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April 3, 2013

Smoke and mirrors

Critics claim bipartisan pension reform deal lauded by state legislators is flawed

With the clock ticking down on the final day of this year’s General Assembly session, it appeared partisan gridlock was once again the big winner in Frankfort, as the House and Senate couldn’t compromise on the big issues that took up most of their time.

However, last-minute deals were struck in the final hours, including bills to regulate the growth of industrial hemp and improve overseas voting access, but most significantly, pension reform that changed the system for new hires and added new revenue to shore up its $34 billion unfunded liability, caused by a decade of neglect.

The finger-pointing and accusations between the two parties and chambers immediately turned into back-slapping and self-congratulation, with Gov. Steve Beshear, Democratic House Speaker Greg Stumbo, and Republican Senate leaders Robert Stivers and Damon Thayer praising the bipartisan pension reform effort as historic, and the session itself as one of the most productive in two decades.

Senate President Stivers concluded his post-session end zone dance by proclaiming, “I’m going to Disneyworld.”

But not everyone watching the same session, or the last-minute pension reform deal, was donning Mickey Mouse ears.

Rep. Jim Wayne, D-Louisville, as well as groups like the Kentucky Public Pension Coalition and the Kentucky Center for Economic Policy, say the pension reform deal has major flaws, including the plan for new state hires, its funding mechanism, and the long-term negative effects the deal will have on Wayne’s main cause over the past decade: comprehensive tax reform.

Kentucky’s pension reform has two main components: SB 2 — which changed the pension plan for new hires to a hybrid public/private system — and HB 440 — the funding mechanism that frees up more than $100 million to fully fund pensions.

Rep. Wayne echoes the criticism of SB 2 by the Kentucky Public Pension Coalition — representing state workers — saying the new structure moves toward the riskier corporate model of 401(k) plans. He adds that “the legislative elite” crafted the legislation behind closed doors without worker representatives or Brent Yonts, chairman of the House State Government Committee.

While House Democrats finally gained a concession from the Senate by having such reform paired with revenue toward pensions, legislators had little time to read or fully grasp HB 440 before voting on it. Billed as $100 million in new revenue — while also being inaccurately labeled by leadership as “revenue neutral” — the details of HB 440 present a more complicated picture.

As Jason Bailey of the Kentucky Center for Economic Policy points out, $30 million comes from new federal tax revenue from the recent fiscal cliff deal that would have come to the state regardless of whether pension reform passed.

While $33.2 million comes from changes to the tax code — including a new internet sales tax and closing loopholes that multi-state corporations use to avoid paying taxes — $32.5 million comes from lowering individual tax credits that go to middle-income workers, totaling approximately $30 for a family of three.

However, a new tax credit also emerged at the last minute in HB 440 that would give an average savings in sales tax of just under $700 for people who buy a new car in Kentucky while trading in their old one. This measure will subtract roughly $34 million in revenue from the state’s road fund, which is already — like many other aspects of the state’s budget — under-funded.

Rep. Wayne says the Kentucky Automobile Dealers Association has been pushing for this reform for years in order to compete with neighboring states, and a review of the Kentucky Registry of Election Finance shows a recent spike in political donations to both parties in Frankfort.

In the last three months of 2012, KADA’s PAC gave almost 90 contributions to legislators in both parties totaling $30,000, including maximum $1,000 donations to Stumbo and Stivers. While the trade-in tax credit was part of the recommendations of Lt. Gov. Jerry Abramson’s Blue Ribbon Tax Commission last year, it was one of only a handful that made it into legislation, as tax reform was mostly ignored in the session.

Rep. Wayne tells LEO this funding mechanism means middle- and low-income Kentuckians will bear the brunt of the burden on paying for pensions, especially when you take into account how tolling for the new bridges is being used.

“The reason we’re tolling the bridges is because we don’t have enough in the road fund to finance the bonding,” Wayne says. “Here, you’re essentially gutting the road fund in order to pay for the pension. Which means, if you connect all the dots, the people who are going to be paying the tolls are going to be paying for the pension.”

Wayne says an earlier plan put forth by Gov. Beshear — which he supported — would have capped the itemized deductions for the wealthiest 2 percent of Kentuckians, raising $60 million in revenue to go toward pensions, but the idea was scrapped.

According to Wayne, another downside to the last-minute measure is that it used much of the “low hanging fruit” from last year’s tax commission, and with many believing the pension issue has been solved, there won’t be an impetus for comprehensive tax reform next year.

“Right now, all of (tax reform) is in jeopardy,” Wayne says. “All of the work of the tax commission, the recommendations of all these groups, now are basically on life support.”

While Wayne says some progress was made in this session — noting the passage of a strong human trafficking bill and Auditor Adam Edelen’s bill to reform special taxing districts — the General Assembly spent too much time focusing on trivial bills, such as the unnecessary “religious freedom” bill that could undermine LGBT fairness laws, while neglecting to address tax reform and common sense gun control legislation.

“Frankfort’s a pretty dysfunctional place,” Wayne says. “And unfortunately, we have leaders that did not have a clear agenda for this session, and they mishandled many things.”