Kentucky’s New Governor: Ignoring ‘Our Financial Problems Is No Longer an Option’

Axing about $650 million in expenditures and pumping more money toward the state’s severely underfunded pension system, were among the top priorities Kentucky Gov. Matt Bevin laid out on Tuesday during his inaugural state budget address.

The governor’s spending proposal includes $70.4 billion in combined total appropriations over the course of fiscal years 2017 and 2018. Of that money, about $21.7 billion would fall within the state’s general fund, which is its main budget account.

General fund spending would increase by about 5.5 percent in 2017, and 2.5 percent in 2018.

“We cannot move forward unless we address the crippling debt that faces this state,” Bevin, a Republican who took office in December, said during his remarks, which were delivered to General Assembly lawmakers at the State Capitol in Frankfort. “To continue to ignore our financial problems is no longer an option.”

He added: “We are going to have to cut the budget.”

Bevin proposed a 4.5 percent spending reduction in the current, 2016, fiscal year, along with a 9 percent reduction to “baseline” spending over the two following years.

But a number of significant budget categories would be exempt from slashing under the governor’s plan, including state expenditures on student financial aid, veterans programs, Medicaid, combatting the state’s heroin epidemic, and pay for public safety and social workers.

Also exempt is the primary funding mechanism for local K-12 schools. Bevin proposed an increase of $39 million for that funding mechanism, to accommodate projected growth in the number of students.

Education accounts for about 44 percent of Kentucky’s general fund spending.

Some of the areas not explicitly included on a list of exemptions attached to a summary of the budget are public universities, and agencies that oversee environmental issues, parks and other regulatory matters. Although there is a category called “necessary government expenses.”

On the revenue side, money flowing into the state’s general fund is expected to increase by 3.2 percent in fiscal year 2017 to around $10.6 billion and 2.4 percent in 2018 to about $10.8 billion.

The governor used the budget speech to repeat his calls for dialing back Kentucky’s Medicaid expansion and shutting down the state’s Kynect online health insurance marketplace.

Both the Medicaid expansion and Kynect were signature initiatives the governor’s predecessor, Democrat Steve Beshear, carried out under the Affordable Care Act.

The Medicaid expansion in its current form, Bevin has argued, will create costs the state cannot afford.

A report Beshear’s office referenced early last year estimated the state’s costs in the 2017-2018 budget biennium for the Medicaid expansion would be around $247.6 million. But, the former governor's office said at the time, that these expenditures were projected to be offset by about $511 million in general fund savings.

Bevin’s administration is pursuing a federal waiver to revamp the program.

“Expanded Medicaid does not pay for itself,” Bevin said during his speech. Later he added: “We can’t afford it, and we’re not going to try.”

As for Kynect, Bevin said the state online marketplace is redundant with the federal government’s health care exchange. “It does not have the ability to sustain itself,” he said. “We’re wasting money there that could be better applied in other areas.”

Although Bevin’s moves related to Kynect and Medicaid have drawn attention in recent months, pensions were very much at the core of his budget address.

Kentucky has one of the most financially-stressed pension systems of any state in the nation.

During his speech, Bevin said each of the plans that are part of the system should undergo an outside audit.

There will be new pension investments as well. According to the governor, “$1.1 billion in new monies are going to be added to the pension systems over the next biennium.”

After describing contributions that would be made to the Kentucky Teachers' Retirement System, he said: “This is significant money.”

“This is the heartbeat of this entire budget, because everything else we care about, including things that I want, things I campaigned on,” Bevin continued, “we cannot afford until we get our financial house in order.”

Depending on the accounting rules that are applied, the Kentucky Teachers' Retirement System had unfunded liabilities on June 30, 2015 of either $13.9 billion, or $24.43 billion, and a funding ratio of either 55.3 percent or 42.4 percent.

Another one of the state’s main plans, the Kentucky Employees Retirement System Non-Hazardous Pension Fund, is even worse off. As of June 30 last year, it covered 42,269 retirees and beneficiaries and had 39,056 active members. It had a funding level of just 19 percent, meaning that it was 81 percent short of where it should be. Unfunded liabilities measured around $10 billion.

Democrats in Kentucky’s House of Representatives have backed legislation that would allow for borrowing up to $3.3 billion to help cover expenses tied to the teacher’s pension system.

On Tuesday, Bevin said: “I will not sign any bill, I will not sign any budget that encumbers future generations with debt that we refuse to take responsibility for today."

Beyond spending cuts and pensions, the governor’s budget included a number of other notable proposals.

One involves distributing funding for state universities based on their performance. This system would be developed with input from state university leaders, and phased in over a three-year period beginning in fiscal year 2018.

Another calls for directing no less than 15 percent of the state-funded portion of Kentucky's “road fund,” toward the maintenance and repair of existing bridges.

Rep. Greg Stumbo, the speaker of the Democratic-controlled House, was asked about Bevin’s proposed cuts in an interview on Kentucky Educational Television, after the budget address.

“The exemptions are the biggest part of the dollar,” Stumbo said. “It’s his government to run," he added. "If he thinks his agencies can sustain themselves and work with that type of reduction, I don’t know that we’ll have any problem with that.”