Kentucky Club for Growth
fighting and winning for economic freedom

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May 29, 2009

Louisville Mayor Protects Louisville Job Creation

Prevailing wages, as they are determined in Kentucky, are set at rates artificially above what would otherwise exist in a free market. The result of these artificial wage rates is that they dampen a company's ability to afford to create new jobs and economic growth.

Recently, Mayor Abramson vetoed a Louisville city ordinance that would require these artificial wage rates. The Kentucky Opportunity Coalition explains:

By destroying free and open market competition, those dollars which fund artificially inflated wages also artificially increase the cost of those projects to business. Taxpayers footing the bill for government projects deserve better. This excess, 20 cents for every wage dollar, could be better used to fund other essential public projects otherwise funded by taxpayers.

Visit their website to learn more about how Kentucky's prevailing wage system is contributing to the state budget crunch.

May 28, 2009

Special Session to Waste $60,000 a Day on Issues That Can Wait

The rumbling grows louder that a special session of the General Assembly will be called in the next couple of weeks. Earlier we wrote about how useless a special session would be:

The 2009 legislative session should be characterized as nothing less than a disaster. The cooperation they are so proud of is nothing less than a mutual agreement to abscond without action or responsibility...As the rhetoric rises and the chimes sound for the next wasteful special session, remember this dismal record and tell your legislators: "No thanks!"

Pat Crowley recently ran through the list of discussed topics for a special session. Not one of them demand immediate action that justifies spending $60,000 tax dollars a day. Here's Cowley's list interspersed with the KyCFG's rebuttal of their immediacy:

Interviews with lawmakers, lobbyists and others indicate these issues are likely to appear on a special session agenda:

Legislation to allow Kentucky's race tracks, including Florence-based Turfway Park, to operate casinos with video slots known as Video Lottery Terminals, or VLTs. Track operators say they need slots to compete with states like Indiana and Pennsylvania that use money from slots to increase purses and breeder incentives.

Leaving aside the discussions of the necessity or impact of expanded gambling, there is an ongoing dispute about the constitutionality of VLTs that will forestall progress in letting the licenses and make it impossible for immediate financial impact. If a vote turns out to be required, it can not take place until 2010. There is no reason this issue must be acted upon prior to the January 2010 Regular Session.

Tax incentives for the Kentucky Speedway in Gallatin County to expand. Speedway owners say the expansion is needed to attract a premier NASCAR Sprint Race to the track, and the expansion isn't feasible without the incentives.

We've discussed the problem with tax incentives, but tax incentives are just as applicable in January as they are in July.

Tax incentives for others, including small businesses and the film industry, would also be considered as would an adjustment to incentives already approved for the Ovation, a planned $800 million residential, office and entertainment development planned near the Ohio River in Newport.

Tax incentives again. While the effort to create a small business tax credit is an admission of the way Kentucky's tax system burdens job creation in the state, tax giveaways to Hollywood and some condos hardly justify a special meeting of Kentucky's legislature.

Legislation establishing bridge authorities between Kentucky and Indiana do build new Ohio River bridges in Louisville and Henderson in west Kentucky. The bill would not immediately affect the planned replacement of the Brent Spence Bridge between Covington and Cincinnati. But it is being closely watched by Northern Kentucky legislators, who have said tolling allowed by the authorities could set a precedent for how to pay for the Brent Spence project. Tolling is largely opposed by Northern Kentucky legislators and local officials, though no other plan to pay for the state's portion of the project has been offered.

Again, plans that can easily wait until January. If the Governor and the Legislature are confident they can create this new commuter-tax, they can go ahead and start planning.

A plan to cut the state budget, possibly by giving Gov. Steve Beshear's administration broad authority in targeting and making the cuts.

The Governor was granted authority to make cuts for FY09 in RS09 HB 143. The best way to address the spending baseline for the following year is to make reductions immediately. If he were to reduce immediate spending (for the next three months to end the fiscal year) by $50 million, it would have a theoretical impact of $250 million ($50 million over the next five quarters). Beshear should act now to limit spending to live within the state's means, and doesn't need the legislature to do so.

As Crowley concludes:

Special sessions cost taxpayers about $60,000 a day.

Let's not waste additional money dealing with matters that can wait until the legislature is constitutionally scheduled to meet.

Paul, Grayson Announce Committees; Other Candidates Update

In a short update of the Senate non-race in Kentucky, non-candidates Trey Grayson and Rand Paul have both recently announced committees of support.

Last week, Grayson announced a long list of prominent finance committee members to help him raise funds to not run for Senate.

Yesterday, Rand Paul announced a committee of eight prominent Kentucky economists to advise him as he doesn't run for Senate.

Meanwhile, actually-announced candidate Jim Bunning was honored by the National Taxpayers Union for his efforts in Congress to protect American and Kentucky taxpayers.

While Grayson and Paul have both indicated that they will not challenge incumbent Jim Bunning, Roger Thoney has already launched his campaign.

On the Dem side, Jack Conway and Dan Mongiardo are running, but we haven't gotten emails from them yet.

We'll keep you updated as the various candidates and non-candidates send us info.

May 27, 2009

Are they Representatives, Or Aren't They?

In a recent article, Tom Loftus explains that tax hikes are most likely off the table in any potential special session:

When Gov. Steve Beshear announced April 30 that his budget staff anticipated a revenue shortage of between $800 million and $1.1 billion, he said all options, including higher taxes, must be considered in dealing with the problem.

But Beshear, a Democrat, said in a statement released last week, "It is becoming increasingly clear that now is not the time to raise taxes on working families and small businesses."

House Speaker Greg Stumbo, D-Prestonsburg, made a nearly identical comment the previous week.

And Senate President David Williams, R-Burkesville, made his position clear at the Republican Party's Lincoln Day Dinner on May 9 in Louisville when he said, "We've given this governor as much money as he's going to get."

What's strange to us, is this quote from Kentucky Youth Advocates executive director Terry Brooks:

"Spending cuts alone are not going to resolve the deficit, nor are tax increases alone. It has to be a combination," said Terry Brooks, executive director of Kentucky Youth Advocates, which lobbies for programs that help needy families. "If taxes are off the table, then it means the leaders in Frankfort have decided that re-election is more important than kids and families."

Really Terry?

Spending cuts alone can solve the deficit, we assure you. You just reduce spending until it matches revenues, like Minnesota.

Secondly, in what situation is it unimportant to represent your constituents? If holding the line on spending is what is desired by the citizens you represent, than it is more important than the spending you personally desire.

May 26, 2009

A Contrast in Governing

As the first shortfall projections came out last November, Governor Beshear launched a full-scale effort to describe the pain that cutting government spending would inflict on Kentucky citizens. Check out his language last Thanksgiving:

A statement from Beshear said asking the state agencies and universities to plan for 4 percent cuts was the first necessary step to gauge the effects of potentially painful cuts.

"We know this process is not easy for anyone involved, and the size of the cuts being contemplated would, as the governor indicated last week, result in very difficult and painful choices," the statement said. "But we have to prepare and these scenarios are critical in doing that."

Now, let's contrast his language with that of Governor Tim Pawlenty of Minnesota. Gov. Pawlenty has won a battle with the Minnesota legislature which passed large spending increases and tax increases to his desk. You should read the whole article here.

Governor Pawlenty vetoed the tax increases, then made use of a provision of Minnesota's constitution that the Governor has the authority to ignore any program for which there is no funding. Those actions allowed him to balance the budget while creating "one of the first times in modern Minnesota history that the state will reduce the size of government in real terms, not just slow its rate of growth." His quote:

"The sky isn't going to fall," Mr. Pawlenty told reporters on Tuesday, just because Minnesota has to trim 3% to 4% from a $34 billion budget.

And what to Minnesota voters think? The same thing Kentucky voters would:

Mr. Pawlenty's hardball has earned him glowing praise from the state's job creators, in particular small businesses, who are relieved to be spared additional tax burdens in today's economy. The governor's message -- that it is simply "inappropriate" for state legislators to keep spending like lunatics and raise taxes in a recession -- has resonated with cash-strapped voters.

Hat Tip to Rick Grana

Everything Comes Back to Baseball

Like national Club for Growth blogger Andy Roth, I'm a baseball fan. To kick things off after a long weekend, a note on Obama's Supreme Court nominee from Baseball Primer:

Obama Chooses Sotomayor for Supreme Court Nominee

President Obama will nominate Judge Sonia Sotomayor of the United States Court of Appeals for the Second Circuit as his first appointment to the court, officials said Tuesday, and has scheduled an announcement for 10:15 a.m. at the White House.

[...]

In what may be her best-known ruling, Judge Sotomayor issued an injunction against major league baseball owners in April 1995, effectively ending a baseball strike of nearly eight months, the longest work stoppage in professional sports history, which had led to the cancellation of the World Series for the first time in 90 years.

In related news:

Politico: Republicans hold their fire on Sonia Sotomayor

In talking points distributed by the Senate Republican Conference to its members before the Memorial Day recess, Senate GOP leaders recommended that the GOP should neither "pre-judge" nor "pre-confirm" any Obama nominee. They said that any nominee should live by the baseball metaphor used by John G. Roberts Jr. during his 2005 Supreme Court confirmation hearing, when he said that a justice should simply "call balls and strikes" and not "pitch or bat."

Sooner or later, everything comes back to baseball.

May 21, 2009

CFG Recognizes Worthlessness of Stimulus

It has just occurred to us that our post Tuesday about calamitous predictions for the state budget could have been written another way.

Let's go back to the information from Greg Harkenrider of the state budget office:

"This recession's going to have a hang over no matter how you look at it," said Greg Harkenrider, Deputy Executive Director for the Governor's Office for Economic Analysis in the state budget office. "There's going to be an employment hangover, that's going to be head wind against robust consumption growth."

The panel was told that personal income won't start its rebound in Kentucky until this coming fiscal year and employment won't begin a turn around until 2011. Harkenrider says employment "has been hammered" and improvement will lag behind the country's recovery from a recession.

"We had huge inventories going into the recession," explained Harkenrider. "We're going to have higher sales, without higher production for sometime to beat down inventories, so that's not a good sign for employment."

So in summary:

  • Personal income won't start coming back until July.
  • Employment won't rebound until 2011.
  • Kentucky's recovery will lag the country's.

Let's contrast these ideas with this one from Governor Beshear's stimulus spending website:

Kentucky At Work is the Commonwealth's implementation of the American Recovery and Reinvestment Act (ARRA), signed into law by President Barack Obama and estimated to bring $3 billion in stimulus funding from the federal government to be invested in Kentucky over the next 28 months. ARRA will provide a much-needed, one-time infusion of dollars that will allow us to maintain our jobs and quality of life.

We've mentioned a few times our troubles with the disastrous spending frenzy commonly referred to as the stimulus. The stimulus law was signed in mid-February. It passed the Congress without any of our Representatives reading the legislation because it was too urgent to wait.

Now the economists of the Kentucky state budget office and the consensus forecasting group are admitting what we have known all along: $3 billion of spending on liberal interests does not improve the economy in any significant way.

Let's take this parsing one more step.

Greg Harkenrider is a (very good) economist in the Governor's Budget Office. His realization of the worthlessness of the stimulus is not new. He knew when it was being created, and we have no doubt that the Budget Office briefed the Governor and his senior staff about the impact of the stimulus.

If Governor Beshear knew that the stimulus was nothing more than wasteful spending, why didn't he speak out? If he knew at the beginning of 2007 that all the stimulus would do would increase the national debt, not improve Kentucky's economy, why didn't he stand up for taxpayers?

We know the answer, don't we?

May 20, 2009

Respecting the Taxpayer in Walton, KY

A Gold Star to the government of Walton, Kentucky. From NKY.com:

Although the city's tax rolls are projected to increase by $20 million in the coming fiscal year, it does not plan to spend more money.

On Monday, Mayor Phil Trzop presented City Council with a $1.6 million operating budget for the fiscal year that begins July 1.

It calls for $938,000 in revenue, a $698,000 surplus carried over from this year, and $1 million in expenditures.

This year's operating budget was $1.7 million.

"In the city of Walton, our budget is based on last year's forecast: what we actually got in," Trzop said. "We can forecast (future revenues), but we don't spend them. The budget is built for what we actually got last year, and then we let the future take care of itself."

That will allow the city to keep from raising taxes. The proposed budget calls for the current rates of $1.06 per $1,000 of assessed value for real property and $2.31 per $1,000 for tangible property.

They expect a windfall, and cut spending. That's defending the taxpayer!

HAT TIP: COAST

May 19, 2009

Calamitous Predictions for Kentucky's Finances

There's alot of disaster-talk going on in discussions about the future of Kentucky's state budget.

Yesterday, at the first meeting of the Consensus Forecasting Group, Greg Harkenrider discussed the long impact of decreased employment in Kentucky. Seeming to concentrate on national statistics, WTVQ reported:

The panel was told that personal income won't start its rebound in Kentucky until this coming fiscal year and employment won't begin a turn around until 2011. Harkenrider says employment "has been hammered" and improvement will lag behind the country's recovery from a recession.

We've shown you that, for a shortfall prediction of anything more than $500 million, three things will have to be true:

  1. Revenues for FY 2009 will have to meet the CFG prediction over the next two months, despite currently being on track to come out ahead,
     

  2. Revenues for FY 2010 will have to be lower than FY 2009, a two-year decrease that has not happened in Kentucky in at least the last 25 years,
    and

  3. Governor Beshear will have to have increased spending above the amount appropriated in 2008.

Harkenrider contends that consumption, which has been steady throughout this economically turbulent time will not translate into increased production and employment because inventories have been stockpiling. Maybe. But that still doesn't really suggest that employment will do anything other than level off as we shift into recovery...

Regardless of predictions, we can be assured that Governor Beshear will use them to justify greater spending on the part of government.

Once again, we have Senate President David Williams saying that any shortfall should be addressed through reduced spending and promising to hold the line against tax increases:

"For those bloggers who are here who want to see a battle over taxation and spending, you're about to see Armageddon," Williams said, generating one of the biggest rounds of applause of the night.

"We've given this governor as much money as he's going to get," he said. "He's going to have to manage his money and be responsible and tighten his belt the way every household in the commonwealth has done."

It seems we have the same discussion we were having one and a half years ago, just with more disaster. Let's hope for a real conversation about reducing spending responsibly and reforming taxes so that Kentucky is attractive to economic growth.

May 18, 2009

Entrepreneur Flees "Tax the Rich" Tax in NY, Flees to State With No Income Tax

Representative Bill Farmer (2008 Rank #10) introduced a bill last session to expand the transactions that are covered by the sales tax, lower the sales tax and eliminate all income taxes in Kentucky. There was no activity on it during the session.

Meanwhile, states without income taxes are gaining entrepreneurs:

BILLIONAIRE GOLISANO FLEES NY OVER TAX

ALBANY -- New York billionaire Tom Golisano is taking his big bucks elsewhere.

Furious over a new "millionaire's tax" that could cost him an extra $1 million this year, the Rochester-area resident and three-time gubernatorial candidate says he's fleeing the state for Florida's Gulf Coast.

Golisano called it a "quick decision" to switch his legal address to his $13 million waterfront mansion in Naples, Fla., after Gov. Paterson and lawmakers agreed to a record-breaking $4 billion income-tax hike last month.

"This budget and this increase in the level of taxation are really going to push a lot more people out of the state," Golisano told a gathering of Rochester business executives Thursday, according to The Buffalo News.

Here's the rest.

May 15, 2009

PA Senate Candidate Pat Toomey on the GOP Tent

Former CFG President Pat Toomey gives advice to the Republican Party in the Pittsburgh Post-Gazette:

A strong, diverse and healthy Republican Party should welcome an open and lively debate about these and other poles in our tent. But a tent consists of more than just poles. In fact, the purpose of the poles is to hold up the fabric that unifies the poles and provides the cooling shade that brings people to the tent in the first place. It is this unifying fabric, this common Republican cloth that is the essential defining characteristic of what it means to be a Republican.

This unifying idea is that personal freedom is the highest political goal of our great nation. It is not the only goal, but the most important. To achieve it necessarily means the power of government must be limited so it cannot excessively infringe on our freedom. All who embrace this transcendent theme should be welcome in the Republican tent.

Read the rest here.

Rand Paul Joins Shadow Senate Primary

There are now two candidates in a potential Republican Primary. Last week we found out that Kentucky Secretary of State Trey Grayson had formed an exploratory committee for the race with some sort of blessing from incumbent GOP Senator (and Defender of Economic Freedom) Jim Bunning. Yesterday, Dr. Rand Paul, a ophthalmologist from Bowling Green announced he would form an exploratory committee as well.

Both Grayson and Paul proclaim that they have no interest in running in a primary against Jim Bunning, making this a contest that may not materialize.

Where Grayson has attempted to keep his actions out of the spotlight, Paul took it straight to liberal talk show host Rachel Maddow's show (the clip is embedded below).

It is certainly an awkward non-primary in Kentucky, and we can't fault any candidate's approach to "not running". Dr. Paul's should be recognized for engaging the other side in a discussion of economic liberty, and we suggest that this is an approach needed from leadership throughout the country if those of us interested in economic freedom wish to answer the constant assault from those currently in power.

Obama's Centrally Organized Economy

We knew the massive increase in federal spending set up by the departing Bush administration and grown exponentially by the new Obama administration would be devastating to the cause of economic liberty. Now the new long reach of the federal government is becoming too apparent.

We've seen the President replace Rick Wagoner as the CEO of GM and Congress attempt to rewrite contracts between AIG and its employees by creating a special tax that would only apply to AIG workers. In both these cases, the outrage that would be directed at the audacious government disregard for democratic enterprise and the severe curtailment of liberties was dampened because, well, we all sympathized with the government's reaction to incredibly poor decisions made by that democratic enterprise. The public also recognized that these enterprises had accepted financing from taxpayers our children's IOUs, and should therefore be responsible to taxpayers and our elected government.

Therein lies the problem: the rate of spending by the Obama administration really has centralized decision making in our country. Financial institutions, large corporations and states are now all answerable to the federal government in a way that better resembles China than anything we're familiar with.

Just recently we saw two pristine examples:

First, we saw President Obama threaten California because his political friends did not approve of the budget decisions the elected legislature of California had made. As George Will points out:

In February, California's Democratic-controlled Legislature, faced with a $42 billion budget deficit, trimmed $74 million (1.4 percent) from one of the state's fastest-growing programs, which provides care for low-income and incapacitated elderly people and which cost the state $5.42 billion last year. The Los Angeles Times reports that "loose oversight and bureaucratic inertia have allowed fraud to fester."

But the Service Employees International Union collects nearly $5 million a month from 223,000 caregivers who are members. And the Obama administration has told California that unless the $74 million in cuts are rescinded, it will deny the state $6.8 billion in stimulus money.

Such a federal ukase (the word derives from czarist Russia; how appropriate) to a state legislature is a sign of the administration's dependency agenda -- maximizing the number of people and institutions dependent on the federal government. For the first time, neither sales nor property nor income taxes are the largest source of money for state and local governments. The federal government is.

Next we have the example of Obama using the authority of bailout spending to intervene in the bankruptcy of GM in order to make sure his political buddies get paid first instead of the classes of investors protected by current law. The Washington Post editorializes:

The government's intervention in GM's financial affairs tilts the scales so dramatically in the company's (read: government's) favor that it risks shutting out the legitimate interests of some creditors in favor of politically connected players who are owed much less and have less of a claim to the company's money. GM bondholders, for example, are being pushed to accept a 10 percent equity stake in repayment of their $27 billion in loans to the company. The United Auto Workers, on the other hand, is being offered a 35 percent equity stake in exchange for its claim of roughly $10 billion -- a claim that would typically be wiped out in bankruptcy.

--snip--

Extraordinary times call for extraordinary measures, and it was with this thought in mind that we endorsed the federal government's decision to pump billions of dollars into the automakers. But the spectacle of creditors being stripped of their legal rights in favor of a labor union with which the president is politically aligned does little to attract private capital at a time when the government and many companies need these investors the most.

While the audacity of government control is appalling, there is a common thread in how President is wielding it. These two examples entirely protect union interests, first above the interests of the citizens of California, second ahead of the interests of investors and potential investors of an ill American company.

There's another step in this centralization, this one being pushed in Congress by the doublespeak title of "The Employee Free Choice Act". Most of the debate is over the provision that says corporations will no longer have the right to ask for secret ballot union elections, but Obama's central planning will rely on the provision requiring "binding interest arbitration."

Interest arbitration will set up a scenario where all first labor contracts will be dictated by the federal government. The template for these contracts will be other contracts in existence, not the business models that have made a company successful. Kentucky Club for Growth Chairman Warren Rogers explains the dangers of this provision here.

May 12, 2009

April Revenues Were Down, but Forecasts Should Not (necessarily) Be

The April revenue report is out, and General Fund receipts declined 12.1% versus 2008.

It was easy to see coming. As we wrote on March 10:

In 2008, March through June were quite volatile year-on-year, with a 5% decrease in March, a 36% increase in April followed by a 21% decrease in May.... It is unlikely we'll know where we'll end up until we are there.

Last year, Budget Director Mary Lassiter noted the spike in April was unusual and likely to result in a drop in May 2008 (which it did):

State Budget Director Mary Lassiter explained the growth seen in April is an anomaly, and will largely be given back in May.

"A year ago, receipts fell dramatically in April and then rebounded in May," she said.

"This year, the Department of Revenue got the money in the bank quicker. The evidence that this is timing-related is reflected by General Fund receipts in the first nine days of May this year, which are below receipts in the same nine-day period in the previous year by about $188 million."

If 2008 was an anomaly, then perhaps it is worth noting the April 2009 receipts are up 19% versus April 2007, back when the economy was in reasonable shape as compared to today's "challenging revenues." This overall increase includes a 22% increase in sales and use taxes, a 47% increase in individual income taxes and an 11% increase in total income taxes.

Or perhaps it is not a useful comparison. Regardless, given the recent volatility of April and May receipts, it is difficult to draw conclusions from them.

Remember this as your legislators and Governor try to tell you that the latest budget numbers "are no surprise, but they are further proof that the next fiscal year is going to be the toughest one we've faced in decades."

May 11, 2009

Looking at Budget Possibilities for FY 2010

To look ahead to 2010, we need to make some assumptions

  • The Governor did make a reduction in baseline spending by $147 million.
  • The federal stimulus did not require any increase in baseline spending (a popular claim).

We also need to make a revenue forecast for FY 2010. We will not pretend to be economic sages.

The original forecast was an increase of 3.1% versus FY 2009. If FY 2009 revenues end up matching FY 2008 revenues, that would be a forecast for $8.933 billion in FY 2010. We'll call this the "high". For a "midpoint", we'll use $8.664, the 2008 revenue level that also happens to be approximately a 3% increase over the CFG forecast for FY 2009. For a "low" we'll use the CFG forecast for 2009 of $8.430 billion. To all of these estimates, we'll add the $159 million estimated revenues from the tax increases.

Now, let's look at the numbers from the original budget document with the adjustments and assumptions listed above. 2008 numbers are adjusted for final revenue numbers, the application of half the surplus to reserves and spending the other half of the surplus. That spending is considered a one-time expense and not added to future baselines.

2009 numbers are listed at the CFG forecast and the current trend of flat revenues. Both are adjusted for new revenues from the tax increases, and the spending is adjusted to reflect Beshear's $147 million reduction in baseline spending.

Finally we show how the various revenue scenarios for 2010 outlined above play out. For the "low" 2010 numbers, we'll assume the CFG estimate is met in 2009. For the "high" 2010 numbers, we'll assume the current trend for 2009. For the "midpoint" we'll run it both ways.

Revenues
2008 CFG 2009 Current 2009 Low 2010 Mid 2010 & CFG Mid 2010 & Current High 2010
$8.664 $8.482 $8.716 $8.589 $8.823 $8.823 $9.092
(in billions)
Reserves
2008 CFG 2009 Current 2009 Low 2010 Mid 2010 & CFG Mid 2010 & Current High 2010
$289 $245 $245 $40 $40 $225 $225
(in millions)
Total Resources
2008 CFG 2009 Current 2009 Low 2010 Mid 2010 & CFG Mid 2010 & Current High 2010
$9.815 $9.274 $9.508 $8.961 $9.195 $9.430* $9.699*
*includes additional $50 million in carryover from FY2009    (in billions)
Executive Branch Appropriations
2008 CFG 2009 Current 2009 Low 2010 Mid 2010 & CFG Mid 2010 & Current High 2010
$9.143 $8.865 $8.865 $9.120 $9.120 $9.120 $9.120
(in billions)
Total Appropriations
2008 CFG 2009 Current 2009 Low 2010 Mid 2010 & CFG Mid 2010 & Current High 2010
$9.469 $9.184 $9.184 $9.472 $9.472 $9.472 $9.472
(in billions)
Reserves & Carry Over
2008 CFG 2009 Current 2009 Low 2010 Mid 2010 & CFG Mid 2010 & Current High 2010
$346 $90 $324* ($511) ($277) ($42) $227
*$50 million more than expected in the budget    (in millions)

So there you have it.

Our worst case scenario -- in which the 2009 CFG forecast actually comes true and then 2010 revenues are flat as well:
A $511 million deficit.

A scenario in which the 2009 forecast comes true then FY 2010 recovers to FY 2008 levels:
A $277 million deficit.

A scenario where revenues are flat in 2009 and 2010:
A $42 million deficit.

A scenario where revenues are flat in 2009 and grow in 2010:
A $227 million surplus.

Anything else:
Someone has increased spending above the amounts listed in the 2008 budget.

Analysis next.

The Original Budget and Adjustments

OK, probably overkill on background, but we have written

A Short Summary of the 2008 Budget
The 2008 Surplus and Spending the Reserves
The Prediction of the $456 Million Shortfall
Governor Beshear's and the Legislature's Responses to the $456 Million Shortfall
and
2009 Revenues through the First Three Quarters

Here are the numbers from the original budget again:

Revenues
2008 2009 2010
$8.633 $8.824 $9.096
(in billions)
Reserves
2008 2009 2010
$289 $236 $225
(in millions)
Total Resources
2008 2009 2010
$9.793 $9.604 $9.653
(in billions)
Executive Branch Appropriations
2008 2009 2010
$9.131 $9.012 $9.267
(in billions)
Total Appropriations
2008 2009 2010
$9.458 $9.331 $9.619
(in billions)
Reserves and Carryover
2008 2009 2010
$335 $273 $34
(in millions)

Here are the adjustments we have noted since then:

  • 2008 ended with a $22.7 million surplus, half of which was spent and half of which ($11.3 million) was applied to the reserves
  • The Consensus Forecasting Group reduced revenue expectations by $394 million
  • Governor Beshear called the $394 million reduction in revenues a $456 million shortfall, suggesting he planned to spend an additional $50 million above the baseline in the 2008 budget.
  • Governor Beshear promised and claims to have made $147 million in cuts.
  • If Governor Beshear really did increase his baseline spending from the 2008 budget by $50 million, then his $147 million in cuts are actually only a $97 million reduction.
  • The General Assembly passed tax increases which are estimated to bring in $56 million for FY 2009
  • The General Assembly provided an additional $250 million in spending flexibility for Governor Beshear for FY 2009, but using any of that authority would create a deficit for 2010.
  • Revenues for the first three quarters of FY 2009 have matched pace with FY 2008, meaning revenues would exceed the CFG estimate by $234 million.

Now let's look ahead...

2009 Revenues through the First Three Quarters

Despite the dire predictions, in March we learned that general fund revenues through the first nine months of 2009 were even with 2008 levels. Revenues had been running ahead of 2008 from July through December despite the weak economy and the financial crash, followed by a weak January and the month of February being the first in which shortfall predictions were met. March revenues came in even so that the result of the first three quarters was even revenues versus 2008.

2009 Revenue Predictions
2008 Actual 2009 Budget 2009 CFG Shortfall 2009 Current Pace
$8,664 $8,824 $8,430 $8,664
Shortfall -$394 -$160
(in millions)

Through nine months, revenues are on pace to match 2008, leaving a shortfall of about $160 million instead of the $406 million suggested in November.

As we noted in the previous post, the budget cuts Beshear proposed in December combined with the predicted new revenue from tax increases in the session provided him with $199 million in new budget room. With a $160 million shortfall, Beshear still has $36 million in surplus budget space for FY 2009, without the need for the additional flexibility the legislature provided.

If we learn that this breathing room does not materialize, then we will know that the Governor has spent above the baseline provided in the 2008 budget.

Today, we are likely to learn that April revenues came in considerably short of expectations. We have noted that

April and May receipts were incredibly volatile, with April 2008 receipts increasing 36% over April 2007, but a 21% decrease in May receipts versus 2007. With such a spike last April, receipts are almost determined to be down this April, just as they are almost determined to be up in May.

So let's take any predictions based on the single month of April instead of the trend from the previous nine months (remember that the financial crash happened in October) with a grain of salt.

May 6, 2009

Governor Beshear's and the Legislature's Responses to the $456 Million Shortfall

In November, the CFG had predicted a revenue shortfall of $406 million and Governor Beshear indicated that he'd be an additional $50 million short of his spending objectives, for a total $456 million shortfall.

In December, Governor Beshear presented his plan to answer the projected shortfall.

He proposed:

  • $147.1 million in spending cuts
  • $81.5 million from a 70-cent cigarette tax increase this fiscal year, which ends June 30, 2009.
  • $8 million by furloughing state workers three days, during which they won't get paid.
  • $40.6 million in money transfers from various "restricted" funds throughout state government.
  • $178.9 million by tapping the state's "rainy day fund."

It is unclear whether the $147 million in proposed cuts include the $50 million of proposed new spending. In other words, we're not sure if he's proposing to cut the $50 million in spending that wasn't in the budget anyway.

We noted then, as we've noted twice in this review, that there is not $178.9 million in the state's "Rainy Day Fund", only $46 million in reserves:

Balances in reserve to carry into the next fiscal year
2008 2009 2010
$347 $285 $46
(in millions)

Any spending of reserves more than $46 million would leave a deficit in 2010.

His proposals instantly met opposition, including the size of the cigarette tax, the furlough proposal and the fund transfers.

Eventually, the General Assembly passed HB 144, a cigarette tax increase and a new sales tax on alcohol which is estimated to create $52 million in tax revenues for FY 2009.

Additionally, the General Assembly passed HB 143, legislation that would allow the governor to make his proposed cuts, spend up to $209 million of the Budget Reserve Trust Fund, and transfer over $50 million from the state pension system's health care fund.

With these actions, Governor Beshear has $199 million of new room in the budget for 2009 (the total of the $147 in spending cuts, $52 million in revenues from the new taxes).

And an additional $250 million of flexibility, adequate to cover a slightly revised shortfall projection of $459 million ($199 million of budget space + $250 million of flexibility = $459 million).

Let's note that the budget changes will help in 2010, while the flexibility is just a quick fix.

The budget portion follows into 2010. The spending cuts should reduce the baseline for both years. The new taxes are estimated to create an additional $159 million in 2010. These total $306 million in new budget room for FY 2010.

The remaining $250 million remains an obligation in 2010. The $50 million must be repaid to the the retirement health fund, and spending $209 million of reserves will leave an instant deficit for 2010 of at least $163 million.

May 5, 2009

Bunning Identifies a Significant GOP Problem

First reported by James Carroll at the C-J now carried at Bluegrass Politics, Bunning had this to say about the successful approach of the GOP's leadership:

Good God, he wants to run everybody," Bunning said of McConnell during a conference call with reporters.

Bunning contrasted his 2010 re-election bid with that of Sen. Arlen Specter of Pennsylvania, who last week bolted the Republican Party and joined the Democrats.

"It is the fact that Arlen Specter is probably as selfish as our leader is in trying to survive, that's the only way he thought he would survive in the U.S. Senate," Bunning said.

"Do you know Arlen Specter will be 80, has had four bouts with cancer and he still wants to run for the U.S. Senate?" Bunning continued. "And I'm being criticized at 77 and healthy for wanting to run for the U.S. Senate by certain leadership people in my party. Give me a break."

Asked if the leadership he was referring to was McConnell, Bunning answered: "Obviously. Do you want me to spell it out for you?"

He said: "Do you realize that under our dynamic leadership of our leader, we have gone from 55 and probably to 40 (Senate seats) in two election cycles, and if the tea leaves that I read are correct, we will wind up with about 36 after this election cycle. So if leadership means anything, it means you don't lose ... approximately 19 seats in three election cycles with good leadership."

Indeed, a decade of support for power over principle has diminished the GOP. The greatest problem with Arlen Specter is not just that he supported the stimulus, but that he thought leadership was " peeling a $100 billion dollars off whatever the Democrats ask for and declaring victory."

Arlen Specter left to GOP because he realized that PA Republican primary voters would see straight through his CYA politics. From his website:

On this state of the record, I am unwilling to have my twenty-nine year Senate record judged by the Pennsylvania Republican primary electorate.

It is truly an insult to the Democratic voters of Pennslyvania that he thinks they won't.

The $456 Million Shortfall Prediction

In late 2008, as the financial crisis took hold, Governor Beshear asked the Consensus Forecasting Group (CFG) to return and predict the "worst case scenario" for revenues.

Remember, this was the prediction made in the budget:

Forecast Revenues
2008 2009 2010
$8.633 $8.824 $9.096
(in billions)

Also recall that 2008 revenues actually reached $8.664 million.

The CFG created a new projection for FY 2009 that General Fund revenues would only total $8.430 billion, $394 million short of the original prediction and $234 million less than actual revenues in 2008.

Here is the first contradiction in the information we have available to us. The revenue prediction was reduced $394 million, yet it takes hold publically as a $456 million shortfall.

There are other contradictions between the information contained in the budget and the information publically presented as the shortfall is being created.

The budget includes mandated lapses, in other words a requirement that the executive branch not spend some amount of the appropriated money. The legislature is simultaneously telling the governor to spend $X, but also to avoid spending all of $X.

In a presentation to House and Senate A&R, the Governor's budget office details that executive appropriations are reduced $176 in 2009 and an additional $180 million in lapses are mandated. According to the budget, executive branch appropriations are reduced $119 million and $190 million in lapses are mandated for 2009. This is a $47 million total discrepancy between these "reduced spending" numbers.

We point this out not to confuse things, but to point out how little good information about the state's budget is available to the public (and the need for real transparency in state spending). Since these numbers don't line up, let's use the original budget as our baseline.

If the new revenue forecast is $8.430 billion, then total resources for 2009 are reduced by $394 million:

Total Resources
2008 2009
$9.793 $9.210
(in billions)

Remember that total spending for 2009 was $9.331 billion, with a $285 million reserve after the 2008 surplus was added, a total budget of $9.616.

The difference of $9.616 billion budgeted and $9.210 billion in resources is a shortfall of $406 million.

If the shortfall would be more than $406 million, it would not be because revenues were short of the original prediction, it would have to be because spending increased.

The 2008 Surplus and Spending the Reserves

In our last post, we summarized the projections put forward in the 2008 budget, passed before fiscal year 2008 ended in June 2008.

If you recall (or look below), 2008 revenues were projected to total $8.633 billion. Actual revenues for 2008 totaled $8.664 billion, a $31 million increase over the earlier projection. After these greater revenues were adjusted for unexpected expenditures, fiscal year 2008 ended with a $23 million surplus (page 6 here).

Half of this surplus was added to the Budget Reserve Trust Fund, while the other half was added to other reserves actually spent immediately. Here is the last chart from the previous post adjusted for this surplus.

Balances in reserve to carry into the next fiscal year
2008 2009 2010
$347 $285 $46
(in millions)

What this means, is that the biennial budget for fiscal years 2009-2010 began with a reserve of $347 million. Of this $347 million, $226 was dedicated to the Budget Reserve Trust Fund, $57 million was dedicated to other reserves, and $63 million was considered a part of resources available for appropriations.

Note here that the reserves decrease each year. After $63 million is spent in fiscal year 2009, another $239 million is budgeted to be spent in 2010. The state only has $57 million extra to spend. Any other increased spending will have to come from cutting somewhere else or unexpected evenues.

May 4, 2009

A Short Summary of the 2008 Budget

So, where are we with the state budget today?

First, let's look at the assumptions contained in the budget passed in 2008. The state's fiscal year runs from July-June. The budget passed into law in April 2008 during the 2008 fiscal year. The budget mainly pertains to fiscal years 2009 and 2010 which runs from July 2008 - June 2010. Here are the revenues projected for each year by the Consensus Forecasting Group (CFG) for each fiscal year during the budget:

2008 2009 2010
$8.633 $8.824 $9.096
(in billions)

General Fund revenues are not the total resources to the state. Additionally, fiscal year 2008 began with $579 million carried over from fiscal year 2007. The CFG estimate combined with carry-overs and other resources yield the following projected total resources.

2008 2009 2010
$9.504 $9.370 $9.428
(in billions)

Additionally, some revenues are reserved for future spending and for unexpected expenses. These funds include the Budget Reserve Trust Fund, commonly referred to as the state's "Rainy Day" fund.

2008 2009 2010
$289 $236 $225
(in millions)
Total Resources
2008 2009 2010
$9.793 $9.604 $9.653
(in billions)
Percentage Increase
2008 2009 2010
  -1.9% 0.5%

That's the revenue side of the budget passed in 2008. Here's the spending side:

Most of state spending is done by the executive branch. For the executive branch the budget appropriated:

2008 2009 2010
$9.131 $9.012 $9.267
(in billions)

When the Legislative and Judicial budgets are included the appropriations total:

2008 2009 2010
$9.458 $9.331 $9.619
(in billions)

Which leaves the following balances in reserve to carry into the next fiscal year:

2008 2009 2010
$335 $273 $34
(in millions)

All of this information is from the first page of the budget.

Things to note:

  • Appropriations spend $200-$500 million more than forecast revenues annually.
  • While total resources were forecast to decrease 0.7%, total appropriations increased slightly.
  • The Reserve Fund and total reserves are almost completely spent in 2010.

May 1, 2009

$1 Billion Dollars!!!

Oh my.

Governor Beshear, doing his best Dr. Evil impression, thinks that there's a chance of a $1 billion shortfall.

Beshear says budget shortfall could top $1 billion

FRANKFORT -- Kentucky is bracing for what may be the largest shortfall ever in its state budget -- more than $1 billion.

You've read our quick explanation about how such a scenario can only be due to out-of-control spending, but we'll go into detail today and this weekend.

For now know that a prediction of a $1 billion dollar shortfall means he thinks state revenues will be lower than they've been since 2006.

Financial Calamity. Economic Disaster. Dogs and cats living together... mass hysteria!

We'll break this into two more posts:

  • The math for where the Kentucky Club for Growth thinks Kentucky's budget leaves us, and
  • The math for what would have to be true for Beshear's dire predictions to come true.

Stay tuned!

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The KY Club for Growth seeks principled candidates who are committed to the following:

* Free market principles
* Lowering taxes
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* Judicial reform
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