Tobacco Settlement Agreement Fund Oversight Committee




<MeetMDY1> November 4, 2009


The<MeetNo2> 9th meeting of the Tobacco Settlement Agreement Fund Oversight Committee was held on<Day> Wednesday,<MeetMDY2> November 4, 2009, at<MeetTime> 10:00 AM, in<Room> Room 129 of the Capitol Annex. Senator Carroll Gibson, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Carroll Gibson, Co-Chair; Representative Dottie Sims, Co-Chair; Senators David E. Boswell, Vernie McGaha, Joey Pendleton, and Damon Thayer; Representatives Royce W. Adams, James R. Comer Jr., Charlie Hoffman, and Tom McKee.


Guests:  Roger Thomas, Michael Judge, and Joel Neaveill, Governor’s Office of Agriculture Policy;  Bill McCloskey, Tim Hughes, and Cyndi Hall, Kentucky Agriculture Finance Corporation; Drew Graham, University of Kentucky College of Agriculture; Mac Stone, Kentucky Department of Agriculture.


LRC Staff:  Lowell Atchley, Biff Baker, Stefan Kasacavage, and Kelly Blevins.


The October 14, 2009 minutes were approved by voice vote and without objection on a motion made by Senator Boswell, seconded by Representative Hoffman.


The presiding co-chair, Senator Gibson, invited Mr. Roger Thomas, Executive Director, and Mr. Mike Judge, Director of Operations, Governor’s Office of Agricultural Policy, to appear before the committee and report on the Agricultural Development Board’s actions from the previous month.  Before beginning his report, Mr. Thomas acknowledged the phone calls, e-mails, cards, and letters that he had received following his recent biking accident. Mr. Judge then briefly reviewed the funds approved under four programs – the County Agricultural Investment, the Deceased Farm Animal Disposal Assistance, Pilot Farm Management, and Shared-use Equipment programs.


As they reviewed the state projects approved for tobacco settlement funding, Co-chair Sims asked some questions about the University of Kentucky Food Systems Innovation Center project, which received a grant of $358,904. In particular, she asked about the use of Agricultural Development Fund (ADF) moneys for administration.


Mr. Judge explained that the center assists producers in the state in marketing their food-based products. Assistance has included activities such as labeling, shelf-life, and consumer acceptance. The grant would help expand those services.


He explained to Co-chair Sims that UK had received some federal funding, but that funding could only be applied toward equipment, consequently some of the Agricultural Development Funds granted would be used for administration. Most of the grant funding would be used for purposes other than administration, according to the committee witness, who also indicated to Co-chair Gibson that the grant marked the first time UK had received such ADF funding.


As the projects review continued, two projects spurred several minutes of discussion among committee members – the Thoroughbred RC & D Council project to use $15,000 in Woodford County funds to establish a land preservation board, and Fayette County Rural Land Management Board project to allow $75,000 in county funds to buy conservation easements under the Fayette County Purchase of Development Rights (PDR) program.


Mr. Judge explained to Co-chair Sims that the approval of the Woodford County funds was in keeping with a similar previous approval for Scott County.


The Fayette County project prompted several minutes of committee discussion after Co-chair Gibson asked about a $15 million bond approved in 2001 that provided funds for the Fayette PDR.


According to Mr. Thomas, who was a member of the General Assembly at the time, the Legislature approved bond issuances totaling $25 million ($10 million went to the state Purchase of Agricultural Conservation Easements program) for land preservation. Tobacco settlement funds are used to make the annual bond repayment.


Representative McKee mentioned the positive aspects of farmland preservation and observed that the latest Fayette County fund contribution of $75,000 did not seem significant. But the GOAP officials said Fayette County’s local council had approved $525,000 for land preservation in the last few years.


In subsequent discussion, Representative McKee said he and Representative Adams recalled that Fayette County had an existing farmland preservation program in existence in 2001 and could immediately use the funds. Senator Boswell later reiterated Representative McKee and added that the PACE program has had an impact in his area in terms of farmland preservation.


Responding to Co-chair Sims, who asked how tobacco settlement funds are divided among agencies, Mr. Thomas described to the committee how the state portion of the ADF has shrunk in recent years due to the use of tobacco settlement funds to pay off Kentucky Infrastructure Authority water and sewer bonds, and other types of bonds. For example, he cited the bonding approved during the 2008 legislative session for the Kentucky Agriculture Heritage Center, renovation of the four 4-H camps in the state, an FFA Leadership Training Center renovation, upgrades of the UK Livestock Disease Diagnostic Center, plus another round of KIA bonds.


As Mr. Thomas talked with the committee, a staff member distributed a budget chart that depicted tobacco settlement fund appropriations in the 2009 and 2010 fiscal years. Mr. Thomas told the committee that the debt service amounts taken from the ADF are substantial. All projects are worthwhile, but the amount available for statewide long-term projects to benefit agriculture have diminished, remarked Mr. Thomas, who told the committee that the situation “has almost reached a critical stage for the state portion of the fund.”


Responding to Senator Pendleton and later to Senator McGaha, Mr. Thomas indicated the Agricultural Heritage Center project is progressing; meetings have been conducted regarding conditions that must be following in accessing funds to build the center. Senator Pendleton said the project needs to advance before construction costs increase.


Referring back to the chart distributed to the committee, Co-chair Gibson said he could “see why our money is running out.”


            Responding to some additional questions from Co-chair Gibson, Mr. Thomas noted that only two counties, Pike and Knott, receive no county tobacco settlement funds because they had no significant tobacco production history. Counties that historically produced large amounts of tobacco currently receive settlement funds generally proportional to those historic production amounts.


            The witnesses next responded to a series of questions from Co-chair Sims related to the bonding process. At one point in the discussion, Mr. Thomas indicated that it is his understanding that the state cannot draw interest from bond proceeds.


            In subsequent discussion, Representative Adams mentioned that he was concerned about tying bonded indebtedness to Master Settlement Agreement payments, which will continue to decrease over time because of the decline in the consumption of cigarettes. In response, Mr. Thomas said an original agreement was to shift the bond payment obligations to the General Fund, but that has not occurred.


            The speakers, joined at the table by Mr. Joel Neaveill, GOAP’s Chief of Staff, responded to a series of questions from Senator McGaha regarding the funds with which they actually have access to for statewide projects. Mr. Thomas said they were “basically flat-lined in the 2008 budget for FY 2009 and FY 2010, with the FY 2010 ADF balance of just over $6 million will hinge on that year’s MSA payment. They also noted to the senator that some of the newest bond payments due for FY 2010 were half-year payments and would double afterward.


            As the discussion on that topic ended, Mr. Thomas said legislators as policymakers should be proud of the way they have used the MSA funds compared to other states, which have securitized the funds or have used the money for non-agricultural endeavors.          


             Following the GOAP projects discussion, Co-chair Gibson called on the speakers for a status report on the Kentucky Agricultural Finance Corporation (KAFC) including Mr. Bill McCloskey, KAFC Director of Financial Services, and Mr. Tim Hughes, Senior Policy Analyst.


            Preceding their remarks, Mr. Thomas told the committee that the ADB initially set aside $20 million for the loan program in 2003. Since that time, almost 300 loans have been approved for almost $36 million. The speakers reviewed the status of KAFC programs – the Beginning Farmer Loan Program, the Agricultural Infrastructure Loan Program, the Coordinated Value-added Assistance Loan Program, the Agricultural Processing Loan Program, and the Large/Food Animal Veterinary Loan Program, which is relatively new. Mr. McCloskey described how the program works in tandem with several commercial lenders in the state.


            During the presentation, they responded to Representative Comer that Beginning Farmer and Agricultural Infrastructure loans were generally set up for 15 years. Regarding the Beginning Farmer program, they told Senator Boswell that some agricultural production experience is required of those applying for loans.


            During their presentation, they mentioned a loan made to Kentucky Bioprocessing of Daviess County to conduct research and development of plant-made pharmaceuticals. Elaborating on Kentucky Bioprocessing, Senator Boswell indicated the company collaborates with the University of Louisville and the University of Kentucky, plus the Owensboro Medical Health System in plant-made drug development.


Documents distributed during the committee meeting are available with meeting materials in the LRC Library. The meeting adjourned at approximately 11:30 a.m.