 from the High Tech Investment/Construction Pool; two items of correspondence from the University of Kentucky reporting the purchase of unbudgeted scientific research equipment and plans to use the Construction Management-at-Risk project delivery method for construction of the Student Health Facility project; and the Kentucky Lottery Corporation's monthly financial report for March 2006.


Ms. Collins said five information items were also included in members' folders: a staff update on various capital projects; a summary of capital projects and capital-related provisions in the 2006-08 budget bills; two reports relating to the state's bond ratings; an update on the Private Activity Bond Cap allocated by the Kentucky Private Activity Bond Allocation Committee; and the updated monthly and weekly debt issuance calendar.


Senator Tori said at the Committee's April meeting members requested an update on the proposed exchange of property between the Commonwealth of Kentucky and the City of Pineville. She then asked Mr. Jim Abbott, Commissioner for Facilities and Support Services, Finance and Administration Cabinet, to update the Committee on this project. Also joining Mr. Abbott at the table was Mr. Bruce Hendrickson, the Mayor of Pineville.


Mr. Abbott said a Memorandum of Understanding (MOU) has been executed between the City of Pineville and the Commonwealth respective to the construction of a 40-room hotel to be built at the current Pineville site of the state-owned Bert T. Combs Building. As part of this agreement, the City of Pineville will exchange property it owns, which is the current location of the off-track betting facility, for the Combs Building, which currently serves as the regional office for the Division of Forestry. The City and the Finance Cabinet have jointly issued a Request for Proposal (RFP) seeking a private developer to renovate the off-track betting facility as a permanent replacement for the Forestry District Office; and agree to finance, construct, manage, operate, and furnish through a long-term lease agreement with the City, a first class, high quality hotel/conference center and restaurant complex, which would include the off-track betting facility. The Complex would be built on the Bert T. Combs Building property.


Mr. Abbott said to ensure that the state will have a new facility for the Division of Forestry, which will be displaced by the construction of the hotel, the developer will be required to secure and pay for leased property to be used temporarily to house the Division of Forestry for a period not to exceed two years. At the conclusion of the construction of the hotel, the off-track betting facility will be relocated to the new hotel, and the developer will then renovate the existing off-track betting facility to the specifications of the Commonwealth, and it will become the new Forestry office building in Pineville. The developer is also being required to acquire a $1.5 million performance bond to be put in place specifically for any default that may occur during the construction which could leave the Division of Forestry homeless.


Mr. Abbott said should the developer not move forward with the construction, or if they are unsuccessful in finding a developer through this RFP, the MOU would be cancelled. The properties will then revert to the ownership as they exist currently.


Representative Wayne thanked the Mayor of Pineville for his leadership, and asked about a market analysis. Mr. Abbott said a market analysis was performed on this project, but it is somewhat dated. However, he noted that the economic conditions supporting this project have actually improved over time.


Representative Wayne asked why no members of the Finance Cabinet are on the RFP selection committee. Mr. Abbott said the MOU specifies the City of Pineville will administer the RFP, but there is a provision which allows the Finance Cabinet to review the evaluation process. The Cabinet also has the opportunity to either concur with or not concur with the recommendation that is brought forward.


Representative Wayne said it was his understanding that Elledge & Associates, at some point, received approval to purchase the Bert T. Combs property for construction of a hotel as reported in the May 17, 2005 Middlesboro Daily News. He asked about the status of this proposal. Mr. Abbott said the report made in the paper was an error, the off-track betting facility property is still owned by the City, and the Bert T. Combs property is still owned by the state. He said the exchange of these properties will only be completed if they have a developer that will be able to meet the terms of the RFP. The proposals for the RFP are due on May 31, and no award or action has been taken on this to date.


Representative Wayne suggested that if it has not been announced to the City of Middlesboro that Elledge & Associates will not be constructing a hotel, a formal clarification may be in order. Mayor Hendrickson said he would be glad to make that clarification to the residents of Middlesboro. He said Mr. Elledge was the first person to approach the City with this idea, and at that time, he was not sure how the City would try to change over the ownership of properties.


In response to another question from Representative Wayne, Mr. Abbott said the RFP requests the developer to provide to the City and the Commonwealth a percentage of gross receipts. He said also there is an optional flat fee included in the RFP that could be accepted as part of the proposal. Mr. Abbott said the Finance Cabinet will monitor the oversight of the project.


Senator Tori thanked Mr. Abbott and Mr. Hendrickson for their report. She requested that they keep the Committee updated on this project. Mr. Abbott responded that he would be happy to keep the Committee updated and suggested that the Committee visit the project sometime next year.


Mr. Abbott next reported a $7,516,850 Energy Savings Performance Contract (ESPC) for the Kentucky Fair and Exposition Center and the Kentucky International Convention Center in Louisville. He said this ESPC contract was authorized in the 2004-2006 Budget Guaranteed Energy Performance Pool, and Johnson Controls, Inc. was the energy service company (ESCO) selected for the project. The guaranteed energy savings are $9,472,391, and the financing rate on the project is 3.5%.


Mr. Abbott said the Department has, to date, administered a total of 12 ESPC contracts worth $65 million in energy savings, and 11 additional ESPC projects are currently pending.


Mr. Abbott said the primary actions taking place in this project are lighting replacement at both the Fairgrounds and the International Convention Center, water conservation retrofits, building envelope improvements, new chiller and air handling units, systems testing and control, extensive retrofitting of the exterior signage at the Fairgrounds, and automatic lighting controls at the Fairgrounds and at Freedom Hall.


Senator Tori asked if Homeland Security funds can be used for security lighting replacement. Mr. Abbott said they have used Homeland Security funds for security efforts associated with a variety of buildings, but he was not aware of Homeland Security funds being used for interior lighting. Senator Tori said the ESPC did not require any Committee action.


Senator Tori next introduced Mr. Doug Teague, Budget Director, Administrative Office of the Courts (AOC); Mr. Garlan Vanhook, General Manager for Facilities, AOC; and Mr. Robert Brooks, Attorney, Boehl Stopher & Graves, LLP. Mr. Vanhook said AOC is requesting a 15% increase in the Bullitt County Court Facility project's authorized use allowance.


Mr. Vanhook said in April 2004, this project lost its leadership when the architect, Architecture Plus, abandoned the project on short notice. At the same time, the project also lost its construction manager, Construction Management Concepts (CMC), a subsidiary of Architecture Plus. A replacement architect and construction manager were hired, but due to inevitable delays, other contractors associated with the project began to experience problems and defaulted. He said the targeted finish date of putting the project in operation is January 2007, and currently, all the contractors and contracts are operating and working towards completing the project.


Representative Damron asked if it is normal for a construction management firm and an Architecture firm to be owned by the same group. Mr. Vanhook said this is now against AOC rules. He explained that the Architecture contract for this project was in place before the enactment of HB 734, 2000 Session, which directed the establishment of judicial rules to regulate the construction of courthouses in Kentucky. He said the law was not retroactive to existing contracts.


Representative Damron asked if any money can be recovered from Architecture Plus and Construction Management Concepts. Mr. Brooks said they do have claims pending and are in litigation against the bonding company for Construction Management Concepts, and have claims against Architecture Plus as well. He said in addition to the original contractors that defaulted, two other contractors defaulted as well. Litigation has been favorably resolved with Clark and Associates, the steel subcontractor, and a claim is still pending with the other contractor. Mr. Brooks said there are also claims by other contractors relating to delays and increased material costs pending against the county. He said the state's financial impact may exceed the penal sum of the bonds, but within the next nine months to a year, they should be in a position to conclude any litigation involving this project.


In response to a question from Representative Damron, Mr. Vanhook said if the request is approved by the Committee today, this will allow Bullitt County to finish paying all of the people working on the building and would allow legal counsel to make his claims against the liability insurers for Construction Management Concepts and Architecture Plus. (If approved, Bullitt County would then obtain an additional $2,096,115 from the Kentucky Association of Counties Leasing Trust, and the increased use allowance would be used to pay debt service on the financing.)


Mr. Vanhook said Architecture Plus' liability would be $1 million and CMC was bonded for the value of their fee at approximately $430,000, meaning the optimum amount that would be contractually bonded to the project would be $1.4 million.


Representative Damron asked if the $1.4 million comes back to the state, will AOC use that to pay for project's use allowance. Mr. Grant Satterly, Director of Financial Services, Kentucky Association of Counties (KACO), said at the request of AOC, KACO has offered them a variety of ways they could pay off this latest debt financing. They could do it on a short-term variable rate, and pay off at any time. They were also offered a fixed rate alternative, which is fixed by use of an interest rate swap. Representative Damron said he was concerned about the state having to make those debt service payments. He said the problem he has with using swaps is the bond is not competitively bid, and once a swap agreement is entered into, the participant cannot get out without extremely high fees to unwind the swaps. Mr. Satterly said they have sent a proposal to AOC recommending they do a short-term note rather than a long-term financing involving a swap.


Representative Wayne asked if state guidelines are needed to ensure that contractors and architects selected for these kinds projects are fully bonded and covered if they do not complete the project. Mr. Vanhook said this is a unique and unprecedented situation, and today, any construction manager selected is required to take the project as a construction manager at risk and must be bonded for the full amount of the project. Mr. Vanhook added that if they do not recover any money, they will need the long-term financing to cover the increased cost as authorized by the increased use allowance.


Mr. Brooks noted that he had litigated construction cases before, but he has never seen this kind of problem where the whole project management team defaults. He said for the project to get back on track with only a 15% increase is extraordinary.


In response to a question from Senator Buford, Mr. Books said he anticipated more claims in the future from vendors and contractors impacted by this delay. He said part of the challenge of putting this project back on track has been the fact that there have been a myriad of contractor claims to resolve and settle. He said there have been legitimate damages suffered by the various construction contractors who are not at fault on this project.


Senator Buford noted the initial steel contractor and the mechanical contractor both defaulted, and asked if they received compensation in excess of work performed. Mr. Brooks said that determination is still being evaluated. They are in litigation with regard to the structural steel contractor. There was a claim against the bonding company for additional money and they were able to favorably resolve that and received over $200,000. Arbitration with the original mechanical contractor is scheduled for later this fall.


In response to another question from Senator Buford, Mr. Books said both the steel contractor and mechanical contractor have dissolved their businesses. He said he was not aware that either of these two contractors had problems in the past with other construction projects. Mr. Vanhook added that prior to HB 734, AOC did not have any procedures for hiring professional services.


In response to a question from Senator Buford, Mr. Vanhook said if his office sees a contractor in the court project bid listing that has had difficulties with the state in the past, they strongly question and review those bids. Senator Buford noted contractors sometimes go out of business and start up with new names and new employees.


Representative Marcotte asked how many contractors bid on the original project. Mr. Vanhook said the contract for this project was bid in phases, and there were multiple bids on each phase.


Representative Marcotte said he wondered if, in this case, the state accepted the lowest bid from a contractor that was not qualified to do the work, and if maybe it would have been better to select a higher bidder that was reliable. Mr. Vanhook said in his review of the project, he found some contractors had financial problems and most of the defaults were strictly a financial circumstance and not related to quality of work or capability.


In response to a question from Representative Denham, Mr. Vanhook said the average completion time for a court project is approximately 32 months.


Representative Denham thanked AOC staff for their hard work on the courthouses they have constructed around the state.


Senator Tori asked Mr. Vanhook to report back to the Committee on the project's progress in August, November, and upon completion of the project.


In response to a question from Senator Tori, Mr. Vanhook said he believes the requested increase will be sufficient to fund the remainder of the project.


Representative Denham made a motion to approve the request. The motion was seconded by Senator Buford and approved by unanimous roll call vote.


Senator Tori next asked Mr. Larry Owsley, Vice President for Business Affairs, University of Louisville (U of L), to present two project reports for the University. The first project Mr. Owsley discussed was the Cardinal Arena Expansion project. This project was authorized for $9,548,000 in the 2004-06 budget as a 24,000 SF addition to the Swain Student Activities Center, but once the University started planning the expansion to the Swain Student Activities Center, they encountered problems with high voltage lines along Floyd Street. Mr. Owsley said the University would like to modify the original project to allow for a free standing facility on University property south of Eastern Parkway, and increase the scope of the project using $6,592,000 in private donations and gifts.


Mr. Owsley said the Cardinal Arena Expansion project was authorized at a scope of $16,140,000 in the 2006-08 Executive Budget, but this project was vetoed by the Governor. Subsequent to that veto, Mr. Owsley said that Governor Fletcher and U of L President Ramsey determined that there was a way to proceed with the project with Committee approval. The plan developed is to use U of L's 2004-06 budget authorization of $9,548,000 in agency bonds, and increase the scope to $16,140,000 using $6,592,000 in private donations and gifts.


In response to a question from Representative Damron, Mr. Owsley said the $9,548,000 in agency bonds will be paid back from non-General Fund sources. Mr. Owsley said the Governor supported this project.


Representative Damron said that Kentucky's process of approving agency bonds is archaic because the bonds are not supported by General Fund receipts, and therefore do not represent a direct cost to the state. He said that the universities should be given independence in deciding which bond-financed projects they should pursue, and how to pay for these obligations.


Mr. Owsley next reported a lease of parking spaces for the U of L Health Sciences Center. The University plans to lease from the Louisville Medical Center Development Corporation 458 spaces at an annual cost of $164,880. Parking spaces are being eliminated due to the construction of a new research building, and replacement parking is needed for students attending the University's Health Science Center.


Senator Tori asked what the funding source is for the lease. Mr. Owsley said the funding source is agency receipts.


Senator Buford made a motion to approve the scope increase for the Cardinal Arena Expansion project and the new lease for parking spaces. The motion was seconded by Senator Rhoads and passed by unanimous roll call vote.


Mr. Doug Ault, Director of Planning, Design and Construction, Western Kentucky University, next reported that an emergency project has been established to repair damage to Cherry Hall caused by multiple fires on April 23, 2006. Five fires in different parts of the building were intentionally set, and caused substantial damage on the first and second floor of the building. He said there was no structural damage to the facility, but there was interior damage. A total of 13 rooms, including four classrooms and two technology classrooms, were either destroyed or heavily damaged by fire, smoke and water.


Mr. Ault said the University would like to have the repairs completed before the start of the fall semester. The project is estimated to cost $1,500,000, and agency restricted funds will be used to address any shortfall not covered by insurance proceeds. Senator Tori said this project is an emergency, and no Committee action is required.


Senator Tori then called on Mr. Steve Biven, Director, Division of Real Properties, to present three lease reports. Mr. Biven first reported a lease modification for the Department of Labor, Division of Worker's Compensation in Franklin County. At one time, the Department of Labor and the Department of Military Affairs occupied space at 1047 US Highway 127 South in Frankfort. The two agencies shared a bay area which included a breakroom, smoking room, and a telecommunications closet. Since the Department of Military Affairs has moved, the space is being used exclusively by the Department of Labor. Consequently, the Labor Cabinet has modified its lease (PR-1069) to include an additional 459 square feet in space. This additional space will cost $4,568 annually.


Mr. Biven next reported two lease modifications for leased properties in Franklin County. The first modification reported was for the Department of Revenue (PR-3882). The Department plans to raise some light fixtures in the warehouse portion of this facility that are now too low and interfere with the use of a pallet rack system. The cost of the work is $2,593, and will be amortized over the remaining lease term. The second lease modification was for the Alcoholic Beverage Control Office (PR-4111). He said this office plans to paint eight restrooms and enlarge its hearing office. The cost of the work is $4,459, and will be amortized over the remaining lease term. Senator Tori said no action was required on these projects since the modifications are under $50,000.


The final item Mr. Biven reported was three state leases with square footage modifications from January through March 2006. Since each of the modifications were less than $50,000, no action was required.


Ms. Sandy Williams, Kentucky Infrastructure Authority (KIA), said members’ folders included a report from KIA regarding 48 line-item Coal/Tobacco Development Grants approved in previous sessions of the General Assembly. Senator Tori said no further action was required on these projects.


Representative Damron asked where the state is on the drawdown schedules on bonds for projects approved in previous General Assembly sessions. Ms. Williams said she did not have that information, but she would be happy to provide it to the Committee.


The next report was provided by Mr. Tom Howard, Executive Director, Office of Financial Management (OFM). Mr. Howard introduced Mr. Walter Clare, Financial Management Senior Director, Kentucky Housing Corporation, and Ms. Terri Fugate, OFM's new Deputy Executive Director. Mr. Howard said OFM submitted one new bond issue report to the Committee this month: Kentucky Housing Corporation (KHC) Single Family Housing Revenue Bonds, 2006 Series K, L & M, or additional series as may be designated in an amount not to exceed $100 million. Proceeds from this bond issue will be used to provide mortgage financing for first-time low and moderate income Kentucky homebuyers.


Representative Damron made a motion to approve the new bond issue. The motion was seconded by Senator Buford and passed by unanimous roll call vote.


Mr. Howard said there were two follow-up reports included in members folders for previously approved bond issues: KHC Revenue Bonds, 2006 Series E (AMT), Series F (AMT) (Variable Rate), and Series G (Taxable), $84,900,000; and Turnpike Authority of Kentucky Economic Development Road Revenue Bonds (Revitalization projects), 2006 Series A and B, $146,630,000. Senator Tori said the Committee approved these two bond issues at previous meetings, and no further action was required.


Mr. Howard presented 22 new school bond issues with School Facilities Construction Commission (SFCC) debt service participation: Ashland Independent (Boyd Co.), Augusta Independent (Bracken Co.), Barren County, Boone County, Bourbon County, Campbell County, Carroll County, Casey County, Fairview Independent (Boyd Co.), Fleming County, Ft. Thomas Independent (Campbell Co.), Hopkins County, Knox County, Larue County, Lewis County, Nelson County, Powell County, Rowan County, Russell County, Russell Independent (Greenup Co.), Trigg County, and Walton-Verona Independent (Boone Co.).


Representative Wayne made a motion to approve the 22 school bond issues. The motion was seconded by Senator Rhoads and passed by roll call vote. Five members voted affirmatively. Representative Damron abstained from the vote, citing a potential conflict of interest.


Ms. Collins said there were two locally–funded school bond issues submitted to the Committee for review this month for Bardstown Independent (Nelson Co.) and Letcher County. She said all disclosure information has been filed, and no further action on the bond issues is required.


With there being no further business, Representative Damron made a motion to adjourn the meeting. The motion was seconded, and the meeting adjourned at 2:30 p.m.