Presentation: Kentucky’s Budget Outlook

Kentucky lawmakers will begin assembling what Speaker Greg Stumbo recently called a “destructive” two-year state budget when it reconvenes in January. Current projections suggest the weakest revenue growth since the recovery began due to a still-sluggish economy and an inadequate and outdated tax system. At the same time, there’s need to roll back painful budget cuts, make fiscally responsible payments to pension and other debts, and invest in education, health and other areas that would move Kentucky forward.

This presentation is an overview of the context lawmakers face when they begin crafting a new budget come January. To inquire about budget presentations with your organization, contact KCEP.

Kentucky’s Budget Outlook Presentation

 

State Must Begin Meeting Responsibility to Teachers’ Retirement or Pay More Later

The state has not been making full required contributions to Kentucky teachers’ retirement since 2009, and the impact of not making those payments has a compounding effect—meaning more costs for Kentucky down the road unless it starts putting more resources into the system beginning with the next budget.

Teachers’ Retirement Brief

Preliminary Forecast Predicts Weakest Revenue Growth Since Recovery Began

Kentucky currently expects to craft its next two-year budget with the least amount of new General Fund revenue it has had since the recovery began. This bad news comes despite passing a revenue bill in the 2013 session intended to allow Kentucky to pay its full annual obligation to the pension system while protecting other parts of the budget.

The October estimates of the state’s Consensus Forecasting Group (CFG) project growth of $230 million in 2015 (the first year of the budget) and $221 million in 2016, increases of 2.4 percent and 2.3 percent respectively. Growth was stronger in each of the four prior years of the recovery (see graph below). The CFG will decide on a final forecast for the new budget by January.

Annual New General Fund Revenue Since Recovery Began

 Source: KCEP analysis of Office of the State Budget Director data, Consensus Forecasting Group October estimate

Several immediate issues contribute to the fall-off in growth. Coal severance tax revenues are expected to be $100 million less in 2016 than they were in 2012 as eastern Kentucky coal loses competitiveness in energy markets. Cigarette tax revenues are expected to be $33 million less in 2016 than in 2012 as smoking rates continue to decline. And the state’s forecasters say corporate income tax receipts have been temporarily boosted because of high corporate profits, but growth is likely to level off or even decline once businesses start spending more.

The individual income tax–by far the state’s strongest revenue source–is also expecting somewhat slower growth over the next two years than it had at the beginning of the recovery. Higher growth is typical in early periods of recovery, when income taxes tend to rise more rapidly than other sources like sales taxes. It’s particularly true in this recovery, where the incomes of wealthy individuals have grown dramatically while the wages and spending of low- and middle-income people have stagnated.

The weakness of the economy overall contributes to the state’s revenue problem. At current rates of job growth, Kentucky would not get back to pre-recession unemployment rates until the last half of the decade. Kentucky’s revenue is heavily dependent on growth in income from wages and salaries, which is hampered by too few jobs and sagging wages.

And as has been well-documented, Kentucky’s tax system doesn’t keep up with growth in the economy because it has too many exemptions and exclusions in its major tax sources. Sales tax revenue, for example, is projected to grow at rates of only 1. 3 percent and 2.2 percent over the next two years (compared to growth of more than 5 percent a year throughout the 1990s), and failing to extend the sales tax to services plays a role in this slow growth.

Why Isn’t the Pension Revenue Bill Helping Matters?

As part of the deal over legislation that made changes to Kentucky’s pension system in the 2013 regular session, the General Assembly passed a revenue bill that proponents said would allow Kentucky to begin making full annual contributions to pay down its pension liability. However, the new revenue from the bill was small to begin with, and is easily overwhelmed by other forces depressing state revenue growth.

The law, House Bill 440, was projected to raise $65.7 million in new General Fund money the first year of the new budget and $69.9 million the second. Its major provisions were a cut in the small personal credit for individual income taxes, an end to a corporate loophole that allowed large multi-state corporations to reduce tax liability by deducting fees paid between subsidiaries, and a reduction in the compensation vendors can claim from remitting sales taxes. Also, the state said at the time it expected to gain $30 million a year in additional revenue because of federal tax law changes associated with the “fiscal cliff” deal Congress made in January 2013.

Other revenue trends like the continued decline in coal severance and cigarette tax receipts negate the impact of House Bill 440 in the latest revenue forecast. And the state does not have the benefit of the tax amnesty program in the next budget, which provided $58.4 million in one-time tax revenue in 2013.

A Terrible Budget without More Revenues

The only good news is that the preliminary forecast projects revenues for this year will be $59.5 million more than originally expected, which could mean a small boost going into the new budget. However, the next budget must replace $157 million in one-time monies used to balance the current budget (including $49 million taken out of the rainy day fund), and make $128-$148 million in additional state employee pension payments per year (not to mention the amount owed to teachers’ pensions) before it can begin to address other budget needs.

Come January, the conversation in Frankfort will be about a budget with unprecedented austerity unless additional revenues are considered.

Economic Analyst: Budget Austerity Hurting Kentucky

Sequestration Cutting Housing Assistance for Thousands of Low-Income Kentuckians

As many as 4,000 fewer low-income Kentucky families will receive rental assistance by the end of 2014 if Congress does not reverse or substantially mitigate the damage done by sequestration to the Housing Choice Voucher program, according to a new report by the Center on Budget and Policy Priorities (CBPP).

Sequestration – the deep, across-the-board budget cuts that started this year and that are not slated to end until 2021 – reduced the Housing Voucher program’s funding by $938 million in 2013. Funding will remain at that level unless Congress changes its course.

This cut falls heavily on low-income Kentucky households that, after waiting for months or even years to receive rental assistance, now find themselves on frozen waiting lists. Most agencies would rather prevent new people from joining the program than the alternative: decreasing payments to those already receiving vouchers. Cutting vouchers can mean negotiating with landlords to decrease rent or, more commonly, shifting the costs onto families who must then either spend more to remain where they are or move to lower-cost housing.

CBPP estimates that anywhere from 2,174 to 4,054 fewer Kentucky households will have vouchers by of the end of 2014. The range assumes that agencies may choose to sustain pre-sequestration levels of service to some extent by spending down reserves. Whether agencies choose to spend aggressively to keep up enrollment levels, or spend more cautiously due to concern that funding will not be restored soon, will determine how many fewer families are served in Kentucky.

If agencies continue to serve the same number of people as before sequestration for as long as they can, CBPP estimates that by mid-2014, 1,000 of the total 2,300 state and local agencies providing vouchers nationwide will have used up their reserve funds.

The Housing Choice Voucher program served 31,294 households in Kentucky as of December 2012. A case-load reduction of 4,054 would represent a 13 percent drop in assistance in the state. Working parents and elderly and disabled Kentuckians will have less access to housing assistance while also dealing with sequester cuts to supplemental nutrition assistance for Woman, Infants and Children (WIC), Title 1 education grants to disadvantaged schools, child-care subsidies, home energy assistance and more.

Congress should make it a priority in the coming budget debates to restore funding to the Housing Choice Voucher program, as well as restore cuts to other programs that help lift millions of Americans out of poverty while aiding the economic recovery.

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