by Joe Glaser
Cleaning up expensive tax breaks is essential if we are going to invest in a stronger Kentucky and restore funding to our pension systems. The biennial Tax Expenditure Analysis (i.e. tax break analysis) published by the Office of State Budget Director provides insight into how much we are spending and on what. According to that analysis, our current tax code provides more exemptions than it collects in revenues. There are so many that the document is 154 pages in length and lists 269 separate tax breaks valued at over $13 billion in the current fiscal year.
How did we get here?
In addition to the many big tax breaks that cost Kentucky hundreds of millions in revenue every year and continue to grow because they are never revisited or reviewed, nearly every session the legislature also enacts or expands seemingly small tax breaks, often to benefit powerful interests.
These smaller tax breaks are often sold as a way to help businesses or grow the economy (a dubious claim itself) at little to no cost to the Commonwealth since in many cases the projected loss of revenues is “just a few million dollars a year.” The problem is that when new “small” breaks are enacted year after year and existing breaks are expanded or extended session after session they add up, resulting in a tax code that is fragmented, convoluted, unfair, inefficient, and, most importantly, unable to generate sufficient revenues to support the investments necessary for Kentucky to prosper.
The list below illustrates how small tax breaks can add up over time. It’s a partial compilation of tax breaks enacted or expanded since 2009 by legislative session (note that the impacts reflected below are those determined at the time the legislation was enacted, compiled by KCEP from information available on the LRC website unless otherwise referenced):
- Expand aviation fuel tax credit for Amazon: –$3 million (Proceeds from tax on aviation fuel are deposited in the Kentucky Aviation Economic Development Fund, not the state General Fund)
- Expand Tax Increment Financing Provisions to include projects that did not meet the existing requirements: – Indeterminable negative (this designation is used by the Legislative Research Commission when information is not available to provide an estimated dollar amount)
- Expand the Kentucky Industrial Revitalization Act (KIRA) incentives for supplemental projects: -$1.1 million
- Exempt blast furnace purchases related to KIRA projects from the sales tax: -$1 million
Both items listed here were identified in the LRC fiscal note as being for AK Steel
- Exempt Breeder’s Cup wagers from pari-mutuel tax: -$800,000
- Extend the UPS Metropolitan College tax credit for 10 more years: -$4 million (estimate based on history of credits claimed under the program – primary beneficiary is UPS)
- Expand film industry incentive credit and reduce threshold to qualify: -$5.5 million
- Establish the Angel Investor Tax Credit: -$3 million (estimate based on the program cap)
- Expand the Historic Preservation Tax Credit: -$6 million (narrowly tailored for specific projects – estimate based on the investment and maximum recovery permitted)
- Establish the Distilled Spirits Income Tax Credit: -$2.8 million (for 1st year of a 5 year full phase in when the impact is expected to be $13 million annually)
- Increase the annual cap for the New Markets Development Program -$5 million (based on the cap increase)
- Phased reduction of the tax imposed against wine and beer from 11 percent to 10 percent over 5 years: -$1.6 million (for the 1st year of a full 5 year phase in when the impact is expected to be -$7 million annually)
- Extend the Film Industry Tax Credit: – $1 million
For a more detailed description of the 2014 tax breaks listed above see this analysis.
- Expand the cap on the Endow Kentucky tax credit program to $1 million: -$500,000 (estimate based on the amount of the cap expansion)
- Expand the Kentucky Jobs Retention Act (KJRA) to apply to companies engaged in the manufacture of household appliances or appliance parts or supplies: –$15 million in out years
- Expand the Kentucky Industrial Revitalization Act program to allow supplemental projects by existing program beneficiaries: Indeterminable negative
- Establish a trade in-allowance against the purchase of new motor vehicles: –$34 million
- Expand economic development incentives for automaker and auto supply parts manufacturers: -$18 million in out years
- Expand incentives available under the Kentucky Industrial Revitalization Act (KIRA) to apply to supplemental projects undertaken by program participants: Indeterminable negative
2010 (Includes extraordinary and regular sessions)
- Establish Endow Kentucky Tax Credit: -$500,000 (based on program cap)
- Accelerate application of the Small Business Incentive Credit: -$2.9 million (see original listing in 2009)
- Establish New Markets Tax Credit: -$10 million (based on program cap)
- Extend temporary new car trade in allowance (made permanent in 2013): -$4.8 million (based on historical information)
- Expand credits under the Incentives for Energy Independence program: Indeterminable negative
- Extend KREDA incentive program: -$1.1 million
- Exempt Breeder’s cup pari-mutuel tax (limited to two years): Minimal negative
2009 (extraordinary session)
- Expand incentives for reinvestment in existing manufacturing companies: -$30.2 million
- Establish Combined Economic Development Programs: -$1.5 million
- Establish Metropolitan College Credit: -$4.4 million
- Expand the Historic Preservation Tax Credit Cap (from $3 million to $5 million): -$2 million
- Establish Railroad Improvement Credits: -$3.4 million
- Establish Sales Tax Rebate for Rural Convention Centers: -$2.4 million
- Establish Small Business Incentive Credits: -$3.3 million
- Establish Breeder’s Cup Tax Exemption: -$0.9 million
- Establish Film Industry Credits: -$13.4 million
- Establish Kentucky Investment Act: -$4.4 million
- Establish New home credit (time limited to 2 years): -$25 million over 2 years (based on program cap)
- Enact temporary new car trade in allowance (one year only): -$25 million (based on program cap)
- Exempt Military Pay from the Income Tax: –$18.6 million
Viewed in this way, it is easier to understand how and why our tax code has become what it is – it didn’t all happen at once, nor does it represent a comprehensive and cohesive system for producing the revenue we need to invest systematically in education, workforce development, infrastructure, health, and other essential public services to support thriving communities. After many years of incremental changes, tinkering around the edges, and passage of new special interest tax breaks session after session, it is time for a comprehensive and honest review of our state and local revenue systems.
The 401k-type defined contribution (DC) plans proposed by PFM in their final report would cost more than Kentucky’s existing defined benefit (DB) plans, according to data from PFM itself and the systems’ actuaries. Under a switch, the state would be making bigger contributions for a plan that reduces the retirement security of its workers. That hardly makes it a solution to the state’s pension funding challenges.
The cost of the DC plan is higher in part because the existing pension plan for new employees is already inexpensive if funded on time.
PFM’s proposed DC plan would require employees to make a minimum three percent contribution to their accounts and employers to make a minimum two percent contribution. The employer would then be required to match 50 percent of employee contributions up to an additional 6 percent, and there would be vesting requirements for employees to access what employers contribute. For workers in the Kentucky Employees Retirement System (KERS) and County Employees Retirement System (CERS) non-hazardous plans (along with the judicial and legislative systems), PFM projects the average employee will put in 6.5 percent of salary in total with a net employer contribution of 3.2 percent.
The DC plan would replace the existing hybrid cash balance plan for new employees in those systems, which the state put in place in 2013 (and is known as Tier 3). However, the cost for employers of the cash balance plan is very low already. The price tag for a pension plan is known as the normal cost, which is what actuaries say must be contributed each year so enough money is in the systems to pay workers’ benefits when they reach retirement (the other part of pension costs are catch-up payments when past contributions are not made and/or assumptions not met).
For workers in the KERS non-hazardous plan, the employers’ normal cost is only 2.24 percent of a worker’s pay, according to Kentucky Retirement Systems (KRS), with employees contributing 5 percent (employers’ normal cost is 1.27 percent of pay for CERS non-hazardous). That number is lower than the 3.2 percent employer contribution described above for the proposed DC plan, as shown in the graph below.
PFM’s plan would also put new teachers in a DC plan, which would necessitate moving them into Social Security (that’s because their DB plan is a Social Security replacement plan but a 401k-type plan is not). The employee and employer cost for the DC plan is similar to the cost for other state employees, but both employers and employees would also each need to make the required 6.2 percent contribution to Social Security. However, Social Security in itself is more expensive than the employer normal cost of the existing DB plan for teachers, which is estimated at 5.84 percent of pay, and the total cost of the new plan is much higher, as shown in the graph below. PFM admits to this additional cost in their report, but says already-strapped school districts rather than the state could pick up the cost of Social Security contributions.
In both cases, then, moving to a 401k plan would increase costs to fund retirement benefits for new employees rather than reducing them. And of course any change for new employees does nothing to reduce Kentucky’s substantial unfunded liability from the past, which is the major challenge the state faces.
But the added cost of switching to 401ks is even higher than that, because a switch involves closing the existing defined benefit plans to new entrants. As we note in our recent report, that will make it more expensive to pay off the closed plan’s liabilities over the coming decades. The added cost comes from the closed plan no longer being balanced by workers of different ages, which means it must take on a more conservative investment portfolio that will earn lower returns. Studies from 14 states have shown that closing a plan makes it more expensive to pay off legacy debts.
What’s more, these added costs would result in substantially lower retirement benefits for employees. As the graph below shows and as we describe here, it costs 42 to 93 percent more to provide the same benefit through a DC plan that an employee receives through a DB plan. DC plans are inefficient, earning lower investment returns and, unlike DB plans, not allowing workers the protection of insuring against each other about how long they will live.
Kentucky needs ideas that work to reduce its unfunded pension liabilities. Moving employees into 401k-type DC plans is actually more expensive, increases the cost of paying off existing liabilities and harms retirees while making it much more difficult to attract and retain a skilled workforce.
The series of reports from PFM on Kentucky’s pension systems overstate serious challenges with the condition of the state’s plans to justify drastic cuts in benefits. PFM overgeneralizes about assumptions in the plans to assert employers should contribute $1.8 billion more in 2019 above what prior assumptions would suggest, in some cases nearly doubling what contributions would otherwise be.1
While Kentucky has substantial unmet pension funding needs, exaggerated numbers do not help the problem and inaccurately imply radical action should occur to roll back and cut already-modest public pensions. Kentucky must responsibly pay down its pension liabilities over a period of decades. The need to meet our obligations to workers and retirees is one of many reasons the state must clean up our tax code to generate additional revenue, which will allow targeted extra dollars for pensions in the short term and consistent funding in the long term. But overblowing the problem encourages actions that would cause unnecessary additional harm to workers and retirees and could make the pension funding problem even worse.
We Should Address Actual Problems, Not Create More By Overstating Crisis
PFM bases its huge funding gap assertion on claims that wrong assumptions are being used in all Kentucky pension plans to calculate what should be contributed each year. Particularly, PFM is critical of the method of calculating contributions as a percent of payroll (and assuming payroll will grow in the future) and what they claim are too-high assumptions of future investment returns (assumptions were until recently 6.75 percent to 7.5 percent per year across plans).
If you look at the last decade, payroll costs have not been growing in some of the plans (especially the Kentucky Employees Retirement System (KERS) non-hazardous system, which has had negative payroll growth). That’s due to round after round of state budget cuts that have shed employment and denied raises to employees, and because some employers in the KERS non-hazardous system have responded to pressure from rising pension liabilities by privatizing and outsourcing services. When contributions are pegged to how much is paid to employees and payroll does not grow as assumed, contributions are too small to adequately pay down liabilities. That is especially problematic for KERS non-hazardous because the plan is so poorly funded already.
But political leaders have gone far beyond that empirical statement to claim using a percent of payroll method is itself fundamentally flawed. But the state’s existing method is not controversial: actuaries consider it standard practice. The Conference of Consulting Actuaries identifies the method as its “model” policy, noting it is the best approach to match benefits like Kentucky’s that are based on the pay of the covered employees.2 The method allows employers to contribute a stable amount as a share of compensation expenses over time, rather than having to find and contribute much more money as a share of total expenses at first and then much less money in later years (which is necessary under the “level dollar” approach that PFM says Kentucky should be using in all its plans, in which employers contribute approximately the same dollar amount of money each year). PFM admits in their report the level percent of payroll approach is “common nationally and widely accepted.”3 And the Legislative Research Commission recently reported 41 of 50 states use level percent of payroll.4
For the plans that are experiencing payroll growth, such as the Teachers Retirement System (TRS) and the County Employees Retirement System (CERS), percent of pay remains the right approach. A level dollar method may be appropriate in the short-term for other plans, but Kentucky must return to a status where workforce and salaries grow in order to provide an adequate level of services and attract the qualified teachers, social workers and other employees needed. We cannot continue on our current payroll-cutting path, which has created unreasonable employee caseloads, eroding payscales and damaging gaps in public services that ultimately hurt communities across the commonwealth.
As for investment returns, because of the Great Recession returns fell short of the target over the last 10 years, although they come close to or even exceed the target over the last 5 years, 20 years and beyond.5
The poorly-funded KERS non-hazardous plan has a more difficult time achieving its investment targets due to depleted assets and negative cash flow necessitating a more liquid portfolio to pay benefits. Despite that challenge, the plan earned returns of 12.09 percent in the year that just ended, and thanks to investment earnings and additional state contributions in 2017, its cash flow is finally positive for the same time frame.
The better funded plans do not face the same barriers in achieving investment goals. Those plans’ return assumptions are in line with other pension plans around the country, and nationwide systems are a healthy 76 percent funded as a whole and their financial status is improving.6 That’s because governments in most states — unlike Kentucky — made the required annual payments to those systems. The median investment return assumption for plans nationally is 7.52 percent, with only 8 percent of plans using an assumption below 7 percent. None of the 127 plans surveyed by the National Association of State Retirement Administrators uses an assumption as low as 6 percent, which PFM recommends for TRS, KERS Hazardous, CERS and the Judicial Form Retirement System (and 5.1 percent for KERS Non-Hazardous and the State Police Retirement System), as shown below.7
PFM takes one-size-fits-all approach to assumption changes
Dramatically and immediately adopting more conservative assumptions across the board causes the big increase in required contributions PFM says is necessary. Only 26 percent of the $1.8 billion in additional monies PFM calls for goes to the severely underfunded KERS non-hazardous plan, as shown the graph below. In contrast, 65 percent of those monies go to plans that are nearly 60 percent funded — TRS and the CERS non-hazardous plan.
PFM does not present a sound case for that level and allocation of additional resources as the smartest or most practical for the next budget period — especially if it is met in significant part through cutting other parts of the state budget and slashing workers’ benefits. The $862 million more PFM alleges is needed for TRS is over 80 percent above what is now being contributed, as shown in the graph below. Kentucky finally stepped up to nearly paying its full ARC contributions to TRS in the 2017-2018 budget, and the state’s failure to pay the ARC before those years is the main reason TRS is underfunded. Kentucky is only just now on the right track for funding TRS, but PFM is claiming that contribution is far too small.
That higher number for TRS comes from using a level dollar assumption that teacher payroll will not grow over the next 30 years — meaning we will fail to add any teachers to keep up with a growing population and fail to pay them any more than we pay them now, both of which are implausible and would be deeply harmful. The number is also derived, as mentioned, from assuming the plan’s investments will earn 6 percent annual returns on average, as opposed to their current assumption of 7.5 percent. Although no one can guarantee future returns, TRS has $17 billion in assets from which to invest in financial markets, and it earned 15.4 percent returns in the year that just ended and 8.1 percent over the last 30 years. As noted above, in a national survey no plan had adopted an assumption as low as 6 percent and certainly not a plan with the assets of TRS.8 PFM itself was part of a survey of 35 investment advisors in 2016 that projected pension funds have a 48.8 percent chance of earning at least 7.5 percent returns over the next 20 years.9
Claims that dire actions are necessary today to radically increase contributions could lead to counterproductive and extreme changes to benefits. On the table now are clawbacks of past cost of living adjustments (COLAs) and elimination of future teacher COLAs, big increases in the retirement age and the closing of defined benefit plans to shift to less efficient and less attractive 401ks.10 Such cuts and changes will break promises to employees, reduce their standard of living, make it much harder to attract and retain qualified public servants and hurt the entire economy by reducing retiree spending in local economies.11 Existing benefits for employees and teachers are inexpensive for the state as long as they are properly funded, and have been reduced already through multiple rounds of benefit cuts including in 2008 and 2013 and a lack of employee raises that results in a subsequent decline in pension incomes (which are tied to an employee’s salary at the end of their career).12 Furthermore, moving to a 401k-style defined contribution plan would make it more expensive to pay down existing liabilities over time, worsening the challenge we now face.13
A Responsible Approach: Short-Term Aid and Long-Term Consistency
A sound approach would protect already-reasonable benefits and provide responsible funding levels in the near term to get the plans on the right path so that challenges diminish over time. The General Assembly has already made major strides in that direction recently. In 2015, the state began paying the full actuarially required contribution (ARC) for the KERS non-hazardous system and paid $58 million above the ARC in 2017 and $68 million above the ARC in 2018. And, as mentioned previously, in the 2017 and 2018 budget, the state paid about 94 percent of the ARC for the teachers’ plan after paying only about 50 percent in the prior year.
A responsible plan would include additional aid to the KERS non-hazardous plan, which needs higher contributions for the time being than its prior actuarial assumptions would suggest. Given that system’s depleted state, extra caution and resources are warranted to help the plan get back on its feet and headed in the right direction.
The state should contribute an amount that would improve the short-term financial condition for KERS non-hazardous. At a minimum Kentucky could target funding to the amount needed to pay benefits each year. By preventing negative cash flow, that would free up the plan’s existing $2 billion of assets from being liquidated to pay benefits — allowing it to maximize its investment portfolio for long-term returns.
How much is that? In 2017, the plan paid $948 million in benefits and it received $703 million in employer contributions, so a payment achieving that target would be at least $245 million or 35 percent above what is now being contributed. That’s a big increase in the next budget, but is less than the consultant group’s suggestion that the plan needs $474 million or 67 percent above the current contribution for the KERS non-hazardous plan.
While KERS non-hazardous needs special attention, other plans like the local workers’ plan (CERS) and teachers’ plan are in much better shape and will be on their way to healthy funding levels as long as annual required contributions continue to be made (local governments must make those full contributions by law). Since the state paid 94 percent of the teachers’ contribution in the current budget, that means an additional contribution in the neighborhood of $50 million a year beyond that level. There is not a demonstrated need for dramatic changes in assumptions for these plans. If their boards wished to err on the side of caution, they could phase in modestly lower assumptions over a period of years rather than making large changes all at once.14 PFM actually recommends such a cap for CERS in how much annual contributions change due to assumption changes, but does not apply the same logic to the state-level plans.
Some will inevitably charge that an approach ratcheting down the alarmism around assumptions across the board is just “kicking the can down the road.” But, as noted above, Kentucky is only recently beginning to make much more aggressive contributions to these systems, and the suggestions above would increase contributions further. Pension liabilities cannot be paid off overnight, but the obligations are also not owed to retirees immediately, and getting the systems back to healthy funding levels will take decades.
Additional Revenue is Key
The real challenge we face now is this: even just replicating the historic increase in pension contributions made in the current budget looks to be very difficult moving forward. That’s because the budget was built with significant one-time money unlikely to be available for the next budget.15 Revenue growth is modest with another shortfall of $200 million expected at the end of the year, and the state is on track to deplete its rainy day fund in 2018.16 There is also pent-up demand for reinvestment after years of budget cuts that have led to strain on nearly every public service the state provides, soaring college tuition and a lack of employee raises.
Our budget challenge can be solved, but we need to take a responsible approach and not one based on overgeneralizations about assumptions. The key to solving it will be action to clean up the tax code and raise new and more sustainable revenue — to meet our obligations to employees and retirees and invest in a stronger Kentucky.17
- PFM, “Pension Performance and Best Practices Analysis, Report #3: Recommended Options, Summary Presentation to Public Pension Oversight Board,” August 28, 2017, https://pensions.ky.gov/Documents/2017%2008%2028%20-%20KY%20Report%203%20FINAL%20PFM%20Briefing%20Presentation%208.28.pdf. ↩
- Conference of Consulting Actuaries, “Actuarial Funding Policies and Practices for Public Pension Plans,” October 2014, https://www.ccactuaries.org/Portals/0/pdf/CCA_PPC_White_Paper_on_Public_Pension_Funding_Policy.pdf. ↩
- PFM, “Pension Performance and Best Practices Analysis, Interim Report #2: Historical and Current Assessment,” May 22, 2017, https://pensions.ky.gov/Documents/2017%2005%2022%20-%20Report%202%20FINAL%205.22.17%20-%20Historical%20and%20Current%20Assessment.pdf. ↩
- Legislative Research Commission, “Payroll Growth Assumption,” Public Pension Oversight Board, March 27, 2017. ↩
- Rates of return for KRS are: 1-year 13.47%, 5-year 8.08%, 10-year 4.86%, 20-year 6.46%; inception to date 9.16%. KRS Monthly Performance Update, June 2017, https://kyret.ky.gov/Investments/Documents/June%202017%20Monthly%20Update.pdf. Rates of return for TRS are: 1-year 15.37%, 5-year 10.1%, 10-year 6.3%, 30-year 8.1%. TRS, “Teachers’ Pension Fund Gains 15% with New Funding,” https://trs.ky.gov/news/. ↩
- National Conference on Public Employee Retirement Systems, “Economic Loss: The Hidden Cost of Prevailing Pension Reforms,” May 2017, http://www.ncpers.org/files/NCPERS_2017%20Economic%20Loss.pdf. ↩
- NASRA Issue Brief, “Public Pension Plan Investment Return Assumptions,” February 2017, http://www.nasra.org/files/Issue%20Briefs/NASRAInvReturnAssumptBrief.pdf. ↩
- NASRA, “Public Pension Plan Investment Return Assumptions.” ↩
- Horizon Actuarial Services, “Survey of Capital Market Assumptions: 2016 Edition,” http://www.horizonactuarial.com/blog/2016-survey-of-capital-market-assumptions. ↩
- Jason Bailey, “PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts,” Kentucky Center for Economic Policy, August 28, 2017, http://kypolicy.org/pfm-report-uses-exaggerated-claims-justify-harsh-counterproductive-cuts/. Jason Bailey, “Clawback of Cost of Living Adjustments Would Be Major Hit to Retiree Checks,” Kentucky Center for Economic Policy, August 30, 2017, http://kypolicy.org/clawback-cost-living-adjustments-major-hit-retiree-checks/. ↩
- Jason Bailey, “Pension Benefits Inject $3.4 Billion into the Economies of Kentucky Counties,” Kentucky Center for Economic Policy, June 6, 2017, http://kypolicy.org/pension-benefits-inject-3-4-billion-economies-kentucky-counties/. ↩
- Jason Bailey, “Kentucky Public Pensions Are Not Expensive — If You Fund Them,” Kentucky Center for Economic Policy, June 21, 2017, http://kypolicy.org/kentucky-public-pensions-not-expensive-fund/. ↩
- Jason Bailey and Stephen Herzenberg, “Switch to 401k-Type Plan for Kentucky Public Employees Will Cause More Harm,” Kentucky Center for Economic Policy and Keystone Research Center, August 22, 2017, http://kypolicy.org/switch-401k-type-plan-kentucky-public-employees-will-cause-harm/. ↩
- The Board of Kentucky Retirement Systems already recently lowered the investment return assumption of CERS from 7.5% to 6.25 %. ↩
- Jason Bailey, “Budget’s Reliance on One-Time Funds Presents Challenge Next Time Around,” Kentucky Center for Economic Policy, August 30, 2016, http://kypolicy.org/budgets-reliance-one-time-funds-presents-challenge-next-time-around/. ↩
- Pam Thomas, “Four Added Concerns About Kentucky’s Fiscal Outlook,” Kentucky Center for Economic Policy, August 4, 2017, http://kypolicy.org/four-added-concerns-kentuckys-fiscal-outlook/. ↩
- Anna Baumann, “Revenue Options that Strengthen the Commonwealth,” Kentucky Center for Economic Policy, February 2, 2016, http://kypolicy.org/new-report-kentucky-can-take-balanced-approach-to-budget-with-revenue-options/. Anna Baumann, “What Good Tax Reform Looks Like,” Kentucky Center for Economic Policy, April 17, 2017, http://kypolicy.org/good-tax-reform-looks-like/. ↩
by Daniel Desrochers
Labor Day is a good time to reflect on the state of working Kentucky. This year, as the economy continues a long recovery and state and federal decision makers debate policies that could impact progress, it is important to acknowledge we are not yet in a full employment economy that substantially improves Kentuckians’ standard of living.
We have a long way to go to full employment.
The most recent monthly jobs update from the Bureau of Labor Statistics (BLS) shows jobs are continuing to grow steadily in Kentucky as they have been over the 7.5-year period since the recovery began – by 11.8 percent since the trough of the recession in February of 2010. Growth is positive but the pace is moderate and, despite political rhetoric, has not accelerated in 2017.
Even with this steady growth over many years, the labor market has not yet closed the gap between actual job growth and what is needed to catch up with population growth in the civilian non-institutional population over age 16 since the Great Recession (see graph below). Kentuckians still face a gap of 19,000 jobs compared to employment levels in December of 2007, once population growth over that span of time is factored in.
An even more sobering comparison – employment today versus the last time Kentucky and the nation experienced full employment in the early 2000s – reveals there is still much room for improvement. If the same share of the civilian, non-institutional, prime-age population (limited to ages 25-54 to remove distortion caused by aging baby boomers) had been employed in 2016 as were employed in 2000 (78.2 percent instead of just 73.6 percent), 77,000 more Kentuckians would have had employment in 2016.
Unemployment in Kentucky provides further evidence of remaining slack in the labor market. The unemployment rate has mostly held steady over the last 2 years – from 5.2 percent in July of 2015 to 5.3 percent in July of 2017, meaning the share of the labor force in search of work has not declined. On a more positive note, labor force participation rose from a low of 56.9 percent to 59.5 percent as previously discouraged workers began actively searching for employment again.
The continuing shortage of jobs produces weak wage growth.
The public discourse about Kentucky’s labor market challenges often assumes the main problem is with workers (their willingness to work, skills, job readiness, etc.) and not the opportunities available to them – that we face a shortage of willing, productive workers instead of a shortage of good jobs. One way to test this assumption is to measure wage growth: When labor markets are tight and employers must compete for employees, a primary strategy for filling vacancies is to improve compensation.
In Kentucky, unimpressive wage growth hardly suggests that in today’s economy employers are making greater effort to attract skilled workers, while it also reflects the fact a large share of job growth is coming from industries providing low-quality jobs. Wage growth adjusted for inflation has been tepid and mostly isolated to the top end of the wage distribution (see graph below). Typical workers at the median have hardly seen their wages grow at all over the last 15 years, while workers in the bottom 3 deciles are mostly worse off than they were in either 2007 or 2001.
At median wages in 2016 ($16.73 per hour), a full-time, year-round worker in Kentucky made $34,798 annually – too little to support a “modest yet adequate” lifestyle for one adult and one dependent even in rural Kentucky. And though real wages were up a slight $0.42 for workers at the median compared to 2015, for workers at all other deciles that year wages either fell or stagnated.
The figures examined so far are aggregate: They look at how the labor market in Kentucky is for all workers. But economic expansions take longer to reach some groups such as young workers and people of color, meaning they face disproportionally poor outcomes. For instance, the graph below shows that even at similar levels of education, black Kentuckians and women make less. Full employment as a policy goal, along with other policy solutions aimed at improving job quality and reducing inequities, is essential to help raise standards of living for all Kentuckians.
Decisions made at the federal level about monetary policy fundamentally affect Kentucky’s economy. Though the Federal Reserve has begun moderating expansive monetary policy, national data show nominal wage growth is still below what would indicate a full recovery. EPI quantifies the gap between how much nominal average hourly earnings have grown since just 2007 and how much they would have grown if on target as an additional $3.09.
Policy should support continued economic expansion and give workers a raise.
Tightening the reigns on monetary policy before the economy is at full steam would stifle job growth that is still badly needed to reach all groups of workers and put upward pressure on wages in Kentucky. But there are other ways policymakers can either help or hinder on the path to a full recovery.
- Strengthening public investments in Kentucky communities at both the federal and state level would put people to work and help build the foundations of long-term economic growth. Direct spending on infrastructure and education are two prime examples with big payoffs. Investments can also be targeted to communities left behind by the recovery, where in many cases there are fewer jobs than before the recession.
- Cutting investments in Kentucky, on the other hand, will stifle our short-term recovery and hurt long-term growth. For instance, recent efforts in Congress to repeal the Affordable Care Act and slash Medicaid would cost thousands of jobs, worsen the health of our labor force and weaken local economies. Similarly, the assertion that hundreds of millions will need to be cut from essential public investments to pay for Kentucky’s pension systems would harm the economy and weaken the foundation for growth over time. In addition, using spending cuts to pay for new or continued giant tax breaks for the wealthy is a poor strategy for economic growth.
- Giving Kentuckians a raise through a higher minimum wage would put money into workers’ pockets and into circulation in our local economies. Unlike Kentucky, 29 states and D.C. now have a higher minimum wage than the federal $7.25, and 40 localities have higher minimum wages than their states’. Other needed policy changes such as fair scheduling, a higher overtime threshold and paid family and sick leave would similarly improve job quality where the market fails to do so.
- For the same reason putting more money into workers’ pockets helps the economy, taking money out of retirees’ pockets through draconian pension changes will hurt our recovery, especially in communities where schools and other public entities employ a large share of the workforce. Similarly, lawmakers should avoid passing additional anti-worker legislation that, like the prevailing wage repeal and enactment of right-to-work in 2017, reduces worker pay without the benefits advocates claim.
The benchmark for how well we’re doing this Labor Day should ultimately be workers’ standard of living. With the sense among many Kentuckians that they are no better off — or perhaps even worse off than just a couple decades ago — we’ve got our work cut out for us.