The rhetoric surrounding budget reductions in Kentucky never reflects reality. Our friends at the Kentucky Center for Economic Policy predicted in April the cuts to state government due to the COVID-19 shutdown of the economy would be “otherworldly.” To be fair, their prediction was based on a worst-case scenario published by the Office of the State Budget Director. To be fair to my former colleagues, the budget office was dealing with a ton of economic uncertainty when publishing that report.
The numbers being tossed around were huge. $457 million from the General Fund. $161 million from the Road Fund. Widespread layoffs and furloughs of state employees were on the table. The situation was reported as “bleak.”
It’s difficult for the public to get their arms around what was really going on with the expected FY ’20 state budget shortfall. While the top lines generated headlines, the details were largely concealed. And then, after all the hype, the state ended up with $177.5 million surplus instead of a deficit.
The truth is, in the last five years, there has never been a serious reduction of critical state services due to budget reductions.
I was Matt Bevin’s Deputy State Budget Director when the budget office implemented two budget reduction orders. BIPPS also obtained (through an Open Records Request) the details of the actions taken by the Beshear administration to close out the most recent fiscal year. Here’s what taxpayers should know about how the “budget reductions” were handled.
General Fund reductions: The General Fund gets most of the attention. The Budget Office directed agencies to reduce their appropriation by 1% in the final two months of the budget year.
As we posted in May, General Fund reductions are never applied across the board. Governors have complete discretion to “hold harmless” any agency from a budget reduction. In 2017, every state agency was directed to submit a plan to reduce spending in order to address a $152 million shortfall. When the final budget reduction order was issued, however, several critical services were spared any budget reduction.
Not one dollar was cut from the SEEK formula that funds K-12 education. The State Police, Community Based Services that protects vulnerable children, Commonwealth and County Attorneys, Public Defenders and both state retirement systems were all protected from any General Fund reduction.
The same was true this go around. General Fund reductions totaled $18.2 million. Not one teacher or state government employee was laid off as a consequence of that belt-tightening.
Use of Restricted Funds: Restricted funds are agency funds collected from fees, dedicated surtaxes and other miscellaneous collections taxpayers pay, often without much idea of what they’re paying for, or why.
In 2014, Kentucky faced a $90.8 million shortfall to close the fiscal year. More than half of the solution that year – $49.9 million – was achieved through restricted fund transfers. The 2017 budget was balanced using $77 million in agency funds.
The document obtained from the budget office has a column titled “Other Lapses Not Requested” totaling $30.8 million. While I can’t be certain, I expect a significant part of that came from restricted fund lapses.
The Public Protection Cabinet (PPC) proposed achieving their 1% General Fund target in-part by shifting $621,700 of expenses to restricted fund accounts. This is the equivalent of billing a different project code for hours worked. There was likely much more of this creative accounting throughout the Executive Branch.
Vacancy Credits: Vacancy credits are an obscure but critical tool used to balance agency budgets. Here’s how they work.
Every agency is appropriated funding for a certain number of full-time employees. Most agencies, however, have vacant positions throughout the year. The positions are funded but the dollars aren’t being spent. Unfilled positions translate into vacancy credits.
For example, the Department for Behavioral Health, Development and Intellectual Disabilities provides services for people affected by mental illness, intellectual and developmental disabilities and substance abuse. Due to non-competitive wages and tough work conditions, the Department struggles to hire enough personnel.
Behavioral Health’s plan to reach the 1% General Fund reduction included $450,000 in vacancy credits. But, here’s the thing. The Department wasn’t going to fill those jobs by the end of the fiscal year, so those dollars were going to lapse to the General Fund anyway. In this respect, vacancy credits aren’t really budget reductions at all.
Also of interest, according to that Department’s budget reduction plan, it would realize $430,000 in unspent contractual funds and have $681,400 in administrative cost savings to close the fiscal year. I respect the challenging work done by that agency and the need to make sure it is properly funded. But, $1,561,400 in excess funds lapsed to the general fund and caused zero impact on services. (Don’t believe me, the Department said it themselves).
The idea state government is being starved of the resources required to provide essential services ignores the fact agencies have returned hundreds of millions of dollars to balance the state’s books and services are almost always maintained at the same level. There are rare exceptions, I’m sure, but none that caused widespread hardship.
Kentucky’s budget and budget process needs fundamental reform. We’ll have more to say about that in the coming months. Those reforms, however, need to focus on prioritizing the resources Frankfort already collects, not raising more revenue to meet the appetite of interest groups whose missions depend on the growth of government.