Important Issues for Kentucky’s Cities and Counties

By John Gregory | 11/26/19 8:00 AM

Much attention will be focused on Frankfort in the coming year with a new Democratic governor and a Republican legislature sorting out a state budget and other critical issues.

At the same time, cities and counties across the commonwealth have their own challenges to face, ranging from pension payments and taxes to infrastructure needs and jail overcrowding.

KET’s Kentucky Tonight spoke with four community leaders about these issues. The guests were Bill Dieruf, mayor of Jeffersontown and president of the Kentucky League of Cities executive board; James Kay, judge-executive of Woodford County; Jim Henderson, executive director and CEO of Kentucky Association of Counties and a former Simpson County judge-executive; and J.D. Chaney, deputy executive director of the Kentucky League of Cities.


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A Tale of Two Places

Although Kentucky’s cities and counties face many common concerns, they often do so coming from very different economic standpoints. Take the examples of Midway, a small town just northwest of Lexington, and Floyd County in eastern Kentucky.

Midway has added 500 jobs in the past five years. One company alone, Lakeshore school supplies, brought 250 jobs and has plans to add 100 more. That’s helped the community of 1,800 experience a surge in occupational tax revenues.

“We are doing so well in our local economy that we have the interesting distinction of being a city that has not only lowered taxes but we’ve also increased our investments in infrastructure and our services,” says Mayor Grayson Vandegrift.

Meanwhile, Floyd County has been decimated by the decline in the coal industry. Floyd and nine neighboring counties have lost 5,000 jobs and $300 million in annual wages since 2012.

“One of the things that I’m trying to do is to keep our taxpayers in Floyd County,” says Judge-Executive Robert Williams. “If we don’t have tax base, we can’t fix roads. If we don’t have a tax base, we can’t provide a jail service.”

Finding Much Needed Revenues

By law, Kentucky cities and counties have limited options for generating the money they need to pay for civic services. J.D. Chaney of the Kentucky League of Cities says a provision in the state’s 1891 constitution allows the General Assembly to authorize three kinds of local levies: property taxes, occupational taxes, and franchise fees.

“So short of a constitutional amendment, you’re going to continue to have this heavy reliance on occupational tax,” says Chaney. “There really isn’t anything to replace it with.”

Unlike communities in other states, Kentucky’s cities and counties can’t collect local sales taxes. In recent legislative sessions, state lawmakers have debated a proposed constitutional amendment that would allow communities to vote on whether to enact a small, temporary sales tax to fund specific projects. Those measures died in the state Senate.

“That was fine for somebody like Metro Louisville that needs [to pay for] a Yum! Center or needs a soccer field,” says Jeffersontown Mayor Bill Dieruf.

But most communities need revenues to cover basic, ongoing expenses like personnel, which accounts for three-quarters of local government budgets, according to Chaney.

“We need to open up the options for other types of taxes, given the diversity of Kentucky’s communities,” he says. “There needs to be some consumption-based revenue options in that proverbial toolbox.”

One option would enable all communities to enact a restaurant tax of up to 3 percent. Currently only fourth- and fifth class cities that have populations from 1,000 to 8,000 people can levy a tax on food purchased at eateries. Dieruf says that’s created a patchwork of taxation that’s not fair to larger and smaller communities.

“Why should different sides of the street have different options of taxing?” says Dieruf. “We’re not asking for a new tax, we’re just asking for the tax that’s there to be equally treated amongst all.”

Beyond specific taxing options, the League of Cities is proposing legislation in the 2020 session that would give state lawmakers more leeway to help communities boost local tax receipts.

“It’s never been framed in a way that says, General Assembly, you’re powerless really because of the constitutional provisions to rewrite the local government tax code,” says Chaney. “How about we take the handcuffs off you all, so that in participation with locals you can really make that happen in a meaningful way.”

A Pension Plan Divorce

Increased revenues are crucial to cities and counties that are struggling to make higher public employee pension contributions that resulted from revised actuarial assumptions enacted by the Kentucky Retirement Systems (KRS) board in 2017.

But there’s another pension issue on the minds of local leaders: divorcing the County Employees Retirement System (CERS) from KRS. KRS manages the pension plans for state employees, and state police as well as CERS, which represents city and county government employees, police and firefighters, and non-teaching staffs of local schools.

While the state failed to properly fund the Kentucky Employees Retirement System (KERS) in recent years, city and county governments have fully paid their obligations to CERS, according to Dieruf. Earlier this month pension officials reported that the CERS plan for non-hazardous employees was 52.7 percent funded. The funding level for KERS non-hazardous is about 13 percent.

Dieruf says counties don’t want to be held liable for what the state hasn’t paid. So to protect CERS assets, local government officials want to separate their plan from KRS.

“This is about managing 75 percent of the assets,” says Chaney. “That’s what CERS is in the whole Kentucky Retirement Systems because cities and counties have paid.”

Chaney says local officials initially called for a “bloody divorce” of the two plans, but he says lawmakers balked at that idea. The updated proposal calls for maintaining a shared administrative structure but enabling CERS to have its own governance. Chaney says that would better protect CERS assets.

Woodford County Judge Executive James Kay, who is a former state representative, says CERS does need to have more control over its own plan. But he also fears that removing CERS would further weaken KRS and put state employees at risk.

“That’s the domino that will fall, and ultimately I think CERS could be in a much worse position if KRS were to go under,” says Kay.

That risk is precisely why the two plans should be separated, according to Chaney.

“When people are saying we’re worried about KERS because of the separation, I think it makes the point more that we need the separation because CERS and those trusts are not there for propping up KERS,” he says.

Jails and Prisons

The state’s high incarceration rate creates another drag on local government finances.

“Every county that runs a jail will tell you it’s one of their largest expenses,” says Kay.

The root cause of the problem, according Jim Henderson if the Kentucky Association of Counties (KACo), is the drug epidemic. The associated crimes have contributed to overcrowding at county jails across the state.

“So continuing to put people in jail is clearly not the answer,” says Henderson. “There has to be treatment, there have to be alternatives to putting people in jail.”

Housing an inmate in a local jail can cost that county upwards of $75 a day, but the state reimbursement for that service is on about $31 a day. Henderson says the state should offer performance-based reimbursement rates that encourage counties to offer services that will reduce recidivism, like substance abuse treatment, mental health care, and workplace reentry programs.

Both KACo and the League of Cities are encouraging further criminal justice reforms, especially in the area of bail reform and pretrial release. Henderson cites the example of three people recently arrested for trespassing in Jefferson County. Two of the three individuals were released after paying $100 in bail. He says the third person sat in jail for 27 days awaiting trial because he couldn’t afford bail.

“There’s an issue of rightness about that that we have to address,” says Henderson. “The counties would be better off to pay the $100 fine on their behalf to get them out of jail, never mind the civil rights issues that might be at stake.”

Some lawmakers have suggested that county jails should be closed and replaced with a system of state prisons. Henderson says that idea makes no fiscal sense.

“There’s no appetite to build 15 or 20 state prisons,” he says. “So the best deal in town still is the county jail.”

“If the state wants to build new things, they need to build new schools first,” adds Kay. “The second thing they need to build is mental health facilities [and] substance abuse treatment facilities.”

Funding for Infrastructure Needs

The state and local communities are also hamstrung by limited motor fuels tax revenues, which are used to fund road and bridge projects.

For decades Kentucky had a variable tax rate tied to the wholesale price of gasoline, which caused revenues to vary widely. In 2015, lawmakers set a floor below which the gas tax could not drop, no matter how cheap the wholesale price. That floor is 26 cents a gallon.

Henderson says the gas tax is basically a user fee.

“Who pays the motor fuels tax is the person who’s using the most gasoline, who’s using up most of the roads,” he says. “It’s the fairest way of taxing society for the benefit of a service.”

But gas tax receipts have continued to struggle thanks to more fuel-efficient cars and people driving less. Revenues have not yet returned to the high-water mark of $825 million collected in 2014.

Henderson says more than half of KACo members support increasing the gasoline tax by 10 cents a gallon. Almost a quarter of them would endorse a hike of up to 20 cents, he says.

Raising taxes is never easy, though, and 2020 is an election year for many state lawmakers. Kay says he voted to increase the state gas tax in 2014 when he was a state representative. He says his constituents began receiving Republican Party-sponsored robocalls the next day criticizing that vote.

“The partisan warfare in Frankfort has got to stop,” says Kay. “I don’t foresee it stopping, but it’s got to stop when you look at issues like our roads… It’s nonpartisan.”

Dieruf says it’s also a matter of competitiveness: If a business or corporation looking to locate in Kentucky comes here and sees a crumbling infrastructure, they’ll go to another state that has better-maintained roads and bridges.

“Nobody wants to say the word tax,” says Dieruf, “but if we’re going to protect our infrastructure, we’re going to have to do something [to get] additional funds to do it.”