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by Tom Loftus

FRANKFORT, Ky. – Kentucky has emerged from the Great Recession, but the 2016-18 state budget is likely to look like a recession era budget, complete with spending cuts.

That's if Gov. Matt Bevin and lawmakers decide to deal with billions of dollars in public pension liabilities in a meaningful way.

Actuaries for the pension systems say at least $614 million more must be pumped into the retirement systems in the first year of the new budget alone. Add to that the cost of the base Medicaid program - projected to go up by $133 million next year, plus an additional $62 million next year to cover the costs of Medicaid expansion.

And there are other needs next year: for public schools to cover a growing student population, for the Department of Corrections to cover a growing prison population, for promises made within the new law to fight heroin abuse and for debt payments on school building bonds promised last year.

“Kentucky is burdened with a projected biennial budget shortfall of more than $500 million that the outgoing administration of Steve Beshear" left, Bevin said in a news release before taking office.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, looks at the budget from a far different perspective than the conservative Bevin, but he has a similar view of the ability of Kentucky’s revenue stream to meet the state’s needs.

“Kentucky will be hundreds of millions of dollars short of just meeting basic obligations in the next budget if we don’t look for additional revenue,” Bailey said. “…There is a time coming for a reckoning about our budget – and the sooner we face it, the sooner we can begin making progress.”

What is the budget bill?

The budget bill is state government’s spending plan for the period between July 1, 2016, and June 30, 2018. Bevin must propose a budget to lawmakers by Jan. 26. The General Assembly will change it and must agree on a final budget by April 15.

Since his election, Bevin has been mum on details of what he will propose. But that proposal will be the basic policy document of his first two years in office, revealing exactly what he wants to do with programs that cost a lot (like Medicaid, public schools, universities) to ones not so expensive but with political ramifications (like environmental regulation, early childhood education and funding for Planned Parenthood).

But the overarching issue is the tight nature of the budget. A basic one-page analysis of the budget outlook prepared by Beshear’s budget office for the Bevin administration tells the story.

That analysis begins with what might seem to be a bright outlook: Revenues of $10.3 billion to the state General Fund this year will grow next year, a significant surplus is anticipated at the end of this fiscal year and a myriad of small dedicated state funds can be tapped.

That analysis shows that about $700 million is available for new spending in the first year of the next budget.

What to expect

But those new demands – massive outlays for pension funds, Medicaid, etc. – add up to $900 million in 2016-17. That leaves a funding gap of nearly $200 million in the first year of the next budget. The analysis shows that gap grows to $363 million in 2017-18.

And those shortages occur before any money is spent on normal small increases for priority programs. Want to increase base school funding by 1 percent? That causes the gap to grow by $33 million in the budget’s first year. Want to boost funding for universities by 1 percent? The gap grows another $9 million.

The outlook does not leave room for increases. Cuts are more likely – perhaps some deep ones similar to those that Beshear was forced to impose at the depth of the recession.

As a candidate, Bevin offered no comprehensive plan for dealing with this outlook.

“Nobody has an answer to that now,” he said in an interview in October.

But he opposes higher taxes and massive borrowing to bail out pension funds. And his platform promised to “reduce the size of state government.”

In the October interview, he said, “Every single area of government will have to tighten their budgets to the absolute degree possible.”

He did not say which areas would be cut or by how much but emphasized he would spare priorities of education and infrastructure “to the absolute degree possible.”

Sen. Chris McDaniel, the Taylor Mill Republican who chairs the Senate budget committee, said, “There will have to be some cuts, make no mistake.” He declined to speculate on how deep cuts might be, but said, “I think there are areas we can do that in a very smart manner.”

Demands on the 2016-2018 state budget

By far the single biggest new demand on the next budget in the analysis compiled by Beshear’s budget office – one that alone throws the next budget out of whack – is the $520 million more needed in the first year of the next budget to meet the actuarially required contribution of the Kentucky Teachers’ Retirement System.

Gary Harbin, executive secretary of KTRS, said recently that the increase is desperately needed.

“This is a crisis," he said. "It’s a crisis now. It’s a crisis for teachers in the classroom today.”

But McDaniel estimated there is less than a 1 percent chance that KTRS will get a General Fund appropriation increase of that size.

McDaniel said he expects lawmakers will approve some smaller increase after first imposing “structural reforms” to curb the spiraling demand for funding teacher pensions.

“KTRS is going to need an additional infusion of cash," he said. "But it’s going to be a long-term infusion. We’re not going to get out of this in one, or two, or three budget cycles. This is a 20-year issue."

Early this year, the Democratic House passed a bonding option offered by KTRS - borrowing $3 billion and investing the money in the belief that returns on the investments would be more than the interest paid on the bonds. The Senate rejected that approach, and Bevin opposes it.

“The House passed a plan last time that died in the Senate," said Rep. Rick Rand, a Bedford Democrat who chairs the House budget committee. "We’ve never really seen a Senate plan or a plan from Gov. Bevin, so our attitude is we want to wait and see what sort of proposal they might have.”

Rand said it's crucial lawmakers take a significant step toward solving the problem in the 2016 session.

“We know the problem exists, and that time makes it worse," he said. "Also, our credit rating is directly tied to this. So it’s critical that we deal with it in some way this session.”