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The 2007 General Assembly: Perils, promises and political footballs

By Caleb O. Brown

Editor’s note: This op-ed is part of a series of articles analyzing issues relating to the Kentucky General Assembly’s 2007 session.

With multiple looming fiscal crises and the likelihood of a tax cut for Kentucky’s small businesses, the Kentucky General Assembly’s 2007 session holds the possibility of both great peril and significant promise.

First, the peril.

When Gov. Fletcher signed the largest spending plan in Kentucky last May, he created a dark fiscal cloud that will cover Frankfort when the 2007 General Assembly convenes in January.

The governor’s economic double-mindedness in pushing the state in this direction is enough to give taxpayers a bad case of whiplash.

After signing a budget in May that obligated taxpayers to $2.4 billion in additional debt, Fletcher then trumpeted his very modest veto of $370 million in bonded projects, much of which was pork-barrel spending. However, he then turned around and indicated that the vetoed projects could return … and soon. At the time, the governor told reporters that he wasn’t opposed to the vetoed projects, but that they just could not be approved this year.

Since many of these projects were scheduled for the second year of Kentucky’s two-year budget cycle, expect Fletcher and his fellow big spenders in the General Assembly to push state spending even higher by insisting on restoring funding for these projects. With the governor seeking another term in 2007, lawmakers likely will press the advantage by asking for more spending in their districts.

But the previously vetoed projects won’t be the only political footballs being tossed around Frankfort this year.

Fletcher also is claiming that the state has a $279 million budget surplus. However, there is no way of knowing whether the commonwealth will even have excess funds next year, much less a specific amount of financial leftovers.

Still, the imaginary surplus already is burning a hole in the governor’s pocket. Not only does he want to spend these funds before they even materialize, but he’s asking prospective gubernatorial candidates to create a plan for how they would spend the spare change.

Another political football that lawmakers had better start catching instead of punting is the issue of the financially ailing state-pension plan.

Since 2003, the unfunded liability of the Kentucky Employee Retirement System’s pension fund has grown nearly $2 billion – money that will eventually have to be paid out to retirees. The retirement system’s most recent valuation recommended that the fund receive $130 million in 2005, significantly more than the $50 million that was actually paid.

This massive funding shortfall, combined with the fact that many thousands of state workers will retire during the next few years, may result in Kentucky taxpayers being asked to sacrifice their own paychecks to keep state workers in blissful retirement.

Whether or not lawmakers believe the state ought to be in the retirement business, these pensions are contractual obligations to workers at every level of government. Making sure the state keeps these promises should take precedence over new spending in 2007.

But the 2007 legislative session not only holds peril; there also is the promise that lawmakers will put a particularly loathsome tariff – the “alternative minimum calculation” (AMC) – in the shredder.

The ill-advised AMC was implemented as part of Gov. Fletcher’s tax-modernization policy in 2005 and foisted a new worry onto Kentucky businesses: the prospect of paying additional taxes even if a profit is not earned.

During the 2006 budget session, lawmakers backtracked, delaying many corporate tax cuts approved the previous year while failing to exempt small businesses suffering from the increased burden of the AMC. That latter problem was partially corrected in a special session during which broad AMC exemptions were approved by lawmakers, many of whom had previously voted against the tax breaks.

The next session promises to further lighten the tax loads of Kentucky businesses. Rep. Carolyn Belcher, who sponsored the special session’s tax-cut bill last year, has pledged to introduce legislation that would eliminate the AMC in 2007. Given the anger fomented by the General Assembly’s flip-flopping on business taxes, this bill will get more scrutiny than most.

This year’s special session required lawmakers to take a week out of their summer vacations to return to Frankfort and begin to fix what they broke. If they are willing to admit the mistake of approving the AMC in the first place, the political spoils should be considerable.

– Caleb O. Brown is director of KentuckyVotes.org, a voter information Web site. Contact him at brown@bipps.org or at (270) 782-2140.

The Bluegrass Institute is an independent research and educational institution offering free-market solutions to Kentucky's most pressing problems.

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