Thursday, September 21, 2017

KY Chamber Tax Summit

The Kentucky Chamber of Commerce held a Tax Summit in Lexington yesterday.  The conference was well attended and included approximately ten House members who attended as participants.  Governor Bevin was called to a meeting in DC and unable to speak in person, however, he sent a video where he discussed his vision for tax reform in Kentucky.  Additionally, Speaker Hoover was added to the agenda and spoke during lunch. A complete summary is below, but a few highlights to make you aware of:

  • Speaker Hoover announced that the House will appoint a Working Group on Tax Reform to begin meeting after the special session on pension reform. 
  • All speakers seemed to advocate moving from an income based taxing system to a consumption based system.
  • Multiple speakers, including the Governor and Speaker Hoover, indicated complete elimination of the income tax isn't feasible, and decreases would need to be phased in.
  • Local governments will no longer advocate for LIFT, which limits local options sales tax to specific projects with a sunset period.  Instead they will advocate for broad authority related to local option sales tax.
  • Everything is on the table.
  • Reviewing tax expenditures will be a key part of the process.  The Governor has often said that Kentucky's exemptions are more than revenues. 
Jennifer Barber, with Frost Brown Todd, began the conference with a presentation on what tax reform in KY might look like.  Her slide presentation is attached.  Jennifer noted that an additional 1 cent on the sales tax would raise approximately 580M annually and if the sales tax was expanded to include services, an additional 2.78B would be realized.

Dr. Bill Fox, from the University of Tennessee, and well known to those who've followed various tax reform efforts in Kentucky was the next presenter.  His slides are available HERE.  Dr. Fox identified the key elements of a good tax system to be: raising appropriate level of revenues, a system that provides competitiveness, low administration and compliance costs, and a system that is fair.  He also suggested that state and local taxes should be looked at together.  Kentucky is relatively low compared to the national average (ranked 40th) when looking at total state and local tax collection and Kentucky is also weak in revenue growth.  Dr. Fox outlined the following policy options:

  • Broaden the tax base and lower the rates in order to make the system more elastic and reduce behavioral distortions.
  • Enhance KY's competitiveness by shifting to more consumption and less to capital and labor taxation.
Dr. Fox goes on to discuss specific recommendations which you can find in slides 17 through 22 of his presentation.

There was a panel discussion on local government and local issues.  Participating in the panel were JD Chaney (KY League of Cities), Eric Kennedy (KY School Boards Association) and Judge Tommy Turner (KY Association of Counties).  As mentioned earlier, a main takeaway was that local governments are no longer going to focus on the LIFT approach but rather support broad constitutional authority for a local sales tax.  The panel agreed that if given the local option authority they would be willing to have a discussion on the repeal of other taxes, like the inventory tax that Governor Bevin has suggested he'd like to see repealed.  The group said that statewide, the inventory tax provides roughly 140M annually. KSBA mentioned that, if given the opportunity, they'd like to see a reform of the SEEK formula included in tax reform, but seemed to recognize that might not be feasible. Finally, in response to questions about streamlining procedures, local governments shared that they are not in favor of centralized collection.

There was also a panel with policymakers that included Senator Ralph Alvarado, Rep. Jonathan Shell, Budget Director John Chilton and moderated by Mark Sommer.  Sommer had several slides and they are available HERE.  

Sommer asked the group what tax reform / tax modernization actually means.  Several of the responses included looking at a code that has not changed in many years, moving away from a system where prosperity is taxed thereby placing KY at a competitive disadvantage, and including in the system the ability to reward and retain current industry/employers, in addition to creating a system that will attract new job. Sommer questioned whether lawmakers should look at treating for-profit medical systems the same as not-for-profit systems, specific to property tax and briefly mentioned the unfairness of the provider tax.  

In response to a question about the LLET tax, and how burdensome it is to small employers, Director Chilton explained that the state receives 80M in revenues annually from this tax.  Rep. Shell discussed the need to look at the sales tax exemptions and also talked about the need to phase down the income tax rates and explained that complete elimination would require too much of an increase in the sales tax - roughly 14% to 15%.  Senator Alvarado mentioned the possibility of taxing opioids.  Last session, there was legislation introduced to do this, however it did not move.  Rep. Shell ended the discussion by talking about the need for a broad look at tax reform and the need to shift ability and responsibility to local governments.

Juva Barber (KBT), Nick D'Andrea (UPS), and Laurie Maudlin (Appian in Indiana) were speakers for the panel on Infrastructure.  Barber outlined the need for additional infrastructure funding, to not only maintain the current system but also to address new projects.  She discussed the problems with funding improvements to Kentucky's roadways, but also the need to invest more in the other modes of transportation, specifically rail, aviation, waterways, and public transit.  She mentioned the KY Infrastructure Coalition, which has been formed to advocate for additional transportation infrastructure funding.  Maudlin talked about her involvement in the successful effort in Indiana to raise additional revenue for transportation.  She shared that their success began with being able to demonstrate to policymakers that all other options had been explored and that raising the gas tax was the only option left.  D'Andrea talked about the UPS decision to invest so heavily in Kentucky and that without adequate infrastructure that would not have happened, but that continued improvements are needed as well as mega projects like the Brent Spence Bridge.  D'Andrea discussed the successful Tennessee effort and explained that a big part of that success was being able to work with legislators to identify what projects would be addressed with the increased revenue.

There were also panels that included national organizations to discuss tax reform at the state level and at the federal level, with much of the same information that Jennifer Barber and Dr. Fox used in their presentations.

Friday, September 8, 2017


Commonwealth of Kentucky
Senate Majority Office

September 8, 2017
Contact: John Cox


FRANKFORT, Ky. (Friday, September 8, 2017) – The Kentucky Senate Majority Caucus announced Friday that Senator Jimmy Higdon (R-Lebanon) has been chosen by his peers to serve as the new President Pro Tempore in the Kentucky Senate. Senator Higdon replaces Senator David Givens (R-Greensburg) who resigned from his seat in Senate leadership in June citing personal reasons.

"I was sad to see Senator Givens step down, but I am honored to serve in this new capacity in Senate leadership, and I appreciate all of my colleagues for granting me this special opportunity," Senator Higdon said Friday. "I certainly have some big shoes to fill, but Senator Givens has been supportive, and I know he will continue to be a great asset to our caucus and a great resource to me moving forward."

Prior to Friday's election, Senator Higdon held the leadership position of Senate Majority Caucus Whip. A special election will be held in the near future to fill the newly vacant leadership post.

"I am happy for my good friend, Senator Jimmy Higdon, and look forward to continuing to serve with him in Senate leadership," Senate President Robert Stivers (R-Manchester) said. "Senator Higdon is experienced, knowledgeable, and possesses the necessary character skills needed to effectively serve as President Pro Tem, and I am confident he will do an exemplary job."

Senator Higdon was elected to the Kentucky Senate in 2009 during a special election after having previously served in the Kentucky House of Representatives since 2003. Senator Higdon was elected Majority Caucus Whip in 2014 and reelected in 2016. He represents the 14th Senate District, which encompasses Casey, Marion, Nelson, and Spencer counties, as well as a portion of Jefferson County.

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Monday, August 28, 2017

KY Public Pension Audit

The Public Pension Oversight Board (PPOB) met this afternoon in Frankfort.  Today's meeting was highly anticipated, with PPOB consultants presenting the third and final report outlining recommended changes to Kentucky's public pension systems. The report includes recommendations on changes to benefits and actuarial assumptions, but very little information on how to fund the changes. Members of the Kentucky House of Representatives will meet on Tuesday for a private briefing on the report.  

We expect the recommendations will be used as a guide, as policymakers develop a proposal seeking reforms to the various public pension systems.  Following today's meeting, Speaker Hoover issued a press release indicating that he and his colleagues will be seeking public input and that the PFM report is only a recommendation on how to proceed. The Governor and legislative leaders have indicated over the past few weeks that the special session will be called sometime in October. 

PPOB Meeting Summary

John Chilton, State Budget Director, began the meeting by presenting an overview of the problems facing the pension systems and the Commonwealth's budget. Chilton outlined the work of the Consensus Forecasting Group and the anticipated shortfall in FY 19 of roughly $200M.  He also reminded the committee that in the previous PPOB meeting it was determined that Kentucky would need an additional $700M per year in order to fully fund the ARC (actuarially required contribution).

Chilton went on to explain that the state needs an additional $1Billion and outlined three options:
  1. Cut spending
  2. Increase taxes
  3. Adjust benefits
Chilton discussed how spending on pensions and Medicaid have increased the past several years, as spending in other state agencies and programs have declined.

If no changes are made, K-12 education will be cut by $510M per year, from the annual current appropriation of $3.024B. This is an area that has generally been held harmless during previous budget cuts.  According to Director Chilton, without pension reforms, protecting vital government spending, like the SEEK formula, won't be an option.

Chilton also spent some time discussing the unfunded liability and what that number actually is. After talking through several ways to arrive at that number, they have chosen to use assumptions and rates used for private, non-government plans.  In doing so, the unfunded pension liability is $64B.  It's often been said through this process that the liability is anywhere between $30B and $80B.  

Following Director Chilton's opening presentation. the consultants - PFM - presented the final report and recommended changes to Kentucky's Public Pension Systems.  You can view the full reporHERE.  

To summarize, PFM recommends the following changes, as stated in the report:

All future Kentucky state and local government employees would have access to a balanced set of retirement benefits providing positive income replacement levels, including:
  • Social Security participation (not now available to teachers and many local government public safety employees)
  • Additional defined contribution (401K style) plans with significant minimum employer contributions and additional employer match
  • Retiree health care coverage consistent with that provided to active employees
All current KY state and local government employees would have the value of their accrued benefits maintained and receive benefits for future service as good as or better than those available for future hires.
All retired KY former employees would receive at least the same benefit level they were guaranteed upon retirement and would see significant improvements to the funding of their benefits - strengthening the solvency of these vital commitments.
In addition, all Kentucky stakeholders would begin to see steady and meaningful restoration of fiscal stability to the Commonwealth's retirement systems, with greatly reduced risk of renewed pension crises in the years ahead. In turn, this progress would ultimately lead to more resources available for critical investments and services, or fair employee raises going forward, and for improved financial health and credit strength 

Additional resources/slides from today's meeting:

Please don't hesitate to contact Rachel Bayens or Dustin Miller with any questions or concerns that you have. We will continue to keep you updated with information on the likelihood and timing of a special session.