As the months in 2017 continue to pass without a plan presented by the governor on tax and pension reform, rumors have started to fly that there may not be a special session this year to deal with the issues because there is not enough time to build support around a plan.
However, Kentucky Gov. Matt Bevin said Friday there is a 100% chance that there will be a special session this year. The governor said despite the rumors, his office holds the power to call a special session and he plans to.
Before this statement by the governor, legislative leaders like House Speaker Jeff Hoover stated concerns about the idea of having a special session before the end of 2017 without a plan being sold to the legislature and the public first.
“Hoover said he has advised Bevin that, after releasing his proposals for pension and tax reform, ‘he needs 90 to 120 days to go around the state and sell it,’” according to a recent story from The State Journal.
In an exclusive interview with The Bottom Line, Senate Appropriations Chair Chris McDaniel said he believes there is a good chance the legislature will be convened for some sort of special session, whether it will deal with tax reform, pension reform, or both. McDaniel said the state faces some substantial issues that need to be dealt with before crafting a budget in 2018.
“I think crafting the budget in the absence of tax reform could be okay. I think crafting a budget in the absence of pension reform is nearly impossible,” McDaniel said. “Because the explosive growth inside of that system demands attention. And so consequently, I think that will have to be done before a budget can begin to be crafted. Or, the options are cuts the likes of which the Commonwealth has never seen. And I can easily imagine low, double-digit cuts to everything to make the Commonwealth’s pension systems work.”
House Appropriations Chair Steven Rudy noted the governor’s point that he is the only one with the power to call a special session. But Rudy told The Bottom Line he believes in order to be fair to the taxpayers, there needs to be a dialogue and a statewide pitch to get buy in from the people it will affect and he stated that time is running short for those efforts.
In discussing the difficulty of getting everyone on the same page—including members of the General Assembly, their constituents, and groups across the state a new plan will impact—Rep. Rudy said that will be the biggest challenge of getting a tax reform package passed and pointed to it as further proof of the need for an education campaign to get the public and legislators on board.
“If we are going to look at this whole thing comprehensively, I hope that people will keep an open mind and look at the overall picture and not just pick out certain individual things because if we go picking out certain individual things, we are going to be right back in the same shape we are in right now with a piecemeal code that is not in line with the needs of Kentucky’s state government but also to our taxpayers because it won’t be fair to them. It needs to be fair, and simple, and encourage the growth of our economy,” Rudy said.
In terms of what the appropriations chairs expect to see out of a tax reform plan, both men said it is important to remember that at this point, everything is on the table.
Sen. McDaniel said comprehensive tax reform should focus on attracting high quality businesses that bring good jobs and high wages which helps expand the tax base while also making Kentucky an appealing place to live as it relates to tax policy.
One way that has been discussed in order to achieve that is lowering the income tax in Kentucky and re-evaluating the sales taxes and current exclusions made in that area. Both McDaniel and Rudy said they expect those policies to be part of the discussion as Kentucky continues to try and compete with surrounding states with lower or no income tax.
On the pension reform front, Sen. McDaniel said when looking at pension systems and their funding level, the legislature will have to look at three components: the rate of return on investments, the outflow of benefits and the amount of money that Kentucky puts into the systems.
“I believe there is a need for change on every one of those,” McDaniel said.
Rep. Rudy shared Sen. McDaniel’s sentiment that the pension problem is the biggest one facing the state and said that there is no use reforming one without the other because you must align both to address the financial needs of the state.
Rudy and McDaniel both said the recent news of the more realistic debt figures faced by the Kentucky Retirement System (KRS) coming to light and the system’s board lowering their return assumptions to give a more accurate picture, there can now be more serious conversations about how to fix the pension crisis. And when asked about the large contribution increases that will be needed as a result of those changes, Rudy said he hopes tax reform efforts and recent economic growth as a result of business-friendly laws will help that crisis.
When asked what they would want to communicate to the people of the state about the objective of a special session and what could come of tax and pension reforms, Sen. McDaniel noted that there is going to be some hurt felt across all levels through changes to the system but said the state has to make these changes to be fiscally responsible and solvent for the future.
“If you talk to pensioners about whose benefits should we change, if you talk to potential future hires, if you talk to current employees, if you talk to cabinets about if they can take budget cuts, if you talk to taxpayers about whose taxes should increase, everyone will say ‘not me.’ And so there are no good and easy solutions to this. The good and easy solutions would have happened 15 or 20 years ago, but the fact is they didn’t,” McDaniel said.
Rep. Rudy says his constituents have come to him with a lot of concerns and different ideas about reforms and added that he wants people to know that there are people currently in office who are responsive and want to make sure this is done.
“My former state Senator used to say Kentucky has an OPM problem—and that’s other people’s money. So many agencies look at it and say ‘well, this is my money.’ No, this is the taxpayer’s money. And I want them to know they are going to have a seat at the table at this as well and we have to be good stewards of the taxpayer’s money and we will be making the decisions based on what is fair and equitable. And hopefully, we will make a tax code that will move Kentucky forward and grow our businesses and economy,” Rudy said.