Fund Transfers Can Harm Needed Programs and Result in Higher Costs

With deep budget shortfalls and very modest revenue growth predicted in the coming biennium, the Governor has put forward $371 million in fund transfers as a way to help balance the 2014-16 state budget. Although transfers have become commonplace, the state should not consistently rely on funds intended for other uses to patch systemic revenue problems. Fund transfers can harm needed programs, raise fees and taxes and result in higher state costs in the future.

The single largest proposed transfer would move $93 million from the Public Employee Health Trust Fund to the General Fund in 2015—money that exists because, on balance, employees and the state have contributed more to the fund than has been paid out in claims and other expenses since 2006. Instead of changing a state law so available funds could be used to reduce the cost to employees—for whom the share of expenses has risen at the same time as pay-raises have been denied—the state would use funds for competing budget purposes.

The governor’s budget also moves $23 million out of the Firefighters Foundation Program Fund (FFPF). However, firefighters are proposing legislation in this session that would make FFPF monies available for workers’ compensation insurance for all firefighters, and require the insurance cover those who contract job-related cancer.

The budget continues the past practice of transfers from various state licensing board funds, into which physical therapists, social workers and other professionals pay fees to maintain their licenses. With fewer funds to cover costs, boards may be forced to reduce oversight of these professions—putting Kentuckians at risk—or increase fees, which puts an added strain on those who make their livelihood in these areas.

Other fund transfers push costs off to the future. One example comes from the Petroleum Storage Tank Environmental Assurance Fund (PSTEAF), which is financed by a $0.014 per gallon fuel tax and pays for cleanup of underground storage tanks (USTs) containing gasoline, diesel and other hazardous chemicals. Besides making groundwater safer, the program reimburses owners and operators who couldn’t otherwise afford UST cleanups and, in some cases, makes land available for redevelopment. While progress has been made reducing the number of sites in recent years, there are still nearly 1,000 UST sites on the cleanup backlog and an average of 255 new sites are added to the register annually.

In each year of the biennium, the Executive Budget would transfer $32 million from the PSTEAF to the General Fund and issue a $25 million bond to pay for clean-ups. This borrowing will preserve operational funding at about the same level it has been, but the bonds will have to be paid off in future years with interest. And it’s not a new practice; for over a decade, large transfers have been made from the PSTEAF to the General Fund, and since 2006, the state has commonly issued bonds to pay for operations.

The budget also proposes to transfer $18 million over the biennium from the Kentucky Heritage Land Conservation Fund (KHLCF) which finances the purchase and preservation of old-growth forests, cave systems and other important natural areas in the state. The state would issue bonds for $5 million each year of the biennium to pay for acquisitions, but KHLCF will still be short of funds needed to prepare for and manage land purchases through biological inventories, archaeological surveys and other associated costs. The loss will hinder progress on new acquisitions.

Another problem with relying on fund transfers to balance the budget is that doing so can raise costs in future years by affecting the state’s credit rating. That’s because rating agencies watch to the amount of non-recurring monies states use to pay recurring expenses since the practice makes for a structurally imbalanced budget. Lower credit ratings lead to higher interest rates on borrowed funds.

 
The full list of transfers can be found in the executive budget bill and the transportation cabinet budget bill. Although the total $371 million in transfers does not represent a departure from the average of $374 million in each of the last six biennia, the proposed budget’s substantial reliance on fund transfers maintains a troubling trend of pushing costs off and avoiding longer-term solutions through tax reform.