A month ago, Gov. Andy Beshear released his plan for the state to spend some $24 billion dollars over the next two years.
In the coming days, lawmakers in the House of Representatives will get their turn with the release of their budget proposal.
House Appropriations and Revenue Chair Steven Rudy (R-Paducah) says his committee members have reviewed all of the governor's recommendations with a "fine-toothed comb" as they draft their spending plan. This is the second biennial budget Republican majorities in the legislature will oversee, and Rudy says he has one goal in mind.
“We want to make the budget as painless as possible,” says Rudy.
Revenue Options
The first step in that process, according to Rudy, is to examine state revenues to see how much money lawmakers will have to spend over the next two years. The commonwealth has endured more than a decade of budget cuts and Rudy says without some "revenue enhancements" the state's financial hole could get even deeper.
“There’s currently 4.3 million Kentuckians sending in the second year of the biennium nearly $12 billion to the capitol to fund state government,” says Rudy, “and it's not enough. It’s never going to be enough.”
Beshear's plan proposed nearly $148 million in new revenues from a tax increase on tobacco products, taxing e-cigarettes and vaping products, legalizing sports betting, and increasing the entity tax on limited liability companies.
“Three of the four revenue measures were ideas proposed by our colleagues across the aisle,” says Rep. Joe Graviss (D-Versailles), a budget subcommittee member and a member of the Public Pension Oversight Board. “So I think [Beshear] did a good job of trying to bring in both sides.”
But Rudy says lawmakers may not be willing to hit smokers again after raising the cigarette tax by 50 cents in 2018. He also says he's heard some pushback on boosting the entity tax on limited liability small businesses from $175 to $225 a year.
The governor also called for sweeping some $288 million in excess revenues from other state accounts into the General Fund. These sweeps have become a common practice among governors and lawmakers looking for more money to spend. Graviss says Beshear has proposed less in funds transfers than some of his predecessors.
But Rudy argues that’s still a problem. He says that using one-time money from funds transfers to pay for recurring costs leads to a structurally imbalanced budget, which bond ratings agencies tend to dislike.
Graviss says there's a simple solution to that problem.
“If we could grow our economy more and have more revenue, we wouldn't have to have so many fund transfers,” says Graviss.
In the meantime, the House is already considering bipartisan proposals to allow sports betting, to impose an excise tax on vaping products, and to examine tax giveaways offered by the state.
“There are currently about $8 billion per year in tax expenditures,” says Rep. James Tipton, (R) Taylorsville, member of the House Appropriations and Revenue Committee. “These are things like tax credits, these are exemptions when you purchase food you’re exempted from paying sales tax, prescription medicine, so it’s a whole a combination of different things.”
Tipton's House Bill 413 would create a Tax Expenditure Oversight Board to conduct annual reviews of exemptions, some of which have been on the books for years.
“Is it something that’s still worthwhile to the commonwealth?” asks Tipton. “If it is, it’s something we may need to keep. If it’s not, we may need to take a look at eliminating that particular tax expenditure.”
A Democratic tax plan takes a more comprehensive approach to revenue. House Bill 416, sponsored by Rep. Lisa Willner of Louisville, proposes a range of changes including applying the sales tax to luxury items not currently taxed and eliminating the flat tax rate approved by the Republican majorities in 2018.
“A flat tax across everyone regardless of income isn't equitable and isn't fair,” says Rep. Angie Hatton, (D-Whitesburg), House Minority Whip and budget committee member. “Rep. Willner's bill would raise, I think, $1 billion and it would just be by affecting the top 20 percent of the wealthiest Kentuckians.”
The measure likely won’t go far in the Republican-dominated legislature. Plus Rudy says lawmakers don't have "the bandwidth" this session to tackle a comprehensive tax measure proposed by either side.
Pay Raises for Teachers and Public Workers
Beshear's budget includes a 1 percent pay raise for all state employees and a $2,000 hike for classroom teachers. Tipton takes a different approach to pay increases. His House Bill 143 would strike an existing statutory provision that calls for an annual 5 percent pay raise for state employees, which Tipton says lawmakers have overridden for nearly two decades.
Instead, state workers would get an annual cost of living adjustment based on the average of the consumer price index over the previous two years. Using current numbers, Tipton says state employees would get a 2.25 percent pay raise.
“I had a group of state employees come to me and ask me to file this bill because they understand that going forward the 5 percent number is not sustainable,” says Tipton. “So we were trying to get a number that would be more realistic.”
Tipton adds that other statutes say that any pay raise that executive branch employees get should also go to legislative and judicial branch employees as well as public school teachers, so that could override Beshear's plan for a flat $2,000 pay hike for educators. But that still requires having the money to do it, says Tipton.
Rudy says lawmakers have concerns about how the governor's across-the-board increase for teachers would actually be implemented. Legislators also want to provide raises for other school staff like bus drivers and lunchroom workers.
Giving public employees and teachers a much-needed pay raise will also help the state's ailing pension plans, according to Graviss.
“Payroll growth is the biggest driver to our [actuarial] assumptions,” says Graviss. “As your pay rate goes up, so does your contribution to pension system.”
“That’s one of the reasons that our pension system is so underfunded,” says Hatton. “We had counted on there being raises for public employees and there weren’t.”
Pension Issues
Lawmakers are also considering several pension-related measures that will have budget impacts. One bill would change pension payments by the state from a percentage of payroll to so-called level-dollar funding, whereby the actual pension liabilities are paid of in 27 annual installments of the same amount.
Tipton also wants to provide financial backups to quasi-governmental agencies like health departments, mental health centers, and state universities and community colleges that have faced dramatically escalating pension costs following the implementation of more conservative actuarial assumptions.
Beshear's plan froze the employer contribution payment at 67.4 percent of payroll instead of the 93 percent rate they could face. Hatton says the governor also allocates additional funds to help health departments and mental health centers pay their employee pension obligations.
Another pension change promoted by Tipton would eventually close the Legislators' Retirement Plan and move all lawmakers into the Kentucky Employees Retirement System non-hazardous plan. Another provision of House Bill 270 would prevent lawmakers who take jobs in other parts of state government from using those higher pay scales to enlarge their pension benefits.
Over the past two budget cycles, appropriations for the actuarially required contributions (ARC) to the retirement systems have increased from about $1 billion to more than $3 billion, according to Tipton. Rudy says that number is likely to increase even more in the future, which will continue to make it harder for lawmakers to fund other budget priorities.
“We can go back to old days of underfunding them, and we’ll have enough money to do a lot of things, but that is not fiscally responsible,” says Rudy.
“Both parties are to blame [for underfunding] and we have certainly learned our lesson, and I think both parties are committed to fully fund the ARC,” says Hatton.
Graviss says pension plan managers may be willing to revisit the actuarial assumptions in the future if the asset base in the systems continues to grow. He says that could help decrease the required contributions in the future.
“As long as we pay the full ARC, the light at end of the tunnel is very visible and it gets brighter every year we pay that ARC,” says Graviss. “In 24 to 27 years, we're out of the woods.”
But Rudy says that assumes no financial crises or recessions in the future. He contends lawmakers may still have to consider structural changes to pension benefits to help ease the financial burden on the state.
Other Budget Options
Pensions aren’t the only item consuming vast amounts of tax dollars.
“We have got to do something meaningful with criminal justice reform,” says Hatton. “That’s the other part that is eating up our budget, to cage Kentuckians.”
In recent sessions lawmakers have discussed a range of reforms that could reduce prison populations in the state. This year they are exploring ways to address the number of people held before trial because they can't afford to pay their bails.
“When you figure we’re spending $100 million more this year on extra prison beds, if we could whittle that away, that would go a long way to helping fund this Big Bold Ask,” says Graviss.
That Big Bold Ask is a request from the Prichard Committee for Academic Excellence for the state to spend an additional $1 billion on public education over the next six years. Republican leadership say education is a priority for them, but they haven't hinted at what funding options they might propose.
Gov. Beshear asked for a 1 percent increase to per-pupil funding for public schools, as well as money for textbooks, student transportation, and school security measures. He also proposed a 1 percent increase to higher education.
Lawmakers could also give cash-strapped cities and counties more options for raising local revenues. House Bill 470 would allow any community to levy a restaurant tax of up to 3 percent. House Bill 475, which has broad bipartisan support, would amend the state constitution to give the General Assembly more flexibility in allowing local taxes.
“Section 181 of our constitution gives the General Assembly the direction of what local taxes can be levied,” says Rudy. “We have the ability to allow locals to only do it a certain way.”
With municipalities facing their own budget pressures, from pension payments to schools to infrastructure, Hatton says more flexibility on taxation is vital.
“We have shifted more and more and more burdens of the costs over to our counties, and we’re overburdening them, especially in rural counties,” says Hatton. “We need to give them the ability to set their own tax rates.”
