Privatization Brings Concerns about Accountability, Quality and Cost

For revenue-strapped state and local governments, contracting with private entities to build or operate public assets like roads and government buildings or provide public services is often proposed as an alternative. House Bill 407—which would set up a framework in Kentucky for a kind of privatization known as public-private partnerships (P3s)—has passed the House with little opposition. But Kentuckians should be wary that privatization measures can increase costs and jeopardize the public interest in accessible, high-quality public goods and services.

Generally, under a P3 contract, a private entity takes over some combination of the financing, creation, operation, and/or maintenance of a public asset in exchange for access to some form of revenue. Proponents of P3s claim that private involvement can improve quality, save costs or make projects possible that scarce public resources may be hindering.

However, there are numerous ways that privatization contracts including P3s turn out to be bad deals, such as the following:

Kentucky need not look to other states for proof that privatization is no panacea for the challenges facing government. For instance, the state’s experiment with private prisons—which ended this summer when the state chose not to renew its contract with the Corrections Corporation of America—saw multiple abuses of inmates and workers. Kentucky’s recent rapid transition to Medicaid managed care is another example of privatization that led to service quality issues such as denied treatments and delayed payments. And Lexington residents pay about 38 percent more for water from the private company that owns the utility than Louisville and 46 percent more than Cincinnati, both of which have publicly-owned water utilities.

While HB 407 makes general provisions for oversight of P3 contracts, it fails to specify protections that would be crucial to prevent similar problems from occurring in public-private partnerships. Labor standards, limits on user fee increases and unfavorable contract clauses, applicability of state transparency laws, maximum contract lengths and options to cancel contracts or buy back assets are examples of protections that are essential, but that may ultimately cost the state more to oversee than to avoid altogether by maintaining public ownership.

The conversation about P3s should recognize these nuanced concerns. But even more importantly, lawmakers should put the conversation in its rightful context: problems affording public services and investments are the result of a tax system that does not generate the revenue needed, and privatization is no answer to that problem.

Infographic: A State Earned Income Tax Credit (EITC) for Kentucky

The infographic below shows why adopting a state Earned Income Tax Credit (EITC) would be a good move for Kentucky. A state EITC could help more than 400,000 Kentucky families better afford basic necessities, lead to lasting improvements in the lives of children and increase fairness in Kentucky’s tax system. Currently 26 states (including the District of Columbia) have an EITC.

EITC graphic 3

Students Have Potential to Lose $76M in State Aid

Where Dollars Moved in the House Version of the State Budget

The version of the state budget the House passed today is very similar to what the governor proposed in January. The main changes in budget allocations involve a little more money for a variety of smaller human service-related programs and slightly less General Fund money for P-12 education and Medicaid.

The House also did not go along with the governor’s proposal to charge special districts a fee to help pay for Property Valuation Administrators (PVA). That meant the House had to restore General Fund dollars to the PVAs.

Here’s a rundown of the main areas of the budget that get more or less General Fund monies from the House than what the governor had proposed (dollar amounts are over the biennium unless described otherwise, and are relative to the governor’s proposal):

What receives more:

  • Property Valuation Administrators: +$31.8 million
  • Rates paid foster parents: +$10 million
  • Commonwealth’s and County Attorneys:+$6.1 million
  • Private child care provider rates: +$6 million
  • 15 additional social workers in Department of Public Advocacy: +$2.6 million
  • Family Resource Centers and Volunteer Services: +$2 million
  • Placing children with non-parental relatives: +$2 million
  • 10 additional front-line guardianship workers: +$2 million
  • Debt reduction for libraries: +$2 million
  • Homeland Security for enhanced 911 emergency services: +$1.6 million
  • Economic Development Cabinet for entrepreneurship support & business development staff: +$1.4 million
  • Kentucky Legal Education Opportunity Program: +$500,000
  • Vocational Rehabilitation to match available federal funds: +$500,000

What receives less:

  • Medicaid: -$25 million (most of which is replaced from restricted funds)
  • P-12 textbooks & instructional materials: -$10 million
  • Preschool: -$10 million
  • SEEK (K-12 funding formula): -$7 million
  • Department of Public Health (including deletion of monies for HANDS program expansion): -$5 million and another -$5 million from FY 2014
  • Department of Revenue: -$4.4 million
  • Correctional institutions: -$1.5 million

The budget is balanced with $7 million more in fund transfers than what the governor had proposed. Those additional transfers come from the Horse Racing Commission, the Department of Insurance, public safety employee training funds and the underground storage tank cleanup fund.

It is also built with the expectation that the state will net $4.8 million in additional funds from instant racing, $20 million from selling abandoned property, and $3 million more from lottery due to advertising that its earnings go to college scholarships (primarily though not entirely). The LRC budget director reports that the House budget would have a structural imbalance at the end of the biennium of $229.5 million—very close to the $231 million in the governor’s proposal—and would add $1.5 million to the rainy day fund.

Overall, the House budget tinkers around the edges of what the governor set forth. It takes some General Fund money from larger parts of the budget—P-12 education and Medicaid—to plug holes in smaller programs in human services and other areas. It passes costs off to the future and leaves intact new cuts of 2.5 percent to 5 percent for a range of areas that have already been cut drastically in recent years, from higher education to regulation of fair working conditions to environmental protection.

Updated March 14, 2014.

Interactive Map: How a State Earned Income Tax Credit Would Benefit Each Kentucky County

A state Earned Income Tax Credit (EITC) in Kentucky would build on the established benefits of the federal EITC, helping working Kentuckians better afford necessities and stimulating local economies. The following interactive map describes the positive impact a state EITC could have on each Kentucky county. Scrolling over a county on the map shows the number and share of people who would benefit and the additional dollars that would flow into each community. To view a larger version of the map, click here.



Why Grant Programs to Help Low-Income Students Pay for College Is Being Short-Changed

Fact Sheet: The Benefits of a State Earned Income Tax Credit by Legislative District

The federal Earned Income Tax Credit (EITC) has been shown to help working families afford necessities; provide short- and long-term benefits to children; and support local economies. If Kentucky adopted a state EITC—as 26 states (counting the District of Columbia) have done—it would build on these important benefits. Click here to download fact sheets on how each Kentucky legislative district would gain from a state EITC. If you would like a fact sheet featuring just your district, email Ashley Spalding at

State EITC Fact Sheets By District

House Proposes to Maintain Austere Budget, Shift Some Priorities

The House budget for 2013-2014 passed out of committee yesterday largely maintains the Governor’s proposed cuts of up to 8.4 percent to state services while making some shifts in priorities relative to the Governor’s plan.

House Budget Brief

Op-Ed: Budget’s Good News Not Enough for What Ails Kentucky

Published in Floyd County Times.

For a person who is chronically ill, a day of less pain provides welcome comfort but no promise of returning to long-term health. Kentucky finds itself in a similar position when it comes to the new two-year state budget the legislature is considering.

Soon, the House of Representatives will pass its version of the budget. And while the spending plan they’re likely to approve provides some short-term relief in certain areas from years of painful cuts in state services, the “patient” will not recover until our tax system is reformed. Only then will we have more of the resources we need to invest in a healthy future for Kentucky.

The House’s budget is expected to be similar to what the governor proposed back in January, a budget that included some modest good news.

That budget provides the first injection of additional support for public schools in six years. It rolls back cuts that gave Kentucky the most restrictive eligibility in the country for child care assistance. It includes an array of capital projects ranging from broadband technology to university classrooms. And it provides the first state employee raises in four years.

But the budget funds those areas in part by borrowing from Kentucky’s future. For what will be eight consecutive years, the budget will fail to contribute the extra money needed in the teachers’ retirement system, making the debt owed even harder to pay down the line. Higher tuition and fees are likely to result from this budget, meaning greater debt for college students. And Kentucky’s lack of sustainable revenue will make it challenging to pay back money borrowed for new capital projects without squeezing other needs.

The plan scrapes the bottom of the barrel to come up with what new money it does find. It takes funds intended for employee health insurance, underground storage tank cleanup, land conservation, professional licensing boards and more to balance the budget.

And in many important areas, this budget offers still more cuts. Higher education funding is reduced yet again, meaning a cumulative 27 percent cut since 2008 after adjusting for inflation, at the same time the budget continues to deny need-based financial aid to two-thirds of eligible students. Some areas of the budget are cut an additional 5 percent more, including adult education and environmental protection.

Even the areas receiving additional dollars aren’t close to pre-recession funding levels. While SEEK—the main funding formula for K-12 schools—gets added money in the budget, it’s just enough to keep pace with inflation over the next two years. That leaves in place cuts which have reduced per pupil funding by 10 percent (after adjusting for inflation) since 2008.

What makes additional cuts and continued underfunding unwise is that there’s a whole other state budget that we’ve been ignoring—the amount of money the state spends each year through various tax breaks known as tax expenditures. Their total cost is around $15 billion compared to a General Fund budget of just $10 billion. Eliminating less than 5 percent of tax expenditures would raise enough money to repair holes in the budget and make progress in Kentucky.

Years of cuts are harming the foundation of our economy. The state’s approach since 2008 has focused too heavily on cutting areas that make our state smarter, healthier and safer, while failing to address the tax break spending that many people don’t even know exists and is subject to little scrutiny. The budget challenges will just get harder over the next decade as additional bills come due and the tax system’s ability to generate the resources Kentucky needs continues to deteriorate.

To be sure, the budget now being considered would provide some much-needed relief in certain areas. But it’s a long way from what Kentucky needs and deserves. Lasting fiscal health is only possible once legislators embrace the need for state tax reform. There’s still time to do so this legislative session.

Jason Bailey is director of the Kentucky Center for Economic Policy (KCEP), a nonprofit, nonpartisan institute that conducts research, analysis and education on important policy issues.

Expanded Federal Earned Income Tax Credit Would Be Big Benefit to Kentucky Workers

The President’s budget for 2015 includes several important improvements to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) that, taken together, would help low-wage Kentucky workers and their families make ends meet, reduce income inequality and give a boost to the state’s economy.

One proposal is to expand the now-tiny Earned Income Tax Credit (EITC) for working childless adults and non-custodial parents (“childless workers”), an idea that has growing support across the political spectrum. That expansion would help 187,000 workers in Kentucky.1

Currently, a childless adult working full-time at the minimum wage pays significant federal income and payroll taxes, but receives an EITC of less than $30. Partly as a result, childless workers are the sole group of workers that the federal tax system taxes into—or in many cases, deeper into—poverty.

For families with children, by contrast, the EITC—when combined with the CTC—is our most powerful anti-poverty tool. On average, over 2010 to 2012, the two credits lifted 154,000 people—including 88,000 children—out of poverty in Kentucky each year.

Raising the maximum EITC for these childless workers, and making workers between the ages of 21 and 25 eligible who currently are excluded, would substantially increase their after-tax incomes and reward work. This is especially important for less-educated young people who may face multiple challenges when beginning their working careers, helping them gain a foothold in the economy.

The President’s proposal also would significantly help low-income working families with children by making important improvements to the EITC and CTC permanent. These improvements, first enacted in 2009 and slated to expire in 2017, have made more low-income working families eligible and boosted the credit for many others. 183,209 families in Kentucky are benefiting from these improvements, which have lifted an average of 24,500 Kentuckians, including 14,600 children, out of poverty each year between 2009 and 2012.

The EITC has a proven track record of boosting employment among parents. And, research has shown that the EITC also has important positive long-term impacts on children—helping them to do better in school, improving academic performance, and boosting college attendance rates. It would also give our economy a boost. Eligible workers would get to keep more of what they earn and, in turn, spend those dollars here in our state.

The proposal builds on this record of success by extending important improvements in the EITC and CTC for families with children and expanding the credit for childless adults and non-custodial parents. Congress should act on this idea.

Another critical way to enhance the benefits of the EITC would be for Kentucky to join 26 other states (including DC) and create a state EITC based on the federal credit.

See below for a fact sheet explaining the impact of these tax credits and the proposed expansion.

KY Tax Credit Fact Sheet

  1. See fact sheet for sources.