Five problems the legislature never seems to solve

jcheves@herald-leader.comJanuary 2, 2011 

Gov. Steve Beshear, bottom center, shown delivering his State of the Commonwealth address last year, has said he's reluctant to change the tax code at this time.

CHET WHITE — Chet White

FRANKFORT — As he did the past two years, state Rep. Bill Farmer will file a bill in the 2011 General Assembly to revamp Kentucky's tax code, replacing individual and corporate income taxes with an expanded sales tax that would cover services.

Farmer expects his bill — and others attempting to rewrite the tax code — to be ignored, as usual.

It's not that anyone loves the current code, which is antiquated and riddled with unexamined tax breaks, Farmer said. In most years, Kentucky collects millions of dollars less in taxes than it commits to spend, forcing an annual scramble by lawmakers to plug leaks.

But, he said, Frankfort lacks the courage to confront the chronic problems facing the state, and not just on taxes.

"As one lawmaker told me years ago, 'We don't like change,'" said Farmer, R-Lexington, a tax accountant.

"I don't think that anybody's got the guts to take action," he said. "Nobody wants to take responsibility for trying something new that might work but that also might be a mistake. So we do the same things over and over every year."

On Tuesday, the General Assembly will convene and again confront five perennial problems: Taxes (who should pay what), schools (our children need better educations), state pensions (not enough money is tucked away), prisons (too many people who cost too much) and Medicaid (same as prisons).

Specially created committees will ponder or deliver reports on some of these problems. In some cases, governors and lawmakers have claimed to successfully solve the problems only to find them back with needs more pressing than ever.

Gov. Steve Beshear says these problems can't be solved permanently.

"These are evolving and complex issues that every state needs to revisit on a regular basis," Beshear said recently. "It is shortsighted to assume there is a single or simple answer to managing these issues. Their very nature demands long-term review."

That review will continue this year.

On tax reform, for instance, House Speaker Greg Stumbo, D-Prestonsburg, said it's Beshear's responsibility to lead. But Beshear said he opposes anything that might raise taxes during "this historic economic recession." The governor also noted that the Tax Foundation in Washington, D.C., last year ranked Kentucky's business tax climate the 19th-best in the nation.

"That's confirmation that we're taking the right steps to encourage growth in Kentucky," Beshear said.

Senate President David Williams, R-Burkesville, who is running for governor, said he wants to create a commission to study Kentucky's tax code and report back by year's end.

But commissions and consultants already have studied Kentucky's tax code and recommended improvements, only to see their reports shelved and forgotten, said Farmer, the Lexington lawmaker. It's time for the legislature to act, he said.

"At some point, somebody's going to have to jump out of the airplane and see if the parachute will open," Farmer said.

Schools

Kentucky spends more than $3.5 billion a year on kindergarten-through-12th grade education, plus about $1 billion in federal funds. But dissatisfied lawmakers continue to push for changes in the public schools.

Not without reason: Education Week's 2010 Quality Counts comparison of education policies and outcomes ranked Kentucky No. 37 among the states, awarding it a grade of "C" overall. The publication flunked Kentucky in the categories of school spending and K-12 achievement status.

In 2009, the General Assembly passed Senate Bill 1, calling for clearer and higher expectations for K-12 students in math, reading and science. It scrapped some of the landmark Kentucky Education Reform Act of 1990. Specifically, KERA's Commonwealth Accountability Testing System, which measured schools' progress, will be replaced with a new test to measure individual students' progress.

The new test, to be created by a yet-to-be-determined entity, must be ready by spring 2012.

Also as part of SB 1, Kentucky became the first state to formally adopt new "common core content standards" for math and English language arts. The standards were developed by the National Governors Association and the Council of Chief State School Officers.

"The standards we've adopted now are common across the country ... so Kentucky children are learning the same thing as kids in Oregon or Massachusetts. That will allow us to compare the learning of our children on a national level," said Education Department spokeswoman Lisa Gross.

Kentucky suffered a setback last year when it failed to win $175 million from the federal Race to the Top contest that it hoped would offset the cost of SB 1, to pay for expenses such as training teachers to teach to the new standards. Local school districts might have to absorb some of that, Gross said.

The Prichard Committee for Academic Excellence, which lobbies for better schools, issued a report in September that said Kentucky is making progress and could enter the Top 20 tier of states by 2020. But the state is stuck on several key fronts, including elementary and secondary school funding per pupil (it ranks 42nd) and bachelor's degree completion (also 42nd), the report said.

"Even in the face of global economic difficulties, we must find the resources to accelerate our educational progress," the Prichard Committee said in its report.

State pensions

Kentucky is struggling with the cost of more state government retirees drawing guaranteed lifetime pensions while fewer workers remain on the job contributing to the pension funds, and the funds get smaller investment returns than originally anticipated.

But the biggest problem is that governors and legislatures have failed to match workers' contributions over the years. The unfunded liability of one major fund — for state workers doing non-hazardous duty — has grown from 40 percent to 62 percent since 2006, according to the 2010 report of the Kentucky Retirement Systems.

The fund could run out of money in 2019 if contributions remain inadequate and market investments sag, under a worst-case scenario presented to lawmakers last July. More likely, by 2018, the fund will pay out nearly half of its assets every year to cover retiree benefits, pension officials warned.

"There are months where we have to sell off assets to make payments," said Mike Burnside, KRS executive director, in a recent interview. "The problem is, your best rate of return is in large, long-term investments. That's obviously hard to get when we need to keep liquefying our assets."

Others are taking notice. Kentucky ranked No. 7 among the 10 most financially vulnerable states because of its underfunded pensions and high indebtedness for projects in an October report issued by TD Bank Financial Group of Toronto, Canada.

The General Assembly passed some pension adjustments in 2008 that many lawmakers believed fixed the problem.

As part of that deal, new state employees must work longer and contribute more before retiring. Also, the legislature last year committed an extra $66 million to the pension funds, with more to come. But it's still not contributing half of what is actuarially necessary to stay solvent.

Because of the 2008 changes, not everyone feels a sense of urgency. Beshear said that "pension reform" stabilized the program's finances. Likewise, Stumbo said: "I believe the 2008 reforms for public pensions will be adequate to cover the unfunded liability if we continue to meet its financial obligations."

But Williams, the Senate president, calls the system "unsustainable." He wants new state workers to enroll in a defined-contribution plan, "like a 401(k)-style plan, what's available in the private sector," rather than the more generous lifetime pensions that state workers now get.

Workers would contribute up to 8 percent of their salary to be matched every year by up to 5 percent by the state. That way, benefits would be limited and paid for up front, Williams said.

"The present sort of system is unsustainable," Williams told cn|2 Politics in December. "We have to change the future of the system to quit digging the hole deeper and deeper."

However, even if the state adopts this model, it still faces the looming cost of tens of thousands of state workers who are enrolled in the present pension plan, guaranteed their benefits by law when they retire.

Prisons

Kentucky spends more than $460 million a year on its Corrections Department as a wave of state inmates packs prisons and local jails. Prison officials say this is largely the result of drug crimes.

This is one area where the General Assembly has made changes that are starting to have an impact.

The inmate population is dropping for the first time in recent history, from 22,483 in December 2007 to 20,530 last month.

Much of that is because of changes lawmakers approved in 2008, prison officials said. For example, felons now get credit for time served on parole even if they subsequently violate parole and are sent back to prison. Within months of this credit being introduced, 1,004 inmates were released.

Prosecutors sued to block the retroactive street-credit plan, arguing that it endangers the public by letting felons out too early. But the Kentucky Supreme Court upheld the plan.

In 2009, the legislature instructed the Corrections Department to develop an intensive substance abuse treatment program for some felony inmates, to divert them from prison. That program, still in its early stages, has fewer than 20 inmates enrolled so far, corrections spokeswoman Lisa Lamb said.

This winter, a state government task force, working with the Pew Center for the States, is expected to offer more recommendations to cut the prison population.

One option is creating a lower felony classification — a Class E felony — that would require less prison time than the current minimum Class D felony, which brings one to five years, said Senate Judiciary Chairman Tom Jensen, R-London, a member of the task force.

This will be a slow process, Jensen said.

"I've got a feeling this legislation is going to be a couple of years in the making," he said. "We'll get some done in 2011 and maybe come back again and try some more in 2012.

However, Senate Republicans are simultaneously pushing a bill that could drive inmate numbers back up.

Senate Bill 6 would establish a state crime for illegal immigrants — "trespassing by an unauthorized alien" — and authorize police to check the immigration status of people they encounter. Sometimes a misdemeanor and other times a felony, the new crime could put an unknown number of illegal immigrants in jails and prisons to serve one to 10 years before they are handed to the federal government for deportation.

Medicaid

Nearly one in five Kentuckians gets health care through Medicaid, a program that costs the state $6.1 billion a year.

The federal government pays 80 percent and leaves 20 percent to the state, but that split is temporary and will revert to 70/30 on June 30, adding to the state's burden. Also, because of high unemployment, several thousand more poor or disabled Kentuckians join Medicaid each month, state officials said.

The state faces a $142 million Medicaid deficit. It has struggled for years to come up with its share of Medicaid money. Former Gov. Ernie Fletcher retooled the program and claimed $120 million in savings. But a state audit after he left office in 2007 disputed that. Instead of savings, auditors found that program costs increased $42 million over the previous fiscal year.

This winter, the legislature will hear from its Task Force on Medicaid Cost Containment. Advocacy groups for patients and doctors closely followed the meetings, fearing that the state's options are to cover fewer people, pay less for existing services, cover fewer services or some combination thereof.

Beshear is touting one option that he says won't require such cuts. He is asking lawmakers to take $139 million intended for Medicaid in fiscal year 2012 and move it ahead to this year, fiscal year 2011. The governor said he can cover the 2012 funding gap with savings from a new system of managed-care Medicaid plans, similar to the Passport plan that operates in Louisville.

Passport gets a fixed rate for each of its 164,000 patients regardless of the cost of that person's medical needs. The rest of the state is on a fee-for-services model, so Medicaid pays a certain rate to health-care providers depending on the service.

A managed-care organization can save money by investing in preventative medicine and helping people manage chronic health problems, such as diabetes, Health and Family Services Secretary Janie Miller said in an interview last week.

"There are opportunities for organizations to pull together different parts of the delivery system so that care is better organized," Miller said. "That's what we're looking for. We're not looking for someone to institute denial of services that are medically necessary."

Passport has its critics. State Auditor Crit Luallen in November issued a report rebuking Passport for excessive spending on travel, lobbying and entertainment. Luallen said more analysis is needed to show if Passport's methods actually saved the state any money. Passport subsequently fired its top officers.

"I'm sure there will be a lot of discussion about using the managed-care approach more than we've used it in the past," said state Rep. Jimmie Lee, D-Elizabethtown, co-chairman of the Medicaid task force. "There are some areas of Medicaid where that would make sense."

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