Capital Projects and Bond Oversight Committee




<MeetMDY1> August 21, 2007


The<MeetNo2> Capital Projects and Bond Oversight Committee met on<Day> Tuesday,<MeetMDY2> August 21, 2007, at<MeetTime> 12:00 PM, in<Room> Room 169 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 Jerry Rhoads and Dan Seum; and Representatives Robert Damron, Steven Rudy, and Jim Wayne.


Guests testifying before the Committee:  John Osborne, Western Kentucky University; John Hicks, Governor's Office for Policy and Management; Jim Abbott and Nancy Brownlee, Finance and Administration Cabinet; Mike Walters, Morehead State University; Sandy Williams, Kentucky Infrastructure Authority; and Terri Fugate and Tom Howard, Office of Financial Management.


LRC Staff:  Nancy Osborne, Shawn Bowen, Kristi Culpepper, and Debbie Rodgers.


Representative Rudy made a motion to approve the minutes of the July 24, 2007 meeting. The motion was seconded by Senator Rhoads and approved by unanimous roll call vote.


Senator Tori asked Nancy Osborne, Committee Staff Administrator, to review the correspondence and information items included in members' folders. Ms. Osborne said the first item of correspondence was from the Secretary of the Finance and Administration Cabinet documenting his decision to move forward with the scope increase for the KASPER System project that the Committee did not approve last month. The second item relating to the use of the Design-Build project delivery method for the KET Replace Master Control and Production Infrastructure project was withdrawn since the project is being re-bid. The third item was from the Department of Commercialization and Innovation reporting two allocations over $400,000 from the High Tech Investment Pool (up to $595,000 to Wind Energy Corporation and up to $750,000 to CreoSalus, Inc). It was noted that these projects will be awarded funds carried over from the 2004-06 budget authorization.


Also included for the Committee's review were three information items: the monthly Staff Update; project status reports from the Administrative Office of the Courts for various court facility construction projects; and a report of postsecondary Major Item of Equipment Pool allocations for Morehead State University, Northern Kentucky University, the University of Kentucky, the University of Louisville, and the Kentucky Community and Technical College System.


Ms. Osborne then discussed items included in the Staff Update. She noted that the U.S. Supreme Court is scheduled to hear oral arguments on November 5, 2007, in the case of Kentucky v. Davis, which relates to the taxation of municipal bonds. Also discussed was the $150,000 renovation of Pioneer Museum at Blue Licks Battlefield State Resort Park to improve the exhibits. Ms. Osborne noted an article from the Frankfort State-Journal reporting the construction of a new parking lot at the site of the old Frankfort Scrap Metal facility. The new parking lot will be utilized by employees working in the newly renovated State Office Building scheduled to reopen in August.


Ms. Osborne clarified two projects related to a $1 million allocation from the 2006-08 Parks Development Pool for facilities being leased by the state that may eventually result in the establishment of a new Benham Lynch State Park in Harlan County. Funds in the amount of $250,000 will be used to renovate an amusement park type ride at a coal mine known as Portal 31 located in Lynch. Funds in the amount of $523,000 will be used to upgrade the HVAC, install new windows, and repair the roof of the Benham School House Inn building.


Senator Seum asked what amount the state would have to pay to bondholders if the Supreme Court ruled in favor of the Davises in the Kentucky v. Davis lawsuit. Tom Howard, Executive Director, Office of Financial Management, said it was his understanding that the amount of refund may be up to $4 million per year depending on whether or not the ruling is retroactive. He said there was a recent favorable ruling by the U.S. Supreme Court relating to the interpretation of the U.S. Constitution's dormant Commerce Clause that supports Kentucky's position that its current system of taxation is constitutional.


In response to another question from Senator Seum, Mr. Howard said it would take some time, but if the Supreme Court did not rule in Kentucky's favor to uphold the state's system, the class-action case would be remanded back to Jefferson Circuit Court to certify the class and proceed with the lawsuit.


Senator Tori asked John Osborne, Associate Vice-President of Campus Services and Facilities, Western Kentucky University (WKU), to discuss a scope increase for the Student Parking Structure project. This project was authorized in the 2002-04 budget at a scope of $10,000,000 (restricted funds). The reported scope increase of $633,817 is from interest income earned from agency bonds. The funds are needed to complete repairs, expand parking within Parking Structure I, and construct adjacent surface lots.


Mr. Osborne said this project was initially administered by the Finance and Administration Cabinet, but was transferred to WKU when the University began management of its own capital construction program in November 2003. Under the University's direction, the project was designed, bid, and awarded. During the course of construction, it was decided that the scope of work needed to be expanded. At the time WKU was considering a funding plan for the cost overrun, it mistakenly believed that restricted funds up to 15% of the authorized amount could be used to address the scope increase without Committee approval.


Mr. Osborne said WKU would like to draw-down the remaining interest earnings in the project account and close the project account. He said this does not represent the proper and appropriate sequence of events but does demonstrate the system works. The University made a mistake, it was found and reported by WKU's construction management team, and is being presented to the Committee to set the record straight and to access the funds.


Senator Tori said according to the statute, the Committee must review and approve any project scope increases prior to their implementation. She acknowledged mistakes are sometimes made, and asked how WKU will handle oversights like this in the future. Mr. Osborne responded that this was a simple case of the statute being misinterpreted by WKU. He said as the University proceeds with projects, it will stay in close contact with Committee staff. He said this year, WKU has been before the Committee with four projects requesting a scope increase, and in each case WKU staff has been in contact with Ms. Osborne to ensure good communication. Action is generally required for a scope increase, but in this case funds have been expended and the project is complete. No Committee action was taken.


Senator Tori asked John Hicks, Deputy Budget Director, Governor's Office for Policy and Management (GOPM), and Jim Abbott, Commissioner, Department for Facilities and Support Services, to present the monthly project report submitted by the Finance and Administration Cabinet. Mr. Hicks first reported a $1,500,000 federally funded scope increase for the Morehead State University (MoSU) Construct Center for Health, Education and Research project. The General Assembly in the last two budget bills appropriated $24.5 million in bond funds to construct a new health science facility in collaboration with the St. Claire Regional Medical Center in Morehead and the University of Kentucky. The additional funds will be used to assist with the construction of the building.


Representative Denham asked for what purpose the funds were being used. Mr. Hicks said the funds will be used to meet the original scope of the project. He explained that due to price increases, the original square footage intended for the project had to be reduced to stay within the budget. This scope increase will allow MoSU to retain some of the planned square footage.


Senator Tori asked if these funds will allow for the purchase of equipment. Mr. Hicks responded affirmatively and explained that equipment was included as part of the original project scope. He said the Finance Cabinet, which manages MoSU's capital construction projects, monitors equipment budgets closely as they enter the construction bidding process. He then introduced Mike Walters, Vice President for Administration and Fiscal Services, MoSU, and asked him to further address Senator Tori's question. Mr. Walters said the University had money for equipment in the original project budget. The amount available for this project will depend upon the construction bids received in the late spring or early summer 2008. Mr. Walters said MoSU originally planned for a 120,000 square foot facility at a scope of approximately $27 million. The project was funded at $23 million, so the University had to scale the project back. He said the additional federal funds, in the form of a grant from the Economic Development Administration, will help return the project to the original plan.


In response to another question from Senator Tori, Mr. Walters said the University will need additional funding for equipment and a project to address this need is listed in MoSU's 2008-2014 Capital Plan. [Purchase Equipment for Center for Health, Education and Research - $3,666,000 General Funds - Priority #3 for 2008-10.]


Representative Denham made a motion to approve the project scope increase. The motion was seconded by Representative Wayne and passed by unanimous roll call vote. The revised project scope is $26,000,000.


Mr. Hicks then presented allocations from the Fees-in-Lieu-of Stream Mitigation Projects Pool for two Department of Fish and Wildlife Resources stream restoration projects. Fund sources are from entities electing to mitigate their development's impact relating to dredge and fill permits issued under the federal Clean Water Act by paying into a pool, rather than mitigating the impacts themselves. The allocations were as follows: Middle Creek in Floyd County at a scope of $1,130,100 and Kinniconick Creek/Indian Creek in Lewis County at a scope of $1,906,900. No action is required by the Committee for pool allocations.


Mr. Hicks next reported an allocation of $506,000 from the Department for Facilities and Support Services' 2006-2008 Maintenance Pool for the L&N Client Access project. He said this project will construct a new entrance, including a lobby area and handicap access, at the rear of the L&N building in Louisville. Funding for the project comes from amounts associated with projects costing under $400,000 each and previously reported to the Committee in March.


Senator Tori asked what the long term plans were for the L&N building. Mr. Abbott said by modifying the building as planned, the state will comply with the intent of House Bill 362 (the Boni Bill), which aims to increase social worker safety. The new entrance is also oriented to the parking lot. He said this building is a primary building of state government for clients that are served by the Cabinet for Health and Family Services in Jefferson County. No action is required by the Committee for pool allocations.


Mr. Hicks next reported a maintenance pool project for the Department of Parks. The Department plans to replace the sewer plant at the Pennyrile State Resort Park at a total cost of $1,350,000. The project was designed with $100,000 from the Parks Renovation Pool (2004-06 budget), and construction funds of $1,250,000 are provided from the Statewide Repair, Maintenance, and Replacement Pool designated for Parks projects (2006-08 budget). Mr. Hicks said the Executive Branch always directs the use of bond proceeds from those pools to the projects that will have a life of 20 years or longer corresponding with the term of the bond issuance.


Representative Damron asked what was the remaining balance in the Parks Maintenance Pool. Mr. Hicks said he was not sure but he would find out and report back to the Committee. He said the total budget for the 2006-08 pool for all fund sources over the two years is $8 million.


Representative Damron requested that Mr. Hicks report to the Committee the remaining Department of Parks Maintenance Pool balance, as well as how much has been expended and what projects have received allocations.


The last item Mr. Hicks reported was a maintenance pool project report for the Department of Military Affairs. The project will entail the upgrade of HVAC and electric systems at the Carrollton National Guard Armory. The project's total scope of $504,906 will be funded 50% by the Department's 2006-08 Maintenance Pool ($252,453) and 50% by federal funds ($252,453).


Senator Tori asked if the federal government routinely matches funding for Department of Military Affairs projects. Mr. Hicks explained that the certainty of federal fund matching for National Guard-related projects in the Department of Military Affairs is not always known initially. He said the Department has done an excellent job in working with the National Guard in being able to obtain a 50% match on a number of its maintenance and renovation projects associated with some of the National Guard installations.


Senator Tori asked what the balance was in the Department of Military Affair's 2006-2008 Maintenance Pool. Mr. Hicks said he did not have that information but he would find out and provide the Committee with an updated list of projects from the pool and its balance. No action is required by the Committee for maintenance pool allocations.


Senator Tori asked Nancy Brownlee, Director, Division of Real Properties, to discuss two lease reports. Ms. Brownlee first reported leases with square footage (SF) modifications for the period of April through June 2007. The modifications reflect a net increase of 1,061 SF in the amount of leased office space and an increase of $11,139 in annual rental costs. No action is required by the Committee for modifications costing less than $50,000.


Ms. Brownlee next discussed a lease modification report for the Transportation Cabinet, Division of Driver Licensing (PR-4278) in Hopkins County. She said the Department of Transportation created a task force to complete a comprehensive review of facility security conditions at the existing twelve driver licensing field offices throughout the state. As a result of the review, modifications to improve security and control access at the Hopkins County building were recommended. The cost of the renovations is $6,316 and will be amortized over the remaining lease term (June 30, 2013). No action is required by the Committee for modifications costing less than $50,000.


Representative Wayne asked if there was a particular situation that necessitated these security measures. Ms. Brownlee said there was no situation that precipitated these modifications; however, she said she would speak with Department of Transportation staff to make sure. She explained that the changes were simply a result the review.


Senator Tori next welcomed Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority (KIA). Ms. Williams presented three KIA Fund B (Infrastructure Revolving Fund) grants for the Committee's approval. The first grant was for $190,750 for the City of Arlington in Carlisle County. The funds will be used to reduce the City's infiltration and inflow into the sewer collection system. The Fund B grant will be combined with a line item grant in the amount of $190,000 for a total project of $380,750.


Representative Denham made a motion to approve the Fund B grant for the City of Arlington. The motion was seconded by Senator Seum and passed by unanimous roll call vote.


Ms. Williams next reported a Fund B grant for $80,000 for the City of Georgetown in Scott County. The funds will be used to construct a gravity collector sewer for the planned Bluegrass Community and Technical College Advanced Manufacturing Center in the Lanes Run Business Park.


Representative Damron asked how much money is available in Fund B for grants. Ms. Williams said there was approximately $7 million available.


Responding to Representative Damron's further questions, Ms. Williams said KIA is in the process of developing criteria to determine whether applicants receive a loan or a grant. She said these criteria will be presented to the KIA Board within the next few months, and she would share that information with the Committee.


In response to a question from Representative Damron, Ms. Williams said the City of Georgetown requested and the board approved a grant. She said she did not know the criteria under which it was approved. Representative Damron commented that areas close to Lexington such as Nicholasville, Georgetown, Paris, and Frankfort normally do not qualify for the grants because the median household income exceeds the state average.


Senator Rhoads ask if there was an award limit on each KIA grant. Ms. Williams said currently there is no limit, but KIA staff plans to recommend that maximum funding levels be set since the amount of funding available in the Fund B pool is limited.


In response to further questions from Senator Rhoads, Ms. Williams said the statutory authority for Fund B is to fund infrastructure projects, which includes water, sewer, electric, or broadband projects, or projects that entail infrastructure for new economic development projects.


Representative Damron asked if underground utility projects that include high fiber optics are eligible for both KIA grants and low interest loans. Ms. Williams responded affirmatively.


Senator Seum asked if the Fund B grant money included federal funds. Ms. Williams responded that Fund B moneys are state funds.


Senator Seum made a motion to approve the Fund B grant for City of Georgetown. The motion was seconded by Senator Rhoads and passed by unanimous roll call vote.


The last Fund B project presented was a grant in the amount of $200,000 to expand the Elkton wastewater treatment plant and make other system improvements. Ms. Williams said the Fund B grant will be combined with other funding for a total project amount of $2,631,100.


Representative Denham made a motion to approve the Fund B grant for the City of Elkton. The motion was seconded by Representative Rudy and passed by unanimous roll call vote.


Ms. Williams addressed a question that was raised at the July 21, 2007, meeting. She said the Committee questioned the appearance of excessive engineering fees associated with a project for the City of Beaver Dam. The project was for the replacement of sewer lines to eliminate excessive inflow and infiltration throughout the system. As a brief summary, Ms. Williams said before a system can correct such problems, leaks and broken lines need to be located and repaired. The primary way a system accomplishes this is to "scope" the lines, which involves running a camera through the sewer line to see where the breaks have occurred. The engineering fees appeared high because scoping fees of $750,000 were included in the engineering budget. She said when those fees were subtracted from the engineering budget, the engineering fees represented approximately 15% of the construction cost, which is in line with the engineering fee scale adopted by KIA.


Ms. Williams said in the future, if there are extraordinary items associated with a project, those fees will be listed separately so any specific category will not appear to be over-inflated.


Ms. Williams next presented 37 coal/tobacco development grants that were funded through line item appropriations from the General Assembly in 2003, 2005, and 2006.


Representative Damron asked if the Committee could get a report on the amount of bond proceeds that have been drawn down. He said as the Committee focuses toward the budget of 2008, it would be valuable to know the status of authorized projects so as to manage that flow of funds.


The next report was provided by Mr. Howard and Terri Fugate, Deputy Executive Director, Office of Financial Management (OFM). Mr. Howard said there were three new bond issues to be presented to the Committee. The first new bond issue presented was Kentucky Asset / Liability Commission (ALCo) Project Notes, 2007 Federal Highway Trust Fund First Series, $300,000,000. This series of project notes represents the second phase of the state's Grant Anticipation Revenue Vehicle (GARVEE) program to widen the following interstates to six lanes: I-75 from northern Scott County to KY 22 near Dry Ridge in Grant County; I-65 from the Tennessee state line to Bowling Green; and I-64 from the Snyder Freeway in Jefferson County toward Simpsonville.


Mr. Howard said the total cost of the project will be paid from the Commonwealth's federal highway funds. This is the $300 million authorization from the last budget bill that was combined with the original $150 million authorization enacted by the 2005 General Assembly. Two future federal authorizations are targeted for purposes of achieving an AA underlying credit rating, which is still being discussed with the rating agencies. The expected interest cost is 4.34%, although that is expected to be higher given the current market's subprime mortgage market issues, and the relative level of interest rates rising compared to US Treasuries.


Senator Tori asked when the highway projects were expected to be completed. Debra Gabbard, Executive Director, Office of Budget & Fiscal Management, Department of Transportation, said she would find out from the Highway Department and let the Committee know. Senator Tori said she was very happy with these long overdue projects.


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


Mr. Howard then reported the issuance of Kentucky Asset / Liability Commission (ALCo) Project Notes, 2007 Road Fund First Series, $350,000,000. Mr. Howard said the gross proceeds will be used to provide interim financing for Road Fund-supported projects authorized by HB 380 (2006-08 budget). He said these project notes will be converted to permanent financing once the road projects are moving forward and the dollar amount is of a significant size.


Mr. Howard said the federal government has specific rules regarding arbitrage payments and when the money must be spent. He said this project note issuance is an attempt to manage that process while still providing money on an as- needed basis to the Transportation Cabinet to make sure that work flow continues.


Representative Denham asked if the interest rate for this bond issue is expected to remain stable in light of the anticipated .25% drop in the federal funds rate. Mr. Howard said there are two different interest rate structures. This particular one is a short-term rate which essentially represents a money market rate, which in a tax-exempt market will be very sensitive to a potential change in the federal funds rate. The other transaction is a fixed rate serial bond maturity. This rate typically changes relative to US Treasuries, although municipal and Treasury yields have diverged recently.


Mr. Howard said there has been a 15 basis point adjustment in the municipal market, and the relationship between the municipal market and the Treasury securities is not moving in sync. He said that ratio was previously in the 70% range, but now they are seeing tax-exempt bonds as a percentage of taxable bond issues anywhere from the mid 70s to over 100% in certain maturity classifications and certain types of bond structures.


In response to another question from Representative Denham, Mr. Howard said the market adjustment is adversely affecting municipal bonds.


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


Ms. Fugate then presented a new bond issue, Kentucky Higher Education Student Loan Corporation (KHESLC) Student Loan Revenue Bonds, Series 2007 A-1 through A-5 (Senior) and B-1 (Subordinate) Revenue Bonds, $350,000,000. The proceeds of the bond issue will be used to make and acquire federal student loans for Kentucky residents and students attending Kentucky institutions.


Senator Rhoads made a motion to approve the Student Loan Revenue Bonds. The motion was seconded by Representative Rudy and passed by unanimous roll call vote.


Ms. Fugate then presented two follow-up reports for previously approved bond issues:  Murray State University General Receipts Bonds, 2007 Series A, dated July 31, 2007 for $14,550,000, and Eastern Kentucky University General Receipts Bonds, 2007 Series A for $12,920,000. No Committee action is required for these follow-up reports.


Ms. Fugate said provided in the members' folders was a summary of recent university General Receipts bond transactions and the ratings the universities received on these debt issues, as presented at the August 20, 2007, meeting of the State Property and Buildings Commission. All of Kentucky's eight public universities have now transitioned their active debt issuance program from Consolidated Education Buildings (ConEd) and Housing and Dining (H&D) indentures to the new General Receipts indentures.


Ms. Fugate said at the discretion of each university, proceeds from some of the General Receipts bond issues were used to refund outstanding housing bonds. She said the summary also included the most recent transactions for the different universities with the principal amount, closing date, interest cost, outstanding H&D bonds, and the underlying ratings. Except for two authorized university projects that are not ready to move forward, all other authorized projects have been put under a plan of finance.


Ms. Fugate then presented two new school bond issues with School Facilities Construction Commission (SFCC) debt service participation:  Berea Independent (Madison County) and Trimble County.


Representative Rudy made a motion to approve the school bond issues. The motion was seconded by Senator Seum and passed by roll call vote. Representative Damron abstained from the vote, citing a potential conflict of interest.


Ms. Osborne said there were three locally-funded school bond issues submitted to the Committee for review this month:  Bell County, Calloway County, and Mason County. She said all disclosure information has been filed, and no further action on the bond issues is required.


Senator Tori announced the next meeting is scheduled for Tuesday, September 18, 2007.


With there being no further business, Representative Denham made a motion to adjourn the meeting. The motion was seconded by Representative Rudy and the meeting adjourned at 1:00 p.m.