Chairman of Senate budget committee says he hopes pension and tax reforms are dealt with separately

07/28/2017 01:49 PM

FRANKFORT – State Sen. Chris McDaniel describes himself as a person who likes challenges, and he says he wouldn’t trade his seat facing daunting challenges like reforming the state’s public pension systems and reforming its tax code “for anything.”

“Do I wish that we didn’t have decisions that would ultimately be so impactful at a personal level in front of us? Yes,” the Senate Appropriations and Revenue Committee chairman said during an interview this week in his Capitol Annex office. “I think we all do, but we are at a certain point in history and we have to address them.”

Gov. Matt Bevin has said he plans to call a special session on pension and tax reforms later this yet, but McDaniel, R-Taylor Mill, said he would like to see the two issues dealt with separately. Bevin has said the state needs to generate more revenue to deal with tens of billions of dollars in pension debt, particularly in the fund that covers retirement plans for most state employees and retirees.

McDaniel’s preference would be to handle pension reform during a special session, then deal with tax reform after Bevin presents his biennial budget either during the 2018 legislative session or in a special session afterward, he said.

That would give Bevin’s administration time to pitch its tax-reform proposal, and the need to overhaul Kentucky’s tax code, to voters across the state, he said, noting that he hopes to see a tax plan that’s revenue neutral.

“I think that most Kentuckians do not see a need for tax reform that is non-revenue-neutral in the absence of really understanding what it means, and I think the governor will have a great opportunity after his next budget is presented because we will really know at that point,” McDaniel said.

“Under the governor’s leadership this is the first time that we’ve really seen an honest picture of what the Kentucky Retirement Systems look like, and now we need to see that picture put into the budget and see what that looks like,” he added. “And once we have all of that, I really believe that we can have an honest discussion with all Kentuckians about, ‘This is what we need to do.’”

McDaniel says a tax plan that isn’t revenue-neutral will have a tough time passing the Senate, which Republicans control with a 27-11 majority. He hopes Bevin will propose a reform package that will not increase Kentuckians’ tax burdens on a year-to-year basis, but rather spur economic growth in the state.

Asked what he specifically wants to see in a tax-reform package and whether that generally includes increasing sales taxes while cutting income taxes, McDaniel said he hoped for a simplification of the state’s tax code and regulatory framework.

“The fact is we have got to set up a tax code that attracts and retains individuals in the commonwealth and businesses in the commonwealth, and we don’t exist on an island,” he said. “We’ve got to be competitive with the surrounding states, and so as we approach fundamental tax reform, there will be lots of ideas that I like, there will be lots of ideas that I oppose, but to me, we’ve got to simplify the tax code.”

For McDaniel, everything is on the table as lawmakers consider tax and pension reforms, including altering benefits for current state workers. Still, most legislators “are fundamentally opposed to doing anything as it relates to current retirees,” he said.

The Senate budget chairman says he expects a shift from the hybrid-cash-balance pensions lawmakers approved in 2013 to 401(k)-style plans for future government workers and possibly altering benefits for some current employees, adding that about 1 percent of the state’s government workforce are employed under the 2013 changes.

“If we had 30 or 40 years to deal with this problem, that would be a workable solution, but the fact is default is imminent and so it will have to go beyond future hires,” he said.

McDaniel said there should be a balance between the interests of public employees and those of taxpayers, noting that Moody’s recently downgraded Kentucky’s credit rating because of its $37 billion in unfunded pension liabilities.

Such an action toward current government workers will likely spark a legal challenge, something McDaniel is anticipating. He says federal and state court rulings pose an interesting question on what’s covered by the inviolable contract, a series of personnel laws that set public employee benefits.

“There are those who will have a very strict interpretation who are experts on it,” McDaniel said. “There are those who will say a whole lot less is included that are experts on the subject, so certainly I don’t see any way that what we do does not ultimately get litigated by some party. I hope that everyone can sit down and allow reasonable heads to prevail because this is the fundamental issue for the future of Kentucky.”


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