Tobacco Settlement Agreement Fund Oversight Committee




<MeetMDY1> September 12, 2006


The<MeetNo2> Tobacco Settlement Agreement Fund Oversight Committee meeting was held on<Day> Tuesday,<MeetMDY2> September 12, 2006, at<MeetTime> 1:00 PM, in<Room> Room 169 of the Capitol Annex. Representative Carolyn Belcher, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Vernie McGaha, Co-Chair; Representative Carolyn Belcher, Co-Chair; Senator Charlie Borders; Representatives Adrian K Arnold, James R Comer Jr, Thomas M McKee, and Tommy Turner.


Guests:  Keith Rogers, Brian Furnish, Bill McCloskey, Governor's Office of Agriculture Policy; Tim Hughes, Kentucky Agricultural Finance Corporation; Steve Coleman, EPPC Division of Conservation; Berea Ernst, Tony Herrington, John Sharpe, Marshall Gazaway , Kaycie Len Carter, and Joe Schroeder, Community Farm Alliance; and Debra Eschmeyer, National Family Farm Coalition.


LRC Staff:  Lowell, Atchley, Biff Baker, Tanya Monsanto, and Kelly Blevins.


Minutes of the August 8, 2006 meeting were approved, without objection, by voice vote, upon motion made by Senator Borders and seconded by Representative McKee.


Chairman Belcher introduced the first speaker, Mr. Steve Coleman, Director, Kentucky Division of Conservation, who reported on the 2006 Kentucky soil erosion and water quality cost share program and environmental stewardship program.


According to his report, the funding level for the programs peaked at $11,150,000 in 2000-2002, and dropped to $9,550,000 in 2005-2006 due to budget cuts. In the first 11 years of the program, the division received 21,465 applications seeking $213 million in cost share assistance. Because of limited funded, only 38 percent of the applications (7,725) had been approved through the years at a total of $82.5 million, according the report. A spread sheet showed the program utilized $48,306,937 in tobacco settlement funds since 2000-2001. Total expenditures since 1994-1995, including general, restricted, tobacco, and federal funds totaled $58,808,107, according to his report.


According to Mr. Coleman’s report, the program had 2,360 applications in the 2006-2007 cycle; a total of 1,514 of those were approved. There were several types of soil erosion and water quality cost share practices.


Mr. Coleman told the committee the types of requests had changed through the years, reflecting the general decline in tobacco production in the state, coupled with an increase in cattle farming. Responding to Representative McKee, Mr. Coleman said a drop in the number of applications in recent year might be because of the general decline in the tobacco industry.


Next, Chairman Belcher asked Mr. Keith Rogers and Mr. Brian Furnish, Executive Director and Deputy Director respectively of the Governor’s Office of Agricultural Policy, to presented their monthly report of state and county projects reviewed at the previous Agricultural Development Board (ABD) meeting.


During discussion, Representative Comer lauded a Green County project involving construction of an agricultural marketing and education center. He said the project would be funded entirely with county funds and everyone was “sold on the project.” The representative also thanked the ADB for approving the project.


Mr. Rogers reviewed the board’s approval of a $3,307,900 grant to the Department of Agriculture to continue a marketing and value-added processing and production program. About two-thirds of the funds ($2,100,000) would be used for “Kentucky Proud” branding and advertising. GOAP staff had recommended $1,579,375 under that category. Co-Chairman McGaha asked why the final funding level was increased. Mr. Furnish said those involved in the program wanted to broaden their advertising reach into additional cities in Kentucky. Funds would pay for ads featuring basketball coaches Tubby Smith and Rick Pitino. Funds also would be used to set up kiosks in stores and other efforts.


Next, Mr. Rogers conducted a review of Kentucky Agricultural Finance Corporation (KAFC) finances. Mr. Tim Hughes, Marketing and Business Development Coordinator for KAFC, also participated in the presentation.


The speakers discussed four main topics – the Coordinated Value-Added Assistance Loan Program; the Beginning Farmer Loan Program; Agricultural Infrastructure Loan Program; and Agricultural Processing Loan Program. According to the report, the ADB had approved $23 million for the KAFC loan programs. A total of $14,324,810 had been committed and disbursed.


The KAFC board loaned $967,110 of the $1 million earmarked under the Coordinated Value-Added Assistance Loan Program to one company, Burton Livestock LLC, of Mason County. Burton Livestock would be raising about 5,000 head of dairy heifers on various farms in the area under a contract arrangement.


A total of $115,495 had been loaned out of the $3 million set aside for the Beginning Farmer Loan Program. During questioning, Mr. Rogers responded to Representative Arnold that eligible loan areas for beginning farm operations included livestock, equipment, agricultural facilities, permanent working capital, a down payment for land, investment in a partnership, and other investments at the discretion of the KAFC board.


The two speakers spent several minutes discussing the Agricultural Infrastructure Loan Program, a multifaceted program which had $8 million allocated and $4,092,205 committed. According to their report, the program was designed to help state agricultural producers finance long-term projects that would improve their financial viability.


Borrowers must use the infrastructure loan funds to build or install permanent structures. Loan categories included beef, poultry, equine, grain, swine, dairy, and tobacco operations. According to their report, 29 of the 71 loans approved had been for tobacco structures. Tobacco structure loans totaled $995,160, the most among all categories. The second highest loan category was dairy, with 12 projects approved, totaling $966,777.


The tobacco infrastructure loan program generated the most committee discussion. Tobacco infrastructure loans had been granted to producers in 14 counties. Mr. Rogers said they had been accused of “moving” tobacco production to Western Kentucky, but producers were actually located in nine counties that were east of Interstate 65.


Responding to Representative Arnold, Mr. Hughes said tobacco loans had gone mostly for barns, but also for stripping rooms, irrigation ponds, and housing for hired help. He said most of the borrowers were tenants under the old quota system who had to lease barns. He said the program had allowed farmers the opportunity to remain in tobacco production.


Also in response to some other questions from Representative Arnold, Mr. Rogers said no amounts were set aside under the individual infrastructure categories. He said the loans could be used only for future expenses, not to cover those occurring before application. Also, the loan limit was $100,000. An infrastructure loan must not be for more than half the cost of an infrastructure project. Mr. Hughes explained they coordinate with local lenders, who handle the loan documents.


Mr. Hughes told Representative Arnold that another program, the Linked-Deposit Program,  was still active with about $9.2 million in outstanding loans.


Representative McKee asked a series of questions. Mr. Hughes told him the tobacco barns were generally the conventional type and several would house 20 acres or more.


The representative questioned whether borrowers could obtain loans through conventional means. Mr. Rogers said that issue had been debated. He said the KAFC accepted a higher level of risk than banks or other lending companies. The loans also could be characterized as incentives, according to Mr. Rogers.


Representative McKee asked if they planned to shift even more funds to the Agricultural Finance Corporation. Mr. Rogers responded that in an earlier planning session the ADB set aside funds under assorted categories, including $7 million in a “capital access” category. The KAFC board could request those funds for a project, such as a biodiesel facility, according to Mr. Rogers, but had not done so.


Referring to a map showing all infrastructure loan projects, Senator Borders questioned why none had been approved in the east and northeast part of the state. Mr. Rogers said they had received no applications from those counties. Mr. Hughes said the infrastructure loans were more long-term. He indicated that for smaller projects, borrowers could request county funds. Senator Borders emphasized a need for the officials to determine why the loans were not reaching the eastern counties. Later, Representative Arnold mentioned the entrepreneurial program that was functioning in that region.


Next, the speakers reviewed the Agricultural Processing Loan Program. A total of $11 million had been allocated and $9,150,000 committed to three major projects, Dickerson Lumber in Barren County, Owensboro Grain BioDiesel, and Kentucky Bioprocessing, of Owensboro.


Responding to Representative McKee, Mr. Hughes said word-of-mouth seemed to be the best way to let the public know about the KAFC loans programs. He said he had visited many banks and other venues to publicize the programs.


Chairman Belcher then asked Community Farm Alliance members John Sharpe and Tony Herrington to address the committee.


Mr. Sharpe urged a continuation of the spirit of HB 611. But he said “large amounts of 611 funds” have been spent to support tobacco interests, biotechnology, and contemplated large feeding systems.


In his remarks, Mr. Herrington said HB 611 was meant to help tobacco dependent counties that lost income because of the Master Settlement Agreement. “These (tobacco infrastructure) loans do not,” he said. Mr. Herrington said 11 million pounds were produced in his home county, Harrison, under the old quota system, but only 2.5 million pounds were produced in 2005. He said they had enough barn space before and “certainly” would have enough barn space now. The speaker said tobacco growing assistance could be obtained from the Burley Tobacco Growers Cooperative and from Philip Morris incentive programs.


Mr. Herrington pointed out that an entrepreneurial center included in HB 611 had never been funded. Such a center would help farmers with good ideas who lacked technical assistance and needed help with business plans, he said. “By funding tobacco infrastructure instead of entrepreneurial assistance, we are hindering the process of rebuilding Kentucky agriculture,” he said.


Mr. Sharpe addressed Senator Borders, saying contract growing or biodiesel are not the type of loans they needed. Should the current price for tobacco increase, he said, barns would begin to be filled. He cited the importance of producing food products at the local level to supply to schools and the like.


Representative McKee told the speakers their ideas were something to consider. He suggested the two groups, the CFA and ADB, meet and discuss their differences. Chairman Belcher also said it appeared additional lines of communication needed to be opened.


Documents distributed during the committee session are available with meeting materials in the LRC Library.


The meeting adjourned at approximately 3 p.m.