KY Policy Blog

Kentucky Not Prepared for Next Recession

By Ashley Spalding
March 23, 2020

Amid the spread of COVID-19 and resulting business closures and layoffs, a recession is under way and could be particularly harmful in Kentucky due to the state’s failure to adequately prepare. Kentucky is among the 12 states least prepared for America’s next recession, according to a new report from the Center on Budget and Policy Priorities.

Kentuckians with low incomes and people of color are especially at risk of COVID-19, job losses, wage cuts, lapses in health care coverage and other resulting hardships. As a result, state responses – in addition to the essential federal ones – will be critical in the weeks and months ahead.

According to the report, people in states with inadequate budget reserves, weak unemployment insurance systems, relatively inaccessible Medicaid programs and/or unaffordable public higher education systems are particularly likely to struggle during the next recession.

Kentucky ranks in the bottom 10 for two out of four of these measures of recession preparedness: ensuring there are adequate reserves in the state’s rainy day fund and providing affordable public colleges and universities. Kentucky ranks poorly in terms of its unemployment insurance (UI) system as well, though pending state action on Senate Bill 150 (SB 150) as amended by committee substitute – an emergency response to the COVID-19 pandemic that will allow more Kentuckians to receive unemployment insurance benefits – would help.

Inadequate reserves in the “rainy day fund”

States generally build up reserves in good times to prepare for recessions and avoid cuts to essential services. State reserves will be particularly important as the economic downturn results in less state revenue and as expenses go up for programs like Medicaid.

However, Kentucky has one of the lowest Budget Reserve Trust Funds (often called “rainy day funds”) in the nation, at 3% of General Fund Expenditures in fiscal year 2020. The median state rainy day fund across the country was at 11.1% as of 2018. And according to the Center on Budget and Policy Priorities report, states should aim for reserves equaling 15% or more of their budgets — as 14 states currently do. According to an economic “stress testing” analysis by Moody’s Analytics, Kentucky ranks 48th among states when it comes to rainy day fund preparedness.

During economic expansions, states advisably replenish their rainy day funds. However, over much of the last decade, Kentucky has too often chosen tax cuts for corporations and the wealthy instead of restoring deep budget cuts stemming from the Great Recession and increasing the rainy day fund balance.

Weak unemployment insurance system

Having a robust UI system is crucial during recessions because it helps individuals who have lost jobs (or in states with important “work sharing” programs, those who have had hours cut back) to afford basic needs. States’ UI systems vary considerably due to their discretion over benefit levels, eligibility rules, tax levels and other program aspects.

Kentucky’s UI program is not as strong as it needs to be, ranking 36th in the nation in the share of people who are jobless who actually receive benefits – the “recipiency rate.” In addition, Kentucky has not enacted any of seven modernization policies recommended by experts for UI including expanding the alternative base period (ABP), which 41 states have already done.

Currently in Kentucky, to determine if an unemployed worker has earned enough to qualify for UI benefits, their earnings from the first four of the previous five quarters of work (prior to filing for benefits) are considered. This leaves out many part-time, low-wage and seasonal workers who may have had higher earnings in the previous quarter (the “lag quarter”), or the quarter in which they applied (the “filing quarter”) than earlier in the year. By one estimate, not having an ABP leaves out 1 in 5 workers, but adopting it only increases the overall UI payouts by 4-6%. As restaurants and bars close, and as a slowing economy reduces seasonal work like construction, adopting an ABP is a critical improvement needed for Kentucky’s UI program.

SB 150 would give the Governor authority to use administrative actions to adopt the ABP and work sharing along with waiving work searching requirements and the seven-day waiting period for benefits, among other ways to support workers.

Barriers to health coverage through Medicaid and KCHIP

During an economic decline, more people must rely on Medicaid and/or the Children’s Health Insurance Program (CHIP and in Kentucky, KCHIP) due to the loss of their employer health coverage. States should make enrolling in Medicaid and CHIP as simple as possible, so people can continue to receive needed health care services and avoid becoming uninsured.

Compared to other states, Kentucky has a relatively accessible Medicaid program thanks to the Medicaid expansion and two federal court rejections of the Bevin administration’s attempts to add work reporting requirements as well as Governor Beshear’s recent rescission of the proposed requirements. However, the report notes than Kentucky does have barriers in place for accessing Medicaid needing removed: disruptions in coverage for children instead of 12-months continuous eligibility for KCHIP, and cost sharing for non-disabled adults (though, co-pays have recently been made optional by an emergency regulation related to the COVID-19 pandemic). Cost sharing, even when the amount required is very small, can keep people from accessing care and has a negative effect on health outcomes. These barriers are even harder to overcome during a recession, when household incomes are lower.

Unaffordable colleges and universities

People enroll in colleges and universities to boost their skills and training when the economy is weak, helping them and state economies through increased productivity in the long term. Yet states vary considerably in how much they invest in higher education.

Kentucky’s investment in its public community colleges and universities has been declining since the last recession, a 35% cut once inflation is taken into account, which has led higher education institutions to raise tuition in order to make up for some of their losses — shifting higher education costs from the state to students.

These rising costs make up a growing share of Kentuckians’ income. A report out last year ranked the state 8th worst in college affordability, measured as the average net price at a 4-year public university as a share of median household income — which in Kentucky is 30%. Kentucky was one of 17 states in 2017 where black households would need to spend at least 40% of their incomes to get a degree. The net price represented 34% of Hispanic/Latino median household incomes compared to 29% for white households.

As described, Kentucky can improve access to Medicaid and UI before the recession reaches its depths. In the longer term, raising revenue through cleaning up tax breaks would allow us to reinvest in higher education and other critical public services.

But in the current crisis, Kentucky and other states will need federal aid to keep essential functions of government running, respond adequately to COVID-19, meet the needs of people across the commonwealth and prevent further harm to the economy. Kentucky will receive some assistance in paying for Medicaid in the Families First Act that has passed Congress, but needs much more aggressive aid in the next package.

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