Larry Dale Keeling: Ky. can't party forever on borrowed money

Float a loan to fete 'Not Worst' rank

Herald-leader columnistSeptember 9, 2012 

Larry Dale Keeling

FRANKFORT — Contrary to what many observers of state government have assumed for years, Kentucky isn't the most fiscally foolish state in the nation. Hawaii, Illinois and Connecticut are in worse shape than the Bluegrass State, according to recent rankings by the financial magazine Barron's.

Hooray! Hooray! Let's celebrate our "not the worst, but almost" status with a blowout bash. We'll float a loan to cover the costs. Because that's what we do in Kentucky. We borrow and borrow and borrow. And even then, we can't pay the bills. Which is how we came to be the fourth most fiscally foolish state.

Yes, I know Barron's didn't put it in those words. The magazine rated the fiscal "health" of the states. Viewed from that perspective, someone better rush a respirator to the Capitol Rotunda because this state is one sick fiscal puppy.

But the virus that laid it low was the fiscal foolishness our elected leaders have engaged in for at least a decade — amassing huge debts, plugging holes in budgets with one-time sources of money, neglecting to pay the bill for public pensions and outrunning Usain Bolt whenever someone mentioned the dreaded "T" word.

Unfunded liability in state pension plans (now estimated to be more than $30 billion) and the state's general obligation debt were the key factors in Barron's ranking of Kentucky's fiscal health.

Mary Lassiter, Gov. Steve Beshear's budget director and cabinet secretary, says the debt picture isn't as bad as the rankings suggest because some debt counted against the state in Kentucky would be considered local debt in other states. OK, maybe Kentucky's fiscal health wouldn't be the fourth worst in the nation if apples were compared to apples when it comes to debt. Maybe it would be fifth or sixth or even 10th. It would still be very sick.

Not surprisingly, Barron's rankings started fingers pointing in the Capitol. Bad news always prompts Republicans to blame Democrats and Democrats to blame Republicans. This time, they're both right, because both sides are complicit in the fiscal foolishness in recent years.

Every budget passed since 2000 had to be approved by the Democratic-controlled House and the Republican-controlled Senate. Every debt incurred to feed both sides' addiction to projects had the blessing of both chambers. And the bulk of the skimping on actuarially recommended state contributions to the public pension plans occurred after 2000.

Although the General Assembly's failure to fully fund the pension plans on a pay-as-you-go basis is just one of several factors contributing to the $30 billion-plus unfunded liability, it is a significant one.

Now, a variety of groups covered by the plans are telling a legislative task force the answer to past fiscal foolishness is to be even more foolish by issuing as much as $4 billion in bonds and letting the pension plans covering state and local government workers invest the proceeds.

The assumption behind the issuance of pension bonds is that you can earn more from your investments than you pay out in interest on the bonds. But the reality often proves otherwise because you're at the mercy of the markets, which means you're gambling.

Sometimes, you can take a $5,000 cash advance on your credit card, plop it all down on one spin of the roulette wheel and win. Other times, though, you lose. And the results from the flurry of pension bond issues by state and local governments in recent years have at best been mixed.

Debt and unfunded pension liability aside, Kentucky's worst fiscal foolishness involves the dreaded "T" word. Multiple times since the mid-1990s, experts have told our political leaders what they need to do to transform a tax code geared to a 1950s manufacturing economy into one that fits a modern economy dominated by the information and service sectors. For the most part, the experts' reports have been ignored.

To his credit, former Gov. Paul Patton offered to take the hit for tax reform after his dalliance with Tina Connor destroyed his future political ambitions. Neither House Democrats nor Senate Republicans took him up on his offer. Former Gov. Ernie Fletcher eventually won approval of some "tax modernization" proposals that really just tinkered around the edges. And Beshear spent his first term saying a recession is no time to raise taxes.

Now in his second term, Beshear has appointed a task force on tax reform that has been holding hearings around the state. Presumably, it will issue a report later this year, which more than likely will soon be gathering dust with all the past reports. At best, we may see a bit more of the "tax tinkerization" we saw during the Fletcher years. But don't get your hopes up for anything more.

You see, to end the foolishness and improve Kentucky's fiscal health with real reform that puts the tax code in synch with a 21st century economy, state lawmakers — Democrat and Republican alike — need backbones. But most of them had that part of their anatomy surgically removed when they first ran for office.

Reach Larry Dale Keeling at lkeeling@herald-leader.com.

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