The4th meeting of the Interim Joint Committee on Labor and Industry was held on Thursday, October 23, 2008, at 9:00 AM, at Bluegrass Station in Avon. Senator Alice Forgy Kerr, Co-Chair, called the meeting to order, and the secretary called the roll.
Members:Representative Mary Lou Marzian, Co-Chair; Representative Alice Forgy Kerr, Co-Chair; Senators Julie Denton, Denise Harper Angel, and Gary Tapp; Representatives Will Coursey, C. B. Embry Jr., Bill Farmer, Tim Firkins, Richard Henderson, Charlie Hoffman, Dennis Horlander, Joni L. Jenkins, Thomas Kerr, Adam Koenig, Charles Miller, Rick G. Nelson, Tom Riner, Jim Stewart III, and Brent Yonts.
Guests: Major General Stephen Collins (Retired), Director, Bluegrass Station; Roger Fries, President and Chief Executive Officer, Kentucky Employers’ Mutual Insurance Authority; Bob Quick, President and Chief Executive Officer, Commerce Lexington, Inc.; Len Heller, Vice President, Commercialization and Economic Development, University of Kentucky; Anthony Wright, Economic Development Officer, Lexington/Fayette Urban County Government; and Tony DeName, Director, Division of Unemployment Insurance.
LRC Staff: Linda Bussell, Adanna Hydes, and Betsy Bailey.
A quorum being present, the meeting was called to order. A motion and second to approve the minutes of the September 9, 2008 meeting passed by voice vote.
Sen. Kerr introduced Roger Fries, President and CEO of Kentucky Employers’ Mutual Insurance Authority (KEMI) to address the committee on KEMI’s safety initiatives. Mr. Fries informed the members about KEMI’s Mine Safety and Training Competition that was held in Pikeville, KY on August 13-14, 2008. The event included more than 300 competitors representing 30 commercial coal companies and 4 states, as well as more than 150 representatives from the Federal Mine Safety and Health Administration (MSHA) and the Kentucky Office of Mine Safety and Licensing. He introduced Jon Stewart, Chief Financial Officer for KEMI, who gave a brief overview of the event.
Mr. Stewart said the two day event, co-sponsored by MSHA and the Kentucky Office of Mine Safety and Licensing, was made available free of cost to the general public. The event featured competitions in mine rescue scenarios and pre-shift hazard eradicating scenarios. Due to the success of the event, the program is scheduled for July of 2009. A promotional video for the event was shown.
Rep. Marzian asked if KEMI offers any incentive for policy holders to take part in safety programs. Mr. Fries replied that participation in such events is taken into consideration in developing workers’ compensation premiums.
Sen. Kerr introduced Tony DeName, Director of the Division of Unemployment Insurance, to provide a brief update on the Unemployment Insurance (UI) Trust Fund following news reports that Kentucky’s Trust Fund, like many others in the nation, has been hit hard by the downturn in the economy. Rep. Marzian stressed the importance of Mr. DeName’s testimony at the meeting and asked that he give full details.
Mr. DeName addressed the committee with regard to recent media attention given to Kentucky’s UI Trust Fund and whether it is prepared to weather another recession after the recession of 2000. He stated that at the end of August 2000, the Trust Fund balance was at a record high of nearly $725.8 million. As of the end of August 2008, the balance stood at $229 million, a reduction of nearly half a billion dollars over the past eight years. He said that the Trust Fund does not have the reserves today that it did at the beginning of the decade, but this in itself does not address the issue of fund adequacy.
Mr. DeName said funds are considered to be “adequate” when they contain enough reserves to sustain one year of benefits at a historically high rate. Kentucky’s Trust Fund, along with many others, falls below this threshold for adequacy. However, these measurements of adequacy do not take into consideration the tax revenues flowing into the Trust Fund at the same time benefits are being paid out. As long as our revenues are adequate to meet current benefits, even a significantly reduced Trust Fund balance could be sufficient to preserve fund solvency.
Mr. DeName noted that in 2000 and 2003, after the recession took its toll, the Trust Fund largely stabilized from 2004 through 2007. This demonstrated that the statutory funding mechanism was performing as intended. He said by the end of 2007, the fund balance had declined by over ten percent, ending at just below $230.8 million. This raises the concern that the fund could be reaching a “tipping point” where current revenues might no longer keep pace with current benefits.
Mr. DeName noted Kentucky is at the second highest tax rate schedule provided in current statutes, Schedule D; and that even at this increased rate of taxation we are not keeping pace with benefits, let alone re-growing the Trust Fund. He said we are running out of our reserve tax generation capacity just as we are threatened with renewed recession. He said the question of preparedness comes down to two issues: do we have an adequate fund balance to preserve solvency; and do we have sufficient revenue capacity to meet rising benefits? Mr. DeName said at this point Kentucky may have neither.
Mr. DeName said the next six months will be critical to answering the question of fund solvency. Based on revenue and benefits during past years, if we experienced the same benefits and revenues in the months ahead, our Trust Fund balance at the beginning of April 2009 could be less than $36 million. He stated that benefits this year are running over 20 percent ahead of last year, while revenues are up less than seven percent. Some short-term fund depletion is a very real possibility at this stage.
Mr. DeName said the possibility for Congressional relief in the form of another “Reed Act” distribution of excess Federal Unemployment Tax funds to the states could profoundly change the near-term prospects for fund solvency.
Rep. Yonts referred to several years ago when a surplus of $700 million was cut. He asked if the surplus had not been cut, would the Trust Fund be able to sustain the current demands on the system. Mr. DeName responded that it would not be likely. Rep. Yonts asked if Kentucky is given funds from the Federal surplus, would those funds have to be paid back. Mr. DeName explained the funds would be tax money that employers have paid into the Federal Trust Fund. Rep. Yonts asked if the Division of Unemployment Insurance would have recommendations for the General Assembly by January. Mr. DeName responded that he hoped so.
Rep. Marzian asked if the Federal bail-out included unemployment benefits. Mr. DeName said an extended benefits program took effect in July, providing $49 million of Federal money.
Sen. Kerr introduced Mayor Jim Newberry of Lexington, Mayor Ed Burtner of Winchester, and Judge Henry Branham, County Judge Executive, Clark County. Judge Branham expressed appreciation to the members for their work on behalf of the Commonwealth and to Bluegrass Station for providing the facilities. Mayor Burtner further expressed appreciation for the facilities at Bluegrass Station and in Madison County. He informed the members that 800 jobs at Bluegrass Station are filled by citizens of Clark County and 60 jobs at Madison County. He commented on the positive influence the facilities have on the region. Mayor Newberry explained Fayette County’s economic plan to utilize the industries of health care, horses, and high technology opportunities. He emphasized the importance for the state of UK achieving top 20 business status. In 2007, UK received $332 million in research funding that benefitted not only UK, but the entire state.
There being no further business, the meeting was adjourned.