KY Policy Blog

Three Steps to a Better Budget this Session

By Jason Bailey
February 25, 2016

The General Assembly has less than two months to finalize the next two-year state budget. Although the governor’s budget rightly takes a big step toward fully funding our pension liabilities, taken as a whole his plan would send the state backwards by deeply slashing the systems Kentucky relies on for the well-being of its citizens.

We don’t need to make such a painful choice. Kentucky can have a budget this session that more aggressively pays down our debt while better protecting education, human services and other vital investments needed to create thriving communities in our state.

Here are three steps to improve on what the governor proposed:

Don’t leave so much money sitting idle.
At the same time the governor’s budget makes cuts of 9 percent to many parts of government, the plan leaves over $1 billion idle and unspent. While it’s wise to put aside money in the state’s rainy day fund while the economy is growing (and spend it when recessions hit), the budget goes far beyond that principle. It adds $314 million to the rainy day fund (growing its balance to $524 million) and then transfers another $500 million from the state’s employee health insurance trust fund into a new “permanent fund” that has little definition in the budget.

While adding some money to the rainy day fund makes sense, we shouldn’t put $1 billion in limbo when there are such harmful cuts being proposed in the budget. And even though the budget goes a long way towards funding pension liabilities, it is still $397 million short of providing the full actuarially required funds to the teachers’ plan over the next two years.

Because the surplus in the health insurance fund exists because costs have been shifted to employees, any transfers from that fund should go only to pension funds (or for employee raises). Monies that can be responsibly transferred from that fund for pensions are better sent directly to the pension systems themselves where they can be invested for the long-term, rather than a new fund. Sending those dollars directly to pensions could free up some of the monies dedicated to these systems in the governor’s budget to help ease other budget cuts — while still putting as much or more money into those systems overall than what the governor proposed.

Reject new initiatives that lack development or are unwise.
The governor’s budget includes some new proposals that aren’t fully fleshed out or are unsubstantiated. For example, the budget includes $59 million over the biennium for a new workforce development scholarship that would divert lottery money from financial aid for low-income Kentuckians, as has become the recent habit of the legislature. But the new scholarship program doesn’t exist in statute and has no specific design or plan supporting it that is put forward in the budget. Likewise, the governor has proposed $100 million in bonds for buildings and equipment related to workforce development. But with such a need for affordable access to higher education and training, it’s hard to see the justification for such large capital spending in this area.

These ideas need further study before so much money is diverted to them, and could be looked at as part of a new workforce development task force proposed by resolutions in both legislative chambers.

Another example where dollars can be saved is the plan to shut down Kynect and move to the federal health insurance exchange. The state will incur an uncertain amount of costs associated with this transition. Because no state has shut down a working exchange we don‘t know yet what portion of the transition costs the federal government will pick up. It doesn’t make sense to spend new money to overhaul a program that is working well — and is in fact recognized as a national model — when other areas of the budget are being cut so deeply.

Take a more balanced approach by ending some tax breaks to generate new revenue.
The governor’s budget takes a one-sided approach to the state’s fiscal challenge by paying down liabilities through sacrificing important areas of the budget. But a more balanced approach would also reduce the tax expenditure side of the ledger, where the state spends billions of dollars each year in unexamined tax breaks. The legislature did just that the last time it increased its contribution to paying down pensions, in 2013, when it ended some tax breaks to generate additional revenue for those payments. That was in recognition that we can’t afford to undermine the investments we need to prosper in order to pay down our liabilities.

There’s no reason the General Assembly can’t do that this time. For example, Kentucky could raise $88 million by closing a handful of corporate tax loopholes or $104 million by ending a few sales tax breaks for luxury services, proposals that are included in House Bill 342. The legislature should also end the loophole that allows suburban mansion owners and developers to benefit from a tax break intended for working farms, as exposed by the Lexington Herald-Leader. Taking some action on tax breaks would better allow us to more aggressively pay down pension liabilities and put more money into our schools, higher education institutions, human services and other areas slated for deep cuts.

Even with these three steps, we’d still be facing a budget with harmful cuts and big challenges ahead. But we could lessen the pain through wiser use of public dollars. Creating a budget for Kentucky’s future would require an additional step: declaring that the next priority on the state’s agenda is a more aggressive effort to clean up the tax code so we can better invest in a stronger Commonwealth.

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