WKU Students Rally for Higher Ed Funding in Frankfort

What’s In the Criminal Justice Reform Bill, and What’s Not

Senate Bill 120, the bill coming out of the state’s Criminal Justice Policy Assessment Council (CJPAC), proposes some positive steps to address barriers to successful reentry often experienced by former offenders when they are released from jail or prison. Here’s an overview of what is and is not in the bill.

The bill includes:

Second chances for workers with records

SB 120 includes licensing reforms that would increase employment opportunities for workers with records by making it possible for them to receive state occupational licenses in some circumstances. Currently the state’s occupational licensing boards and commissions can deny a license just because a person has a criminal conviction for cutting hair, landscaping, driving a bus and many other jobs. The bill would make changes so that such a denial only happens if the person’s conviction and the occupational license are related. This provision of SB 120 is expected to help prevent recidivism.

Modest reductions in the state’s inmate/supervised population

  • Inmates owing large fines or court costs wouldn’t be incarcerated if they truly couldn’t afford to pay. The bill would also increase the amount of credit an inmate receives per day for spending time in jail toward paying fines and court costs.
  • Parole would be shortened for inmates convicted of certain crimes who have no violations while on parole.
  • Some who violate probation and parole would be sanctioned with up to 60 days of incarceration rather than being sentenced to serve their full sentence for having probation/parole revoked.
  • Day reporting programs would have specific authority in the law, which could help to reduce the number of Kentuckians in jail, prevent reoffending and result in savings to counties. A day reporting program is a community-based, structured sentencing program operated by a county jail that combines supervision with resources and services. One such program operating in Louisville provides electronic monitoring for participants on home incarceration and requires them to report to the program for alcohol and drug testing as well as cognitive skills training.

Changes to benefit addicts

  • The Department of Corrections would be required to implement a Reentry Drug Supervision Pilot Program for certain inmates and parolees with substance use disorders. This program would include drug testing and counseling.
  • An Angel Initiative program would allow addicts to turn themselves in to a law enforcement agency to get help without criminal charges being pursued. Only some are eligible to participate and additional investments to expand access to treatment are not part of the program.

Better preparation for reentry while inmates are incarcerated

  • Jails would be allowed to operate reentry centers that offer vocational training and other programs, with funding tied to how successful they are at reducing recidivism.
  • More work opportunities would be available to inmates while they are incarcerated. The bill includes a work release program that would allow some inmates to work outside of a jail or prison for private employers. In addition, the bill would allow private industries inside prisons in some circumstances, providing additional paid work opportunities for some inmates; wages would be at least the federal minimum wage although some deductions would be made. Such work programs have been shown to increase inmates’ employability when they are released and in doing so prevent their likelihood of returning to jail or prison.

The bill does not include several provisions that were in a draft bill:

Several aspects of the draft bill that would have made a big impact on our state’s growing inmate population and associated costs — not to mention the lives of those who become involved in the criminal justice system and their families — did not make it into the final version of SB 120.

Raising the felony theft and fraud thresholds

  • Currently theft in Kentucky is considered to be a felony if it is for more than $500. The draft bill proposed raising the threshold to $2,000. Such a reform would have reduced the number of Kentuckians charged with a felony and therefore the amount of time spent incarcerated, among other consequences associated with a felony conviction.
  • The earlier draft would also have raised the felony threshold for fraud to $2,000. Currently, for instance, fraud related to public benefits in the amount of only $100 and unlawfully registering a car in another state with the intent to avoid paying taxes or the registration fee in the amount of $100 are both felonies.

Raising the threshold for felony nonsupport

  • Failure to pay child support in the amount of $1,000 is currently a felony. The draft bill would have raised this threshold to $5,000. For parents somewhat behind in their payments, adding a felony charge would only worsen a family’s economic situation.

Making reforms to the bail system

  • The earlier draft proposed to eliminate money bail for all but high-risk offenders; this is the practice of pre-trial release from jail being contingent on a defendant’s ability to afford a monetary payment. Currently many with low incomes remain in jail while those with higher incomes can return home to await trial. This reform would have had many positive effects, including potentially $100 million in corrections savings.

Additional reforms that did not make it into the bill:

Many other promising reforms that would make a big impact in our state are also not in SB 120 and will hopefully be taken up by the legislature in future years. These include reforming the state’s Persistent Felony Offender (PFO) law, expanding drug courts and making parole automatic for certain offenses.

Harsher Criminal Penalties Not a Proven Way to Address Heroin Problem

We all want to see Kentucky address its devastating drug problems. The issue touches individuals and families from all walks of life across Kentucky, and too many of us have friends, relatives and neighbors who have been hurt in some way by drug addiction.

Senate Bill 14, which passed the Senate yesterday, increases criminal penalties for possession of heroin and fentanyl, drugs that are most frequently involved in overdose deaths, as a solution to these problems . This approach would lock up more Kentuckians struggling with addiction for longer periods of time and increase the state’s inmate population (Kentucky already has the 12th highest incarceration rate in the country). And evidence suggests that unlike expanded access to drug treatment, it would not help with Kentucky’s drug addiction problems.

SB 14 would make the transfer of any amount of heroin or fentanyl (an even more powerful, synthetic opioid) a Class C felony carrying a 5 to 10 year sentence even for first time offenders. Currently, the transfer of a small amount of these drugs (under two grams) is considered a Class D felony, with a 1 to 5 year sentence. Under Kentucky’s very broad definition of trafficking, one addict sharing drugs with another with no cash involved is considered to be drug trafficking.

An established body of research shows harsh penalties for drug offenses do not result in a meaningful decline in drug use. Research also indicates increasing drug penalties can actually have a negative impact on public health as drug users may be afraid to seek help or utilize existing services, which can lead to greater spread of HIV and Hepatitis C by intravenous drug users. Other harms from increased penalties for low-level drug offenses include the loss of potentially productive years of life for inmates, their families and our economy, and the increased costs associated with the resulting growth in the inmate population.

In recent years Kentucky has acted on the understanding that harsh penalties for drug use generally lead to more harm than good. Reforms to the state’s drugs laws in 2011 led to important changes, including shorter sentences for addicts sharing small amounts of drugs and more inmates receiving drug treatment. Heroin legislation passed in 2015 resulted in some increased investment in treatment and other resources and alternative sentencing for drug offenders. The bill coming out of the Criminal Justice Policy Assessment Council (CJPAC), Senate Bill 120, is another positive step in the right direction for criminal justice reform in Kentucky. It proposes a number of provisions to improve reentry and reduce recidivism.

But SB 14 would move us back toward old approaches and take dollars that could be used for strategies shown to work. The fiscal analysis by the Commissioner of Corrections explains some of the potential costs of the current version of the bill in the following way: There are presently 493 offenders incarcerated in Kentucky for a Class D trafficking in heroin charge for an amount less than 2 grams. Under the current version of SB 14 these offenders would have instead been charged with the higher Class C felony. One Class D felony sentence of 1-5 years costs Kentucky an average of $11,464 to $57,320 over the course of the sentence. In contrast, one Class C felony sentence of 5-10 years costs the state an average of $121,995 to $243,910. One hundred inmates with Class C felonies cost the state $12.2 million to $24.4 million.

We should all be upset at the lost lives and damaged communities resulting from heroin addiction, but it is critical that we put scarce resources toward strategies that can make real progress on the epidemic, including increased opportunities for addiction treatment that is too difficult to access in our state.

Not Yet to Full Economic Recovery

The economy as a whole has been slowly improving and Kentucky’s unemployment rate has fallen from 10.9 percent in June 2009 to 4.8 percent now — the lowest rate since 2001. While the low unemployment rate suggests an economy almost fully recovered, another measure of employment shows Kentucky still has a ways to go.

The unemployment rate only counts people who have sought work in the last four weeks – not the individuals who, because of the depth of the job losses in the Great Recession and a slow and regionally uneven recovery, have become discouraged and stopped looking for work. Since those “missing workers” aren’t counted, the unemployment rate paints an incomplete picture of the strength of the economy.

A different measure, the employment to population ratio, simply looks at the share of people with a job. By focusing on the percentage of Kentuckians employed who are of prime working age (ages 25 to 54), we can get a better sense of where the job recovery stands.

In 2016, 73.4 percent of prime age Kentuckians were employed, as shown in the graph below. That is an improvement from recent years, but still below the 75.9 percent reached in 2007 and far below the 78.2 percent in 2000.

Source: Economic Policy Institute analysis of Current Population Survey data.

To put that gap in context: if the same share of prime age workers was employed in 2016 as in 2000, 80,000 more Kentuckians would have a job. In a typical month, Kentucky adds only about 2,000 jobs, so a jobs gap of 80,000 people is large. The state’s share of prime age population employed is the 5th worst among states, as seen in the table below, and the national average is 4.5 percentage points higher (77.9%).

Source: Economic Policy Institute analysis of Current Population Survey data.

Although some are quick to blame individuals’ moral failings as the cause for unemployment, the vast majority of Kentuckians are willing to work when more jobs are available, as is shown when the economy is stronger. An overall shortage of jobs in a still-recovering economy is the primary reason the ratio is still depressed. The regionally lopsided nature of the economic recovery is part of the problem, with job growth strong in more urbanized areas like central Kentucky and weak in parts of rural and eastern Kentucky. Two strategies that could create more jobs today are expanded federal investment in infrastructure and targeted job creation in distressed communities through subsidized employment programs.

Besides a lack of jobs, individuals can be unemployed because they are pursuing education, taking care of children or family members, or dealing with health problems. But it can also be because there are barriers to getting and staying employed. That can include inability to afford child care and transportation, especially with so many jobs being low wage; not enough income supports like an Earned Income Tax Credit; a criminal record that makes it difficult to find employment; and a lack of affordable access to higher education and training aligned with available jobs.

Through better policies, we can make more jobs available and increase the number of Kentuckians who can access them. But we also need to recognize what won’t work or will make the job situation worse. Kentucky is now a Right to Work state, but there is no evidence that means stronger job growth (most of the states in the table above are RTW). Repealing the Affordable Care Act will eliminate an estimated 56,000 jobs in Kentucky. And tax “reform” that is really about cutting taxes for corporations and high-income individuals won’t spur growth but cut revenue needed for the work-supporting investments described above, as states like Kansas have learned the hard way.

No Need to Overinflate Pension Liabilities

Lately the governor is saying Kentucky’s unfunded pension liabilities are not the $33 billion reported by the systems’ actuaries, but a much larger $82 billion. That estimate is based on unrealistically low assumptions about the future rate of return on investments.

The size of pension liabilities and amount employers should contribute each year depend on assumptions about future employee growth, retirement, mortality and more. One key assumption is what the average annual rate of return on investments will be. Most pension plans use an assumption of between 7 and 8 percent with a national average of 7.62 percent. Kentucky’s plan assumptions range from 6.75 percent for the underfunded Kentucky Employees Retirement System (KERS) non-hazardous plan to 7.5 percent for some plans.

The $82 billion number is an estimate of the liability assuming a rate of return of only 2.7 percent, the average yield in 2016 for low risk 30-year U.S. Treasuries. If you assume the plans will earn only 2.7 percent per year, the total amount owed becomes much higher.

Some argue plans should calculate defined benefit pension liabilities using low return rates in recognition that the benefits under such plans are guaranteed by law. However, if such low rates were actually used to make funding and investment decisions, it would lead to a poor allocation of resources by governments and/or unwise investment strategies by pension plans.

Public pension funds are well-equipped to maintain diverse portfolios with a long-term investment horizon, including stocks. Normally, only a small portion of resources goes to pay benefits in any one year, allowing plans to withstand fluctuations in financial markets. That’s why pension systems have been able to achieve high rates of return over time. The annual rate of return over the last 30 years is about 9 percent for Kentucky Retirement Systems and 8 percent for the Kentucky Teachers’ Retirement System.

If a plan were to assume average returns of only 2.7 percent a year while maintaining current investment strategies, governments would have to make dramatically higher annual contributions in the short term, leading to big increases in taxes and/or cuts in services. Before long, pension funds would have large surpluses and governments would then contribute little or nothing to the plans. There is no good reason for that kind of heavily front-loaded funding pattern.

Even worse, using such an assumption could lead a plan to adopt a very conservative, low return investment strategy — including not investing in stocks. The result would be much greater reliance on tax dollars rather than investment returns to fund employees’ pensions. Currently, for the country as a whole about 64 percent of what ends up in an employee’s benefit check comes from systems’ investment returns.

All of this is not to say that the current assumptions used by the plans in Kentucky are exactly correct. Special care must be given to investment return and other assumptions in the poorly funded KERS non-hazardous plan, which in its depleted state must maintain greater liquidity to pay benefits. It is critical to regularly evaluate and adjust all assumptions in light of experience, market conditions, a realistic assessment of the future and a commitment to shared responsibility in paying down the liability over time. That very well may mean somewhat of a reduction in investment return assumptions for the KERS non-hazardous plan.

But the motivation of some who tout the size of liabilities using dramatically lower investment return assumptions is to argue defined benefit plans are “unsustainable” and should be closed in favor of defined contribution plans (such as 401ks) that shift risk to employees (Kentucky is already part of the way there with a hybrid plan created in 2013 for some employees). Especially since governments are large and permanent employers, defined benefit plans are an efficient way to attract qualified employees who appreciate the security and predictability of such plans. They work well across the country historically as long as they are funded properly, which is where Kentucky ran into trouble.

We need a clear-headed view of our pension liabilities and, most importantly, a plan to generate the revenue that allows Kentucky to pay down the debt over time while also making the investments in our schools, health and more needed to strengthen the commonwealth.

Bevin’s Tax Reform Push Already Fueling Debate

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Will More Revenue from Tax Reform Be Real and Sustaining?

Governor Bevin suggested in his State of the Commonwealth speech that his tax plan will generate more revenue to help Kentucky pay down its large unfunded pension liabilities. Kentucky needs more revenue to honor those debts and make the public investments that build thriving communities. But there are big questions about what he means by more revenue and whether the kind of tax plan he is talking about will do the job.

There are three ways more money could come up in these discussions, only one of which would actually work to meet Kentucky’s needs.

  1. Real Money

True tax reform results in additional revenue that is sustainable over time. That happens by ending exemptions, loopholes and tax breaks so revenue better keeps up with economic growth. That means making sure taxes apply to expanding sectors of the economy as well as ensuring those whose incomes are growing the most — the wealthiest people — are chipping in according to their ability to pay.

This report outlines tax reform options that would generate real money, including limiting income tax breaks for those at the top and creating a new income tax bracket for high earners, expanding the sales tax to services, allowing property taxes to grow with property values and closing corporate tax loopholes.

  1. Temporary Money

A second outcome is for a tax plan to generate more revenue at first, but for that revenue to fade away over time — at some point resulting in less revenue than if no changes were made at all. That fade away will happen if Kentucky shifts from more productive to less productive revenue sources.

The governor appears to favor an approach that would end up there. Moving from a “production- to a consumption-based tax system,” as he has expressed interest in doing, is another way of saying we should reduce reliance on income taxes and increase reliance on sales taxes. But sales tax revenues have slower growth than income taxes — see the graph below for an example.

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

Even if Kentucky expands the sales tax base to include faster-growing services, sales tax revenue growth will still lag way behind growth from income taxes. That’s because incomes are growing much more rapidly at the top, and those people spend only a portion of their income — meaning much of it is not subject to sales taxes. Because a shift from income to sales tax means lower taxes where the growth is happening, we end up with less revenue down the road.

The graph below shows the impact of an increase in the sales tax rate from 6 percent to 7 percent and a cut in the top income tax rate from 6 percent to 5 percent. The bottom 60 percent of Kentuckians (whose real incomes are stagnant or declining) would pay more in taxes on average, while the wealthiest 1 percent would get an average tax cut of $5,396.

Source: Institute on Taxation and Economic Policy.

  1. Funny Money

A third way claims an income to sales tax shift will lead to economic growth as a state attracts businesses and entrepreneurs by reducing taxes on high-income people and corporations — ultimately resulting in more revenue to the state. That’s the assumption states like Kansas and North Carolina have used in recent years based on input from people like Art Laffer (who is advising Kentucky’s tax plan). So-called trickle-down theory has been a disaster where it’s been tried, leading to reduced revenue and major budget cuts.

Tax cuts are costly and ineffective at promoting economic growth, and they undermine investments in things like schools, health and roads that create greater prosperity. Tax policy does little to nothing to attract millionaires, entrepreneurs and others. State corporate taxes are also a small part of the cost of doing business, and the vast majority of job growth in a state comes from local start-ups and expanding businesses rather than companies lured to a state. States are smarter to focus on the fundamentals: building a skilled workforce and improving the infrastructure and quality of life (all of which require tax revenues) rather than giving away the tax base.

In short, the idea that reducing certain taxes leads to more revenue is deeply flawed.

 

When an elected official says they want to raise more revenue through tax reform, it’s important to look at their assumptions and the specifics of what they propose before accepting claims that the plan will mean additional revenue for important investments.

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