State lawmakers and the governor are giving dire warnings of what’s coming in the next two-year state budget. In recent press reports, they have called the budget “brutal,” with officials claiming an unprecedented $1 billion gap between revenues and expenses.
We’re now careening toward drastic budget cuts to fill that gap and are told such cuts are an inevitable reckoning. Decision makers claim it’s all due to the size of our pension liabilities — a penance for Kentucky’s sins of the past.
While there is no question pension funding has been a problem, some are hyping a “chicken little” story on pensions to build pressure for benefit cuts. In reality, our pension obligations are owed over many decades and we have time to nurse the plans to better health. And while there is no question our budget needs are dire, the resources to meet them are not fixed in stone — we can find new revenues. It’s possible to create a responsible budget that both targets added contributions to pensions where truly needed and better protects the commonwealth’s other crucial investments.
Here are two steps to a better budget:
- Don’t Trigger Exorbitant Hike in Pension Contributions
Everyone knows Kentucky’s pension plans are poorly funded compared to other states due to decisions made over the last couple of decades to not fully fund them. What’s less understood is how much progress we’ve made in the last few years to correct that problem.
Kentucky began making what’s called the full actuarially required contribution (ARC) to the Kentucky Employees Retirement System in 2015, and contributed an amount above the ARC in 2017 and 2018. We finally got on track to paying the ARC for the teachers’ plan just in 2017.
As new year-end reports of the pension systems show, these payments are getting the plans on the path to better health. We’re finally seeing their assets grow again. Over time, this approach will build the cushion needed to safeguard the benefits owed our public employees and teachers.
Additional monies are needed for pensions in the next budget to stay on track, but only in specially targeted amounts. However, counterproductive pension changes like those proposed last fall would trigger huge additional contributions. Especially expensive ideas are closing the pension plans to new members in favor of 401k-type plans and requiring what is called level dollar contributions to all plans (as opposed to the graduated payment schedule used by almost all plans around the country).
Abandoning those proposals will close roughly $500 million of the coming budget gap.
- Generate New Revenue
Kentucky’s revenue fails to keep up with growth in the economy due to too many loopholes and exemptions. We haven’t addressed that problem in decades, and doing so has never been more important.
There are many ways to fairly raise new revenue. My organization laid out 50 options in a recent report, and lawmakers in the House have introduced a plan that draws on the best ideas from the 2012 Blue Ribbon Commission.
It’s an especially a good time to look at generating new revenue because of the massive windfall coming to the wealthiest Kentuckians from the federal tax cuts that just became law. The richest 20 percent are set to receive a phenomenal $2.1 billion from the new tax cuts in 2019. The richest 1 percent of Kentuckians, who make on average $1.3 million a year, will collect $781 million of those cuts alone.
These giveaways were not previously expected, and those at the top already pay a smaller share of their income in state and local taxes than do the rest of Kentuckians. We could easily divert a portion of these tax cuts to Kentucky’s budget, end other loopholes and make changes that would add up to the other $500 million in the budget gap we face.
Without taking the steps outlined above, we face a train wreck in the next state budget. Kentucky’s problems are serious enough — let’s not turn them into a disaster of our own making.
This column originally ran in the Lexington Herald-Leader on Jan. 9, 2018. It also ran on Insider Louisville on Jan. 9, 2018. It ran in the Lane Report on Jan. 10, 2018. It ran in the Courier-Journal on Jan. 12, 2018.