Frankfort, KY - Retooling Kentucky’s tax code and reining in multibillion-dollar unfunded liabilities in the state pension systems should be top priorities for the General Assembly as it convenes for an abbreviated session today, legislators say.
Those matters may require a special session given the brevity of odd-year, 30-day sessions, but challenging decisions are ahead, they told The State Journal.
Lawmakers are scheduled to meet four days to elect leadership, get committee assignments and attend ethics training before breaking until Feb. 5.
Other issues such as expanded gambling, legislative redistricting, tweaking new prescription drug and pseudoephedrine laws, and implementing a state-run health benefit exchange under the Affordable Care Act, will likely be debated in the upcoming session, but local legislators say pensions and taxes are among the most pressing issues.
“Whether it’s in a special session or if it’s in just a regular session, I think this is the time, this is the year to do it,” Rep. Carl Rollins, D-Midway, said while discussing tax reform.
“There are no elections this year, so people tend to have more courage when they’re farther away from elections.”
Two panels have studied those issues separately and issued several potentially costly – to both the state and taxpayers – recommendations.
Lowering the exemption on retirement income from $41,110 to $30,000 and capping itemized tax deductions at $17,500, as recommended by Gov. Steve Beshear’s Blue Ribbon Commission on Tax Reform, are projected to bring $835 million in additional revenue.
In its final report, the Kentucky Public Pensions Task Force said the state should fully fund the annual actuarially required contribution, a move that’s expected to cost an extra $766 million in the next two-year budget cycle.
Both reports have items that aren’t appealing to legislators, such as cutting automatic 1.5 percent cost-of-living pay adjustments for retirees.
Lawmakers say retiree COLAs should stay in state law, noting the General Assembly can suspend them as it did in the current biennium budget.
“If we can provide, we can provide; if we can’t, we can’t,” said Rep. Derrick Graham, a Frankfort Democrat who served on the pensions task force. “But I don’t think you ought to take that out, primarily because we’ve got some people who did not … retire making a lot of money.”
Failing to provide cost-of-living raises – not just to state retirees, but also state workers – cuts a “significant portion” of future pay, said Sen. Julian Carroll, D-Frankfort.
But giving unfunded COLAs to retirees also takes dollars away from the pension systems, he said. Eliminating the raises in the current budget is expected to lower Kentucky Retirement Systems’ unfunded liabilities by $400 million, Greg Rush, the Legislative Research Commission’s deputy budget director, told lawmakers during budget negotiations in March.
“Even that, in many ways, is a little tough to swallow because our retirement amounts are not that large, particularly for medium- to lower-income state government workers,” Carroll said.
Rollins said he’s opposed to moving new state hires to a cash-balance hybrid pension plan that blends aspects of defined-benefit and defined-contribution plans. It’s part of the pensions task force’s recommendations, and future employees would maintain individual retirement accounts with guaranteed 4 percent investment returns.
“I think what we have now is better for our retirees and our employees,” Rollins said.
There is, however, one area of agreement among local lawmakers – paying full pension contributions. Finding money for those multimillion-dollar payments would be a concern, which is why legislators say tax reform should go hand-in-hand with any solution to the pension issue.
The tax reform commission’s 54 proposals are projected to bring in some $659 million in additional tax revenue. The recommendations are a mix of tax breaks, like lowering individual income tax rates, and increases, like capping itemized deductions.
The proposals have already proven divisive.
“I cannot support taxing retirement benefits to the extent recommended by the commission,” Carroll said. “… Let me put it this way: If it’s in the bill and it requires an up or down vote on the bill, I’m going to vote against the bill.”
Carroll suggested raising the sales tax to 7 percent, which he says would produce $450 million in new revenue. A recommendation that the state expand the sales tax to include select services probably won’t fare well in the Republican-led Senate, he said.
Most of the tax reform commission’s proposals, such as taxing more retirement income, “will have a tough time” in the legislative process, Rollins said.
Raising the sales tax should not be on the table, he said.
“That’s very regressive,” Rollins said. “Poor people have to spend all their money and thus have to pay taxes on all of it and rich people don’t.”
The commission’s report faces a rocky road ahead, but local legislators agreed that the General Assembly needs to tackle tax reform.
Revenues haven’t kept pace with the public’s needs, and the state must modernize a tax structure that’s more fitting for a bygone era, Graham said.
Kentucky should look at other southern states that have revitalized their economies, such as North Carolina and Georgia, as examples, he said.
“(North Carolina has) been one of those southern, innovative states that dealt with education reform, higher education reform and attracting new industry, which meant as times changed, they became an area of high-tech, high-industry, high-income-producing jobs,” said Graham.
“They changed the whole makeup of their state, and we can do that.”
Beshear has said he may call a special session later in the year to handle both issues if lawmakers can’t find common ground in the 30-day session.
“I hope we can avoid a special session, but (Beshear) may be right because of the attention that you can give a subject matter in a special session,” Carroll said.
“… The public needs to understand that it’s not a matter of failing to get the work done. Our time is going to be so restricted in this (30-day) session that we may just not be able to complete that work for a vote by the time this regular session is over.”