Governor’s Veto Means Budget Depends on Managed Care Savings and Anticipated Revenue

Governor Steve Beshear’s selective veto of legislation addressing the hole in the Medicaid budget means no additional budget cuts at this time. Instead, the budget will depend on possible Medicaid savings through expanded use of managed care next year and additional revenue the state is hoping will come in for 2011.

The administration’s original estimate of needed Medicaid savings (not taking into account this revenue) is $425 million, including $139 million in state funds, through the use of managed care and other efficiencies in 2012.

The governor’s veto removes the following provisions of House Bill 1:

  • Additional budget cuts in 2011 or 2012 to education and other programs in state government.
  • Face-to-face interview requirements for new and renewal applicants to Medicaid and the Kentucky Children’s Health Insurance Program. Face-to-face interviews could be a barrier to enrollment in these programs.
  • A mandate for $168.9 million in spending reductions through efficiencies including reduced personal service contracts and reduction in non-merit employees.
  • A restriction of no more than $203 million in General Fund debt restructuring over the biennium to help close the budget gap. The governor has restructured more debt in 2011 than the budget originally laid out, and House Bill 1 would have limited debt restructuring in 2012 to cap the total at no more than $203 million. That would reduce the amount of restructuring the governor could do in 2012 by $67 million. Debt restructuring refers to pushing forward interest and principal payments on debt to future years, and costs the state more in the long run. The veto also removes specific requirements associated with Road Fund debt restructuring.
  • A requirement that the Legislative Research Commission hire an accounting firm to certify savings that the administration achieves through expanded use of managed care. Instead, the governor will certify the savings.
  • Elimination of the governor’s authority to put in place additional furlough days.

The changes that the governor allowed to stand in House Bill 1 relate to additional revenue to help close the budget gap. Specifically the bill includes:

  • An assumption of $22.4 million in additional revenue for 2011 that is not part of the official state forecast. An interim forecast from the Office of the State Budget Director issued in January projected that the state will have $53 million above projections at the end of the year, but is an unofficial estimate.1 State law requires that official estimates come from the Consensus Forecasting Group, but revisions can only be requested by the Legislative Research Commission as a whole or the state budget director.2
  • Fund transfers of $4.6 million to the General Fund for 2011 from the Controller’s office and from Vehicle Regulation to help fill the budget gap.

In the short term, passage of the legislation allows Kentucky to access additional federal Medicaid dollars for 2011; avoid deep and painful cuts to Medicaid reimbursement rates for providers that would have begun April 1; and meet federal requirements to maintain certain levels of education spending in order to keep extra federal education money awarded in the fall. It also means avoiding more budget cuts on top of the eight previous rounds of cuts over the last couple of years.

Important questions lie ahead as Kentucky limps through the remainder of the current two year budget and begins work on a budget for 2013-2014. Those questions include:

  • Will the governor be able to achieve the promised savings in managed care? What are the implications of greater use of managed care in terms of access to health care for Medicaid-eligible Kentuckians? How will managed care contractors be held accountable to the public interest, especially given the major, well-publicized accountability problems associated with the state’s contract with Passport?
  • How will revenues fare given the tepid and uncertain recovery and the long way Kentucky has to go until employment reaches pre-recession levels? How can the legislature craft a budget for 2013-2014 that moves the state forward given these revenue challenges and the costs that the legislature has passed forward in order to balance the current budget?
  • What are the implications of federal budget choices on Kentucky, including likely additional federal budget cuts (which will take dollars from the state budget) as well as the likelihood of continued inaction on needed stimulus measures?
  • When will state leaders begin to discuss necessary reforms to Kentucky’s tax system?

Special Session Veto.pdf

The Kentucky Center for Economic Policy (KCEP) conducts research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. Launched in 2011, the center receives support from foundation grants and individual donors and is an initiative of the Mountain Association for Community Economic Development (MACED).

  1. Office of the State Budget Director, “Quarterly Economic and Revenue Report: Second Quarter Fiscal Year 2011,” http://www.osbd.ky.gov/NR/rdonlyres/7CD70E7E-1FEF-4A32-BF17-D8208D132389/0/1101_2ndtQtrRpt2011.pdf.
  2. KRS 48.115, http://www.lrc.ky.gov/KRS/048-00/115.PDF.

Op-Ed: Kentucky Must Invest, Reform Tax Code to Progress

Published in the Lexington Herald-Leader.

Lawmakers left Frankfort last week without agreement on closing the hole in this year’s Medicaid budget, and are convening this week to give it another try. A point of contention between the chambers has been whether to include additional across-the-board cuts to a range of state services.

The House and Governor Beshear argue that more cuts aren’t necessary, while the Senate claims that cuts now will prevent bigger cuts later.

But before the legislature makes any more cuts—now or next year—it should consider that they would come on top of deep budget reductions already made over the last few years. Those reductions are limiting Kentucky’s capacity to cope through the downturn and forestalling our ability to move forward as a state.

The cuts the Senate proposed added to previous reductions would mean General Fund support for many areas would be 10 to 30 percent less in 2012 than originally appropriated in 2008. Agencies as diverse as career and technical education, the Attorney General’s office, Kentucky Educational Television, public health and the state police are already struggling with severe reductions.

Universities and community colleges would receive $142 million less than in 2008 under the Senate plan; the Support Education Excellence in Kentucky (SEEK) program of school funding would receive $69 million less; and the Cabinet for Health and Family Services’ Department for Community-Based Services $35 million less.

These reductions in funding over a four year period have come while the cost of services continues to grow (especially because of health care inflation) and at the same time that the demand, eligibility and need for many services has increased substantially because of the economic downturn.

Cuts would have been much more severe if it weren’t for the American Recovery and Reinvestment Act, which provided Kentucky with $3.4 billion over the years 2009-2011 to help plug budget gaps and address growing service needs. Recovery Act funds made up 42 percent of the state’s approach to closing the shortfall in the 2009-2010 budget, with 29 percent coming from budget cuts and the balance from one-time measures and cigarette and alcohol tax revenues.

The Recovery Act money ends this summer while the economy still has a long way to go until it reaches full speed. Kentucky has 87,000 fewer jobs now than it did before the recession, and needs 131,000 more jobs once you take into account growth in the working-age population since the recession began. At current rates of growth, the nation’s unemployment rate won’t reach pre-recession levels until 2015 or later.

That will mean continued revenue challenges and ongoing high demand for public services.

To make matters worse, Kentucky faces two other well-known problems. First, recent budgets have been patched together using a range of measures that push off our problems. The current budget includes significant debt restructuring, the use of one-time money and the delay of the last payroll of fiscal year 2012 until fiscal year 2013.

Second, Kentucky’s tax system continues to be in need of reform, but the legislature again chose to take no action this session. The only positive move was the passage of a resolution to study the effectiveness of the state’s economic development tax incentive programs, including asking what information should be collected to even begin understanding their impact.

Meanwhile, the evidence of need for greater rather than less public investment continues to pile up. The task force on Transforming Education in Kentucky quietly released its final report during the session; it identified $270 million in needed new investments with an emphasis on early childhood education.

And a new report by Gallup ranked Kentucky next-to-last, ahead of only West Virginia, in its 2010 well-being index. The index looks at emotional and physical health, access to basic needs and perception of quality of life.

We have a long way to go in Kentucky. To make progress, our budget debate must move beyond Frankfort’s two main strategies in recent years: cut investments we need and delay facing our problems until another day.

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP).

Op-Ed: Kentucky Must Invest, Reform Tax Code to Progress

Published in the Lexington Herald-Leader at http://www.kentucky.com/2011/03/18/1675526/kentucky-must-invest-reform-tax.html

Lawmakers left Frankfort last week without agreement on closing the hole in this year’s Medicaid budget, and are convening this week to give it another try. A point of contention between the chambers has been whether to include additional across-the-board cuts to a range of state services.

The House and Governor Beshear argue that more cuts aren’t necessary, while the Senate claims that cuts now will prevent bigger cuts later.          

But before the legislature makes any more cuts—now or next year—it should consider that they would come on top of deep budget reductions already made over the last few years. Those reductions are limiting Kentucky’s capacity to cope through the downturn and forestalling our ability to move forward as a state.        

The cuts the Senate proposed added to previous reductions would mean General Fund support for many areas would be 10 to 30 percent less in 2012 than originally appropriated in 2008. Agencies as diverse as career and technical education, the Attorney General’s office, Kentucky Educational Television, public health and the state police are already struggling with severe reductions.    

Universities and community colleges would receive $142 million less than in 2008 under the Senate plan; the Support Education Excellence in Kentucky (SEEK) program of school funding would receive $69 million less; and the Cabinet for Health and Family Services’ Department for Community-Based Services $35 million less.          

These reductions in funding over a four year period have come while the cost of services continues to grow (especially because of health care inflation) and at the same time that the demand, eligibility and need for many services has increased substantially because of the economic downturn.         

Cuts would have been much more severe if it weren’t for the American Recovery and Reinvestment Act, which provided Kentucky with $3.4 billion over the years 2009-2011 to help plug budget gaps and address growing service needs. Recovery Act funds made up 42 percent of the state’s approach to closing the shortfall in the 2009-2010 budget, with 29 percent coming from budget cuts and the balance from one-time measures and cigarette and alcohol tax revenues.          

The Recovery Act money ends this summer while the economy still has a long way to go until it reaches full speed. Kentucky has 87,000 fewer jobs now than it did before the recession, and needs 131,000 more jobs once you take into account growth in the working-age population since the recession began. At current rates of growth, the nation’s unemployment rate won’t reach pre-recession levels until 2015 or later.          

That will mean continued revenue challenges and ongoing high demand for public services.          

To make matters worse, Kentucky faces two other well-known problems. First, recent budgets have been patched together using a range of measures that push off our problems. The current budget includes significant debt restructuring, the use of one-time money and the delay of the last payroll of fiscal year 2012 until fiscal year 2013.          

Second, Kentucky’s tax system continues to be in need of reform, but the legislature again chose to take no action this session. The only positive move was the passage of a resolution to study the effectiveness of the state’s economic development tax incentive programs, including asking what information should be collected to even begin understanding their impact.          

Meanwhile, the evidence of need for greater rather than less public investment continues to pile up. The task force on Transforming Education in Kentucky quietly released its final report during the session; it identified $270 million in needed new investments with an emphasis on early childhood education.       

And a new report by Gallup ranked Kentucky next-to-last, ahead of only West Virginia, in its 2010 well-being index. The index looks at emotional and physical health, access to basic needs and perception of quality of life.          

We have a long way to go in Kentucky. To make progress, our budget debate must move beyond Frankfort’s two main strategies in recent years: cut investments we need and delay facing our problems until another day.

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP).

Kentucky Must Invest, Reform Tax Code to Progress.pdf

Four Revenue Options that Should Be on the Table

The Kentucky legislature is debating ways to address the hole in the state’s Medicaid budget. The options under consideration include immediate across-the-board budget cuts as well as eventual cuts to non-education programs if the governor’s proposed Medicaid savings for 2012 are not achieved. But before enacting painful cuts that are on top of several years of reductions, Kentucky leaders should consider revenue options that are a sensible part of a more balanced approach to the state’s budget challenges.

Four Revenue Options Brief

Op-Ed: Federal Budget Debate Must Include Discussion of Investments Needed for Growth

Important debates over the federal budget are now taking place in Congress. Kentucky’s representatives, including Senate Minority Leader Mitch McConnell, House Appropriations Committee Chair Hal Rogers, and Senator Rand Paul, are in the thick of this debate.

The work ahead is significant. In addition to finishing this year’s budget and crafting a budget for 2012, Congress must soon approve an increase in the amount of debt the federal government can owe in order to avoid default.

Some members of the Kentucky delegation are among those using current and future budget challenges as an opportunity to push for extreme, immediate cuts to the budget. We’re also hearing about proposals to set arbitrary limits on spending as a share of the economy and even a constitutional amendment to eliminate budget deficits.

Good choices on these critical questions require understanding of the causes of the budget deficit and the role of public investment in economic recovery and long-term growth.

The short-term budget deficit is higher for two main reasons: revenue fell when the economy collapsed, and the federal government stepped in to halt the economy’s decline.

The Recovery Act provided a mix of public investments and tax cuts for working families to give the economy a boost.  It extended unemployment insurance, food assistance, and health insurance for people who lost jobs, helping families get by while at the same time boosting economic activity by putting money in the hands of people who would spend it right away.

This response was critical because the economy’s other engines were stalled. Consumer spending was sputtering because fewer jobs and declining home values meant less ability to spend, while business investment idled because demand was not there. Government was the only entity that could jump-start the economy and get it moving.

The Congressional Budget Office has confirmed that the Recovery Act created up to 3.6 million jobs and helped bring the official recession to an end.

While the economy is now gradually advancing, this recession was the most severe since the Great Depression. Getting to full speed will take time. At current rates of growth, the unemployment rate may not equal pre-recession levels until 2015 or later.

The 2011 budget that passed the House could bring growth to a halt by slashing spending while unemployment remains high. Extreme plans like those of Senator Rand Paul would drastically cut or eliminate funding for key areas like education, housing and energy.

In the short-term, the most important deficit is the jobs deficit, and plans to cut critical investments will only make that problem worse.  Elimination of necessary services would ripple through local economies and cost jobs.

We can and should enact legislation that will reduce the budget deficit once the economy is back on its feet. But one necessary ingredient to a lower long-term deficit is strong economic growth, which will require investment in education, infrastructure, clean energy and other areas. A deficit reduction approach comprised entirely of cutting needed investments will harm the future growth rate.

Plans to face the long-term budget deficit should focus on the real challenges. The largest contributor to the deficit in coming years is the continued high growth of health care costs. Health care has long been growing faster than the economy due to a range of factors including high administrative costs associated with our fragmented payment system, the growth of expensive medical technologies and an inefficient health care delivery system.

The Affordable Care Act passed last year is the first step in addressing those issues, and the Congressional Budget Office has confirmed that the bill will reduce the budget deficit. But additional reform will be needed in the future to make health care both more effective and more affordable.

We face an important decision over the expiration of the Bush-era tax cuts (now scheduled for 2012). We will also have to address reform of the tax system, including scrutiny of the estimated $1 trillion in tax preferences and loopholes that are buried in the tax code.

Kentuckians should be concerned about proposals to wantonly cut or arbitrarily limit investments needed for immediate economic recovery and long-term economic prosperity. We should be deeply troubled by radical plans like the constitutional amendment to prevent budget deficits that Senator Paul touted in a recent visit to the Kentucky legislature. That amendment would lock away critical tools the country needs to address future recessions.

Our approach must recognize the critical role of public investment in spurring job creation in tough times and building lasting prosperity in the future.   

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP).

Federal Budget and Investment.pdf

Op-Ed: Federal Budget Debate Must Include Discussion of Investments Needed for Growth

Important debates over the federal budget are now taking place in Congress. Kentucky’s representatives, including Senate Minority Leader Mitch McConnell, House Appropriations Committee Chair Hal Rogers, and Senator Rand Paul, are in the thick of this debate.

The work ahead is significant. In addition to finishing this year’s budget and crafting a budget for 2012, Congress must soon approve an increase in the amount of debt the federal government can owe in order to avoid default.

Some members of the Kentucky delegation are among those using current and future budget challenges as an opportunity to push for extreme, immediate cuts to the budget. We’re also hearing about proposals to set arbitrary limits on spending as a share of the economy and even a constitutional amendment to eliminate budget deficits.

Good choices on these critical questions require understanding of the causes of the budget deficit and the role of public investment in economic recovery and long-term growth.

The short-term budget deficit is higher for two main reasons: revenue fell when the economy collapsed, and the federal government stepped in to halt the economy’s decline.

The Recovery Act provided a mix of public investments and tax cuts for working families to give the economy a boost. It extended unemployment insurance, food assistance, and health insurance for people who lost jobs, helping families get by while at the same time boosting economic activity by putting money in the hands of people who would spend it right away.

This response was critical because the economy’s other engines were stalled. Consumer spending was sputtering because fewer jobs and declining home values meant less ability to spend, while business investment idled because demand was not there. Government was the only entity that could jump-start the economy and get it moving.

The Congressional Budget Office has confirmed that the Recovery Act created up to 3.6 million jobs and helped bring the official recession to an end.

While the economy is now gradually advancing, this recession was the most severe since the Great Depression. Getting to full speed will take time. At current rates of growth, the unemployment rate may not equal pre-recession levels until 2015 or later.

The 2011 budget that passed the House could bring growth to a halt by slashing spending while unemployment remains high. Extreme plans like those of Senator Rand Paul would drastically cut or eliminate funding for key areas like education, housing and energy.

In the short-term, the most important deficit is the jobs deficit, and plans to cut critical investments will only make that problem worse. Elimination of necessary services would ripple through local economies and cost jobs.

We can and should enact legislation that will reduce the budget deficit once the economy is back on its feet. But one necessary ingredient to a lower long-term deficit is strong economic growth, which will require investment in education, infrastructure, clean energy and other areas. A deficit reduction approach comprised entirely of cutting needed investments will harm the future growth rate.

Plans to face the long-term budget deficit should focus on the real challenges. The largest contributor to the deficit in coming years is the continued high growth of health care costs. Health care has long been growing faster than the economy due to a range of factors including high administrative costs associated with our fragmented payment system, the growth of expensive medical technologies and an inefficient health care delivery system.

The Affordable Care Act passed last year is the first step in addressing those issues, and the Congressional Budget Office has confirmed that the bill will reduce the budget deficit. But additional reform will be needed in the future to make health care both more effective and more affordable.

We face an important decision over the expiration of the Bush-era tax cuts (now scheduled for 2012). We will also have to address reform of the tax system, including scrutiny of the estimated $1 trillion in tax preferences and loopholes that are buried in the tax code.

Kentuckians should be concerned about proposals to wantonly cut or arbitrarily limit investments needed for immediate economic recovery and long-term economic prosperity. We should be deeply troubled by radical plans like the constitutional amendment to prevent budget deficits that Senator Paul touted in a recent visit to the Kentucky legislature. That amendment would lock away critical tools the country needs to address future recessions.

Our approach must recognize the critical role of public investment in spurring job creation in tough times and building lasting prosperity in the future.

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP). 

House Federal Budget Proposal Means Major Cuts in Kentucky from Head Start to Clean Water

The House federal budget proposal for 2011 would reduce educational opportunity for thousands of Kentucky pre-school kids, college students, and adults needing job training; eliminate funding for the home weatherization program at a time of rising electricity prices; and cut $25 million to Kentucky in funding for clean water and drinking water projects.

House Budget Fact Sheet

Senate Budget Proposes $148 Million in Cuts

scissors-cutting-budgetBoth the House and Senate versions of House Bill 305 close a sizeable hole in the state’s Medicaid budget for 2011. The House version claims potential savings through use of managed care and efficiencies in the Medicaid program in 2012, while the Senate plan pays for closing the hole with $148 million in cuts in 2011 and 2012. The Senate cuts reduce funding for K-12 education by $47 million, higher education by $28 million, health by $18 million and other programs by $55 million.

Background

Kentucky’s budget for 2011-12 made two key assumptions about Medicaid. First, it assumed that the state could find General Fund cost savings of $209 million over the biennium. Second, it assumed that the federal government would extend the higher Federal Medical Assistance Percentage (FMAP) that had been part of the Recovery Act over the second half of fiscal year 2011. The higher FMAP was intended to provide fiscal assistance to the states at a time of higher Medicaid enrollment, and simply provides more federal dollars for every state dollar that is spent.

However, the state has so far only identified $167 million of the needed $209 million in two year cost savings. And in August Congress extended the enhanced FMAP but at a lower rate than the state had assumed, creating an additional $100 million deficit in state funds. The combination of these factors creates a $139 million hole in the General Fund budget in 2011 and a $3.4 million hole in 2012.

Governor Beshear proposed and the House passed House Bill 305, a plan to move $139 million in General Fund money from 2012 to 2011 to plug the hole along with an additional $27.5 million to allow Medicaid to process payments in 2011 at the highest possible federal match rates. Beshear’s proposal is to close the resulting 2012 gap through increased use of managed care and ongoing efficiency measures to control Medicaid costs.

The Senate passed a version of HB 305 that fills the 2011 gap in state Medicaid money, but does not count on the administration being able to achieve the additional savings in Medicaid through managed care and efficiencies. Instead, it makes $148 million in cuts in 2011 and 2012 to balance the budget in addition to making other changes outlined below.

Failure to come to some agreement and put more state money into Medicaid this year would result in $600 million in cuts to Medicaid before June 30, 2011. The state is not allowed to reduce eligibility so cuts will have to come from an estimated 30 percent reduction in provider reimbursement rates or from eliminating optional services to Medicaid beneficiaries. The State Budget Director reports that benefit reductions would be difficult to implement by June 30.1 In addition, a 30 percent reduction in provider reimbursement rates would impact thousands of healthcare employees and the economic well-being of the communities in which they live.2

Cuts Included in HB 305 Senate Committee Substitute

The Senate’s version of HB 305 includes reductions in several areas at an average rate of 0.525 percent for the remainder of FY 2011 (reductions are not made in education in 2011). With only about four months left in the fiscal year, these reductions are equivalent to more than 1.5 percent cuts for a full budget year. The FY 2012 reductions are a higher 2.26 percent for most agencies, and 1.33 percent to the SEEK education formula. Total cuts for the two years are $148 million. Table 1 includes cuts by major Cabinet, branch or function; Table 3 includes detailed cuts.

Table 1: HB 305 Senate Committee Substitute General Fund Reductions

  2011 Reductions % Reduction 2012 Reductions % Reduction Total Reductions
 General Government  -$8,655,900  -1.50% -$6,054,700  -0.99%  -$14,710,600 
 Economic Development  -$123,600  -0.52%  -$669,300  -2.26%  -$792,900
 Education  -$1,697,300 -0.05%   -$45,737,600 -1.19%   -$47,434,900
 Education and Workforce Development -$342,800  -0.44%   -$1,424,900  -1.91% -$1,767,700 
 Energy and Environment  -$333,600  -0.44%  -$1,528,600  -1.90%  -$1,862,200
 Finance and Administration  -$762,500  -0.52%  -$3,260,200 -2.26%   -$4,022,700
 Health and Family Services (non-Medicaid)  -$3,384,800 -0.52%  -$14,445,000  -2.26%   -$17,829,800
 Justice and Safety  -$3,191,100  -0.52%  -$14,237,300 -2.26%   -$17,428,400
 Labor -$25,500  -0.52%   -$109,000 -2.26%   -$134,500
 Personnel -$15,100   -0.04% -$1,415,100  -2.26%  -$1,430,200 
 Postsecondary  $18,672,600  1.55%  -$46,671,800  -3.75% -$27,999,200 
 Public Protection  -$37,800 -0.52%  -$161,900  -2.25%  -$199,700 
 Tourism Arts Heritage  -$264,300  -0.52% -$1,118,700   -2.26% -$1,383,000 
 Transportation  -$25,400  -0.52% -$115,000   -2.26% -$140,400 
 Judicial Branch  -$1,499,000  -0.52%  -$7,019,100  -2.22% -$8,518,100 
 Legislative Branch -$267,100   -0.52%  -$1,215,800 -2.26%  -$1,482,900 

The Senate version of HB 305 reduces funding for the Department of Education, including $38.6 million in cuts to the state’s Support Education Excellence in Kentucky (SEEK) funds. The eight state universities and the community and technical college system receive additional funds for this fiscal year (to meet the maintenance of effort requirement described in endnote 2), but will make up for that with cuts of roughly four percent next year. The net cuts to these institutions total $22 million. Other postsecondary education programs including financial aid programs receive cuts of $5.8 million over the two years.

The Cabinet for Health and Family Services will receive the needed Medicaid Benefits funds this year, but will be cut in all other areas in the remaining months of the fiscal year and in 2012 for a total of $18 million. Large cuts include $8.7 million to Community Based Services and $5 million in funding for Behavioral Health and Intellectual Disabilities. Other cuts include $17 million to the Justice and Public Safety Cabinet and $8.5 million to the Judicial Branch of government.

Proposed Reductions are on Top of Years of Cuts

The Senate’s proposed reductions are on top of several years of budget cuts that the state has made since the recession forced severe revenue declines. While the $3.4 billion in federal Recovery Act money has gone a long way in shielding even deeper cuts, the state has made reductions to a range of programs and services, and the end of the Recovery Act assistance this summer could mean even deeper cuts down the road.3 Table 2 compares the originally enacted 2008 General Fund dollars for a selected set of programs with the proposed 2012 General Fund appropriations for those programs in the Senate Committee Substitute to House Bill 305. These estimates are in nominal dollars, and therefore do not reflect changes in the cost of services over this four year period. A range of state programs and services have experienced this level of decline in General Fund support.

Table 2: Comparison of Original General Fund Appropriations in 2008 (originally enacted) and 2012 (HB 305 SCS) in Selected Programs

  2008 Enacted 2012 Senate % Change Dollar Change
Attorney General’s Office 14,113,100 10,509,500 -25.5% (3,603,600)
Behavioral Health, Developmental and Intellectual Disabilities 194,117,600 177,829,300 -8.4% (16,288,300)
Board of Elections 4,861,900 3,803,300 -21.8% (1,058,600)
Commission for Children with Special Health Care Needs 5,917,000 4,823,200 -18.5% (1,093,800)
Commission on Human Rights 1,859,100 1,665,800 -10.4% (193,300)
Commission on Women 266,200 205,300 -22.9% (60,900)
Department of Career and Technical Education 29,894,500 25,128,100 -15.9% (4,766,400)
Department of Community Based Services 341,633,700 305,681,500 -10.5% (35,952,200)
Kentucky Arts Council 4,182,500 2,976,300 -28.8% (1,206,200)
Kentucky Center for the Arts 1,264,400 887,200 -29.8% (377,200)
Kentucky Educational Television 16,816,100 11,832,300 -29.6% (4,983,800)
Kentucky Nature Preserves Commission 1,166,500 1,007,700 -13.6% (158,800)
Pre-School 75,127,000 71,806,300 -4.4% (3,320,700)
Public Health 73,823,000 59,926,900 -18.8% (13,896,100)
State Police 80,305,900 64,024,900 -20.3% (16,281,000)
Support Education Excellence in Kentucky (SEEK) 2,930,595,600 2,861,501,800 -2.4% (69,093,800)
Universities & Community College System 1,107,765,400 965,463,500 -12.8% (142,301,900)

Other Senate Budget Changes

The Senate Committee Substitute to HB 305 finds additional dollars through fund transfers totaling $6.2 million and by assuming a revenue surplus in FY 2011 to the tune of $22.4 million that is not part of the estimates provided by the state’s Consensus Forecasting Group. The revenue surplus is assumed from the Office of the State Budget Director’s interim forecast, which is based on the first six months of the fiscal year. That report estimates that the General Fund will have $53 million above projections at the end of the year, but is an unofficial estimate.4 State law requires that official estimates come from the Consensus Forecasting Group, but revisions can only be requested by the Legislative Research Commission as a whole or the state budget director.5

The Senate version of the bill requires that the state avoid additional debt restructuring to fill remaining budget gaps beyond what was originally budgeted for the biennium. In addition, the Senate reinstates language proposed during the 2010 Extraordinary Session that requires the Governor to make reductions to non-merit employee expenditures and government contract expenditures. The Senate requires that the Governor demonstrate implementation of all cost cutting measures outlined by the bill and certify achieved savings from those measures before utilizing state employee furloughs for any additional budget reductions.

The Senate plan reinstates the requirement that all new and renewal applications for the Kentucky Children’s Health Insurance Program (KCHIP) include face-to-face interviews, and the plan requires continuation of face-to-face interviews for new and renewal applications to Medicaid (excluding institutionalized Medicaid recipients). In addition, any Medicaid savings achieved through efficiencies or managed care may not be used to “increase or expand optional services, optional beneficiaries, or Medicaid reimbursement rates, unless the expansion of existing services by a managed care provider can be demonstrated to provide an overall cost savings and improved outcome.”

The budget bill also loosens rules related to class size, use of kindergarten aides, and preschool certification standards in association with the education budget cuts.

Frankfort Should Be Having a Revenue Discussion

Missing from the alternatives in front of the legislature is consideration of revenue options as part of a balanced approach to addressing the budget challenge. Whether or not the governor’s proposed savings from Medicaid materialize, Kentucky is likely to continue facing ongoing budget problems in the coming years, and the state has already deeply cut many services. If the legislature passes the Governor’s budget and the Medicaid savings do not materialize, the state has an even more serious imperative to consider revenue. Necessary reforms to the state’s tax system could both provide revenue to help ease budget woes and better align the system to future needs.

Table 3: General Fund Changes in HB 305 Senate Committee Substitute by Program

statebudget

The Kentucky Center for Economic Policy (KCEP) conducts research, analysis and education on important state fiscal and economic policy issues. KCEP seeks to create economic opportunity and improve the quality of life for all Kentuckians. Launched in 2011, the center receives support from foundation grants and individual donors and is an initiative of the Mountain Association for Community Economic Development (MACED).

Originally published March 4, 2011. Updated on March 7, 2011.

Senate Budget.pdf

  1. Office of State Budget Director, “HB 305—Amendment to 2010-12 Executive Branch Budget,” presentation to Senate Appropriations and Revenue Committee, February 17, 2011.
  2. Both the House and Senate versions of the budget also include a plan to move higher education money from 2012 to 2011 in order to meet maintenance of effort requirements associated with federal education money awarded in the fall of 2010.
  3. Jason Bailey, “End of Recovery Act Funds Could Mean Serious Budget Challenge for Kentucky,” Kentucky Center for Economic Policy, January 10, 2011, http://www.kypolicy.us/sites/kcep/files/End%20of%20Recovery%20Act.pdf.
  4. Office of the State Budget Director, “Quarterly Economic and Revenue Report: Second Quarter Fiscal Year 2011,” http://www.osbd.ky.gov/NR/rdonlyres/7CD70E7E-1FEF-4A32-BF17-D8208D132389/0/1101_2ndtQtrRpt2011.pdf.
  5. KRS 48.115, http://www.lrc.ky.gov/KRS/048-00/115.PDF.

Payday Lending is Godsend or Evil

Testimony on HB 318: Tax Reform

Thank you Mr. Chairman and members of the committee. My name is Jason Bailey, and I am Director of the Kentucky Center for Economic Policy.

Three strengths of HB 318:

First, it closes growing holes in our tax system by modernizing it to a changing economy and changing demographics.

The state’s own report identifies 287 tax expenditures that collectively result in about as much lost General Fund revenue as the state takes in each year. The bill begins to address that problem by eliminating deductions that disproportionately benefit the wealthy (as 14 other states do), expanding the sales tax to services in a targeted way, and phasing out the private pension exclusion at higher income levels—an exclusion that currently costs Kentucky $235 million and will cost more as the population ages.

Secondly, HB 318 looks for revenue where the ability to pay has increased the most.

It is among high earners that incomes have grown and federal tax cuts have been the largest. Over the last twenty years, the wealthiest 20 percent of Kentucky families saw their real incomes increase 41 percent on average. The poorest 20 percent of Kentucky families had no statistically significant change in their real incomes over that period.1 At the same time, the extension of the federal tax cuts that Congress agreed to in December means that the highest-earning five percent of Kentuckians are receiving $1 billion in federal income tax cuts this year.2 HB 318 asks more from those who have benefitted the most. But the net result of the bill is not to make Kentucky’s overall tax system progressive, or even flat. It just makes it a little less regressive than it already is.

Those tax increases will be partially subsidized by the federal government. Deductibility means those in the top bracket get a 35 cent federal tax decrease for every $1 increase in state taxes.

Thirdly, HB 318 supports economic recovery in the short-term and economic development in the long-term.

Recovery Act monies go away this summer, while the economy (and therefore revenue) still has a long way to go until it reaches pre-recession strength. In a short time this body will be crafting a new budget for the next biennium; those 22 states that have projected revenues for 2013 are showing continued serious budget shortfalls. If we will be crafting a tight budget in Kentucky as well, we should keep in mind that the strongest positive impacts on the economic recovery come from assistance to middle- and low-income families and from avoiding deep state budget cuts.

In the long run, states like North Carolina, which has grown as much as or more than any other in the South in recent years, have shown that dependence on a robust income tax coupled with adequate public investment can help rather than deter economic development.3 HB 318 supports working families with lower marginal rates and an earned income tax credit. And by better aligning the tax system with future growth in the economy, the bill helps protect the investments Kentucky needs.

I urge you to pick up the conversation that HB 318 advances and lead the state in developing a tax reform package for the 2012 General Assembly that can move us forward.

Thank you for the opportunity to speak.

Testimony on HB 318 Tax Reform

  1. Jared Bernstein, Elizabeth McNichol, and Andrew Nicholas, “Pulling Apart: A State-by-State Analysis of Income Trends,” Economic Policy Institute and Center on Budget and Policy Priorities, April 2008, http://www.cbpp.org/archiveSite/states/4-9-08sfp-fact-ky.pdf.
  2. Kentucky Center for Economic Policy, “Using the Federal Income Tax Cuts to Help Address Kentucky’s Budget Challenge,” January 27, 2011, http://kypolicy.org/using-federal-income-tax-cuts-help-address-kentuckys-budget-challenge/.
  3. North Carolina’s top marginal income tax rate is 7.75 percent. The state also enacted a temporary tax surcharge of 2 percent on those with incomes over $60,000 and 3 percent on those with incomes over $150,000, retroactive to January 1, 2009 and expiring December 31, 2009. Tax Foundation, “State Individual Income Tax Rates as of February 1, 2010,” http://www.taxfoundation.org/files/state_individualincome_rates-20100327.pdf.