Kentucky is in great need of a substantive conversation about how to better fund essential services in its state budget.
But by ignoring the state’s revenue problems, the Kentucky Chamber of Commerce’s “Leaky Bucket” reports offer a one-dimensional and potentially harmful view of the state budget picture.
It is well-documented that Kentucky has problems with its tax system that prevent revenue from keeping up with the growing and changing economy. Simply put, our tax code is outdated and has too many holes.
Over time, the resulting gap between Kentucky’s needs and the resources we have to meet them keeps growing. If state General Fund revenue—Kentucky’s main pot of funding—was able to perform now as it did in the 1990s Kentucky would have over a billion more dollars a year to cope with the economic downturn and avoid deep cuts to services.
Without tax reform, the gap will continue to grow. The latest Consensus Forecasting Group estimate predicts an overall decline in revenue as a share of the Kentucky economy over the next four years.
Yet the Leaky Bucket reports overlook the state’s revenue issues to focus exclusively on cutting spending. The problem is that if the pie is getting continually smaller, efforts to divide it differently have diminishing effect. And while some ways to save money make good sense, others can harm Kentucky’s economy, health and quality of life.
The Chamber calls for reducing cost growth in Medicaid, public employee health benefits and the state’s prison system, and putting in place new budget mechanisms.
The first two of these challenges stem from broader and more fundamental problems with the American health care system that affect the private sector just as well as the public sector. All health care costs are growing too fast, and nationwide private insurance costs are growing at a faster rate than Medicaid once health differences are taken into account. While the Chamber points out that Kentucky’s Medicaid and public employee health care costs have grown rapidly over the past twelve years, in fact the cost of the state’s tax break for private health insurance has grown just as fast.
What is needed is additional system-wide health reform to put more emphasis on prevention of costly illnesses, coordination of care by doctors and other caregivers, reduction in administrative costs and more appropriate use of medical technologies.
In the meantime, we cannot simply blame Medicaid and public employees for the health system’s cost problems and make unreasonable cuts to benefits. Doing so runs the risk of further reducing Kentucky’s already poor health status. And in the case of public workers, we could hinder our ability to attract the qualified teachers, police officers and other public servants that we need.
On its third issue, the Chamber is right that we need to reduce prison costs by locking fewer people up for non-violent crimes and drug offenses. However, it’s important to note that potential budget savings from these efforts are limited because corrections make up only five percent of the budget, and a portion of the dollars saved must be reinvested in prevention efforts like drug treatment.
The Chamber’s recommendation that the state rebuild its rainy day fund is sound, as the fund did not have adequate resources going into the recession. The state should strive for reserves equal to 15 percent of annual spending rather than the five percent outlined in current statutes.
But the Chamber’s proposals for arbitrary limits on the state budget are without justification, and are dangerous. And the claim that Kentucky should prioritize education and economic development over all other areas ignores the range of investments that are important in a modern, complex economy and in a state with many needs. Investment in education is essential, but efforts that improve health and well-being, strengthen the state’s infrastructure, protect the environment and more are equally key to making Kentucky a great place to live and work.
Kentucky cannot just cut its way to greater prosperity and a higher quality of life. While smart spending decisions are a necessary part of good government, so is making sure the resources are there to pay for the investments we already have–and the ones we’ll need for the future.
Jason Bailey is director of the Kentucky Center for Economic Policy.
“Weaknesses Remain, Despite Better Numbers”
By Jack Latta
The first of a series of state estimates projects modest revenue growth over the next few years. But increases in revenue should be put into context. The economy is only slowly emerging from a deep hole, and continued growth is very uncertain. Without tax reform, revenue is expected to continue declining as a share of the Kentucky economy. And high unemployment and longstanding budget needs mean serious demand for whatever revenues the state can generate.
By ignoring Kentucky’s revenue problems, the Kentucky Chamber of Commerce’s “Leaky Bucket” reports offer a narrow and potentially harmful response to the state budget picture. While smart spending decisions are a necessary part of good government, so is making sure the resources are there to pay for investments needed now and in the future. And while some forms of cost-cutting are appropriate, others harm Kentucky’s economy, health and quality of life.
Now that the artificial crisis associated with raising the debt ceiling is over, the country must turn to the big challenge facing it: creating jobs and spurring faster economic growth. Recent Kentucky job numbers suggest an economy where job growth is so slow that employment won’t fully recover in the foreseeable future without greater federal action.
Job Growth Slow and from a Deep Hole
When the economy fell into recession following the collapse of the housing bubble and subsequent financial crisis, the drop was dramatic. Between December 2007 and February 2010, Kentucky lost 117,700 jobs. By June 2011, Kentucky still had 77,800 fewer jobs than when the recession started—meaning we have gained back only one-third of the jobs that had been eliminated. While that means an increase of nearly 40,000 jobs since the start of the recovery, Kentucky needed to gain 50,000 jobs just to keep up with growth in the working age population. That makes the total jobs gap we are now facing at 127,800 jobs (Figure 1).
Sources: Bureau of Labor Statistics, Economic Policy Institute
In the last year, Kentucky has been adding only about 1,500 jobs a month on average. At that pace, it would take approximately seven years to close a gap of 127,800 jobs. And keep in mind that the working age population will continue to grow over that period, pushing out the time period for full recovery indefinitely. Without faster job growth, the high unemployment economy Kentuckians now face will exist for a very long time.
Particularly hard hit in the recession were jobs in the manufacturing and construction sectors—industries with jobs historically accessible at decent wages by Kentuckians without a college education (Figure 2). Nearly a quarter of construction jobs that existed before the recession still haven’t returned, and job loss has continued over the last year. About one-sixth of manufacturing jobs were eliminated.
|Percent Job Change Since Start of Recession||Percent Job Change Over Last Year|
|Trade, Transportation and Utilities||-6.6%||0.1%|
|Professional and Business Services||0.2%||3.2%|
|Education and Health||4.5%||1.6%|
|Leisure and Hospitality||3.8%||7.5%|
Sources: Bureau of Labor Statistics, Economic Policy Institute
The National Conversation Must Pivot to Jobs
Now that the artificial crisis created around raising the debt ceiling is over, the federal government should turn its attention to job creation. The key problem in the economy is inadequate demand. Spending is too low because unemployment is too high—too many people do not have jobs—and because of the wealth effects associated with the decline in home values. Consumers aren’t spending, and as a result businesses aren’t investing because they do not see the demand for their products and services. The only agent that can do more in the economy is government, which can spur further growth through investments that both help people who are now struggling while also creating conditions for stronger growth in the long-term.
State and local governments must have balanced budgets, so there is little they can do to spur growth now. The primary responsibility lies with the federal government to make smart investments that can turn the economy around. The conversation should include at a minimum doing no harm by extending the unemployment benefits and payroll tax cuts set to expire at the end of the year; making big investments in infrastructure that can both create jobs and increase the nation’s productive capacity; and providing fiscal assistance to states in order to better meet the health, education and human service needs of people dealing with difficult times.
We don’t yet know what cuts Congress will make as a result of the deal made to raise the debt ceiling, and thus what the specific impact on Kentucky will be. But the agreement will inevitably lead to large federal cuts to services that directly benefit communities and families across the Commonwealth.