State Budget

Published in the Lexington Herald-Leader, August 22, 2011.

Op-Ed: Focus on Spending Cuts Ignores Revenue Problem

By Jason Bailey

Kentucky is in great need of a substantive conversation about how to better fund essential services in its state budget.

But by ignoring the state’s revenue problems, the Kentucky Chamber of Commerce’s “Leaky Bucket” reports offer a one-dimensional and potentially harmful view of the state budget picture.

It is well-documented that Kentucky has problems with its tax system that prevent revenue from keeping up with the growing and changing economy. Simply put, our tax code is outdated and has too many holes.

Over time, the resulting gap between Kentucky’s needs and the resources we have to meet them keeps growing. If state General Fund revenue—Kentucky’s main pot of funding—was able to perform now as it did in the 1990s Kentucky would have over a billion more dollars a year to cope with the economic downturn and avoid deep cuts to services.

Without tax reform, the gap will continue to grow. The latest Consensus Forecasting Group estimate predicts an overall decline in revenue as a share of the Kentucky economy over the next four years.

Yet the Leaky Bucket reports overlook the state’s revenue issues to focus exclusively on cutting spending. The problem is that if the pie is getting continually smaller, efforts to divide it differently have diminishing effect. And while some ways to save money make good sense, others can harm Kentucky’s economy, health and quality of life.

The Chamber calls for reducing cost growth in Medicaid, public employee health benefits and the state’s prison system, and putting in place new budget mechanisms.

The first two of these challenges stem from broader and more fundamental problems with the American health care system that affect the private sector just as well as the public sector. All health care costs are growing too fast, and nationwide private insurance costs are growing at a faster rate than Medicaid once health differences are taken into account. While the Chamber points out that Kentucky’s Medicaid and public employee health care costs have grown rapidly over the past twelve years, in fact the cost of the state’s tax break for private health insurance has grown just as fast.

What is needed is additional system-wide health reform to put more emphasis on prevention of costly illnesses, coordination of care by doctors and other caregivers, reduction in administrative costs and more appropriate use of medical technologies.

In the meantime, we cannot simply blame Medicaid and public employees for the health system’s cost problems and make unreasonable cuts to benefits. Doing so runs the risk of further reducing Kentucky’s already poor health status. And in the case of public workers, we could hinder our ability to attract the qualified teachers, police officers and other public servants that we need.

On its third issue, the Chamber is right that we need to reduce prison costs by locking fewer people up for non-violent crimes and drug offenses. However, it’s important to note that potential budget savings from these efforts are limited because corrections make up only five percent of the budget, and a portion of the dollars saved must be reinvested in prevention efforts like drug treatment.

The Chamber’s recommendation that the state rebuild its rainy day fund is sound, as the fund did not have adequate resources going into the recession. The state should strive for reserves equal to 15 percent of annual spending rather than the five percent outlined in current statutes.

But the Chamber’s proposals for arbitrary limits on the state budget are without justification, and are dangerous. And the claim that Kentucky should prioritize education and economic development over all other areas ignores the range of investments that are important in a modern, complex economy and in a state with many needs. Investment in education is essential, but efforts that improve health and well-being, strengthen the state’s infrastructure, protect the environment and more are equally key to making Kentucky a great place to live and work.

Kentucky cannot just cut its way to greater prosperity and a higher quality of life. While smart spending decisions are a necessary part of good government, so is making sure the resources are there to pay for the investments we already have--and the ones we'll need for the future.

Jason Bailey is director of the Kentucky Center for Economic Policy, www.kypolicy.org.

   
Published in the Lexington Herald-Leader

http://www.kentucky.com/2011/03/18/1675526/kentucky-must-invest-reform-tax.html

Op-Ed: Kentucky Must Invest, Reform Tax Code to Progress

By Jason Bailey

Lawmakers left Frankfort last week without agreement on closing the hole in this year’s Medicaid budget, and are convening this week to give it another try. A point of contention between the chambers has been whether to include additional across-the-board cuts to a range of state services.           

The House and Governor Beshear argue that more cuts aren’t necessary, while the Senate claims that cuts now will prevent bigger cuts later.           

But before the legislature makes any more cuts—now or next year—it should consider that they would come on top of deep budget reductions already made over the last few years. Those reductions are limiting Kentucky’s capacity to cope through the downturn and forestalling our ability to move forward as a state.           

The cuts the Senate proposed added to previous reductions would mean General Fund support for many areas would be 10 to 30 percent less in 2012 than originally appropriated in 2008. Agencies as diverse as career and technical education, the Attorney General’s office, Kentucky Educational Television, public health and the state police are already struggling with severe reductions.           

Universities and community colleges would receive $142 million less than in 2008 under the Senate plan; the Support Education Excellence in Kentucky (SEEK) program of school funding would receive $69 million less; and the Cabinet for Health and Family Services’ Department for Community-Based Services $35 million less.           

These reductions in funding over a four year period have come while the cost of services continues to grow (especially because of health care inflation) and at the same time that the demand, eligibility and need for many services has increased substantially because of the economic downturn.           

Cuts would have been much more severe if it weren’t for the American Recovery and Reinvestment Act, which provided Kentucky with $3.4 billion over the years 2009-2011 to help plug budget gaps and address growing service needs. Recovery Act funds made up 42 percent of the state’s approach to closing the shortfall in the 2009-2010 budget, with 29 percent coming from budget cuts and the balance from one-time measures and cigarette and alcohol tax revenues.           

The Recovery Act money ends this summer while the economy still has a long way to go until it reaches full speed. Kentucky has 87,000 fewer jobs now than it did before the recession, and needs 131,000 more jobs once you take into account growth in the working-age population since the recession began. At current rates of growth, the nation’s unemployment rate won’t reach pre-recession levels until 2015 or later.           

That will mean continued revenue challenges and ongoing high demand for public services.           

To make matters worse, Kentucky faces two other well-known problems. First, recent budgets have been patched together using a range of measures that push off our problems. The current budget includes significant debt restructuring, the use of one-time money and the delay of the last payroll of fiscal year 2012 until fiscal year 2013.           

Second, Kentucky’s tax system continues to be in need of reform, but the legislature again chose to take no action this session. The only positive move was the passage of a resolution to study the effectiveness of the state’s economic development tax incentive programs, including asking what information should be collected to even begin understanding their impact.           

Meanwhile, the evidence of need for greater rather than less public investment continues to pile up. The task force on Transforming Education in Kentucky quietly released its final report during the session; it identified $270 million in needed new investments with an emphasis on early childhood education.           

And a new report by Gallup ranked Kentucky next-to-last, ahead of only West Virginia, in its 2010 well-being index. The index looks at emotional and physical health, access to basic needs and perception of quality of life.           

We have a long way to go in Kentucky. To make progress, our budget debate must move beyond Frankfort’s two main strategies in recent years: cut investments we need and delay facing our problems until another day. 

Jason Bailey is Director of the Kentucky Center for Economic Policy (KCEP). KCEP is on the web at www.kypolicy.org.