Econ Development Committee - Incentives Study

The Interim Joint Committee on Economic Development met today and were provided a presentation regarding a study of the state's Economic Development incentives. The study was authorized by HJR 5 in 2011 and provided for an outside consultant to be hired by the Legislative Research Commission to study these incentive programs, compare them to peer states, and make recommendations to improve these incentive programs. The study and presentation was handled by Anderson Economic Group the outside consultant. A copy of the full study is available for download HERE and our notes are below. 

Kentucky's programs fared pretty well in the study's comparison to its 13 peer states. Further, the state's business tax and labor cost were also found to be very competitive compared to peer states. Businesses that received Kentucky incentives reported creating 55,173 jobs between 2001 and 2010. This resulted in 33,000 "maintained" jobs per year. The cost to Kentucky of incentive programs were $140 million in 2010 and averaged $3,330 per job per year between 2001 and 2010. The incentive programs in general were found to be effective when compared to an alternative policy of broad-based tax decreases to try and achieve the same goals. The state has seen an increase in knowledge based jobs, particularly due to growth in advanced manufacturing. 

Speaker Pro-Tem Larry Clark, who sponsored HJR 5 that created the study, commented that he thought the report showed Kentucky's Economic Development incentives are better than most legislators thought. 

The report was critical in two areas: Hi-Tech jobs and Cabinet for Economic Development transparency. 

Kentucky has seen strong growth in knowledge based industries: hi tech, advanced manufacturing, and other technology based businesses. However, the report showed that there was still significant brain drain as total employment in knowledge based industries in Kentucky is only 25% of the employment in peer states. Kentucky is getting Hi-Tech/STEM graduates and Kentucky is spending more on research at universities than peer states, but not getting those jobs. Need better working partnership between research universities, Economic Development cabinet and the private sector. 

The other critical area was a lack of transparency and accountability of information coming from the Cabinet for Economic Development. 

That being said it is clear by the very limited recommendations offered by the consultants that there appears to be few changes the General Assembly could take on that would drastically increase the incentives effectiveness. The consultants recommendations were targeted at improving incentive reporting and ways to encourage growth in knowledge-based industries. The recommendations in short were:

- Require more reporting and annual reports be provided on certain programs by the Cabinet, including one comprehensive Annual Report. 

- Put more emphasis on bridging the gap between Economic Development, research universities, and the private sector.

- Consider increasing or expanding the tax credit for R&D expenditures.

A copy of the report is available for download HERE. 

Labor & Industry Committee - Unemployment Insurance Update

The Interim Joint Committee on Labor & Industry met this morning and heard a presentation from Secretary Joe Meyer on Unemployment Insurance. Our notes are below and a copy of the Unemployment Insurance Annual Report is available for download HERE. 

HB 495 

- Bill passed in 2012 Session allowed for method to borrow money to payback interest on Unemployment Insurance dollars borrowed from the Federal Government. Initially thought the money would come from a financing arrangement with KEMI, but instead the state borrowed $76 million from JP Morgan Chase at 1.95%. The Maturity/Pay Off of the loan is in 2018. Didn't use KEMI because JP Morgan was half the finance cost.

- $47.7 million already drawn to payback Commonwealth from the last years interest payment and the remaining $26.3 million is available to make Sept. 23 interest payment for this year.

Overall Unemployment Insurance Status Update 

- $948 million borrowed from Federal Government for Unemployment Insurance benefits as of 1/1/2012. The state borrowed and repaid $37 million earlier this year for cash flow reasons.

- Extra FUTA tax has reduced debt to $918 million as of current date. It is estimated that the debt should be down to $915 million by end of 2012 and below $800 million by the end of 2013. 

- House Bill 5 Reforms related to process and tax changes are fully implemented except for changing the procedures on how employers are notified of new claims, however this should be fully implemented in the next 2 weeks. 

- Appeals and Employer Protests - Secretary Meyer said that there is a perception that the appeals and protest process is tilted against business. However, his testimony was that the numbers don't show that. Of the roughly 83,000 employer protests in 2011, benefits were denied 66% of the time. Of the roughly 22,000 appeals, employers and claimants received similar treatment as each had a favorable decision rate of 31% if they brought the appeal. 

- 8.2% unemployment insurance rate for this month, same as last month. Claims have been cut in half compared to last year. Positive trend from 2009-2012 in terms on initial claims and benefits paid out. 

A copy of the Annual Unemployment Insurance Report is available for download HERE. 

A&R and Budget Subcommittees

Here is a quick recap of the first Interim meeting of the Joint Appropriations & Revenue Committee and its various subcommittees.

IJC on A&R
The Interim Joint Committee on Appropriations & Revenue met this afternoon in Frankfort and heard presentations on the National Mortgage Settlement by staff from the Attorney General and an update on several Cabinet for Health & Family Services initiatives by Deputy Secretary Friedlander. Copies of the presentations are available for download HERE.

Sean Riley, with the Attorney General's office, gave a detailed presentation of the National Mortgage Settlement negotiated by the National Attorney General Association, which Kentucky participated in through Attorney General Conway. The presentation was very detailed, the main highlight is that of the $25 billion settlement Kentucky will receive $58.7 million. Those funds are directed into four buckets: $12 million in Foreclosure initiatives, $15.9 million for refinancing for underwater borrowers, $19.2 million in direct state payments, and $10.8 million in payments direct to borrowers. There was no specific details related to the $19.2 million in state payments, except that Mr. Riley said the state didn't have the money yet, but could draw it down.

Legislator reaction was related to getting information on the settlement from the AG's office to share with their constituents that have had issues with their mortgages.

Secretary Friedlander gave an overview of a wide range of CHFS Initiatives. Most are covered in detail in the presentation slides, but here are a few highlights:

- KASPER - Friedlander touched on the implementation of HB 1, specific to KASPER. He mentioned that paperless registration for the KASPER program is already in place, that daily reporting by pharmacies will begin on July 1, 2013, and that the cabinet is planning to hire additional staff to managed the KASPER changes. Friedlander also mentioned that interstate data sharing has begun and currently Kentucky is able to data share with Alabama. By October, KY will be able to share with all our surrounding states.

Also, $4M from Kentucky's share of the National Mortgage Settlement will be used for the KASPER enhancements. This was placed in HB 1 to replace physician and pharmacist fees, which was included in the legislation as introduced.

- Social Workers - The General Assembly in the budget allowed for the hiring of more social workers and the Cabinet is working to get those folks hired and still maintain the numbers as they are losing several to attrition. They acknowleged some lapses in documentation and other areas that have come up over the past couple of months. They attributed that mostly to lapses in management in certain pockets of the state and to the replacement of experienced folks that have left with these new hires. Some legislators were very critical of the quality and credentials of the folks they were hiring and a fear that these "lapses" were becoming too common place.

- Construction - The Cabinet is not normally a big facilities construction type of agency, but they are in the middle of construction on replacement of the Glasgow Nursing Facility and Eastern State Hospital. Both of which are nearly 70% complete. Legislators asked a few questions in regards to programs and vendors at the Eastern State Hospital where the Cabinet is talking exclusively to Bluegrass MH/MR Board. If Bluegrass' plan isn't acceptable then the Cabinet will take the plan to bid.

The next meeting will be held on July 26.

Joint Meeting of Budget Review Subcommittee on K-12 & Post-Secondary Education
The Budget Review Subcommittee on Education heard presentations from CPE President Bob King and from Military Affairs on the Appalachian Youth Challenge Academy. Copies of the presentations are available for download CPE & Youth Academy.

CPE President King discussed adult education initiatives, specifically the Commonwealth College. This program was authorized during the 2012 Session and will utilize two public universities to focus on increasing degrees among adults. The two universities selected will be done so through an RFP process. More details in regards to the timeline, target market, and partnership with KCTCS are included in the presentation slides.

Representatives from the Department of Military Affairs gave an overview of the Kentucky Youth Challenge a program for at-risk youth. Most of the information provided was covered in the presentation slides.

Budget Review Subcommittee on Transportation
The House and Senate members of the Budget Review Subcommittee on Transportation heard testimony from the Transportation Cabinet in regards to the Road Fund. A copy of their presentation is available for download HERE.

The Budget Review Subcommittee on Transportation met this morning in Frankfort. The Interim Joint Subcommittee includes both House and Senate members who are charged with putting together the Road Plan and Transportation Budget during the session. Today's meeting was a presentation by the Transportation Cabinet on the Road Fund. The meeting was short and to the point, as the Cabinet outlined current road fund revenues. Year to date, the Road Fund is on target to meet revenue estimates. The fund will need $102.4M in the final month to do so, and cabinet officials expect that will happen. There has been a 6.8% growth in revenue compared to this time last year. FY 13 revenues are estimated to be 1.5B and 1.6B in FY 14. The Cabinet also gave an overview of the gas tax. The tax is currently at 29.9 cents per gallon. Recently the index was triggered adding another 2.1 cents to the tax. The Revenue Cabinet will determine in July whether the index will be triggered again for the fourth quarter.

May 2012 Revenues

General Fund and Road Fund receipts for May 2012 were released today by the State Budget Director. You can download a copy of the press release and charts HERE. The highlights are:

1. General Fund down 2.3% and Road Fund up 4.7% as compared to May of 2011.

2. As we approach June 30, we also approach the end of the state's fiscal year. The Official Revenue estimate for the General Fund was 2.8%, in order to meet that estimate revenues can dip in June, but only by 0.4% to meet the estimate. If revenues were to slide further than 0.4% in June then Kentucky's revenues would come in lower than anticipated creating a possible budget shortfall that may require further action by the Governor or General Assembly.

3. This is the second consecutive month that General Fund revenues have been below their 2011 levels.

4. Road Fund revenues continued to perform well, as they are up 6.8% year to date. June revenues could fall 8.3% and still hit their forecasted growth at 5.5%.

Budget Director Lassiter feels confident that revenues will come in at the Official Revenue Estimate level. If not, it might be interesting to see how the Governor and General Assembly would approach things in light of the Governor's Tax Reform Commission and Legislative Elections this Fall. Stay Tuned...

IJC on Natural Resources

Below is a press release from LRC in regards to Thursday's Natural Resources Committee meeting. A copy of the slide presentation can be accessed HERE.

For Immediate Release

June 7, 2012

State legislative panel considers effect of new EPA rule

FRANKFORT-- A new Environmental Protection Agency rule regulating greenhouse gas emissions favors natural gas over coal for electricity generation, a state Air Quality official told state lawmakers today.

Division of Air Quality Director John Lyons told the Interim Joint Committee on Natural Resources and the Environment that the recently proposed and published Greenhouse Gas New Source Performance Standards (NSPS) rule, which was proposed and took effect in April 2012, will not apply to certain natural gas fired turbines but will apply to future small (73 megawatt base load rating) coal-fired plants that were not permitted or built prior to April 13.

The emission standard under the rule, Lyons said, limits carbon dioxide to 1,000 pounds of carbon dioxide per megawatt hour gross output annually.

"You might ask, 'What does that mean?' To give you an idea of what some current facilities emit in terms of CO₂, a super critical coal fired generator such as the Trimble 2 unit (in Trimble County, KY) ,which is one of the cleanest units in the nation, puts out about 1,800 pounds of CO₂," he said.

Lyons said a simple cycle natural gas fired turbine emits about 1,300 pounds of CO₂ per megawatt hour gross output a year, while a combined cycle natural gas fired unit emits around 750 pounds per megawatt hour of the greenhouse gas.

"The only technology that really falls under 1,000 pounds of CO₂ per megawatt hour is a combined cycle natural-gas fired turbine," he said.

The rule does give some leeway to coal-fired electricity generation at new units that can meet the average 1,000 pound CO₂ emission standard over a 30-year period, Lyons explained.  Lyons said the 30-year standard is a kind of "out, if you will" for coal-fired power plants, although he said meeting that standard would require reliance on technologies like carbon capture and storage that is not what he called "a proven technology".

Committee Co-Chair Rep. Jim Gooch, D-Providence, said he recently heard a federal official say natural gas is going to be "the standard" in power generation in the future. 

"His comments went on to say if you're wanting to build a coal-fired power plant, you've got major problems," Gooch said.

"We're the ones who are going to pay the consequences for this decision," Gooch said.

When asked by Rep. John Will Stacy, D-West Liberty, what the "tipping point" is in deciding to switch from coal to natural gas, Lyons commented that EPA rules like the one published April 13 could play a part. 

"At this point in time, it's as cheap to use natural gas as coal because of the price of natural gas.  But,… I think it's driven more by what the rules are and what you've got to meet in terms of pollution output, is what really the tipping point is rather than the equipment and whatnot," said Lyons.  "That's something I can investigate..."

Also, Lyons said electric utilities are asking themselves whether it is smarter to retrofit aging coal-fired power plants or build new plants.  Utilities are asking "'does it make sense to retrofit a 60-year old plant, rather than build a new plant which at this point in time is going to be natural gas fired unit with all the factors involved?'" Lyons said.

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