Tobacco Settlement Agreement Fund Oversight Committee




<MeetMDY1> May 7, 2008


The<MeetNo2> Tobacco Settlement Agreement Fund Oversight Committee met on<Day> Wednesday,<MeetMDY2> May 7, 2008, at<MeetTime> 10:00 AM, in<Room> Room 129 of the Capitol Annex. Representative Rick Rand, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Carroll Gibson, Co-Chair; Representative Rick Rand, Co-Chair; Senators Charlie Borders, Dan Kelly, and Joey Pendleton; Representatives Royce W. Adams, James R. Comer Jr., Charlie Hoffman, Tom McKee, and Tommy Turner.


Guests:  Joel Neaveill, Governor's Office of Agricultural Policy, Michael Judge, Governor's Office of Agricultural Policy; John Bell, President, Kentucky Horticulture Council; Butch Case, Harrison County; Zeldon Angel, Clark County; Bob Bedford, Harrison County; Paul Dennison, Hart County, Andre' Barbour, Hart County; and Perry Nutt, LRC Staff Economist.


LRC Staff:  Lowell Atchley, Biff Baker and Susan Spoonamore, Committee Assistant.


Minutes of the March 3, 2008 and April 9, 2008 meetings were approved, without objection, by voice, upon motion made by Senator Pendleton and seconded by Representative Adams.


The presiding chair, Representative Rand, asked Mr. Joel Neaveill and Mr. Mike Judge, representing the Governor's Office of Agricultural Policy (GOAP), to report on the projects considered for funding during the April Agricultural Development Board (ADB) meeting.


State projects summarized were: O'Bryan Grain Farms, Elliott County District Extension Council, Porchetta Primata, Jessamine County FFA Alumni Association, Lewis County Conservation District, Russell County Cattlemen's Association, Elliott County Board of Education, River Valley Agritourism Alliance, Jefferson County Farm Bureau, and Shelby County Cattlemen's Association.


 As he proceeded through the projects list, Mr. Neaveill responded to some questions from Representative McKee and Co-chair Gibson concerning the O'Bryan Grain Farms operation, which received $369,239 in state and county grant funds to partner with the University of Kentucky in researching and developing a swine manure management system. He said the project would be a "test case." The company would acquire the requisite state permits to run such an operation, according to Mr. Neaveill. The manure disposal operation would involve a lagoon system, with the waste ultimately spread over farm fields.


The O'Bryan Grain Farm composting facility would have some new elements to it, according to the speaker. According to Mr. Neaveill, the grant funds would be used solely for building the composting operation. He said he would provide additional information to Senator Gibson regarding O'Bryan Grain Farms' financial commitment in the project.


Mr. Neaveill described the Porchetta Primata project, which would entail the production of a premium pork product to be sold to upscale restaurants. Porchetta Primata would receive an $87,693 loan from the state board, plus $3,000 in county funds, with the state portion set up as a zero-interest loan repayable following a two-year grace period.


Speaking next, Mr. Judge, the GOAP Director of Operations, reviewed the projects that were denied funding. He responded, in particular, to questions from Representative McKee, who observed that a Russell County Cattlemen's Association project to offer low-cost soil sampling came to the ADB with a high priority, yet was denied. According to Mr. Judge, the board indicated the soil sample services could readily be acquired by other means.


Mr. Judge also brought to the attention of committee members the schedule for the 2008 regional administrator workshops designed to help acquaint county council members with reporting requirements and programmatic changes; a status report on the Kentucky Agricultural Relief Effort (KARE), showing 49 counties had applied thus far for funds totaling almost $3.8 million; and a chart depicting the activities of the Kentucky Center for Agriculture and Rural Development, provided in response to a request in the April meeting.


Next, the committee heard a presentation on the Kentucky Horticulture Council, featuring the president, John Bell, a Scott County cattle and produce farmer, with additional testimony from Mr. Butch Case and Mr. Bob Bedford, both of Harrison County, Mr. Zeldon Angel, Clark County, and Mr. Paul Dennison and Mr. Andre' Barbour, both of Hart County.


Mr. Bell described the Horticulture Council, which was created in 1991 and has 13 affiliate groups that form the council.


According to his presentation, the horticulture industry in Kentucky accounted  for annual sales of $630 million. He said the industry had growth potential, and mentioned the increase in consumption of fresh produce nationally. Also, locally grown produce was in high demand.


Mr. Bell said the ADB grants have made a difference in providing a base structure for marketing horticulture products, education, and research. According to his report, 50 percent of the more than $8.7 million in ADB funds awarded to the council have been spent on farm demonstrations, consulting by field representatives, travel and the like. A total of 25 percent has been spent on research and development, 13 percent on marketing, and 12 percent on market research and education.


He said the industry grew 8 to 10 percent each year in the past five years. Produce auctions increased, both in the number of producers and in total sales. The number of on-farm markets had grown. Also the number of community farmers' markets increased from 65 in 1997 to 114 in 2007, with sales increasing from $1 million to $7.5 million. His report also detailed increases in floricultural crop sales, the growth of high-end landscape plant markets, and vegetable crop acreage.


The producers each described their own experiences in growing and marketing horticultural products.


Responding to Senator Gibson, some of the producers said they utilize federal H2A workers along with full-time employees in their businesses. They also talked about the importance of some of the Horticulture Council-funded assistance, such as horticulture field trips, on-farm consultation, crop demonstrations, and market development.


Regarding marketing, Mr. Dennison said he first began selling his products in his yard, but has since created retail space adjacent to a barn on his property. Mr. Barber said he has regular customers at a local farmers' market and also sells his products in Tennessee.

Mr. Bell responded to a question from Representative McKee, saying short-term growth could be achieved in retail sales, but producers in the future could also move toward more wholesale and regional sales.


Representative Hoffman pointed out that, in the current economic downturn, it might be helpful to develop local markets, and ultimately consumers would benefit.


Senator Borders also complimented the speakers. He noted his district had a large tobacco economic impact, and it was good to hear that farmers were diversifying.


Mr. Perry Nutt, LRC Staff Economist, briefed the committee on the status of Master Settlement Agreement (MSA) funds and outlined the manner which the 2008 General Assembly budgeted the MSA funds.


According to Mr. Nutt's report, Kentucky receives 1.76 percent of total funds going to states that settled with tobacco companies and formed the MSA.  Kentucky received its largest amount of MSA funds in FY 2000, about $142 million, and lowest in FY 2006, approximately $103 million. The state anticipated over $119.7 million in FY 2009 and over $121.6 million in FY 2010.


After describing the budgeting of those funds for FY 2009 and FY 2010, he responded to questions from the committee.


According to Mr. Nutt, responding to Co-chair Rand, the MSA is a contractual agreement between settling tobacco companies and states that will continue in effect in perpetuity because of cigarette sales in the United States.


It was pointed out state statutes required that the agricultural development portion of the MSA funds be split 65-35 percent between the state and counties, but budget language had overridden that requirement at times. Responding to one question, GOAP staff said the ADB had averaged about $15 million per year in grants awarded.


According to Senator Borders, in alluding to the budgeting of the funds for agricultural-related projects, the process showed the legislature, during the economic downtown, allocated the tobacco dollars to the agriculture community and to rural areas.


Allowing that some of the projects such as the FFA Leadership Training Center or University of Kentucky Livestock Disease Diagnostic Center to be bonded with agriculture portion of tobacco settlement funds were agriculture related, Representative McKee said he was concerned about the transfer of over $17 million of the agricultural development funds to the general fund. He urged the committee to be cognizant of that issue in the future.


Senator Pendleton said it is "something we need to be mindful of in the next session, that we get that money restored."


Senator Gibson pointed out that oftentimes MSA estimated funds were lower than actual funds received. Mr. Nutt responded that the MSA section of the budget had language allowing allocation of additional funds as they were received.


According to Mr. Nutt, responding to Co-chair Rand, there had been budget cycles during which tobacco dollars were used for Kentucky Infrastructure Authority bond payments, but were not included in subsequent budgets. Also, any tobacco dollars set aside for KIA bond payments that were unused would be transferred to the general fund and used for budget reductions. According to Mr. Nutt, officials generally project higher bond payment rates to allow for a cushion in case the market changed.


He also addressed an earlier comment by Senator Pendleton, and recalled two occasions when tobacco funds were used for other budgetary purposes, but restored later. One was a final Phase II tobacco payout to farmers that was made while the payments from tobacco companies were being held up. Those funds were later restored after states won a court suit. Also, in FY 2003, about $20 million was moved from GOAP accounts to the general fund, but later replaced with funds obtained from a bond issuance.


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


Meeting adjourned at approximately 12:00 p.m.