The second meeting of the Interim Joint Committee on Economic Development and Tourism was held on Thursday, March 18, 1999, at 1:00 PM, in Room 149 of the Capitol Annex. , Senator Glenn Freeman, Co-Chair, called the meeting to order, and the secretary called the roll.

Present were:

Members: Senator Glenn Freeman, Co-Chair. Representative Tom Kerr, Co-Chair. Senators Dick Adams, Walter Blevins, Charlie Borders, David Boswell, Vernie McGaha, Virgil Moore, Dick Roeding, Katie Stine. Representatives Royce Adams, Scott Alexander, Hoby Anderson, Bo Ausmus II, Eddie Ballard, Carolyn Belcher, Buddy Buckingham, Philip Childers, Perry Clark, Tim Feeley, Joseph Fischer, Gippy Graham, J.R. Gray, Porter Hatcher, Jodie Haydon, Thomas McKee, Ruth Ann Palumbo, Marie Rader, Chris Ratliff, Tom Riner, Gary Tapp, Johnnie Turner, Ken Upchurch, Charles Walton, Mike Weaver, and Robin Webb.

Guests: John Brazil and Mike Ridenour, Kentucky Chamber of Commerce; Steve Zea, West Kentucky Corporation; Joe Rudd and Susan Smith, KWPCC; Jerry Deaton, KLC; Gene Fugua, Economic Development Cabinet; Gay Dwyer, Kentucky Retail Federation; and Marchita Sparrow, Kentucky Tourism Council.

LRC Staff: Mary Yaeger, John Buckner, Kim Wilson, Doug Teague, and Ellen Steinberg.

Minutes of the October 15, 1998, meeting were approved by voice vote.

The first item on the agenda was the committee review of 307 KAR 6:010. This administrative regulation addresses the Kentucky Investment Fund Act. Secretary Gene Strong, Executive Development Cabinet, and David Bratcher, Vice President, Commonwealth Small Business Development, presented the regulation to the committee. Secretary Strong said that the administrative regulation involved a new piece of legislation, the Kentucky Investment Fund Act, that passed in the last General Assembly. This regulation is consistent with the Act which is a venture capital fund bill.

Mr. Bratcher said that in the 1998 session, the General Assembly passed HB 206 which establishes the Kentucky Investment Fund Act. This bill allows the creation of privately operated venture capital funds throughout the Commonwealth. The investors who invested in those privately operated funds will be receiving 40% tax credits on the cash they contribute to each fund. Under this particular bill, the maximum fund of any one fund can be $10 million, the maximum of all tax credits is $20 million and that amount is divided over a five year period at the rate of $4 million per year. He said no one fund can have more than $4 million of credits associated with the fund, which means that one fund would have a $10 million investment and the maximum of credit for investors in that fund would be $4 million. At a minimum there would be at least five privately operated venture capital funds throughout the Commonwealth, each with a capitalization of $10 million.

Mr. Bratcher said that the investors in the funds are recovering these tax credits over a four year period, and cannot recover more than 25% of their credit in any one year and commences after July 1, 1999.

Under this law, the state approves the venture capital firm that is going to oversee each fund. After the firm is approved, it is no longer a state operated program, the private investors are allowed to make the investments that they deem will provide a good return. The role the Cabinet plays is to make sure that the fund managers are making the investments in the appropriate types of businesses. Under this statute there are provisions that a certain percent of funds must be invested in small business, and companies must have 50% of their assets, operations, and employees located in Kentucky at the time the investment is made, companies that have a net worth of less than $3 million, and cannot have earnings in each of the prior two years of more than $2 million and no more than 100 employees.

Upon motion of Representative Ballard, and seconded by Senator Roeding 307 KAR 6:010 was approved by voice vote.

Marvin E. Strong, Secretary, Economic Development Cabinet, gave a presentation on various programs within the Cabinet. Secretary Strong said the primary mission of the Cabinet was to create more and higher quality opportunities for the citizens through building a sustainable economy. For the past five years, the Cabinet has been following the strategic plan that was adopted in 1994.

Secretary Strong said in 1992, the General Assembly passed HB 89 establishing the Kentucky Economic Development Partnership Board. The members of the board include: The Governor as Chairman, eight members from the private sector, three from the public sector, the Secretary of Natural Resources and the Secretary of Finance. Mr. Strong said he and the Secretary of Tourism Development are ex-officio members. Every congressional district has a representative and eight state-wide organizations are represented.

Secretary Strong said the Economic Development Cabinet is the smallest Cabinet in government with approximately 125 employees. The total budget is about $17.5 million and of that almost $6.3 million is in the grants category for training.

Secretary Strong said the four primary areas of the Cabinet other than the Secretary's office are: administration and support, job development function, community development, and financial incentives. In 1998, there were 29,583 new jobs created in the state, which was an investment of just over $2.9 billion. In Site Selection Magazine Rankings for 1996-98 Kentucky ranked third in the country for one million population, for new and expanded facilities Kentucky ranked fourth, and for investment Kentucky ranked ninth. He said Kentucky ranked 13th for total new and expanded facilities in 1998.

Secretary Strong gave an overview of Area Development Magazine rankings of the most important site selection factors taken from a survey of business executives and site location consultants throughout the United States. A few of the major factors were: highway accessibility, availability of skilled labor, occupancy or construction costs, labor costs, availability of telecommunications services, availability of land, and state and local incentives. He said the 1998 ranking of important quality of life factors were: low crime rate, health facilities, rating of public schools, housing costs, housing availability, climate, recreational opportunities, colleges and universities in the area, and cultural opportunities.

Secretary Strong said one of the problems in some of the rural areas of Kentucky is that there has not been a product to compete on a level playing field with other areas in Kentucky and the country. He said in 1992, the coal severance legislation was passed which allowed dollars to flow back to the regions where the coal production occurred. Large blocks of money was accumulated to develop larger industrial sites in east and west Kentucky. He said the six industrial parks that have been approved are: MMRC Regional Industrial Park, Four Start Industrial Park, Coal fields Regional Industrial Park, East Regional Industrial Park, Honey Branch Regional Industrial Park, and Southeast Kentucky Regional Industrial Park. The parks are paid for by the multi-county portion of the coal severance return and are joint efforts between the counties in each of the regions. These counties enter into local operating agreements approved by the Attorney General, and share on the tax revenues that come into the area. Two future parks will be West Kentucky Regional Industry Park -II Ohio County and Pine Ridge Regional Park.

Mr. Strong said the Cabinet originally sent out an RFP and asked for proposals from the coal producing counties, about 90% of the counties participated, and in the initial proposal nine responses were received, seven of which are underway or about to be underway.

Senator Freeman asked how the Cabinet planned on marketing the regional industrial parks, and what part the East and West Corporation as well as the local regional park industrial authorities would play in the marketing.

Secretary Strong said they are coordinating their marketing efforts with both East and West Kentucky Corporations for the sites, as well as the industrial authorities. He said at this point, some of the authorities do not have full time staff. He said they would be actively marketing these parks in line with their target industry analysis, and are partners with the organizations in the east and west and do a number of trade shows together. Secretary Strong said the Governor is very actively involved in the marketing of the parks.

Representative Buckingham asked if the counties involved in the parks were KREDA counties. Secretary Strong said all the counties except for one. Representative Buckingham asked a question about tying the welfare-to-work program to the regional parks. Secretary Strong said they are trying to put together a more comprehensive approach, not just in terms of the recruitment of the project, but as it relates to welfare-to-work, child care, and various other components.

Senator Borders asked if any outlying counties of the regional parks share in the property taxes. Secretary Strong said all counties in the agreement would share in the tax revenues that are generated from that particular park.

Representative Ratliff said Pike County generated about $800 million is severance tax and received about $50 million. He said he would like to learn how he can help people who don't have a job and want to start a business but do not have any access to capital or any way to get it. Secretary Strong said there was no Pike County industrial site proposal for a regional park submitted to the Cabinet. The Economic Development Cabinet can fund projects in coal producing counties, but they cannot fund projects in those counties unless it is requested by the fiscal court in the counties. Secretary Strong said the General Assembly made the commitment in the last session that they would forego $20 million in direct tax credit over the next fifteen years to investors in the venture capital fund. He said this fund should take Kentucky from 49th in the availability of venture capital to possibly the top ten in the country.

Representative Anderson asked if there were any requirements on wage and benefit rates of companies coming to the industrial parks. He asked if there were any type of requirements on the type of jobs the KREDA program approves. Secretary Strong said the KREDA program is a tax credit program. If the company doesn't produce a tax liability they wouldn't receive a benefit.

Secretary Strong said there were no requirements on wages for the companies that come to the industrial parks, but he thought the state had some ability to control this.

Senator Freeman asked if the Cabinet had any new incentives planned for the future. Secretary Strong said no. Secretary Strong said incentives were not the most important factor in any locational decision. He said as a government, Kentucky needs to work harder on highway accessibility in rural areas, workforce development, educational opportunities, be conscious of telecommunications services, and make land available.

Senator Freeman asked how many leads the Cabinet has in a month, and how many in a year. Secretary Strong said they have about 400 contacts, and have five agents that carry 80 to 120 active projects at all times.

Senator Freeman asked how much money was spent recruiting prospects. Secretary Strong said there is an advertising and marketing budget of about $500,000, and in the job development area there is a total budget of $2.3 million which is for staff.

Senator Freeman asked how the Cabinet attracts prospective clients. Secretary Strong said they do six to seven trade shows a year and spend the money in target markets. He said they track the number of responses they get from the various print media and the national name recognition that Kentucky has built in the last eight or nine years draws some prospects. Some of the prospects come from existing businesses, international markets, and through the automotive sector.

Senator Freeman asked what procedure was in place to share the leads with the East and West Corporation. Secretary Strong said when they get a lead from a company looking at East or West Kentucky, they would contact the community or East or West Kentucky Corporation to bring that company for a site visit in that particular area.

Senator Freeman suggested that the Cabinet scale back on some of their funding and enhance the East and West Corporation funding in order to acquire more prospects and focus on the coal counties. Secretary Strong said he thought it was a mistake to decrease and diminish the role of the state in economic development efforts in recruiting and retention. He said that would be penalizing all of Kentucky.

Representative Haydon said he would like some information on the foreign offices. Secretary Strong said there has been enormous success with the international offices. There are 110 Japanese manufacturers in the state with over 35,000 people employed, and approximately $6.9 billion dollars in the facilities. The Cabinet locates between five and ten new manufacturing facilities a year from Japan. Secretary Strong said the Europeans tend to work in joint venture with existing companies, as opposed to acquiring a green field site and building on it. There have been some new European projects recently and the Cabinet continues to see a steady stream of business from Germany and France. Secretary Strong said their other office in Quadalajara is relatively new.

Representative Haydon asked if Kentucky agricultural products are promoted in offices other than Mexico. Secretary Strong said they have an international trade office that promotes an array of products throughout Europe and they participate in different trade events during the year.

Steve Zea, Executive Director, West Kentucky Corporation gave an overview of the handout that was given to the Committee on the Regional Industrial Park Program, the current financial incentive programs, a listing of new and expanded industries in west Kentucky, and discussed future incentive programs to assist under-employed, rural areas of the state. Mr. Zea said that the West Kentucky Corporation receives $350,000 of direct state appropriations, $100,000 in other funds, and occasionally receives grants from the federal and state government on different projects. Mr. Zea said the West Kentucky Corporation has worked on the majority of the projects involving the new industries in western Kentucky. He said the work on expansion of industries is generally referred to the Western Kentucky Regional Office, but they do assist in setting up the financing packages.

Mr. Zea said the Board of Directors of the Western Kentucky Corporation consists of gubernatorial appointments, county judges, mayors and citizen members. The strategic plan and the goals have been provided in the handout. Mr. Zea said that they have been asked by West Kentucky Caucus Chairman, Senator Bob Jackson, to provide an overview of suggestions on future incentive programs and initiatives to assist west Kentucky. Their suggestions are: recruitment of jobs, higher wage, tourism development revolving loan fund, agribusiness loan program, bond bank program, loan funds for river ports, certified industrial parks, marketing of the Kentucky Investment Fund Act, marketing by themes, and linking communities by developing trails. An explanation of these suggestions can be found on page 21 of the handout.

Senator Freeman asked what the percentage of coal was as far as their funding source. Mr. Zea said as of the last legislative session, all of it came from coal severance. Senator Freeman asked Mr. Zea and Mr. Jones if they were satisfied with the funding, and said maybe they need to have more influence in bringing prospects into the coal producing counties.

Mr. Zea said their Board has asked them to try to help the counties that need the most help and several are coal producing counties.

Mr. Jones said the East Kentucky Corporation has had a little different focus than the West Kentucky Corporation from its beginning. It has focused on two components: industrial recruitment of companies from outside of their service area; and a little revolving loan fund that has about $1 million in assets. He said in respect to the industrial recruitment effort, they have always given a disproportinent share of time to the hard core eastern Kentucky. Mr. Jones said when they get a prospect they try to see if there is anyway to draw them into the mountains, and draw them away from the interstate highways.

Mr. Jones said they have a challenge of finding companies to go into industrial parks. You have to look at what kind of assets the mountain industrial park sites have that make it a good location for a company. Mr. Jones said over the last five years KREDA has eroded its cash benefits and KIDA has enhanced its cash benefits.

Senator Freeman asked how many manufacturing referrals they get a month from the Cabinet. Mr. Zea said they get about ten to twenty referrals a month. He said they work with the different project managers in the Cabinet. He said they had quite a few referrals this month because of the auto show and next month there may not be quite as many. Mr. Jones said they generate about 90% of all the prospects that they have. He said they have a list of the active projects which show 24 active projects this month.

Senator Freeman asked how many contacts the Cabinet sends per month and per year. Mr. Jones said the bulk of contacts they receive from the Cabinet are from wood products companies because they have a specialist on their staff who is a wood product developer. He said they were getting four to five referrals from the Cabinet.

Senator Freeman asked if it would help if their budget was increased in order to be more competitive with the Cabinet.

Mr. Jones said they would like to be able to help the entrepreneurial types of businesses. He said Kentucky (government) has good capital facilities for recreation and tourism but they have not followed up on the private sector side. We can get more for our money in the recreation tourism and a number of ancillary service businesses that are clustered around manufacturing. He said they need to emphasize in some of the entrepreneurial types of things, both in the service, recreation and manufacturing service sector.

Senator Freeman said that we should look at some initiatives, like an Alabama project, where three banks go together to provide loans to companies and the state government underwrites the loss. We need something that is working for manufacturing and tourism in the remote rural areas.

Mr. Zea said their goal was to grow the economy and he thought the tools they have in the area of industrial development are probably adequate. He said the state needs to take a serious look at agribusiness, as well as, tourism development.

Mr. Jones said one of the problems they have in eastern Kentucky is that there is only one county that has a professional staff in their economic development office that has had more than one year experience. He said they have very few counties that have people in economic development whose primary job is economic development.

Representative Ratliff said that the local governments in Kentucky are underfunded. He said there is no reason it should be that way, since they produce an abundance of tax revenue.

Being no further business before the committee, the meeting adjourned at 3:30 PM.