Significant progress, but ‘leaks’ persist in state spending
FRANKFORT, Ky. – Kentucky has made significant progress in “plugging the leaks” in certain areas of state spending, but serious challenges must be addressed to assure the state’s long-term fiscal stability, according to a new report from the Kentucky Chamber of Commerce.
Building a Stronger Bucket is a follow-up to the Chamber’s 2009 Leaky Bucket report that identified areas of unsustainable spending growth – corrections, Medicaid and public employee health insurance – that are diverting tax dollars from education and economic development. Key developments since the release of the initial report include:
- Corrections reforms enacted by the 2011 General Assembly that are projected to generate $422 million in gross savings over 10 years, with significant reinvestment in drug treatment and probation and parole
- Expanded Medicaid managed care statewide to contain cost increases
- Legislative action to reduce the annual growth in spending on health insurance by almost half in the 2010-12 biennium, resulting in savings of approximately $100 million
The persisting challenges are reflected in the fact that, despite the state’s progress, the 2010-12 budget continues the spending trends identified in the initial Leaky Bucket report, with corrections spending growing 50 percent faster, Medicaid spending three times faster and public employee health insurance costs four and a half times faster than the rate of the overall budget and Kentucky’s economy. In addition, within the past few months:
- Moody’s Investors Service downgraded its rating on Kentucky bonds and maintained a negative outlook for the state due to fiscal stress, the use of non-recurring funds to balance the budget and the unfunded pension liability.
- Fitch Ratings downgraded Kentucky from stable to negative due to concerns of the state’s financial direction.
- A Pew Center on the States study found Kentucky’s pension system to be funded at only 58 percent of its liabilities in 2009 compared to a national average of 78 percent.
“It’s very encouraging to see how much progress the General Assembly and the governor have made in addressing the three leaks that the Chamber first identified in 2009,” said Kentucky Chamber President and CEO Dave Adkisson. “The business community of Kentucky applauds them for the progress to date. But these spending problems – these leaks – were created over decades and won’t be plugged overnight. The drafting of the next state budget and the 2012 session of the legislature will require all of us to step up our efforts to tackle these problems.”
Building a Stronger Bucket calls on Kentucky’s policy leaders to continue moving in the direction of spending reform. It also recommends that they adopt the following spending principles to help the state achieve financial stability:
- Limit spending to 6% of the state’s economy
- Limit borrowing costs to 6% of the state budget
- Eliminate the structural deficit by adopting a five-year plan to spend only recurring revenues for recurring obligations
- Prioritize spending on areas that invest in the future, such as education and economic development
- Eliminate the practice of appropriating all anticipated revenue during every budget cycle and re-establish a “rainy day fund”
The full Building a Stronger Bucket report, including more details on the spending principles, can be found at www.kychamber.com/strongerbucket.pdf.