Statement on Justice Reinvestment Work Group Recommendations

The Justice Reinvestment work group has laid important groundwork for needed reforms to our justice system with the recommendations they released today. Continuing to grow the inmate population is incredibly costly to the state budget as well as to the Kentuckians who become involved in the criminal justice system, often for low-level crimes related to their struggles with addiction. Adding 4,400 more inmates over the next decade is where we’re headed if we don’t make changes — a trend that will not solve Kentucky’s drug problems or make our communities safer.

When the General Assembly meets in January, our lawmakers can choose to steer us down a different path. Increasing the felony threshold, reforming the bail system, streamlining the parole process for non-violent offenders and providing more treatment options are just some of the many recommended policies that are critically needed.

-Ashley Spalding, Senior Policy Analyst

Pension Reform, Taxes and the Budget

In This Small Kentucky Town, They Aren’t Waiting on Washington to Fix Things

‘Child Care Deserts’ are Leaving Rural Parents with Few Options

Funding Gap Between Kentucky’s Wealthy and Poor School Districts Climbing Toward Pre-KERA Levels

A new report by the Kentucky Center for Economic Policy shows the funding disparity between Kentucky’s wealthiest and poorest school districts is getting closer to the level it was before a landmark Kentucky Supreme Court case led to comprehensive school funding reform in the early 1990s.

KCEP’s report, The Funding Gap Between Kentucky’s Poor and Wealthy School Districts Continues to Grow, builds on previous analysis by the legislature’s Office of Education Accountability. It shows that although funding disparities shrank after the Kentucky Education Reform Act (KERA), the state has been losing ground for decades. KCEP finds that state and local per-pupil revenue in Kentucky’s wealthiest 20 percent of school districts was $1,399 more than in the poorest 20 percent of districts in 2016. That’s just $159 shy of the pre-KERA difference of $1,558 in 1990, and 2.4 times bigger than the gap in 1997 (all figures in 1990 dollars). As a share of total funding for the poorest schools, the gap fell from 58 percent in 1990 to 14 percent in 1997, but was back up to 31 percent in 2016.

Lack of equitable funding led to the 1989 Rose decision, which held the state was failing in its constitutional duty to “provide for an efficient system of common schools” that gives equal educational opportunities to all Kentucky children. In response, the General Assembly passed KERA in 1990 and infused its “SEEK” funding formula with more than a billion dollars in new revenue in order to reduce disparities and improve educational outcomes.

“For years, our elected officials have sought to protect education funding from the consequences of Kentucky’s fiscal challenges. But by not adequately funding the SEEK guaranteed base, by cutting non-SEEK funding for several years and by leaving wealthy and poor school districts alike to make up the difference, we have put our school districts on an increasingly uneven playing field,” KCEP Senior Policy Analyst and author of the report, Anna Baumann, said.

In January, the General Assembly faces the most challenging two-year budget outlook in recent memory. Potentially large budget cuts are on the table, which could include cuts to SEEK that will further widen an already problematic gap.

“Another budget session with either flat funding or cuts to education will further limit our ability to fund education equitably,” said Baumann. “With KERA we cleaned up tax breaks and increased investment in education to close this gap. It’s time for us to talk about doing so again.”

In response to the report, the Kentucky School Boards Association called for adequate funding of the SEEK formula to take mounting pressure off local school boards.

“This report clearly demonstrates that the financial burden for providing Kentucky’s children with the educational opportunities they have a constitutional right to has been increasingly falling to local school boards, which really means it falls to the taxpayers of each local community,” Eric Kennedy, director of governmental relations for KSBA, said. “This has exacerbated resource gaps that are not fair to the students and families of our common school system, which is created to provide equal access to opportunity for each and every child. KSBA has long been concerned that over-reliance on local property taxes as the source of investment in the education of our children will lead to the inequities that plagued our classrooms prior to the creation of the SEEK allocation formula in 1990, and we are now experiencing that in districts from the eastern and western ends of our state.”

Brigitte Blom Ramsey, executive director of the Prichard Committee for Academic Excellence, said it was time for Kentucky to once again make a commitment to education funding.

“Kentuckians have repeatedly set ambitious goals for student outcomes, but only once have we followed through with a commitment to adequate and equitable funding necessary to achieve those goals. Over time, the commitment has sadly eroded as this report shows. If we’re going to make the next giant leap from the middle of the national rankings to the top tier, we must make sure our schools and districts have the resources necessary to serve each and every student well.”

And Tom Shelton, executive director of the Kentucky Association of School Superintendents, noted that when the SEEK formula isn’t adequately funded, the consequences are negative.

“The SEEK formula is meant to be adequately funded so that resources can be equitably distributed. When it is funded, it works. The lack of adequacy in funding has caused these equity issues to reappear as the formula works the same way in reverse (negatively) as it does positively when it is adequately funded,” Shelton said. “We must again as a state recognize that education is an investment, not a cost. Education is economic development. We are only hurting ourselves and our future when we underfund education.”

Click to view a copy of the report.

The Funding Gap Between Kentucky’s Poor and Wealthy School Districts Continues to Grow

Click to view as a PDF

As a result of decreasing reliance on state funding for education and an increasing reliance on local school district resources, the gap in per-pupil funding between the state’s poorest and wealthiest districts is growing. This “equity gap” shrank dramatically in the 1990s after the Kentucky Education Reform Act (KERA) was passed. But since then, the trend has reversed and funding for Kentucky’s school districts has become less equitable, raising the same kinds of issues that prompted the filing of the lawsuit that resulted in the passage of KERA.

In 1989, in Rose v. Council for Better Education, the Kentucky Supreme Court held that the state had failed in its duty, put forth in Section 183 of the Constitution of Kentucky, to “provide for an efficient system of common schools.”1 One of the central tenets of the Rose decision was that the General Assembly must “provide equal educational opportunities to all Kentucky children.” The court explained:

The system of common schools must be adequately funded to achieve its goals…[and] must be substantially uniform throughout the state. Each child, every child, in this Commonwealth must be provided with an equal opportunity to have an adequate education. Equality is the key word here. The children of the poor and the children of the rich, the children who live in the poor districts and the children who live in the rich districts must be given the same opportunity and access to an adequate education. This obligation cannot be shifted to local counties and local school districts.

As a part of KERA, the Office of Education Accountability (OEA) was established and charged with monitoring funding equity among school districts (in addition to other responsibilities). OEA prepared and submitted a School Finance Report each year between 1992 and 2006, with the analysis going back to 1990. In 2006, the General Assembly amended the law to require the report only upon request by the legislative Education Assessment and Accountability Review Subcommittee.2 Since then, OEA has produced just one report with analysis through 2010, which was presented to the subcommittee in 2012.3

This analysis updates that report through 2016, focusing on one specific application of OEA’s quintile-based method – measuring the per-pupil state and local funding gap between the wealthiest districts and the poorest districts that each represent 20 percent of the student population. It provides strong evidence that Kentucky’s education funding continues to grow less equitable.

Kentucky’s Education Resource Gap Is Nearing Pre-KERA Levels

OEA has historically used a quintile-based analysis to examine the level of funding equity among school districts. As the graph below illustrates, the gap between the top and bottom quintiles is climbing back toward the level it was before KERA. Adjusted to 1990 dollars, in 2016 state and local funding per-pupil in the poorest Kentucky’s school districts was $1,399 less than in the wealthiest districts, compared to $1,558 in 1990.4 In current dollars, the gap in state and local funding between students in the top and bottom quintiles in 2016 was $2,570.

As a share of total funding for the poorest schools, this gap is not as close to pre-KERA levels as the dollar size shown above, but still headed in that direction. In 1990, the gap in funding between the top and bottom quintiles was equal to 58 percent of state and local funds for the bottom quintile. That share fell to 14 percent by 1997 but has been creeping back up since. In 2016, the gap was almost a third of the bottom quintile’s state and local funds – 31 percent.

OEA’s 2012 analysis looked at the school funding equity gap from a number of angles, including the aggregate equity gap between the wealthiest and each of the other four quintiles, the Gini coefficient and coefficient of variation equity measurements, and with and without on-behalf funding.5 Those different methods all pointed to the same conclusions. In OEA’s words: “while the magnitude of the equity gap varies depending on the method used, all methods consistently show that the equity gap for local and state (combined) revenue has been widening in recent years.”6

Attempting to update each of OEA’s analyses is beyond the scope of this report. However, we did also look separately at the impact of on-behalf funds on school funding equity in 2016. These substantial state resources – $1.3 billion in 2016 – pay for teacher pensions, vocational training and health and life insurance.7 On-behalf funds are not included in the graph above because they have been reported inconsistently over the time period. However, including on-behalf funds using KDE data available more recently and OEA’s 2012 analysis does not mitigate the trend identified in the graph. The total state and local per-pupil funding gap between the 1st and 5th quintiles is widening when on-behalf funds are included — from $2,075 in 2010 according to OEA to $2,625 in 2016 according to KCEP’s analysis (both figures in 2016 dollars).8

Relative to the equity gap that doesn’t include on-behalf funds, OEA found that in 2010 on-behalf funds slightly narrowed the gap in per-pupil funding between the poorest and wealthiest quintiles by $192 (in 2016 dollars). But since then, on-behalf funds have grown more per-pupil in the wealthiest quintile of districts than in the poorest quintile; our analysis shows that on-behalf funds slightly widened the gap in 2016 by $55. Unlike state SEEK funds, state on-behalf funds have little to no equalizing effect on total district resources.9

Mechanisms that Improved Equity Under KERA Rely on Adequate State SEEK Funding

In Rose v. Council for Better Education, the Kentucky Supreme Court was clear that achieving equity would require new revenue – the General Assembly could not just reallocate already inadequate resources. In 1990, legislators responded by passing KERA (HB 940) which – in addition to reforming academic expectations, performance measurement, local decision-making, teacher development, oversight and accountability, wraparound services for students and more – improved funding adequacy and equity.10 The new core funding formula, Support Education Excellence in Kentucky (SEEK), guaranteed a minimum amount of funding per student and established a formula that divides the responsibility between school districts and the state, taking into account district property wealth – or lack thereof.

Through state level tax changes, the legislature raised an estimated $1.3 billion in new revenues for the General Fund over two years, with the vast majority going to education (SEEK and non-SEEK).11 These measures included, in order of their revenue-positive fiscal impact:

  • Getting rid of several individual income tax deductions by conforming to the federal tax code, as well as eliminating the state deduction for federal income taxes paid.
  • Increasing the sales tax rate from 5 percent to 6 percent.
  • Increasing corporate income tax rates by one percentage point, bringing the top rate to 8.25 percent.12

Under the KERA funding formula, local districts are required to levy, through a combination of property, motor vehicle and permissive taxes, a minimum of 30 cents per $100 of assessed property to participate in the SEEK program.13 SEEK funds are distributed on a per-pupil basis, and the amount generated locally is equalized by the state to match the guaranteed SEEK base, which is established by the General Assembly in the biennial budget.14 This formula means local districts with the wealth to generate more revenue receive fewer state dollars, while poorer districts with less capacity to generate revenue receive more from the state.

Local districts also have the authority to:

  • Generate an additional 15 percent of the adjusted SEEK base, otherwise known as Tier I funding, which the state partially equalizes. The tax rate that generates Tier I funding, referred to as the “HB 940” rate, is established considering revenues from other permissible taxes levied by the school district. No portion is subject to voter recall. Absent these KERA provisions, school districts would be subject to voter recall on the portion of any levied rate that generates more than 4 percent real property revenue growth over the prior year.15
  • Generate up to 145 percent of the adjusted SEEK base, subject to a voter referendum. Amounts generated through this levy are referred to as “Tier II” revenues, and are not equalized by the state. Tier II was established to set an upper limit on local effort, although there are some districts – due to grandfathering and anomalies that occur because of the interaction with other tax provisions – that currently levy a rate exceeding the Tier II upper limit.16

In theory, the shared responsibility between the state and local school districts should provide an adequate baseline of funding for all school districts, while allowing local communities, within limits, to exceed the baseline. In reality, the lack of meaningful state revenue-supported increases in the SEEK guaranteed base and Tier I equalization over the past several years has resulted in local school districts making up for lagging state resources through additional local levies. The state has, for example, shifted from fully funding the costs of transportation in school districts calculated by a formula to funding only slightly more than half of those costs. The increased reliance on local resources for school costs has resulted in a growing funding gap between wealthy and poor districts due to their differing abilities to generate revenue.17

Less State Revenue, More Local Effort

Amendments to the tax code the General Assembly passed under KERA in 1990 increased state revenue, but revenue has eroded since then.18 New and growing tax breaks have left fewer dollars for all public investments including education.19 Since the Great Recession, multiple rounds of state budget cuts have reduced education funding through direct cuts and freezes, which also amount to cuts once inflation and other cost increases are taken into account.20 Including SEEK and non-SEEK funds (which includes revenue for preschool, Family Resource and Youth Centers (FRYSCs), after school programs, textbooks and teacher professional development), audited per-pupil state revenue dropped an inflation-adjusted 14 percent between 2008 and 2016.21

Illustrating the shift in reliance from the state to local governments, total audited per-pupil local revenue increased by 5 percent over the same span of time. This shift has been occurring for decades, as illustrated by the graph below which shows that the share of state and local funding coming from the state has declined, while the share from local districts has increased.22

As noted previously, the problem with an increased reliance on local resources – and why such reliance leads to greater disparities in per-pupil funding – is that wealthier school districts have a larger tax base than poorer districts from which to raise additional revenue. In a 2013 analysis of local ability, KCEP estimated that with the same 4 percent increase the richest Kentucky school district could generate over 10 times more revenue per student than the poorest district.23 This 4 percent analysis is particularly relevant because it corresponds with the maximum tax rate a district can typically levy without the voter recall option.24 KDE data show the number of local districts levying the 4 percent rate has increased since KERA and spiked around the recession when state revenue was especially low.25

KDE data also indicate that despite their limited tax bases, poorer districts are demonstrating substantial effort to generate local resources with what they have. In 2016, the median per-pupil property assessment among all 173 school districts was $371,282. For the 82 districts levying the 4 percent rate – with per-pupil assessments ranging from $142,853 to $942,014 – the median property assessment was $373,172. That means a similar number of districts both below and above median property wealth chose to levy the 4 percent rate.

One particular challenge some poor school districts currently face is related to the waning coal industry: as coal companies close or reduce operations in impacted school districts, their tax payments on real and tangible property decrease. In turn, unmined mineral tax revenues decrease as far less coal extraction has led to reductions in the value of coal land that will no longer be mined. Based on analysis of KDE data, in the 2016-2017 school year the re-assessment alone reduced total local funding in the poorest quintile of school districts by $1.2 million and in the second quintile by $2 million. School districts in the top two quintiles were not impacted by the change in unmined mineral assessments.

The map below shows the distribution of quintiles across the commonwealth:

Hard-Earned Gains in Achievement at Risk

Kentucky’s schools have made major strides since KERA. The University of Kentucky’s Center for Business and Economic Research (CBER) found in 2011 that Kentucky had moved up on the Index of Educational Progress between 1990 and 2009 from 48th to 33rd place – more progress than most states  (over that time, our neighbor state Tennessee went from 44th to 42nd place).26 CBER also recently found that, once obstacles to cost-effective education spending like poverty, poor health and limited English proficiency are accounted for, Kentucky is one of just 11 states where the return on investment for education spending is higher than would be expected.27 In other words, these dollars are well spent.

Even with Kentucky’s efficiencies, research has found a causal relationship between funding levels and student outcomes. A forthcoming peer-reviewed study in the Quarterly Journal of Economics finds that school finance reforms like KERA improve educational attainment for students from low-income families as well as economic outcomes later in life like wages, family income and poverty incidence.28 Another working paper from the National Bureau of Economic Research finds improved equity also helps close achievement gaps between low-income school districts and economically better-off communities.29

The per-pupil state and local funding gap between Kentucky’s wealthiest and poorest school districts is widening and approaching the level it was before KERA. Without significant new state revenue that will grow reliably over time to improve per-pupil funding, we will lose gains made under KERA and experience the consequences of entire communities of students being left behind.

  1. Rose v. Council for Better Education, 790 S. W.2d 186 (Ky. 1989),
  2. Kentucky Legislature, “Acts of the 2006 Regular Session,” Chapter 170,
  3. Marcia Ford Seiler, Pam Young, Sabrina Olds et al, “2011 School Finance Report,” Office of Education Accountability, June 12, 2012,
  4. In Figure 1, the analysis comparing funding in the first and fifth quintiles for years 1990 through 2010 is from the Office of Education Accountability (OEA). Marcia Seiler et al, “2011 School Finance Report.” KCEP’s analysis for 2011-2016 relies on OEA’s methodology. Wealth is based on districts’ per-pupil property assessments and quintiles are enrollment-based. Changes have been made to the underlying data since OEA’s 2012 analysis: in 2014, state on-behalf funds and local activity funds were incorporated into the Kentucky Department of Education’s Audited Financial Reports. On-behalf funds are not included in OEA’s or KCEP’s analysis illustrated by Figure 1, but are discussed subsequently (for KCEP’s analysis of years 2014-2016, we subtracted on-behalf funds from total state revenue). However, isolating activity funds from other local revenue is outside the scope of this report, meaning that these funds are included in KCEP’s analysis in years 2014-2016, slightly increasing the equity gap for these years relative to 1990-2013. A couple of factors mitigate the impact this difference makes in comparing the data across all years from 1990 to 2016. First, the impact of activity funds on the equity gap is small: data from the 2012 OEA analysis show that activity funds increased the equity gap by an average of $25 a year (in 1990 dollars) between 2006 and 2010. Second, activity fund reporting is increasing but not yet robust, meaning data for 2014 through 2016 do not reflect the full extent of these resources as a share of revenue in local districts. Activity funds are contributions to schools from individuals and organizations such as Parent Teacher Association (PTA) donations, athletic and other event ticket sales and revenues from fundraising activities.
  5. The report also adjusts the quintile analysis by using a “comparable wage index” to account for district differences in cost of living, and by factoring in federal revenue and local “activity funds.” In 2016, the total local, state and federal funding gap between the first and fifth quintiles was $2,285 (in 2016 dollars, including local activity funds and state on-behalf funds). A full analysis of the equity gap that incorporates federal funding is not included, as we focus on challenges state decision makers have the ability to redress.
  6.  Marcia Ford Seiler et al, “2011 School Finance Report.”
  7.  Kentucky Department of Education, “Revenues and Expenditures 2015-2016,”,%20Revenues%20and%20Expenditures,%20Chart%20of%20Accounts,%20Indirect%20Cost%20Rates%20and%20Key%20Financial%20Indicators.aspx.
  8.  The aforementioned inclusion of activity funds in the underlying KDE data for 2016 increases the equity gap, although the increase is small. As a point of reference, the size of that increase in 2010 was $36 in 2016 dollars.
  9.  Accounting for variations in the cost of living across districts – which are likely reflected in retirement contributions – would refine this analysis of on-behalf funds, but is outside the scope of this report.
  10.  The Prichard Committee for Academic Excellence and the Kentucky Chamber, “A Citizen’s Guide to Kentucky Education: Reform, Progress, Continuing Challenges,” June 2016,
  11.  Joseph Stroud, “Governor Signs Historic Education Bill Law Ushers In School Reform, Higher Taxes,” Lexington Herald-Leader, April 12, 1990.
  12.  Kentucky Legislature, “Acts of the General Assembly; Kentucky Educational Reform Act Revenue Measures,” 1990, Western Kentucky University Library,
  13.  Districts are also required to levy 5 cents per $100 of assessed property to participate in the state program that supports facility funding.
  14.  The “adjusted SEEK base” also includes add-ons for transportation, at risk and other student populations with additional needs.
  15.  The tax provisions of KERA operate in conjunction with existing broad-based laws establishing requirements and limitations on the levy of property taxes, commonly referred to as the “HB 44” limitations. HB 44 generally provides that any rate levied by a local taxing jurisdiction that generates revenues from real property that are more than 4 percent above what was generated the prior year is subject to recall by the voters of the district. The interrelationship of the two sets of requirements adds a level of complexity to the local district rate setting process. Martha Seiler, Pam Young, Albert Alexander and Jo Ann Ewalt, “Understanding How Tax Provisions Interact With the SEEK Formula,” Legislative Research Commission, November 15, 2007,
  16.  Marcia Ford Seiler et al, “Understanding How Tax Provisions Interact With the SEEK Formula.”
  17.  Jason Bailey, “Vast Inequality in Wealth Means Poor School Districts Are Less Able to Rely on Local Property Taxes,” Kentucky Center for Economic Policy, December 11, 2013,
  18.  Since 1991, Kentucky’s General Fund has shrunk from 7.33 percent of state personal income to 5.85 percent, which amounts to more than $2.5 billion in less revenue. KCEP analysis of data from the Office of the State Budget Director and Bureau of Economic Analysis.
  19.  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,
  20. Many states are finally investing more in education through their core funding formula since the recession, but Kentucky ranks as the 3rd worst among the states still cutting for its per-pupil decline. Michael Leachman, Kathleen Masterson and Eric Figueroa, “A Punishing Decade for School Funding,” Center on Budget and Policy Priorities, November 29, 2017,
  21.  KCEP analysis of data from Kentucky Department of Education, “Annual Financial Revenues and Expenditures,”,%20Revenues%20and%20Expenditures,%20Chart%20of%20Accounts,%20Indirect%20Cost%20Rates%20and%20Key%20Financial%20Indicators.aspx. This estimate excludes on-behalf revenue due to the lack of statewide data prior to 2014.
  22.  As explained previously, this analysis (Figure 2) excludes on-behalf funds and includes activity funds in 2014-2016. Including on-behalf funds would increase the share of total state and local funding from the state. Excluding activity funds would slightly reduce the share of total revenue coming from local governments.
  23.  Jason Bailey, “Vast Inequality in Wealth Means Poor School Districts Are Less Able to Rely on Local Property Taxes.”
  24.   In the years after KERA, the HB 940 rate was often higher than the 4 percent rate. But with more districts having achieved Tier I funding, today the 4 percent rate is typically higher. Until legislative action in 2003, school districts were not allowed to adopt the 4 percent rate if it surpassed the Subsection 1 rate associated with HB 44 – the rate that “produces no more revenue than the previous year’s maximum rate.” Especially since then, the 4 percent rate has given districts the most ability to raise revenue. Very few have exceeded the 4 percent limit under HB 44 which makes the decision subject to voter recall. Marcia Seiler et al, “Understanding How Tax Provisions Interact With the SEEK Formula.” See also Kentucky Department of Education, “Local District Tax Levies” and “Historical Tax Rates by Levied Type,”
  25.  Kentucky Department of Education, “Local District Tax Levies” and “Historical Tax Rates by Levied Type,” Marcia Seiler et al, “Understanding How Tax Provisions Interact With the SEEK Formula.”
  26.  The index looks at degree attainment rates, ACT scores, high school drop out rates, AP test scores and other national test scores. Michael Childress and Matthew Howell, “Kentucky Ranks 33rd on Education Index,” University of Kentucky Center for Business and Economic Research, July 2011,
  27.  Christopher Bollinger, William Hoyt, David Blackwell and Michael Childress, “Kentucky Annual Economic Report 2017,” University of Kentucky Center for Business and Economic Research, 2017,
  28.  Kirabo Jackson, Rucker Johnson and Claudia Persico, “The Effects of School Spending on Educational and Economic Outcomes: Evidence from School Finance Reforms,” The Quarterly Journal of Economics, forthcoming,
  29.  Julien Lafortune, Jesse Rothstein, Diane Whitmore Schanzenbach, “School Finance Reform and the Distribution of Student Achievement,” NBER Working Paper, February 2016,

Connections with Renee Shaw: Disability Rates and Benefits

Kentucky Tonight: Federal Tax Reform

Senate Votes to Give Massive Tax Cuts to Corporations and the Wealthy While Harming Middle Class and Working Kentuckians

Following Senate passage of the Republican tax bill, Jason Bailey, executive director of the Kentucky Center for Economic Policy, released the following statement:

“Both the Senate and House tax bills are enormous new giveaways to the very wealthy and major corporations at the expense of working families, including tens of millions of low-income and middle-class Americans whose taxes would actually go up at the same time. Kentucky’s U.S. Senators wrongly voted for major new gifts to the wealthy and powerful backed by false claims of trickle-down growth that we have seen fail in Kansas and other states.

“The plan in both the House and the Senate will create pressure for cuts to everything from nutrition assistance for families to education, Medicare and Medicaid, and infrastructure and lead to further strain on our state budget. The Senate bill goes further, increasing the number of uninsured Americans by 13 million, including an estimated 181,000 Kentuckians, to pay for even larger corporate tax cuts.

“Small changes won’t fix the bills’ fundamental flaws. With the framework both houses are using, the final tax plan coming out of a conference committee will harm most families and lead to further undermining of the public investments we need to prosper. A tax policy based on helping those who need it least just leaves Kentuckians further behind. House members must abandon support for an approach so radically out of step with the commonwealth’s actual needs.”

Plan to Front-Load Pension Payments Would Create Crisis in Next Budget

The pension framework under consideration would require Kentucky to make excessive increased payments for pension liabilities in the next state budget — even beyond the huge new contributions the state just made in the current budget. If included in a revised pension bill, this overreaction to past underfunding would set up unprecedented budget cuts a few short months from now — especially if there is no new revenue on the table to make those payments possible.

The additional contributions come largely from shifting to what is called the level dollar method of paying down liabilities, which we describe more here and here. The level dollar approach requires liabilities be paid off with the same dollar contribution each year for 30 years, ignoring how revenue and therefore ability to pay grows on average about 3 percent each year. In combination with a big reduction in investment return assumptions for most of the plans, Kentucky would have by far the most austere approach to funding pension liabilities in the country. The plan will massively front-load the costs of paying down liabilities while asking relatively little of the budget two and three decades from now.

This steep increase in funding comes after Kentucky only just made huge additional contributions to the plans in the current budget that approximately met (or exceeded in some cases) the actuarially required contribution (ARC). As shown in the graph below, plan payments in 2017 were 63 percent higher than they were in 2016. Despite that recent jump, this approach would call for contributions that are approximately 75 percent higher in 2019 than in 2018 — or  185 percent above what we put in just a few years ago.


While it is always better to pay down debt more quickly if monies are available, the state has put forward no plan to generate the needed extra cash beyond legally questionable benefit cuts and an apparently now-abandoned three percent cut to employee wages. Fortunately, these are long-term liabilities owed many decades in the future, for which there is no requirement they be paid down faster, only that they be paid down responsibly.  And all these additional monies aren’t necessary in the short term — the majority of new dollars wouldn’t even go to the poorly-funded Kentucky Employees Retirement System (KERS) non-hazardous plan, but to the teacher’s plan which is now on much stronger footing. The new actuarial valuation for the Teachers’ Retirement System shows its funded ratio climbed from 54.6 percent to 56.4 percent this year thanks to the added contributions in the current budget.

The effect of overly ramping up payments in the next budget will be to increase the funded ratios of the plans several extra percentage points beyond what they would otherwise be. Yet that will come at a cost to other public services which will have to be cut by huge amounts to make room for increased pension funding. While there is a compounding negative effect over time of not contributing extra money to pay down pension liabilities, there is also a large compounding negative effect for our economy and communities of not investing in things like education and health.

Kentucky needs a balanced and measured plan to address the challenge — one that puts targeted extra dollars where they are truly needed in the pension plans, generates new tax revenues to make the payments possible and protects investments in the building blocks of a strong and safe commonwealth.