Call to Order and Roll Call
TheCapital Projects and Bond Oversight Committee met on Tuesday, September 17, 2013, at 1 p.m., in Room 169 of the Capitol Annex. Representative Kevin Sinnette, Chair, called the meeting to order, and the secretary called the roll.
Guests Testifying Before the Committee: Secretary Larry Hayes, Kentucky Cabinet for Economic Development; Mr. Jim Host, Former Chairman of the Louisville Arena Authority; Mr. Clifford Rippetoe, President and CEO, Kentucky State Fair Board; Mr. Bob Wiseman, Vice President for Facilities Management, University of Kentucky; Mr. Larry Blake, Assistant Vice President for Facilities Management, Northern Kentucky University; Mr. Scott Aubrey, Director, Real Properties, Finance and Administration Cabinet; Mr. John Hicks, Deputy State Budget Director; Mr. John Covington, Executive Director, Kentucky Infrastructure Authority; and Mr. Ryan Barrow, Executive Director, Office of Financial Management.
Approval of Minutes
Kristi Culpepper, Committee Staff Administrator, said KIA presented five Fund F loans for approval to the committee on March 19, 2013. The presentation included requests from the City of Frankfort for a $4,000,000 loan for the Alternate Power Generation project and the Henry County Water District #2 for a $2,855,000 loan for the Morton Ridge Main Upgrade project.
Four loans, including the City of Frankfort and Henry County Water District #2, were approved by the committee under a single motion. Senator Carroll made a motion to approve the Fund F loans, excluding the City of Barlow project. The motion was seconded by Senator McDaniel and passed by roll call vote.
The meeting minutes did not reflect the approval of the two Fund F loans. The recording of the meeting; however, confirmed both loan requests were presented and approved.
Senator McDaniel made a motion to approve the minutes with this clarification. The motion was seconded by Senator Girdler and approved by voice vote.
Resolution Honoring Dr. Robert Tarvin
Angela Offerman, Committee Assistant, read a resolution honoring Dr. Robert Tarvin, who retired on August 31, 2013, as Executive Director of the School Facilities Construction Commission.
Ms. Culpepper presented two correspondence items. The first item included letters from the committee to the Secretary of the Finance and Administration Cabinet; the Assistant Vice President for Administration and Finance of Northern Kentucky University (NKU); and the Vice President of Business Affairs of the University of Louisville advising them that no action had been taken on the projects submitted for August because the meeting was cancelled.
The second item included letters from the Finance and Administration Cabinet and NKU advising the committee that they would proceed with the projects as permitted in statute.
Ms. Culpepper said there were eight information items for review. The first item was from the Department of Public Advocacy (DPA) regarding the amortization of leasehold improvements reported to the committee at the July 16, 2013, meeting. According to the report presented to the committee, DPA requested that Luxe Vinyl plank tile be installed in the facility and in all leased space going forward. Members requested that DPA explain why the agency asked for tiling from a specific manufacturer. In a letter to committee staff, DPA explained that it did not desire any particular brand of tile, but the agency requested tile to reduce long-term maintenance costs, prevent allergies, and maintain a more professional appearance in the more heavily used areas of their offices.
The second item was follow-up information regarding the Construct CERF-P Facility – Boone National Guard Center Project. During the committee’s June 18, 2013, meeting, members asked for a breakdown of the costs for the improvements associated with recent scope increases and the estimated savings from energy conservation measures. The breakdown was provided to members.
The third item was the annual status report from the Administrative Office of the Courts on the Court Facility Use Allowance Contingency Fund. In fiscal year 2013, there was an expenditure of $116,800 for an additional bond sale for Morgan County due to tornado damage. The allocation was authorized by the committee in September 2012.
The fourth item was a notice of advertisement for leased space from the Finance and Administration Cabinet for the Cabinet for Health and Family Services in Franklin County.
The fifth item was a letter from the Office of Financial Management regarding an interim loan for the Administrative Office of the Courts. 2013 HB 238 authorized $28,100,000 of agency bonds for the Phase One E-Case and Docket Management System. The project has received interim financing for $15,000,000 of the total authorization through a loan from JP Morgan Chase under the state’s master lease contract. The loan closed on August 16, 2013, and has a two-year term, and an interest cost of 0.98 percent.
The sixth item was the annual report of bonds outstanding from the Office of Financial Management.
The seventh item was a report on Kentucky’s Bonded Indebtedness that committee staff submitted to the Capital Planning Advisory Board.
The final information item included documents related to the negative impact reimbursement agreement between the Kentucky State Fair Board (KSFB) and the Louisville Arena Authority (LAA), which members requested at the July 16, 2013, meeting. Member materials included a timeline for the Louisville Arena project; a staff memorandum; language from 2006 HB 380 stipulating conditions for the $75,000,000 grant that the state made from General Fund supported bond funds for the project; an invoice KSFB sent to LAA in May 2013 for services provided to LAA; a resolution and clarification related to the negative impact reimbursement; the minutes from the May 2013 KSFB meeting; the Mutual Agreement of Dissolution and Termination – Amended and Restated Operations and Management Agreement from July 2012, which terminated an earlier agreement for KSFB to manage the arena and modified what was owed under the negative impact reimbursement; correspondence between committee staff and LAA’s accountant; and media reports related to possible modifications to the arena’s tax increment financing district.
In response to questions from Chairman Sinnette, Mr. Clifford Rippetoe, President and CEO, Kentucky State Fair Board, said an invoice was sent to LAA for $1,470,000 for services rendered and not connected to the negative impact reimbursement. The negative impact reimbursement, as identified in the bond indenture, was addressed separately by KSFB in May 2013, and was a part of the clarification statement. Mr. Rippetoe said $750,000 has been set aside each year for the negative impact reimbursement and will be paid in January 2014 when the amount of negative impact reimbursement owed will be calculated. After the amount owed is determined, arrangements between the KSFB and LAA will be made for payment.
Mr. Rippetoe said that the bond indenture requires that LAA operating fund, reserve account, and debt service be funded prior to the negative impact reimbursement to KSFB. If funding is available, the reimbursement will be made to KSFB after January 2014.
Mr. Rippetoe said the clarification issued in May 2013 was reviewed by KSFB internal legal counsel, the Governor’s Office, the Finance and Administration Cabinet, and LAA. It clarified that any action taken could not supersede the bond indenture, and specifically, agreements as addressed in the Bond Trust Indenture Section 404 and 409.
Mr. Rippetoe said KSFB expects to ask the General Assembly for an appropriation of General Funds based on the three-year loss of operating income from Kentucky Kingdom, Executive Inn East, and the loss of the University of Louisville programs at Freedom Hall. The estimated deficit is $3,600,000.
In response to questions from Senator McDaniel, Mr. Rippetoe said there is no debt at this time because the calculation of the negative impact reimbursement will not occur until January 2014. The forgiveness of $5,500,000 owed from the LAA was necessary for accounting purposes. The amount was an estimate based on the bond indenture requirement that $750,000, plus interest, be placed into a reserve fund by LAA annually in anticipation of making the negative impact reimbursement payments after January 2014. KSFB was not counting the payment as a credit or revenue because it is unknown as to whether the funding will be available when the calculation occurs.
Mr. Rippetoe said that KSFB has not lost business aside from the University of Louisville athletics at Freedom Hall. KSFB has maintained the same revenue levels and is in the process of calculating the bottom-line impact.
In response to a question from Senator McDaniel, Secretary Larry Hayes, Cabinet for Economic Development, said that both LAA and KSFB used the same accountant. Mr. Rippetoe said both agencies have had an audit performed.
Senator McDaniel asked if the termination of the management agreement between KSFB and LAA was a result of mismanagement by KSFB and if the mismanagement led to the necessity of the debt forgiveness. Mr. Jim Host, former Chairman of the Louisville Arena Authority, said LAA lost $3,800,000 the first year that KSFB was responsible for the management of the arena. He ordered a management audit because, under ordinance, Louisville Metro pledged a guaranteed minimum of $6,500,000 and a maximum of $9,800,000 for debt service. The management audit was performed by outside consultants and showed the arena operations were flawed. LAA made the decision to change management firms.
The first year with the new management firm, AEG, LAA realized a $1,800,000 operating profit. The profit was used for debt service; funding of the renovation replacement fund; the city guarantee amendment; and to replenish the replacement fund as a result of loss of the loss of UL programs at Freedom Hall. Mr. Host also added the debt service reserve fund of $16,000,000 has never been touched.
Mr. Host said that the arena was attracting new events, generating revenue, and making a positive economic impact to downtown Louisville.
Mr. Rippetoe said KSFB, LAA, and AEG work cooperatively and KSFB will continue as the contract provider for staff services to provide security, perform ushering services, sales of merchandise, and taking of tickets.
Senator McDaniel said the ongoing relationship between KSFB and LAA needs to have more oversight through reporting to the General Assembly because of the revenue loss, which will result in the request for an appropriation from the General Fund. When the calculations of the negative impact reimbursement are performed in January 2014, Senator McDaniel requested the information be presented to the committee.
In response to a question from Chairman Sinnette, Secretary Hayes said the original tax increment financing (TIF) district was reduced from six miles to two miles because of non-performance. The short-term goal was to improve the Standard & Poor’s rating and make it possible to refinance at a lower interest rate within two years.
In response to questions from Representative Wayne, Secretary Hayes said the state’s contribution to the project was the TIF contribution and the larger TIF area was not performing. Therefore, the decision was made to make the TIF area smaller to free up the area for community development.
Representative Wayne asked for an explanation of why the resolution was necessary. Mr. Rippetoe said the intent of the original resolution was to suggest a clean break to put aside all agreements, including dissolution agreements, to get back to the intent of the bond indebtedness documents to move forward. The dissolution agreement required clarification. Thus, the clarification document was read into the KSFB minutes, but did not require action.
Representative Wayne said the General Assembly needs to be a part of actions taken regarding debt forgiveness and changes to agreements.
In response to a question from Representative Damron, Secretary Hayes said the revenues from the new TIF district in 2012 was $3,600,000 and is estimated to be $5,700,000 in 2013.
In response to a question from Senator Leeper, Mr. Rippetoe said an appropriation from the current budget will be requested to address the estimated $3,600,000 deficit.
Project Report from University of Louisville (UL)
Ms. Culpepper said at the May 21, 2013 meeting, committee members requested that UL provide regular updates to the committee regarding funds UL has raised for the Schnellenberger Football Complex Addition/Upgrade project. The $7,500,000 project will be fully funded by the UL Athletic Association.
According to the university, the athletic association has raised approximately $3,000,000 and the project will not begin until all needed funds are raised. No action was required.
Project Reports from University of Kentucky (UK)
Mr. Bob Wiseman, Vice President for Facilities Management, UK, presented four items. The first report involved the purchase of unbudgeted medical equipment. The item purchased was an ICD-10 SCM 6.1 Hardware System to be used to house and support the SCM application and database, which upgrades current inpatient health care records. The cost of the system was $3,157,022 and was paid from restricted funds. No action was required.
The second item involved the purchase of unbudgeted medical equipment. The item purchased was a Central Pharmaceutical Distribution System that provides heavy-duty automated storage for all medication to allow for greater inventory control, enhanced workflow efficiency, improved patient safety, and maximum storage. The cost of the system was $2,572,846 and was paid from restricted funds. No action was required.
The third item was an emergency repair, maintenance, or replacement project, Replace Woodford County Feed Mill project. On May 26, 2013, a fire destroyed the College of Agriculture’s feed manufacturing facility. The facility was insured through the university’s risk management division and was covered to the level of full replacement cost. The $3,000,000 project will be funded with insurance proceeds and was approved by the UK Board of Trustees on September 10, 2013.
In response to a question from Representative Rudy, Mr. Wiseman said that the facility only serves the College of Agriculture farms and produces specialized feed for research purposes. UK has been purchasing feed from other sources, which has not been cost effective. No action was required.
The fourth item was an unbudgeted capital project, Renovate Schmidt Vocal Arts Center Capital project. The $1,700,000 capital project was the second phase of an earlier privately funded project. The university raised $1,235,000 in private funds and expects the remaining $465,000 to be funded with university-restricted funds. The UK Board of Trustees approved the project on September 10, 2013.
Representative Damron made a motion to approve the unbudgeted capital project. The motion was seconded by Representative Wayne and approved by roll call vote.
Project Report from Northern Kentucky University (NKU)
Mr. Larry Blake, Assistant Vice President for Facilities Management, NKU, reported the acquisition of Lakeside Terrace, a former senior housing apartment complex, on June 27, 2013, from the Campbell County Fiscal Court for $1,400,000. The facility was adjacent to another residence hall and, when renovated, will add approximately 200 beds. The total investment cost, including acquisition cost, will be approximately $12,000,000. The NKU Board of Regents approved the land acquisition on January 9, 2013. No action was required.
Lease Reports from the Finance and Administration Cabinet
Mr. Scott Aubrey, Director, Real Properties, Finance and Administration Cabinet, presented two items. The first item was for a lease modification and amortization of leasehold improvements for the Cabinet for Health and Family Services (CHFS) in Henry County. The amortization of leasehold improvements was to complete security-related improvements to the receptionist area, which included the installation of a solid wood/metal frame with a safety glass vision panel, voice port, a slotted pass-through at the bottom of the window, panic bar, and electronic keypad entry for staff.
Two estimates were obtained for the improvements and the cabinet recommended accepting the lowest bid of $4,895 from KB Contracting. The cost will be amortized through the term of the lease, which will expire June 30, 2018. No action was required.
The second item was for a lease modification for the consolidation for multiple leases for CHFS in Franklin County, including necessary temporary space to house 159 staff associated with the Medicaid Enterprise Management System, resulting in an increase of 20,564 square feet (sq ft) (from 29,454 sq ft to 50,019 sq ft) and an increase of $205,650 in annual rent (from $294,540 to $500,190).
Representative Wayne made a motion to approve the lease modification. The motion was seconded by Representative Damron and was not approved by roll call vote.
In response to questions from Representatives Wayne and Rudy, Mr. John Hicks, Deputy State Budget Director, said the leased space will house staff associated with the Medicaid Enterprise Management System and will be adjacent to space occupied by the Health Benefits Exchange staff.
Representative Rudy made a motion to reconsider the vote. The motion was seconded by Senator McDaniel and approved by roll call vote.
Senator McDaniel made a motion to approve the lease modification. The motion was seconded by Representative Wayne and was approved by roll call vote.
Project Reports from the Finance and Administration Cabinet
Mr. John Hicks, Deputy State Budget Director, presented two new unbudgeted capital projects. The first project was a request from the Department of Military Affairs to pave and strip 89,100 square feet (sq ft) of roadway and 159,000 sq ft of parking areas at the Harold L. Disney Training Site in Knox County. The project appropriation was $750,000 and was 100 percent federally funded.
Representative Damron made a motion to approve the capital project. The motion was seconded by Senator McDaniel and approved by roll call vote with one “no” vote.
The second project presented was a request from the Department of Military Affairs to upgrade the exhaust system at the Unit Training and Equipment Site located at the Wendell H. Ford Regional Training Center in Muhlenberg County. The project appropriation was $775,000 and was 100 percent federally funded.
Representative Damron made a motion to approve the capital project. The motion was seconded by Representative Rudy and approved by roll call vote with one “no” vote.
Kentucky Infrastructure Authority (KIA) Loans
Mr. John Covington, Executive Director, Kentucky Infrastructure Authority, presented a Fund A Loan increase for the Regional Water Resource Agency in Daviess County. The request was for a $246,887 increase to the previously approved $5,790,500 Dublin Lane Sewer Outfall Reconstruction and Veterans Drive Sewer Rehabilitation projects. The new Fund A loan amount was $6,037,387. The increase will partially fund additional costs incurred of approximately $600,000 due to heavy rains and flooding in April 2011. Mr. Covington said the loan will have a 20-year term, an interest rate of one percent, and an estimated annual debt service payment of $345,888.
Representative Wayne made a motion to approve the Fund A Loan increase. The motion was seconded by Representative Rudy and approved by roll call vote.
The second request was a Fund F Loan increase for the City of Covington in Carroll County. Carrollton Utilities (CU) requested the increase of $185,027 to the previously approved $1,850,270 Countywide Underserved Project. The new Fund F loan amount was $2,035,297. The increase was requested because costs were higher than originally projected due to 1) an increase in the scope of the preliminary engineering report to evaluate alternative water softening technologies, and 2) higher than anticipated line installation costs.
The regional solution to Carroll County’s source water, water treatment, and distribution needs involved various construction components that will benefit CU, the Carroll County Water District #1, and the West Carroll Water District affecting over 5,650 customers. Mr. Covington said the loan will have a 30-year term, an interest rate of one percent, and an estimated annual debt service payment of $54,460.
Representative Wayne made a motion to approve the Fund A Loan increase. The motion was seconded by Representative Rudy and approved by roll call vote.
New Bond Issues Submitted from the Office of Financial Management (OFM)
Mr. Ryan Barrow, Executive Director, OFM, presented two new bond issues. The first bond issue was for Kentucky Economic Development Finance Authority (KEDFA) Industrial Building Revenue Bonds Catholic Health Initiatives, Series 2013. This was a conduit bond issue and the debt will be a general obligation of Catholic Health Initiatives and not a debt of the state or KEDFA.
The Louisville-Jefferson County Metro Government, Laurel County Fiscal Court, Montgomery County Fiscal Court, and Lexington-Fayette Urban County Government adopted resolutions requesting KEDFA issue the bonds. A Tax Equity and Fiscal Responsibility Act hearing was held for the purpose of receiving public comment on the proposed bond issue.
The bond issue will refinance outstanding commercial paper, which provided interim financing for projects in London and Mt. Sterling, Kentucky. The proposed date of sale is November 5, 2013 and the net proceeds for the project were $140,000,000.
Representative Wayne made a motion to approve the new bond issue. The motion was seconded by Representative Rudy and approved by roll call vote.
The second bond issue presented was Western Kentucky University General Receipts Revenue Bonds, 2013 Series A, to refinance the remaining part of the Downing University Center renovations (authorized by 2012 HB 265) and fully finance the construction of the Honors College facility project (authorized by 2013 HB 7).
The bond issue was approved by the university’s Board of Regents on July 26, 2013, and the proposed date of sale will be October 15, 2013. The expected ratings are Moody’s Aa3 (intercept), A1 (underlying) and S&P A+ (intercept), A (underlying). The true interest cost is 4.36 percent, with a 20-year term, and the total estimated debt service is $54,324,191. This will be a competitive transaction and Peck, Shaffer and Williams will serve as bond counsel; Hilliard Lyons as financial advisor; and US Bank as trustee.
Representative Wayne made a motion to approve the new bond issue. The motion was seconded by Senator Leeper and approved by roll call vote.
Follow-up Reports from the Office of Financial Management
Mr. Barrow presented follow-up reports for three previously approved bond issues. The first report was for a conduit issuance with Kentucky Housing Corporation Multifamily Housing Revenue Bonds (Most Blessed Sacrament Senior Apartments Project), Series 2013, dated August 28, 2013. The bond issue will finance the acquisition, construction, and equipping of the Most Blessed Sacrament Senior Apartments. The facility consists of 30 senior units and is located at 1128 Berry Blvd., Louisville, Kentucky. Frost Brown Todd LLC served as bond counsel; the method of sale was direct placement with Citizens Union Bank of Shelbyville, Inc.; and the developer was Housing Partnership Inc. The final maturity date will be August 1, 2033. The total project cost was $7,229,332. No action was required.
The second report was for a conduit issuance with Kentucky Housing Corporation Multifamily Housing Revenue Bonds (Sheppard ACD Apartments Project), Series 2013, dated August 21, 2013. The bond issue will finance the acquisition, construction, and equipping of the Sheppard ACD Apartments. The facility consists of 129 units and is located at 520 East Jacob St., Louisville, Kentucky. Peck, Shaffer and Williams LLP served as bond counsel; PNC Capital Markets, LLC, underwriter; and Louisville Metropolitan Housing Authority, developer. It was a public offering with a total project cost of $13,000,000.
The third report was for a $212,545,000 Asset/Liability Commission Project Notes, 2013 Federal Highway Trust Fund First Series A (GARVEE) bond issue. The purpose of the bonds was to provide financing for the Kentucky portion of the Louisville-Southern Indiana Ohio River Bridges Project (LSIORBP) using the authorization from 2008 House Bill 410 and 2010 Extraordinary Session House Bill 3. With this issue, all GARVEE authorizations have been exhausted for the LSIORBP. The transaction was priced on July 26, 2013; closed on August 8, 2013; and September 1, 2025 is the final maturity on the debt. The true interest cost was 3.368 percent and it was a negotiated transaction with Citigroup Global Markets Inc. Kutak Rock LLP served as bond counsel and Bank of New York Mellon as trustee.
New School Bond Issues with School Facilities Construction Commission (SFCC) Debt Service Participation
Mr. Barrow reported ten school bond issues with SFCC debt service participation with a total par amount of $51,250,000. The state portion of the annual debt service payment was $1,032,246 and the local contribution was $3,301,466. The bond issues did not involve tax increases.
Senator Leeper made a motion to approve the new bond issue. The motion was seconded by Representative Rudy and approved by roll call vote.
With there being no further business, the meeting adjourned at 2:53 p.m.