Next week, Gov. Matt Bevin will submit his first budget proposal to the Kentucky General Assembly. By a quirk in our state constitution, this tremendous responsibility will come only seven weeks after his inauguration.
The budget is Kentucky's most important policy document. It's as clear a statement you can find of our values as Kentuckians and a measure of our commitment to creating a strong commonwealth.
In recent years, the legislature has deeply cut investments in education, health, public protection and other areas needed to build thriving communities. Despite an improving economy, we still lack the resources to reinvest because of growing long-term liabilities and an unwillingness to close the holes in our tax code.
Given where Kentucky stands today, here are three key questions about the budget the governor will propose:
Will it include the full funding needed to pay down our pension liabilities, and how?
Kentucky has dug itself a hole in recent years because, in truth, we haven't been passing balanced budgets. We’ve been skipping full payments to our employee pension systems to avoid making deeper budget cuts in other areas or creating more revenue. But the decision to underfund pensions doesn’t just delay the problem — it makes it worse as the amount we owe compounds.
Gov. Bevin has indicated he takes this problem seriously and sees paying down the debt as a priority. As such, his budget proposal should include full funding of the actuarially required contributions to our teacher and state worker pension systems.
While doing so is a necessity, a practical question looms: How will we make those contributions without generating new revenue or slashing funding for our schools, health and other vital investments? The new dollars required for full payments to the state worker and teacher plans amount to more than $1.2 billion over the biennium. That's about half of what we spend on our entire system of higher education.
Will it include policy changes that introduce unnecessary new costs?
With reinvestment needed in so many important areas of the budget, we should avoid policy changes that create preventable new costs. Yet some of the governor's positions and recent statements suggest priorities that could add expenses even while introducing inferior approaches.
For example, shutting down Kynect — a system that is considered a national model — and transferring Kentuckians to the federal health insurance exchange will cost $23 million in technology costs alone, according to the Kynect executive director. Similarly, the idea of closing the existing pension plans and moving employees to a 401k plan will mean major new transition costs over the next few decades for a plan that would result in a less secure retirement for workers.
What will be said or included about Kentucky’s tax system?
As soon as possible, Kentucky must get its fiscal house in order by cleaning up the tax code so we can invest more in the things that work. So far, neither the governor nor legislative leaders have called for tax reform this session. But there already have been 30 bills introduced to create new tax breaks, and the governor has said he wants to eliminate the inheritance tax and the tax on business inventory.
Decisions to give new tax breaks year after year are what have gotten us into our budget situation. Kentucky can't afford more giveaways, especially to the wealthy and large corporations.
It’s the wealthiest 5 percent of Americans who receive about half of the value of all inheritances. That’s who the winner would be if we eliminate the inheritance tax, which has been on Kentucky’s books since 1906. All Kentuckians would lose as we have to cut further the funding for our schools, universities, services for the most vulnerable or other areas.
Much more positively, the governor said in his campaign economic plan that he would “call for a significant reduction in the tax exemptions that in budget parlance are known as ‘tax expenditures.’” He noted that Kentucky spends nearly $10 billion in such giveaways while “there is little to no oversight of these favors being doled out.”
That’s the kind of plan that would get us on a better path. Starting the process now could mean a different conversation in two years: one focused not on which public systems must be weakened further, but on restoring the budget investments that can move the commonwealth forward.
Jason Bailey is executive director of the Kentucky Center for Economic Policy, www.kypolicy.org.
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