Incoming governor Steve Beshear has received a welcome package from his predecessor in the form of a budget shortfall. Between now and 30 June 2008, that shortfall is projected at $289 million. For all intents and purposes, it’s $300 million. (In reality it’s over $400 million, but the surplus from last year will offset some of the shortfall.)
Right now, Beshear is talking of 3% cuts across the board. This will probably work for this cycle. He is also talking of a hiring freeze–also a good idea. Trouble is, we’ve been under a hiring freeze for the last four years, and this has not stopped spending from skyrocketing.
This year, as the legislature begins its session, they will have to come to grips with some very nasty realities:
- We have a state government apparatus that is large and is growing at a faster rate than taxpayers can support
- We have a myriad of state agencies that are demanding double-digit increases in spending
- We have an education system–K through 12–that is a shambles in spite of a decade of unprecedented spending.
- We have a state employee retirement system that, as a defined benefit plan, is underfunded and whose obligations–which include retiree health care–are only increasing.
Ultimately, taxpayers are going to have to decide exactly what the heck it is they want out of their government. Most of my gripes on this blog apply to the federal government, but at the state level this is also the case. Taxes are already high in Kentucky, even though we do not have a large, wealthy taxpayer base.
When you get outside of Louisville, Lexington, Frankfort, and the Greater Cincinnati area, per-capita income drops substantially. When you raise taxes, even on cigarettes, it adversely impacts those who live on the margins. You can only sell so many bonds to cover your shortfalls; you can only raise taxes so much.
When your neighbors to the south–Tennessee–and to the north–Indiana–are holding the line on taxes and surviving, the pressure is on you to hold the line, too. Something will have to give.
Beshear says he plans on balancing the budget without raising taxes or laying off state employees. Perhaps that is possible in this cycle–although I have my doubts–but the larger issue is the structural size of government. Unless Beshear addresses that reality, this cycle will come back with a vengeance.
This is not a Democrat or a Republican thing; this is about Economics 101.
My prediction: cuts in state agencies will cover most of the shortfalls for this year, and Beshear will work with the General Assembly to come up with a creative plan that includes some bond sales, some budget freezes in various departments, and a small tax hike on cigarettes and alcohol, that plugs the gaps for the next cycle.
But the problem will return again, as Medicaid and education spending (including postsecondary) will create budget obligations that result in huge shortfalls.
The day of reckoning will happen; it’s only a question of when Beshear will face it, or will be able to defer that event to the next governor.