Tax Reform

Governor Bevin Calls for Responsible Spending in New Budget

Newly elected Kentucky Governor Matt Bevin used his State of the Commonwealth Budget Address to challenge Kentucky to do better in terms of responsible budgeting and be “the best version of ourself.” To his credit, the governor is wasting no time in confronting Kentucky’s budget problems, delivering an address with several proposals that will balance the budget, improve pension funding and set the state on a more sustainable fiscal path in the long term, all without raising taxes or borrowing more money.

Early in his address, Bevin rejected the proposal by some members of the Kentucky legislature that the state borrow money to address the budget deficit, stating, “We cannot borrow our way out of debt, nor will we try.” The governor also remarked that in order to pay off past obligations the state would need to do better than balancing to zero.

Bevin set the context for his budget proposal by referencing the fact that based on the budget forecast his administration was given a few months ago, the state faced a $500 million budget shortfall over the coming biennium. The governor clearly stated the budget would have to be prioritized. The governor’s budget calls for cuts of nine percent for many state agencies for the current and next two fiscal years, relative to the baseline of current spending. The 2016 fiscal year, overall, would see a 4.5 percent cut given that the fiscal year is already half over, to be followed by a nine percent cut for the next two fiscal years. These are not compounding reductions, rather they are an immediate and continuous reduction of nine percent from current spending levels for many state agencies.

However, many programs and other areas of spending would be exempt, including the Department of Veterans Affairs; the SEEK education funding formula, which is the primary funding mechanism for schools; Medicaid; state pension funds; and several other areas of state spending. In fact, according to the governor, the vast majority of state budget spending is being exempted. As such, the budget is only being cut 2.5 percent in absolute terms for the remainder of this fiscal year and the following two fiscal years. This means a $650 million reduction in baseline spending. Regarding the specifics of the cuts, the governor left that to his cabinet secretaries to decide based on their expertise.

In terms of pension reform, the governor acknowledged Kentucky has serious problems with underfunded pension plans. Bevin announced every pension system will be audited by an independent, outside auditor. While waiting for the results of these audits, the governor proposed $1.1 billion in new money to go to pensions systems in the upcoming biennium. However, this is only a short-term solution, and once the audits are completed, the governor will begin looking at long-term solutions to fix the underfunded pension systems in the state. The governor also proposed to set aside $1 billion for future pension contributions taken from any additional dollars that have accrued in other programs or been gained from settlements, dedicating them to the permanent fund to improve pension funding. This money would not be diverted and the governor asked the legislature to make it legally binding that the money could not be spent on anything else.

Bevin also insisted the state must invest in education, infrastructure and work force development. Money will be taken from the general budget and used to increase spending on elementary education to account for a projected increase in the number of students in the next two years. In regards to higher education, the governor will begin by providing all public universities in Kentucky with equal per pupil funding, which at this point would involve increasing funding to certain universities that are not receiving as much as they should. However, after that is accomplished, post-secondary dollars will be moved to outcome-based funding. This will mean about $1 billion will be thoughtfully allocated based on the results various public universities are achieving. This will be phased in and by 2020, all post-secondary funds will be allocated on an outcome-based system. Bevin also pledged 100 percent of all lottery dollars would go to education funding as originally intended, as opposed to being diverted to other areas of spending.

To address the loss of money in the road fund due to lower gasoline prices, the governor committed to using state funds to improve bridges, airports and other infrastructure. The budget also dedicates $100 million to be bonded as necessary for workforce development. The Governor believes that the money can be used to graduate more skilled workers in Kentucky.

The last major proposal in the Governor’s address had to do with health insurance. Governor Bevin reiterated he would shut down Kynect, the state’s health insurance exchange created after the Affordable Care Act was passed. Given the existence of the federal exchange, the governor sees this as redundant. The Kentucky exchange also could not sustain itself, having been heavily subsidized by federal and state dollars. This will not throw anyone off of their current health insurance, and during the next enrollment period, the citizens of Kentucky will be directed to the federal exchange. The governor also stated that closing down the exchange would cost far less than the $23 million some have estimated. Regarding Medicaid, the governor called for better means testing of Medicaid benefits to make sure the people receiving benefits actually need them. This should reduce the number of Kentuckians currently on Medicaid from the unsustainable 25-30 percent that the state now has. Bevin also stated he also looks forward to finding new ways to make Medicaid more affordable for Kentucky.

As he reached the end of his address, the governor decried “sweeping” in the budget, where funds collected for a stated purpose are diverted to other spending. According to the governor, this budget significantly reduces sweeping. Governor Bevin concluded by imploring the people of Kentucky to continue to send his administration ideas for how to improve the state.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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