Kentucky local governments are weathering a recession-induced “triple whammy” on their tax base that is creating revenue shortfalls and forcing difficult cutbacks. And the situation is going to worsen at least through the end of this year.
Past recessions typically affected local government little because it’s not dependent on consumer spending or business investment. However, the Great Recession – which technically ended the second half of calendar year 2009 – has hobbled all three legs of the fiscal stool upon which Kentucky local government rests: Occupational taxes, property taxes and insurance premium taxes all are down.
Local government revenues generally lag 18 to 24 months behind figures for the gross domestic product, which economists use to determine when recessions begin or end. It has been roughly 16 months since the U.S. financial crisis fully erupted, meaning Kentucky local governments are only just entering their greatest difficulties.
Occupational taxes constitute more than three-fourths of revenue for some local governments, and recessionary job losses mean less revenue. Kentucky unemployment went from 5.5 percent in December 2007 to 7.6 percent in December 2008, then to 10.7 percent in December 2009. It crested in October 2009 at 11.3 percent.
In December, 64,600 fewer Kentuckians were working 2009 than a year earlier, the U.S. Bureau of Labor Statistics reported. Manufacturing sustained the biggest hit last year, losing an estimated 21,800 jobs, according to the Kentucky Education and Workforce Development Cabinet.
The good news is the recession is over. U.S. Gross Domestic Product increased at a 5.9 percent rate in the fourth quarter of 2009. The bad news, however, is that so far it’s being called a “jobless recovery.”
Government cutting jobs, services
Declining revenues have forced midyear budget adjustments for local governments. Many city and county executives and finance directors across the commonwealth are reducing employees. The government sector ended 2009 with 3,600 fewer jobs than in 2008, even after regaining 700 jobs
in December.
The Lane Report sent fiscal questionnaires asking about budgets issues to seven of the commonwealth’s largest local governments: Louisville Metro, Lexington-Fayette, Daviess County, Warren County, Paducah, Boone County and Pike County. They told us revenues are down and that they’ve been making difficult operational cuts to keep budgets balanced – nearly all opted not to raise tax rates.
Louisville, the state’s largest local government, chopped its budget by $29 million midyear in fiscal 2009 (July 1, 2008-June 30, 2009), according to the office of Louisville Metro Mayor Jerry Abramson. The city expects another midyear cut of $12 million to keep its fiscal 2010 budget in balance – even though it cut 94 full-time jobs in the FY10 budget process.
In Lexington, Mayor Jim Newberry’s administration implemented a budget freeze midstream in FY09. It followed up with a $12.5 million expense reduction plan this year. Among the cost-cutting steps were 10-day furloughs for the mayor’s senior staff, delays in capital improvements, a hiring freeze including public safety positions and tighter oversight of fire station overtime.
Lexington-Fayette Urban County Government now expects to spend $267.7 million this fiscal year, which is down $23.4 million or nearly 8 percent from FY08. Its 2,890 workforce of full-time employees are 107 fewer than two years ago – and 161 below the 3,051 of FY07.
Louisville in FY09 closed Otter Creek Park and a firehouse, cut hours at libraries and community centers, and put capital projects on hold. The FY10 budget also cut 24 part-time metro government workers.
At $462.7 million, Louisville Metro’s FY10 budget is $22 million lower than two years earlier, a 4.5 percent drop. Its number of full-time equivalent employees is now 6,148, which is 206 fewer than in FY08.
Job cuts, no raises, projects delayed
Down the river in Owensboro, the administration of Daviess County Judge-Executive Reid Haire reports no midyear budget corrections, but this year’s $18.7 million budget cut all departments 5 percent, gives no employee raises, upped employee healthcare contributions, cut funding for outside agencies and denied an emergency requests from arts groups. Daviess did keep its number of full-time employees level; the 237 now is only one less than in FY08.
In Northern Kentucky, the administration of Boone County Judge-Executive Gary Moore reports difficult cost-cutting as it winnowed down the budget 10.5 percent from $41.9 million in FY08 to $37.5 million in FY10. It eliminated 10 percent of its full-time employee positions, which fell from 211 to 189 during the two-year period.
Boone County reported its most difficult decisions were eliminating occupied full-time jobs, halting replacement of equipment and vehicles, postponing capital and infrastructure projects, freezing staff pay and discontinuing investments in technology and training.
In Paducah, Mayor Bill Paxton’s administration actually adjusted budgets upward in FY09 and FY10 when the previous years’ books closed and the surplus fund account topped the city’s mandated 8 percent cap. That didn’t avert spending cuts, though – the city’s $28.6 million budget for FY10 is 8.3 percent less than the $31.2 million spent in FY08.
The administration’s FY10 operational efficiency plan required laying off 12 staffers and eliminating another 18 unfilled slots. In addition, Paducah officials told The Lane Report their most difficult decisions included two rounds of firefighter reductions and consolidations in FY09 of the Engineering and Public departments and the Finance and Human Resources departments.
In Bowling Green, the administration of Warren County Judge-Executive Michael Buchanan perhaps fared best among the local governments we surveyed. It listed only a hiring freeze among its difficult measures.
The FY10 budget is 7 percent below FY09, but state and federal grants made comparisons difficult. FY10’s $15.5 million spending is 3 percent higher than FY08 but 7 percent lower than FY07. Warren County does have a hiring freeze and its number of government workers is down 3 percent for the three-year period.
Pike County Judge-Executive Wayne Rutherford’s administration, which has gone through five midyear budget adjustments during the recession, reports that coal and mineral tax proceeds are down also. Pike County reported overall revenues are down by 13 percent from FY07 to FY10, when it expects county government spending to be $7.7 million.
The bottom later this year?
The National League of Cities forecasts the low point for cities will come sometime in calendar year 2011.
Joseph Coleman, manager of policy and research and of federal issues for the Kentucky League of Cities, agrees the worst is yet to come but thinks commonwealth local governments might be six months ahead of nationwide expectations.
“My hunch is it will be the middle of (calendar) 2010 before it bottoms out for (Kentucky) cities,” Coleman said.
He described the current recession as “a triple whammy” for local governments because all three main revenue sources – occupational, property and insurance premium taxes – are down at the same time, thanks to the housing bubble that helped precipitate the downturn. Recessions always mean fewer jobs and lower occupational tax dollars for cities and counties, he said, but housing’s fall took property values with it, whacking in property tax revenues, too.
Additionally, the depth of the Great Recession prompted households and businesses alike to look for ways to cut expenses, said Coleman, and led many to decide to reduce their insurance coverage for general liability, for cars, homes and buildings, and life and healthcare.
“Citizens are willing to take on a greater amount of risk to cut their premiums to lower their costs,” Coleman said.
Smaller local governments are enacted the same austerity measures Kentucky’s large cites and counties identified in their questionnaire responses to The Lane Report, according to Coleman.
Rural areas are experiencing the most difficulty, said Denny Nunnelly, executive director of the Kentucky Association of Counties.
“The main thing is jobs,” Nunnelly said. “We’ve got to get people back working.”
He expects FY11 to be another difficult year. His budget advice is to put capital projects off another year, remain in hunker-down mode.
The cost of borrowing money has risen 3 percentage points for local governments, Nunnelly said. There’s a lack of competition in the bond-insurance and letter-of-credit markets, he said. The bond insurers who remain “know it and they are just gouging us,” Nunnelly said.
Louisville, Lexington and Owensboro all cited debt service costs among their fastest rising expenses; Louisville and Owensboro ranked it No. 1. Most listed pension and healthcare costs, and governments with unionized workers cited contractual salary relationships as a fastest rising expenses.
KLC is getting questions from local governments on the impact of further cuts to worker benefits, including healthcare. Coleman expects more cuts in local government budgets as the June 30 end of FY10 nears.
The economic pain of the recession and lingering high unemployment make tax hikes less politically feasible, so cities and counties primarily are looking to cut expenditures further or draw down reserves.
“It’s ‘raining’ hard enough now to draw down those reserves,” Coleman said.
Like Coleman, Neil Hackworth, acting KLC director, expects Kentucky’s city and county officials to see quicker improvement than local governments elsewhere because Kentucky’s economy did not participate as much in real-estate sector excesses.
There will be some improvement, Hackworth said, but the bigger problem is jobs.
“Until that employment situation resolves, local government revenue will be down,” he said.
“It’s a very difficult time to impose taxes” currently, he said. “There are not a lot of options out there besides cuts.”
Hackworth does have urgent advise for Kentucky’s local government officials: Engage in serious planning. Determine local priorities and where the community wants to be positioned when the inevitable economic rebound comes and revenues are rising again.
Planning can be difficult to pursue when the community is complaining about layoffs and cuts in services, but remains crucial.
“Think about where you need to be when it ends,” Hackworth said. “We compete in a global economy – not just in your area.”
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