Pre-School Expansion a Notable Part of Budget Agreement

Press reports indicate that the new budget agreement contains an additional $18 million for pre-school in 2016, a 25 percent increase in state funding that would open up public pre-school to 5,125 more low-income four year-olds. Though the budget delays expansion by one year from what the House and governor had proposed, it adopts the governor’s guidelines for a larger expansion of eligiblity.

In this and his previous budget proposal (for 2012-2014), Governor Beshear included an expansion of pre-school eligibility to families with incomes below 160 percent of the federal poverty level from the current 150 percent, and his stated longer-term goal has been to expand eligibility to 200 percent before he leaves office. But the legislature denied the request last time, and state funding for pre-school was in fact 5 percent lower in 2013 than it was in 2008, and 13 percent lower after adjusting for inflation.

The House’s budget included funding for an expansion to about 156 percent of poverty for two years, while the Senate did not provide monies for expansion. According to media stories, in the final budget agreement eligibility reaches 160 percent in the second year of the budget. That costs $8 million less over the biennium than the House’s proposal, but establishes a higher precedent for eligibility and funding in future budgets.

Kentucky is not alone in increasing monies for pre-school. Last year 40 states expanded pre-school funding. South Carolina boosted pre-school funding by 80 percent, Michigan by 60 percent, Alabama by almost 50 percent and Ohio by more than 40 percent.

The rising popularity of pre-school is based on mounting evidence of its effectiveness. Research by economist James Heckman and others shows spending on pre-school for low-income children is a high-return investment that pays back in greater educational attainment and earnings, lower crime rates and less social spending later in life. Heckman reports that high-quality pre-school programs particularly help kids strengthen non-cognitive skills (like patience and dependability) that are extraordinarily beneficial to development.

However, the budget agreement only partially replaces lost funds for the Child Care Assistance Program (CCAP) in 2015, although it fully restores those funds in 2016. That program had been cut by over $50 million last summer when federal funding ended, and child care advocates have pushed for a full restoration. The shortfall in 2015 will be a hardship for already-strapped child care centers, hinder another important source of early childhood education and impact workers who rely on the support to find and keep jobs.

The details of how these programs and related ones fared in the budget will become clearer once the final budget bill is available.

Senate Budget Accepts Affordable Care Act Funds and Draws on Law’s Benefits

Implementation of the Affordable Care Act (ACA) in Kentucky passed a hurdle this week when the Senate chose to accept billions of federal dollars in its budget to fund the law’s expansion of health insurance and built the budget based on the General Fund cost savings associated with the ACA. With 321,000 Kentuckians signed up for coverage so far and given the monies that will flow to health care providers, it’s becoming more unlikely Kentucky will ever move backward on this opportunity to make the state healthier.

The ACA’s implementation in Kentucky involves the expansion of Medicaid to those with family incomes up to 138 percent of the federal poverty level and the establishment of a state-run health care exchange. Kentucky is recognized as a national leader in implementation of the law, and is one of 25 states that are expanding Medicaid and one of very few southern states. This year’s deadline to sign up for insurance through the exchange is March 31.

The budget that passed the Senate on Monday includes language that General Fund dollars not be used for the implementation of the ACA. However, the expansion of Medicaid is fully funded by the federal government for those newly eligible for the first three years. The creation of the exchange is also federally funded initially, and the governor has proposed an insurer surcharge that he would implement (rather than using General Fund monies) to fund the exchange moving forward.

Other aspects of the Senate budget speak to an understanding that the ACA will save the state money, and the budget accepts and appropriates $2.5 billion in federal money to implement the law. Rather than a rejection of the ACA, the Senate budget recognizes the law and fully draws on the benefits associated with its implementation.

The Senate acknowledges and appropriates savings from the ACA of approximately $166 million over the biennium, just as in the House. The ACA is expected to save the state money in part by shifting expenses associated with health services for low-income and uninsured Kentuckians to federal funds. Affected areas include mental health services for low-income adults, preventive health services provided through local health departments, inpatient hospital costs for prisoners and state payments to hospitals for serving the uninsured (known as Disproportionate Share Hospital (DSH) payments).

In part because of cost savings associated with the ACA, the Senate budget is able to put more money into the state police, universities and the rainy day fund and avoid deeper cuts to a variety of public services.

In fact, the Senate budget claims savings beyond that $166 million—more savings than those in the health care arena believe can be achieved, especially in the short-term. In particular, the Senate completely defunds the Quality Care Charity Trust Fund (QCCT) for indigent care at the University of Louisville Hospital. The House and governor’s budget had decreased funding for indigent care in recognition that more people will be covered by Medicaid under the ACA, but didn’t completely eliminate funding in acknowledgement that the law cannot cover everyone in this time frame and fully address costs associated with the uninsured. The Senate budget also cuts cancer screening program funding included in the House budget, which it will likely defend for the same reason.

The Senate budget includes language indicating that accepting the federal funds in no way commits the state to continuing the ACA after this two year period, and we are likely to hear more about the specifics of that language in budget negotiations. But the reality is that despite opposition to the law the Senate is choosing not to pick a big fight over it in the state budget and try to take away newly-gained health insurance from several hundred thousand Kentuckians.

Infographic: Make Work Pay for Kentucky Families with a State EITC and Minimum Wage Increase

Hundreds of thousands of hardworking Kentuckians in low-wage jobs are struggling to make ends meet. Here are two tools that would give Kentucky families a boost they need: enacting a state Earned Income Tax Credit that builds on the poverty-fighting success of the federal EITC and raising the minimum wage to $10.10 an hour.

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Op-Ed: Budget Options Make Higher Education Harder to Afford for Those Who Need It Most

Lack of state revenue is chipping away at the progress Kentucky made in higher education beginning in the 1990s. That trend continues in the new budget being developed. More cuts to community colleges and adult education programs, inadequate funding of need-based financial aid, and new fees for community college students will harm those most in need of education beyond high school and threaten future economic growth.

Yes, the Senate budget freezes funding for Kentucky’s public universities rather than cutting them as the House proposed. However, the budget retains the House’s 2.5 percent cut to the state’s community colleges and 5 percent cut to adult education programs that help Kentuckians without a high school credential improve literacy skills and earn a GED. It would seem that the less education one has the more support one needs, but those priorities are flipped in the Senate’s plan.

These budget decisions are on top of round after round of previous cuts. Between 2008 and 2013, Kentucky’s public universities and community and technical college system were cut by 23 percent—and adult education by 22 percent—in inflation adjusted terms. Even with the Senate’s proposal to maintain current appropriations for public universities, funding levels will not cover the growth in fixed costs for these institutions. And the proposed cuts from the Senate and the House to the community college system would affect about half of students who attend public higher education institutions in Kentucky—and typically those who are least able to afford college.

Because of cuts to higher education, tuition at Kentucky’s higher education institutions has more than tripled since 1998. The new budget also includes added fees for community college students to pay for construction projects that could amount to $480 more for a student earning an associate’s degree. Tuition at Kentucky’s community colleges is already higher than the national average for community colleges, and finances are the leading reason Kentucky Community and Technical College students report withdrawing from school.

At the same time costs are rising, state and federal need-based aid—which has been shown effective at increasing enrollment, persistence toward a degree and number of credits earned for low- and moderate-income students—has become increasingly limited. In 2012-2013, two-thirds of students—or 76,200—who qualified for Kentucky’s need-based College Access Program (CAP) were denied aid due to lack of funds. Part of the problem is that since 2009 a growing amount of lottery money designated by law for the state’s need-based financial aid programs has instead gone to fill holes in the budget. While the Senate’s budget adds $750,000 a year to CAP, this covers only a tiny amount of the unmet need.

Federal need-based Pell grants help far less than they once did. While in the 1970s Pell covered nearly 80 percent of tuition, fees, and room and board at public four-year institutions, today it pays for less than a third of these costs.

Inadequate investment in postsecondary and adult education jeopardizes the ability of many Kentuckians to earn the degrees and credentials necessary to make a better living. An estimated 62 percent of jobs in Kentucky will require some postsecondary education in 2020. Meanwhile, Kentucky’s educational attainment rates are near the bottom compared to other states—with just 32 percent of adults age 25-54 holding an associate’s degree or higher, and 54 percent of adults having either just basic or below basic literacy levels. There are also more than 374,000 adults age 18-64 without a high school credential in Kentucky.

Budget cuts are driving up student debt, which can have lasting impacts on economic well-being—preventing or delaying buying a home, starting a small business or saving for retirement. Especially harmed are disadvantaged Kentuckians, and we are seeing a growing gap in educational attainment between low-income students in Kentucky and everyone else. The higher education system is either losing ground or failing to make progress on various indicators of the graduation gap between low-income and other students.

The road we are on is one of rising personal debt, growing inequality and stunted economic growth. It’s time to get serious about additional revenue through tax reform in order to reverse this harmful course.

Ashley Spalding is a research and policy associate at the Kentucky Center for Economic Policy.

How the Senate Budget Differs from the House

The Senate budget puts less money into early childhood and education programs, capital projects and some health programs than the House budget and allocates more money to the state police, university operations and the rainy day fund. It brings in and spends less money overall than what the House had proposed, and obligates less dollars in future years. Here’s an overview of some of the major changes the Senate made from what the House proposed.

Less for early childhood and education

Some of the biggest cuts in the Senate budget relative to the House involve early childhood education and care. The Senate cuts $13.8 million each year from the proposed expansion of pre-school. It also cuts $14 million in 2015 from child care subsidies, thereby phasing in the restoration of funds following a cut last year rather than restoring the funds immediately. The Senate budget also cuts $3 million each year the House had proposed to increase child care provider reimbursements rates and $5 million annually the House had included to increase foster care reimbursement rates (in both cases, federal funds were also cut as a result).

The Senate budget reduces funding in 2015 for extended school services by $6.6 million and teacher professional development by $3.3 million. It spends the same on instructional resources (textbooks) as the House had proposed, although that is $5 million less than what the governor had suggested.

Less for certain health and safety programs

The Senate budget accepts the $2.5 billion in federal funds over the biennium for implementation of the Affordable Care Act, and claims the $166 million in General Fund savings that will result from having more people covered by Medicaid and through the exchange. However, it goes even further by cutting funding for indigent care at the University of Louisville hospital by $15 million over the biennium, funds that pay for the cost of care to the uninsured. This assumes much more rapid enrollment in Medicaid and the health exchange than is possible.

The Senate budget cuts funding for mine safety by $2.6 million a year (from coal severance monies) and reduces the number of required mine safety inspections at coal mines to two a year from the current six a year. The legislature had increased the number of required inspections from three to six in 2007 following the Darby mine disaster.

The Senate also cuts the Department of Public Health by $5.4 million over the biennium, including less money than the House had proposed for breast, cervical and colon cancer screening. The budget cuts $1 million each year from the Cabinet for Health and Family Services’ appropriation for Family Resource and Youth Service Centers and $3.1 million in 2015 from school safety. It also cuts $1.6 million over two years the House had proposed for enhanced 911 emergency services.

Less for capital projects

The Senate includes $533 million in bonds in its budget compared to $2 billion in the House budget. This would result in a debt ratio of 6.26 percent as opposed to 7.05 percent in the House budget, meaning a smaller share of future revenue would go to pay debt service costs. The Senate budget allows community colleges to raise fees on students to pay for construction projects, but only if 25 percent of the funds are raised from other sources.

The Senate budget deletes the over 400 earmarked projects included in the House budget for coal counties using coal severance tax monies.

More for university operations and police

The governor and House had proposed 2.5 percent cuts to the operating budgets of the state’s universities and community colleges. The Senate puts nearly $40 million into preventing a cut to the universities, although its budget continues to allow a 2.5 percent cut to the community college system.

The Senate proposes $3.5 million more over the biennium to the state police to hire 25 troopers, but cuts funding for county and commonwealth’s attorneys by $2.8 million compared to what the House had proposed.

Less revenue accessed and more left over

The Senate has less money to spend than the House had proposed. The Senate’s budget does not generate additional revenue from the tax on instant racing that the House had proposed, meaning $1.1 million less a year and the threat of additional lost dollars because the Senate revenue bill does not clarify its legality. The Senate also does not include the $3 million that the House had assumed would come from allowing the lottery to advertise that its proceeds go primarily to college scholarships. And it does not cap the film industry tax credit at $1 million a year, as the House had proposed, which could mean more lost revenue.

The Senate utilizes $281 million over two years in transfers of money from various pots in state government to the General Fund, which is $61 million less than what the House had proposed. The Senate transfers no money out of the professional licensing boards. It transfers $50 million less from the Petroleum Storage Tank Fund and $10 million less from the Kentucky Heritage Land Conservation Fund (though the House had proposed issuing bonds for those funds to offset the transfers, which the Senate does not include).The Senate budget also transfers $3 million less from a fund in the Tourism Cabinet that uses transient room tax revenues for marketing. The Senate, unlike the House, takes $11 million it says are held by the Kentucky Lottery Corporation as unrestricted reserves.

The Senate budget leaves more money unspent at the end of the biennium, and proposes depositing $26.9 million into the state’s rainy day fund. The House budget had proposed $1.5 million. The Senate budget would also leave money in the coal severance tax accounts that are accessible by coal counties, whereas the House had earmarked that money to the specific projects mentioned above.

Mine Safety Quietly Cut in House Budget Bill

Severance Tax Dollars Need Stronger Overall Strategy

The House version of the new state budget takes $20 million of coal severance money the governor’s budget had allocated to region-wide programs and local governments and shifts money to over 400 earmarked local projects, many smaller than $10,000. CN2 Pure Politics and the Louisville Courier-Journal have stories exploring potential debate over these changes. It’s become commonplace for the coal severance budget to contain a wide array of projects and programs, but without a clear strategy for how they add up to economic development in the state’s coal-dependent regions.

Originally, much of the coal severance money went to prop up the General Fund. In 1992, the state passed legislation intended to send half of the money back to coal-dependent regions, to be divided into two streams: a portion for local government budgets and a portion to be used for economic diversification. However, the economic diversification monies were restricted to one strategy—the construction of industrial parks to try to lure industry.

After a series of regional industrial parks were built in eastern Kentucky with little success in finding tenants, the legislature began taking those monies—known as the Local Government Economic Development Fund (LGEDF) —for specific projects in each county earmarked in the budget. The General Assembly also began to issue bonds for water and sewer and other projects to be paid back with future coal severance revenue.

After more than a decade of this practice, the dollars that had accumulated in LGEDF accounts are now gone, a substantial amount of debt is owed on already-bonded projects and severance tax revenue is dwindling in eastern Kentucky as coal declines. The House proposes to keep the money flowing for local projects in part by reducing funding for regional coalfield programs that had been supported through the severance tax budget in recent years including mine safety, Save the Children, and the Read to Achieve program, and by giving local governments slightly less money than the governor had proposed. Projects funded in the House budget include senior centers, volunteer fire department equipment, water lines and parks improvement in coal counties.

The House’s proposed allocation of coal severance monies (not counting the 50% that goes to the state’s General Fund) is below:

coal sev house 3

Source: KCEP analysis of HB 235 HFA 14.

While many of the new projects are no doubt worthy, eastern Kentucky also needs a deliberate and aggressive strategy for economic transition given the region’s longstanding poverty and the recent acute job loss in the coal industry. Coal severance tax revenue is the largest current single source of money that could potentially be used for economic development.

One promising measure in this year’s coal severance budget is the allocation of $2 million each year for a Regional Strategic Development Fund (RSDF) and $200,000 per year to administer the Shaping Our Appalachian Region (SOAR) initiative. SOAR, which kicked off with a summit in Pikeville attended by over 1,700 people back in December, is a regional planning process intended to identify ways to diversify the eastern Kentucky economy.

The RSDF could be the beginning of a permanent coal severance tax fund, a structure commonly used by states dependent on natural resources to ensure that wealth is retained after the resource has declined. Dividends from a permanent fund can be used for ongoing initiatives according to a strategic plan while the corpus is preserved for the long term.

SOAR will pick up again very soon. Let’s hope it develops and begins carrying out an economic development plan with deep input from eastern Kentuckians that can be used to shape investment of coal severance and other resources in the future.

Some State Pensions in Dire Straits

While Kentucky’s Budget Faces More Cuts, Profitable Fortune 500 Companies Avoid Paying State Corporate Income Taxes

As Kentucky and other states struggle with tough budget decisions about essential public services, profitable Fortune 500 companies including Kentucky-based Yum Brands and Humana pay little to nothing in state corporate income taxes around the country, according to a new study by the Institute on Taxation and Economic Policy and Citizens for Tax Justice.

The study, 90 Reasons We Need State Corporate Tax Reform: State Corporate Tax Avoidance in the Fortune 500, 2008 to 2012, examines 269 companies that were profitable every year in the sample. 90 of the companies paid no net state income tax in at least one year despite telling shareholders they made $171 billion collectively in pretax U. S. profits those years. 38 companies avoided taxes in two or more years, and many of the others paid taxes at a rate substantially lower than the statutory rate.

Kentucky-based Yum Brands, for example, made $1.8 billion in profits but avoided paying state corporate income taxes in two of the study’s five years, while their average tax rate over the period was only 1.1 percent. Humana made $8.5 billion in profits but paid only 3.1 percent in state income taxes over those five years. In contrast, Kentucky’s top corporate income tax rate is 6 percent, and the average rate for states across the country is 6.25 percent.

The study notes that companies commonly take advantage of copious corporate tax loopholes and use lavish tax incentives and accounting methods to avoid paying adequate corporate income taxes, though states can take actions to fix many of those problems. Corporate tax revenue in Kentucky has fallen from 11.6 percent of General Fund collections in 1989 to 6.9 percent in 2013.

Other findings include:

  • 10 companies, including American Electric Power, Merck and Boeing paid no net state income tax over the five-year period covered by the study.
  • The companies examined collectively avoided paying $73.1 billion in state corporate income tax.
  • The 269 companies paid an average corporate income tax rate of just 3.06 percent.

The report comes at a time when some Kentucky officials promote creating more corporate tax cuts, including single sales factor apportionment, and while lawmakers consider a budget that includes the 14th round of cuts to many valuable public services.

But profitable corporations rely on our state’s schools, roads and courts, and should be held accountable for their fair share of the cost of public investments. Otherwise, middle- and low-income Kentuckians and small businesses are left subsidizing the profits of these corporations. There are a number of reforms Kentucky could make to close loopholes and expand the base, making our state tax system fairer and more adequate.

What Revenue Changes Are Moving in the General Assembly

Despite receiving a tax reform proposal from Governor Beshear back in January, there’s been little discussion about the need for comprehensive reform in this year’s General Assembly. In fact, the state hasn’t even released its report on what Kentucky loses in tax expenditures, even though it was due November 30. The revenue discussion instead has focused on House Bill 445, a bill that generates a small amount of additional revenue primarily for the Road Fund, and several pieces of legislation that will result in lost state revenue in future years.

Protecting the Road Fund

House Bill 445 passed the House by a slim margin of 53-44. It raises the gas tax by 1.5 cents per gallon above its current rate and 2.2 cents per gallon above the rate that will go into effect on April 1. That returns the gas tax to its level at the end of 2013. The bill also raises the floor of the minimum average wholesale price used to calculate the rate to keep the rate from dropping should gas prices decline.

The gas tax proposal would raise $60.8 million a year by the second year of the budget. It comes on the heels of a cut of $34 million to the Road Fund in the 2013 General Assembly, when the legislature created a trade-in credit against the motor vehicle license tax on the value of a used car when purchasing a new car.

In recent years, the Road Fund has achieved stronger revenue growth than the General Fund in part because the gas tax is tied to the price of gasoline and that price has been elevated since 2011. However, the gas tax is impacted by rising fuel efficiency; taxable gallons of gas have declined just over one percent a year on average for the past eight years. And without House Bill 445, as mentioned, the gas tax is vulnerable to drops in the price of gas. The floor—below which the wholesale price used to calculate the gas tax cannot drop—is still at $1.786 while the current price is $2.878.

Temporary boost to the General Fund

House Bill 445 also includes a few measures that provide a temporary revenue boost of $23.2 million to the General Fund to be used this biennium, while being revenue neutral over the long term. The primary revenue source here involves the sale of abandoned property, which is expected to generate $20 million in one-time money.

Also included are measures that simplify, update and clarify various aspects of the tax code.

One measure would update the state’s income tax’s link to the federal tax code. The state’s code has been tied to the federal Internal Revenue Code as it existed on December 31, 2006, which makes compliance more and more complicated as time goes on. The state wisely does not automatically conform each year because that gives Kentucky the opportunity to choose whether or not to go along with specific changes made by Congress. The legislature has not brought the state’s link to the federal code up to date in recent years because doing so would have resulted in lost revenue due to temporary federal tax cuts passed to stimulate economic activity during the recession and its aftermath.

However, many of those stimulus measures have expired and the state can update to the current code without a big cost to the budget. House Bill 445 proposes updating to the code as it stood on December 31, 2013. Importantly, House Bill 445 does not conform to a change in the limit on itemized deductions for high-income people that was made at the federal level, which would have cost the state budget money while giving a tax break to the richest Kentuckians.

Among other changes in House Bill 445: it responds to lawsuits challenging the legality of the method used by library districts to set property tax rates, making it clear that districts’ past decisions were legal (thus avoiding big cuts in library revenues); clarifies that taxes on instant racing are legal in response to a court case that said the state did not have that authority already; allows the lottery to advertise that (most of) its net proceeds go to college scholarships, generating a little more revenue; and extends the film tax credit but lowers the cap on credits that can be used.

New tax breaks

As in the past, the 2014 General Assembly contains numerous bills that will provide new tax breaks to various industries, individuals or activities. Most of those have not moved forward, but tax break bills that have had some movement include the following:

  • House Bill 376, which provides an income tax credit for the donation of property (or an easement on property) for land conservation, is expected to cost $2 million a year at full implementation and has passed the House Appropriations and Revenue (A & R) Committee;
  • House Bill 474, which provides sales, corporate and individual income tax incentives to coal mining and processing facilities. This bill has also passed the House A & R Committee;
  • House Bill 396, which provides tax incentives to General Electric in Louisville, has an expected eventual fiscal impact of $15 million a year and has passed the House;
  • House Bill 483, which provides tax incentives for AK Steel, has an expected eventual cost of $2.088 million a year and has passed through House and has passed the Senate A & R Committee.
  • House Bill 493, which makes smaller tourism projects in higher-poverty counties eligible for tourism tax incentives. It has passed the House A & R Committee.

Tool to understand tax break spending is missing

While Frankfort observers watch and await the creation of a new state budget, the state’s other budget—the one most people don’t even know about—also hasn’t been completed. That’s the state’s biennial report on the revenue that is lost each year from tax expenditures.

Tax expenditures are the tax exemptions, incentives, credits and preferential rates that are buried in the tax code and are a way the state spends money just like appropriations through the budget. In fact, according to the last tax expenditure report the state has about $15 billion a year in tax expenditures—more than it spends through the General Fund.

As has been past practice, the law containing the last state budget included instructions for the governor’s budget office to produce the report by November 30, 2013. That date is important because it gives the General Assembly the information before the session, allowing legislators to weigh the cost of various tax expenditures against the cost public programs and services as they develop a new two-year budget. But the legislative session is nearly over, and the report still has not appeared.