Structural imbalance plagues Ky. budget

FRANKFORT — If Kentucky's General Fund — the main source of income for most government programs — were your personal checking account, you'd be worried.

Having the General Fund's $8.4 billion in tax revenue to spend might be nice, but with that money comes $9.1 billion in spending commitments.

In other words, the state's paycheck — tax payments, fees and fines — doesn't cover its bills. In fact, lawmakers have been forced to scrounge up nearly $2 billion in one-time money to fund the state's ongoing commitments in recent years.

It's called a structural imbalance, and Kentucky's has been ballooning.

If lawmakers pass Gov. Steve Beshear's proposed budget plan for fiscal year 2010 during a special legislative session later this month, the General Assembly will have approved spending $1.989 billion more out of the General Fund since July 2007 than was deposited in revenues.

In the three years before that, the state used a combined $216 million in one-time money to plug budget gaps.

Beshear admitted last week that without more than $700 million in stimulus cash from the federal government, lawmakers would have to make much deeper cuts to state services when they return to Frankfort on June 15 to rectify a projected $1 billion budget shortfall.

In previous years, the state has balanced its books by shifting and borrowing hundreds of millions of dollars from pots of money all across state government that are designated for specific programs, such as charitable gambling and teacher retirement funds.

Although lawmakers have successfully used one-time money to avoid a financial meltdown so far, a day of reckoning might come soon.

Kentucky's revenue forecast for the next biennial budget shows continuing shortfalls — more than $600 million in fiscal year 2011 and more than $300 million the next year.

There's still some federal stimulus money — at least $293 million — to use next year, but many legislators are becoming increasingly frustrated with the state's band-aid approach to fixing its financial ills.

"I am very tired as a legislator to come back each year ... to address a short-term strategy approach," said Rep. Derrick Graham, D-Frankfort, at a budget committee hearing last week. "I would hope that the administration would start looking toward a long-term policy ... . This piece-by-piece approach is not working."

A perennial problem

Kentucky lawmakers have known about their perennial structural imbalance for more than a decade, but repeated recommendations from a variety of task forces and consultants have been largely ignored.

A task force created in the mid-1990s examined the issue and, in 2002, consultant William Fox predicted that the state would have long-term financial problems because its tax system was dependent on an agricultural and manufacturing base that was slowly dwindling.

To expand the tax base, more taxes should be levied on services, such as auto repairs and tax preparation, Fox recommended. The Fox report predicted that Kentucky's books would not balance even before the current fiscal crisis.

There have been moderate attempts to address the issue over the past 10 years. Under former Gov. Ernie Fletcher, the General Assembly approved several tweaks to the tax system in 2005, but lawmakers undertook that task only after being assured that the changes would be "revenue neutral" in the long-term.

Earlier this year, the House and Senate tinkered with taxes again when they voted to increase levies on alcohol and cigarettes to balance a $456 million shortfall. But the increase came with a promise from Beshear and House Speaker Greg Stumbo, D-Prestonsburg, that they would again consider comprehensive tax reform.

Despite that assurance, Beshear didn't include tax reform on the coming special session's agenda.

Beshear said Wednesday that he did not consider adding a major overhaul of the tax system to the agenda because there wasn't enough time to get such a measure through the legislature before the fiscal year begins on July 1.

"It's an issue that deserves a hard look and needs some intense consideration over the next several months," Beshear said. "There obviously was not time to do that."

State Budget Director Mary Lassiter said last week that there was not enough consensus in the legislature on a tax plan for Beshear to place the issue on the agenda for the special legislative session.

Small victories

Still, those who have pushed for an overhaul of the state tax system won a minor victory Thursday when Rep. Bill Farmer, R-Lexington, and Rep. Jim Wayne, D-Louisville, were allowed to present two bills on tax reform to the House and Senate's interim joint budget committee.

But the hearing was for informational purposes only so that members could become familiar with the proposals, said Sen. Charlie Borders, R-Grayson, chairman of the interim budget committee.

Farmer's proposal would do away with the state's corporate and individual income taxes and move the state to a sales tax system. Wayne's proposal calls for redistributing the tax burden — with people who make the most money paying slightly more and people in lower-income tax brackets receiving a break.

Both proposals call for new taxes on some services.

At Thursday's meeting, Wayne reminded legislators that what he was proposing has been done in other states.

"This is not radical," he said. "This is not revolutionary."

Wayne, one of the legislature's most liberal members, has been pushing for changes to the tax system since 2000.

"Some of the fiscal problems that we have now could have been avoided if we had taken Dr. Fox's advice," Wayne said, referring to the 2002 report on the state's tax structure.

He said there needs to be strong leadership from the House, Senate and governor to get any type of revenue overhaul passed. For starters, a new task force headed by Beshear should be appointed soon to study the matter and issue recommendations that are more than just perfunctory "lip-service," Wayne said.

"Had it not been for President Obama's stimulus package, we would be in a state of panic," Wayne said. "The concern that I have is that we have to address this issue to make a long-term solution to sustain our government services."

This story was originally published June 8, 2009 at 12:00 AM with the headline "Structural imbalance plagues Ky. budget."