Kentucky s Economic Competitiveness A Call for Modernization of the State s Fiscal Policies

Transcription

1 Kentucky s Economic Competitiveness A Call for Modernization of the State s Fiscal Policies Illinois Kentucky and Surrounding States Metropolitan and Micropolitan Counties 2003 Y# Principal Metro Cities $T Principal Micro Cities $T Other Area Cities Lakes Rivers Metropolitan Counties Micropolitan Counties Kentucky Counties Indiana Ohio Y# Cincinnati Portsmouth $T Ironton Mad on $T $T $T $T Huntington Maysville Ashland #Y #Y Hanov is er Louisville #Y $T Frankfort Lexington $T Mount Sterling #Y West Vi Illinois Evansville Y# Y# Owensboro Elizabethtown Y# $T Richmond $T Danville Paducah$T $T Campbellsville Madisonville $T London $T $T Central City $T Somerset $T Corbin Bowling Green Virginia $T Glasgow #Y Middlesboro $T $T Cumberland Gap Mayfield$T Murray$T $T Union City #Y Clarksville Tennessee N W E S Miles by Paul Coomes, Ph.D. Professor of Economics, and National City Research Fellow and Barry Kornstein Senior Research Analyst University of Louisville December 2004

2 Acknowledgements Funding for this study was provided by the Tri-County Economic Development Foundation in Northern Kentucky, the Lexington Urban-County Government, and Greater Louisville Inc. National City provided a grant for regional economic research that underpinned much of this research. Thanks to Danny Fore, Gary Toebben, Steve Higdon, and Julian Beard for their leadership. For the first time, Northern Kentucky, Lexington, and Louisville are working together to learn about and highlight the urban competitiveness issues so key to our state s prosperity. We also wish to thank Margaret Maginnis for her help with the database construction and for the map of metropolitan and micropolitan areas. And we appreciate the assistance of many state officials who provided data and advice for this report. Kentucky Fiscal Policies and its Cities July 1,

3 CONTENTS EXECUTIVE SUMMARY...1 INTRODUCTION...5 Kentucky is now an urban state...6 Changing economic structure...8 Human capital, earnings per job, and office industries...10 Tax burdens...13 STATE GOVERNMENT REVENUES AND EXPENDITURES, FY State revenues and expenditures by type...17 Geographic distribution of revenues...18 Geographic distribution of expenditures...19 General fund geographic details...20 Transportation fund geographic details...21 Federal fund geographic details...22 Net cash flows...22 Equity of distribution of funds...26 ANALYSIS OF GEOGRAPHIC DISTRIBUTION...29 State spending on local public K-12 education...29 Economies of scale...33 The Catholic effect...35 Real estate versus human capital wealth...35 Transportation financing...36 Overview of transportation financing in Kentucky...37 Expenditures by Kentucky Transportation Cabinet...38 Revenue sharing programs...44 KENTUCKY PUBLIC FINANCE IN NATIONAL CONTEXT...47 Taxes...47 Expenditures...49 Economic, social, and demographic indicators...54

4 APPENDICES A. Details General Fund, Transportation Fund, Federal Fund, FY A.1 General Fund Receipts and Expenditures...57 A.2 Transportation Fund Receipts and Expenditures...58 A.3 Federal Fund Receipts and Expenditures...59 A.4 Geographic Distribution of General Fund Revenues...60 A.5 Geographic Distribution of Transportation Fund Revenues...60 A.6 Geographic Distribution of Federal Fund Revenues...61 A.7 Geographic Distribution of General Fund Expenditures...62 A.8 Geographic Distribution of Transportation Fund Expenditures...63 A.9 Geographic Distribution of Federal Fund Expenditures...64 A.10 Net Cash Flows, General and Transportation Funds...65 A.11 Net Cash Flows, Federal Funds...66 B. Tax burdens, family of four, largest cities in each state...67 C. Transportation Funding in Jefferson County, 1991 to Kentucky s Cities and State Fiscal Policies December 30,

5 Executive Summary T his study provides two things. It provides fresh estimates of the geographic distribution of Kentucky state government revenues and expenditures. And, for the first time, it links Kentucky s fiscal policies to its economic development challenges. We document in great detail the continuing high levels of taxation by Kentucky state government, and the primarily urban origins of state revenues. On the other side, we document the massive geographic redistribution of public resources, away from the cities where the dollars are collected and towards sparsely populated areas where schools, roads, recreation and other services are heavily subsidized by the state. The Louisville, Lexington and Northern Kentucky metropolitan areas accounted for over one-half of all state government taxes and fees collected in fiscal year But these areas received only about one-third of state expenditures, a net cash transfer out of $1.4 billion. In terms of jobs, the fastest growing and highest paying sectors nationally are the professional, technical, business, financial, and information services industries. Kentucky ranks 46 th among states in the concentration of jobs in those industries, well behind even very rural states like Kansas, South Dakota and New Mexico. Firms in these industries tend to be located in urban areas, where there are clusters of other similar businesses, corporate headquarters, good air connections, and university graduate programs. Kentucky is surrounded by states with more large cities and more success in spawning and attracting these jobs. If Kentucky is to capture its share of the lucrative office economy jobs, it will need to do so primarily in its cities. However, Kentucky s state government has not developed fiscal policies to help its urban areas compete in the modern marketplace. Its individual income tax burden is relatively high, at a time when human capital in the form of educated, talented, and enterprising people - is the prime economic development prize. State government absorbs most of the state and local public resources available statewide, but tends to spend the dollars in sparsely populated areas. It has codified spending formulas that require billions of dollars to be spent annually in areas with little population or economic activity. And it has fostered an unhealthy and unsustainable culture throughout the state, whereby residency entitles one to K-12 schools, community colleges, universities, roads, police service, health care, recreation facilities, and basic infrastructure at little or no cost to the individual or the local community. Urban residents and workers, on the other hand, are taxed twice once to pay for their own public services, and again to pay for services to those who live in the rest of the state. Clearly, if Kentucky is ever to catch up in terms of prosperity, it will be led by its cities. But its urban areas cannot prosper under an anachronistic tax structure and spending policies geared primarily to redistribution and entitlement. Our quantitative findings lead naturally to questions about what policies cause such a large annual redistribution, how does the arrangement work in other states, what are the regional economic consequences, and how can the policies best be changed. We explore these questions for the first time in this report. Among the most important and interesting findings are: We estimate that the Louisville, Lexington, and Northern Kentucky metro areas accounted for $4.2 billion of Kentucky state government taxes and fees collected in FY03, but the state spent only $2.8 billion in these areas. These three metros contributed $2,400 per resident to state revenues, while residents of nonmetro counties contributed but $1,500 per resident.

6 The causes of the redistribution are many and pervasive in state policies and programs. The most prominent are the state K-12 school funding formula, the state gas tax revenue sharing formula, and the subsidy of police, recreation, and other government services in dozens of sparsely populated counties. Kentucky ranks in the top third nationally in nearly every measure of state tax rates and collections. It lags only West Virginia among border states in terms of high taxes. Kentucky s individual income tax and its sales tax on motor vehicles stand out as high, though Kentucky also is known to also have a wide array of different taxes compared to other states. Kentucky ranks fifth highest among states in the degree to which state government dominates state and local government revenues collections. Seventy percent of all state and local government revenues are collected by state government. Only Alaska, Delaware, Hawaii, and New Mexico are more centralized. Local government taxes vary widely around Kentucky. The most urbanized areas levy substantial occupational and net profits taxes for their city and county governments and schools, fairly typical tax rates on property, plus high taxes on insurance premiums and telecommunications. Less urbanized places tend to levy fewer taxes and/or lower tax rates, relying on state government tax collections in cities to raise the funds for local services. This means that the most urbanized areas are doubly taxed, once to provide their own local services, and once more to pay for services around the state. In general, Kentucky s urban economies are not growing as rapidly as their peers around the country. Not all this poor economic performance can be blamed on Kentucky state fiscal policies. But one can t help but notice the contrast with policies in other states where cities are booming with new businesses and people. We see Louisville trailing Nashville and Indianapolis, cities that are state capitols and where state tax rates are lower and redistribution programs are less aggressive. While its peers continue to add major corporate headquarters, to attract more young and educated people, and to add professional sports and arts venues, Louisville continues to rely on an economy that primarily assembles and moves things, not one that primarily creates and owns things. The Cincinnati-Northern Kentucky area is growing at about the same rate as Louisville, and lags its peers in terms of education levels and incomes. Ashland s economy is nearly stagnant, with no population growth, little job growth outside of retail and health care, and very low earnings per job. Owensboro is growing very slowly, even compared to other similarly-sized markets off the interstate grid and without state capitols or major universities. Among Kentucky major cities, only Lexington seems to be performing with or ahead of its peers nationally. However, even Lexington lags in terms of jobs in professional service industries. Without the University of Kentucky and the many new auto-related manufacturing plants in the region, the city s economy would be in similar straits to those along the northern border of the state. It is not that Kentuckians are incapable of competing. It is that Kentuckians cannot compete if we continue to diffuse our public resources so thinly that excellence is infeasible. The result has been a predictable decline in relative economic competitiveness in most of Kentucky s urban areas. The ability of the cities in this state to compete for talent, capital, and economic activity depends upon a restructuring of Kentucky state fiscal policies. This is the essential message of our report. If Kentucky is to capture its Kentucky s Cities and State Fiscal Policies December 30,

7 share of the booming brain-oriented office industries, it will have to do it in its urban areas, since that is where such work is almost exclusively performed. These findings suggest the need for an overhaul of state fiscal policies in Kentucky. Changes need to occur on both the tax and the spending side, and in a number of important categories. Tax modernization. The state needs to lower or eliminate the individual income tax, both to send a signal to talented and enterprising people that success is rewarded not exploited, but also to reduce the drain on disposable incomes of residents of the most urbanized parts of the state. Cigarette and other vice taxes should be raised, and expanded gaming should be considered. Modernize spending formulas. The gas tax revenue sharing formula needs to be changed to ensure that more of the state Road Fund dollars are spent where the population lives, the traffic occurs, and the taxes are paid. The state K-12 program needs to be revised to require more local contributions for local schools in less populated areas, thereby reducing the huge drain of dollars from cities to pay for schools in less densely populated areas of the state. There are others, but these two formulas are most important to the long term economic development of Kentucky. Shift some fiscal power and responsibility from state to local governments. On the revenue side, this can take the form of sharing state revenues with municipalities, local option sales taxes, repealing House Bill 44, and requiring local school districts to levy occupational taxes. The state can then lower its fiscal responsibility for provision of local K-12 education, road maintenance, and community projects. Other bold initiatives should be considered, such as: Privatization. The state should investigate more possibilities for privatization of functions. For example, its seems likely that private companies could better manage hospitality and recreational operations at the state resort parks, turning a perennial financial drain into a performing asset. Consolidation. In many cases, current state funding formulas enable smaller cities, counties, school districts, and other governmental jurisdictions to exist independently rather than consider consolidation to save money or improve service. The Commonwealth should engage in a study of these opportunities and find a way to reward consolidation wherever efficiencies can be found. The Lexington and Louisville communities voted to merge their major city and county governments, to popular acclaim, suggesting that other government consolidations around the state may lead to more effective administration and service delivery. Caveats It is important for the reader to understand what this study is not. First, this is not a cost-benefit study. We estimate the initial geographic incidence of revenues and expenditures, that is, in what county was a tax collected and in what county did an agency spend money. Thus, state expenditures on the penitentiary in Eddyville to house criminals from around the state are counted in Lyon County, just as expenditures on faculty salaries at Western Kentucky University are counted in Warren County, even though students hail from dozens of Kentucky counties. Similarly, sales taxes paid by an Estill County resident on a major purchase in Lexington are counted as Fayette County collections. There are complex chains through which tax liabilities and program benefits are passed to residents of other geographic areas, both within the state and around the world. It is beyond the scope of this project to track the ultimate incidence of Kentucky fiscal policy. Second, our study investigates the flows to and from the state s General Fund ($6.8 billion), Transportation Fund ($1.1 billion), and Federal Fund ($4.9 billion), but does not examine the state s other funds. The state also maintains an Agency Fund, one that collects and distributes dollars related to fee-for-service activities, like college tuition, dormitory fees, and state park room sales. This fund handled $2.6 billion in FY03. Another Kentucky s account, the Cities capital and fund, State disbursed Fiscal $185 Policies million that fiscal December year. Finally, 30, 2004 during the legislative session, the state 3 often elects to distribute budget surpluses for building and other community projects.

8 Metropolitan and Micropolitan Areas Containing Kentucky Counties, as of June 2003 MSA/FIPS code MSA/County name Population 2002 MSA/FIPS code MSA/County name Population Bowling Green, KY Metro 129, Lexington-Fayette, KY Metro 416, Edmonson County, KY 11, Bourbon County, KY 19, Taylor County, KY 23, Clark County, KY 33, Warren County, KY 94, Fayette County, KY 263, Jessamine County, KY 40, Campbellsville, KY Micro 23, Scott County, KY 35, Taylor County, KY 23, Woodford County, KY 23, Central City, KY Micro 31, London, KY Micro 54, Muhlenberg County, KY 31, Laurel County, KY 54, Cincinnati-Middletown, OH-KY-IN Metro 2,040, Louisville, KY-IN Metro 1,182, Dearborn County, IN 47, Clark County, IN 98, Franklin County, IN 22, Floyd County, IN 71, Ohio County, IN 5, Harrison County, IN 35, Boone County, KY 93, Washington County, IN 27, Bracken County, KY 8, Bullitt County, KY 63, Campbell County, KY 88, Henry County, KY 15, Gallatin County, KY 7, Jefferson County, KY 698, Grant County, KY 23, Meade County, KY 27, Kenton County, KY 152, Nelson County, KY 38, Pendleton County, KY 14, Oldham County, KY 49, Brown County, OH 43, Shelby County, KY 35, Butler County, OH 340, Spencer County, KY 13, Clermont County, OH 183, Trimble County, KY 8, Hamilton County, OH 833, Warren County, OH 175, Madisonville, KY Micro 46, Hopkins County, KY 46, Clarksville, TN-KY Metro 234, Christian County, KY 71, Mayfield, KY Micro 37, Trigg County, KY 12, Graves County, KY 37, Montgomery County, TN 138, Stewart County, TN 12, Maysville, KY Micro 30, Lewis County, KY 13, Corbin, KY Micro 36, Mason County, KY 16, Whitley County, KY 36, Middlesborough, KY Micro 30, Danville, KY Micro 51, Bell County, KY 30, Boyle County, KY 27, Lincoln County, KY 24, Mount Sterling, KY Micro 41, Bath County, KY 11, Elizabethtown, KY Metro 109, Menifee County, KY 6, Hardin County, KY 95, Montgomery County, KY 23, Larue County, KY 13, Murray, KY Micro 34, Evansville, IN-KY Metro 344, Calloway County, KY 34, Gibson County, IN 32, Posey County, IN 26, Owensboro, KY Metro 110, Vanderburgh County, IN 171, Daviess County, KY 91, Warrick County, IN 53, Hancock County, KY 8, Henderson County, KY 44, McLean County, KY 10, Webster County, KY 14, Paducah, KY-IL Micro Frankfort, KY Micro 67, Massac County, IL 15, Anderson County, KY 19, Ballard County, KY 8, Franklin County, KY 48, Livingston County, KY 9, McCracken County, KY 64, Glasgow, KY Micro Barren County, KY 38, Richmond, KY Micro 90, Metcalfe County, KY 10, Madison County, KY 73, Rockcastle County, KY 16, Huntington-Ashland, WV-KY-OH Metro 286, Boyd County, KY 49, Somerset, KY Micro 57, Greenup County, KY 36, Pulaski County, KY 57, Lawrence County, OH 62, Cabell County, WV 95, Union City, TN-KY Micro 39, Wayne County, WV 42, Fulton County, KY 7, Obion County, TN 32,394 Source: Office of Management and Budget, June 2003 Kentucky s Cities and State Fiscal Policies December 30,

9 INTRODUCTION T his report updates and extends two previous studies. The initial study, covering fiscal year , was the first comprehensive examination of the geographic distribution of fiscal flows in Kentucky 1. It was financed by a grant from the Louisville Chamber of Commerce. It discovered and documented the very large net cash outflow from Louisville and other urban areas to support public services around Kentucky. The second study, covering the fiscal year, was supported by a general economic development grant from National City 2. In the update we found the same geographic pattern of fiscal flows but a much larger amount. The dollars at stake are even larger now. Despite the much publicized recession, total state government General Fund and Road Fund revenues grew 22 percent between FY97 and FY03, to a total of $8.1 billion. The current study is designed both to update the two previous studies and to extend the analysis to better understand the hows and whys of the redistribution. We delve into complicated education and road funding formulas and explain how they disadvantage Kentucky s urban centers. We also examine Kentucky s public finance structure relative to that of other states. Kentucky has aggressively used its state government over the past several decades to invest in education, transportation, and recreation infrastructure around the state. New school buildings of all types dot the landscape, university facilities have expanded, new community colleges have been constructed, good roads now connect most towns, and Kentucky has the greatest number of state resort parks in the nation. Moreover, the state has devised a set of funding formulas that provide generous annual operating subsidies to local school districts, road departments, county governments, and parks. And it has greatly expanded its social programs, with large expenses for health care, welfare, child care, family services, alcohol and drug abuse programs, literacy programs, and legal aid. All of this has been expensive, but will be well worth it financially in future decades if local communities leverage these state investments to build up the quality of their labor force, launch and attract private companies, and use the lure of the state s natural beauty and park facilities to capture tourist and retiree dollars. In the meantime, economic and social statistics on the state do not look so good, and taxpayers shoulder a hefty burden. The major investment work is over, and surely we are entering a new era in the state s economic history. Kentucky has reached the end of a long period of increasing state government involvement in communities and the marketplace it cannot afford to do even more without weakening the state s modest private sector capacity. We believe it would be prudent for Kentucky state government to modify its laws, programs, and practices to better take advantage of modern economic opportunities. Human capital is the new economic development prize, and despite the investments noted above Kentucky scores very low. Education levels remain near the bottom, there are relatively few professional jobs, and 1 The Intrastate Distribution of Kentucky State Government Revenues and Expenditures, Fiscal Year , by Paul Coomes, Richard Thalheimer and William Stober. For a discussion of methodology, see Measuring the Intrastate Distribution of State Government Funds: A Case Study, by Paul Coomes, William Stober, and Richard Thalheimer, Journal of Economic and Social Measurement, Volume 20, 1994, pages The Intrastate Distribution of Kentucky State Government Revenues and Expenditures, Fiscal Year , by Paul Coomes and Barry Kornstein, University of Louisville, August 1999, 16 pages, Kentucky s Cities and State Fiscal Policies December 30,

10 earnings per job remain well below the national average. High individual income taxes repel the most productive people, who can increasingly live wherever they like and unsurprisingly like beaches, mountains, good weather, low taxes, and good public services. Kentucky cannot compete with Florida for beaches and winter weather, but we could on tax policy and public services. To offset any natural competitive disadvantages, we need exceptional man-made advantages. It is not that Kentuckians are incapable of competing. It is that Kentuckians cannot compete if we continue to diffuse our public resources so thinly that excellence is infeasible. The state has many public universities and graduate programs, but few have national reputations. The state s few major cities, where high end service jobs have the only realistic chance of emerging, are being starved for resources by redistributionist state policies. Current road policies mean that the largest urban areas generate most of the revenues for transportation projects, but are choked with traffic, bereft of turning lanes, shoulders, bike trails, walkways, and highway landscaping. State policies also prop up most of Kentucky s 120 county governments, whose service functions and locations were designed when a horse was the primary means of transportation. Most large cities in other states are not saddled with such high state taxes, and local governments have more flexibility to lead economic development through popular projects funded by property tax growth and local option sales taxes. The result has been a predictable decline in relative economic competitiveness in most of Kentucky s urban areas. The ability of the urban areas in this state to compete for talent, capital, and economic activity depends upon a restructuring of Kentucky state fiscal policies. This is the essential message of this report. If Kentucky is to capture its share of the booming brain-oriented office industries, it will have to do it in its urban areas, since that is where such work is almost exclusively performed. And only a few of Kentucky s urban areas are large enough to compete worldwide for corporate headquarters or the regional headquarters for major accounting, engineering, design, testing, research, marketing, public relations, consulting, and computer service operations. These firms need to be near other major firms, have good air connections, and be integrated with strong graduate and professional programs at local universities. To attract and retain good employees, they need their host communities to have excellent public and private schools, low crime, clean air, good transportation systems, and to have the full complement of other urban amenities arts, parks, public art and landscaping, sports and recreation facilities. Finally, these firms and their talented employees are attracted by a business climate centered on private initiative, that tolerates risk and experimentation, embraces change, and rewards success. While Kentucky is a wonderful place, and has enjoyed much economic growth in recent decades, it cannot be said that its cities have the package just described. Much of the reason lies in Frankfort policies that were designed decades ago. Kentucky is now an urban state We are now beginning to recognize that Kentucky has become an urban state. Results from the 2000 Census indicate that over seventy percent of Kentucky s population live in counties one would characterize as urban, suburban, or exurban. While admittedly many of these residents live on multi-acre land parcels and do not consider themselves city dwellers, a closer examination reveals that most earn their living from participating in urban labor markets. Fastgrowing counties, like Boone, Bullitt, Jessamine, Spencer, and Oldham are attracting young Kentucky s Cities and State Fiscal Policies December 30,

11 families who hold jobs in Cincinnati, Louisville, or Lexington, but want to be able to purchase a large modern home unavailable at their income level in the central urban counties. Counting these suburbanites and exurbanites, a large majority of Kentuckians now live and/or work in cities. Illinois Kentucky and Surrounding States Metropolitan and Micropolitan Counties 2003 #Y Principal Metro Cities $T Principal Micro Cities $T Other Area Cities Lakes Rivers Metropolitan Counties Micropolitan Counties Kentucky Counties Indiana Ohio #Y Cincinnati Portsmouth $T Ironton Madison $T $T $T $T Huntington Maysville Ashland #Y #Y Hanover Louisville Y# $T Frankfort Lexington $T Mount Sterling #Y West Vi Illinois Evansville Y# Owensboro #Y Elizabethtown #Y $T Richmond $T Danville Paducah$T $T Campbellsville Madisonville $T London $T $T Central City $T Somerset $T Corbin Bowling Green Virginia $T Glasgow #Y Middlesboro $T $T Cumberland Gap Mayfield$T Murray$T $T Union City #Y Clarksville Tennessee N W E S Miles The federal government recently revised the geographic definitions for metropolitan areas, and defined a new set of smaller population concentrations as micropolitan. Kentucky gained two metropolitan areas Elizabethtown and Bowling Green for a total of nine metros containing 36 Kentucky counties. These metros are home to 2.4 million of the state s 4 million residents. Additionally, the federal government defined seventeen micropolitan areas containing another 26 Kentucky counties and 770,000 residents. Combined, these 61 metropolitan and micropolitan counties account for 3.1 million, or 75 percent of the state s population. See the table on page 4 for the definitions. Using US Census Bureau definitions, urbanized areas are those with a population density of 1,000 persons per square mile, plus adjacent areas with a population density of greater than 500 persons per square mile. These calculations are made at the census block group level, a much Kentucky s Cities and State Fiscal Policies December 30,

12 finer geographic level than the county basis used in metro definitions. While the urbanized land area only accounts for 3.1 percent of Kentucky s land, the population living there accounts for 56 percent of all the state s residents. According to the 2000 Census, 2.3 million of Kentucky s 4 million residents live in urbanized areas. Kentuckians are even more concentrated in their places of work. One-half of all private sector wages and salaries are earned in four counties Jefferson, Fayette, Boone and Kenton. Add in Warren, McCracken and Daviess counties, and one can account for one-half of all private sector jobs in the state. That is, a few places account for a majority of the state s tax base. These places include nearly all the state s office space, airport traffic, distribution centers, retail sales, hotels, arts, entertainment, sports, and media operations. These seven counties also account for 43 percent of the state s manufacturing payrolls. Changing economic structure Simultaneous with the increased urbanization of Kentucky s population has been the decline in economic importance of traditional rural industries like agriculture and mining. If one adds all the wages, salaries, and proprietors income earned from tobacco, corn, soybeans, cattle, pigs, horses, sheep and other farming, and add to that the income from coal, oil, and other mining in the state, it now amounts to only about 3.5 percent of the total from all industries. This is a continuation of a two-decade long trend. These industries remain important, in that they bring new dollars into the state as products are sold outside Kentucky and are linked to many other supporting enterprises. Output and sales of many of these commodities has continued to grow, but productivity gains in farming and mining mean that fewer and fewer workers are needed per dollar of output. Agriculture & Mining Share of Kentucky Wages, Salaries, Proprietors' Income 14.0% Source: US Bureau of Economic Analysis 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Agriculture: $1.1 billion Mining: $1.6 billion or 3.5% of total The opposite is true in the pure service industries, where increased demand for health care, business services, and education could only be met by raising the number of persons employed. Kentucky s Cities and State Fiscal Policies December 30,

13 The transportation, distribution, and warehousing industries have also grown rapidly during the last twenty years, as the national growth in these industries favored our central location. The Cincinnati airport in Northern Kentucky is one of the busiest passenger hubs in the US, and has been a magnet for office and distribution operations. The international air hub of United Parcel Service in Louisville is the 11 th busiest air cargo site in the world, and 6 th busiest in the US. UPS is now the largest private employer and largest taxpayer in Kentucky. Lexington is the center of a wide region that continues to gain auto-related manufacturing plants and supporting industries. These industries are lured to central Kentucky by inexpensive energy, land, and labor costs, but also because Lexington is now the exact center of the US population east of the Rocky Mountains. This means that producers of heavy, expensive consumer goods can minimize their transportation costs to market by locating in the Bluegrass area. While Kentucky, like all states, has added health care, engineering, accounting, legal, data processing, telecommunications and other business service operations, the state has lagged in its ability to spawn or attract major corporate headquarters or research and development firms. Of the bordering states, only West Virginia has fewer than Kentucky s eight Fortune 1000 corporate headquarters. Indiana has fifteen, Tennessee has twenty-one, and the other bordering states have many more. Macro Indicators, Peer Metro Areas Populatio n Growth Job Growth Percent of Adults with College Degree, 2000 * Jobs in Information, Finance, Professional & Technical Service Industries per 10,000 Residents, 2002 Average Earnings per Job, 2002 Growth in Earnings per Job, Population 2002 Louisville 1,180, % 19.7% $37, % Indianapolis 1,574, % 25.4% $41, % Nashville 1,352, % 38.4% $39, % Omaha 783, % 21.6% ,067 $38, % Cincinnati 2,036, % 20.2% $40, % Cleveland 2,141, % 7.0% $41, % Columbus 1,655, % 27.1% $40, % Kansas City 1,886, % 22.2% ,129 $40, % Lexington 416, % 24.8% $38, % Champaign-Urbana 214, % 9.0% $32, % Knoxville 629, % 28.3% $36, % Lincoln 273, % 26.9% ,023 $34, % Source, except for college attainment rate: US Bureau of Economic Analysis, using June 2003 metro area definitions. The Louisville metro includes Southern Indiana, and the Cincinnati metro includes Northern Kentucky. * Source: US Census Bureau, 2000 Census, using pre-2003 metro area definitions. Kentucky s Cities and State Fiscal Policies December 30,

14 Human capital, earnings per job, and office industries There is a myth that Kentucky s low education levels are due to the extremely low levels of schooling in rural parts of the state. In fact, nearly all regions of Kentucky rank low in terms of college attainment, and most are low in terms of high school attainment 3. Except for Lexington, the larger metro areas lag similar markets around the US. As a reference for the Louisville, Northern Kentucky-Cincinnati, and Lexington markets, we picked three similar metros areas for each and organized some macro indicators of human capital. The Louisville-Southern Indiana metro lags Indianapolis, Nashville and Omaha in every indicator population and job growth, education levels, professional jobs, and earnings per job. The Cincinnati-Northern Kentucky market lags Columbus and Kansas City in all measures, but is ahead of Cleveland in measures of growth - though not professional jobs and earnings per job. For Lexington, we chose three other mid-sized metros that are home to state flagship universities. Champaign-Urbana Illinois is the smallest, is in the commercial shadow of Chicago, and hence has fewer professional jobs. It is also not growing very fast. Knoxville is bigger and is growing at a similar rate to Lexington. The Lincoln Nebraska metro area is growing slightly faster than Lexington in terms of population, jobs, and earnings per job. Lexington ranks 3 rd in terms of college attainment rates, 2 nd highest in professional jobs per capita, and 1 st in annual earnings per job. The high earnings per job reflects Lexington area s much higher concentration $50,000 College Education and Earnings 120 Kentucky Counties, 2000 Average Annual Earnings per Job, 2000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 Edmondson Lewis Robertson Hickman Scott Boone X UNITED STATES Jefferson Woodford Warren Oldham Fayette $5,000 $ % of Adults with College Degree, See also The Recent Economic Performance of Regions in Kentucky, by Paul Coomes and Michael Price, University of Louisville, May 2001, 67 pages, for the Kentucky Economic Development Partnership, Kentucky s Cities and State Fiscal Policies December 30,

15 of manufacturing jobs (not shown here). Champaign and Lincoln, in particular, have few manufacturing jobs less than nine percent of all jobs, compared to Lexington s thirteen percent. The above exhibit plots college attainment rates by county against average annual earnings per job. Note that the educational rates are estimated from surveys of households, based on county of residence, while the earnings data is based upon the county of work. So, the plot does not reflect the impact of commuting patterns. Nevertheless, the plot illustrates two important things. First, there is a clear relationship between formal education and earnings of workers. Second, not one county in Kentucky is above the national average in both education and earnings. Indeed only two or three counties are above the national average in either measure. Kentucky s low human capital is reflected in the state s low concentration of office jobs, and is responsible for the state s low earnings per job. Here we measure office jobs as the number of people employed in the Information, Finance and Insurance, Professional and Technical Services industries. Note that nationally, jobs in these three sectors accounted for 40 percent of the 17.4 million net new jobs created since These fast growing industries include most of the higher paying private sector service sector jobs, excluding health care. We exclude health care since this industry is dominated by local population-oriented services, like hospitals, physician offices, and nursing homes. Annual Earnings per Job, 2002 US Job Growth by Sector Since 1990 $80,000 Manufacturing $70,000 $60,000 Information Finance & Insurance Wholesale Trade Professional & Business Services $50,000 Mining, Forestry $40,000 $30,000 Construction Transportation, Warehousing, Utilities Retail Trade Education and Health Care $20,000 Personal Services Leisure & Hospitality $10,000 Sources: job growth data from US Bureau of Labor Statistics; earnings per job data from US Bureau of Economic Analysis. $0-4,000,000-3,000,000-2,000,000-1,000, ,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 Net Job Growth, 1990 to 2003 In 2002, Kentucky had 36,000 jobs in the Information industries, which include publishing, telecommunications, and data processing. Kentucky had 82,000 jobs in the Finance and Insurance industries, which includes banking, investing, and all kinds of insurance. Kentucky had 92,000 jobs in the Professional and Technical Services industries, which include legal, Kentucky s Cities and State Fiscal Policies December 30,

16 accounting, architectural, engineering, testing, design, computer, marketing, advertising, public relations, consulting, and research and development services. 1,200 Number of Jobs per 10,000 Residents, 2002 in Information, Professional & Technical Services, Finance and Insurance Industries Massachussets 1, Virginia Illinois Missouri Ohio Tennessee South Carolina Indiana Kentucky West Virginia Arkansas Mississippi Source: US Bureau of Economic Analysis On a per capita basis, Massachusetts, Colorado and Delaware top the list of states, while Mississippi and West Virginia anchor the bottom. Kentucky is near the bottom, with only 514 jobs per 10,000 residents. All of Kentucky s other border states rank higher, with Virginia and Illinois supporting nearly twice the concentration of these jobs. This is not a surprising finding, given the international status of the Washington DC and Chicago markets underpinning their vast office industries. Nor should one be surprised to see Missouri and Ohio ranked higher, given that they contain large cities in their jurisdictions, including St. Louis, Kansas City, Cleveland, Columbus, and Cincinnati. But the rise of office industries in Indiana and Tennessee should alert Kentucky policy makers to a competitiveness problem. Moreover, Kentucky ranks lower than dozens of rural states around the country, states like Alabama, Montana, North Dakota and South Dakota. Overall, the economic record is mixed on metro areas around Kentucky. Job and population growth are tightly related, and the hottest metros are Clarksville-Hopkinsville, Bowling Green, and Lexington. The Huntington-Ashland metro has been losing population, and the Owensboro and Evansville-Henderson metros are growing quite slowly 4. Earnings per job are highest in the 4 For a more recent look at the relative performance of Owensboro, see Philanthropy, Charitable Giving, and the Public Sector in Owensboro-Daviess County Kentucky, by Paul Coomes and Raj Narang, University of Louisville, January 2004, 34 pages, for the Hager Educational Foundation, Kentucky s Cities and State Fiscal Policies December 30,

17 Cincinnati-Northern Kentucky, Lexington, and Louisville-Southern Indiana metros, but pay has recently been growing fastest in the Bowling Green and Hopkinsville markets. Summary Economic Measures for Metro Areas Containing Kentucky Counties Populatio Per Capita Income of Job Average Annual n Growth, Residents Growth, Earnings per Job Value, Growth, Growth, Metro Areas Value, Bowling Green 20.3% $24, % 30.0% $31, % Cincinnati-Northern KY 10.1% $31, % 20.2% $40, % Clarksville-Hopkinsville 23.3% $24, % 40.3% $34, % Elizabethtown 7.9% $25, % 7.3% $34, % Evansville-Henderson 5.8% $29, % 16.3% $36, % Huntington-Ashland -0.6% $23, % 7.8% $32, % Lexington 18.9% $31, % 24.8% $38, % Louisville-Southern IN 11.5% $30, % 19.7% $37, % Owensboro 5.3% $25, % 13.9% $31, % United States 15.4% $30, % 19.8% $40, % Source: US Bureau of Economic Analysis; using metro area definitions as of June Tax burdens State and local taxes vary greatly around the US, as do the quantity and quality of public services provided by these governments. Taxes and public services are key factors in the competition among places for mobile companies and households. In this section we summarize results from national studies of relative tax burdens in major markets, compilations of local tax rates, studies of state tax structures and rates, and studies of state government spending patterns. The evidence supports a number of conclusions: 1. Local taxes in Louisville, Lexington and Northern Kentucky are overall in line with those in competitor markets. These jurisdictions tend to rely upon occupational and insurance premiums taxes for growth. 2. Property tax rates levied by urban school systems, large municipalities and county governments are comparable to those in other large cities, while property tax rates are relatively low in the other county and city jurisdictions around Kentucky. Jurisdictions in competitor markets tend to rely more on local sales taxes and higher property taxes. 3. Due to high Kentucky state taxes, Louisville, Lexington, and Northern Kentucky area workers and residents have a high tax burden relative to their counterparts in competitor markets. Moreover, the relative tax burden has gotten worse over the past decade. The primary culprit is the Kentucky individual income tax. 4. Due to Kentucky state government s practice of aggressively redistributing resources from urbanized to sparsely populated parts of the state, the state s major cities receive relatively little in return for shouldering this high tax burden. Moreover, the cities poor fiscal relationship with Kentucky state government is programmed to continue Kentucky s Cities and State Fiscal Policies December 30,

18 indefinitely, due to the structure of the tax code and the redistribution formulae embedded in state programs, particularly for local K-12 education and transportation. 5. State government has mitigated this discrepancy somewhat in the past decade by allocating a large portion of state budget surplus dollars to the major cities for capital projects, e.g., the Covington and Louisville convention centers, Louisville Waterfront Park, University of Kentucky buildings. However, these discretionary allocations are a fraction of the annual net outflow of state dollars from the most urbanized areas. Due to the complexities of tax codes and jurisdictions around the US, there are but a few comparative studies available. We consider two that focus on state and local taxes. Runzheimer International, a corporate relocation specialist located in Milwaukee, released a study three years ago of comparative household tax burdens in major cities. Runzheimer estimated the annual tax burden on a family of four, with income of $60,000, and living in a home valued at $180,000. Here the geographic reference point is a suburban location, and for Louisville this means outside the (old) City of Louisville but inside Jefferson County. The tax calculations included federal income taxes. Runzheimer found Louisville to have the fifth-highest tax burden ($14,800) among the largest cities in each state, following New York, Philadelphia, Milwaukee, and Cleveland. A detailed and ongoing study by the government of the District of Columbia compares the tax burdens on DC residents to those of residents in the largest city in each of the fifty states. As the largest city in Kentucky, Louisville is included in the DC studies. Analysts examine state and local taxes on real estate, income, sales, and automobiles for five categories of family income. The geographic reference point is the largest city jurisdiction, not the metropolitan area. This $14,000 Tax Burden, State and Local Government, Family of Four with $75,000 income Largest City in Each of the 50 States, 2002 Bridgeport, CT (with $8,605 in property taxes) $12,000 $10,000 $8,000 $6,000 Louisville (10th) Charlotte Columbus Omaha Kansas City Birmingham Indianapolis Memphis $4,000 $2,000 $0 Source: Government of the District of Columbia, Tax Rates and Tax Burdens in the District of Columbia - A Nationwide Comparison 2002, August Jacksonville Cheyenne WY Kentucky s Cities and State Fiscal Policies December 30,

19 introduces some "noise," in that some of the cities have wide jurisdictions that include large suburban areas, while other cities like Louisville include only the most urbanized core. The recent merger of the City of Louisville and Jefferson County governments should improve Louisville s position in this ranking, as most county residents pay lower property tax rates than those in the former City. State and Local Tax Burden Louisville's Rank Among Largest Cities of Each State (1 = highest taxes) Family Income $25, $50, $75, $100, $150, Source: Government of the District of Columbia, Tax Rates and Tax Burdens in the District of Columbia - A Nationwide Comparison 2002, August 2003, and previous issues ( The table summarizes Louisville s ranking over the nine years studied by the DC government. A second table, in Appendix B, provides more detail for Louisville and eight of its prime competitors covered by the study of 2002 tax burdens. Several things stand out. First, Louisville has one of the highest household tax burdens among the largest cities in each state. Second, the high tax burden is due primarily to the high income taxes, and these are largely collected by Kentucky state government, not the City of Louisville or suburban governments. Third, the difference in household tax burdens across competitor markets is large: residents of Jacksonville and Memphis (and by implication Nashville) pay less than half of what Louisville residents pay, a two to three thousand dollar per year difference depending upon income level. It is safe to say that Lexington and Northern Kentucky residents face similar tax burdens as do Louisville residents. Property tax rates in the three most urbanized Kentucky places are fairly similar, and they all levy occupational taxes on workers and net profits taxes on businesses. Kentucky s Cities and State Fiscal Policies December 30,

20 Kentucky State Government Revenues and Expenditures, Fiscal Year I n this section we provide a comprehensive update to our previous studies. We examined all revenues and expenditures of the General and Transportation funds for the 2003 fiscal year. We also examined federal government revenues derived from Kentucky citizens and businesses, and expenditures of federal funds received by the state government. Our study covers about $13 billion of the roughly $19.5 billion total State budget (including various Restricted Funds and the Capital Projects Budget). We allocate all the detailed revenues and expenditures to Kentucky s 120 counties, based on administrative data and economic or demographic indicators 5. State revenues and expenditures by type The State collected nearly $7 billion in General Fund revenues during the 2003 fiscal year. Of that, $3 billion came from income taxes. The individual income tax is the single largest revenue source for the State government, bringing in over $2.7 billion in FY2003. (See Table A-1 for details on General Fund revenues and expenditures.) Corporate income taxes bring in just under $280 million. Various sales and gross receipts taxes, at $2.6 billion, bring in the next biggest chunk of State revenue. Of that, most ($2.4 billion) comes from the general sales tax. Taxes on various kinds of intangible, tangible, and real property brought in a bit over $440 million, while license and privilege taxes accounted for $340 million of State revenue. Of the latter, half was brought in through oil production and coal, minerals, and natural gas severance taxes, with most of the rest due to the corporate license tax. The State had about $7.2 billion in General Fund expenditures during the 2003 fiscal year. Nearly forty percent of that total ($2.8 billion) was spent by the Education, Arts & Humanities Cabinet. Of that, ninety-seven percent was spent through the Education Department on K-12 education. The Health Services Cabinet accounts for the next biggest chunk of State spending, at just over $1 billion. Three-quarters of all Health Services spending goes into Medicaid and K- CHIP benefits. Spending on the State University and Community & Technical College systems 5 For a line-by-line discussion of the how General Fund and Transportation Fund dollars were allocated to counties, see Measuring the Intrastate Distribution of State Government Funds: A Case Study, by Paul Coomes, William Stober, and Richard Thalheimer, Journal of Economic and Social Measurement, Volume 20, 1994, pages For the Federal Funds, we attempted to mirror the allocation process utilized for the state government funds. On the expenditure side, where we were able to obtain specific administrative data on Federal Fund expenditures we used that to allocate to the counties. Otherwise, if the federal funds were going to a line item that also occurred in either the General or Transportation funds we used the same allocator as we used for those state monies. If a Federal Fund line item was not present in either state fund and we did not have specific administrative information on where the money was spent, we used economic and demographic indicators which we thought would give a good approximation to how the funds were spread around the state. On the revenue side, we first used Federal Highway Administraton data on federal fuel taxes and the volume of fuels taxed to estimate the statewide collections of federal fuels taxes. Allocation to the counties was then handled exactly as we allocated the state's fuels tax receipts. We then used information from the Internal Revenue Service on the sources of Federal government revenues to divide the remaining Federal Fund revenue among the individual and corporate income taxes, estate and gift taxes, and excise taxes. These make up the vast majority of Federal revenues and are the ones most likely to be paid by Kentucky citizens and businesses. We used a combination of 2000 Census data on household income, 1997 Economic Census data on the number and size of firms by industry, and IRS data on individual and corporate income tax receipts to allocate those tax collections among the counties. Kentucky s Cities and State Fiscal Policies December 30,

21 through the Universities Cabinet was just short of $1 billion during FY2003. These three cabinets accounted for just over $4.8 billion (sixty-seven percent) of General Fund spending. Of the remaining $2.4 billion of General Fund spending, the largest portions were for the police and corrections functions of the Justice Cabinet ($452 million) and the social service functions of the Families and Children Cabinet ($354 million). In addition, over $310 million was transferred to the Debt Service Fund and $241 million was transferred to the Expendable Trust Fund. Of the funds sent to the Expendable Trust Fund, $125 million were Tobacco Settlement Proceeds. This was spent on various rural economic development, early childhood development, and health care improvement programs. Most of the rest of the money in that fund was spent on the Kentucky Educational Excellence Scholarship (KEES) program ($60 million) and the Local Government Economic Development Fund program ($34 million). The State of Kentucky collected just over $1.1 billion in Transportation Fund revenues during the 2003 fiscal year. Most of this, nearly $900 million, was raised through various sales and gross receipts taxes. Motor fuels taxes (mostly at the pump) brought in about $453 million, while the motor vehicle usage tax, assessed when vehicles are first registered in Kentucky or change ownership, raised just over $433 million. (See Table A-2 for details on Transportation Fund revenues and expenditures.) License and privilege taxes account for nearly all of the rest of the Transportation Fund revenue ($174 million). Taxes on commercial trucking activities brought in around $115 million and license plates about $53 million. Various fines, tolls, and investment income make up the remainder ($61 million) of Transportation Fund revenues. The State had about $1.3 billion in Transportation Fund expenditures during the 2003 fiscal year. The majority of this money ($763 million) went into the construction and maintenance of state maintained roads. About $220 million was sent back to the counties and cities of the state through the Energy Recovery, County Road, Rural Secondary, and Municipal aid programs. Nearly $180 million was transferred to the Debt Service Fund. The remaining $140 million was divided among general administration and support functions, vehicle regulation, and funding for the Kentucky State Police. Kentucky State government received just over $4.9 billion in federal funds during the 2003 fiscal year. In our analysis we assume that these funds derive from the same mix of tax revenues that comprise United States government revenues of the type that would likely be paid by Kentucky citizens and businesses. These are individual and corporate income taxes, various excise taxes (on alcohol and cigarettes, for example), estate and gift taxes, and highway fuel taxes. We estimate that Kentucky drivers paid about $550 million in federal gas taxes during FY2003. (See Table A-3 for details on Federal Fund revenues and expenditures.) Most of the nontransportation funds received by the State ($3.7 billion) derive from the federal individual income taxes paid by Kentucky residents. We estimate that $472 million derives from the corporate income tax, with $122 million coming from excise taxes and $92 million from estate and gift tax payments. We estimate that Kentucky nearly broke even in terms of the return of highway fuel taxes, as the Transportation Cabinet received over $497 million in Federal Fund expenditures, which was mostly spent on highways ($475 million) and public transportation ($17.6 million). Of the $4.4 billion of non-transportation expenditures of federal funds by far the biggest chunk was spent by Kentucky s Cities and State Fiscal Policies December 30,

22 the Health Services Cabinet on Medicaid and K-CHIP benefits ($2.8 billion out of $3 billion in federal funds for the cabinet). Of the remaining $1.4 billion of Federal Fund spending, the largest portions were for the social service functions of the Families and Children Cabinet ($510 million) and for K-12 education ($498 million of the $502 million received by the Education, Arts & Humanities Cabinet). Geographic distribution of general, transportation, and federal fund revenues The following table presents our estimates of the percentage of General, Transportation, and Federal Fund revenue collections that come from individuals and businesses in the nine metropolitan areas, the seventeen micropolitan areas, and the rural areas of the state. We also provide information on the distribution of population and personal income as rough benchmarks against which can discuss the equity of the situation. More detailed information with the funds revenues broken down into multiple categories based upon what is being taxed is provided in the appendix (tables A-4, A-5, and A-6). Kentucky State and Federal Revenue Collections, Fiscal Year 2003 State Federal Population, 2002 Personal Income, 2001 General Fund Transportation Fund Nontransportation Transportation Statewide Total 4,092,891 $101,222,546,000 $6,783,452,625 $1,123,103,133 $4,373,217,380 $550,025,046 Metropolitan Areas - Kentucky portion Bowling Green 2.6% 2.5% 2.8% 2.8% 2.5% 2.9% N. Kentucky (Cincinnati) 9.5% 10.4% 11.2% 11.1% 11.2% 11.1% Hopkinsville (Clarksville) 2.1% 1.7% 1.4% 1.8% 1.5% 1.6% Elizabethtown 2.7% 2.5% 2.1% 2.7% 2.3% 2.8% Henderson (Evansville) 1.4% 1.5% 1.4% 1.9% 1.4% 2.0% Ashland (Huntington) 2.1% 2.0% 2.2% 2.0% 2.2% 1.9% Lexington 10.2% 12.3% 13.4% 10.2% 12.9% 10.2% Louisville (S. Indiana) 23.2% 29.1% 30.3% 22.6% 30.9% 22.4% Owensboro 2.7% 2.8% 2.6% 2.7% 2.9% 2.6% Metro Areas (35 counties) 56.5% 64.7% 67.2% 57.9% 67.9% 57.6% Micropolitan Areas Campbellsville 0.6% 0.4% 0.4% 0.6% 0.5% 0.6% Central City 0.8% 0.6% 0.5% 0.6% 0.5% 0.5% Corbin 0.9% 0.6% 0.7% 1.2% 0.5% 1.9% Danville 1.3% 1.1% 0.9% 1.0% 1.0% 1.0% Frankfort 1.7% 1.9% 1.5% 1.6% 1.8% 1.7% Glasgow 1.2% 1.0% 0.9% 1.4% 1.0% 1.4% London 1.3% 1.1% 1.0% 1.8% 0.9% 2.1% Madisonville 1.1% 1.0% 1.0% 1.2% 1.1% 1.0% Mayfield 0.9% 0.8% 0.7% 0.7% 0.8% 0.4% Maysville 0.8% 0.6% 0.5% 0.7% 0.6% 0.7% Middlesborough 0.7% 0.5% 0.5% 0.5% 0.4% 0.5% Mount Sterling 1.0% 0.8% 0.6% 0.9% 0.7% 0.9% Murray 0.8% 0.8% 0.8% 0.8% 0.7% 1.1% Paducah 2.0% 2.4% 2.7% 2.3% 2.2% 2.3% Richmond-Berea 2.2% 1.8% 1.8% 2.2% 1.8% 1.8% Somerset 1.4% 1.2% 1.1% 1.5% 1.1% 1.5% Union City 0.2% 0.2% 0.3% 0.2% 0.1% 0.2% Micro Areas (26 counties) 18.9% 16.9% 15.8% 19.3% 15.8% 19.7% Non-Metro/Micro Areas 24.7% 18.4% 16.9% 22.9% 16.3% 22.8% Kentucky s Cities and State Fiscal Policies December 30,

23 Compared to population, the metro areas contribute much more in General Fund and nontransportation Federal Fund revenues than would be proportional. The micro areas are contributing somewhat less than what might be expected on the basis of population, while the rural areas are contributing only two-thirds of what might be expected on that basis. However, the revenue sources are much more evenly distributed when judged on the basis of personal income. This is not surprising since income and sales taxes make up almost 80 percent of those revenues. The situation is reversed for transportation-based revenues. The metro areas provide much less than their proportion of personal income, with the micro areas contributing a bit more and the rural areas much more than might be expected on that basis. But on the basis of population transportation revenues are very evenly distributed. Much of this revenue is fuel related which depends upon vehicle use and gas mileage and the prevalence of travelers filling their tanks as they pass through the area. A closer look at the table reveals that the Louisville, Lexington, and Cincinnati-Northern Kentucky metropolitan areas are outliers, with the other metro areas more similar to the smaller micropolitan areas. Louisville, Lexington, and Northern Kentucky are the only metro areas with a significantly higher percentage of the non-transportation revenue than of the State s population. Louisville and Lexington are also they only metro areas with a significantly lower share of transportation-based revenue than of non-transportation revenue. Geographic distribution of general, transportation, and federal fund expenditures The following table presents our estimates of the percentage of General, Transportation, and Federal Fund expenditures that went to the nine metropolitan areas, the seventeen micropolitan areas, and the rural areas of the state. We also provide information on the distribution of population and personal income as rough benchmarks against which can discuss the equity of the situation. More detailed information with the funds expenditures broken down into multiple categories based upon the broad functions of government is provided in the appendix (tables A- 7, A-8, and A-9). We estimate that 47 percent of General Fund expenditures went to the nine metropolitan areas, 25 percent went to the seventeen micropolitan areas, and 27 percent went to the non-metro/micro rural areas of the state. Compared to the population distribution of the state the metro areas received quite a bit less money than would have been expected on a per capita basis. On the other hand, the micro areas received much more than their 19 percent of the population, and the rural areas a bit more than those counties 25 percent of the state s population. This pattern is even more pronounced for the state s Transportation Fund and the non-transportation portion of the Federal Fund. In those cases, the metro areas are receiving less than two-thirds of what they might expect to receive on a per capita basis. Kentucky s Cities and State Fiscal Policies December 30,

24 Kentucky State and Federal Expenditures, Fiscal Year 2003 State Federal Population, 2002 Personal Income, 2001 General Fund Transportation Fund Nontransportation Transportation Statewide Total 4,092,891 $101,222,546,000 $6,967,668,381 $1,182,628,151 $4,425,617,714 $497,624,712 Metropolitan Areas - Kentucky portion Bowling Green 2.6% 2.5% 3.1% 1.8% 2.5% 7.7% N. Kentucky (Cincinnati) 9.5% 10.4% 6.4% 9.7% 5.9% 10.6% Hopkinsville (Clarksville) 2.1% 1.7% 1.7% 1.2% 1.7% 3.0% Elizabethtown 2.7% 2.5% 2.2% 2.5% 2.1% 1.3% Henderson (Evansville) 1.4% 1.5% 1.3% 1.0% 1.3% 0.9% Ashland (Huntington) 2.1% 2.0% 1.7% 2.4% 2.1% 1.1% Lexington 10.2% 12.3% 11.0% 6.0% 6.6% 9.7% Louisville (S. Indiana) 23.2% 29.1% 18.0% 9.7% 17.3% 14.0% Owensboro 2.7% 2.8% 2.2% 1.6% 2.5% 2.1% Metro Areas (35 counties) 56.5% 64.7% 47.5% 35.8% 41.8% 50.4% Micropolitan Areas Campbellsville 0.6% 0.4% 0.5% 0.3% 0.6% 0.3% Central City 0.8% 0.6% 0.9% 0.8% 0.7% 0.1% Corbin 0.9% 0.6% 1.1% 0.8% 1.5% 0.2% Danville 1.3% 1.1% 1.4% 1.5% 1.2% 0.7% Frankfort 1.7% 1.9% 7.2% 7.4% 3.8% 1.1% Glasgow 1.2% 1.0% 1.0% 1.5% 1.3% 0.2% London 1.3% 1.1% 1.3% 1.7% 1.7% 0.9% Madisonville 1.1% 1.0% 1.3% 1.6% 1.2% 0.2% Mayfield 0.9% 0.8% 0.8% 1.1% 1.0% 0.4% Maysville 0.8% 0.6% 0.7% 1.1% 0.8% 0.7% Middlesborough 0.7% 0.5% 0.9% 0.9% 1.4% 0.2% Mount Sterling 1.0% 0.8% 0.9% 0.7% 1.1% 1.3% Murray 0.8% 0.8% 1.3% 1.4% 0.6% 0.2% Paducah 2.0% 2.4% 1.6% 1.4% 1.9% 1.0% Richmond-Berea 2.2% 1.8% 2.7% 1.5% 2.0% 3.9% Somerset 1.4% 1.2% 1.6% 1.1% 2.4% 5.2% Union City 0.2% 0.2% 0.2% 0.3% 0.3% 0.2% Micro Areas (26 counties) 18.9% 16.9% 25.4% 25.2% 23.5% 16.8% Non-Metro/Micro Areas 24.7% 18.4% 27.0% 39.0% 34.6% 32.8% General fund The difference between the population distribution and General Fund expenditures is most pronounced for Louisville, Northern Kentucky, and Owensboro. Bowling Green and Lexington exhibit the opposite pattern than the other metro areas. Of the micro areas, aside from Frankfort, Richmond-Berea and Murray are the big winners, while Paducah exhibits the same pattern as the metropolitan areas. Much of this can be explained by the distribution of spending on the educational functions of government (as manifested in the Education, Arts & Humanities and Universities cabinets), though in different ways for each of the metros just mentioned. Louisville receives 18 percent of the General Fund funds spent on education, the same as the overall General Fund percentage it receives (see Table A-7). But while Louisville gets 21 percent of Universities cabinet spending due to the presence of the University of Louisville, it Kentucky s Cities and State Fiscal Policies December 30,

25 receives less than 17 percent of Education, Arts & Humanities cabinet expenditures, which is mostly K-12 spending. Louisville also fares poorly in terms of the general government (support of the legislature, revenue collection, budgeting, personnel, executive branch) and economic development functions of government, where the area receives only about 10 percent of state spending. While these two functional areas are dominated by Frankfort (45 and 20 percent of expenditures, respectively), if we were to spread the central legislative and administrative costs housed in the state capital around the entire state (on the presumption that everybody benefits from them) it would not change the results appreciably. The Louisville metro area s share of General Fund expenditures would only increase by just under one percent, for example. Northern Kentucky receives just over 7 percent of the General Fund education spending, which is better than what it receives overall from the General Fund and quite a bit better than how the area fares in terms of all the other functions of government, where the area received 5 to 6 percent of expenditures. The Owensboro metro area received about the same percentage of education spending as overall General Fund spending. Owensboro does well in terms of K-12 education spending, but because it does not have a state university received less than 1 percent of Universities cabinet spending. Paducah has the same characteristics as Owensboro. The Paducah micro area is distinctive in the set of micropolitan areas because it s share of K-12 funding is lower than its population percentage in contrast to all other micro areas except for Murray (where a state university drastically alters the overall picture). Lexington and Bowling Green fare well in overall General Fund spending in large part because they receive much larger shares of university spending than their percentages of the state s population. While Bowling Green received Education, Arts & Humanities cabinet expenditures equal to its population share, the Lexington metro area, like Louisville, received only about 70 percent of what would be expected on a per capita basis. Richmond-Berea and Murray both greatly benefit from the presence of a big state university. But while General Fund expenditures in the Murray area are in line with its population share for the other functions of government, the Richmond-Berea micro area was a beneficiary of a great deal of economic development spending. Transportation fund Transportation Fund expenditures heavily favored the micropolitan and rural areas of the state. There are several exceptions (Campbellsville, Mount Sterling, Paducah, Richmond-Berea, and Somerset) that are mostly due to a lack of expenditures on construction and maintenance, but these micro areas received their population share or greater in revenue sharing funds. The rural areas of the state received over 20 percent more construction and maintenance and revenue sharing money from the state than did the metropolitan areas. Northern Kentucky and Ashland stand out as exceptions among the metro areas. Both received more in construction and maintenance funding than their share of the state s population. The Louisville metro area, on the other hand, fared the worst in terms of both construction and maintenance and revenue sharing expenditures, receiving just 33 and 49 percent, respectively, of its share of the state s population. Kentucky s Cities and State Fiscal Policies December 30,

26 Federal funds The metropolitan areas do not fare much better when it comes to the distribution of federal funds. The metro areas received 42 percent of all non-transportation expenditures from the Federal Fund and 50 percent of transportation related expenditures. The micropolitan areas received 23 percent of the non-transportation and 17 percent of the transportation federal funds, while the rural areas took in 35 and 33 percent of the non-transportation and transportation Federal Fund expenditures, respectively. The big winners in non-transportation expenditures among the micro areas are Corbin and Somerset. In both cases this is largely due to much more spending per capita on Medicaid and K-CHIP benefits than the other micro areas. Corbin also received much more per capita in federal K-12 education spending than did the other micro areas. Of the metropolitan areas, Bowling Green, Henderson, Ashland, and Owensboro all received about their share of the state s population in Federal Fund non-transportation expenditures. Bowling Green did well receiving funds covering general government functions, law enforcement and regulation, and economic development. Henderson got a boost from funds spent on economic development, while Ashland and Owensboro did well with K-12 funding. In terms of non-transportation Federal Fund expenditures, Northern Kentucky, Lexington, and Louisville fared the worst, receiving only about two-thirds of their state population shares in those expenditures. There were differences among the three areas, however. While Northern Kentucky and Lexington did relatively better in terms of education funding, Louisville fared quite a bit worse. Lexington did very well in terms of funding which passed through the General Government cabinet (water projects and community development block grants in the peripheral counties), but Northern Kentucky and Louisville did relatively poorly. And while Louisville did relatively well receiving social service funding (primarily Medicaid and family support services) Northern Kentucky and Lexington did not. Federal transportation funding was more evenly distributed throughout the state, but a third more was spent in the rural areas would have been on a per capita basis. In addition, the micropolitan areas received less than their collective share of the state s population and what they did receive was not spread evenly among them. Richmond-Berea and Somerset alone received over half of all federal transportation funds that went to the micro areas. Transportation funding was also not evenly distributed among the metro areas. Bolstered by major work on I-65, Bowling Green received 15 percent of the funds going to metro areas but has less than 5 percent of the total metro population. Northern Kentucky and Hopkinsville also did well receiving federal transportation funds. On the other hand, Elizabethtown and Louisville received far less than a per capita share in transportation funding. Net cash flows The following table shows our estimates of the net cash flow (expenditures to a region minus the revenues collected from a region) of General Fund, Transportation Fund, and Federal Fund dollars for each of the metropolitan and micropolitan areas and the rural areas of the state. Our Kentucky s Cities and State Fiscal Policies December 30,

27 estimates of the actual revenues from and expenditures to these regions of the state are provided in the appendix (tables A-10 and A-11). Net Cash Flows, General, Transportation, and Federal Funds, Fiscal Year 2003 Net cash gain or loss (State) Net cash gain or loss (Federal) General Fund Transportation Fund Total Nontransportation Transportation Total Federal Fund Statewide Total $184,215,756 $59,525,018 $243,740,774 $52,400,335 -$52,400,334 $0 Metropolitan Areas - Kentucky portion Bowling Green $26,236,726 -$11,031,742 $15,204,983 -$1,399,617 $22,589,594 $21,189,977 N. Kentucky (Cincinnati) -$311,082,041 -$9,999,062 -$321,081,102 -$229,446,353 -$7,994,321 -$237,440,674 Hopkinsville (Clarksville) $23,875,018 -$5,999,533 $17,875,484 $9,589,982 $5,863,288 $15,453,269 Elizabethtown $10,434,324 -$1,160,082 $9,274,242 -$10,439,764 -$9,184,929 -$19,624,693 Henderson (Evansville) -$11,071,693 -$9,670,432 -$20,742,126 -$5,063,162 -$6,223,764 -$11,286,926 Ashland (Huntington) -$28,336,701 $6,011,772 -$22,324,930 -$2,941,665 -$5,282,978 -$8,224,643 Lexington -$140,791,026 -$44,066,885 -$184,857,911 -$272,130,882 -$7,994,679 -$280,125,561 Louisville (S. Indiana) -$798,102,640 -$139,461,669 -$937,564,309 -$589,532,392 -$53,667,741 -$643,200,133 Owensboro -$20,262,927 -$10,959,513 -$31,222,439 -$16,064,067 -$4,037,092 -$20,101,160 Metro Areas (35 counties) -$1,249,100,960 -$226,337,148 -$1,475,438,109 -$1,117,427,921 -$65,932,622 -$1,183,360,544 Micropolitan Areas Campbellsville $4,574,740 -$2,145,500 $2,429,240 $8,118,824 -$1,916,495 $6,202,329 Central City $25,681,099 $2,654,390 $28,335,489 $7,454,064 -$2,250,578 $5,203,486 Corbin $29,672,849 -$3,983,651 $25,689,198 $42,974,991 -$9,885,841 $33,089,150 Danville $38,943,723 $5,796,097 $44,739,820 $5,632,491 -$2,094,488 $3,538,003 Frankfort $402,278,930 $68,974,513 $471,253,443 $92,322,633 -$3,932,712 $88,389,921 Glasgow $9,006,996 $3,121,365 $12,128,361 $12,326,630 -$6,409,875 $5,916,755 London $19,570,124 -$460,101 $19,110,023 $34,955,099 -$7,219,993 $27,735,106 Madisonville $23,984,210 $6,081,296 $30,065,506 $7,666,707 -$4,802,163 $2,864,544 Mayfield $12,886,925 $5,455,572 $18,342,497 $6,185,761 -$234,146 $5,951,615 Maysville $11,195,132 $4,525,623 $15,720,756 $11,572,941 -$638,560 $10,934,381 Middlesborough $33,839,157 $5,463,060 $39,302,217 $43,205,925 -$1,578,613 $41,627,312 Mount Sterling $19,859,919 -$1,846,985 $18,012,933 $17,655,206 $1,607,253 $19,262,459 Murray $32,998,361 $6,918,808 $39,917,169 -$3,822,132 -$5,226,749 -$9,048,880 Paducah -$66,628,253 -$9,147,119 -$75,775,372 -$10,516,036 -$7,922,527 -$18,438,563 Richmond-Berea $69,631,810 -$6,725,166 $62,906,643 $10,580,060 $9,872,591 $20,452,651 Somerset $39,927,575 -$4,048,784 $35,878,791 $58,403,607 $17,799,569 $76,203,176 Union City -$8,954,685 $1,305,933 -$7,648,752 $6,538,069 $180,965 $6,719,034 Micro Areas (26 counties) $698,468,611 $81,939,350 $780,407,961 $351,254,841 -$24,652,361 $326,602,480 Non-Metro/Micro Areas $734,848,105 $203,922,816 $938,770,921 $818,573,415 $38,184,649 $856,758,064 We estimate that the metropolitan areas collectively experienced a net cash loss for each fund. Our estimates are that the metro areas collectively supplied $1.2 billion, $226 million, $1.1 billion, and $66 million more in General Fund, Transportation Fund, non-transportation Federal Fund, and transportation Federal Fund revenues, respectively, than they received back in expenditures. In terms of the return from a dollar of revenue invested in each fund, the metropolitan areas received back 73 cents on the dollar for the General Fund, 65 cents on the dollar for the Transportation Fund, 62 cents on the dollar for the non-transportation portions of the Federal Fund, and 79 cents on the dollar for the transportation portion of the Federal Fund. Kentucky s Cities and State Fiscal Policies December 30,

28 Net Returns, State and Federal Funds, Fiscal Year 2003 Return on a dollar of revenue collected from region State Federal Statewide Total $1.03 $1.00 Metropolitan Areas - Kentucky portion Bowling Green $1.07 $1.17 N. Kentucky (Cincinnati) $0.64 $0.57 Hopkinsville (Clarksville) $1.16 $1.21 Elizabethtown $1.05 $0.83 Henderson (Evansville) $0.83 $0.85 Ashland (Huntington) $0.87 $0.92 Lexington $0.82 $0.55 Louisville (S. Indiana) $0.59 $0.56 Owensboro $0.85 $0.86 Metro Areas (35 counties) $0.72 $0.64 Micropolitan Areas Campbellsville $1.07 $1.26 Central City $1.69 $1.20 Corbin $1.43 $1.98 Danville $1.63 $1.07 Frankfort $4.92 $2.02 Glasgow $1.16 $1.11 London $1.21 $1.54 Madisonville $1.38 $1.05 Mayfield $1.35 $1.16 Maysville $1.35 $1.38 Middlesborough $2.07 $3.10 Mount Sterling $1.35 $1.52 Murray $1.61 $0.76 Paducah $0.63 $0.83 Richmond-Berea $1.44 $1.23 Somerset $1.40 $2.35 Union City $0.69 $1.94 Micro Areas (26 counties) $1.60 $1.41 Non-Metro/Micro Areas $1.67 $2.02 There are differences among the metropolitan areas. Bowling Green, Hopkinsville, and Elizabethtown experienced cash flows more like those of the micropolitan areas than of the other metro areas. They all experienced more than enough of a net gain in General funds to offset a net loss of Transportation funds resulting in a net gain for total State dollars. In addition, Bowling Green and Hopkinsville each had large net gains in Federal transportation funds (returns on the dollar of $2.43 and $1.66) and excellent returns for non-transportation Federal funds (Bowling Green s loss was just 1 percent of the revenues the area contributed). While Elizabethtown had net losses on the Federal side, it receives immense federal spending directly through Fort Knox. The Louisville metro area was the big loser, both in terms of total dollars and return on the dollar of revenue paid. Louisville experienced a net loss of about $937 million in State cash flows and $643 million in Federal Fund cash flows. In each case Louisville received less than 60 cents on Kentucky s Cities and State Fiscal Policies December 30,

29 the dollar for its paid revenues. The Northern Kentucky metro area fares nearly as badly, however. It s net losses of $321 million and $237 million in state and federal cash flows represents returns just a few pennies on the dollar better than the Louisville area. Henderson, Ashland, Lexington, and Owensboro all receive back around 85 to 90 cents for every revenue dollar they contribute, with the lone exception being that Lexington fared as poorly as Louisville and Northern Kentucky in terms of non-transportation Federal Fund flows. We estimate that the micropolitan areas collectively experienced a net cash gain for all but the transportation portion of the Federal Fund. Our estimates are that the micro areas collectively received $698 million, $82 million, and $351 million more in General Fund, Transportation Fund, and non-transportation Federal Fund revenues, respectively, than they supplied in expenditures. We estimate that they experienced a net cash loss of $25 million in the transportation part of the Federal Fund In terms of the return from a dollar of revenue invested in each fund, the micropolitan areas received back $1.65 on the dollar for the General Fund, $1.38 on the dollar for the Transportation Fund, $1.51 on the dollar for the nontransportation portions of the Federal Fund, and 77 cents on the dollar for the transportation portion of the Federal Fund. Frankfort stands out among the micro areas, of course, due to the fact that the legislative and administrative functions of the state government are housed there. Eliminating Frankfort, however, still leaves the other micropolitan areas collectively earning a return of $1.26 on every dollar of revenue sent to the state and $1.33 on each dollar passing through the Federal Fund. The big winners (in terms of the return on the dollar) for state government funds are Middlesborough ($2.07), Central City ($1.69), Danville ($1.63) and Murray ($1.61). The only micropolitan areas with a net cash loss in state funds are Paducah and Union City, but they each fare about as poorly as the worst metropolitan areas. Paducah, in fact, also fares poorly in terms of Federal Fund spending, making it far more similar to the metro areas than any of the other micro areas. Union City, on the other hand, did extremely well in terms of the Federal Fund. Except for Richmond-Berea and Somerset, most of the micropolitan areas fared very poorly in terms of the transportation part of the Federal Fund. In fact, Central City, Corbin, Glasgow, Madisonville, and Murray all experienced a return of less than 20 cents on the dollar for their federal highway taxes (Corbin being the lowest at 8 cents). Even with Frankfort s governmental functions, the micropolitan areas are not absorbing nearly all of the net losses of the metropolitan areas. In fact, the rural areas of the state are picking up the majority of the metro net losses. We estimate that the rural areas collectively experienced a net cash gain for each fund. Our estimates are that the rural areas collectively received $735 million, $204 million, $819 million, and $38 million more in General Fund, Transportation Fund, non-transportation Federal Fund, and transportation Federal Fund revenues, respectively, than they supplied in expenditures. In terms of the return from a dollar of revenue invested in each fund, the rural areas received back $1.64 on the dollar for the General Fund, $1.79 on the dollar for the Transportation Fund, $2.15 on the dollar for the non-transportation portions of the Federal Fund, and $1.31 on the dollar for the transportation portion of the Federal Fund. Kentucky s Cities and State Fiscal Policies December 30,

30 Equity of the distribution of the funds There is a great deal of redistribution of state and federal government revenues among the various counties of Kentucky. That is an expected state of affairs, however, given commonly held notions of equity - that more developed and affluent areas should subsidize government spending on programs benefiting individuals and businesses in the poorer regions of the state. The ultimate question is what is the optimum level of redistribution. We do not attempt to answer that question in this study, but we can provide some information on the current revenue and expenditure flows that can aid such a discussion. Our analysis above lays out our estimates of the current redistribution of funds, but does so without a context with which to judge questions of equity. We add that dimension here by calculating the theoretical net cash flows that might result if state and federal revenues were collected according to personal income while state and federal expenditures were based upon population. This conforms to one common sense notion of equity in which taxation is based upon one s ability to pay but everyone receives the same government benefits. The following table presents our calculations of the theoretical net cash flows for the General, Transportation, and Federal Funds if revenues and expenditures conformed to this common sense notion of equity. The results in the table do take into account the legislative and administrative functions associated with a state capital. We assumed all such expenditures would be the same as in our previous allocations. We also show the difference between the actual and theoretical net cash flows for the combined two state funds and the Federal Fund. The latter is an indicator of how much redistribution there is away from this particular definition of an equitable collection and distribution of funds. Kentucky s Cities and State Fiscal Policies December 30,

31 One Possible "Equitable" Distribution of Funds versus Actual Net Cash Flows, FY 2003 Actual minus theoretical Theoretical net cash flow (State) Theoretical net cash flow (Federal) net cash flow Transportation Nontransportation General Fund Fund Transportation State Funds Federal Fund Statewide Total $184,215,756 $59,525,018 $52,400,335 -$52,400,334 $0 $0 Metropolitan Areas - Kentucky portion Bowling Green $2,225,845 $1,097,783 $3,044,768 -$847,956 $11,881,355 $18,993,166 N. Kentucky (Cincinnati) -$73,714,968 -$9,544,009 -$41,650,112 -$9,729,175 -$237,822,125 -$186,061,388 Hopkinsville (Clarksville) $18,371,040 $3,616,056 $13,111,670 $679,467 -$4,111,612 $1,662,132 Elizabethtown $9,881,271 $2,382,533 $8,018,278 -$251,596 -$2,989,562 -$27,391,375 Henderson (Evansville) -$5,555,991 -$515,637 -$2,689,554 -$1,020,576 -$14,670,498 -$7,576,796 Ashland (Huntington) $1,967,370 $916,713 $2,572,898 -$673,912 -$25,209,012 -$10,123,629 Lexington -$157,775,006 -$23,272,745 -$95,426,210 -$16,811,120 -$3,810,159 -$167,888,230 Louisville (S. Indiana) -$435,062,577 -$65,529,424 -$266,127,900 -$44,445,397 -$436,972,308 -$332,626,836 Owensboro -$8,366,450 -$630,318 -$3,727,429 -$1,742,936 -$22,225,672 -$14,630,795 Metro Areas (35 counties) -$648,029,467 -$91,479,047 -$382,873,591 -$74,843,201 -$735,929,594 -$725,643,752 Micropolitan Areas Campbellsville $8,295,122 $1,532,153 $5,698,248 $448,691 -$7,398,035 $55,390 Central City $8,830,455 $1,678,951 $6,171,766 $410,071 $17,826,084 -$1,378,351 Corbin $16,192,401 $2,931,595 $10,992,462 $959,388 $6,565,202 $21,137,301 Danville $7,272,526 $1,559,363 $5,472,786 $88,640 $35,907,931 -$2,023,424 Frankfort $324,232,789 $55,163,157 $81,866,875 -$2,203,836 $91,857,496 $8,726,883 Glasgow $11,044,197 $2,162,436 $7,857,137 $424,617 -$1,078,272 -$2,364,999 London $12,215,924 $2,394,193 $8,695,888 $466,375 $4,499,907 $18,572,843 Madisonville $8,934,197 $1,797,991 $6,463,506 $274,829 $19,333,317 -$3,873,792 Mayfield $6,112,065 $1,266,674 $4,502,677 $136,357 $10,963,758 $1,312,582 Maysville $12,199,550 $2,230,994 $8,331,067 $691,374 $1,290,212 $1,911,940 Middlesborough $14,495,961 $2,606,094 $9,800,269 $884,774 $22,200,162 $30,942,270 Mount Sterling $15,398,192 $2,832,545 $10,552,058 $849,239 -$217,803 $7,861,161 Murray -$238,121 $195,918 $365,988 -$351,199 $39,959,372 -$9,063,670 Paducah -$27,871,881 -$4,049,773 -$16,721,856 -$3,056,505 -$43,853,718 $1,339,798 Richmond-Berea $21,090,736 $4,108,557 $14,958,213 $840,457 $37,707,350 $4,653,982 Somerset $9,731,432 $2,002,329 $7,137,168 $237,450 $24,145,030 $68,828,558 Union City $528,331 $139,144 $454,669 -$30,030 -$8,316,227 $6,294,395 Micro Areas (26 counties) $448,463,875 $80,552,323 $172,598,921 $1,070,693 $251,391,763 $152,932,867 Non-Metro/Micro Areas $383,781,348 $70,451,742 $262,675,005 $21,372,174 $484,537,831 $572,710,885 Theoretical net cash flows are calculated assuming that all revenue collections are proportonal to each county's total personal income and all expenditures are proportonal to each county's share of the state's total population. Actual minus theoretical net cash flow is an indicator of how much "redistribution" there is away from this particualr definition of an equitable distribution of funds. We also assume that all legislative and administrative expenditures we previously allocated to Frankfort remain the same. According to this particular concept of equity, the metropolitan areas would subsidize the rest of the state by $648 million for the General Fund, $91 million for the Transportation Fund, $383 million for the non-transportation portion of the Federal Fund, and $75 million for the transportation portion of the Federal Fund. This would be $736 million less for the state funds and $726 million less for the Federal Fund than what actually occurred in fiscal year Furthermore, nearly all of the subsidization in the state funds and most in the Federal Fund would have come from the Northern Kentucky, Lexington, and Louisville metro areas (with a very sizable amount only from the latter two). In fact all of the metro and micro areas except those three plus Henderson, Owensboro, and Paducah would have experienced net cash inflows of state funds under this equity scenario. The same holds true for the Federal Fund, with the addition of Frankfort subsidizing federal transportation spending. Kentucky s Cities and State Fiscal Policies December 30,

32 Compared to this theoretical distribution of funds, all of the metro areas except for Bowling Green fare worse today in the actual distribution. Northern Kentucky in particular does poorly by this measure, as most of it s sizable $321 million (state) and $237 million (federal) net cash losses are beyond what would be expected if revenues mirrored personal income and expenditures were distributed per capita. Among the micropolitan areas, Paducah again seems to have more in common with the metropolitan areas than the areas in its own category. Campbellsville, Glasgow, and Union City fare significantly worse in the actual distribution of state funds versus the theoretical distribution, and Central City, Danville, Glasgow, Madisonville, and Murray fare significantly worse in the actual distribution of the Federal Fund versus the theoretical distribution. Of course this simple notion of equity does not take into account the particular constituencies or goals of the many government programs being funded. This may affect the outcome of this analysis to the extent that the sum of a program-by-program determination of what is equitable in terms of expenditures differs from our simple per capita formulation. But we think it is a useful indicator of the magnitude of the redistribution occurring. Kentucky s Cities and State Fiscal Policies December 30,

33 Analysis of Geographic Distribution T he previous section laid out our best estimates of the geographic distribution of state government receipts and expenditures among Kentucky counties in fiscal year In this section we analyze some of the main causes of that geographic distribution, in terms of the state s tax and fee structure, its laws, and spending policies. We cannot be exhaustive in our treatment, given the hundreds of taxes and programs. But we do provide an analysis of the most important causes of the annual redistribution. The revenue side should be fairly clear from our discussion in the Introduction most of the private sector activity in Kentucky occurs in a few urbanized places, and this is where the state collects the bulk of its income, sales, property, and other tax revenues. The spending side is less well understood, and we address the two biggest components here. We begin with state spending on local public elementary and secondary education, the largest single item in the state budget. Then we examine the transportation fund and the formulas and criteria that have been used to allocate the fuel and sales taxes collected to pay for road construction and maintenance. State spending on local public K-12 education Perhaps the biggest cause of the poor fiscal relationship between Kentucky s urban areas and the state government is the system of financing local public K-12 education in Kentucky. The urbanized areas are the primary source of state income and sales taxes used to finance education statewide, but proportionately little of the those dollars are returned to the school districts in the Louisville, Lexington, and Northern Kentucky areas. Moreover, the laws behind this redistribution have no sunset provision. Hence, without new legislation the transfer of hundreds of millions of dollars annually out of the urban areas will continue indefinitely State Share of Local Public K-12 Funding, 2000 Source: US Department of Education, National Center for Education Statistics, Digest of Education Statistics, Kentucky 60.7% Hawaii 88.8% Nevada South Dakota Missouri Maryland Connecticut Rhode Island Ohio Arizona Texas Montana Tennessee Louisiana Iowa Indiana Wisconsin Mississippi Oklahoma Utah Arkansas Kentucky West Virginia Kansas Michigan North Carolina Vermont Kentucky s Cities and State Fiscal Policies December 30,

34 The financing system is very complicated, and we will not try to describe it fully here 6. Rather we will highlight its features and consequences. We examine Kentucky s system relative to other states, observe the main winners and losers among school districts statewide, and examine some of the economic reasons that so many school districts remain dependent on state funding. Kentucky stands out in its reliance upon state government to fund local public K-12 schools. In 2000, Kentucky school districts in total received 61 percent of funding from state School Districts with Greatest and Least State Subsidy per Student Fiscal Year 2003 government, twelfth highest among the fifty states. Nationally an average of 52 percent of local public K-12 revenues come from state governments. And Kentucky ranks 39 th of 50 in the local tax contribution to revenues for local education. In most parts of the US local property taxes are a much more important source of funds for primary and secondary education. Most Kentucky school districts (and other city and county governments) rank local public school district average daily attendance levy very low tax rates on homes and other real estate, and have historically not been diligent in assessing property at full value. Kentucky House Bill 44 limits the growth in property tax receipts to jurisdictions to four percent annually. Thus when property values rise faster than that, tax rates are required to be lowered accordingly to keep under the four percent growth cap. This has increased the reliance on state income and sales taxes as a source of local public school financing. Not only does Kentucky rely disproportionately on state income and sales taxes to finance local public education, state government raises most of its tax revenues from but a few places in Kentucky State Government Contribution to School Revenues (per ADA) 1 Cloverport Independent $6,873 2 Augusta Independent $6,262 3 West Point Independent $6,083 4 Owsley County $6,079 5 Wolfe County 1,173.1 $5,833 6 Breathitt County 1,944.8 $5,824 7 Jenkins Independent $5,812 8 Leslie County 1,941.1 $5,803 9 Clay County 3,511.2 $5, Elliott County 1,066.4 $5, Magoffin County 2,117.1 $5, Jackson County 2,057.1 $5, McCreary County 2,942.3 $5, Providence Independent $5, Whitley County 4,012.1 $5, Scott County 5,493.7 $3, Franklin County 5,196.0 $3, Oldham County 8,760.3 $3, Erlanger-Elsmere Independent 1,958.0 $3, Southgate Independent $3, Lyon County $3, Jefferson County 81,664.6 $3, Campbell County 4,196.4 $3, Woodford County 3,433.3 $2, Kenton County 11,268.6 $2, Fort Thomas Independent 2,108.6 $2, Boone County 13,135.4 $2, Beechwood Independent $2, Fayette County 29,689.9 $2, Anchorage Independent $2,163 Source: Kentucky Department of Education the state. The Louisville, Lexington, and Northern Kentucky metro areas account for over half of all state government taxes and fees collected. These are the communities and regional economies 6 For more detailed discussion of Kentucky s educational finance system see Wildasin, David E., 2001, Local Government Finance in Kentucky, in Financing State and Local Government: Future Challenges and Opportunities, Kentucky Long Term Policy Research Center, pages ; and Picus, Lawrence O., Allan Odden and Mark Fermanich, 2001, Assessing the Equity of Kentucky s SEEK Formula: A Ten-Year Analysis, Kentucky Department of Education, September, 49 pages. Kentucky s Cities and State Fiscal Policies December 30,

35 that are the primary contributors to the state financing of local public school districts. And these contributor counties receive relatively little of these funds back for their local public schools. Two large state tax increases that went into effect in 1990 are the main source of new tax dollars for local K-12 public education in Kentucky. The first is the increase in the state sales tax from five to six percent. The second was an effective twenty percent increase in the state individual income tax rate. Before 1990, Kentucky taxpayers were able to deduct their federal income tax payments from their income before calculating their state individual income tax. This deduction was removed in 1990, meaning Kentuckians have since paid much more in income taxes as a percent of their total income. Both of these large state tax increases went into effect in 1990, and remain the main source of funds for local K-12 education in Kentucky. School Districts with Greatest and Least Share of Total Revenue Contributed by State Government, Fiscal Year 2003 Share of Distrivt Revenues average daily Contributed by rank local public school district attendance State Government 1 Jackson Independent % 2 Science Hill Independent % 3 East Bernstadt Independent % 4 Dawson Springs Independent % 5 Monticello Independent % 6 Estill County 2, % 7 Raceland Independent % 8 Powell County 2, % 9 Elliott County 1, % 10 Barbourville Independent % 11 Fairview Independent % 12 Carter County 4, % 13 Butler County 1, % 14 Clay County 3, % 15 Pineville Independent % Lyon County % 163 Carroll County 1, % 164 Paducah Independent 2, % 165 Scott County 5, % 166 Pikeville Independent 1, % 167 Covington Independent 3, % 168 Kenton County 11, % 169 Woodford County 3, % 170 Campbell County 4, % 171 Jefferson County 81, % 172 Boone County 13, % 173 Beechwood Independent % 174 Fort Thomas Independent 2, % 175 Fayette County 29, % 176 Anchorage Independent % Source: Kentucky Department of Education The donor areas are primarily large and urban, the recipient areas small and rural. The Kentucky Department of Education distributed $2.3 billion to local school districts in fiscal year About one-half of those dollars went to the 98 school districts that derived less than one-fourth of their revenues from local taxes. In other words, the state is basically providing elementary, middle, and high schools to the majority of districts those that either can t or won t raise significant local dollars to pay for their schools. These school districts are almost all in eastern and southern Kentucky. The most dependent, the Jackson Independent school district, raises only nine percent of its revenues from local sources. In 2003, it raised only $356,000 locally and received $2.8 million from Kentucky state government and another $400,000 from federal and other sources. The district has only about 500 students. By contrast, the Fayette County school district received only 29 percent of its funds from state government, and the Boone County and Jefferson County school districts only 38 percent of its Kentucky s Cities and State Fiscal Policies December 30,

36 funds from the state. In fact, the ten least dependent school districts are all in the Northern Kentucky, Lexington, or Louisville areas. These same triangle-area school districts also are at the bottom of the ranking of districts in terms of state support per pupil. The average Kentucky state subsidy per pupil was $3,949 in fiscal year However 132 of Kentucky s 176 school districts received more than the state average per pupil, suggesting a powerful constituency for status quo in education financing around Kentucky. The skewed distribution is due the fact that a few large urban school districts receive so much less than the state average that funds are available to subsidize many smaller or rural school districts. Distribution of 176 School Districts in Kentucky Local Revenues as Percent of Budget, FY Source: Kentucky Department of Education. 60 number of districts Campbell Kenton Pikeville Walton Woodford Anchorage Beechwood Fort Thomas Fayette Jefferson Boone % or less 15-25% 25-35% 35-45% 45-55% more than 55% local share of annual budget Essentially, the Support Education Excellence in Kentucky, or SEEK, formula consist of a set of ratios, floors, ceilings, and adjustments that are designed to ensure that every school district in the state has equivalent dollars per student. Districts with little (assessed) taxable property are heavily subsidized by the state. Districts with high taxable property per student are penalized. The SEEK formulae include a "hold harmless" provision guaranteeing that no school district shall receive less state aid per pupil than it did in the fiscal year. This floor has in effect become a ceiling, where large urban districts receive today per pupil about what they did a dozen years ago. With state education dollars doubling to $2.3 billion during the last decade, capping the payments back to a few districts at their 1992 levels can hardly be called harmless. Kentucky s Cities and State Fiscal Policies December 30,

37 Economies of scale The urban school districts are also hurt financially because state redistribution formulae penalize population density and subsidize sparsity. Schools are very expensive operations, with a minimum cost including the salaries and fringe benefits of a principal, administrative staff, and at least one teacher per grade level, food service, building expenses, and bus service. Education costs per student fall with the number of students as the large fixed costs can be spread over more students. Sparsely populated counties having only hundreds of pupils incur very high costs per student. The state subsidizes nearly all of these small school districts. There is a clear negative relation between the number of students served and subsidy per student. Forty of the 176 school districts have less than one thousand students in terms of average daily attendance. Nearly all of those receive more than $4,000 in state subsidy per student. Anchorage is the major exception, with only 400 students it receives but $2,400 per student from the state. This is due to its high real estate values and the penalties built into the SEEK formula for "high wealth" districts. The Jefferson County Public School system received but $3,108 per student from the state in fiscal year 2001, and the Fayette County system received only $2,551. These two districts plus five other large urban or suburban school districts account for seven of the ten lowest state subsidy rates in Kentucky. In fact, twelve of the fifteen lowest subsidized districts are in the triangle formed by Louisville, Lexington, and Northern Kentucky the most densely populated area of the state. 15 Pupils per Certified Staff, Kentucky Public School Districts, (average daily attendance divided by number of certified staff - FTE) 14 pupils per certified staff person Source: Kentucky Department of Education. Fayette: 29,300 and 10.6 pupils per staff Jefferson: 81,100 and 12.7 pupils per staff 8 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 average daily attendance, all schools in district Kentucky s Cities and State Fiscal Policies December 30,

38 The above chart illustrates the high teaching cost per pupil in sparsely populated school districts. Here we divide the average daily attendance in a district by the number of certified staff (teachers, principals, counselors). There are fewer than nine students per staff member in three districts (Jenkins, Frankfort, and Wolfe). Large, mainly urban, school districts are those with the fewest staff per pupil and presumably have larger class sizes. JCPS, serving almost thirteen pupils per staff member, would need 500 more teachers just to attain the state average. The density penalty is perhaps easiest to see in the transportation costs per district. Sparsely populated counties with but a few schools send buses out to collect and deliver their few students over hundreds of square miles. The transportation cost per student ranges from $586 to $779 in the ten most expensive districts all rural, and all but one in eastern Kentucky. By contrast, the ten least expensive districts all spend less than $113 annually per pupil on transportation, and all these districts are in towns or suburban areas (as opposed to countywide districts). Two districts, Southgate and Anchorage, incur no transportation expenses. The greater population density of cities generates efficiencies in the delivery of primary and secondary education, primarily in terms of larger class sizes, lower transportation costs, and in spreading the central administrative costs over more students. On the other hand, there are many extra costs that large urban school districts incur that are currently not accounted for in the SEEK formulas. 1. Due to Louisville s relatively large Transportation Costs per Student, Fiscal Year Average daily attendance Tranportation expenditure per student rank School district name 1 Owsley County $779 2 Elliott County 1,066.4 $690 3 Leslie County 1,941.1 $672 4 Wayne County 2,323.4 $670 5 Jackson County 2,057.1 $642 6 Breathitt County 1,944.8 $629 7 Wolfe County 1,173.1 $610 8 Russell County 2,505.6 $603 9 Clinton County 1,366.3 $ Knott County 2,459.5 $ Pineville Independent $ Paintsville Independent $ Beechwood Independent $ Bellevue Independent $ Erlanger-Elsmere Independen 1,958.0 $ Fulton Independent $ Fort Thomas Independent 2,108.6 $ Ludlow Independent $ Anchorage Independent $0 176 Southgate Independent $0 Source: Kentucky Department of Education immigrant population, the Jefferson County Public School system has around 2,200 students in its English as a Second Language program, half of all ESL students in Kentucky. ESL programs are expensive, and there is no allowance for that in the SEEK formulas. 2. Teachers in urbanized areas have on average higher educational credentials than those in the rest of Kentucky. They are also paid more on average, partly due to their credentials and partly due to higher overall pay of workers in the urban labor markets from which they must hire. There is no allowance for the higher personnel costs for large urban districts in the SEEK formulas. 3. Property assessments tend to rise more rapidly in the large urban areas than the more sparsely populated areas of Kentucky, due to the much faster turnover of real estate. It is widely believed that much of the property in Kentucky outside the major cities is assessed at a fraction of its market value. If true, this lack of full assessment causes the rural school districts to appear more property-poor than they really are, and to receive... Kentucky s Cities and State Fiscal Policies December 30,

39 more state subsidy than they really deserve. There is no accounting for the differences in real estate markets in the current SEEK formulas. The Catholic effect As in most states, taxpayer support for primary and secondary education flows only to public schools in Kentucky. The state redistribution formulas allocate dollars according to the average daily attendance in local public schools, not the total number of pupils living in the district. Hence, counties with large concentrations of Catholic families who send their children to parochial schools, or of families choosing to send their children to other religious and private secular schools, will see a disproportionately low return of state tax dollars. In Kentucky, most private schools are Catholic, and most Catholics reside in the Louisville, Northern Kentucky, Lexington, and Owensboro-Henderson and Bardstown areas. In fact, over one-half of the state s 365,000 Catholics live in two counties Jefferson and Kenton. Catholic school enrollment in Kentucky is nearly 40,000. While the choice to send one s children to Catholic schools is obviously voluntary, the financial consequences are enormous for a few counties, and are presumably unintended. The counties with the largest concentration of Catholics are also the ones with the lowest per capita return of state tax dollars. The economic effect on these local economies is tremendous, equivalent to an annual financial drain of over one hundred million dollars. A crude estimate of the annual loss to Jefferson County can be calculated by multiplying the number of pupils in local Catholic schools (roughly 20,000) times the average state subsidy per student ($3,949 for FY01), or almost $80 million. Students Enrolled in Private Schools, Kentucky Counties, 2000 share of state total number Jefferson 27, % Kenton 7, % Fayette 5, % Campbell 4, % Boone 3, % Daviess 3, % Oldham 1, % Hardin 1, % Christian 1, % Bullitt 1, % Nelson 1, % Franklin 1, % McCracken 1, % Warren 1, % A more precise estimate would have to take into account the effect of adding the Catholic students to the state totals and tracking how this would affect the shares going to each district. However, under any calculation the financial effect on Jefferson County is very large, and is compounded each year. Moreover, there are important rest of state Kentucky Total 24,816 86, % 100.0% Source: US Census Bureau, 2000 Census, SF3, indirect economic effects of this net financial drain, as the Table P36. Private schools include both religious dollars are taken out local circulation, thereby reducing and secular schools. local retail and other spending, payrolls and employment. The beneficiaries are, of course, the counties that are serviced by only public schools and that receive large state subsidies. A more sophisticated analysis would also need to take account of the way the Catholic effect intensifies points 1 and 4 above, as immigrant and/or truant students tend to cluster in the public schools, thereby raising the cost per student. Real estate wealth versus human capital For some reason the KERA legislation requires that redistribution use only property wealth as the statistical discriminator of rich and poor districts. Hence, a county with a large payroll, but little taxable real estate per student, is treated as poor and therefore is heavily subsidized by the Kentucky s Cities and State Fiscal Policies December 30,

40 state. KERA does allow districts to use taxes other than property taxes toward their required "local effort," but does not require the use of other taxes to support local schools. (See Wildasin, pages , for a discussion of local tax possibilities.) Only eight of Kentucky s 176 school districts levy an occupational tax, and these are districts (except for Cumberland County) that are already penalized by the SEEK formula. Jefferson County has by far the highest tax rate. These occupational taxes are applied to all the wages and salaries of workers in the county who are also residents of the county, as well as to the net profits of businesses (except in Boone County). Nonresident workers are exempt from school board occupational taxes. The occupational, or payroll, tax is withheld from workers' paychecks, and there is no end of year filing or refund. By law, school districts can levy an occupational tax of up to one-half of one percent, except for Jefferson County, which can levy a tax of three-quarters of a percent. Anchorage.50% Boone County, excluding Walton-Verona.50% Cumberland County.50% Fayette County.50% Jefferson County.75% Marshall County.50% Scott County.50% Warren County, excluding Bowling Green.50% The.75 percent tax rate on the wages and salaries of resident workers in Jefferson County raised $70 million for JCPS in 2000, implying a payroll tax base of $12.8 billion. We can use this ratio, along with public data on the wages and salaries of workers in each county, to calculate the amount of local occupational taxes that could be raised for public schools throughout the state. A modest.5% levy on payrolls in each county in Kentucky, other than those eight that already have a school occupational tax, would have raised $83 million for local districts in This would amount to an eleven percent increase in the local support for their school districts. Pike County, for example, could reap over $2 million annually from a school district occupational tax, or about $222 more per student. Pike is currently raising only $1,800 per student from local sources, compared to $4,300 per student in Jefferson County. Pulaski County, which now raises only $1,608 locally per student, could reap over $1.7 million annually from an occupational tax, or about $251 per stduent. Rowan County raises only $1,794 locally per student, but could reap over $650,000 from an occupational tax, or about $241 more per student. All of these districts, and dozens more, are heavily subsidized by the state, yet have substantial payroll bases in their communities that have not been tapped to support their local schools. Transportation Financing High quality physical infrastructure is a necessary condition for economic prosperity. The private sector typically builds the homes, subdivisions, factories, offices, and wholesale and retail operations. The public sector is primarily responsible for roads, bridges, airports, local bus service, and parks. The quantity and quality of physical infrastructure is an important factor in the ongoing competition for firms and people. Kentucky s Cities and State Fiscal Policies December 30,

41 Kentucky is faced with many critical transportation needs. In Louisville, for example, Spaghetti Junction, where three interstate highways converge messily in a small spot downtown, is the most visible daily reminder of the need for major attention. Many of the interstate interchanges in Louisville, particularly those inside the Watterson Expressway, are poorly designed and have irrational approaches, short ramps, dangerous mergings, and are generally unsightly. Interstate 71 needs one or two more lanes between the Watterson and downtown. Elsewhere in the state, the Cincinnati-Northern Kentucky area needs to replace the bridge that is the major interstate highway artery into and out of the city, dozens of smaller bridges need to be repaired or replaced, and many major state highways and street arteries have sections in areas of fast population growth (as the suburbs of our major population centers extend farther out from their urban cores) where congestion often occurs and safety is a problem. Other states are investing continually in modern transportation infrastructure, especially in their metropolitan areas, and we need to make sure we are at least keeping up in this important facet of mobility and attractiveness. Transportation infrastructure comes down to design and money. In this section we provide an explanation and analysis of transportation financing in Kentucky. We draw upon many public sources of data and program descriptions. We provide an overview of the way transportation infrastructure is financed in Kentucky, with an explanation of the roles of federal, state, and local governments. The data from the fiscal year provides a snapshot of transportation related revenues and expenditures. As major construction projects begin and end and move around the state transportation expenditures may look different in each year s snapshot. We supplement the fiscal analysis in this report with data from a previous report for Jefferson County, which covers a ten year period. We also note that a significant portion of the state s spending is done by formula, so that the distribution among the counties remains roughly the same from one year to the next. Overview of transportation financing in Kentucky Transportation in Kentucky is financed and managed almost exclusively by the state and federal governments. Local governments levy gasoline taxes in some municipalities around the US, but not in Kentucky. Federal highway, mass transit, and other transportation funds come to cities and counties of Kentucky through the Kentucky Transportation Cabinet. State government must approve most local projects, even those financed with federal funds. Often federal funding for a local road project is combined with state funds, where the match may vary from 10 to 20 percent. Residents, workers and travelers pay into the Kentucky State Transportation Fund through a variety of taxes and fees. Gas tax. The most visible payment is the gasoline tax that motorists pay when they fill up their tanks. Kentucky levies a tax of 16.4 cents per gallon, which is in addition to the federal tax of 18.4 cents per gallon. The state also levies a tax on diesel and other special fuels of 13.4 cents per gallon. The gas and other motor fuels taxes generated about $454 million for state government in fiscal year Motor vehicle usage tax. The state levies a tax of six percent on the sale of new and used cars. It also applies to the first time registration of a formerly out-of-state vehicle. It is called a usage tax, but is in fact a sales tax. The tax generated about $434 million for state government in fiscal year Kentucky s Cities and State Fiscal Policies December 30,

42 Weight distance tax. Kentucky levies a weight distance tax on trucks. As its name implies, taxes collected are a function of the weight of the truck and the distance traveled in Kentucky. Trucking companies moving up and down the interstate highways, particularly I-75 and I-65, pay most of the taxes. The state collected about $78.5 million from the weight distance tax in fiscal year Other revenues sources. The state also raises road funds from several other sources, including fees for drivers licenses, license plates, truck decals, tolls, fines, and investment income. These various sources generated about $120 million in fiscal year The federal Highway Trust Fund collects revenues primarily through the federal gasoline tax, which is currently 18.4 cents per gallon. Of the federal tax per gallon, cents goes to the highway account, 2.86 cents goes to the mass transit account, and.1 cents goes to the leaking underground storage account. The Trust Fund received approximately $35 billion in A majority of these dollars are distributed back to state and local governments based upon formulas that take account of the number of lane-miles of different types of roads, vehicle miles traveled, and types of traffic. For example, Kentucky has 3,400 lane miles of interstate highway, and received $85 million in interstate road maintenance dollars in FY 2002, 1.9 percent of the national total. Congress also regularly budgets general fund dollars to supplement those received by the Trust Fund, and often directs those dollars to specific projects. From the point of view of the state total, Kentucky receives back in federal spending on highways and mass transit an amount roughly equal to what it contributes through taxes to the Highway Trust Fund. Currently, this is about $550 million annually. The Kentucky Transportation Cabinet, through the state highway construction program, mediates the distribution of most of the federal funds ($497 million in FY 2003). Other funds go to local mass transit organizations. Expenditures by Kentucky Transportation Cabinet The Kentucky Transportation Cabinet exercises the primary control over road construction and maintenance in Kentucky. The state collects funds from taxes and fees statewide, combines that with federal dollars, and controls the allocation of these dollars to projects around the state. A portion of the state s revenues is allocated directly to city and county governments for street and road resurfacing projects locally. The other portion is managed by the state Cabinet, with state planners and engineers designing projects and letting contracts with private construction firms. There is some regional coordination and planning with the state through the Area Development Districts (ADD). The ADDs have small staffs of transportation planners, and maintain traffic models for their areas. In the urban areas of the state, the ADDs are designated by the federal and state governments as the Metropolitan Planning Organization for the area. This designation gives the ADD the primary authority to identify and prioritize transportation projects in the region that require federal funding. The ADDs receive funding from Kentucky state government and their member counties. Kentucky s Cities and State Fiscal Policies December 30,

43 Unfortunately, there is no publicly available complete accounting of state transportation expenditures by county or region. But we can paint a fairly accurate picture by organizing the substantial amount of public data provided in state budget documents and the annual Financial Report to Management of the Transportation Cabinet, which supplies (in Note 2) the expenses of the cabinet by county for the Road, Federal, General, Agency, Capital Project, and Fleet Management funds combined. In addition, our multi-year analysis of transportation spending in Jefferson County relies heavily on information in the historical six-year highway plans. The state goes through a biennial exercise wherein the various transportation project requests are prioritized for the subsequent six years. State planners and local advocates both have input in the identification of transportation needs. Ultimately though, the decision on which project to fund and complete lies in the political domain the governor and the legislators. Typically, road projects become part of the currency in political bargaining to garner legislators votes on other matters, such as parks, university funding, K-12 school issues, or tax proposals. A component of the regional distribution of state transportation funds is driven by formulas, however. By statute, 48.2 percent of Kentucky motor fuels tax collections are distributed back to local jurisdictions, as follows: County Road Aid (18.3%), Rural Secondary Aid (22.2%), and Municipal Road Aid (7.7%). A 'formula of fifths' is used to allocate the County and Rural program dollars, with one-fifth each for (1) equal shares to counties (2) percent of the state's rural road mileage (3) percent of the state's rural population, and two-fifths for the percent of the state's rural land area. Municipal Road Aid dollars are distributed to cities based on their percentage of Kentucky's urban population. We analyze the various uses of transportation funds in detail below. It is useful to portray the totals at the outset, however. The maps below show the actual expenditures of state construction and maintenance, federal highway, and state revenue sharing program funds. The state construction and maintenance spending shows a clear pattern that follows the state parkways and, to a lesser extent, the interstates. There is also a swath of heavy spending in the eastern mountains. The federal highway spending more clearly follows the interstates, but there was also quite a lot of money spent around Owensboro, Henderson, and a cluster of eastern mountain counties. The revenue sharing money went primarily to the state s urban areas and more populous rural counties. However, the range of the revenue sharing expenditures going to each county was not nearly as great as the range of either the state or federal construction expenditures. Kentucky s Cities and State Fiscal Policies December 30,

44 Kentucky s Cities and State Fiscal Policies December 30,

45 While the previous maps show the raw numbers, the maps below summarize the redistribution of state and federal transportation funds among Kentucky s counties. The first shows the total net cash flow of funds (state and federal expenditures minus state and federal revenue collections) while the second shows the return each county realized from a dollar of revenue collected (the percentage of expenditures relative to revenues expressed in terms of a dollar of revenue). The first gives an indication of the magnitude of redistribution around the state but emphasizes the larger counties, while the second gives an indication of the winners and losers of this redistribution regardless of county size. The maps divide the counties into two roughly equal groups of net donors and two roughly equal groups of net donees. Our estimates indicate that there are 49 donor counties and 71 donee counties. Kentucky s Cities and State Fiscal Policies December 30,

46 It seems fairly clear from the maps (which are nearly equivalent in terms of the county categorization) that the pattern of redistribution does not closely follow the major transportation corridors through the state. The counties with the lowest return on the dollar are primarily ones that include the major urban areas of the state and those on the borders with interstate highways (where a favorable location may greatly increase fuel tax revenue collections). The counties with the highest returns are primarily in the eastern mountains and the fringe of the Lexington metro area. Kentucky s Cities and State Fiscal Policies December 30,

47 There is a stark contrast, however, between state and federal funding, as can be seen in the next set of maps, which summarize the returns on the dollar for state and federal transportation funding separately. The maps are interesting for several reasons. First, while there are 36 donor and 84 donee counties in terms of state funding, the situation is reversed for federal funding, with 82 donor counties and 39 donee counties. This may be expected since there are fewer federally funded projects and they tend to big-ticket items. The 18 counties that received $2 or more for each dollar of federal transportation revenue they generated accounted for 42 percent of the federal expenditures. Second, the federal funding seems to be more closely tied to interstates and parkways than the state funding. Even here, however, the eastern parkways received more funding than those in the western part of the state. Third, interstate construction going on south and north of Lexington and around Bowling Green boosted federal spending in those counties, but otherwise all the urban areas of the state were net donors of federal funds. Fourth, the clear anomalies in the federal funding map are Pike and Letcher counties in the far southeast of the state. In fact, they have the third and fifth highest returns on the dollar of federal funds. Fifth, state transportation funding is weighted heavily towards the far western and eastern portions of the state. And sixth, none of the largest urban areas of the state received more in state transportation funding than they generated in Transportation Fund revenues. Kentucky s Cities and State Fiscal Policies December 30,

48 This discussion summarizes a snapshot of transportation funding for FY2003, but it may be argued that since transportation spending is lumpy in that many individual projects are large and their locations shift around as some are completed and others begun a snapshot may not accurately reflect the long-term distribution of funds among the counties. In a previous study we looked at transportation spending in Jefferson County over a ten-year period, The results of that study mirror this one, and so give some confidence to our conclusions regarding the general redistribution of state and federal transportation funds. We present highlights from that study in Appendix C, to give the reader an idea of how persistent the redistribution trends appear to be. Revenue Sharing Programs While the state s three revenue sharing programs distribute most of their money to the state s more populous counties, as was seen in the map above, on a per capita basis there is a great deal of redistribution that results from the formulas used to distribute the funds to the counties. On a per capita basis, all of the state s most populous counties receive the least amount of revenue sharing funds, as can easily be seen in the following map and table. If population is a key indicator of the lane-miles of road that must be maintained by a county, and of the intensity of use of those roads, then the counties with the most pressing needs are receiving the least amount of help from the state. Kentucky s Cities and State Fiscal Policies December 30,