Capital Projects and Bond Oversight Committee




<MeetMDY1> September 18, 2007


The<MeetNo2> Capital Projects and Bond Oversight Committee met on<Day> Tuesday,<MeetMDY2> September 18, 2007, at<MeetTime> 1:00 PM, in<Room> Room 169 of the Capitol Annex. Representative Mike Denham, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Mike Denham, Co-Chair; Senator Elizabeth Tori, Co-Chair; Senators Tom Buford, Jerry Rhoads, and Dan Seum; and Representatives Steven Rudy and Jim Wayne.


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


LRC Staff:  Nancy Osborne, Pat Ingram, Shawn Bowen, Kim Link, Kristi Culpepper, Bart Hardin, and Lesa Prewitt.


Senator Buford made a motion to approve the minutes of the August 21, 2007 meeting. The motion was seconded by Representative Rudy and approved by unanimous roll call vote.


Representative Denham 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 a report by the Finance and Administration Cabinet that it planned to use the Design-Build project delivery method for the KET Replace Master Control and Production Infrastructure project. The report had been pulled from the Committee's August agenda after the Cabinet decided to re-bid the project to delete the requirement for the successful bidder to post a bond for the equipment. Under the new RFP, equipment will be covered by the manufacturers' warranties.


Ms. Osborne briefly reported two additional items of correspondence submitted in response to questions raised at the Committee's August meeting:  a letter from the Transportation Cabinet regarding the completion dates for three interstate highway projects and correspondence from the State Budget Director regarding fund balances for the Department of Military Affairs' and the Department of Parks' 2006-08 Maintenance Pools. She noted that the Department of Military Affairs has committed 84% of its $1.7 million pool. The Department of Parks has committed 48% of its almost $8 million pool leaving a balance of about $3.5 million.


Also included for the Committee's review were four information items:  the monthly Staff Update, a report of fund transfers in FY 2006-07 from the Statewide Deferred Maintenance Fund, an update on Kentucky's Bonded Indebtedness, and the monthly and weekly debt issuance calendar.


Ms. Osborne then discussed items included in the Staff Update. She noted that the Department of Parks has issued a Request for Information seeking to acquire up to 400 acres of land within ten miles of Cumberland Falls State Park to develop a golf course. She also noted that Kentucky River valves in Dams 12 and 13 in Estill and Lee counties, which were recently opened to increase water flow, are functioning properly.


The Staff Update also contained an article regarding a replacement facility for Eastern State Hospital in Lexington that was announced at a press conference held by Governor Fletcher and Health and Family Services Cabinet Secretary Birdwhistell. The likely site for the new hospital would be a 30-acre tract of land to be leased at the University of Kentucky's Coldstream Research Park.


Representative Denham asked if the 30-acre tract would be sufficient to build a 450-bed hospital given that the existing facility is located on 64 acres. Ms. Osborne said this preliminary information is based on a newspaper article in the Lexington Herald-Leader. John Hicks, Deputy Budget Director, Governor's Office for Policy and Management (GOPM) added that a specific site had not been determined, but based upon conceptual designs that were available in the 2007 session, 30 acres should be sufficient. He said the general programming needs of the hospital in terms of the number and type of beds was known, but at this point in time planning is in the early stage.


In response to another question from Representative Denham, Mr. Hicks said the new site is one-third the size of the current site. He said the hospital now accommodates a fraction of the number of patients it once did, and the new site should be adequate.


Senator Buford said he thought the Eastern State Hospital utilizes about 30% of its property, and the remainder is open space. He commented that the hospital, which was built after the Civil War, is in bad condition and is experiencing problems with its HVAC. He said the new site is conveniently located close to the interstate, which may encourage more people to visit.


Ms. Osborne then noted an Addendum to the Staff Update that summarized three Requests for Proposals (RFP) issued in September for private development of facilities at state parks: Green River, General Burnside, and Lake Malone. These RFPs had been previously issued, but the bids received were considered non-responsive and the RFPs were cancelled. The state funds from the 2006-08 Parks Development Pool that had been offered for infrastructure improvements in the initial RFPs for Green River and General Burnside as incentives were removed when the RFPs were re-issued.


Representative Denham asked what was the status of the 2006-08 Parks Development Pool. Mr. Hicks said he would provide the Committee with an updated report of Pool allocations.


Representative Wayne asked why the infrastructure funding was removed from the RFPs. Mr. Hicks said the Cabinet received unsatisfactory responses to the earlier solicitations, and based on discussions with some of the bidders, they thought removing what vendors may have considered a hindrance would increase the number of bids.


Representative Wayne asked if prevailing wage was a factor in luring private developers to these projects. Mr. Hicks said he could not answer that question.


In response to an earlier question from Representative Wayne, Jim Abbott, Commissioner, Department for Facilities and Support Services, added that the Department changed the scope of the Green River RFP by deleting the development of an 18-hole championship golf course. Parties interested in this RFP indicated that this was a hindrance to their ability to respond. Respective to General Burnside, two offers were received and neither were interested in the state infrastructure funds. Mr. Abbott said those bids were deemed unresponsive due to the lack of information that was provided in accordance with the RFP. He said the RFP was solicited again for General Burnside to accommodate an earlier interested party.


In response to further questions from Representative Wayne, Mr. Abbott clarified that the golf course at Green River was an amenity to be developed by the private sector. The current RFP calls for development of a lodge, conference room, and restaurant.


Representative Wayne asked if state funding associated with the RFP for Lake Malone was deleted. Mr. Abbott said he did not recall the background but would be glad to check on it and respond to the Committee.


Representative Wayne referred to a Department of Labor determination earlier this year that if state funding for infrastructure improvements associated with an RFP for private development at a state park was accepted, then the private developer would have to follow prevailing wage requirements for the entire project. He had questioned the interpretation of the Department of Labor and indicated he felt that prevailing wage should be paid for these types of projects at state parks regardless of whether state funding incentives are used. He said the Committee has raised this issue with the State Government Committee because it needs to be clarified statutorily.


Senator Rhoads asked if the developer would have to finance the infrastructure improvements for the solicited development at Lake Malone. Mr. Abbott responded affirmatively.


In response to another question from Senator Rhoads, Mr. Abbott said based on the earlier interest it is possible a sufficient response for the Lake Malone project will be received. He cautioned there is a lot of concern based upon the bond market. He explained that the financial market is different than it was a few months ago, and as is the case with many of these private development opportunities, they could be adversely impacted by current market conditions.


Senator Rhoads asked if the deletion of the infrastructure money would make the projects less attractive. Mr. Abbott said based on the feedback and project modification, the Cabinet felt it had an opportunity to gain a positive response from the community. Senator Rhoads said he hoped inclusion of state infrastructure funds would be reconsidered if satisfactory responses were not received on the current RFP.


Senator Buford referred to the Labor Cabinet's ruling that if developers are offered state infrastructure funds for private development on state property, they must pay prevailing wage. He suggested that developers may have decided they could complete the projects for less without taking state money and having to pay prevailing wage.


Representative Wayne said the issue is whether the workers hired for state construction projects are getting a just wage. He said the answer to that was unclear in the statutes, but in terms of ethics or morality, the Administration was wrong to circumvent the ruling by the Labor Cabinet by removing the state funds. He added that it may be beneficial to developers, but the workers are being hurt. He said he hoped in January the statute would be clarified and justice restored to workers.


Referring to the news article related to the University of Louisville Papa John's Cardinal Stadium expansion project, Senator Seum asked if it was standard procedure for local governments to bond state projects. The project's cost of $65 million is to be financed by $30 million in private donations and $35 million in bonds to be issued by the local government. Mr. Hicks explained that the University approached the Louisville Metro government to be the conduit for financing the bonds similar to the way the City of Bowling Green provided financing as a conduit for the Diddle Arena renovation project. Mr. Hicks said this was not standard practice but it was a model that has been used in infrequent circumstances. The University of Louisville would pledge the revenues generated by the facility to provide the recurring revenue stream sufficient to repay the debt under an agreement with the local municipality.


The next item reviewed was correspondence from the Finance Cabinet to the LRC reporting the transfer of funds from the Statewide Deferred Maintenance Fund in FY 2006-07. Transfers were made to the Department of Parks ($1,000,000), the Department of Veterans Affairs ($200,000), and pursuant to a 2006-08 budget provision to the General Fund ($332,000). The Statewide Deferred Maintenance Fund was established by statute as a supplemental source of funding for deferred maintenance for state agencies that do not have separate agency-specific maintenance funds or that have inadequate maintenance funds.


In May 2007, a deposit of $1,200,000 was made to the Fund pursuant to the 2006 HB 380 budget provision that interest income earnings on bond proceeds beyond that which is required to satisfy IRS arbitrage rebates and penalties may be credited to the Fund.


In August 2007, an additional $1 million was deposited to the Fund. These funds had been appropriated in the 2004-06 budget to the Statewide Deferred Maintenance Fund that had not been transferred due to an oversight. The Fund balance is now $1,010,314.


Representative Wayne questioned why the Department of Parks received an allocation of $1 million from this Fund when the Department had a balance of $3.5 million in its own maintenance pool. Mr. Hicks said the maintenance pool appropriated for the Department of Parks has an amount for FY 2007 and for FY 2008. He said the current balance reported to the Committee includes the new fiscal year appropriation.


In response to another question from Representative Wayne, Mr. Hicks said during the 2007 Session, the Governor made proposals to accommodate budget difficulties that the Department of Parks was facing. Mr. Hicks said some of the Department's fiscal difficulties were due to lower than estimated revenues and underestimated construction costs.


Mr. Hicks added that the Department had a significant level of maintenance expenses and to help alleviate some of those expenses, the statutory Statewide Deferred Maintenance Fund was utilized. At the time the funds were needed, access was not yet available to the FY 2008 Parks Maintenance Pool.


Representative Wayne asked if the money would be returned to the Fund. Mr. Hicks said the money would not be returned. He explained that spending demands for parks maintenance expenses are sufficient to warrant use of the appropriated maintenance pool. Representative Wayne said he understood why the Finance Cabinet transferred the money but felt it was not good public policy. He said there were a lot of demands on the Statewide Deferred Maintenance Fund for a lot of different purposes and from state agencies that do not have maintenance pool funds. He said the Department of Parks should use its own maintenance pool instead of using money from different sources.


Representative Wayne said it was the Committee's responsibility to know how this money is being spent and requested a list of projects funded by the transferred funds. Mr. Hicks said he would provide a list.


Senator Buford said in the 2006 Session, the Department of Parks received inadequate funding during the budget cycle for the two-year period. Mr. Hicks responded that agencies are in the process of building their budget requests for the 2008 Session and the State Budget Office is working with the Department of Parks to identify its needs and ways to accommodate them.


The next item reviewed was a report regarding Kentucky's Bonded Indebtedness prepared by Kristi Culpepper, LRC Staff Economist. This report is traditionally presented to the Capital Planning Advisory Board during the preparation of its six-year statewide capital improvements plan. Representative Denham noted that the report indicated the state authorized over $2 billion in debt for 2006-2008. No Committee action was required for this report.


Larry Blake, Assistant Vice President for Facilities Management, Northern Kentucky University (NKU), reported a $4,614,000 scope increase for the Regional Special Events Center project. This project was authorized in the 2004-06 Budget for $60,000,000 ($54,000,000 bond funds; $6,000,000 Restricted Funds). Mr. Blake said NKU received a restricted funds scope increase of $4,286,000 in April 2006 due to increased costs associated with construction. He said this current request for a scope increase is due to increased material and equipment costs. The funding source will be University restricted funds or private funds that may result from donations.


Representative Denham asked if naming rights funds of $6 million from the Bank of Kentucky had been received. [The facility will be known as The Bank of Kentucky Center.] Mr. Blake said the money would be received after construction of the facility is complete.


In response to another question from Representative Denham regarding oversight of NKU's capital construction program, Mr. Blake said there is a separate project management staff consisting of project managers, two of which were assigned to The Bank of Kentucky project. The University architect reports to the Assistant Vice President who then reports to the Vice President of Administration. Mr. Blake added that the Construction Management-at-Risk (CM-at-Risk) project delivery method is being utilized for The Bank of Kentucky Center, so NKU has the CM-at-Risk to assist with that project.


 Senator Buford made a motion to approve the scope increase. The motion was seconded by Senator Rhoads and passed by unanimous roll call. The revised project scope is $68,900,000.


Representative Denham asked Mr. Hicks and Mr. Abbott to return to the table to present the monthly project report submitted by the Finance and Administration Cabinet.


Mr. Hicks reported a federally-funded scope increase of $2,421,300 for the Kentucky State University (KSU)-Land Grant Farm Facility Welcome / Conference Center project. This project was approved by the Committee at its December 2005 meeting as an unbudgeted 100% federally-funded project. At that time, the project scope was reported as $1,578,700.


Mr. Hicks said during the design phase of this project, KSU discovered that the size of the Center would not suit its need for a conference space. The additional funds will be used to expand the Center by 5,960 SF. The project will now consist of one 12,460 SF building that can accommodate up to 300 people and a 750 SF pavilion attached to the back with a 300-seat capacity. With this action, the apiculture (beekeeping) facility has been deleted from the project.


Senator Buford made a motion to approve the scope increase. The motion was seconded by Senator Tori and passed by unanimous roll call. The revised project scope is $4,000,000.


The next project Mr. Hicks reported was an agency-funded project scope increase of $400,000 for the Morehead (MoSU) State University Residence Hall Renovation / Improvement project. This project was authorized in the 2004-2006 Budget for $5 million (agency bonds) to renovate Nunn Residence Hall. Mr. Hicks said the additional funds will be used to provide an adequate construction contingency account for the project. He noted that MoSU had enough funds for the renovations, but not enough to provide for the required project contingency account. Mr. Hicks said the source of funds is surplus bond proceeds from previous Housing and Dining bond issues that can only be used for housing and dining projects at MoSU.


Mr. Hicks said MoSU will be able to fully renovate the interior of Nunn Hall, but some exterior problems will be deferred until a later time period. Upon completion of the renovations, Nunn Hall will be a fully useful, habitable building.


Representative Denham asked Mike Walters, Vice President for Administration and Fiscal Services, Morehead State University, to describe for the Committee how the University's capital construction program is administered. Mr. Walters explained that MoSU does not administer its own construction program because it does not have sufficient staff to manage capital projects. The program is administered through the Finance and Administration Cabinet. Mr. Walters added that MoSU has project managers within the facilities management operation who are involved with the architects and engineers that constitute the design team. The University also has an on-site project manager that watches the activities of these projects.


Senator Buford asked when the project would be completed. Mr. Walters said the project was scheduled for completion in December 2008. He added that during the renovation period, Nunn Hall has been and will remain closed. He said MoSU anticipated opening the dormitory by August 2008, but because of the value engineering process and the time needed to review the project, this is not possible.


Representative Wayne made a motion to approve the scope increase. The motion was seconded by Senator Rhoads and passed by unanimous roll call. The revised project scope is $5,400,000.


Mr. Hicks next reported the acquisition of property located at 999 Chenault Road in Franklin County. Funds in the amount of $1,150,000 from the Statewide Acquire Land / Demolish Structures Pool was used to acquire nine acres and a 72,433 SF warehouse building to accommodate two divisions of the Finance and Administration Cabinet. Mr. Hicks said this land acquisition occurred in summer 2004, but was not reported to the Committee due to an oversight. No Committee action for the allocation was required.


The final item Mr. Hicks reported was the purchase of a 56-passenger tour bus by Kentucky State University. This unbudgeted purchase, at a cost of $400,000, will be financed 100% with federal funds from the U.S. Department of Agriculture.


Senator Buford made a motion to approve the KSU project. The motion was seconded by Representative Wayne and passed by unanimous roll call vote.


Representative Denham asked Mr. Hicks to update the Committee on the status of the naming rights issue for the Horse Park Indoor Arena project. [At the Committee's July meeting, it was reported that The Bonham Group, Greenwood Village, CO., had been awarded a $15,300 personal service contract to establish the value of naming rights for the arena. The Committee raised questions as to the state's policy for selling naming rights for state facilities.] Mr. Hicks said the Finance Cabinet's legal counsel is taking a lead role in this effort and information is being gathered as to the legal ramifications of this effort and any past situations where a state building has sold its naming rights or received some kind of remuneration associated with naming rights with any facility. He said this information will be used to formulate a public policy or a practice in terms of naming rights. Mr. Hicks added that he was not sure about the status of the work of The Bonham Group at this time. He added that the most important question is what can be done under existing law before moving into the next question of what should be done and under what circumstances.


Representative Denham said the Committee is meeting at the Horse Park in October, and this will be an opportunity to give a report.


Representative Denham noted that the lease report submitted by the Finance and Administration Cabinet this month had been withdrawn from the agenda.


Representative Denham next welcomed Sandy Williams, Financial Analyst, Kentucky Infrastructure Authority (KIA). Ms. Williams first presented a report summarizing loan activity in KIA's Fund A, B, C, and F programs for FY 2006 and FY 2007. This report required no Committee action.


Ms. Williams next presented various coal/tobacco development grants that were funded through line item appropriations from the General Assembly in 2005 and 2006. No Committee action was required.


The next report was provided by Terri Fugate, Deputy Executive Director, Office of Financial Management (OFM). Ms. Fugate presented three follow-up reports for previously approved bonds: Morehead State University General Receipts Bonds, 2007 Series A, dated August 30, 2007, $6,445,000; Kentucky Housing Corporation Housing Revenue Bonds, 2007 Series K (non-AMT), Series L (AMT), Series M (Taxable), $59,890,000; and Kentucky Higher Education Student Loan Corporation Student Loan Revenue Bonds, Senior Series K 2007 A-1 through Series 2007 A-5 and Subordinate Series 2007 B-1, $250,000,000. No Committee action was required for these follow-up reports.


In response to a question from Representative Denham, Ms. Fugate said the purchase of state issued bonds has not been affected by the federal government lowering interest rates or by the Kentucky v. Davis lawsuit.


Ms. Fugate presented two new school bond issues with School Facilities Construction Commission (SFCC) debt service participation: Larue County and Simpson County.


Senator Buford made a motion to approve the school bond issues. The motion was seconded by Representative Rudy and passed unanimously by roll call vote.


Ms. Osborne said there was one locally-funded school bond issue submitted to the Committee for review this month for Johnson County. She said all disclosure information has been filed, and no further action on the bond issue is required.


Ms. Osborne announced that the next meeting is scheduled for Tuesday, October 16 at 1:00 p.m. at the Kentucky Horse Park in Lexington.


With there being no further business, the meeting adjourned at 2:00 p.m.