Stop Shortchanging College Student Aid

Fund Transfers Can Harm Needed Programs and Result in Higher Costs

With deep budget shortfalls and very modest revenue growth predicted in the coming biennium, the Governor has put forward $371 million in fund transfers as a way to help balance the 2014-16 state budget. Although transfers have become commonplace, the state should not consistently rely on funds intended for other uses to patch systemic revenue problems. Fund transfers can harm needed programs, raise fees and taxes and result in higher state costs in the future.

The single largest proposed transfer would move $93 million from the Public Employee Health Trust Fund to the General Fund in 2015—money that exists because, on balance, employees and the state have contributed more to the fund than has been paid out in claims and other expenses since 2006. Instead of changing a state law so available funds could be used to reduce the cost to employees—for whom the share of expenses has risen at the same time as pay-raises have been denied—the state would use funds for competing budget purposes.

The governor’s budget also moves $23 million out of the Firefighters Foundation Program Fund (FFPF). However, firefighters are proposing legislation in this session that would make FFPF monies available for workers’ compensation insurance for all firefighters, and require the insurance cover those who contract job-related cancer.

The budget continues the past practice of transfers from various state licensing board funds, into which physical therapists, social workers and other professionals pay fees to maintain their licenses. With fewer funds to cover costs, boards may be forced to reduce oversight of these professions—putting Kentuckians at risk—or increase fees, which puts an added strain on those who make their livelihood in these areas.

Other fund transfers push costs off to the future. One example comes from the Petroleum Storage Tank Environmental Assurance Fund (PSTEAF), which is financed by a $0.014 per gallon fuel tax and pays for cleanup of underground storage tanks (USTs) containing gasoline, diesel and other hazardous chemicals. Besides making groundwater safer, the program reimburses owners and operators who couldn’t otherwise afford UST cleanups and, in some cases, makes land available for redevelopment. While progress has been made reducing the number of sites in recent years, there are still nearly 1,000 UST sites on the cleanup backlog and an average of 255 new sites are added to the register annually.

In each year of the biennium, the Executive Budget would transfer $32 million from the PSTEAF to the General Fund and issue a $25 million bond to pay for clean-ups. This borrowing will preserve operational funding at about the same level it has been, but the bonds will have to be paid off in future years with interest. And it’s not a new practice; for over a decade, large transfers have been made from the PSTEAF to the General Fund, and since 2006, the state has commonly issued bonds to pay for operations.

The budget also proposes to transfer $18 million over the biennium from the Kentucky Heritage Land Conservation Fund (KHLCF) which finances the purchase and preservation of old-growth forests, cave systems and other important natural areas in the state. The state would issue bonds for $5 million each year of the biennium to pay for acquisitions, but KHLCF will still be short of funds needed to prepare for and manage land purchases through biological inventories, archaeological surveys and other associated costs. The loss will hinder progress on new acquisitions.

Another problem with relying on fund transfers to balance the budget is that doing so can raise costs in future years by affecting the state’s credit rating. That’s because rating agencies watch to the amount of non-recurring monies states use to pay recurring expenses since the practice makes for a structurally imbalanced budget. Lower credit ratings lead to higher interest rates on borrowed funds.

Transfers proposed to balance the 2014-2016 budget (millions) 2015 2016
Public Employee Health Trust Fund $93 $0
Petroleum Storage Tank Environmental Assurance Fund $32 $32
Public Protection – Insurance Company Oversight $23 $21.5
Criminal Justice Training $12 $11
Firefighters Foundation Program Fund $18 $5
Kentucky Heritage Land Conservation Fund $10 $8
Occupational and Professional Boards and Commissions $2 $1.5
Other transfers $63.4 $38.4
Total $253.4 $117.4

The full list of transfers can be found in the executive budget bill and the transportation cabinet budget bill. Although the total $371 million in transfers does not represent a departure from the average of $374 million in each of the last six biennia, the proposed budget’s substantial reliance on fund transfers maintains a troubling trend of pushing costs off and avoiding longer-term solutions through tax reform.

Will Kentucky Move Forward or Go Backward?

Proposed State Budget Would Divert $76 Million Away From Cash-Strapped Student Aid Programs

New Commitment to Need-Based Financial Aid Critical in Context of Rising Tuition

The cost of public higher education in Kentucky has risen by more than 200 percent in the last 15 years, but the state’s financial aid programs have changed very little in response. As a result, the financial aid system does not fully recognize the importance of need-based aid to helping low-income students (a substantial portion of whom are adults) obtain degrees and credentials at a time of higher cost. Kentucky can strengthen the well-being of many thousands of its families and improve the state’s economy through reforms that make a new commitment to need-based financial aid.

New Commitment to Need-Based Aid

state financial aid by income graph


Diverting Lottery Revenues Makes College Less Affordable For Those Who Need It Most

The state is increasingly diverting lottery revenues from financial aid programs to help shore up the budget, as described in a Lexington Herald-Leader story today. Those dollars are coming from need-based financial aid programs at the same time budget cuts are driving up tuition.

By law, all but $3 million of lottery revenue goes to college financial aid programs (the $3 million is for literacy efforts). But since 2009, the state has diverted lottery revenues to fill in holes in the state budget. The amount diverted was $11 million the first year, and in the governor’s proposed budget climbs to $33.7 million in 2015 and $42.7 million in 2016.


Source: Office of the State Budget Director

Those diversions aren’t hitting all financial aid programs equally. 55 percent of the lottery financial aid money is supposed to go to need-based programs (aid based on an individual or family’s financial resources) and 45 percent to the merit-based Kentucky Educational Excellence Scholarship (KEES) program, which is based primarily on grades. The state has continued to fully fund the KEES program (at a level that’s actually slightly above its statutory requirement) while making big cuts to the need-based programs, the College Access Program (CAP) and the Kentucky Tuition Grant (KTG) program.


Source: KCEP analysis of Office of the State Budget Director data

That makes a big difference in who gets financial aid. As shown in our new report, 46 percent of KEES scholarship money went to students with family incomes over $75,000 in 2013. In contrast, less than 2 percent of CAP and 29 percent of KTG funds were disbursed to students in that income category.


Source: Kentucky Higher Education Assistance Authority. This analysis is based on KEES, CAP and KTG recipients for whom income information is available.

Not only is the state failing to fulfill its own requirements—it is underfunding need-based programs even more once eligibility is taken into account. While KEES is fully funded—meaning all students who qualify will receive their scholarships—CAP and KTG are awarded on a first-come, first-served basis. In 2012-2013, over 76,000 eligible students (67 percent of eligible applicants) were denied CAP scholarships due to lack of funds. Over 10,000 eligible students (46 percent of eligible applicants) were denied KTG. Funds for CAP and KTG are running out earlier and earlier each year.


Source: KCEP analysis of Kentucky Higher Education Assistance Authority data

The state’s financial aid system is not adequately prioritizing need-based financial aid, which is particularly critical in the context of rising tuition at Kentucky’s public universities and community colleges. Reforms to the state’s financial aid programs are needed so that the students with fewer economic resources receive greater assistance in meeting the growing costs of college.

Deep Business Tax Cuts Are Not the Key to a Stronger Kentucky Economy

Governor Beshear’s tax reform proposal includes a substantial amount of new business tax cuts aimed at making the state more competitive. But tax cuts are not the most effective way to grow jobs and build our economy. Instead, by leaving Kentucky with less revenue to invest in education, health and other public services that businesses rely on, more business tax cuts weaken the foundation of the state’s economic growth.

Deep Business Tax Cuts

“Single Sales Factor” Would Cost Substantial Revenue Kentucky Needs for Investments that Work

A proposal included in Governor Beshear’s tax reform plan that would change the way Kentucky calculates state corporate income taxes for big multistate corporations would wipe out one-third of the corporate income tax revenue Kentucky needs for investments that will grow the state’s economy. Claims about the economic development benefits of such a change—which would base corporate income taxes solely on a company’s sales in Kentucky, ignoring its other assets—are unsubstantiated. 

Single Sales Factor Brief

Top 1 Percent of Kentuckians Captured Nearly Half of State Income Growth over Last Few Decades

The top 1 percent of earners in Kentucky took home 48.8 percent of state income gains from 1979 to 2007—a share in line with the national average of 53.9 percent—according to a new report released today by the Economic Policy Institute that documents growing income inequality in all 50 states.

In The Increasingly Unequal States of America: Income Inequality by State, Estelle Sommeiller and Mark Price conduct a state-level analysis of income trends from 1917-2011. They show that states reflected the national pattern of extreme growth in income inequality over the last few decades between those at the top and everyone else.

From 1979 to 2007, incomes overall in Kentucky grew 19.9 percent. But incomes of the top 1 percent grew 105.1 percent while the average income of the bottom 99 percent of Kentuckians grew only 11.2 percent.

Since the early 1980s, U.S. inequality has been climbing back toward its peak in 1928, right before the Great Depression. That year, the top 1 percent of Kentuckians had 19.4 percent of all state income. Their share fell to 9.2 percent in 1979, but rose to 15.8 percent in 2007.

After incomes at all levels declined as a result of the Great Recession, lopsided income growth reemerged when the recovery began in 2009, with the top 1 percent capturing an alarming share of economic growth since then. In Kentucky the top 1 percent have netted 48.7 percent of state income growth from the beginning of the recovery in 2009 until 2011, the latest year for which data are available.

The report documents what Kentuckians are experiencing: while the wealthy have done well, the vast majority have not benefited from economic growth and many struggle to make ends meet. Policies like a higher minimum wage would lift the bottom and increase the living standards of many Kentuckians. The state also needs tax reform that recognizes the growing gap in ability to pay taxes between the top and bottom of the income ladder, and that generates revenue for much-needed investments that help create more broadly-shared prosperity.

The earnings of Kentucky’s top 1 percent rank comparatively low among states. But since the earnings of the rest of Kentuckians also rank near the bottom, the pattern of growth in income inequality in Kentucky is similar to national trends. The top 1 percent in Kentucky earned $578,193 on average in 2011, 16.7 times more than the average earnings of the bottom 99 percent, $34,716.

The report is available here.

Kentucky Fact Sheet.pdf

Income Inequality in Kentucky Six Graphs.pdf

State Tax Reform