Tobacco Settlement Agreement Fund Oversight Committee


Minutes of the<MeetNo1> 2nd Meeting of 2004


<MeetMDY1> May 10, 2004


The<MeetNo2> 2nd meeting of the Tobacco Settlement Agreement Fund Oversight Committee was held on<Day> Monday,<MeetMDY2> May 10, 2004, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Roger Thomas, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Vernie McGaha, Co-Chair; Representative Roger Thomas, Co-Chair; Senators Charlie Borders, and Joey Pendleton; Representatives Adrian Arnold, Carolyn Belcher, James Comer, Thomas McKee, and Tommy Turner.


Guests:  Keith Rogers, David Bratcher, Joel Neaveill, Sandy Gardner, Stephen Yates, and Maggie May, Governor's Office of Agriculture Policy; Lowell Reese, Kentucky Gazette; Maurice Heard, farmer; Dr. Gordon F. Jones, Western Kentucky University; and David Sparrow, University of Kentucky College of Agriculture.


LRC Staff:  Dan Risch, Lowell Atchley, Biff Baker, and Kelly Blevins.


The minutes of the January 6, 2004 meeting were approved. Next, Mr. Keith Rogers, Executive Director, and Mr. David Bratcher, both of the Governor's Office of Agricultural Policy, reported on agricultural diversification project applications that were considered by the Agricultural Development Board at its April meeting.


As Mr. Rogers explained projects that were approved for funding from the Board, he said that the Board increasingly has used a forgivable loan mechanism to accomplish goals of the Board. He gave as an example the Lake Cumberland Milling project. The project managers will purchase a feed and grain business, make capital improvements, and expand its milling operations to include soybean extrusion. As part of the contract to receive Board funding, Lake Cumberland will be forgiven the repayment of the loan based on a premium paid to Kentucky farmers for their soybean production. For each dollar paid to a Kentucky grower above the U.S Department of Agriculture benchmark price for soybeans, one dollar of the loan amount will be forgiven. By using this mechanism with a variety of funded projects, he said the Board can promote higher payments to and new marketing opportunities for Kentucky farmers.


When reporting on the Lincoln County Farm Bureau project to administer a livestock cost-share program for youths, Mr. Rogers pointed out that 15 to 20 counties have similar programs for the use of county account money. He said that the McDowell Farms Salsa project is the first in the state to utilize the initiative of the 2003 legislative session, HB 391, which lowered the regulatory hurdles for small food processing facilities. He also reported that Kentucky Center for Agricultural Development and Entrepreneurship money has been used to fund the first of a three-part study of the feasibility of locating an ethanol plant in Meade County.


When Mr. Rogers reported on a Mason County project that will purchase hay handling equipment for shared use among Mason County farmers, Senator McGaha asked him about instances when the Board has authorized the purchase of equipment which was allegedly sold after only one use for its intended purpose. Mr. Rogers acknowledged that he had heard of such allegations. He said the Board has instituted a new method of accounting for the shared use equipment projects. He said that when the value of the equipment exceeds $20,000 that the Board retains a lien on the equipment. He added that the Board also reserves the right to institute other controls as they may be deemed necessary. He also said that the Board is now reviewing the reporting requirements to be followed by project administrators. Finally, he said that he anticipates that the Board will review its accountability mechanisms on an annual basis.


Next, there was a discussion of the projects that were denied funding. Representative Tom McKee asked for an explanation of the different treatment given a Marion County project to improve the county fairgrounds, which received funding, and a Muhlenberg County project with a similar purpose but which was denied funding. Mr. Rogers pointed out that the difference lies in the priority assigned the projects from their county councils. The Marion County project received a high priority while the Muhlenberg County project received a low priority. Representative Thomas asked if the Board had ever funded a project that had received a low county priority. Mr. Rogers replied that the Board had not. However, he pointed out that the Board has suggested to some county councils that certain projects be reconsidered. Senator Charlie Borders observed that he appreciated the local input on projects and the deference that the Board gives to local decision.


When the discussion turned to the denial of a project by Wildside Vines Winery, Senator McGaha asked Mr. Rogers to speculate how the Board may have decided if the project had received a high priority. Senator McGaha pointed out that several vineyards had been approved for funding and that a saturation point seems to have been reached. Mr. Rogers agreed that controversy surrounds the development of the viticulture industry are Kentucky. He said that there are two distinct points of view among those involved with the industry. He said he couldn't answer the question, in part because he and his staff is now in the process of reviewing information on the industry and hope to complete the review by the end of June.


The next topic of discussion was an overview of model program changes that were enacted recently by the Board. Mr. Rogers mentioned they undertook a thorough review of all model programs, tightening up administration, money handling, accounting, and reconciling and closing accounts. The Agricultural Development Board placed lifetime funding limits on all programs except agriculture diversification and cattle genetics. Representative McKee referred to the forage program and the accountability related to the lime aspect. Mr. Rogers reviewed the program specifics and indicated the Board has sent a strong message that it supports the liming program. Representative McKee also asked about the status of the cattle genetics program. Mr. Rogers said that, although GOAP staff recommended ending the program, the Board did not agree and decided to continue it, but with some limits. In response to Chairperson Thomas’ question about input that led to the model program policy changes, Mr. Rogers said many of the recommendations were based on comments that staff had received. He added that GOAP staff would create a running list of suggestions and ideas that could lead to changes in the future.


Mr. Rogers then brought to the Committee’s attention, three problem production and marketing cooperative agreements which the Board considered in March. He outlined difficulties that each co-op had experienced and the Board’s decision on each. The Board agreed to restructure West Kentucky Growers Cooperative’s $1.5 million loan. The co-op must adhere to a strict future interest payment schedule, undergo an audit of its finances, operate under a business plan, and comply with periodic GOAP staff reviews. The Board approved $122,000 in funding for the Green River Marketing Produce Cooperative to help that entity cover operating expenses for an 18-month period. The Green River Co-op has lost significant production acres in Logan County because of the effect of certain changes in the 2002 Farm Bill. The Board agreed to amend the Purchase Area Aquaculture Cooperative agreement to provide an additional $240,000 in loan funds to cover operating expenses for a period of time this year. The funds will be used to set up a line of credit at a Hickman County bank, with the ultimate goal of helping the co-op meet its product demand problems. Mr. Rogers characterized that co-op’s financial problems as serious. Chairperson Thomas asked if the problems experienced with the co-ops was a trend and cause for concern. Mr. Rogers said that in January and February, the board thought they were witnessing a trend, but with the actions taken, all three co-ops have been given a chance to succeed. But he also indicated the Board has sent a strong message that each co-op needs to improve its operations and financial standing.


Turning to another topic, Mr. Rogers said that three new Agriculture Development Board members had been recently appointed -- Donna M. Amburgey, H.H. Barlow, and Rodney Dick. During the ensuing discussion, the Committee asked for resumes of the newest Board members. Mr. Rogers promised to comply in a timely manner.


As a lead-in to the next agenda topic, Chairperson Thomas told the Committee that he and Co-Chair McGaha had agreed as well as the committee members, and after talking with staff, that project applicants should be able to appear before the Committee to discuss an Agricultural Development Board funding issue after clearly outlining their concerns in writing. Two speakers then addressed the Committee, Maurice Heard, a Warren County pork producer, and Dr. Gordon F. Jones, an animal science professor at Western Kentucky University. Both protested the Agricultural Development Board’s approval in January of an $800,000 forgivable loan to PIC USA Inc. to construct a swine breeding facility in Allen County. Mr. Heard detailed his privately owned and operated pork production venture in Warren County, the erratic nature of the hog market, his efforts to assist other producers in that area, and his business relationship with an Indiana company that supplies pork products to Japan. Mr. Heard said he was upset with the ADB decision to loan money to PIC, a multinational company. Dr. Jones also expressed his concern about the PIC loan. He reviewed the particulars of the contract and said the approval gives a British-based company an advantage over breeders in Kentucky who have supplied the market for generations. When Dr. Jones finished his remarks, Chairperson Thomas explained that the statutes specify that the Committee must take action on an Agricultural Development Board decision in a subsequent meeting, but session work prevented the Committee from meeting. Thus, the Committee could no longer act on the Board’s decision regarding PIC. He said that the applicable statutory language should be reviewed.


Mr. Rogers and Mr. Bratcher returned to the table to explain the Agricultural Development Board’s actions on the PIC project. Mr. Rogers said the Agricultural Development Board viewed the PIC venture similarly to a cattle genetics project. He said the Board believed the PIC project would assist the swine industry in the state. Mr. Rogers said the Board has added swine to its model programs. Mr. Rogers then reviewed the six ways that PIC can earn credit toward lowering its loan amount. For example, PIC will be able to reduce its debt to the degree that it sells customized genetic pork products, including live animals, at prices below its standard prices for Kentucky producers. And, if it discounts prices, the company has agreed to offer additional reductions in the top 60 tobacco producing counties that are at least 125% of the greatest price cuts offered to producers not in the top 60 tobacco producing counties. The company also can earn credit in an amount equal to all contract finisher fees received by the Kentucky Pork Producers on new commercial contract finishing spaces created in Kentucky after the date of the loan agreement. Representative Turner asked Mr. Rogers about the circumstances that led to the PIC contract approval and the GOAP staff recommendation to endorse the contract. Mr. Rogers said there were no minutes of the staff’s review of the project.


Representative Belcher observed that, even though Mr. Rogers talked about the contract helping to expand the industry, most of the loan forgiveness conditions seemed to enable PIC to reduce the loan amount. In his response, Mr. Rogers indicated that if they are successful in providing a genetic product and put that into the production channel, they will get credit, and if they do not succeed, the money will return to the Board to go elsewhere. Responding to another question, Mr. Rogers outlined some of the problems of the industry, including a downturn in the 1990s and restrictive state environmental requirements. According to Mr. Rogers, the goal is to assist the pork production industry in Kentucky.


Representative Comer told the Committee that he disagreed with the project. He mentioned that PIC is headquartered in England and the loan is forgivable. In the application for funding, Representative Comer said, PIC indicated that, in addition to expanding the industry, it wanted to overcome the impact from a fire. He wondered aloud if the insurance proceeds have been used to help to build the PIC facility and if the Agricultural Development Board has seen documentation. Mr. Rogers said PIC is to submit invoices during construction. Representative Comer asked if PIC would sell in Kentucky. Mr. Rogers responded that PIC markets its products worldwide.


Representative Comer also questioned Mr. Rogers and Mr. Bratcher about the decision-making process that led to the GOAP staff endorsement of the project, and the input of other legislators. Mr. Bratcher said they had received no external pressure to recommend the PIC contract for approval. Representative Turner asked how the PIC contract approval helped tobacco-dependent counties diversity. Mr. Rogers said the intent was to assist the swine industry in Kentucky and ultimately tobacco-dependent counties.


The meeting adjourned at approximately 1:15 p.m.