Notes from CFG Meeting

The Consensus Forecasting Group, a panel of economists charged with predicting the state's future revenues, met today in Frankfort to review the key economic data for the US and Kentucky economies. The highlights from the meeting are below and you can view the handouts HERE:


- This is the second of a three meeting series, with the final meeting of this series scheduled for October 14, when the CFG will make its preliminary revenue forecast. The Governor's Office will utilize that number to prepare the Governor's Budget that he will present in January. The CFG will meet again in December and January to finalize the state's revenue forecast for use in the 2012 Session as the General Assembly builds the next biennial budget.  


- Today's meeting was more focused on an analysis of the economic data and discussion of the economists overall views of the economy. Most of the economists were relatively pessimistic in their view of the economy. That view may still lead to revenue growth in the next biennium, but possibly not as robust as originally thought.

Budget Committee Notes

The Interim Joint Committee on Appropriations & Revenue met yesterday and heard testimony regarding Kentucky's Economic Development efforts and a staff report regarding Kentucky's use of bonding and current credit status.

Budget Staff Changes: Of particular importance, it was announced at the meeting that Bart Hardin the current LRC Budget Director would be retiring next week. Beginning October 1, Greg Rush will take over those duties. Greg has most recently been the Budget Review staff for Education. He will be joined by Stephanie Craycraft as his Deputy. Stephanie is coming from the Budget Review staff for Transportation.

Economic Development

Secretary Larry Hayes and Commissioner for Business Development Erik Dunnigan presented an update to the committee on current economic development efforts and the status of implementation of House Bill 3 from the 2009 Special Session. Much of their presentation followed very closely with their slides which are available for download HERE, the highlights are below:

- Staffing at the Cabinet is down 30% from 2007. They have been looking at their structure and trying to get "flatter" by reducing down from 3 Commissioners to 1 and by tearing down silos to be more cross-functional. This has been in response to the changes in HB 3.

- Prior to the passage of HB 3 in 2009, they had the K-programs, which were useful, but they took a piecemeal approach to trying to help a company. The focus was on new business location and not necessarily helping the companies Kentucky already had. Business changed the way they were doing things, competition wasn't for the next Toyota, but inter-company for a Kentucky business unit to compete against the same company's unit in another state or country. Incentives had to change.

- HB 3 has been helpful because of the reinvestment incentives, the consolidation of the K programs, and the increased accountability if companies do not meet the goals in their economic development agreements.

- Since 2009, the Cabinet credited HB 3 with $3.5 billion in new investment from 350 firms that have been approved. Creating nearly 20,000 new jobs and retaining more than 7,000 existing jobs.

State's Debt

LRC Staff for the Capital Projects and Bond Oversight Committee, Kristi Culpepper, gave a presentation on the state's debt. Her presentation served as the highlights from a recent report she compiled that is more in depth on Kentucky's bonded indebtedness. You can download the presentation slides and the report are attached, and the highlights are below:

- Due to structural budget imbalances, high levels of debt per capita and dept as a percent of revenues, and due to high levels of unfunded liability in Kentucky's pension system Fitch and Moody's have each downgraded Kentucky in the last year. Further, the outlook from all three of these agencies is negative.

- The practical impact is that Kentucky will have difficulty issuing more debt going forward, because investors will want higher rates thus costing more in terms of state appropriations for debt service.

- There are no silver bullets to solve the problem as increased appropriations to fund items like pension liabilities eat up revenues that could be used to pay debt service on new or expanding projects and programs and actually reduce the states cash position.

The attached presentation and report provides more in depth analysis.

BR Sub on Transportation

The Budget Review Subcommittee on Transportation met yesterday a summary is below and the handouts are available for download HERE. 


The Cabinet gave an update of the Road Fund.  It was characterized by the Chair as the one piece of positive financial news in Frankfort recently.  In 2011 they met and exceeded all estimates with the three main tax sources--motor fuels tax, motor vehicle usage taxes and the other category which is weight distance and the various license fees.

Chairman Collins, Chair of Transportation asked a question about the escalating gas tax and whether it was in danger of falling back with the falling wholesale prices.  The Cabinet answered they were confident the current tax rate would be safe to at least January.

The Cabinet also gave an update on the bond situation.  The state has 1.45 B in bond funds authorized dating back to 2005.  The years 05 and 06 are pretty much maxed out.  The years 09 and 2010 have substantial bonding authority remaining.  They expect to have the remaining projects obligated in the next two years.

Another Cabinet presentation was on the Appalachian Projects that are funded with Appalachian Regional Commission funds, but contain a 20% state match.  These projects were started in 2002 and are huge in scope--some 600 plus million in Letcher, and the Pike US 460  corridor.  Majority Leader Adkins brought up the initiative to have the remaining 2-3 lane section of the Mt. Parkway and the corridor from Campton to Hazard as Appalachian eligible and able to receive APD funding.  These are projects that have been discussed for some time and most state officials believe they couldn't fund without the APD designation.

Finally, they had a quick update on BRAC spending by the head of BRAC in Kentucky, Col. Mark Needham.

 

No mention of the Sherman Minton or the Ky/In Bridges project.

2012 Session Calendar

See the news release from LRC below and/or access the 2012 Session calendar by clicking HERE.

News Release

September 16, 2011

Calendar set for 2012 legislative session

FRANKFORT – The 2012 Regular Session of the Kentucky General Assembly is scheduled to begin on Jan. 3 and will last 60 days, the maximum number allowed by the state constitution.

The session will conclude on April 9, according to the schedule that has been approved by Senate President David L. Williams and House Speaker Greg Stumbo. The schedule is pending ratification of the full 16-member Legislative Research Commission, which Williams and Stumbo co-chair.

Legislators will not meet in session on Jan. 16 in honor or Martin Luther King, Jr. Day or on Feb. 20 in observance of Presidents' Day.

The veto recess – the period of time when lawmakers commonly return to their home districts to see which bills, if any, the governor chooses to veto – will run from March 28 through April 7.

The 2012 session calendar can be viewed online at http://www.lrc.ky.gov/sch_vist/12RS_calendar.pdf.

--END--

August Revenue Report - GF Down & RF Up

The State Budget Director's Office released the August tax receipts report today. Click HERE to see the full report, here are the highlights:

- The General Fund broke a string of 15 months of increasing revenues, as August General Fund receipts came in 3.0% below August 2010, $623 million compared to $642 million a year ago.

- The Road Fund on the other hand continued its streak of revenue growth for the 14th consecutive month with a 5.4% increase in August resulting in $134 million in revenue.

Analysis:

- General Fund: At the most recent meeting of the Consensus Forecasting Group, the state's economists predicted that revenues would increase and that based on current budgeted expenses Kentucky could possibly have a significant surplus of $192 million in June 2012. To meet the official forecast revenues would need to grow 1.2% over the rest of this fiscal year. Certainly one down month won't necessarily have a large impact, but given the national economy it will be interesting to see if this forms into a trend.

If so it could drastically impact the General Assembly's work on the 2012 budget in January if they have less revenue than expected. Since 2008, the General Assembly and Governor Beshear have had to deal with less revenue year over year, and it appeared with the recent $121 million deposit into the rainy day fund and possible surplus next year things were looking up. However, they may not be able to take a break from the budget cutting just yet.

- Road Fund: Lead by continued growth in motor fuels tax 4.4% and a strong growth month from motor vehicle usage tax 10% the fund continues to grow. Only two months into this fiscal year and revenues could decline 0.7% over the rest of the fiscal year and the fund would still meet its revenue forecast. Certainly, more monies in the Road Fund could aide in the overall politics of the state budget when the legislature takes it up in the 2012 Session. But it is a long time between now and January and with the overall apprehension about the national economy anything could happen.

Transportation Committee Notes

The Senate and House Transportation Committees met separately today in Frankfort to discuss a variety of issues. Both committees had the same agenda, with the exception of an update from KY Speedway on parking and traffic improvements related to the NASCAR race that took place several months ago. The Senate Transportation Committee included this as part of their agenda, while the House committee did not.

KY Speedway
Mark Simendinger, the General Manager at Kentucky Speedway, gave a good review of the problems that they experienced with traffic and parking at the recent NASCAR Sprint Cup Race, to Senate Committee members this morning. As part of their effort to improve track operations before next year's race, the Speedway has purchased land for additional parking. In addition to this improvement, the state has agreed to fund the construction of a tunnel connecting the new parking lot to the track and also a new lane exiting off of I-71. The total cost to the state will be $3.6 million. Several Republican senators were critical of using public monies to pay for a private venue for an event that will take place one time per year. Secretary Hancock said that they will use funds from the Cabinet's contingency account. In response to questions from Senator Givens, Hancock explained that the account contains approximately $31 million annually, and those funds are budgeted by the General Assembly.

Road Fund Update
A brief update was given by the Cabinet on the status of the Road Fund. As has been reported, revenues have exceeded Road Fund estimates, to the tune of $73 million in FY 11. The following questions were asked:

Senator Shaughnessy asked for a breakdown of the gas tax by county and the Cabinet responded that it is not reported in that manner. Shaughnessy has requested a meeting with Hancock and Finance Cabinet officials to determine if that data can be determined.

Senator Thayer asked how the additional revenues would be spent and Hancock told the committee that the funds will support state funded construction projects.

There were a couple of questions related to electric vehicles and how funding for roads will continue with this movement away from gasoline. Hancock said that all states are wrestling with this issue and they are hopeful that Congress will provide guidance. Senator Higdon mentioned that he is aware that a bill will be filed in the 2012 session to allow for tax credits for electric vehicles.

In the House Committee, Chairman Collins mentioned the car trade-in tax credit and his desire that the credit be placed back into the budget this coming session. He believes the program has been positive for revenues. There were additional questions related to how the additional revenues would be used, and as in the Senate committee Hancock said they will go toward state funded projects. As part of this conversation, Rep. Combs expressed concern that the construction jobs are not going to labor workers and instead going to out of state workers. Rep. Henley echoed those concerns.

I-69 Update
Ted Merryman was introduced as the project manager for the I-69 project. Merryman gave the background and then an update on where the state is with I-69. The interstate will cover approximately 160 miles, with 140 miles along the existing parkway system. Last week 55 miles were branded as I-69. Eventually 10 miles of new road and 1 new bridge will need to be added as part of the project. Jody Wassmer, with the Owensboro Chamber of Commerce and Brad Schneider with the Henderson County Chamber of Commerce spoke in support of the project. In the House Committee, Chairman Collins asked how the project would be funded. Hancock said that innovative financing will be an option as well as state funds; they will be looking for the right mix. Arnold Simpson followed up by asking if tolls were the innovative financing that Hancock referred to. He said that, yes, tolls would be looked at for the project. Simpson also asked about the support of the Congressional delegation. The answer he received was limited to contacts with Whitfield, McConnell, and (to a lesser extent) Rogers. Steve Riggs tried to hone in on whether Paul supported the project. It seems that there has not yet been contact with Paul.

KAVIS Update
Representatives from the Cabinet, Tom Zawacki and others, gave an update on the implementation of the new Automated Vehicle Information System. The current system, AVIS, needs to be replaced because of new technology and to improve certain processes and customer service to the public and to county clerk office. The vendor that the state is using is 3M and they have successfully implemented similar programs in several states. Currently AVIS has high maintenance and programming costs and the new KAVIS system will reduce those numbers by half. In addition KAVIS will allow for digital documents, more reporting options, and more online renewal options. The Cabinet has set August of 2012 as the earliest possible go live date, but have a secondary date of the end of 2012, if need be due to the heavy workload the County Clerks will have working on the November 2012 presidential election. House committee members asked questions regarding the potential that exists with driver's licensing and paperless titling. The Cabinet says that the new system is designed to handle both of these, but will not be implemented at this time. A driver's licensing system would require an additional capital investment as well.

Estimating Procedures for Highway Construction Contracts
Finally, Secretary Hancock and Steve Waddle (State Highway Engineer) gave an overview of how the cabinet goes about putting together engineering estimates to be used in bidding highway construction contracts. The state's engineer estimate is the baseline for a project and the Cabinet will use that to analyze and review the bids they receive. The estimates for all highway construction projects are kept confidential.
Two methods are used: a historical data approach and a cost-based analysis. The Cabinet will use both of these approaches and sometimes a combination of the two depending on the project.

In response to questions, particularly in the House committee, the Cabinet said they get more bids on projects than they have in the past and specifically are averaging 3 bidders per project. In some instances, they have had as many as 11 bids on a single project. Rep. Riggs asked if the process that is used is audited and the Cabinet said that it is audited frequently. There was also some discussion as to whether contractors were able to hire from the cabinet staff who put together the engineering estimates. Hancock and Waddle mentioned the ethics laws and also said they didn't see where it would be an issue, although they did ultimately say that would look into the issue further.