Kentucky

State Budget Practice Report Cards and Budget Resource Guide

Kentucky was tied with New Jersey in 2016 for having the worst-funded state pension, with only 31 percent of assets needed to meet obligations. By 2019, Kentucky’s funding level had risen to 45 percent, allowing the state to overtake New Jersey and Illinois at the bottom of the pack. Its progress resulted from reforms that pushed the state into aligning total annual contributions for five plans that make up the Kentucky Retirement Systems–as well as that for the separate Kentucky Teachers’ Retirement System—with actuaries’ recommended contributions. The improvements helped Kentucky achieve a C average in legacy costs for fiscal 2015 through 2019. Even as it worked to lessen pension underfunding, the state consistently contributed to other postemployment benefits (OPEB), primarily health care, on an actuarially recommended basis.

Kentucky’s C average in budget maneuvers reflects frequent deferrals of recurring expenditures to achieve balance. Since 2012, the state has moved a portion of its payroll into the next fiscal year. It has also used money from special funds to shore up the general fund, as in a transfer of $310 million from the Kentucky Employees’ Health Plan to the general fund in the biennium that included fiscal 2019.

The state’s average grade of C in reserve funds resulted from a lack of clear policies to guide when and how money set aside in its Budget Reserve Trust Fund can be used. Although Kentucky has a policy to replenish the account, it has limited its deposits and had just 1.1 percent of general fund expenditures in the rainy day fund in fiscal 2019. This left the state with the fourth-lowest percentage of expenditures in a rainy day fund among all states.

 

Download Printable State Report Card

To emphasize the need for clear and comprehensible budgets to inform citizens, promote responsible policymaking, and improve fiscal stability, the Volcker Alliance in 2016 began a study of budgetary and financial reporting practices of all fifty states. The Volcker Alliance’s mission is to improve the effectiveness of the administration of government at all levels. Making state budgeting more transparent and accountable is an important part of that goal.

The report cards presented here are taken from the 2021 Volcker Alliance report, Truth and Integrity in State Budgeting: Preparing for the Storm, which proposes a set of best practices for policymakers. For those wishing to gain greater insight into state fiscal issues, the accompanying budget resource guide is derived from the Alliance publication State Budget Sources: An Annotated Guide to State Budgets, Financial Reports, and Fiscal Analyses (2016). 

State Budget Report Cards

The report cards found here contain grades of the state's budgetary practices during the fiscal years of 2015 through 2019. Each state received marks in five critical categories, based on their adherence to best practices in several key budgeting indicators. The five categories covered methods used to achieve budgetary balance as well as how budgets and other financial information are disclosed to the public.

States received grades of A to D-minus (there are no “failed states”) for their procedures in estimating revenues and expenditures; their use of one-time actions to balance budgets; how they oversee and use rainy day funds and other fiscal reserves; the adequacy of their funding of public worker retirement and other postemployment benefits; and the quality of transparency of budget and related financial information. The grades are based on research conducted by public finance and budgeting professors and students at eight US schools of public administration or policy. The universities’ research efforts were augmented by Volcker Alliance staff, data consultants at Municipal Market Analytics, and special project consultants Katherine Barrett and Richard Greene.

Budget Forecasting evaluates whether and how states estimated long-term revenue and expenditure trends.

This table contains assessments of the scope and quality of states’ budgetary forecasting for fiscal 2015 through 2019. States are graded on a scale of A to D-minus, the lowest possible, on whether they used consensus revenue estimates for the coming year or biennium in budget documents; provided a reasonable, detailed rationale to support revenue growth projections at the time of the initial budget; utilized multiyear revenue forecasts for at least three full fiscal years in budget and planning documents; and utilized multiyear expenditure forecasts for at least three full fiscal years in budget and planning documents.

Budget Maneuvers evaluates whether states used one-time revenues, borrowings, asset sales, and other measures to achieve short-term budgetary balance.

This table contains assessment of states’ use of a range of one-time actions to balance budgets for fiscal 2015 through 2019. States are graded on a scale of A to D-minus, the lowest possible, on their successful avoidance of such techniques. They include deferring recurring expenditures (excluding those for capital projects) into future fiscal years; transfers from special funds to the general fund to cover recurring expenditures, temporarily shifting costs to other governments or agencies, or upstreaming cash from such entities that is not part of a regular process; using proceeds of borrowings, “scoop and toss” refinancings, diverting bond premiums into the general fund, or using bonds to make pension contributions; asset sales, or utilizing other upfront cash flows from financial transactions to the general fund or similar accounts.

Legacy Costs evaluates whether states provided adequate funding, as defined by retirement system actuaries, for pensions and other promised retirement benefits for public workers.

This table contains assessments of states’ ability to meet promises made to public employees for pensions and other retirement costs for fiscal 2015 through 2019. States are graded on a scale of A to D-minus, the lowest possible, on whether their contributions to public employee pension funds were effectively 100 percent of the actuarially required or determined contributions (ARC or ADC), adjusted for any unfunded liabilities; and whether their contributions to any public employee other postemployment benefit (OPEB) plans were effectively 100 percent of the ARC or ADC.

*Pension funding ratios were compiled by Bloomberg as of the end of the fiscal year in question.

Reserve Funds evaluates states’ rainy day funds and other fiscal reserves as well as any policies governing their use and replenishment.

This table contains assessments of states’ balances and policies for reserve funds for fiscal 2015 through 2019. States are graded on a scale of A to D-minus, the lowest possible, on whether they had policies (set by constitution, referendum, statute, or other formal rule) for the use and replenishment of rainy day funds; whether the rainy day fund balance (or contribution) was specifically tied to the historical trend of revenue volatility; and whether the rainy day fund or general fund balances were greater than zero on the first day of the fiscal year.

Transparency evaluates the accessibility to the public of state's budget practices.

This table contains assessments of states’ actions to promote greater transparency of their budget and related information for fiscal 2015 through 2019. States are graded on a scale of A to D-minus, the lowest possible, on whether they had a consolidated website or set of related sites providing budget and supplemental data; provided tables listing outstanding debt, debt service costs, and information on any legal debt limits; disclosed the estimated cost of the deferred infrastructure maintenance liability for all capital assets as part of budget and planning documents; and provided an annual or biennial tax expenditure report in budget documents or through other agencies.

State Budget Sources

State Budget Sources: An Annotated Guide to State Budgets, Financial Reports, and Fiscal Analyses is a resource published by the Volcker Alliance designed to help public officials, policy advocates, journalists, academics, and concerned citizens fully understand the critical fiscal decisions that governors and legislators must make. The guide includes the links below to budgets for this state as well as legislative analyses of budget bills and treasurers’ or comptrollers’ monthly state cash-flow statements; capital spending plans; reports on public-worker pension funding and returns; and reports by local and national fiscal research organizations, bond rating firms, and associations of state fiscal and finance officials.