2016 Kentucky legislature to deal with ambitious new governor, same old money problems

Lawmakers return to state capitol in Frankfort on Tuesday for a 60-day session.
Lawmakers return to state capitol in Frankfort on Tuesday for a 60-day session. Staff file photo

Kentucky’s legislature returns to Frankfort on Tuesday for a 60-day session featuring an ambitious Republican governor who wants to shake up state government, a solidly Republican Senate that intends to help him and a House that almost has slipped from Democrats’ hands.

There will be partisan battles over charter schools, public pensions, abortion, voting rights for felons, educational spending, caps on lawsuit damages, a higher statewide minimum wage and mandatory workplace union dues.

Who wins these battles could depend on special elections held toward the end of the session to fill four vacant House seats. If Republicans win all four elections, there would be a 50-50 tie in the House, and it’s unclear who would control the chamber as it gives final passage to some of the most important legislation of the winter. The GOP has persuaded two House Democrats to switch parties in recent weeks, further narrowing the gap.

Whatever the uncertainties, one thing lawmakers are required by law to do before adjourning April 12 is pass a two-year state budget. That’s going to be hard enough.

State economists predict Kentucky can spend $10.6 billion in fiscal year 2017 and $10.8 billion in fiscal year 2018, up from $10.3 billion this year. While the extra money looks good, it won’t match the demand.

The roughly 400,000 Kentuckians who get health insurance through Medicaid because of the Affordable Care Act will cost the state about $250 million next year. The state Education Department wants $73 million a year to expand public preschools. The University of Kentucky will ask for $125 million in state bonds to renovate its older campus buildings. The retirement systems for state workers and school teachers are requesting several billion dollars in contributions.

And so forth, and so on, as officials who supervise prisons, parks, social workers and the rest of state government pile on their own budget requests following multiple rounds of spending cuts since the 2008 recession.

“We’re expecting $320 million in new revenue the first year, but we can very easily get to a figure of $850 million to $900 million in additional spending needed,” said Jason Bailey, executive director of the Kentucky Center for Economic Policy in Berea.

“Once you take into account the pension contributions we’re supposed to be making, this budget is just as bad, just as tight, as any we’ve faced,” Bailey said. “We need to stop having this conversation in Frankfort about how to cut the pie into more slices. Instead, we need to be talking about baking a larger pie. Even in a national economic recovery, our current tax code just isn’t collecting very much more.”

Most Frankfort politicians from both parties agree Kentucky’s tax code is outdated. Nine tax-reform committees between 1995 and 2013 advised Kentucky governors and legislatures on how to modernize the tax code in ways that better capture growth in a modern economy. Those reports are gathering dust on shelves throughout the Capitol.

“Everyone talks about it, but that’s it. Since I’ve been in the legislature, anyway, which has been 10 years, we’ve never taken a vote on a tax-reform package,” said House Minority Whip Jim DeCesare, R-Bowling Green.

Newly elected Gov. Matt Bevin says he wants to eliminate the state’s inventory and inheritance taxes, which will reduce state revenue by an estimated $55 million a year. Otherwise, Bevin says the budget proposal he presents to lawmakers on Jan. 26 won’t look radically different.

“Don’t expect dramatic things,” Bevin told the Kentucky Chamber of Commerce policy conference last month. “It will be simple. It will be simple on purpose. Because it will then afford us, through that simplicity, to get to the things that matter.”

One detail the governor has offered: There will be “outcome-based funding” in a Bevin budget that rewards public agencies for good behavior. For example, a university’s funding might be tied to its graduation rate or the quality of its STEM (Science, Technology, Engineering, Mathematics) education program, he said.

Nothing but painful choices

The state of Kentucky is responsible for three pension plans, the first for 122,000 educators at the Kentucky Teachers’ Retirement System; a second for 120,595 state workers at the Kentucky Retirement Systems; and a third for 2,379 state police, also at KRS.

All three plans are badly underfunded. Collectively, they’re expected to be $35 billion short of what they’ll need in coming years to pay the benefits promised to retirees. This is due to the decision of governors and legislatures for many years to contribute far less to the pension plans than actuarial advisers recommended. In 2015, for example, the state gave only 61 percent of $913 million recommended for KTRS.

The pension shortfall has moved ratings agencies to downgrade Kentucky’s bonds, essentially warning investors about the state’s ability to repay its debts, which drives up interest rates whenever the state borrows money.

Having kicked the can down the road this far, lawmakers face nothing but painful choices, said Jim Carroll, who co-founded the Facebook group Kentucky Government Retirees and closely monitors the state pension problem.

They can somehow find several billion dollars this winter to pay the full recommended contributions to the pension plans, plus extra money to start closing the gap. Or they can issue massive multibillion-dollar pension bonds, which means borrowing money for those contributions and hoping the principal and interest later can be paid off.

“What we’re asking for is very difficult. We understand that,” Carroll said. “But the alternative, if nothing is done during this biennium, is either insolvency for the pension plans or a pay-as-you-go model where every dollar coming into the retirement system from employee contributions just goes right back out the door as benefits for a retiree, with nothing left over to invest. And that isn’t a workable model for any length of time.”

There continues to be talk of legalizing casino gambling and dedicating a portion of the state’s new gambling revenue to pensions, but nobody has any solid numbers to show how that would work, Carroll said.

There also are persistent concerns around Frankfort that the budget might divert money from K-12 schools to cover at least part of the contribution to teachers’ pensions, though lawmakers dismiss that as rumor.

“I have not heard anything about any cuts to education to fund KTRS,” said Senate budget chairman Chris McDaniel, R-Taylor Mill. “Now, I will say that I think it’s important for local school districts to consider the impact of their decisions, like giving pay raises, on the liability of the pension system, which the entire commonwealth is responsible for. Going forward, I do think we might try to find a way to require that those local decisions come with some responsibility in terms of helping with employer contributions to the pension system.”

Bevin proposes to rebuild the system entirely. For future public employees, he wants to replace the state’s defined-benefits plans, which promise lifetime pensions, with defined-contribution plans, like a 401(k), which can run out of money if employees do not have enough saved. That limits the employer’s liability, Bevin says.

“We will have a defined-contribution plan for future hires,” Bevin told the Chamber of Commerce policy conference. “It has to happen. There is literally no financial way to do anything other than that.”

However, officials at KRS and KTRS say Bevin’s idea is unworkable for two reasons. It wouldn’t address the benefits owed to several hundred thousand active and retired employees in the existing plans, which are covered by an inviolable contract. And by placing new employees in separate plans, Bevin would redirect all of their paycheck contributions away from the defined-benefits plans that are starved for every dollar they can get.

Marriage, schools, felons

Other issues could include:

▪  Marriage licenses. Conservative lawmakers unhappy about the U.S. Supreme Court decision last year legalizing same-sex marriage want to express support for county clerks, like Rowan County’s Kim Davis, who no longer want their names on marriage licenses.

Bevin ordered the state’s marriage licenses rewritten in December to remove clerks’ names. But critics say that might not have been legal, because the contents of licenses are set by law, which only the legislature can change. Several bills already pre-filed would let clerks opt out of issuing a marriage license if it conflicted with their religious beliefs or they would transfer the responsibility for issuing marriage licenses to a state agency.

“The clerks I’ve spoken to, while they understand they have a legal obligation, there is a degree of discomfort with it because they do have their own personal opinions on the subject of marriage,” said state Rep. James Tipton, R-Taylorsville, co-sponsor of one of the pre-filed bills.

▪  Charter schools. Republicans long have pushed legislation in the General Assembly calling for charter schools, which are separately operated schools that are relieved from certain state and local regulations in exchange for — ideally — a higher level of accountability. House Democrats have blocked it. But this year, the new governor is a vocal champion of charter schools and House Democrats are on the ropes.

State Sen. Mike Wilson, R-Bowling Green, says he will file a bill to allow public charter schools as part of a pilot project in Fayette and Jefferson counties. These schools would be authorized by local school boards and overseen by the Kentucky Board of Education, Wilson says.

DeCesare, the House Republican whip and a charter schools advocate, said House Democratic leaders are making conciliatory noises about the reception that Wilson’s bill can expect in their chamber this year.

“It all comes down to what happens in the House Education Committee,” DeCesare said. “We’ve had discussion before. But will the chairman call it for a vote? Will majority leadership allow us to act on it on the House floor? That’s what hasn’t happened before. So we’ll see.”

▪  Felon rights. In past sessions, the Democratic-led House has passed a proposed constitutional amendment restoring the right to vote to most non-violent felons who have completed their sentences — a pool that includes many tens of thousands of Kentuckians. But the Republican-led Senate keeps defeating it.

Then-Gov. Steve Beshear, a Democrat, thought he found a way around the legislative impasse in November. Beshear issued an executive order automatically restoring voting rights for those felons once they completed and submitted a short form. (In Kentucky, governors have the authority to issue pardons and commute sentences.) However, Bevin suspended Beshear’s order just before Christmas. So the controversy falls back into lawmakers’ laps this winter.

Simultaneously, there is growing support for a liberalized state policy on expungement that makes it easier for some felons to have their criminal histories wiped from public records. One pre-filed bill would create a process for people convicted of a Class D felony — the least serious kind — if the crimes did not involve violence or sex offenses.

Supporters of the bill, who range from business leaders to civil-rights activists, say a felony conviction can make it impossible for Kentuckians to get a good job or even housing, long after they’ve paid their debt to society.

“Right now the system takes them out of the workforce and makes it harder for my company and our clients to do our jobs, and that is to put people to work,” said Tierra Kavanaugh-Wayne, chief executive of TKT and Associates, a Louisville staffing company, in a prepared statement last month. “It costs businesses money and countless hours of productivity as they try to recruit and hire qualified people for their organizations. And our state increases this cost by further limiting the pool of quality people ready to work.”

John Cheves: 859-231-3266, @BGPolitics