The recession hit Kentucky manufacturing jobs hard, with the state losing 48,800 or nearly 20 percent of its manufacturing employment between December 2007 and February 2010. In the last four years we’ve seen a turnaround, with the state gaining back 27,600 or more than half of its lost factory jobs.
However, the new manufacturing jobs emerging out of the recession often aren’t as good as the jobs of old when it comes to wages, benefits and job security, as a new National Employment Law Project (NELP) report points out.
Some manufacturing industries are choosing to “on-shore” production in the United States in recent years. That decision is due to several factors, including rising wages in countries like China; closer proximity to markets and to research and development functions in the United States; just-in-time production models that require quick shipments of parts; and higher costs of shipping across the globe.
But the new jobs often have lower pay and benefits than the middle-class incomes that many people associate with manufacturing. While there are still good jobs in manufacturing, real pay is declining and a low-wage sub-sector is emerging. NELP reports that “wages for production workers in manufacturing are now more than 4 percent less than the private-sector average, and they continue to decline.”
One way earnings are lower is that some companies have introduced two-tier wage structures where new employees make far less than incumbent workers for doing the same jobs. That’s happened at the Ford plant in Louisville. General Electric also decided to move its production of water heaters from offshore to Louisville, but wages for the new workers are only $13 an hour. And NELP reports that monthly earnings for new hires in motor vehicle parts manufacturing in Kentucky are 18 percent lower than for all such workers in the state.
Also, as NELP notes, reported wages in these sectors may overstate earnings for new manufacturing workers because of the growing use of temporary agencies to provide employees. While once primarily reserved for office and janitorial work, companies are increasingly turning to temp agencies to fill blue collar jobs. Staffing agencies save money for companies and clear a profit themselves by cutting corners, ranging from lower pay for workers to higher prevalence of wage theft.
Motor vehicle manufacturing including parts production has had some of the fastest job growth of Kentucky industries in the recovery. It’s the source of 11,200 of the 65,700 net new jobs created in the state between 2009 and 2013 according to the Bureau of Labor Statistics. The industry with the largest job growth over that time period was employment services like temp agencies, which is responsible for 23,000 of the new jobs.
NELP reports that, nationally, 14 percent of auto parts workers actually work for temp agencies, and that they make 29 percent less, on average, than those employed directly by auto parts manufacturers. NELP relays one such worker’s story that hits close to home:
Phillips Hicks explained to The Washington Post that his only option for a job at a Toyota plant in Georgetown, Kentucky was through the staffing agency Manpower, Inc. Manpower assured Hicks that he would be able to switch to Toyota payroll after a year or two, promising a doubling of his salary from $12.60 to $24.20 an hour and gaining benefits. But after four years, Hicks was still waiting for a permanent employee position, unable to afford health benefits for his family or take more than three days off per year without risking his job, because of a punitive leave policy that applied only to “temps.”
Even in what many have long seen as enviable jobs in manufacturing, job quality is a growing concern that casts a shadow on any celebration of job growth in our state.
Because of the recession and subsequent shortfalls in the state’s annual contributions to the Kentucky Teachers’ Retirement System (KTRS), the system’s liability is growing and the problem is becoming more severe each year. Now, KTRS has only 52 percent of the resources it needs to pay future benefits.
A proposal from KTRS would take advantage of the current low interest rates to refinance a portion of the debt the state owes to Kentucky’s teachers. The refinancing would take the form of a bond, and in the current context is a sensible next step as long as it’s part of a financial plan that commits the state to begin making full payments to the system in the near future.
Digging out of a hole
By law, Kentucky makes annual contributions in its budget for the retirement benefits earned by its teachers that year and to make up any shortfall from previous contributions. But in 2009, as the economy fell into recession and the financial returns of the retirement system dropped along with the markets, the state stopped making full payments to the system.
In the first year, that amounted to a payment shortfall of $60 million, but the amount grew in the following years as the full effect of the recession was felt and the impact of the state’s annual funding shortfalls compounded. In April, the General Assembly passed a budget in which the contribution for 2016 is $487 million short of what’s needed to avoid insolvency down the road, or a shortfall of nearly five percent of the state’s General Fund budget.
Additional dollars must be found to pay down the liability, as these benefits are earned by and legally owed to Kentucky’s teachers and the problem gets worse the longer we wait. Teachers do not participate in Social Security, meaning their pensions are critical to economic security in retirement. And the $2 billion paid out each year in benefits plays a significant role in Kentucky’s economy.
While finding the revenue to begin making full payments is the most important problem to be solved, a bond to refinance a portion of the debt is reasonable given the financial markets. The wisdom of such a bond depends on timing. For it to work, the expected rate of return on the investments that are made with the bond proceeds must exceed the interest rate paid on the bonds. That means it needs to be issued at a time when interest rates are low and financial markets are not overvalued.
Interest rates are certainly at historic lows for the time being, so that’s to the state’s advantage (KTRS suggests a bond could likely be sold with an interest rate of less than five percent). While no one can predict the future performance of financial markets, the ratio of stock prices to underlying corporate earnings—while having increased recently to above its historic average—is nowhere near where it was during the dot-com market bubble of the early 2000s and the bubble that preceded the Great Recession. Also, the past financial performance of KTRS is good, meeting or exceeding its 7.5 percent assumed rate of return over the long term.
A recent report by the Center for Retirement Research at Boston College shows that from the vantage point of 2014 the experience of most bonds issued for pension obligations over the last couple of decades is positive with the exception of those issued at the end of the peak financial markets in the late 1990s and right before the crash in 2007. While the authors note that there is risk involved, they also say that bonds “could potentially be a useful tool under the right circumstances.”
Issuing a bond does two things. First, it can lower the long-term costs of paying off the debt because of the difference between what the system earns with the funds and the cost of the bond. Second, by providing an infusion of cash to the system it gives the state a little time to figure out a plan for addressing the most important part of what needs to happen—a way to come up with the funds to make the annual payments on the liability over the next few decades.
The pieces of a plan
KTRS lays out two options in its proposal, a $1.9 billion bond and a $3.3 billion bond. KTRS shows how the state can repurpose funds already built into the state budget for KTRS to help pay for the bonds in the future—monies that go for past cost-of-living adjustments and sick leave liability. Also, they note that as prior bonds are paid off the payments can be redirected to help with costs.
With the smaller bond, the state would have four years to come up with the funds to make the full annual contribution to KTRS of about $400 million annually. An essential part of KTRS’ plan is that they propose the state immediately start ramping up its contributions to the system in the next budget beginning with $92 million in 2017, $184 million in 2018, $276 million in 2019 and $366 million in 2020. With the larger bond, it would take seven years for the state to reach the full $400 million annual contribution amount with the payments ramping up by $45 million each year.
Not issuing a bond and continuing to avoid making the full required payment to KTRS will cause the problem to grow. By 2026, according to KTRS, the state would be short $988 million a year in payments compared to about $420 million a year if it issues the bonds and phases in to making the full annual contribution to KTRS (see graph).
Source: Kentucky Teachers’ Retirement System presentation to Interim Joint Committee on State Government.
Because of a tight state budget and the loophole-ridden tax system, making the full contributions in the future must be part of a broader revenue conversation that the state needs to be having as soon as possible. But in the meantime, Kentucky should take advantage of low interest rates to refinance the pension liability and somewhat reduce the payments in the future, while making sure to include a commitment to phasing in full annual payments to the system. While it’s not all that will need to happen, it’s a prudent next step.
President Obama’s announcement yesterday that nearly 5 million unauthorized immigrants will be eligible to receive a temporary stay and work permit is good news for Kentucky. By removing the fear of deportation for almost half of the undocumented immigrants living in the U.S. and increasing their access to work, the law will safeguard families, improve their economic opportunities and contributions and allow fuller participation in communities across the Commonwealth.
Briefly, the executive order:
- Builds on Obama’s 2012 initiative, Deferred Action for Childhood Arrivals (DACA), which delays deportation and makes work permits available on a renewable basis for eligible young people who were brought to the United States as children. As of June 2014, 2,230 DACA applications from Kentucky had been approved.
- Extends eligibility for deferred action status to roughly 4.3 million unauthorized immigrants nationwide by including a larger class of childhood arrivals as well as immigrants who have been in the U.S. at least five years and whose children are legal residents.
- Does not create a pathway to legal permanent residence: the stay applies for three years at a time on a renewable basis, so long as the program is not rolled back or terminated by a future president.
- Does not extend eligibility for Social Security, Medicaid or Affordable Care Act tax credits.
According to an analysis of 2008-2012 census data by the Migration Policy Institute, one in three Kentucky undocumented immigrants ages 15 and older has a U.S. citizen child. The president’s action will provide those parents who have been here at least five years and their kids greater physical, emotional and economic security. A recent study from Pew estimates that, in 2012, two of every hundred children enrolled in Kentucky’s public elementary and secondary schools had at least one undocumented parent (compared with seven in 100, nationally). What helps the children of immigrants is good for their classmates and teachers as well.
The action will benefit immigrants and their communities in a number of ways including:
- Work permits will open a wider range of jobs to unauthorized immigrants, increasing incentives to build human capital through education and training, leading to better wages and greater economic productivity.
- Work permits may also increase pay by putting workers in a position to contest wage abuse, a significant problem for immigrants. Growing the ranks of low-wage workers with bargaining power will lift the floor for U.S. born workers whose wages are suppressed by abuse as well.
- Increased wages are especially important considering immigrants’ higher rates of poverty than U.S. born Kentuckians (one in four compared to one in five). More money in their pockets to spend on rent, school clothes and other basic needs will help the whole economy.
- The action opens the door to fuller compliance with state and federal tax laws, specifically payroll taxes, and will allow more immigrants to claim earned income and child tax credits. Some experts predict a small net gain for federal coffers and potentially for states that levy income taxes. Unauthorized immigrants already pay a substantial amount of taxes: a study from ITEP estimates they paid $59 million in state and local taxes in Kentucky in 2010.
- Based on the provisions in Kentucky that allow young people with DACA status to get a driver’s license, the expansion of deferred action will ensure that more people on Kentucky roads are tested for basic driving skills and are insured. That could make our roads safer, save our state and other drivers money, and boost revenue through car registrations and other fees.
While a pathway to citizenship that reaches more of the 35,000 undocumented immigrants living in Kentucky would be even better for our state, in the absence of comprehensive congressional immigration reform, the President’s action is a welcome improvement.
Budget Review Subcommittee on Postsecondary Education
Thank you for the opportunity to speak today on this important topic.
Research shows that there are numerous factors associated with success in postsecondary education—including: college readiness; the accessibility of educational opportunities (due to time constraints and geographic location); availability of academic, personal and career support services; and students’ aptitude and capacity to persevere. Another critical factor is the affordability of higher education. Kentucky has been making good progress in a number of areas—for instance, in the college readiness of high school graduates for which, according to the Council on Postsecondary Education (CPE)’s most recent accountability report, the state is on track to reach its 2014 goal. However, on the issue of college affordability the state has clearly been losing ground.
As you all know—and was highlighted in the previous presentation on the Legislative Research Commission report “Cost and Funding of Higher Education in Kentucky”—during the difficult budget situation of recent years, state cuts to higher education have led Kentucky’s public universities and community colleges to raise tuition in order to make up for some of the lost revenue from the state. As in other states, we’ve seen tuition at Kentucky’s public postsecondary institutions increase as a result—in our state by more than 200 percent since 1998. As described in the LRC report, the state’s appropriation to these universities and community colleges declined by 22 percent between 2000 and 2013 (in inflation-adjusted terms), with tuition and fees surpassing state funding as the largest source of revenue for these institutions in 2010. And as you know, funding was cut an additional 1.5 percent in 2015.
Most states have begun to reinvest in higher education after the years of budget cuts since the recession hit, but Kentucky has not; a recent national report shows that Kentucky ranked in the bottom 10 states in funding progress in 2014—and the additional cuts in 2015 will put Kentucky even further behind.
We all want to see our state reach its higher education goals—and in doing so improve Kentucky’s economy as well as the lives of individual Kentuckians—but these budget cuts make it hard for many students, and prospective students, to earn postsecondary degrees and credentials. I want to highlight how those with the greatest economic need, many of whom are adult students, are being hit especially hard.
These days more adults and low-income students are attending college. Around 42 percent of U.S. college students in 2011 were age 25 or older. However, a significant share is not successfully earning postsecondary degrees and credentials, which are associated with higher wages. 23 percent of Kentuckians ages 25-54 have some postsecondary education but no degree (2012 ACS).
The Center for Postsecondary and Economic Success estimates that nearly 644,000 adult Kentuckians (ages 25-64) are in need of better skills and wages. Of those, more than 58,000 are seeking work but have not worked in the last year; more than half worked at least some of the last year but earned poverty-level wages; and just over 254,000 worked at least some of the last year and earned above poverty-level wages but below the state median wage of $14.60 an hour. Half of this group has a high school diploma or equivalency; 17 percent has no high school diploma; and nearly 33 percent has some college but no degree.
Meanwhile there is expected growth in some middle-skills jobs in Kentucky—for instance, in healthcare—which require education beyond high school but not a four-year degree.
While more low-income, adult students are enrolling in college classes, one of our state’s biggest gaps and shortcomings in education is the low rates of low-income students earning degrees and credentials. Low-income students in Kentucky have lower postsecondary degree attainment rates than other Kentucky students. According to the CPE’s latest accountability report, compared to the 2012-2013 bachelor’s degree graduation rate of 48.9 percent for all Kentucky students at four-year institutions, the bachelor’s degree graduation rate for low-income Kentuckians was just 36.6 percent; this is far from the 49.7 percent target for 2013-2014. For associate’s degrees, the 2012-2013 graduation rate for all Kentucky students at the state’s two-year-degree-granting colleges—where many of the students are low-income community college students—was just 12.8 percent; the associate graduation rate for low-income students was 10.4 percent, which is below the baseline year’s graduation rate.
Adult students—many of whom are low-income—face more barriers to graduating from college than more “traditional” students, in part because they typically have greater financial need. These adult students often support families and work while going to school, so their cost of attending college may include expenses like childcare and the costs associated with cutting back hours at work in order to take and be successful in college courses. Meanwhile, many scholarship opportunities—like the merit-based Kentucky Educational Excellence Scholarship (KEES)—are not available to most adult students; a person must be no more than five years out of high school to be eligible for KEES. And some adults received a GED instead of a high school diploma and therefore for the most part don’t qualify for KEES (other than possibly a very small supplemental KEES scholarship depending upon ACT or SAT scores).
Taking a look at the state’s most affordable option for postsecondary education, the Kentucky Community and Technical College System (KCTCS), shows that even at community colleges—where a lot of adult students enroll—tuition is not affordable for many low-income Kentuckians. According to a 2012 national Community College Survey of Student Engagement, KCTCS students consider lack of finances to be the issue most likely to cause them to withdraw from college. Transfer to a 4-year college was the next most likely reason, followed by working full-time, then caring for dependents and lastly being academically unprepared. Despite being affordable relative to other state institutions, tuition at Kentucky’s community colleges had the highest median annual tuition and fees of Southern Regional Board states in 2011-2012 and the 11th most expensive community college tuition and fees in the nation in the 2012-2013 school year. And starting this year, KCTCS is charging additional fees to students—currently $4 per credit hour but scheduled to rise to $8 per credit hour next year—to finance construction projects. The $4 fee is on top of a 2.08 percent tuition increase; when calculating in the fee, this means a 4.9 percent increase in the cost per credit hour this year. Kentucky’s poorest pay close to a quarter (23 percent) of their incomes to cover tuition and fees at a community college. It is also important to note that the federal Pell Grant, for which most low-income students qualify, does not have the purchasing power it once did. In the 1970s, Pell covered nearly 80 percent of tuition, fees, and room and board at four-year public postsecondary institutions. Today it covers maybe a third of these costs.
More and more students end up going into debt to pay for college—in 2012-2013, 59 percent of graduates of four-year postsecondary institutions in Kentucky. And the average amount of debt is also increasing—up from $14,250 in Kentucky in 2003-2004 to $24,693 in 2012-2013. Low-income students who receive Pell are more than twice as likely to be in debt as those who do not qualify for Pell—and to have greater debt.
While as you know Kentucky does have financial aid opportunities through its three main scholarship programs—the merit-based KEES; the need-based College Access Program (CAP) that requires a student to be eligible for Pell to qualify; and the Kentucky Tuition Grant (KTG), which is for students attending private schools who have a gap between their Expected Family Contribution and the cost of attending an in-state private college—after factoring in other scholarships. But the state’s financial aid system does not give a high priority to need-based scholarships, which target those with the greatest financial need, and budget cuts have further limited investments in need-based aid. Kentucky also has a Postsecondary Education Tuition Tax Credit, which I will come back to later in the presentation.
A large share of KEES and also KTG go to students with relatively high family incomes. Based on available data, in 2013, 46 percent of merit-based KEES funds were disbursed to those with family incomes of more than $75,000 a year, and more than 29 percent of KTG funds went to those with family incomes in that category. In contrast, the majority of CAP funding goes to those with relatively low incomes.
However, as you all know, unlike KEES, CAP, which provides scholarships to those with the greatest financial need—and also KTG—are not fully funded; or in other words, not everyone who qualifies receives CAP and KTG although they do with KEES. With CAP and KTG, scholarships are awarded on a first-come, first-served basis—with funds being exhausted at an earlier date each year. In 2012-2013, over 76,000 eligible applicants (67 percent of eligible applicants) were denied CAP due to lack of funds. It was good to see that the final budget for 2014-2016 included a small bump in funding for CAP and KTG ($750,000 per program in 2015); however, it was not enough to make much of a dent in the level of underfunding experienced by the two programs.
And unfortunately, as has been discussed in this committee before, the underfunding of need-based financial aid in Kentucky is being furthered by state lottery revenues being utilized to help balance the overall state budget. According to statute, all but $3 million (for literacy efforts) of lottery revenues are to go to the state’s financial aid programs. However, since 2009 the budget has used some of this lottery money to assist with the bottom line. All of the moved monies are coming from CAP and KTG. The amount moved was 11 million in 2009, and it climbs to $32.3 million in 2015 and $41.3 million in 2016. While statute dictates that 55 percent of the lottery financial aid money (minus the $3 million) is supposed to go to CAP and KTG and 45 percent to merit-based KEES, KEES has been fully funded at a level that’s actually slightly above its statutory requirement (47 percent in 2015), and CAP and KTG funding levels have been cut (they receive just 39 percent in 2015).
Need-based financial aid is an especially important tool for increasing college degree and credential attainment among low-income Kentuckians, many of whom are adults. In contrast to many other forms of financial aid, need-based aid is effective at influencing whether or not students go to college and complete postsecondary degrees or credentials. Higher income students are not as price sensitive as low-income students and typically will attend college whether or not they receive scholarships. Also the delay in benefiting from education tax credits, which are applied for and received long after students enroll in college, can make it difficult for this form of financial aid to influence the educational decisions of the lower-income adults who qualify for these credits (and most do not qualify as many of these credits are nonrefundable, so those who do not owe taxes cannot benefit). Research has shown, however, that need-based scholarships both increase college enrollment among low- and moderate-income students and increase college persistence and the number of credits earned.
Meanwhile, although the state’s need-based scholarship programs are underfunded, Kentucky expends quite a bit of money for education-related tax expenditures—which primarily benefit middle-to-upper-income families. Kentucky’s most recent biennial tax expenditure report shows a growing amount of money going to the state’s nonrefundable Postsecondary Education Tuition Tax Credit—which can be claimed for undergraduate tuition and related expenses at Kentucky colleges and universities. It is expected to cost the state an estimated $20.8 million in 2016, compared to $14.8 million in 2012, an increase of 41 percent over that time period.
For state individual income taxes in 2014, this credit will be set at 25 percent of the amount recorded on the federal return for the Lifetime Learning Credit (LLC), which provides up to a $2,000 nonrefundable credit for qualified expenses paid for each eligible student, and the American Opportunity Tax Credit (AOTC), which offers up to $2,500 per student for qualified expenses and is partially refundable. Because the state credit isn’t refundable—even though the AOTC is partially refundable at the federal level—Kentuckians below the federal poverty level can’t benefit from the state tax credit because they do not have a federal tax liability while those with incomes well over $100,000 can. To qualify for the LLC, an individual’s income can be up to $63,000 and up to $127,000 for a married couple filing jointly and to qualify for the AOTC, an individual’s income can be up to $90,000 (income phase-outs occur between $80,000 and $90,000) or a married couple filing jointly’s income can be up to $180,000 (with income phase-outs occurring between $160,000 and $180,000).
One small strategy for supporting low-income Kentucky students in the context of rising tuition rates and prioritizing need-based financial aid would be to eliminate the state’s Postsecondary Education Tuition Tax Credit and redirect these funds to need-based financial aid programs like CAP. This is a recommendation that has been made by Kentucky’s Higher Education Work Group.
Of course we know the resource challenges in this state, but as more become available, making need-based financial aid—and postsecondary education in general—higher priorities would benefit Kentucky’s low-income adults and the state’s economy. Increased funding for higher education in the budget would enable the state’s public postsecondary institutions to keep tuition rates down, and full statutory funding for CAP would enable more funds for scholarships for low-income students—as would allocating KENO lottery funds and any growth dollars in lottery funds to CAP. Other possible ways to address the college affordability challenges of the state’s low-income students include moving forward the award date for CAP and KTG, which could help adults who may not make college plans as far in advance as more traditional students, and/or taking extent of financial need into account when awarding CAP and KTG. It could also be important to study specifically what level of funding is needed to incentivize low-income students to enroll and persist in college given the increased cost of attending.
While finances are a huge barrier for many students, this is not the only element of student success in college. Low-income adult students, for instance, may require additional student and family supports in order to be successful—such as intensive academic advising, supports that help students balance school with work and family responsibilities (for example, childcare and transportation assistance), and/or emergency financial aid. Career pathways is another way to help low-income adult students earn degrees and credentials and attain good jobs—by providing a clear path from very low levels of education (developmental education or even adult education) to increasingly skilled, marketable credentials in high-demand fields.
One-third of the way through the budget calendar, the state is on track for a revenue shortfall if growth doesn’t pick up for the remainder of the year.
According to a state report released today, revenues grew only 1.9 percent in the period July through October compared to the year before. They need to grow by 3.6 percent on average for the whole year (and 4.4 percent for the last eight months) to meet the forecast that the budget is based on. However, a new forecast also released today in a separate report (forecast was made after the first quarter) says the state is expecting growth of only 2.1 percent for the year.
If that were to happen, the state would face a shortfall of $135 million.
The individual income tax, Kentucky’s largest source, performed well in the first four months with growth of 5.2 percent compared to the previous year. Sales taxes grew by a strong 4.1 percent. But gains in income and sales taxes were offset by weakness in other taxes, for which revenue fell by 2.8 percent in the first four months.
Among the weaker-performing taxes are the corporate income tax, which fell 24.1 percent, and the limited liability entity tax (another business tax), which fell 11.6 percent. Revenue from these taxes has been elevated in recent years because of strong corporate profits, setting the bar high for additional revenue growth. Corporate receipts have also been up because of the 2012 tax amnesty program and other measures that encouraged acceleration of tax payments. As the recovery continues and businesses begin to reinvest to replace aging equipment, that can reduce profit margins and therefore business’ taxable income.
Coal severance taxes, which fell 5.2 percent in the first four months, are dropping because of a decline in the market for eastern Kentucky coal that likely will continue. Cigarette taxes actually rose 0.2 percent for the first four months, which was unexpected and unlikely to persist. Property taxes are down by 5.5 percent because of timing issues with tax fillings, according to the state’s budget office, and have been weak in general in recent years because of the depressed housing market.
A bright point is that receipts for October grew much faster compared to the previous year than July through September’s receipts. However, revenues had declined in October 2013 by 0.4 percent compared to the year before that, meaning the hurdle for growth in October 2014 was easier to exceed.
Moving forward, the state’s economists note that “the national economic outlook remains filled with more questions than answers. In periods of great uncertainty, consumers and businesses exercise restraint and additional caution before making decisions that will affect current and future expectations. Until the fog of uncertainty is lifted, growth rates will remain muted.”
And the economy is far from its full potential. Though jobs are expanding in Kentucky, the state is still over 70,000 jobs shy of getting back to the employment-to-population ratio it had before the recession hit. And wages have been stagnant for those with jobs.
The challenge of closing another shortfall
If the state ended up with another shortfall this year, that would be on top of the $91 million shortfall for the year that ended June 2014. To plug that budget hole, the governor took $50 million from various accounts across state government—ranging from the fund intended to clean up underground petroleum storage tanks to the Board of Nursing—withdrew $21 million from the already-eroding rainy day fund, made small cuts to some agencies and used $15 million that was budgeted but not spent.
Dealing with another shortfall would be tough because typical sources have been tapped so much already, including the rainy day fund and other reserves, transfers from various accounts in state government and budget cuts.
The additional withdrawal from the rainy day fund this summer reduces its balance to $77 million. Because of language put in the budget and because there was no surplus at the end of last year, the state will draw on the fund further if there are any unbudgeted expenses this year (known as necessary governmental expenses). And the rainy day fund is scheduled to have only $63 million by the end of 2016 because a portion is being used to balance next year’s budget. That puts it at just about half of the $122 million it had going into 2014, or only 0.6 percent of the 2016 budget—far less than the 10-15 percent experts say is needed to prepare for economic downturns.
The budget also assumes $81.7 million is carried-forward at the end of this year into 2016. Reducing that number further would create a hole in next year’s budget.
What’s more, the state is already using a lot of transfers from other accounts in state government to balance its current budget. The $50 million in additional transfers made this summer is on top of the $302 million in transfers included in the 2015-2016 budget. That’s much more than the $205 million in transfers used in the last two-year budget.
And many budget areas have already been slashed. The state has endured 14 rounds of budget cuts since 2008, and the most recent budget cuts many services by 5 percent, higher education by 1.5 percent and the state police by 2.5 percent.
A number of factors are contributing to slow revenue growth in the recovery, a situation made worse by the huge number of exemptions and loopholes in the state tax code that limit what revenue we can collect. While we all hope economic growth will pick up, we should be concerned that a sluggish economic recovery and eroding state tax system mean continuing budget woes.
By Linda Blackford
A new report from the Kentucky Council on Postsecondary Education shows that the state is not on track to meet several critical higher education goals it set for itself a few years ago. Most concerning of all is the lack of progress in graduation rates for low-income, underprepared and underrepresented minority students, with rising costs likely a big factor.
In 2010-2011, the state set targets for 2013-2014 as part of a broader plan for higher education in Kentucky. The state has shown improvement on numerous metrics, but low-income, underprepared and underrepresented minority students are still falling behind. The annual report measures progress in the areas of college readiness; student success; research, economic and community development; and efficiency and innovation. The new report gives progress up to 2012-2013, a year before the goals were to be met.
As seen below, the three-year associate graduation rate for low-income students was 10.4 percent in 2012-2013, which is even lower than in the baseline year.
The three-year associate graduation rate for all students (including low-income students, which many associate degree students likely are) is also low at 12.8 percent—just barely above the baseline year’s 12.6 percent. The three-year associate graduation rate for underprepared students was just 8.6 percent—down slightly from the previous year’s 8.9 percent. And the three-year associate graduation rate for underrepresented minority students was just 6.8 percent—a drop from the previous year’s 7.7 percent and below the baseline year’s rate of 7.2 percent.
In addition, while the six-year bachelor’s graduation rate was 48.9 percent in 2012-2013, for low-income students it was just 36.6 percent; this reflects a small increase in the bachelor’s graduation rate for low-income students from the previous two years, but it is far from the 2013-2014 target of 49.7 percent. The bachelor’s graduation rate for underprepared students, as seen below, was just 27.8 percent—down from 28.6 percent the previous year and 30.7 percent the baseline year.
The bachelor’s graduation rate for underrepresented minority students was 33.3 percent in 2012-2013—down very slightly from 33.6 percent in 2011-2012 and only negligibly higher than the baseline year (33.2 percent in 2008-2009).
Kentucky is also not doing well on measures that have been shown to help disadvantaged students succeed and persist in college. The state came up short—falling far behind baseline years—on progress in state appropriations for public higher education and grants to low-income students. And the number of low-income students without grants increased 58 percent from the baseline year of 2009-2010.
The lost ground on these targets, which makes higher education less affordable, likely plays a role in the poor graduation rates for disadvantaged students as finances are one of the key barriers to students completing degrees and credentials.
Students who receive a GED are also part of Kentucky’s postsecondary education pipeline—and these students do not fare well in the accountability report either, although the report says the state is on track to increase GED graduates next year. In 2012-2013, just 8,890 students earned a GED, down from 9,469 the year before and the baseline year’s 9,357. The goal for 2013-2014 is 11,500.
There are areas where the state is making gains. By 2012-2013, Kentucky had already reached its targets for the total degrees and credentials earned; number of graduate degrees conferred; transfers from the Kentucky Community and Technical College System to four-year colleges and universities; degrees and credentials earned in Science Technology Engineering, Mathematics and Health (STEM+H) degrees. Beyond these already accomplished goals, the state is “on track to meet target by 2014” on one measure: the college readiness of college entrants.
But improving educational attainment for low-income, underprepared and underrepresented minorities—as well as adult education students—is an essential part of growing the state’s economy, improving the circumstances of individual Kentuckians and making the state more equitable. Multiple strategies are needed to accomplish these goals, but increasing the affordability of higher education, particularly for those with the greatest economic need, must play a critical role.