The1st meeting of the Interim Joint Committee on Economic Development and Tourism was held on Thursday, June 26, 2008, at 11:30 AM, in Room 149 of the Capitol Annex. Representative Eddie Ballard, Chair, called the meeting to order, and the secretary called the roll.
Members: Representative Eddie Ballard, Co-Chair; Senators Julie Denton, Jerry P. Rhoads, Katie Stine, Jack Westwood, and Ken Winters; Representatives Larry Belcher, Larry Clark, Will Coursey, Jim DeCesare, Mike Denham, Bob M. DeWeese, Myron Dossett, Ted Edmonds, Jim Gooch Jr., Mike Harmon, Melvin B. Henley, Joni L. Jenkins, Dennis Keene, Thomas Kerr, Tom McKee, Brad Montell, Tim Moore, David Osborne, Ancel Smith, Alecia Webb-Edgington, Ron Weston, and Addia Wuchner.
Guests: State Auditor Crit Luallen; Secretary Marcheta Sparrow and Commissioner Gerry van der Meer, Department of Parks, Tourism, Arts and Heritage Cabinet.
LRC Staff: John Buckner, Committee Staff Administrator; Karen Armstrong-Cummings; Louis Pierce; and Dawn Johnson.
State Auditor Crit Luallen reviewed the 2007 Financial Data Analysis of the Kentucky Department of Parks. Ms. Luallen noted that as former Secretary of the Tourism, Arts, and Heritage Cabinet she is a strong supporter of Kentucky’s state parks. She said that based on the previous eight years of data, the parks system is struggling. Tourist activity is declining and net losses are growing in spite of investing hundreds of millions of dollars in capital improvements in recent years. In 1995, a major bond issue of $316 million was appropriated to renovate and expand parks facilities. With a 14 percent increase in operating losses since 2000, the Department of Parks was forced to seek a $5 million supplemental appropriation this year to meet its obligations.
Ms. Luallen said the audit documents a trend toward declining levels in many areas including room occupancy, rounds of golf, gift shop purchases, and dining. Expenditures are increasing at a higher rate than revenues. She said the final report calls for increased marketing and the development of a strategic plan. Auditor Luallen said she believes the state will always need to provide funding to the parks system and they could never become fully self-sufficient. General fund support has averaged $28 million per year in recent years and is now at $31 million per year. She said this funding is necessary because many aspects of the park system do not produce revenue or they cannot produce enough revenue to generate a profit, which include historic sites and shrines, recreation parks with no lodges, smaller parks facilities, and golf courses that cannot generate enough revenue. She said the report focused on the 17 resort parks that can generate revenue. The analysis showed that at the beginning of the time frame these parks either generated a profit or were close to breaking even but since then have operated at a decreased profit margin or at a loss. She said the number of occupied units at the resort parks decreased by more than 29,000 units from 2000-2007—a 12 percent decrease. At the same time available units declined by four percent due to renovations. Also during that time revenue increased slightly due to higher rates. Approximately $55 million has been provided for golf-related projects since 1994; however, golf-related activity experienced its greatest loss of approximately $700,000 in 2007. Golf activities have seen a steady decline since 2004 although five new courses have been added to the system. Rounds of golf played have decreased by nearly 16,000 rounds.
Ms. Luallen said the total meals served during the reporting period decreased by 89,000 meals, or seven percent. During that time, parks moved from a profit of three cents per meal to an average loss of $1.60 per meal. At some parks the loss was as high as $6 or $7 per meal. Also, gift shops and grocery revenues decreased by nearly 24 percent and net profits decreased 87 percent in 2007.
Auditor Luallen said although the parks system has received significant capital construction funding with the goal of increasing usage, this has not happened. She said the Department of Parks needs to identify funding sources to effectively market and advertise parks facilities and activities. Ms. Luallen pointed out that this is an historical analysis that does not deal with the current budget situation. She said the report recommends that the Cabinet use a small portion of the recently instituted 1 percent lodging tax as a source of funding to market the parks. She said the parks are currently receiving a portion of the tax based on the number of rooms rented but the report suggests additional funding be used from the pool given the restrictive budget and the amount of investment the Parks Department has already made in parks facilities. Auditor Luallen said that a 2007 performance audit of the statewide lodging tax was performed to determine if enough strategy was used initially in deciding where and how the money would be allocated and whether enough benchmarking had been done to determine if the initial goals of the tax appropriation had been met. According to the report the tax brought in approximately $7.5 million the first year and was deposited into a restricted fund for the sole purpose of additional promotion of tourism in the Commonwealth. This amount was a threefold increase in tourism marketing funds prior to implementation. The audit found that this new funding was initially spent without adequate direction or performance measurements to monitor the effectiveness of the promotional efforts being funded. Auditor Luallen said the growth of tourism’s economic impact slowed during the first year the new tax money was distributed. In 2005, the growth rate of tourism’s economic impact was 8.2 percent and fell in 2006 to 6.6 percent, below the national average of tourism expenditure growth during the year even though the state tripled the amount of money spent. Auditor Luallen said this is an ideal time for the Cabinet to review how the funds are being used and ensure the state is making strategic investments for marketing purposes. The report also recommends that the Parks Department develop a comprehensive room rate structure based on market research to maximize the economic impact of state lodges. The report recommends that Parks evaluate the pricing structure, marketing, and advertising of its other activities including golfing and dining to maximize participation and economic benefit. The report also recommends that all existing vendor contracts be reviewed to determine if contract costs could be reduced or eliminated. The Department should evaluate the approach taken to renovate lodging and dining facilities to ensure the negative economic impact of construction or minimized. Ms. Luallen said the decline in activity and the resulting financial problems are alarming trends and the state will pay increasing more if the trend is not reversed.
Ms. Luallen noted that throughout her state government career she has continuous stressed to the General Assembly that investments in the state parks lead to increased economic activity for the Commonwealth. She said this should be the goal of the new administration.
Responding to the Chairman’s question, Ms. Luallen said that previously an economic impact study of state tourism funding was done in 2002 by the University of Kentucky but that it has not been updated. She noted that Secretary Sparrow was looking into this matter. Secretary Sparrow added that the 2002 report concluded that there was a $131 million economic impact in the state from the parks.
Responding to Representative Montell’s question, Secretary Sparrow said two state parks fair better than the others by consistently breaking even—Cumberland Falls State Resort Park and Kentucky Dam Village State Resort Park. She noted that Burnside State Park does well and should continue to do so with the addition of a new golf course.
Representative Keene said it has been his experience that the lack of alcohol by the drink prevented some groups from using state park meeting facilities.
Representative Clark recommended the state golf courses host amateur golf tournaments.
A motion was made by Representative Denham and second by Representative Weston to approve the submission of a letter of support to the Kentucky Congressional Delegation concerning a renewal of the exemption of the Delta Queen from the Safety of Life at Sea Act of 1966. The motion was approved by voice vote.
Next, Secretary Marcheta Sparrow, Deputy Secretary Jamie Link, Commissioner of Parks Gerry van der Meer, and Deputy Commissioner of Parks Larry Cotton addressed the Auditor’s report on the financial analysis of the state parks system. Commissioner van der Meer addressed the five major audit recommendations. The first was to develop thorough research and analysis on a comprehensive rate structure to maximize the economic impact of lodging including package pricing special and seasonal rates. The Department will establish rate and occupancy strategies through revenue or yield management. Currently, season rates are rigidly set. Revenue management will allow the parks to offer a lower rate when occupancy is low and a higher rate when occupancy is greater or when reservations are made at the last minute. Commissioner van der Meer said guidelines will be developed in the overall marketing strategy. This strategy is currently used throughout industry. He said it is essential to know what competitors are doing. Also, packages that are currently successful will be expanded and others added and discount packages will be expanded to included military, AARP and other groups.
Next, Commissioner van der Meer said all vendor contracts will be reviewed to reduce or eliminate costs. Working with the Finance Cabinet, they are currently reviewing items such as contract time periods, products, and contract terms.
The next recommendation was to evaluate the approach taken when renovating lodge rooms and dining facilities to minimize the negative impact of construction. Mr. van der Meer said that for the most part construction is performed during slower periods. He noted that renovations to golf courses require not only a construction period but also growing time.
Another recommendation was to evaluate the price structure of marketing and advertising of other activities including golfing and dining to maximize participation and economic benefit. Mr. van der Meer said the Department is currently evaluating the price structure for all park activities. He noted that the new food services director is currently evaluating all operations for cost-saving opportunities and quality assurance.
Referring to the recommendation to identify funding sources to use effectively to advertise park facilities and activities, Secretary Sparrow said the cabinet utilizes General Fund monies as well as funds from the statewide 1 percent lodging tax collected at state parks. In coal producing counties containing state parks, coal severance tax monies will be used to promote adventure tourism. These amounts are estimated to be $750,000. She said for many years marketing efforts have been limited. Millions were spent on renovations and expansions but not marketing, which contributed to the decrease in park usage. Traditionally, the Department has advertised in smaller print publications and AAA directories. She said relying on print advertising with limited resources has not helped the state stay competitive. To develop new marketing strategies, Secretary Sparrow said the Cabinet will create partnerships with public and private sectors to expand marketing efforts and options for state parks. She said the Cabinet is currently working in conjunction with several national parks to establish ways of promoting and encouraging travel between state and national parks. Secretary Sparrow said the Cabinet will implement a comprehensive web-based marketing initiative with special offers, and to research and target specific niches. The Cabinet will increase efforts to attract group business such as church, civic, sport groups, family reunions, corporate and business retreats as well as group tours. Secretary said the Cabinet will continue to evaluate allowing alcoholic beverages.
Secretary Sparrow expressed concern that younger groups do not know about Kentucky’s state parks; therefore, a comprehensive public relations effort is being developed to educate a new generation of Kentuckians. The Cabinet will also encourage all Kentuckians to help market the parks system by becoming third-party advocates. A survey will be posted on the Department of Parks website for visitor feedback. This will be incorporated into marketing plan. Secretary Sparrow said that Mykentuckbackyard.com has been a successful promotional website.
Secretary Sparrow said that the Cabinet will contract with an outside firm to conduct a thorough study of the state parks system and recreation parks to obtain an objective comparison to operations in other states as well as private sector resorts. It will gauge audience participation, future needs, growth opportunities, and uncover potential trouble spots. Once the report is complete, Governor Beshear will name a task force to review it and work with staff to construct a strategic plan. Secretary Sparrow said the issues mentioned in the audit have been ongoing and cannot be resolved immediately, but progress will be made as quickly as possible.
Commissioner van der Meer said the parks do not have a sustainable year-round capability necessary to generate the revenue needed to cover expenses. He noted that state parks facilities only recently added amenities such as wireless internet access, better cell phone services, and online reservations. They continue to receive requests for alcoholic beverage service for meeting and convention guests. Commissioner van der Meer said the new food services director is conducting a review of standard and banquet menus with park chefs. Over the past three years, the parks were encouraged to individualize their menus but this effort was not successful. Food costs have risen and some of the parks have lost the “Kentucky” flavor that many state parks guests seek. The review will ensure Kentucky standards are available across the state but will also allow chefs to be creative and offer local fare as well.
Over the pasted few years the number of golf courses increased dramatically with the addition of “Signature Series” courses. The expense to maintain them has increased also. Maintenance of the Signature Series courses is approximately 50 percent higher than for the other courses. Revenues peaked with the excitement of the new courses, then leveled, and are now showing a decline. The Commissioner noted that play across the country has decreased slightly.
Responding to a question from Representative Wuchner, Commissioner van der Meer said the gift shops are lacking in quality and quantity of merchandise and suffer a general lack of direction in their operation. There is a renewed effort to focus on these issues within the Department. The Department is currently working with the Artisan Center to increase the number of Kentucky-made products offered in the gift shops.
Commissioner van der Meer said state park campgrounds also showed a decline in use but rebounded in 2007 reflecting site improvements made across the system as well as the adoption of online reservation capabilities.
Commissioner van der Meer said there are other underling costs within the system, including increased personnel expenses. Although employment levels decreased significantly, payroll expenses rose. Reasons include basic increases in salaries for the majority of employees and increased benefits expenses, particularly health insurance. He noted that Department staff is working to lower expenses in these areas to lessen the budgetary impact. The Commissioner noted that, in 2003, the University of Kentucky’s Gatton College of Business estimated the economic impact of Kentucky state parks at $317 million with associated worker earnings of $115 million.
Responding to the Chairman’s question, Secretary Sparrow said it was important to market toward local residents of the state parks as they are the best advocates of parks. She said the Cabinet is developing a plan to market golf and dining facilities to local residents.
Senator Stine asked if the Department was working with Kentucky Proud. Commissioner van der Meer said they have worked with Kentucky Proud for several years. He said in some cases this has resulted in an increase in costs because it can be more expensive to buy locally, but a number of Kentucky Proud products are carried throughout the parks.
Senator Stine asked if public/private partnerships were being considered. Secretary Sparrow said the agency is developing a plan for partnerships to promote state parks. She noted that there were successful programs in the 1990s, including Ford Motor Company and Coleman. The Cabinet is also expanding contracts with vendors for parks that do not have dining facilities.
Responding to Senator Stine’s question, Commissioner van der Meer said there is a concern of liability and damage to the façade with rock climbing at Natural Bridge. He said they are willing to review the issue again.
Referring to Representative DeCesare’s question, Secretary Sparrow said that while a task force is looking at the entire tourism marketing effort, currently, of the $8 million 1 percent room tax collected, $5.5 million goes directly back to the regions through the tourism matching funds program. With recent budget cuts, including the loss of general funds for marketing, the agency is relying on the remaining $3 million for the Travel Department’s marketing campaign. She said the money goes into every region of the state. She noted that approximately $200,000 is generated at the state parks. Representative DeCesare expressed concern that the 1 percent room tax was to be directed specifically to each region.
Representative Harmon asked if the parks reservation system could be linked through a service like www.hotels.com. Commissioner van der Meer said this idea is being explored as part of the overall reviewing of services. He said they will create a sliding room rate scale based on occupancy rates and seasonal rate adjustments.
Representative Edmonds stressed that he has throughout the years he has worked diligently to promote Natural Bridge State Park but felt defeated in his attempts. He said the Department of Parks has been of little help. He has tried marketing the park for various local interests such as clogging and quilting but he has seen little support from the Cabinet. He noted that the 63rd Annual Natural Bridge Park Association is in October and hoped that the Governor and the Cabinet would be involved. Representative Edmonds said rock climbers and equestrian groups complain about not being allowed to use the park by officials. He said the park is ideal for promoting adventure tourism. Representative Edmonds said the answer to the economic development problem in eastern Kentucky is tourism. Secretary Sparrow said it is now a new administration and she is more than willing to work with Representative Edmonds on this matter.
Responding to Representative Denham’s question Secretary Sparrow said the economic impact of the World Equestrian Games is estimated to be approximately $160 million. Secretary Sparrow said that number is conservative. She said the Horse Park has the opportunity to become the equestrian center of the United States through the Games.
Representative Wuchner said several area companies give one or two days a year to community service, sometimes working with the state parks. She suggested that the state market to these groups to stay at the Parks with special appreciative programs and discounts. Representative Moore suggested a “parks passport” with special incentives for visiting Kentucky’s parks and other tourism destinations.
There being no further business the committee adjourned at 1:15 PM.