House Budget Does Not Restore Many Crucial Services for Vulnerable Kentuckians

The House budget bill builds on Governor Bevin’s proposed funding for KTRS and KERS and rightly restores his cuts to P-12 and higher education. However, it maintains reductions to other budget areas, including parts of the Cabinet for Health and Family Services (CHFS) that serve Kentucky’s most vulnerable citizens.

The House budget appropriates a total of $2.5 billion in 2017 and $2.7 billion in 2018 from the General Fund (GF) to the Cabinet – just over $12 million (or 0.5 percent) more each year than the Governor proposed. $10.6 million would go to raise the eligibility threshold for the Child Care Assistance Program (CCAP) to 160 percent of the federal poverty line from 150 percent and $1.6 million to increase foster parent reimbursement rates.

Other CHFS programs that help keep at-risk Kentuckians healthy and safe – such as cancer education and prevention, Relative Placement Support (distinct from Kinship Care), domestic violence shelters and rape crisis centers – have some funding identified in the House budget. But since additional dollars beyond those mentioned were not added to the Cabinet, reductions will have to be made elsewhere to meet the overall cut.

Furthermore, it is clear that some of these identified provisions do not go far enough to help Kentuckians thrive within their communities. For example, while the budget includes new slots for Medicaid waiver programs that provide people with intellectual and developmental disabilities supports to live well at home, these slots just make a dent in the wait lists for each program, and are fewer than the new slots in the last budget cycle:

  • The budget adds 171 slots over the biennium for the Supports for Community Living Waiver program (SCL) which has a wait list of over 2,000 people. 440 were added in the 2015-16 budget;
  • It promises 249 slots over the biennium for the Michelle P. Waiver program, which was created to relieve the SCL backlog, but now has about 5,000 Kentuckians on its own wait list. 500 slots were added in the 2015-16 budget;
  • 16 slots would be added for the long-term Acquired Brain Injury Waiver, on which about 200 individuals and their families are currently waiting. 120 slots were added in the 2015-2016 budget.

Other crucial service areas that support vulnerable Kentuckians face substantial challenges under the House’s plan as well.

Outside of the $10.6 million in additional General Fund support for Child Care and inclusion of the governor’s promised raise for social workers, the Department for Community Based Services is subject to the governor’s 9 percent cuts. This agency is tasked with administering federal programs like nutritional assistance (SNAP) and energy assistance for low-income families (LIHEAP); and providing community-based juvenile services, adult protective services (help “finding food, shelter, clothing and medical treatment”), Kinship Care (financial assistance for non-parental relatives caring for children, a program that closed to new enrollees due to budget cuts in 2013 and which neither Governor Bevin’s nor the House Budget re-open) and in-home supports for children with emotional and other needs, among other services.

Also subject to the full cuts is the Department of Behavioral Health, Developmental and Intellectual Disabilities which among other things funds the community mental health centers throughout the state. Although these agencies get some help in the budget in making their pension contributions, their state funding for services has not increased since the 1990s.

Similarly, Aging and Independent Living is subject to the nine percent cuts. With our rapidly aging population, Kentucky should be investing more to ensure that seniors have the support they need to stay healthy and happy in their own homes. Instead, the budget threatens to increase the existing 13,000 person wait list for meals, transportation, and home-based and caregiver services.

Why the House Budget Approach Is Better than a Big Set Aside of Idle Funds

The major point of difference between the governor’s budget and the House budget concerns the use of idle funds. The governor’s plan sets aside $500 million in a new so-called permanent fund and $241 million more than the House in the state’s rainy day fund, while the House plan uses those funds to reduce budget cuts and increase direct payments to the underfunded pension systems.

The House plan is a better approach for this budget because it limits harm to critical education systems, gets us on the right path for our pension liabilities sooner and can achieve a greater return on investment for the underfunded pension plans.

Limits harm to critical education systems
The House budget puts money into wiping out deep nine percent budget cuts proposed by the governor to P-12 education, higher education and a few other services. It freezes, rather than reduces, education funding at its 2016 levels for the next two years. Supporting education is important for Kentucky’s economy both now and in the future.

In the short term, by stopping cuts the House budget would prevent job loss through attrition and possible layoffs, especially important to rural areas of the state where public schools and community colleges play a significant employment role. In the long term, we know that education is key to the skilled workforce and entrepreneurial leadership it takes to grow our economy and generate revenue to invest in thriving communities and pay down our debt over the next few decades.

Gets pension plans on the right path sooner
The House plan makes the full actuarially required contribution (ARC) to our pension plans immediately and with House Bill 1 sets that as the policy of the state moving forward for the teachers’ plan (a 2013 law did so for the state workers’ plan). The governor’s budget falls short of the full ARC for the teachers’ plan.

Both budgets actually contribute more than the ARC for the Kentucky Employees Retirement System (KERS) non-hazardous plan. The House plan contributes $90 million above the ARC over the biennium while the governor’s plan puts in $157 million over the ARC. A contribution above the ARC makes sense because it’s been calculated with an unreasonably high assumption about the plan’s future rate of return on investments given its low level of assets. The KERS board recently lowered that assumption and an amount significantly above the ARC is needed to reflect that revision.

While the House plan provides the full ARC for the Kentucky Teachers’ Retirement System (KTRS), the governor’s plan only puts in two-thirds of its required ARC. That makes the governor’s budget $345 million short of the KTRS ARC over the biennium.

It’s unwise to make only a partial payment to KTRS while setting so much money aside, as the Governor proposes. Doing so is akin to saving money for next year’s mortgage payments on your home while not making full payments this year. It’s much better to get on the right track now.

Anything less than the full ARC for KTRS could hurt the state’s credit rating. That’s because the accounting rule that kicked in last year requiring the state to report a much larger unfunded liability will presumably continue to apply.

Also, while it makes sense to add money to the rainy day fund with a growing economy, the $524 million the governor leaves in the fund is a huge leap from the $209 million that’s in there now – especially considering the important investments in our economy we’d have to forego. The House does add money to the fund, growing it by $74 million.

Can achieve a greater return on investment
Sending more money directly to the pension plans is better than leaving them in an idle permanent fund because the monies can be immediately invested with a long-term time horizon and can help with the plans’ cash flow problems.

Both the KERS non-hazardous plan and KTRS have a negative cash flow situation, meaning more money is going out of the systems than is coming in. That’s forcing them to sell investment assets to pay retiree benefits. In order to do so, they have to maintain more liquidity in their portfolios than is optimal. Especially in a down financial market as we have been experiencing, that means the systems are selling assets at a loss and are unable to diversify into potentially more lucrative opportunities. More money into the systems now can help address that problem.

Also, the permanent fund has an unclear set of investment goals. While the stated purpose of the fund is to help the pension plans as needed in the future, it’s not clear when those dollars would be infused into the systems and why. A shorter-term investment horizon would be needed, which would constrain options. One reason pension plans have achieved high rates of return historically is they are able to invest with 30-40 year time horizons. Putting more money directly into the pension systems would likely mean higher investment returns over time.

Moving forward
The House plan certainly doesn’t solve all the state’s problems and more will have to be figured out about the path forward beyond this two-year budget.

It still contains big cuts to many vital investments ranging from mental health to environmental protection, from services for the elderly to the arts. Except in a few areas like college scholarships, it doesn’t include needed new investments and continues to freeze funding in areas like the SEEK formula for schools — which constitutes a cut once inflation is taken into account. It’s built on a record amount of one-time money that is very unlikely to be there when the next budget is created, making a conversation about new revenue a necessity between now and then.

But given where we are, and with the time left in the session, it’s a responsible way forward.

House Budget Would Make College More Affordable for Kentuckians

In recent years, Kentucky has had among the largest state budget cuts to higher education in the nation and steepest tuition increases. By ending cuts to state universities and community colleges, making a big increase in funding for need-based financial need and creating a scholarship to end tuition for traditional-age community college students, the House budget would go a long way toward making a college education attainable for more Kentuckians.

No Cuts to State Universities and Community Colleges

The House budget does not include any cuts to the state’s public universities and community colleges, reversing many of the deep cuts to higher education in the governor’s budget proposal. One of the main drivers for tuition hikes at public postsecondary institutions in recent years has been declining state funding. As shown in the graph below, the state’s share of funding for postsecondary education compared to the students’ share declined from 67 percent in 1999 to only 36 percent in 2015.

higher ed shift

Source: Kentucky Council on Postsecondary Education.

Although the House budget does not include increases in funding for these schools to address past cuts and fixed cost increases, the flat-lined funding ends the trend of cuts in recent years and is expected to prevent large tuition increases. Kentucky Community and Technical College System’s president had testified to a budget review subcommittee that the tuition increase needed to compensate for the cuts proposed in the governor’s budget was 8.8 percent. Tuition at KCTCS has already gone up 203 percent since 1999.

Big Increase in Funding for Need-Based Financial Aid

The House budget also includes a substantial increase in the state’s investment in need-based financial aid. In recent years, lottery funds that are by law intended for the state’s need-based financial aid programs — the College Access Program (CAP) and the Kentucky Tuition Grant (KTG) — have instead been used for other areas of the budget. Meanwhile, tens of thousands of qualified students each year have been denied these scholarships due to lack of funds. The governor’s proposed budget continued this diversion of funds.

The increased money for CAP and KTG — $26.4 million more in 2017 and $30.6 million more in 2018 than in the governor’s budget — would enable more than 30,000 additional low-income students to receive need-based scholarships over the biennium. This increased investment in helping those with the greatest need attend college is important as research shows that need-based financial aid is effective at increasing college enrollment among low- and moderate-income students as well as increasing the number of credits earned and degree completion. That’s the group of students where Kentucky has fallen short in its accountability measures.

Free Community College for Traditional-Age Students

The House budget also funds an initiative to provide free community college tuition and fees to Kentuckians right out of college or who earn a GED credential before the age of 19. An estimated 37 percent of Kentuckians newly graduating from high school would benefit from this program, titled Work Ready Kentucky. As a “last dollar program,” the scholarship pays for the gap between what a student has received in grants and scholarships and the cost of tuition and mandatory fees. Adult and part-time students do not qualify for this program. The budgeted cost is $13 million in 2017 and $20 million in 2018.

Taken together, these three aspects of the budget would go a long way toward improving college affordability in Kentucky, and should be included in the final budget.

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The House budget reduces proposed cuts to education and selected other areas and provides additional money to fully fund the actuarially required contribution to the Kentucky Teachers’ Retirement System. It does that by using resources the governor set aside in his budget for a $500 million permanent fund and for extra contributions to the state’s rainy day fund.

How the Budget is Built

The budget begins with revenue growth of 3.2 percent in 2017 and 2.4 percent in 2018 and relies on revenues for 2016 that are currently expected to end the year $243 million above what was originally forecast.

In addition to those monies, the House budget transfers $638 million from a variety of funds across state government over the biennium, including $500 million from the Public Employees’ Health Insurance Trust Fund 1. That’s slightly more than the $611 million in transfers contained in the governor’s plan and much higher than the average of $340 million over the last eight biennia.

The budget uses those resources for the spending outlined below as well as an additional contribution of $74 million to the rainy day fund, growing its balance to $283 million. That contribution is $241 million less than the governor’s plan added to the rainy day fund, which would have brought the fund to a balance of $524 million. The House budget also includes less new debt for capital projects than the governor’s budget, $549 million compared to $625 million in the governor’s budget.

Fully Funds Pensions Now, Doesn’t Create New Permanent Fund

The House plan, unlike the governor’s proposal, provides the full actuarially required contribution to the Kentucky Teachers’ Retirement System (KTRS). The governor’s budget included only two-thirds of the required contribution to KTRS, meaning that the House plan puts $345 million more into the pension system over the biennium. The House does not propose issuing a bond to make these additional contributions, but instead does so through General Fund appropriations.

Like the governor’s plan, the House plan includes the actuarially required contribution to the Kentucky Employees Retirement System (KERS) plus an additional $90 million over the biennium above that amount because of concerns about the risk that plan faces without more money. The House budget does not include another $67 million in additional funding to KERS that was part of the governor’s budget.

The House plan also does not include the governor’s proposed permanent fund, a set-aside of $500 million that he said was intended to be used for pensions in future years. The source of that funding in the governor’s plan, the $500 million from the employees’ health insurance trust fund, is instead used to help fund the pension plans directly.

Removes Governor’s Cuts to P-12, Higher Education and a Few Other Areas

The House plan eliminates proposed cuts in the governor’s budget of nine percent next year in P-12 education, higher education and a few other areas.

The governor’s budget did not shield from those cuts the Learning and Results Services part of the education budget that includes programs like Family Resource and Youth Service Centers, textbooks and afterschool programs. The House budget instead freezes funding to these programs at 2016 levels over the next two years. It also expands eligibility for public preschool from 160 percent to 200 percent of the federal poverty level.

In higher education, the House plan eliminates the proposed nine percent cuts to the universities. It also eliminates the provision in the governor’s plan that made one-third of university funding subject to performance in 2018 and instead proposes a new work group to develop a comprehensive funding model for the institutions.

The budget funds the House’s proposed new Work Ready scholarship program that fills the gap in providing free tuition to traditional age students at the state’s community colleges, at a cost of $33 million over two years. It also provides $57 million more than in the governor’s budget over the biennium for the need-based, lottery-funded scholarship programs — the College Access Program and the Kentucky Tuition Grant program — which have had dollars diverted from them in recent budgets. The House budget does not fund the governor’s proposed new workforce scholarship program and doesn’t include the proposed $100 million in bonding for workforce training.

Outside of education, the House budget deletes cuts in a few other areas, including the constitutional offices (Attorney General, Secretary of State, Auditor, Treasurer, Agriculture), Kentucky Educational Television, Office for the Blind, Vocational Rehabilitation, Property Valuation Administrators, Commission on Human Rights, Commission on Women, the Executive Branch Ethics Commission and Military Affairs. The budget increases eligibility for child care assistance from 150 percent to 160 percent of the poverty level.

Maintains Cuts to Many Vital Services

Despite this easing of reductions, cuts of nine percent remain for many agencies and programs across state government, including agencies addressing health, family services, environmental protection, and tourism, arts and heritage. Funding for many of these investments has been reduced 15 to 50 percent since 2008, once inflation is taken into account 2.

It’s also important to remember that flat funding of programs and services is a cut after inflation. For example, like the governor’s budget the House budget essentially freezes funding for SEEK, the core funding formula for schools. That would make SEEK funding 12 percent below 2008 dollars in 2018 once inflation is taken into account.

Kentucky already ranks sixth-worst among states in cuts to its core formula funding with a 10.6 percent cut since 2008 after inflation3. Also, our inflation-adjusted cuts to higher education rank among the worst in the country 4.

As in the governor’s proposal, there are again no raises for employees in the budget other than selected raises for a few occupations such as social workers and state police.

Makes Other Significant Changes

Other elements of the House budget include:

  • It begins to shift more coal severance tax dollars back to counties and local spending, with a plan to make that transition complete over four years. Some of the programs previously funded with coal severance dollars, like Operation Unite and the SOAR initiative, are funded through other parts of the budget.
  • Budget does not repeal prevailing wage as the governor’s budget proposed, and neither did the House minority budget released today.
  • Budget is accompanied by a revenue bill that includes tax breaks for animal pharmaceuticals, 529 college savings accounts and beekeeping as well as some nominal additional revenue measures.
  1. Jason Bailey, “Shifting Health Costs to Employees Has Become Way State Plugs Budget,” Kentucky Center for Economic Policy, January 28, 2016, http://kypolicy.org/shifting-health-costs-employees-become-way-state-plugs-budget/.
  2. Ashley Spalding, et al., “Investing in Kentucky’s Future: A Preview of the 2016-2018 Kentucky State Budget,” Kentucky Center for Economic Policy, January 4, 2016, http://kypolicy.org/investing-in-kentuckys-future-a-preview-of-the-2016-2018-kentucky-state-budget/.
  3. Michael Leachman, et al., “Most States Have Cut School Funding and Some Continue Cutting,” Center on Budget and Policy Priorities, January 25, 2016, http://www.cbpp.org/research/state-budget-and-tax/most-states-have-cut-school-funding-and-some-continue-cutting.
  4. Michael Mitchell, et al., “Years of Cuts Threaten to Put College Out of Reach for More Students, “Center on Budget and Policy Priorities, May 13, 2015, http://www.cbpp.org/research/years-of-cuts-threaten-to-put-college-out-of-reach-for-more-students.

House Minority Budget Doesn’t Put More Money into Education

The House minority budget presented today keeps the governor’s proposed deep cuts to education and just makes modifications to how those cuts are implemented.

The budget essentially flat-funds the SEEK formula, Kentucky’s main funding program for K-12 schools, just as in the governor’s plan. The proposal also includes a nine percent cut to the non-SEEK funding category Learning and Results Services, just as in the governor’s budget.

However, unlike in the governor’s budget, the House GOP’s plan specifies where those cuts will fall. It deeply cuts funding for preschool by 25 percent, or $22.7 million below the 2016 level, and also cuts Read to Achieve and Save the Children funding to generate the resources to flat-fund other programs (see table below). There is language allowing some flexibility for districts to move money from four of those programs to preschool.

The budget also includes the nine percent cuts to higher education that the governor put forward. It doesn’t subject any of the appropriations in the second year to a performance-based system, though it does include a task force to develop such a system. Like the governor’s plan, the House GOP budget also doesn’t increase funding for the need-based financial aid programs — known as CAP and KTG — that help offset the costs of higher education for low-income students and are intended to be funded by law from lottery monies.

house minority budget

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