The1st meeting of the Subcommittee on Postsecondary Education of the Interim Joint Committee on Education was held on Tuesday, June 3, 2003, at 10:30 AM, in Room 129 of the Capitol Annex. Senator Jack Westwood, Presiding Co-Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Jack Westwood, Co-Chair; Representative Mary Lou Marzian, Co-Chair; Senator R.J. Palmer II; Representatives Hubert Collins, Bill Farmer, Mary Harper, Russ Mobley, Frank Rasche, Tom Riner, Charles Siler, Dottie Sims, and Kathy Stein.
Guests: Arch Gleason, Howard Kline, and Rick Redman, Kentucky Lottery Corporation; Jim Applegate, Council on Postsecondary Education.
LRC Staff: Jonathan Lowe, Audrey Carr, and Lisa Moore.
Senator Westwood said he had hoped members had reviewed the 2003 proposed workplan for the Subcommittee on Postsecondary Education. He recommended delaying the discussion of the workplan until later in the meeting when other subcommittee members would be there to provide input.
Senator Westwood discussed the study of the Kentucky Educational Excellence Scholarship (KEES) Program, and referred members to the copy of House Concurrent Resolution (HCR) 141 in their folders. He said HCR 141 requires the Interim Joint Committee on Education to study the KEES during this interim and make recommendations to the 2004 General Assembly. Senator Westwood said the question was raised about the viability of the KEES program and whether Kentucky would be able to support the KEES program with the anticipated revenue drop in the Kentucky Lottery, as a result of Tennessee establishing their own lottery. He said the Subcommittee on Postsecondary Education will be responsible for the KEES study and submitting its work and recommendations to the Interim Joint Committee on Education for approval.
Senator Westwood welcomed the new members to the subcommittee including Senators R.J. Palmer II and David Williams; and Representatives Bill Farmer and Mary Harper. He also welcomed Mr. Thomas Layzell, the recently appointed President for the Council on Postsecondary Education.
Senator Westwood introduced Dr. Joe McCormick, Executive Director, Kentucky Higher Education Assistance Authority (KHEAA), and Kentucky Higher Education Student Loan Corporation (KHSLC); and Mr. Thomas Layzell, President, Council on Postsecondary Education (CPE) who provided an overview of the KEES program and outlined key issues for the subcommittee to conduct its study.
Dr. McCormick said KHEAA and CPE share the responsibility for administering the KEES program to all the private and public colleges and universities across the state. He introduced school representatives from the audience including Mr. David Cecil, Transylvania University, and Mr. David Prather and Ms. Linda George, University of Kentucky, who represent the financial aid community that is an integral part of the administration of the KEES program. Dr. McCormick then introduced his staff including Mr. Tim Phelps and Ms. Linda Renschler, who work directly with the KEES program.
Dr. McCormick said the 1998 Kentucky General Assembly created a merit-based scholarship program funded by lottery proceeds. He said the lottery also provided substantial funding for the need-based programs including the College Access Program (CAP) and the Kentucky Tuition Grant (KTG) Program. Dr. McCormick said KEES awards are earned on a yearly basis by high school students beginning in the ninth grade. He said students can earn up to $500 per year for four years of high school, and receive a bonus award based on ACT scores. He said the maximum aggregate scholarship award could be $2,500 per year for four years.
Dr. McCormick noted that the 2001-2002 graduating high school class was the first year with students receiving Senator Jeff Green scholarships. He said these are students who achieved a 4.0 GPA for each of the four years of high school and scored at least a 28 or higher on the ACT test. These students received a $2,500 award, and there were 759 of those students in the Commonwealth of Kentucky.
Dr. McCormick said the scholarship program was formed to serve three primary purposes: 1) to promote access to postsecondary education and educational attainment; 2) to encourage and reward students for working hard academically; and 3) to encourage the best and brightest students to remain in Kentucky to attend college. He said the funding was provided on a schedule that an increasing amount of net lottery proceeds on a percentage basis would be dedicated to the KEES and the CAP and KTG program. He said that as of the year 2006, 45 percent of the lottery proceeds will go to the merit-based KEES program, and 55 percent will go to the need-based CAP and KTG programs. He said the legislature gave a specific emphasis to continuing support for the need-based program while implementing the merit-based program. Dr. McCormick said the creation of the KEES program and the shifting of the funding base to the lottery proceed, resulted in dramatic increases in both need-based and merit-based aid. He said this is a unique attribute of the Commonwealth of Kentucky in addressing need-based versus merit-based aid.
Dr. McCormick said differences in eligibility under CAP include that students must attend a public university, while under KTG, a student must attend a private university. He said under KEES, the students qualify on the basis of merit alone, and it does not matter if they attend a public or private postsecondary institution in Kentucky.
Dr. McCormick said specific eligibility criteria for students to receive a KEES base award include: enrollment in a certified Kentucky high school for at least 140 days and enrolled on the last day of the school year; Kentucky residency; a minimum 2.5 GPA at the end of a school year that included the approved five-course core curriculum authorized by the CPE; and students not being a convicted felon.
Dr. McCormick said the eligibility criteria for students to receive a KEES bonus award up to ($500) include: students qualifying for a base award; students having a composite score of at least 15 or higher on the ACT (or 710 on the SAT); and students attending a participating school. He said the bonus award is also available to students attending home school, and also to a GED recipient who has not turned 18 before 1999.
Dr. McCormick said the KEES awards are used at all public and private colleges and universities in Kentucky. This includes the Kentucky Community and Technical System (KCTCS) schools, Kentucky two-year and four-year public, and most private institutions. He said students have five years from the date of high school graduation to use eight semesters of eligibility, with the exception of students enrolled in an approved five-year undergraduate program who have six years to use ten semesters. Dr. McCormick said students must be full-time in order to receive the full amount; if at least half-time, the award amount is reduced proportionately and counts as a full semester used.
Dr. McCormick said that to renew the scholarship each year, the KEES recipient needs maintain at least a 2.5 cumulative GPA after the first year. He said at least a 3.0 cumulative GPA should be maintained after the second year and thereafter to keep full award amount. He said if at least a 2.5 GPA is maintained after the second year, one-half of the full award is retained. Dr. McCormick said if award is lost, recipients may regain eligibility after one year if cumulative their GPA improves to at least a 2.5 at the end of the academic year. Base awards range from $125 for a 2.5 GPA to $500 for a 4.0 GPA each year, and bonus awards range from $36 for a 15 ACT composite score or converted SAT score to $500 for a 28 or higher ACT score or converted SAT score.
Dr. McCormick said 23 states in the union have merit-based scholarship programs. He said lottery proceeds and tobacco settlements are a major source of funding for these states. He said all states except Kentucky have the GPA of 3.0 or higher as a typical minimum criteria. Kentucky is unique that it accepts the GPA of 2.5. Dr. McCormick said class rank and ACT/SAT scores are also used as sole criteria in some states.
Dr. McCormick said there are five national trends in higher education finance that should be kept in mind, which include: 1) increases in tuition have made college less affordable for most Americans; 2) federal and state funding of student financial aid has not kept pace with increases in tuition; 3) more families at all income levels are borrowing more than ever before to pay for college; 4) increases in tuition have come at times of greatest economic hardship, and 5) state financial support for public higher education has not increased at a rate to keep up with increases in tuition.
Dr. McCormick said KEES has several unique characteristics that expand educational opportunities that Kentucky should be very proud of including: 1) no application is required; students simply have to “show up” on campus; 2) KEES recognizes and encourages average students to pursue a college education or technical training since the minimum 2.5 GPA is lower than most merit scholarships; 3) KEES recognizes and rewards academic excellence, since the award amounts increase as GPAs increase; 4) the minimum ACT score is lower than required by most state merit programs increasing the number of eligible students; 5) the award is earned each year of high school rather than based on a cumulative four-year GPA; 6) only one yearly award must be earned to be used in college; 7) college students may regain eligibility after losing the award for low grades; 8) college cumulative GPA after the first year (2.5) is lower than most state merit programs; 9) the KEES program co-exists with substantial need-based state aid grant program; 10) there is no reduction in awards due to Pell grants or other aid; and 11) KEES and need-based grants can be “stacked” with no penalty.
Dr. McCormick said in 1998-1999, $13.2 million was earned in KEES awards. In 2001-2002, $114.5 in scholarships were earned by students. Dr. McCormick said $8.3 was actually dispersed in 1999-2000, while $58 million was dispersed to students in 2002-2003. He said the number of KEES recipients was 18,228 in 1999-2000, and 56,004 in 2002-2003.
Dr. McCormick said that Kentucky retained 504 of its best and brightest students in 2002 through the Senator Jeff Green Scholars program of which 135 attended Kentucky private colleges/universities, and 369 attended Kentucky public college/universities. He said that represented a 66.4 percent retention rate.
Dr. McCormick said some possible administrative issues the subcommittee should consider include: 1) whether net lottery proceeds are sufficient to sustain the program in future years; 2) if awards are decreased because of limited lottery funds, should decreases occur for both high school as well as college students; and 3) should award amounts float with tuition? Dr. McCormick said there are other policy/statutory changes to be considered that are outlined in the powerpoint presentation that was distributed.
Mr. Layzell said Dr. McCormick provided a very clear statement of background and current status of the KEES program. He said a key question is whether KEES will continue to be limited to funding out of lottery proceeds since the demand is outgrowing those monies. Mr. Layzell said that while the statute provides that CPE can make adjustments to both the base and supplemental awards dependent upon the availability of funds, other policy questions need to be considered. Mr. Layzell said CPE and staff will be available to help the subcommittee conduct a full and accurate study of KEES issues.
Representative Collins asked if Kentucky allowed students to use their scholarships in other states. Dr. McCormick said statute allows students to use the KEES money in other states if they offer a program that is not offered in Kentucky. Dr. Jim Applegate, CPE, said Kentucky has contract space agreements with other states, wherein Kentucky buys spaces at those universities to meet needs of Kentucky students in particular areas. He said Kentucky has long been a member of the Academic Common Market, which is a group of southern region states that work together through a reciprocity agreement where students can attend each others’ schools at in-state tuition prices for agreed to programs.
Representative Collins asked if more weight is based on test scores rather than grades for the home school eligible recipients of the KEES bonus awards. He said the home schools do not have the same curriculum and wondered how it compares with the high school requirements. Dr. McCormick said the award for home school students is based on test scores only. Representative Collins asked about home-school students receiving the original base awards for KEES. Dr. McCormick said it his understanding that home-school students do not receive the base KEES awards at all and the only award they can receive is the bonus award which is up to a maximum $500 annually. Representative Collins asked about GED recipients and the KEES award. Dr. McCormick said those students are based on test scores alone, and also are only eligible for a maximum $500 per year.
Representative Sims asked if surrounding states offer scholarships similar to the KEES program to send their students to Kentucky. Dr. Applegate said the other states have scholarship programs, and Kentucky allows them to attend its colleges/universities through the reciprocity agreement if we have a program that their state does not have. Mr. Layzell said other states have similar scholarship programs with portability.
Representative Mobley said some private institutions chose not to participate in the KEES program and questioned why. Dr. McCormick said some proprietary institutions do not participate with an example being a hair design and cosmetology school.
Senator Westwood noted that a chart in the presentation identified four states that use general revenues in order to pay state merit scholarships rather than the lottery or tobacco settlement funds. He asked about other states where the funding source to pay for these programs is not identified. Mr. Layzell said that complete information was not available for all states, but he was aware that in Illinois the need-based program was funded out of general funds. Senator Westwood asked if the dramatic increase in yearly allocations for KEES was due to the fact that each year during the initial phase it accumulates new students as well as maintaining the students already eligible. Dr. McCormick said it levels off by 2006 because the program will have four years of scholars in the system, and it cannot exceed four. Dr. McCormick said many students eligible for need-based financial aid grants do not get funded because the lottery proceeds do no generate enough money to pay for them. He estimated that there is a $72 million shortfall between lottery funds available to support need-based aid and the total amount needed to support all eligible students.
Representative Sims said she was concerned with the administrative costs of the lottery. Dr. McCormick said one issue that he hopes the subcommittee will address will be that the sole funding of KEES is not based on the lottery. He said this problem needs to be addressed despite the budget crises Kentucky is facing. Senator Westwood said this is the main question that the subcommittee will be analyzing before it reports back to the Interim Joint Committee on Education. He also said the viability of being able to predict the needs because of the concern about increases in tuition, the grades that the students will be making, and the budget itself and its stability will affect the study and recommendations.
Representative Siler asked about the scholarship money for the students earning a 2.5 GPA versus the success of students earning the 3.0 GPA. He said if cuts are necessary, the question is who should be penalized. Mr. Layzell said Kentucky needs to look at the correlation between the GPA and predictability of success in college and the persistence of graduation. He said Kentucky has embarked on a major initiative to upgrade the education of its citizens. He said this is an important part of the effort, but it is not to be looked at in isolation. Mr. Layzell said funds need to distributed where they will do the most good in times of limited resources. Dr. McCormick said to note that if the ceiling is raised on the GPA from 2.5 to 3.0, it would impact the poor students more than others. He said GPA’s tend to track family income, and families at the lower income would be excluded more than others because typically students from middle and upper class families tend to have higher GPA’s. Representative Siler said he does not relate innate intelligence of the student to the income source of the home. Mr. Layzell said he agrees with Representative Siler that the income source of the family is not directly related to student GPA’s.
Senator Westwood introduced Mr. Arch Gleason, President and CEO, Kentucky Lottery Corporation and Mr. Howard Cline, Vice-President and Chief Financial Officer, and Rick Redman, Vice-President, Public and Community Relations, who made a presentation on the Sales and Dividends Projections for the Kentucky Lottery Corporation for the fiscal years of 2004-2010.
Mr. Gleason said many citizens of the Commonwealth of Kentucky have the impression that they have failed to fulfill the promise of the lottery in dedicating lottery revenues to education. He said this is still an issue and they are trying to rebuild the trust with the public.
Mr. Gleason said since 1994 the Kentucky Lottery Corporation has improved the operating results of the lottery significantly. He said the lottery is dependent upon sales from the Powerball jackpot and it has proven to be a very stable product with sales amounting to $90 - $100 million year in and year out. Mr. Gleason said the instant scratch off tickets continue to be the bread and butter of the lottery proceeds.
Mr. Gleason said the challenges the Kentucky Lottery Corporation face include the impending start-up of the Tennessee lottery. Their legislative body enacted legislation which will allow the creation of the Tennessee lottery with anticipated ticket sales beginning in January 2004. Mr. Gleason said Kentucky has been the beneficiary of Tennessee not having a lottery for many years and it is estimated that between $65 and $75 million tickets are sold each year by Kentucky to citizens of Tennessee, which translates to $16-$20 million in profits for Kentucky’s bottom-line. He estimates the total sales loss which will occur gradually over the next three years will ultimately reach about $71 or $72 million dollars by fiscal year 2006.
Mr. Gleason said expansion of gaming is another challenge facing Kentucky. He said since 1996, there has been an astounding amount of growth in the revenue generated from the riverboats. He said in 1996, the river casino boats had a gross handle of $1.5 billion with a net win of $218.6 million, while in 2002 the river casino boats had a gross handle of $15 billion with a net win of $1.1 billion representing a dramatic increase. Mr. Gleason said Indiana made the decision in their legislative session of 2002 to allow dockside gaming where the boats do not have to leave shore and people do not have to worry about timeframes. He said the result of dockside gaming in 2003 increased the handle 5 percent in the first four months, and the net wins up 6.7 percent, and the attendance and admission was up 13.2 percent. Mr. Gleason said it has been estimated that anywhere from 30 to 40 percent of the patrons at the Indiana river boats come from the state of Kentucky. He also said Indiana recently approved 24 hours a day gaming and several of the casinos are following this pattern. Mr. Gleason also mentioned the land-based casino approved for the French Lick/West Baden area.
Mr. Gleason said video lottery/slot machines at race tracks have been installed in West Virginia with over 9,000 devices expected to yield a $700 million net win, which will translate into $275 to $280 million in payments to West Virginia’s State Treasury. He said West Virginia in 1992 also passed expanding limited video lottery in an age-controlled environment (6,000 + licenses issued, 9,000 authorized, 5,250 placed) which is expected to yield $160 million net win for fiscal year 2003.
Mr. Gleason said Illinois and Ohio are considering video lottery and slot machines at race tracks, but no legislation has been passed. He said the impact would be tremendous on Northern Kentucky if legislation is passed in these states.
Mr. Gleason said the growth nationally in lotteries from fiscal year 1996 to fiscal year 2002 was 32 percent, however, this percentage was very much skewed by states that offered more aggressive forms of gaming. He said a game called Keno is offered in social environments in about ten states across the country and generates almost $2 billion in sales of which about 30 percent falls to the bottom line of profits. Mr. Gleason said states that offer expanded gambling have seen growth at 58 percent, and states like Kentucky that offer the traditional lottery games have seen about a 16 percent cumulative growth. He also said the growth rate for states that offer video lottery and Keno has been 61 percent.
Mr. Gleason said few people know how Kentucky Lottery proceeds benefit the Commonwealth of Kentucky. A 2002 marketing study conducted for the Kentucky Lottery revealed that nearly 60 percent of Kentuckians are not aware that lottery dividends go to support education. Mr. Gleason said 55 percent of the public plays the Kentucky Lottery, and 63 percent of former players would play again if proceeds went to education.
Mr. Gleason said the projected sales presented to the committee for the Kentucky Lottery over the next several years is based on several assumptions: 1) the Tennessee Lottery will begin ticket sales in January 2004. By fiscal year 2006, Tennessee’s product offering should be similar to the Kentucky Lottery Corporation’s; 2) fiscal year 2004 reflects a $16 million erosion of sales due to the Tennessee Lottery and a reduction in Powerball sales from fiscal year 2003 due to the extraordinary sales gained during the $315 million jackpot in December 2002; 3) fiscal year 2005 reflects an additional erosion of sales of $32.4 million, due to the Tennessee Lottery; 4) fiscal year 2006 reflects an additional erosion of sales of $23 million, due to the Tennessee Lottery. This brings the cumulative loss of revenue due to the Tennessee Lottery to $71.4 million; and 5) fiscal year 2007 to fiscal year 2010 assumes annual sales growth of two percent for the Kentucky Lottery.
Mr. Gleason said the total dividend transfers for fiscal year 2004 should be $168.5 million and the dividend transfers should be $157.8 million in fiscal year 2006 after the impacts are realized from the Tennessee Lottery. He said Kentucky would continue to see small decreases as sales would hopefully build by two percent each year. Mr. Gleason said these decreases heighten the problem raised by Dr. McCormick and Mr. Layzell in trying to fund the educational programs using existing lottery proceeds.
Mr. Gleason said the Kentucky Lottery Corporation will continue to diligently pursue growth opportunities based on what policymakers determine is appropriate. He said he hopes that policymakers will consider expansion of gaming for Kentucky like neighboring states and offer Keno/monitor games, and video lottery terminals and slot machines at race tracks. Mr. Gleason said Keno could be offered under Kentucky’s present statutes, and it is just a matter of whether the policymakers would find such a game acceptable. He said offering Keno does not change any laws or operations. Mr. Gleason has provided the General Assembly’s leadership, Appropriation and Revenue Committee, and State Government Committee a study of expansion opportunities and it is estimated that if Keno was offered in Kentucky today, we could realize $75 to $125 million in sales over and above the sales we presently realize. Mr. Gleason said this amount of money would overcome the offset of the creation of the Tennessee Lottery and would also increase dividends between $29 and $38 million annually. He also said the Kentucky Lottery Corporation has received no indication that Keno is a game that the policymakers believe should be offered and just wants the members of the subcommittee to realize that Keno is an option to help increase revenues in order to pay for educational scholarships.
Mr. Gleason said another option to increase revenues would be to authorize video lottery and slot machines at race tracks which could be done through the Kentucky Lottery Corporation. He said the estimate of the implementation of 10,000 devices such as slot machines at the racing facilities in Kentucky could yield between a net win approaching a billion dollars annually and a net return to the Commonwealth of $325 - $375 million dollars.
Mr. Gleason said the Kentucky Lottery Corporation has made operational changes in the past couple of years to continually reduce the operating expenses. He said the regional office was reorganized to save $500,000 a year, the re-negotiation with GTECH for a contract extension saved $1.5 million, the Instant Ticket Delivery System design and implementation saved $300,000 in shipping costs, and the telecommunications contract re-bid will save $1.7 million.
Representative Mobley said constituents are always asking where the lottery money goes and asked Mr. Gleason to provide a percentage breakdown of how money is distributed. Mr. Gleason said the Kentucky Lottery Corporation is working towards a funding formula that will be in place in 2006 and will allocate 45 percent of the net lottery proceeds to the KEES program and 55 percent to the CAP and KTG programs. He said the General Assembly in 2003 set aside any unclaimed prizes which averages about $9.5 million annually, to conform to the distribution formulas for the current year. He said 32 percent of the net profits of the lottery will be distributed to the KEES program, and this is estimated to be $62.4 million dollars for the current year, 32 percent will go to CAP and KTG programs, which is also $62.4 million dollars, and $31 million dollars is still being distributed to the General Fund. Representative Mobley asked if these figures change on a yearly basis. Mr. Gleason said yes, it is a graduated schedule and increases because of the formula that was established in a 1999 statute to match the funding to the expected increases in students.
Senator Westwood talked about the comparison between dividends and total sales. He said the dividends are what Kentucky can actually realize in the scholarship funds. Mr. Gleason said that was correct. He said a small percentage of the unclaimed prizes used to be distributed to the Kentucky Affordable Housing Trust Fund in 1998, but after fiscal year 2006, all Kentucky Lottery proceeds will be used for educational purposes. Senator Westwood asked about advertising costs and how they were paid. Mr. Gleason said the advertising costs come out before net profits, thus making expenses for advertising paid out of operating costs.
Mr. Gleason said it is difficult to communicate to the public where the Kentucky Lottery proceeds are distributed because of the limitation that specifically prohibits the lottery in the advertising of its games to make reference to the programs that benefit from the proceeds. He said the Kentucky Lottery Corporation could realize a three to five percent increase in sales if the citizens of the Commonwealth knew what programs were benefiting from lottery sales.
Representative Marzian asked if this would need to be enabling legislation or just removal of language. Mr. Gleason said the only thing necessary would be removing the provision in the statute that prevents the Kentucky Lottery Corporation from mentioning specific programs that benefit from lottery proceeds. He said advertising that provided information on the uses of lottery funds could be done in a tactful manner which would be non-offensive to the citizens. Representative Marzian expressed the opinion that the provision should be removed to help keep citizens informed and briefed on lottery proceeds and their uses/benefits.
A motion was made by Representative Marzian, seconded by Representative Stein, that Legislative Research Commission (LRC) Education staff draft a resolution supporting the elimination of the prohibition on advertising that describes how lottery proceeds are used. The motion was approved by voice vote.
Senator Westwood discussed the 2003 proposed workplan for the Subcommittee on Postsecondary Education. He said the subcommittee will not meet at the June 18th meeting in Northern Kentucky and therefore will not meet again until August 4, 2003.
Representative Collins suggested that the subcommittee hear about the effect of the college and university tuition increases compared to the budget and if there is a significant increase in revenues, where the revenue is to be applied. Senator Westwood recommended addressing this subject at the September 8, 2003 subcommittee meeting and asked staff to add this item to that subcommittee agenda.
The meeting adjourned at 12:10 p.m.