Call to Order and Roll Call
The11th meeting of the Capital Projects and Bond Oversight Committee was held on Tuesday, November 20, 2012, at 1:00 PM, in Room 169 of the Capitol Annex. Senator Bob Leeper, Chair, called the meeting to order, and the secretary called the roll.
Guests: Robin Brewer, Financial Analyst, Office of Financial Management; Rick McQuady, Chief Executive Officer, Kentucky Housing Corporation; Michael Gross, Frontgate developer; Sujyot Patel, Bond Counsel, Peck, Shaffer, and Williams; John Bingham, community representative; Lisa Beran, General Counsel, Kentucky Housing Corporation; Ben Threadman, community representative; Sonja Minch, Mayor of Hollow Creek; Scott Aubrey, Director, Division of Real Properties; John Hicks, Deputy Director, Governor’s Office for Policy and Management; John Covington, Executive Director, Kentucky Infrastructure Authority.
Approval of Minutes
Representative Rudy moved to approve the minutes of the October 16, 2012, meeting. The motion was seconded by Representative Damron and approved by voice vote.
Senator Leeper asked Kristi Culpepper, Committee Staff Administrator, to read a resolution honoring Tom Howard upon his retirement from the Office of Financial Management. Representative Rudy made a motion to approve the resolution. The motion was seconded by Senator Carroll and passed unanimously by voice vote.
Ms. Culpepper said there were two items for members to review. The first was a report of Fitch Ratings’ downgrade of Kentucky’s appropriation-supported debt from AA- to A+. The outlook for the new rating was revised from negative to stable. The second item was the annual report on the Economic Development Bond (EDB) program from the Cabinet for Economic Development detailing whether previously approved EDB projects have met their job creation and wage requirements. No action was required.
Ms. Culpepper said there was one correspondence item for members to review. The committee received a response from the Office of Financial Management in response to question raised at last month’s meeting about the manipulation of the London Interbank Offered Rate – based on interest rate swaps. The Finance Cabinet has filed three claims to participate in a $63.3 million settlement fund for and out-of-court settlement between UBS AG and 25 state attorneys general. The total amount of the claims filed to date is $602,693.
There was one item of old business. The Kentucky Housing Corporation (KHC) Conduit Multifamily Housing Revenue Bonds, Series 2012 – Frontgate Apartments project was originally considered at the September 2012, meeting, but action was postponed pending local action on the project.
Robin Brewer, Financial Analyst, Office of Financial Management, said that the information from their office had not changed since the issue was first presented to the committee at the September 2012 meeting.
Jon Bingham, a community representative, expressed a number of concerns about the project. He said the neighborhood had concerns about the developer’s track record with other properties. KHC should take the developer’s track record into account when evaluating applications for assistance. He questioned the affordability of apartments in the new complex. A nearby apartment complex had lower rental rates. Mr. Bingham said that the community was concerned about the number of apartments in the proposed project. There were fairness issues when the project was considered by the local Board of Zoning Adjustment that led to the neighborhood filing a lawsuit in circuit court the prior week. He had concerns about who the actual developer for the project was. The entity that applied for tax credits, Overlook Development, is different than the entity that will be developing the project, LDG. He believed the developer applied for assistance under Overlook to take advantage of KHC’s policy for giving preference in scoring to a female-owned business.
Rick McQuady, Chief Executive Officer, KHC, said it had received two applications with respect to the Frontgate project. The first application was for nine percent tax credits. Approximately $9.5 million of these credits are provided to the state each year for the development of multi-family housing projects throughout the state. The developer submitted an application for 32 units at Frontgate Apartments, which was scored competitively. The project scored high enough to be funded.
A second application for a tax-exempt bond issue was received from the developer. Projects funded with tax-exempt bonds issued to create multi-family housing automatically receive four percent tax credits. That bond issue called for 180 units of housing on the same site as the 32 units funded by the nine percent credit. Due to a surplus of tax-exempt bond cap, the cycle for the bond-funded projects is not competitive at this time. KHC reviews market studies for projects and uses agency criteria in an attempt to ensure that projects are viable and will succeed. Since this project met the criteria, the bond funds were allocated.
Representative Wayne asked Mr. McQuady to respond to Mr. Bingham’s concerns. Mr. McQuady said that the competitive process involving points assigned to Overlook Development being a female-owned business had to do with the 9 percent tax credits and did not involve the bond issue before the committee. Developers frequently create different entities for legal and tax purposes. Mr. McQuady said that he had met twice with Mr. Bingham and will take his suggestions for improving the application process into consideration.
In response to a question from Senator Leeper, Mr. McQuady said that rent limits are established by the United States Treasury Department.
In response to a question from Senator Carpenter, Mr. McQuady said he was confident in the application process and the way this bond issue has been handled.
In response to a question from Representative Wayne, Lisa Beran, General Counsel for KHC, said that different deals were put together to create the housing complex at Frontgate. She said this was a standard process for such developments.
Michael Gross with LDG addressed the committee to discuss the concerns of neighborhood representatives. Concerns had been expressed at the September meeting about another LDG project (Cambridge Station) in Indianapolis, Indiana, and associated property liens. Every lien the neighborhood representatives presented had to do with single-family homes and not multi-family housing projects. LDG hired an asset manager to supervise the property management company in 2009. When issues were raised regarding Section 8 issues by the Indianapolis Housing Authority, LDG elected to keep the Section 8 tenants in place and absorb the costs while those issues were resolved. Mr. Gross had a letter stating that all violation fees have been resolved. Regarding complaints about the developer’s Falconcrest property, KHC investigated Falconcrest and found that it was not falling into disrepair or suffering from mismanagement as was suggested by the community representatives at the September meeting.
Mr. Gross presented a letter from Louisville Metro Government stating that there are no outstanding property violation fees associated with LDG developments there.
In response to a question from Representative Wayne, Mr. Gross said the two meetings held between neighborhood residents and the developer at the suggestion of the committee at the September meeting were both constructive and non-constructive. Mr. Gross said that the developer addressed many of the issues raised by the neighborhood representatives, but the revised plan was rejected by the resident group. There have been two Board of Zoning Adjustment (BOZA) meetings since the September meeting. In order for the revised plan to be approved, the developer had to file for category three approval with the local planning department. An issue was raised as to whether a waiver was needed. The director of planning issued a letter that said variance was not needed for the development plan. The neighborhood appealed, and that appeal went to BOZA. The appeal was denied and the developer’s plan was upheld. The neighborhood attorney asked for another hearing, which was denied by BOZA. A planning commission meeting was then held and the development plan was approved. After that, the developer held another meeting with neighborhood representatives. The neighborhood’s proposed plan included three times the retail space and a fraction of the planned residential development, which the developer found problematic because there is already vacant retail space in the area. Mr. Gross said the developer filed a compromise plan which took away retail space, lowered the height of buildings, increased open space, lowered density, and increased buffers between the apartment complex and neighborhood. That is the plan the developer intends to move forward with.
In response to a question from Representative Wayne, Mr. Gross said the nine percent tax credits will go to Frontgate Apartments Limited, which is a single-purpose, free-standing entity set up to develop the nine percent tax credit project. Mr. Gross also said that there is a second entity, Frontgate Apartments Two Limited, set up to develop the project funded with tax-exempt bonds. Whoever purchases the tax credits will become a limited partner and will own 99.99 percent of the development.
Ben Threadman, a neighborhood resident, asked to address the committee and asked Senator Leeper what the role of the committee is in an oversight capacity. Senator Leeper said he believed his role on the committee was to determine if the proper process had been followed. Mr. Threadman said he believed that the project is not in the best interest of the community.
Sonja Minch, Mayor of Hollow Creek, expressed her concerns about LDG and Overlook as separate, free-standing entities. Mr. Gross said that the application for a category three development plan was submitted to the local planning department by the developer’s local real estate counsel without review and had several errors on it. The forms have been corrected at the local level and there were no errors on the KHC application. The developer was submitted as Overlook on both applications.
Representative Wayne made a motion to approve the project. Representative Glenn seconded the motion, which passed with five yes votes and two no votes.
Lease Reports Submitted by the Finance and Administration Cabinet
Scott Aubrey presented nine items. The first was a report of state leases with square foot modifications from July 2012 through September 2012. Eight leases had their square footage modified, but the rental rate per square foot on each lease remains the same. No action was required.
The second item was a lease renewal exceeding $100,000 for the Cabinet for Health and Family Services in Montgomery County (PR-2829). The Cabinet will renew its existing lease at 108 East Locust Street in Mt. Sterling at an annual cost of $130,356.
The third item was a lease renewal exceeding $100,000 for the Cabinet for Health and Family Services in Franklin County (PR-3282). The Cabinet will renew its existing lease at 677 Comanche Trail in Frankfort at an annual cost of $116,761.
The fourth item was a lease renewal exceeding $100,000 for the Cabinet for Health and Family Services in Ohio County (PR-4175). The Cabinet will renew its existing lease at 947 West 7th Street in Beaver Dam at an annual cost of $107,950.
The fifth item was a lease renewal exceeding $100,000 for the Public Protection Cabinet in Franklin County (PR-4377). The Cabinet will renew its lease at 132 Brighton Park in Frankfort at an annual coast of $136,769.
The sixth item was a lease renewal exceeding $100,000 for the Cabinet for Health and Family Services in Letcher County (PR-4487). The cabinet will renew its lease at 415 Highway 2034 in Whitesburg at an annual cost of $178,579.
The seventh item was a new lease exceeding $100,000 for the Cabinet for Health and Family Services in Lincoln County (PR-4642). New lease space was sought through a competitive bid process after the owner of the previously leased space sought a rate increase. The cabinet will lease 9,164 square feet at 144 Frontier Boulevard in Stanford at an annual cost of $127,288.
The eighth item was a new lease exceeding $100,000 for the Cabinet for Health and Family Services in Scott County. New lease space was sought through a competitive bid process after the owner of the previously leased space sough a rate increase. The Cabinet will lease 13,761 square feet at Lane’s Run Business Park in Georgetown at an annual cost of $127,014.
In response to questions from Representative Rudy, Mr. Aubrey said that the Scott County lease would be a new construction and the lease on the current space would run through June 30, 2013. Janitorial services are included in the current lease. Both new construction and existing facilities are considered during the competitive bid process.
Senator Carroll made a motion to approve the lease renewals and new leases. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
The ninth item was a report of emergency lease for the Cabinet for Health and Family Services in Kenton County (PR-5304). The Cabinet will lease 7,761 square feet at 19 East Pike Street in Covington at an annual coast of $93,132 due to damage at the previous location on September 15, 2012, which rendered the space unsuitable. No action was required.
Project reports submitted by the Finance and Administration Cabinet
John Hicks, Deputy Director, Governor’s Office for Policy and Management, presented three items. The first item was a new unbudgeted capital project for the Education and Workforce Development Cabinet’s Office of Employment and Training. The scope for the Unemployment Insurance Integrity Enhancement – Adjudication project is $666,200 and is 100-percent federally funded. The project will develop an automated process for determining eligibility for unemployment insurance benefits. Representative Wayne made a motion to approve the project. The motion was seconded by Senator Carroll and passed unanimously by roll call vote.
The second item was also a new unbudgeted capital project for the Education and Workforce Development Cabinet’s Office of Employment and Training. The scope for the Unemployment Insurance/Reemployment and Assessment Data Integration Project is $661,000 and is 100-percent federally funded. The project will organize the data for reporting elements of the Unemployment Insurance program that are currently stored across multiple systems. Representative Wayne made a motion to approve the project. The motion was seconded by Representative Rudy and passed unanimously by roll call vote.
The third item was a request for a scope increase on a budgeted project. Morehead State University requested a scope increase of $264,000 (bond funds) for the Renovate West Mignon Residence Hall project to be used for paving, replacing the roof, and replacing the cooling tower. In July 2012, the university requested, and the committee approved, a scope increase of $412,000. The total of the two scope increases is 13.7 percent and within the limits established by statute. Senator Carroll made a motion to approve the scope increase. The motion was seconded by Representative Damon and passed unanimously by roll call vote.
Kentucky Infrastructure Authority (KIA) Fund A Loans
John Covington, Executive Director, KIA, presented two Fund A loan requests. The first request was for a $1,148,730 increase to a previously approved loan to the City of Barbourville for $5,651,270 for the Wastewater Treatment Plant Upgrade – Phase 1 project. Design changes resulted in the addition of a new blower, electrical building, removal and installation of clarifier equipment, thicker concrete walls, and a change to the feed system.
In response to a question from Senator Leeper, Mr. Covington said the need for design changes became apparent only after work had begun on the project.
The second loan request was a new loan to the City of Jackson. The $700,000 loan will be used to rehabilitate ten lift stations throughout the city’s system. The lift stations range in age from 5 to 30 years, and the city is under an agreed order to remediate numerous operation and maintenance issues.
Representative Wayne made a motion to approve both Fund A loan requests. The motion was seconded by Representative Rudy and passed unanimously by roll call vote.
KIA Fund B Loan
Mr. Covington presented one Fund B loan request, for a loan to the city of Mount Olivet in the amount of $350,000 for the elevated Water Tank project. This project will replace an existing 100,000-gallon standpipe that has been in place since 1955 with a new 100,000-gallon elevated tank.
Representative Wayne made a motion to approve the loan. The motion was seconded by Senator Carpenter and passed unanimously by roll call vote.
KIA fund F loans
Mr. Covington presented three Fund F loan requests. The first was a loan assumption for the Adair County water district d/b/a Columbia/Adair Utilities District. The Adair County Water District is seeking to assume $5,382,822 of outstanding Fund F loans of the Columbia/Adair County Water Commission in anticipation of the merger of the commission’s assets into the district. The merger is expected to close in late 2012 or early 2013.
The second loan request was for a loan to the Adair County Water District in the amount of $4,000,000 for Phase I of the Downtown System Improvements project. The project consists of installation of approximately 5,400 linear feet of eight-inch and 38,000 linear feet of six-inch waterline to replace existing undersized and asbestos-cement water lines.
The third loan request was for a loan for the City of Hartford in the amount of $564,150 for the Pretreatment Basin and System Improvements project. The project involves modifications and rehabilitation of an existing settling basin as well as repainting and repairing the city’s one-million-gallon storage tank.
Representative Damron made a motion to approve the Fund F loan requests. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
Ms. Culpepper said that the committee had received information from KIA on several grants for coal and non-coal counties. No action was required.
Economic Development Bond Grant submitted by the Cabinet for Economic Development
Katie Smith, Executive Director, Office of Compliance, Financial, and Administrative Services at the Cabinet for Economic Development, presented an Economic Development Bond grant. The $400,000 grant was made to the Crittenden County Fiscal Court for the benefit of Invensys Rail Corporation. The company agreed to create 50 new full-time jobs for Kentucky residents with an average hourly wage on $14.00, including benefits within three years of the date of KEDFA approval and to maintain those jobs for three additional years.
In response to a question from Representative Wayne, Ms. Smith said that it had been more than three years since the last approval for this company and that they had met the terms and conditions of their previous grant.
Senator Carpenter made a motion to approve the grant. The motion was seconded by Representative Wayne and passed unanimously by roll call vote.
Follow-up report for previously approve bond issue
Ms. Brewer presented a follow-up report on a previously approved bond issue for the Kentucky Economic Development Finance Authority Healthcare Facilities and Revenue Refunding Bonds, Series 2012 (Masonic Homes of Kentucky). The bond proceeds totaled $49,655,000 and the costs of issuance totaled $442,691. No action was required.
New school bond issues with School Facilities Construction Commission debt service participation
Ms. Brewer said there were nine school district bond issues being reported with SFCC debt service participation. Seven were refundings and two were for new schools and school improvements. None of the projects involve tax increases. Representative Wayne made a motion to approve the bond issues. The motion was seconded by Senator Carpenter and passed unanimously by roll call vote.
New school bond issues with 100 percent locally-funded debt service participation
Ms. Culpepper said there were five local school bond issues reported to the committee this month. The bond issues have 100 percent local debt service support and none of the bond issues involved a tax increase. No action was required.
With there being no further business, the meeting adjourned at 2:45 p.m.