Protecting Medicaid’s Role in Advancing a Healthy Kentucky

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A new report by the Kentucky Center for Economic Policy provides an in-depth look at Medicaid in Kentucky, the benefits of Medicaid expansion and potential harmful impacts of changes that could create barriers to coverage and care.

The report was prepared in expectation of a proposal from Gov. Bevin to apply for a Medicaid waiver that might involve additional costs to recipients, benefit changes or other provisions.

The report highlights several key facts and points, including:

  • Medicaid is key to the health of Kentuckians for its role in covering many children, working adults, veterans, senior adults and the disabled. With Medicaid expansion, the program’s positive benefits are growing including a significant increase in health screenings, budgetary savings and a recent uptick in job growth in the health care sector.
  • The benefit package offered in Kentucky’s Medicaid program is reasonable and very similar to other states: most all of the services covered in Kentucky are also covered in least 40 other states or territories. And many other states offer important benefits not currently offered in Kentucky.
  • Some waiver ideas put forward by other states have the potential of impeding access to needed care, including premiums, lockout periods and elimination of certain benefits. Certain ideas introduce new administrative expenses that could end up costing the state more than any new revenue or savings generated. Also, there is a long list of state waiver requests the federal government has consistently rejected including: high premiums, benefit-reduction requests, work requirements and partial expansions.

Kentucky is in a unique situation among states because it has already expanded Medicaid while other states used a waiver-based approach in the decision to expand. By law, Kentucky cannot make changes designed simply to save money relative to the current program. Changes must meet the law’s goals of increasing coverage, expanding the provider network, improving health outcomes and/or improving the efficiency and quality of care.

The report concludes with recommendations that include active public participation in the process of developing a proposal, transparency, independent assessment of any changes and a focus on long-term benefits to the health of Kentuckians.

Governor Presents Austere Budget that Cuts Public Investments Further and Dedicates More for Pension Liabilities

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Governor Bevin’s budget proposal includes major cuts to higher education institutions and across other areas of state government where funding has been reduced deeply by what will amount to a decade of cuts. It repurposes those resources primarily to increase funding for the state’s pension plans and put money aside in the rainy day fund.

How the Budget is Constructed

The General Fund budget relies on modest expected revenue growth over the biennium of 3.2 percent in 2017 and 2.4 percent in 2018. It utilizes a beginning balance of $221 million in fiscal year 2016 as well as revenues for 2016 that are currently expected to be $243 million above what was originally forecasted. That money is spent over the biennium, leaving no balance at the end of 2018 (though money is deposited in the rainy day fund, as described below).

Unlike previous budgets, the governor’s plan spends comparatively little in the way of fund transfers from dedicated pots of money in state government to the General Fund — only $120 million. The previous two-year budget included $369 million in fund transfers including money from the Public Employees’ Health Trust Fund and firefighter and law enforcement training funds. The average amount of fund transfers over the last eight biennia is $340 million.

Added Funding

Pensions receive significant new funding under the governor’s plan. The plan includes $130 million more to the Kentucky Employees Retirement System (KERS) over the biennium, or the full actuarially required contribution using the new, lower investment return assumption of 6.75 percent adopted by the KERS board. On top of that, the plan puts an additional $89.4 million into KERS over the two year-period.  The proposal also includes $591 million in new funding for the Kentucky Teachers’ Retirement System (KTRS) over the biennium, or approximately 56 percent of the new funding requested. And the plan includes what are called “contingent appropriations for pensions” of $136 million over the biennium, which are available for the state employee and teacher retirement systems if revenues come in as expected and spending is held at the levels appropriated (split evenly between the two plans).

The proposal also grows the Budget Reserve Trust Fund, known as the rainy day fund. It adds $179 million over the biennium to the fund, plus an additional $136 million in contingent appropriations (this is in addition to the $136 million in contingent appropriations mentioned above for pensions). In total, this would increase the balance of the rainy day fund from $209 million in 2016 to $524 million at the end of 2018.

Other areas with increased dollars in the budget include higher salaries for social workers and state police, a reduction in caseloads for guardians, more public defenders and money for cleaning up backlogs of untested rape kits.

The budget increases funding for college scholarship programs, but that increase largely doesn’t go to need-based scholarships like the College Access Program (CAP) as required by statute — from which lottery monies have been diverted in recent years 1. Instead, $27 million in 2017 and $32 million in 2018 are allocated to new “student financial aid for participation in workforce development and training programs.”

What is Cut

The governor’s budget includes 4.5 percent cuts in the current fiscal year to state agencies and then a 9 percent cut for the two-year biennium.

Among the biggest cuts in absolute dollars are to universities and community colleges, which would receive $63 million less in 2018 than they did in 2015 and $231 million less than they received in 2008. As seen in the graph below, funding for universities and community colleges would be 35 percent less in 2018 than it was in 2008 once inflation is taken into account. Kentucky already ranks 11th-worst among the states in per student cuts to higher education since 2008 2.

Budget Graph 1

Source: KCEP analysis of OSBD, BLS data.

The plan also eliminates Kynect, the state’s health insurance exchange, and uses a portion of the dedicated fee that had been funding Kynect to help pay for its shutdown, according to the governor’s address. It cuts General Fund dollars to behavioral health, developmental and intellectual disabilities by $14.5 million or 7.4 percent between the 2016 enacted budget and 2018. No raises for either teachers or state employees are included in the plan beyond the selected salary adjustments mentioned previously.

SEEK, the core formula that funds local schools, is the largest General Fund expenditure in the budget. Funding for SEEK in the governor’s plan is almost flat for the biennium — total SEEK funding goes up 0.8 percent in 2017 and declines 0.4 percent in 2018. The monies freeze the guaranteed per pupil SEEK level at $3,981 from 2016 through 2018. That would make this funding 12 percent below 2008 dollars once inflation is taken into account (see graph below). In a recent report, Kentucky ranked sixth-worst among states in cuts to its core formula funding with a 10.6 percent cut since 2008 3.

Budget Graph 2

Source: KCEP analysis of OSBD, BLS data.

The Learning and Results Services part of the education budget that includes pre-school, afterschool programs, textbooks, family resource centers and other services is cut substantially. This area (minus health insurance) is funded at a level 9.2 percent less in 2018 than it was in 2016’s original budget, and 13.2 percent less once inflation is taken into account. That’s a cut of $32 million.

The cuts in total General Fund dollars to a selection of other programs and agencies are included in the graph below (note these cuts differ somewhat from the across-the board percentages because added pension dollars are spread across agencies’ budgets). In some areas of government, cumulative budget cuts amount to over 30 percent since 2008 once inflation is taken into account.

Budget Table 1

Source: KCEP analysis of Office of the State Budget Director (OSBD), Bureau of Labor Statistics (BLS) data

  1. Dustin Pugel, “Diversion of Lottery Funds Undermines College Affordability,” Kentucky Center for Economic Policy, January 6, 2016,
  2. Michael Mitchell, et al., “Years of Cuts Threaten to Put College Out of Reach for More Students,” Center on Budget and Policy Priorities, May 13, 2015,
  3. Michael Leachman, et al., “Most States Have Cut School Funding, and Some Continue Cutting,” Center on Budget and Policy Priorities, January 25, 2016,

Pension Needs Far Exceed Likely Revenue Growth in 2017

The state needs to find $580 million more to make its actuarially required General Fund contributions to pension plans in the first year of the next budget, according to information shared with the Public Pension Oversight Board yesterday. But the state is currently expecting only $278 million in new General Fund revenue that same year — or less than half of what it needs for pensions alone — according to a recent draft estimate from the state’s Consensus Forecasting Group.

Presentations from the state budget director and retirement system officials show Kentucky will need $520 million more in order to fully fund the annual contribution to the teachers’ retirement system in 2017. The state stopped making the full required contributions in 2009 and the amount owed has since ballooned as payments were skipped and investment losses from the recession were fully felt.

In addition, the state will need to find $60 million more from the General Fund (and $108 million in total state dollars) in 2017 to make the full contribution to the Kentucky Employees’ Retirement System (KERS), according to the budget director (slightly different numbers were shared by legislative staff and KERS). That amount has increased in part because the system recently lowered its investment return assumption from 7.75 percent to 7.5 percent. A recent analysis of the system actually predicted an even lower rate of return (6.9 percent), meaning the $60 million extra contribution may not be enough. It’s certainly not enough to keep the funded ratio of the system from declining over the next ten years.

As shown in the graph below, the preliminary forecast for revenue growth shows only $278 million in new revenue for 2017. The state currently also expects to have some money in the rainy day fund — roughly $400 million by the end of this budget year if the forecast holds — though that makes for a still-small rainy day fund according to what experts say is needed to prepare for recessions.

Given the size of Kentucky’s pension liability, the problems with our tax system and the needs in other areas of the budget, we won’t be able to grow our way out of this problem. We need tax reform that fairly raises more revenue in order to meet our obligations to teachers and employees while also better funding our schools, health and other critical services.

general fund revenue

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

Year-End Revenues Highlight Importance of Individual Income Tax

Kentucky ended its budget year with General Fund revenues $165.4 million more than anticipated, equaling growth of 5.3 percent from the year before. The individual income tax is the main source of this bit of good news because of its ability to generate revenue from wealthier individuals whose incomes have soared in recent years.

For the year, individual income tax receipts grew 8.5 percent compared to 2014, meaning all other revenue grew by only 3.2 percent. Sixty-three percent of total net new revenue for the year was from the individual income tax. Income tax receipts were particularly high in April, when the state collected $535 million, or 39.5 percent more, in income taxes than it had the year before. This “April surprise” wasn’t unique to Kentucky, as almost all states with income taxes saw huge growth that month.

Capital gains taxes key to growth

In addition to encouraging growth in the Kentucky economy overall, a central explanation for the extra income tax revenues is likely a surge in capital gains taxes, or income taxes paid on growth in the value of assets, like stocks, when they are sold. The stock market was particularly strong during tax year 2014 (which benefits this year’s state budget), with average annual growth in the S&P 500 of 17.5 percent. Also, capital gains taxes were weak last year because of a federal tax law change that encouraged people to sell capital gains at the end of the prior year rather than hold them longer. Weak growth last year made for a lower bar to hop over this year.

Capital gains taxes are disproportionately paid by wealthy people—in Kentucky about two-thirds of capital gains are claimed by those with more than half a million dollars in income. And those same wealthy individuals have seen their incomes rise rapidly in recent years, while others’ wages have sagged. The highest-earning 1 percent of Kentuckians captured 38 percent of state income growth in the first 3 years of recovery from the Great Recession.

This year’s receipts are a reminder of the importance of income taxes in an era of rapidly climbing inequality. In fact, Kentucky should be doing even more to ensure wealthy individuals pay their fair share of taxes. The richest one percent in Kentucky pay only six percent of their income in state and local taxes, compared to nearly 11 percent of income for Kentuckians in the middle.

One of the many reasons for that inequity is that we never tax capital gains made on assets that are held by an individual until death, meaning a loss of about $78 million a year in revenue. And we allow unlimited deductions against individual income taxes no matter how high a person’s income, even while a growing number of states limit deductions and some don’t allow them at all.

If Kentucky was less reliant on income taxes, we would’ve faced more of a budget challenge in this year and previous years. Since 2007, individual income tax revenue has grown by 3.9 percent on average each year compared to 1.9 percent growth in the sales tax and a decrease of 0.2 percent in all other sources (see graph below). Cutting income taxes and moving to a so-called consumption based tax system based more on sales taxes would mean big tax cuts for the rich and less revenue to pay pension liabilities and invest in education, health and other needs. Just ask Kansas.

income tax

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

Good revenue news today but not enough

The extra revenue this year is helpful, especially after last year’s $91 million shortfall. But while we dodged another shortfall this year, the fiscal outlook is still bleak. Although the economy is picking up, income taxes aren’t likely to continue growing at such a rapid pace and the stock market is flat so far in 2015. Extra revenues this year will go first toward payments to the SEEK education formula and drug treatment that were added to the budget this session, necessary governmental expenses like natural disasters and the state’s rainy day fund, which contains an amount equal to only 1.4 percent of the budget—far less than the 15 percent that many experts say is needed.

The latest interim forecast projects revenue growth in the first two quarters of next year to be only around 2.7 percent. And the state faces major funding needs, including the necessity of putting more money into its underfunded pension systems and filling funding gaps all across the budget.

Today is a moment of relief in an otherwise troubling picture that will improve only through tax reform that ends exemptions and loopholes to raise more revenue.

KCEP Seeks Research and Policy Associate

The Kentucky Center for Economic Policy (KCEP) seeks to hire a research and policy associate. This new position will be responsible for work advancing effective programs, policies and strategies aimed at reducing poverty in the Commonwealth. Successful applicants will bring experience, education and interest in analyzing policy issues and working with a wide range of partners to advocate for positive policy change.

See more about the position here.

Developing the Healthcare Workforce: Growing Need Is an Opportunity for Kentucky

report cover imageThe healthcare landscape is changing dramatically in ways that increase workforce needs. Greater numbers of people having access to healthcare through the Affordable Care Act (ACA) and an aging population are major drivers. In addition, other provisions of the ACA—such as cost-reduction imperatives and a focus on improved outcomes—are beginning to change how healthcare is delivered. These changes mean a big shift in healthcare workforce needs, including growth in healthcare jobs that require less than a bachelor’s degree. Occupations and industries related to healthcare are projected to continue having the fastest job growth over the next decade.

Developing the Healthcare Workforce

Who Stands to Benefit from Louisville’s New Minimum Wage

An estimated 45,000 workers in Louisville/Jefferson County who would otherwise make less than $9 an hour will have higher wages once the new metro government minimum wage ordinance—the first such local law in the South—is fully implemented in two and a half years.

In addition to the workers who will directly benefit, another 13,500 who make slightly above $9 an hour could also receive a small raise when wage scales are adjusted upward, based on the experience of minimum wage increases elsewhere.

Of the workers affected, an estimated 88 percent are at least 20 years old and more are over the age of 50 than are teenagers. Fifty-seven percent are women, 60 percent work full-time and 28 percent have a child in the household.

Fifty-nine percent of those workers with family income below the poverty line will benefit. Forty percent of affected workers are employed in either restaurants and food services or retail trade. See the table below for more detail.

Those workers benefitting will get smaller increases than the estimated 62,500 who would’ve received a raise from the original $10.10 proposal. But because the final ordinance also added a clause to adjust the minimum wage annually by growth in the consumer price index in the years after 2017, those workers affected are assured that their wages will not become stuck.

The final ordinance did not increase base pay for tipped workers from the current $2.13 an hour, where it has remained since 1991. The ordinance does require that tipped workers’ total wages including tips plus base pay be at least equal to the new local minimum wage. The original ordinance had increased the base pay for tipped workers to 45 percent of the new minimum wage, or $4.55 an hour for a $10.10 minimum wage.

louisvillebreakdownSource: KCEP analysis of 2013 American Community Survey data. See here for details on methodology.



Five Factors Behind Shrinking Revenue Growth in the Recovery

The rate of revenue growth in Kentucky’s General Fund has slowed down between 2011 and 2014, as seen in the graph below. That’s a big part of why Kentucky’s budget has been so tight even this far into the economic recovery.

New General Fund RevenueSource: KCEP analysis of Office of the State Budget Director data.

Here are five big reasons for this falling rate of growth:

Income taxes grew quickly at the beginning of the recovery.
Revenue from individual and corporate income taxes grew rapidly the first few years of the recovery. In part, that was because a bounce-back in the financial markets and income growth for those at the top translated into tax revenues. The individual income tax grew by $263 million or 8 percent in 2011, making up nearly half of all state revenue gains that year. Since then, individual income tax growth has been more modest, and a one-time capital gains tax issue shifted some income tax revenue from 2014 to 2013. Revenue from corporate income taxes and the limited liability entity tax (an alternative corporate income tax) has also grown rapidly in the recovery due to high corporate profits, but growth is beginning to taper off. Revenue grew 35 percent in 2011, 11 percent in 2012, 12 percent in 2013 and only 4 percent in 2014.

Sales taxes have been weak due to too few jobs and stagnant wages.
Since the sales tax is a regressive tax paid disproportionately by low- and middle-income Kentuckians, it depends heavily on their ability to spend. That’s been limited by continued high unemployment and weak wage growth for those who have jobs. Sales tax revenue has actually declined in three of the last six years. Growth was stronger in 2012, at 5.4 percent, in part because of one-time spending due to pent-up demand from the recession according to the Office of the State Budget Director. Limited taxation of services also impedes sales tax growth.

Tax amnesty inflated revenues in 2013.
To help balance the budget during weak revenue growth, the state put in place a tax amnesty program in 2013 that netted a total of $58.4 million for the General Fund. Tax amnesty allows those who owe back taxes to pay them without a penalty, meaning a one-time infusion of funds.

Coal severance tax revenues were strong in 2011 and 2012, but have since collapsed.
Coal severance tax revenues were strong early in the recovery due to high prices for eastern Kentucky coal and growth in western Kentucky coal production (power plants have begun buying western Kentucky coal again after installing scrubbers to address its high sulfur content). The tax reached all-time highs of $296 million in 2011 and $298 million in 2012. But by 2013, cheap and abundant natural gas was winning out over expensive-to-mine eastern Kentucky coal, and coal severance tax revenue fell to only $197 million by 2014.

Cigarette tax revenues have dropped substantially.
Kentucky raised its cigarette tax in the 2009 session in order to help address the budget shortfall, resulting in $108 million more in 2010 than had been raised in 2008. But by 2014, the state had lost $50 million of that new revenue as declining smoking rates led to lower tax collections. While a cigarette tax increase is a good way to help curb smoking, it’s not a sustainable approach to the state’s revenue problems.
2009 Increase in Cigarette TaxSource: KCEP analysis of Office of the State Budget Director data.

Moving forward, the combination of factors that led to strong revenue growth early in the recovery is unlikely to return. No one expects eastern Kentucky coal to regain its former strength, cigarette tax revenue will continue to decline, tax amnesty can’t be repeated and corporate profits are unlikely to continue at all-time highs. A stronger recovery would help the income tax and sales tax, but because of too many holes in the tax code Kentucky is likely to continue experiencing challenges until it takes on tax reform that raises more revenue.

Promoting Long-Term Investment in Appalachian Kentucky: A Permanent Coal Severance Tax Fund

Road through AppalachiansForecasts predict dramatic declines in eastern Kentucky coal production in future years, heightening the need for a strategy to transition the region’s economy. A permanent coal severance tax fund, as implemented in other natural resource-rich states, could help extend investment over the long-term and create a permanent financial asset for the region’s future.

Coal Severance Tax Brief.pdf