MINUTES
Kansas Bioscience Authority
Executive Committee of the
Board of Directors
Wednesday, December 16, 2009
7:30 – 8:00 a.m. CT
Call to Order: A quorum being present, a special meeting of the Executive Committee of the Board of Directors of the Kansas Bioscience Authority was called to order at 7:33 a.m. by Chairman John Carlin. Additional members of the Committee participating by phone were Dr. Ray Smilor, Bill Sanford, and Ed McKechnie. Also on the call was Kansas University Chancellor Gray-Little. KBA staff in attendance included Tom Thornton and Jan Katterhenry. Katie Logan and Jeff Ellis, legal counsel from Lathrop & Gage, were also on the call.
Purpose of Meeting: Chairman Carlin explained that the purpose of this special meeting of the Executive Committee was to consider final action to approve industrial revenue bond financing for the Venture Accelerator project, to consider approval of KDFA bond funding for NBAF expenditures, to consider final action regarding bonus consideration for the President of KBA, and to review a proposed reallocation of the Annual Operating Plan budget for recommendation to the Board of Directors.
Venture Accelerator Project Financing: Chairman Carlin asked Ms. Katterhenry to review the financing structure for the Venture Accelerator project and to present the documents needed for approval of the financing.
Ms. Katterhenry stated that on October 23, 2009, the Executive Committee approved financing for the Venture Accelerator project using industrial revenue bonds to be issued through the City of Olathe and to be purchased by UMB Bank. UMB Bank has agreed to finance up to 80 percent of the appraised value of the building and up to 75 percent of the cost of certain furniture and equipment not included in the appraised value of the Facility. The total UMB Bank loan is $10,080,000.
The revenue bond structure is being utilized to allow materials and equipment purchased by the general contractor and subcontractors and incorporated into the Facility to be exempt from sales tax. The Kansas Department of Revenue has ruled that KBA’s separate tax exemption does not apply to purchases of these materials and equipment by third-party contractors. Accordingly, without the exemption, the cost of the Facility to KBA would be increased by the additional sales tax in the approximate amount of $272,000.
In the revenue bond structure, the lender, UMB Bank, will loan the funds to KBA through the purchase of lease revenue bonds issued by the City of Olathe. The documents and agreements governing the bonds and the loan to be approved by the Executive Committee were previously circulated to the members of the Executive Committee for their review and are available at the meeting. Those documents included a Base Lease between KBA and the City of Olathe; a Lease Agreement between KBA and the City of Olathe; a Memorandum of Lease; an Assignment of Lease by the City to the bond trustee to assign the City’s interest in the Lease Agreement to the bond trustee as security for the bonds; a Bond Trust Indenture between the City of Olathe and UMB Bank; a Bond Purchase Agreement among KBA, UMB Bank, and the City of Olathe; and a Tax Compliance Agreement among KBA, the City of Olathe, and UMB Bank as bond trustee.
Bond counsel has determined that $3,475,000 of the total financed amount of $10,080,000 qualifies for tax-exempt financing. Accordingly, that amount of the UMB loan will be allocated to the Series 2009A bonds. The remainder of the UMB loan will be allocated to a Series 2009B bond. The allocations of the UMB loan between real estate improvements and furniture and equipment is shown in a table in the previously distributed materials.
The loan payments to be made by KBA are made as monthly payments of “rent” to the City of Olathe under the Lease Agreement. As a result of the City’s Assignment of the Lease Agreement to the bond trustee, these payments are made by KBA directly to the bond trustee. The monthly “rent” payment is equal to the monthly payments of interest and principal on the bonds as described in the Bond Indenture. When the bonds are paid in full, either by prepayment or at maturity, the bonds are canceled and the Lease Agreement and the Base Lease are terminated.
The bonds are structured as “draw down” bonds so that principal amounts advanced by UMB and KBA are based upon construction progress draws made by KBA. The outstanding principal amount is noted from time to time on the bonds as these draws are funded, and interest is payable only on the outstanding principal amount. Approved draw requests will be generally allocated first to the Series 2009A bond and second to the Series 2009B bond until the aggregate maximum principal amount of the bonds is fully funded.
Ms. Katterhenry referred the members of the Committee to the memorandum prepared by Katie Logan for additional details regarding the structure of the financing.
Motion: Dr. Smilor moved that the Executive Committee approve financing of the Venture Accelerator project using industrial revenue bonds to be issued through the City of Olathe to be purchased by UMB Bank in the amount of $10,080,000. The motion was seconded by Mr. Sanford.
Discussion: Dr. Smilor noted that the original construction amount for the project was estimated at over $19,000,000 versus the revised estimated construction cost of $14,900,000 upon which the financing was based. He complimented staff for achieving a financing structure which took advantage of sales tax exemptions and a financing structure advantageous to the KBA. Both Mr. McKechnie and Mr. Sanford concurred and expressed their favorable views regarding the financing.
Approval: The question was called and the motion was unanimously approved.
National Bio- and Agro-Defense Facility (NBAF) Project Financing: Chairman Carlin asked Mr. Thornton to present a proposed resolution authorizing the Kansas Development Finance Authority (KDFA) to issue $32,000,000 in bonds on behalf of the KBA for the NBAF project.
Mr. Thornton reported that in 2008, the Kansas Legislature approved legislation for certain capital improvements for the NBAF in Kansas. The legislation provides authorization for the KDFA to issue bonds for an amount not to exceed $105,000,000 with the funds to be managed by the KBA. The bonds can only be issued with the approval of the KBA, and the KBA can only authorize use of the funds for the items identified in the legislation; e.g., all amounts required for the cost of the bond issuance; cost of interest on the bonds; and the cost of bond insurance to finance land acquisition, site preparation, utility plant facility construction, and infrastructure for electricity, water, sewer, and other utilities, construction of streets, sidewalks, and parking facilities, and landscaping, all related to facilities for the NBAF.
The KDFA is requesting approval by the KBA Executive Committee for issuance of $32,000,000 in bonds for NBAF expenditures. Future bond authorizations will be brought to the KBA Executive Committee as needed, up to an aggregate amount not to exceed $105,000,000. This request will match the $32,000,000 approved by Congress in this fiscal year for NBAF, in line with Kansas’ cost-share offer to the U.S. Department of Homeland Security (DHS) during the site selection process. Twenty million dollars of the $32,000,000 request will be provided to DHS, and $12,000,000 will be placed in a project fund owned by the State. The KBA will authorize payments from the fund in order to reimburse project expenditures as they are incurred by Kansas State University for NBAF-related capital improvements. Debt service for these bonds will be financed by appropriations from state general funds or any appropriate special revenue fund or funds.
KBA staff will provide oversight of this project to assure that the project stays on time and within budget. The resolution presented to the Executive Committee, which was previously circulated to its members, will allow KDFA to proceed with the issuance of the bonds.
Mr. McKechnie questioned the status of the Texas lawsuit involving NBAF and asked whether there was any chance that the federal government would stop payment or request reimbursement of the one-to-one match of $32,000,000 approved by Congress for the NBAF project. Mr. Thornton reported that the Texas lawsuit had been dismissed without prejudice, meaning that Texas could refile the lawsuit. He expressed his opinion that the refiling of the lawsuit was a remote possibility, but felt that it was unlikely. He further reported that DHS was enthusiastically supporting the project and believes that the site selection process was well done and defensible.
Dr. Smilor requested information about the status of the follow-up report concerning the risk assessment which had been commissioned by Congress. Mr. Thornton reported that the follow-up report will be completed in the April 2010 timeframe. It will be submitted for approval by the National Academy of Sciences. Mr. Thornton expressed his confidence that any risk identified in the report will be capable of remediation and that the site-specific assessment will be upheld.
Motion: Mr. McKechnie moved that the resolution of the Kansas Bioscience Authority requesting the issuance by the Kansas Development Finance Authority of $32,000,000 of its revenue bonds to provide all or a portion of the funds necessary to provide a deposit or deposits to the Bioscience Development Investment Fund and to apply the funds to pay the costs of the capital improvement project relating to the National Bio- and Agro-Defense Facility be approved. Dr. Smilor seconded the motion, which was unanimously approved.
Executive Compensation: Chairman Carlin reported that it was time to consider the bonus for Mr. Thornton as authorized by his Employment Agreement with KBA. Chairman Carlin noted that the timing of the bonus consideration is out of sync with the fiscal year for the KBA, a situation which will be considered by the Board at its next meetings so that bonus consideration in light of the achievement of goals established through the Annual Operating Plan can be coordinated. Nevertheless, the current contract requires consideration of a bonus at this time. In reviewing goals established in the AOP for fiscal year 2009, Chairman Carlin observed that the KBA had an extremely successful year under Mr. Thornton’s leadership. A final decision has been reached on the NBAF project and the Texas lawsuit challenging the site selection for NBAF has been dealt with successfully. The KBA has made enormous strides toward its efforts to commercialize the activities of recipients of funding from the KBA and major strides have been achieved in establishing bioscience as the fourth leg of the Kansas economy. Mr. Thornton has overseen the successful expansion of KBA activity to more aggressively pursue the programs established in the AOP and to assemble highly capable staff to oversee the KBA’s activities. Outcomes are beginning to be realized from the investments made by the KBA since its inception. Chairman Carlin noted that members of the Executive Committee had talked collectively and separately about the KBA’s achievements over the past year under Mr. Thornton’s leadership and suggested that payment of the full bonus available under Mr. Thornton’s contract terms was warranted.
Motion: Dr. Smilor moved that the full bonus for the Contract Year authorized by Mr. Thornton’s Employment Agreement be paid in one lump sum on or before January 15, 2010. The motion was seconded by Mr. McKechnie and unanimously approved.
Proposed Revisions to AOP Line Item Budget: Mr. Thornton reported that the KBA was nearly halfway through fiscal year 2010, and based upon investments made to date, it was his assessment that expectations for investments to be considered throughout the rest of the year will require revisions to various line items in the AOP program budget in order to more accurately estimate the KBA’s spending on specific programs. He presented to the Executive Committee two schedules providing details of line item adjustments with explanations describing the reasons for the recommended revisions to each respective line item. The proposed FY 2010 program plan revisions which were presented to the Executive Committee members is attached to these minutes as Attachment A.
Mr. Thornton noted that, in total, the proposed revisions result in a $5,000,000 reduction in payments for the year consistent with the recent reduction in the KBA’s FY 2010 funding allocation from the State. In terms of commitments, the staff’s proposed revisions reduce the FY 2010 plan by $250,000. The revisions essentially eliminate selected payments to allow the KBA to meet the reduced allocation from the state and also reallocate funds between program line items by reductions to those items staff now know do not require as much as had originally be budgeted, and increases to those line items which staff expects to require additional funding for the year.
Chairman Carlin noted that the proposal presented by Mr. Thornton was to be considered by the Executive Committee for recommendation to the full Board at its meeting in January.
Motion: Mr. McKechnie moved that the proposed revisions to the AOP line item budget proposed by staff be recommended to the Board for approval at its next meeting. The motion was seconded by Dr. Smilor.
Discussion: Mr. McKechnie stated that no one likes to have to make cuts in funding, but noted that the status of the Kansas economy requires adjustments in the KBA budget. He asked that the KBA maintain its focus on animal health and the development of projects related to that activity. He noted the success of the NBAF project, but wanted to assure that the KBA continue to emphasize the need to commercialize the ideas emerging from other KBA investments.
Question: The question having been called, the motion was unanimously approved.
General Discussion: Chairman Carlin noted that staff had been successful in recommending budget adjustments for this year, but expressed his opinion that further adjustments in the future won’t be made so easily. He asked staff to continue its efforts of educating the Legislature of the need to continue to fund KBA projects. Chairman Carlin also noted that the Committee will be asked to continue its dialogue with Buck Consultants regarding executive compensation and that the Committee should be prepared to consider executive staff contract revisions during the May 2010 timeframe.
Adjournment: Upon motion by Mr. McKechnie, seconded by Dr. Smilor, the meeting was adjourned at 8:02 a.m.