The Focus Factor – July 2011

By wmadministrator

Changing the focus in Frankfort is a challenge. But it’s possible when a compelling argument is made based on documented research reinforced with recommendations for practical solutions.

That, in brief, has been the impact the “Leaky Bucket,” the Kentucky Chamber’s 2009 study that found spending on corrections, Medicaid and public employee health insurance to be growing at a faster rate than the overall state budget and Kentucky’s economy. The alarming trend had a disturbing bottom line: More money for the unsustainable “leaks” in the state revenue bucket meant a diminishing commitment to education – the key investment the state can make in its future.

Since the report’s release, Kentucky’s elected leaders have made progress in addressing unsustainable spending. In addition, smarter spending has become a bigger part of the conversation about Kentucky’s budget challenges. Yet, no matter how much revenue the state collects, the bucket will continue to leak until the areas of unsustainable spending are addressed.

Our latest update on developments since the initial report is called “Building a Stronger Bucket.” It details such progress as:

• Legislative action to reduce the annual growth in spending on public employee health insurance by almost half in the 2010-12 biennium

• Corrections reforms projected to generate $422 million in gross savings over 10 years, with $204 million of that to be reinvested in programs to slow the growth in Kentucky’s prison population

• Expanded managed care to contain escalating cost increases in the state’s Medicaid program

The update notes that the state faces significant challenges in curtailing the skyrocketing spending increases that undermine prospects for economic growth.

A compelling case for the need to address spending was made in March when Moody’s Investors Service downgraded its rating on Kentucky bonds to AA2 and maintained a “negative outlook” for Kentucky. Moody’s noted Kentucky’s “significant fiscal stress related to the economic downturn, a large and growing unfunded pension liability and a trend of reliance on non-recurring budget balancing measures.” Moody’s action followed that of Fitch Ratings, which downgraded Kentucky from “stable” to “negative,” indicating concerns about the state’s financial direction.

Kentucky’s pension performance also continues to be of great concern, with a study by the Pew Center on the States finding the state’s system to be funded at only 58 percent of its liabilities compared to a national average of 78 percent in fiscal year 2009.

If Kentucky is to get and keep its financial house in order, it needs to address leaks in state spending and follow disciplined spending principles. Toward that end, the Kentucky Chamber encourages state policymakers to adopt the following guidelines for state spending:

• The size of the state General Fund should be maintained within 6 percent or less of the gross state product. For nearly two decades the average has been between 5 percent and 6 percent of GSP, dating to the 1990 passage of the state’s last broad-based tax increase to support the Kentucky Education Reform Act. (The contracting economy resulted in the General Fund exceeding 6 percent of GSP in 2009.)

• Limit borrowing costs to 6 percent of the state budget. Spending for payments on state debt (supported by a state appropriation) should be held to 6 percent of the General Fund. This will provide credit rating agencies with a basis on which to evaluate the state’s fiscal discipline and diminish the extent to which higher debt payments reduce education funding.

• Adopt a five-year plan to spend only recurring revenues for recurring obligations. If non-recurring revenues are available, they should be spent for purposes that do not have long-term obligations.

• Prioritize spending on areas that invest in the future (e.g., education and economic development), ensure that more education funds are spent to improve student performance, and contain spending on programs that have had unsustainable growth (e.g., corrections and escalating pension and healthcare costs).

• Eliminate the practice of appropriating all anticipated revenue during every budget cycle and re-establish a “rainy day fund” to ensure money is available to meet the state’s unanticipated emergency needs.

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