coomes ky spending study fy03

7/31/2019 Coomes KY Spending Study Fy03

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Kentuckys Economic CompetitivenessA Call for Modernization of the States Fiscal Policies

Kentucky and Surrounding StatesMetropolitan and Micropolitan Counties 2003

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Kentucky CountiesMicropolitan CountiesMetropolitan CountiesRiversLakes

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by

Paul Coomes, Ph.D.Professor of Economics, and

National City Research Fellow

and

Barry KornsteinSenior Research Analyst

University of Louisville

December 2004


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Kentucky Fiscal Policies and its Cities July 1, 2004 2

AcknowledgementsFunding for this study was provided by the Tri-County Economic Development Foundationin Northern Kentucky, the Lexington Urban-County Government, and Greater Louisville Inc.National City provided a grant for regional economic research that underpinned much of thisresearch. Thanks to Danny Fore, Gary Toebben, Steve Higdon, and Julian Beard for their

leadership. For the first time, Northern Kentucky, Lexington, and Louisville are workingtogether to learn about and highlight the urban competitiveness issues so key to our statesprosperity.

We also wish to thank Margaret Maginnis for her help with the database construction and forthe map of metropolitan and micropolitan areas. And we appreciate the assistance of manystate officials who provided data and advice for this report.


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CONTENTS

EXECUTIVE SUMMARY .................................................................................................1

INTRODUCTION ...............................................................................................................5Kentucky is now an urban state ...............................................................................6Changing economic structure ..................................................................................8Human capital, earnings per job, and office industries..........................................10Tax burdens............................................................................................................13

STATE GOVERNMENT REVENUES AND EXPENDITURES, FY 2002-03 ..............16State revenues and expenditures by type ...............................................................17

Geographic distribution of revenues......................................................................18Geographic distribution of expenditures................................................................19General fund geographic details ............................................................................20Transportation fund geographic details .................................................................21Federal fund geographic details.............................................................................22Net cash flows........................................................................................................22Equity of distribution of funds...............................................................................26

ANALYSIS OF GEOGRAPHIC DISTRIBUTION..........................................................29State spending on local public K-12 education......................................................29

Economies of scale ....................................................................................33The Catholic effect.....................................................................................35Real estate versus human capital wealth....................................................35

Transportation financing........................................................................................36Overview of transportation financing in Kentucky ...................................37Expenditures by Kentucky Transportation Cabinet...................................38Revenue sharing programs.........................................................................44

KENTUCKY PUBLIC FINANCE IN NATIONAL CONTEXT .....................................47Taxes......................................................................................................................47

Expenditures ..........................................................................................................49Economic, social, and demographic indicators......................................................54


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APPENDICESA. Details General Fund, Transportation Fund, Federal Fund, FY03 ................57

A.1 General Fund Receipts and Expenditures ...........................................57A.2 Transportation Fund Receipts and Expenditures ................................58A.3 Federal Fund Receipts and Expenditures............................................59

A.4 Geographic Distribution of General Fund Revenues..........................60A.5 Geographic Distribution of Transportation Fund Revenues...............60A.6 Geographic Distribution of Federal Fund Revenues...........................61A.7 Geographic Distribution of General Fund Expenditures ....................62A.8 Geographic Distribution of Transportation Fund Expenditures .........63A.9 Geographic Distribution of Federal Fund Expenditures.....................64A.10 Net Cash Flows, General and Transportation Funds ........................65A.11 Net Cash Flows, Federal Funds ........................................................66B. Tax burdens, family of four, largest cities in each state........................67

Kentuckys Cities and State Fiscal Policies December 30, 2004 2

C. Transportation Funding in Jefferson County, 1991 to 2001 .............................68


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Executive Summaryhis study provides two things. It provides fresh estimates of the geographic distribution ofKentucky state government revenues and expenditures. And, for the first time, it linksKentuckys 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 geographicredistribution of public resources, away from the cities where the dollars are collected andtowards sparsely populated areas where schools, roads, recreation and other services are heavilysubsidized by the state. The Louisville, Lexington and Northern Kentucky metropolitan areasaccounted for over one-half of all state government taxes and fees collected in fiscal year 2003.But these areas received only about one-third of state expenditures, a net cash transfer out of $1.4billion.

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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 amongstates 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 urbanareas, where there are clusters of other similar businesses, corporate headquarters, good airconnections, and university graduate programs. Kentucky is surrounded by states with morelarge cities and more success in spawning and attracting these jobs. If Kentucky is to capture itsshare of the lucrative office economy jobs, it will need to do so primarily in its cities.

However, Kentuckys state government has not developed fiscal policies to help its urban areascompete in the modern marketplace. Its individual income tax burden is relatively high, at a timewhen human capital in the form of educated, talented, and enterprising people - is the primeeconomic development prize. State government absorbs most of the state andlocal publicresources 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 littlepopulation or economic activity. And it has fostered an unhealthy and unsustainable culturethroughout the state, whereby residency entitles one to K-12 schools, community colleges,universities, roads, police service, health care, recreation facilities, and basic infrastructure atlittle or no cost to the individual or the local community. Urban residents and workers, on theother hand, are taxed twice once to pay for their own public services, and again to pay forservices to those who live in the rest of the state. Clearly, if Kentucky is ever to catch up in termsof prosperity, it will be led by its cities. But its urban areas cannot prosper under an anachronistictax 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 regionaleconomic consequences, and how can the policies best be changed. We explore these questionsfor the first time in this report. Among the most important and interesting findings are:

We estimate that the Louisville, Lexington, and Northern Kentucky metro areasaccounted for $4.2 billion of Kentucky state government taxes and fees collected inFY03, 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 contributedbut $1,500 per resident.


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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 revenuesharing formula, and the subsidy of police, recreation, and other government services indozens 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.Kentuckys 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 toother states.

Kentucky ranks fifth highest among states in the degree to which state governmentdominates state and local government revenues collections. Seventy percent of all stateandlocal 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 levysubstantial occupational and net profits taxes for their city and county governments andschools, 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 taxrates, relying on state government tax collections in cities to raise the funds for localservices. This means that the most urbanized areas are doubly taxed, once to provide theirown local services, and once more to pay for services around the state.

In general, Kentuckys urban economies are not growing as rapidly as their peers aroundthe country. Not all this poor economic performance can be blamed on Kentucky statefiscal policies. But one cant help but notice the contrast with policies in other stateswhere cities are booming with new businesses and people. We see Louisville trailingNashville and Indianapolis, cities that are state capitols and where state tax rates arelower and redistribution programs are less aggressive. While its peers continue to addmajor corporate headquarters, to attract more young and educated people, and to addprofessional sports and arts venues, Louisville continues to rely on an economy thatprimarily 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. Ashlands economy is nearlystagnant, 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 toother similarly-sized markets off the interstate grid and without state capitols or majoruniversities. Among Kentucky major cities, only Lexington seems to be performing withor ahead of its peers nationally. However, even Lexington lags in terms of jobs inprofessional service industries. Without the University of Kentucky and the many newauto-related manufacturing plants in the region, the citys 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 cannotcompete if we continue to diffuse our public resources so thinly that excellence isinfeasible. The result has been a predictable decline in relative economic competitivenessin most of Kentuckys urban areas. The ability of the cities in this state to compete fortalent, capital, and economic activity depends upon a restructuring of Kentucky statefiscal policies. This is the essential message of our report. If Kentucky is to capture its



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share of the booming brain-oriented office industries, it will have to do it in its urbanareas, since that is where such work is almost exclusively performed.

These findings suggest the need for an overhaul of state fiscal policies in Kentucky. Changesneed 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 senda signal to talented and enterprising people that success is rewarded not exploited, but also toreduce 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 toensure that more of the state Road Fund dollars are spent where the population lives, thetraffic occurs, and the taxes are paid. The state K-12 program needs to be revised to requiremore local contributions for local schools in less populated areas, thereby reducing the hugedrain 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 economicdevelopment 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. Thestate can then lower its fiscal responsibility for provision of local K-12 education, roadmaintenance, and community projects.

Other bold initiatives should be considered, such as:

Privatization. The state should investigate more possibilities for privatization of functions. Forexample, its seems likely that private companies could better manage hospitality andrecreational operations at the state resort parks, turning a perennial financial drain into aperforming asset.

Consolidation. In many cases, current state funding formulas enable smaller cities, counties,school districts, and other governmental jurisdictions to exist independently rather thanconsider consolidation to save money or improve service. The Commonwealth should engagein a study of these opportunities and find a way to reward consolidation wherever efficienciescan be found. The Lexington and Louisville communities voted to merge their major city andcounty governments, to popular acclaim, suggesting that other government consolidationsaround the state may lead to more effective administration and service delivery.


CaveatsIt is important for the reader to understand what this study is not. First, this is not a cost-benefit study. Weestimate 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 inEddyville to house criminals from around the state are counted in Lyon County, just as expenditures on facultysalaries at Western Kentucky University are counted in Warren County, even though students hail from dozensof Kentucky counties. Similarly, sales taxes paid by an Estill County resident on a major purchase in Lexingtonare counted as Fayette County collections. There are complex chains through which tax liabilities and programbenefits are passed to residents of other geographic areas, both within the state and around the world. It isbeyond the scope of this project to track the ultimate incidence of Kentucky fiscal policy.

Second, our study investigates the flows to and from the states General Fund ($6.8 billion), TransportationFund ($1.1 billion), and Federal Fund ($4.9 billion), but does not examine the states other funds. The state alsomaintains an Agency Fund, one that collects and distributes dollars related to fee-for-service activities, likecollege tuition, dormitory fees, and state park room sales. This fund handled $2.6 billion in FY03. Anotheraccount, the capital fund, disbursed $185 million that fiscal year. Finally, during the legislative session, the state

often elects to distribute budget surpluses for building and other community projects.


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MSA/FIPS

code MSA/County name

Population

2002

MSA/FIPS

code MSA/County name

Population

2002

14540 Bowling Green, KY Metro 129,773 30460 Lexington-Fayette, KY Metro 416,383

21061 Edmonson County, KY 11,841 21017 Bourbon County, KY 19,576

21217 Taylor County, KY 23,202 21049 Clark County, KY 33,726

21227 Warren County, KY 94,730 21067 Fayette County, KY 263,618

21113 Jessamine County, KY 40,740

15820 Campbellsville, KY Micro 23,20221209 Scott County, KY 35,32021217 Taylor County, KY 23,202 21239 Woodford County, KY 23,403

16420 Central City, KY Micro 31,702 30940 London, KY Micro 54,313

21177 Muhlenberg County, KY 31,702 21125 Laurel County, KY 54,313

17140 Cincinnati-Middletown, OH-KY-IN Metro 2,040,746 31140 Louisville, KY-IN Metro 1,182,832

18029 Dearborn County, IN 47,333 18019 Clark County, IN 98,198

18047 Franklin County, IN 22,585 18043 Floyd County, IN 71,633

18115 Ohio County, IN 5,804 18061 Harrison County, IN 35,244

21015 Boone County, KY 93,290 18175 Washington County, IN 27,618

21023 Bracken County, KY 8,482 21029 Bullitt County, KY 63,800

21037 Campbell County, KY 88,604 21103 Henry County, KY 15,367

21077 Gallatin County, KY 7,836 21111 Jefferson County, KY 698,080

21081 Grant County, KY 23,620 21163 Meade County, KY 27,439

21117 Kenton County, KY 152,164 21179 Nelson County, KY 38,823

21191 Pendleton County, KY 14,815 21185 Oldham County, KY 49,310

39015 Brown County, OH 43,464 21211 Shelby County, KY 35,125

39017 Butler County, OH 340,543 21215 Spencer County, KY 13,52339025 Clermont County, OH 183,352 21223 Trimble County, KY 8,672

39061 Hamilton County, OH 833,721

39165 Warren County, OH 175,133 31580 Madisonville, KY Micro 46,588

21107 Hopkins County, KY 46,588

17300 Clarksville, TN-KY Metro 234,893

21047 Christian County, KY 71,267 32460 Mayfield, KY Micro 37,225

21221 Trigg County, KY 12,681 21083 Graves County, KY 37,225

47125 Montgomery County, TN 138,241

47161 Stewart County, TN 12,704 32500 Maysville, KY Micro 30,860

21135 Lewis County, KY 13,944

18340 Corbin, KY Micro 36,636 21161 Mason County, KY 16,916

21235 Whitley County, KY 36,636

33180 Middlesborough, KY Micro 30,114

19220 Danville, KY Micro 51,920 21013 Bell County, KY 30,114

21021 Boyle County, KY 27,865

21137 Lincoln County, KY 24,055 34460 Mount Sterling, KY Micro 41,377

21011 Bath County, KY 11,407

21060 Elizabethtown, KY Metro 109,096 21165 Menifee County, KY 6,70821093 Hardin County, KY 95,724 21173 Montgomery County, KY 23,262

21123 Larue County, KY 13,372

34660 Murray, KY Micro 34,392

21780 Evansville, IN-KY Metro 344,022 21035 Calloway County, KY 34,392

18051 Gibson County, IN 32,590

18129 Posey County, IN 26,990 36980 Owensboro, KY Metro 110,314

18163 Vanderburgh County, IN 171,744 21059 Daviess County, KY 91,694

18173 Warrick County, IN 53,624 21091 Hancock County, KY 8,573

21101 Henderson County, KY 44,995 21149 McLean County, KY 10,047

21233 Webster County, KY 14,079

37140 Paducah, KY-IL Micro

23180 Frankfort, KY Micro 67,762 17127 Massac County, IL 15,021

21005 Anderson County, KY 19,561 21007 Ballard County, KY 8,163

21073 Franklin County, KY 48,201 21139 Livingston County, KY 9,846

21145 McCracken County, KY 64,534

23980 Glasgow, KY Micro

21009 Barren County, KY 38,749 40020 Richmond, KY Micro 90,117

21169 Metcalfe County, KY 10,046 21151 Madison County, KY 73,334

21203 Rockcastle County, KY 16,783

26580 Huntington-Ashland, WV-KY-OH Metro 286,184

21019 Boyd County, KY 49,603 43700 Somerset, KY Micro 57,160

21089 Greenup County, KY 36,761 21199 Pulaski County, KY 57,160

39087 Lawrence County, OH 62,172

54011 Cabell County, WV 95,266 46460 Union City, TN-KY Micro 39,945

54099 Wayne County, WV 42,382 21075 Fulton County, KY 7,55147131 Obion County, TN 32,394

Source: Office of Management and Budget, June 2003

Metropolitan and Micropolitan Areas Containing Kentucky Counties, as of June 2003



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INTRODUCTION

his report updates and extends two previous studies. The initial study, covering fiscal year1991-92, was the first comprehensive examination of the geographic distribution of fiscalflows in Kentucky1. 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 the1996-97 fiscal year, was supported by a general economic development grant from NationalCity2. In the update we found the same geographic pattern of fiscal flows but a much largeramount. The dollars at stake are even larger now. Despite the much publicized recession, totalstate government General Fund and Road Fund revenues grew 22 percent between FY97 andFY03, to a total of $8.1 billion.

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The current study is designed both to update the two previous studies and to extend the analysisto better understand the hows and whys of the redistribution. We delve into complicatededucation and road funding formulas and explain how they disadvantage Kentuckys urbancenters. We also examine Kentuckys public finance structure relative to that of other states.

Kentucky has aggressively used its state government over the past several decades to invest ineducation, transportation, and recreation infrastructure around the state. New school buildings ofall types dot the landscape, university facilities have expanded, new community colleges havebeen constructed, good roads now connect most towns, and Kentucky has the greatest number ofstate resort parks in the nation. Moreover, the state has devised a set of funding formulas thatprovide generous annual operating subsidies to local school districts, road departments, countygovernments, and parks. And it has greatly expanded its social programs, with large expenses forhealth care, welfare, child care, family services, alcohol and drug abuse programs, literacyprograms, and legal aid.

All of this has been expensive, but will be well worth it financially in future decades if localcommunities leverage these state investments to build up the quality of their labor force, launchand attract private companies, and use the lure of the states natural beauty and park facilities tocapture tourist and retiree dollars. In the meantime, economic and social statistics on the state donot look so good, and taxpayers shoulder a hefty burden. The major investment work is over, andsurely we are entering a new era in the states economic history. Kentucky has reached the end ofa long period of increasing state government involvement in communities and the marketplace it cannot afford to do even more without weakening the states modest private sector capacity.

We believe it would be prudent for Kentucky state government to modify its laws, programs, andpractices to better take advantage of modern economic opportunities. Human capital is the neweconomic development prize, and despite the investments noted above Kentucky scores verylow. 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 1991-92, byPaul Coomes, Richard Thalheimer and William Stober. For a discussion of methodology, see Measuring theIntrastate Distribution of State Government Funds: A Case Study, by Paul Coomes, William Stober, andRichard Thalheimer,Journal of Economic and Social Measurement, Volume 20, 1994, pages 285-329.

2 The Intrastate Distribution of Kentucky State Government Revenues and Expenditures, Fiscal Year 1996-97, byPaul Coomes and Barry Kornstein, University of Louisville, August 1999, 16 pages,http://monitor.louisville.edu/taxes/Report_FY97.pdf.

http://monitor.louisville.edu/taxes/Report_FY97.pdfhttp://monitor.louisville.edu/taxes/Report_FY97.pdf


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earnings per job remain well below the national average. High individual income taxes repel themost productive people, who can increasingly live wherever they like and unsurprisingly likebeaches, mountains, good weather, low taxes, and good public services. Kentucky cannotcompete with Florida for beaches and winter weather, but we could on tax policy and publicservices. 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 ifwe continue to diffuse our public resources so thinly that excellence is infeasible. The state hasmany public universities and graduate programs, but few have national reputations. The statesfew major cities, where high end service jobs have the only realistic chance of emerging, arebeing starved for resources by redistributionist state policies. Current road policies mean that thelargest urban areas generate most of the revenues for transportation projects, but are choked withtraffic, bereft of turning lanes, shoulders, bike trails, walkways, and highway landscaping. Statepolicies also prop up most of Kentuckys 120 county governments, whose service functions andlocations 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 moreflexibility to lead economic development through popular projects funded by property tax growthand local option sales taxes.

The result has been a predictable decline in relative economic competitiveness in most ofKentuckys 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 theessential message of this report. If Kentucky is to capture its share of the booming brain-orientedoffice industries, it will have to do it in its urban areas, since that is where such work is almostexclusively performed. And only a few of Kentuckys urban areas are large enough to competeworldwide for corporate headquarters or the regional headquarters for major accounting,engineering, design, testing, research, marketing, public relations, consulting, and computerservice operations. These firms need to be near other major firms, have good air connections, andbe integrated with strong graduate and professional programs at local universities. To attract andretain good employees, they need their host communities to have excellent public and privateschools, low crime, clean air, good transportation systems, and to have the full complement ofother 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 onprivate 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 inFrankfort 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 the2000 Census indicate that over seventy percent of Kentuckys population live in counties onewould characterize as urban, suburban, or exurban. While admittedly many of these residentslive on multi-acre land parcels and do not consider themselves city dwellers, a closerexamination reveals that most earn their living from participating in urban labor markets. Fast-growing counties, like Boone, Bullitt, Jessamine, Spencer, and Oldham are attracting young



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families who hold jobs in Cincinnati, Louisville, or Lexington, but want to be able to purchase alarge modern home unavailable at their income level in the central urban counties. Countingthese suburbanites and exurbanites, a large majority of Kentuckians now live and/or work incities.

Kentucky and Surrounding StatesMetropolitan and Micropolitan Counties 2003

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Cincinnati

tington

Clarksville

Bowling Green

Elizabethtown

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London

Murray

Glasgow

Paducah

Danville

Richmond

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Maysville

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Campbellsville

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Portsmouth

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Kentucky CountiesMicropolitan CountiesMetropolitan CountiesRiversLakes

$T Other Area Cities$T Principal Micro Cities#Y Principal Metro Cities

The federal government recently revised the geographic definitions for metropolitan areas, anddefined a new set of smaller population concentrations as micropolitan. Kentucky gained twometropolitan areas Elizabethtown and Bowling Green for a total of nine metros containing 36Kentucky counties. These metros are home to 2.4 million of the states 4 million residents.

Additionally, the federal government defined seventeen micropolitan areas containing another 26Kentucky counties and 770,000 residents. Combined, these 61 metropolitan and micropolitancounties account for 3.1 million, or 75 percent of the states population. See the table on page 4for the definitions.

Using US Census Bureau definitions, urbanized areas are those with a population density of1,000 persons per square mile, plus adjacent areas with a population density of greater than 500persons per square mile. These calculations are made at the census block group level, a much



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finer geographic level than the county basis used in metro definitions. While the urbanized landarea only accounts for 3.1 percent of Kentuckys land, the population living there accounts for 56percent of all the states residents. According to the 2000 Census, 2.3 million of Kentuckys 4million residents live in urbanized areas.

Kentuckians are even more concentrated in their places of work. One-half of all private sectorwages and salaries are earned in four counties Jefferson, Fayette, Boone and Kenton. Add inWarren, McCracken and Daviess counties, and one can account for one-half of all private sectorjobs in the state. That is, a few places account for a majority of the states tax base. These placesinclude nearly all the states office space, airport traffic, distribution centers, retail sales, hotels,arts, entertainment, sports, and media operations. These seven counties also account for 43percent of the states manufacturing payrolls.

Changing economic structure

Simultaneous with the increased urbanization of Kentuckys population has been the decline ineconomic 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 inthe state, it now amounts to only about 3.5 percent of the total from all industries. This is acontinuation of a two-decade long trend. These industries remain important, in that they bringnew dollars into the state as products are sold outside Kentucky and are linked to many othersupporting 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 perdollar of output.

Agriculture & Mining

Share of Kentucky Wages, Salaries, Proprietors' Income

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Source: US Bureau of Economic Analysis

2001

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.



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The transportation, distribution, and warehousing industries have also grown rapidly during thelast twenty years, as the national growth in these industries favored our central location. TheCincinnati airport in Northern Kentucky is one of the busiest passenger hubs in the US, and hasbeen a magnet for office and distribution operations. The international air hub of United ParcelService in Louisville is the 11th 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 ofa 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, butalso because Lexington is now the exact center of the US population east of the RockyMountains. This means that producers of heavy, expensive consumer goods can minimize theirtransportation costs to market by locating in the Bluegrass area.

While Kentucky, like all states, has added health care, engineering, accounting, legal, dataprocessing, telecommunications and other business service operations, the state has lagged in itsability to spawn or attract major corporate headquarters or research and development firms. Ofthe bordering states, only West Virginia has fewer than Kentuckys eight Fortune 1000 corporate

headquarters. Indiana has fifteen, Tennessee has twenty-one, and the other bordering states havemany more.

Population

2002

Population Growth

1990-2002

Job

Growth1990-

2002

Percent

of Adults

with

CollegeDegree,

2000 *

obs in

Information,

Finance,

Professional

& Technical

Service

Industries

per 10,000Residents,

2002

Average

Earningsper Job,

2002

Growth

in

Earnings

per Job,1990-

2002

Louisville 1,180,294 11.5% 19.7% 22.2 729 $37,984 57.1%

Indianapolis 1,574,963 21.1% 25.4% 25.8 845 $41,725 61.0%

Nashville 1,352,568 28.4% 38.4% 26.9 896 $39,842 65.5%

Omaha 783,477 13.9% 21.6% 28.0 1,067 $38,777 62.3%

Cincinnati 2,036,534 10.1% 20.2% 25.0 775 $40,378 53.3%

Cleveland 2,141,802 1.8% 7.0% 23.5 865 $41,903 42.7%

Columbus 1,655,942 17.4% 27.1% 29.1 986 $40,286 57.7%

Kansas City 1,886,672 15.0% 22.2% 28.5 1,129 $40,916 60.6%

Lexington 416,480 18.9% 24.8% 28.7 759 $38,283 52.0%

Champaign-Urbana 214,786 5.7% 9.0% 38.0 697 $32,355 47.4%

Knoxville 629,589 17.3% 28.3% 23.5 795 $36,025 52.0%Lincoln 273,853 19.0% 26.9% 32.6 1,023 $34,003 57.3%

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.

Macro Indicators, Peer Metro Areas



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Human capital, earnings per job, and office industries

There is a myth that Kentuckys low education levels are due to the extremely low levels ofschooling 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 foreach and organized some macro indicators of human capital. The Louisville-Southern Indianametro lags Indianapolis, Nashville and Omaha in every indicator population and job growth,education levels, professional jobs, and earnings per job. The Cincinnati-Northern Kentuckymarket lags Columbus and Kansas City in all measures, but is ahead of Cleveland in measures ofgrowth - though not professional jobs and earnings per job.

For Lexington, we chose three other mid-sized metros that are home to state flagshipuniversities. 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 isgrowing at a similar rate to Lexington. The Lincoln Nebraska metro area is growing slightlyfaster than Lexington in terms of population, jobs, and earnings per job. Lexington ranks 3 rd interms of college attainment rates, 2nd highest in professional jobs per capita, and 1st in annualearnings per job. The high earnings per job reflects Lexington areas much higher concentration

College Education and Earnings120 Kentucky Counties, 2000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

0 5 10 15 20 25 30 35 40

% of Adults with College Degree, 2000

AverageAnnualEarningsperJob,

2000

Fayette

Oldham

Scott

Hickman

Edmondson

LewisRobertson

Woodfordefferson

Warren

Boone

X UNITED STATES

3 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,http://monitor.louisville.edu//kentucky/KyRegionsED.pdf.

http://monitor.louisville.edu/kyhttp://monitor.louisville.edu/ky


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accounting, architectural, engineering, testing, design, computer, marketing, advertising, publicrelations, consulting, and research and development services.

Number of Jobs per 10,000 Residents, 2002

in Information, Professional & Technical Services, Finance and Insurance Industries

0

200

400

600

800

1,000

1,200

Massachussets

Mississippi

KentuckyWest Virginia

Indiana

OhioMissouri

Tennessee

Illinois

Virginia

Source: US Bureau of Economic Analysis

Arkansas

South Carolina

On a per capita basis, Massachusetts, Colorado and Delaware top the list of states, whileMississippi and West Virginia anchor the bottom. Kentucky is near the bottom, with only 514

jobs per 10,000 residents. All of Kentuckys other border states rank higher, with Virginia andIllinois 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 theirvast office industries. Nor should one be surprised to see Missouri and Ohio ranked higher, giventhat 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 alertKentucky policy makers to a competitiveness problem. Moreover, Kentucky ranks lower thandozens of rural states around the country, states like Alabama, Montana, North Dakota and SouthDakota.

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 Owensboroand Evansville-Henderson metros are growing quite slowly4. Earnings per job are highest in the

4 For a more recent look at the relative performance of Owensboro, see Philanthropy, Charitable Giving, and thePublic Sector in Owensboro-Daviess County Kentucky, by Paul Coomes and Raj Narang, University ofLouisville, January 2004, 34 pages, for the Hager Educational Foundation,http://monitor.louisville.edu/kentucky/Owensboro%20Philanthropy%20Study.pdf.

http://monitor.louisville.edu/kentucky/Owensboro%20Philanthropy%20Study.pdfhttp://monitor.louisville.edu/kentucky/Owensboro%20Philanthropy%20Study.pdf


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Cincinnati-Northern Kentucky, Lexington, and Louisville-Southern Indiana metros, but pay hasrecently been growing fastest in the Bowling Green and Hopkinsville markets.

ax burdens

taxes vary greatly around the US, as do the quantity and quality of public services

he evidence supports a number of conclusions:orthern Kentucky are overall in line with those

2. rban school systems, large municipalities and countyre

in

3.r

4. ively redistributing resources

r

Metro Areas

Value,

2002

Growth,

1990-2002 Value, 2002

Growth,

1990-2002

Bowling Green 20.3% $24,242 64.5% 30.0% $31,200 60.2%Cincinnati-Northern KY 10.1% $31,804 62.0% 20.2% $40,378 53.3%Clarksville-Hopkinsville 23.3% $24,716 81.3% 40.3% $34,640 58.3%Elizabethtown 7.9% $25,324 69.8% 7.3% $34,229 47.6%Evansville-Henderson 5.8% $29,116 63.6% 16.3% $36,729 55.3%Huntington-Ashland -0.6% $23,139 54.1% 7.8% $32,064 29.8%Lexington 18.9% $31,136 59.9% 24.8% $38,283 52.0%Louisville-Southern IN 11.5% $30,666 65.3% 19.7% $37,984 57.1%

Owensboro 5.3% $25,014 59.2% 13.9% $31,776 46.4%

United States 15.4% $30,906 58.7% 19.8% $40,758 53.5%

Source: US Bureau of Economic Analysis; using metro area definitions as of June 2003.

Summary Economic Measures for Metro Areas Containing Kentucky Counties

Per Capita Income ofResidents

Average AnnualEarnings per Job

Population Growth,

1990-2002

JobGrowth,

1990-2002

T

State and localprovided by these governments. Taxes and public services are key factors in the competitionamong places for mobile companies and households. In this section we summarize results fromnational studies of relative tax burdens in major markets, compilations of local tax rates, studiesof state tax structures and rates, and studies of state government spending patterns.

T1. Local taxes in Louisville, Lexington and N

in competitor markets. These jurisdictions tend to rely upon occupational and insurancepremiums taxes for growth.

Property tax rates levied by ugovernments are comparable to those in other large cities, while property tax rates arelatively low in the other county and city jurisdictions around Kentucky. Jurisdictionscompetitor markets tend to rely more on local sales taxes and higher property taxes.

Due to high Kentucky state taxes, Louisville, Lexington, and Northern Kentucky areaworkers and residents have a high tax burden relative to their counterparts in competitomarkets. Moreover, the relative tax burden has gotten worse over the past decade. Theprimary culprit is the Kentucky individual income tax.

Due to Kentucky state governments practice of aggressfrom urbanized to sparsely populated parts of the state, the states major cities receiverelatively little in return for shouldering this high tax burden. Moreover, the cities poofiscal relationship with Kentucky state government is programmed to continue



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indefinitely, due to the structure of the tax code and the redistribution formulae embeddedin state programs, particularly for local K-12 education and transportation.

5. State government has mitigated this discrepancy somewhat in the past decade byallocating a large portion of state budget surplus dollars to the major cities for capitalprojects, e.g., the Covington and Louisville convention centers, Louisville Waterfront

Park, University of Kentucky buildings. However, these discretionary allocations are afraction 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 fewcomparative studies available. We consider two that focus on state and local taxes. RunzheimerInternational, a corporate relocation specialist located in Milwaukee, released a study three yearsago of comparative household tax burdens in major cities. Runzheimer estimated the annual taxburden 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 outsidethe (old) City of Louisville but inside Jefferson County. The tax calculations included federalincome 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 taxburdens on DC residents to those of residents in the largest city in each of the fifty states. As thelargest city in Kentucky, Louisville is included in the DC studies. Analysts examine state andlocal 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

Tax Burden, State and Local Government, Family of Fourwith $75,000 income

Largest City in Each of the 50 States, 2002

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

0 5 10 15 20 25 30 35 40 45 50

Bridgeport, CT (with $8,605 in property taxes)

Cheyenne WY

Source: Government of the District of Columbia, Tax Rates and Tax Burdens in the District of Columbia - A

Nationwide Comparison 2002, August 2003.

Louisville (10th)Charlotte

ColumbusOmaha

Kansas CityBirmingham

Indianapolis

Memphis

acksonville



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introduces some "noise," in that some of the cities have wide jurisdictions that include largesuburban areas, while other cities like Louisville include only the most urbanized core. Therecent merger of the City of Louisville and Jefferson County governments should improveLouisvilles position in this ranking, as most county residents pay lower property tax rates thanthose in the former City.

Family Income 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

$25,000 13 12 11 7 7 7 7 5 8 7

$50,000 12 8 8 8 11 9 7 8 12 10

$75,000 12 10 10 9 14 12 7 8 15 10

$100,000 11 10 11 8 15 14 10 9 16 13

$150,000 11 10 16 15

Louisville's Rank Among Largest Cities of Each State (1 = highest taxes)

State and Local Tax Burden

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

(http://cfo.dc.gov/services/studies/index.shtm).

The table summarizes Louisvilles ranking over the nine years studied by the DC government. Asecond table, in Appendix B, provides more detail for Louisville and eight of its primecompetitors covered by the study of 2002 tax burdens. Several things stand out. First, Louisvillehas one of the highest household tax burdens among the largest cities in each state. Second, thehigh tax burden is due primarily to the high income taxes, and these are largely collected byKentucky state government, not the City of Louisville or suburban governments. Third, thedifference in household tax burdens across competitor markets is large: residents of Jacksonvilleand 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 saythat Lexington and Northern Kentucky residents face similar tax burdens as do Louisvilleresidents. Property tax rates in the three most urbanized Kentucky places are fairly similar, andthey all levy occupational taxes on workers and net profits taxes on businesses.



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Kentucky State Government Revenues and Expenditures, Fiscal Year 2002-03

n this section we provide a comprehensive update to our previous studies. We examined allrevenues 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 variousRestricted Funds and the Capital Projects Budget). We allocate all the detailed revenues andexpenditures to Kentuckys 120 counties, based on administrative data and economic ordemographic indicators5.

I

State revenues and expenditures by type

The State collected nearly $7 billion in General Fund revenues during the 2003 fiscal year. Ofthat, $3 billion came from income taxes. The individual income tax is the single largest revenuesource for the State government, bringing in over $2.7 billion in FY2003. (See Table A-1 fordetails 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 onvarious kinds of intangible, tangible, and real property brought in a bit over $440 million, whilelicense and privilege taxes accounted for $340 million of State revenue. Of the latter, half wasbrought in through oil production and coal, minerals, and natural gas severance taxes, with mostof 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 & HumanitiesCabinet. Of that, ninety-seven percent was spent through the Education Department on K-12education. The Health Services Cabinet accounts for the next biggest chunk of State spending, atjust 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

5For a line-by-line discussion of the how General Fund and Transportation Fund dollars were allocated to counties,seeMeasuring 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 285-329. For the Federal Funds, we attempted to mirror the allocation process utilized for the stategovernment funds. On the expenditure side, where we were able to obtain specific administrative data onFederal Fund expenditures we used that to allocate to the counties. Otherwise, if the federal funds were goingto a line item that also occurred in either the General or Transportation funds we used the same allocator as weused for those state monies. If a Federal Fund line item was not present in either state fund and we did not havespecific administrative information on where the money was spent, we used economic and demographicindicators 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 thenhandled exactly as we allocated the state's fuels tax receipts. We then used information from the InternalRevenue Service on the sources of Federal government revenues to divide the remaining Federal Fund revenueamong the individual and corporate income taxes, estate and gift taxes, and excise taxes. These make up thevast 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 numberand size of firms by industry, and IRS data on individual and corporate income tax receipts to allocate those taxcollections among the counties.



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through the Universities Cabinet was just short of $1 billion during FY2003. These threecabinets accounted for just over $4.8 billion (sixty-seven percent) of General Fund spending. Ofthe remaining $2.4 billion of General Fund spending, the largest portions were for the police andcorrections functions of the Justice Cabinet ($452 million) and the social service functions of theFamilies 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 thefunds sent to the Expendable Trust Fund, $125 million were Tobacco Settlement Proceeds. Thiswas spent on various rural economic development, early childhood development, and health careimprovement programs. Most of the rest of the money in that fund was spent on the KentuckyEducational Excellence Scholarship (KEES) program ($60 million) and the Local GovernmentEconomic Development Fund program ($34 million).

The State of Kentucky collected just over $1.1 billion in Transportation Fund revenues duringthe 2003 fiscal year. Most of this, nearly $900 million, was raised through various sales andgross 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 TransportationFund revenues and expenditures.) License and privilege taxes account for nearly all of the restof the Transportation Fund revenue ($174 million). Taxes on commercial trucking activitiesbrought in around $115 million and license plates about $53 million. Various fines, tolls, andinvestment 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 statemaintained roads. About $220 million was sent back to the counties and cities of the statethrough 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 wasdivided among general administration and support functions, vehicle regulation, and funding forthe Kentucky State Police.

Kentucky State government received just over $4.9 billion in federal funds during the 2003 fiscalyear. In our analysis we assume that these funds derive from the same mix of tax revenues thatcomprise United States government revenues of the type that would likely be paid by Kentuckycitizens 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. Weestimate that Kentucky drivers paid about $550 million in federal gas taxes during FY2003. (SeeTable A-3 for details on Federal Fund revenues and expenditures.) Most of the non-transportation funds received by the State ($3.7 billion) derive from the federal individualincome taxes paid by Kentucky residents. We estimate that $472 million derives from thecorporate income tax, with $122 million coming from excise taxes and $92 million from estateand gift tax payments.

We estimate that Kentucky nearly broke even in terms of the return of highway fuel taxes, as theTransportation Cabinet received over $497 million in Federal Fund expenditures, which wasmostly spent on highways ($475 million) and public transportation ($17.6 million). Of the $4.4billion of non-transportation expenditures of federal funds by far the biggest chunk was spent by



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the Health Services Cabinet on Medicaid and K-CHIP benefits ($2.8 billion out of $3 billion infederal funds for the cabinet). Of the remaining $1.4 billion of Federal Fund spending, thelargest portions were for the social service functions of the Families and Children Cabinet ($510million) 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, andFederal Fund revenue collections that come from individuals and businesses in the ninemetropolitan areas, the seventeen micropolitan areas, and the rural areas of the state. We alsoprovide information on the distribution of population and personal income as rough benchmarksagainst which can discuss the equity of the situation. More detailed information with the fundsrevenues broken down into multiple categories based upon what is being taxed is provided in theappendix (tables A-4, A-5, and A-6).

Population,

2002

Personal

Income, 2001 General Fund

Transportation

Fund

Non-

transportation 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%

FederalState

Kentucky State and Federal Revenue Collections, Fiscal Year 2003



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Compared to population, the metro areas contribute much more in General Fund and non-transportation Federal Fund revenues than would be proportional. The micro areas arecontributing 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 personalincome. This is not surprising since income and sales taxes make up almost 80 percent of thoserevenues.

The situation is reversed for transportation-based revenues. The metro areas provide much lessthan their proportion of personal income, with the micro areas contributing a bit more and therural areas much more than might be expected on that basis. But on the basis of populationtransportation revenues are very evenly distributed. Much of this revenue is fuel related whichdepends upon vehicle use and gas mileage and the prevalence of travelers filling their tanks asthey pass through the area.

A closer look at the table reveals that the Louisville, Lexington, and Cincinnati-NorthernKentucky metropolitan areas are outliers, with the other metro areas more similar to the smallermicropolitan areas. Louisville, Lexington, and Northern Kentucky are the only metro areas witha significantly higher percentage of the non-transportation revenue than of the States population.Louisville and Lexington are also they only metro areas with a significantly lower share oftransportation-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, andFederal Fund expenditures that went to the nine metropolitan areas, the seventeen micropolitanareas, and the rural areas of the state. We also provide information on the distribution ofpopulation and personal income as rough benchmarks against which can discuss the equity of thesituation. More detailed information with the funds expenditures broken down into multiplecategories 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/microrural areas of the state. Compared to the population distribution of the state the metro areasreceived quite a bit less money than would have been expected on a per capita basis. On theother hand, the micro areas received much more than their 19 percent of the population, and therural areas a bit more than those counties 25 percent of the states population. This pattern iseven more pronounced for the states Transportation Fund and the non-transportation portion ofthe Federal Fund. In those cases, the metro areas are receiving less than two-thirds of what theymight expect to receive on a per capita basis.



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Population,

2002

Personal

Income, 2001 General Fund

Transportation

Fund

Non-


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 portionBowling 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%

State Federal

Kentucky State and Federal Expenditures, Fiscal Year 2003

General fund

The difference between the population distribution and General Fund expenditures is mostpronounced for Louisville, Northern Kentucky, and Owensboro. Bowling Green and Lexingtonexhibit 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 themetropolitan areas. Much of this can be explained by the distribution of spending on theeducational functions of government (as manifested in the Education, Arts & Humanities andUniversities 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 theoverall General Fund percentage it receives (see Table A-7). But while Louisville gets 21percent of Universities cabinet spending due to the presence of the University of Louisville, it



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receives less than 17 percent of Education, Arts & Humanities cabinet expenditures, which ismostly K-12 spending. Louisville also fares poorly in terms of the general government (supportof the legislature, revenue collection, budgeting, personnel, executive branch) and economicdevelopment functions of government, where the area receives only about 10 percent of statespending. 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 costshoused in the state capital around the entire state (on the presumption that everybody benefitsfrom them) it would not change the results appreciably. The Louisville metro areas share ofGeneral 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, whichis better than what it receives overall from the General Fund and quite a bit better than how thearea fares in terms of all the other functions of government, where the area received 5 to 6percent of expenditures. The Owensboro metro area received about the same percentage ofeducation spending as overall General Fund spending. Owensboro does well in terms of K-12education 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. ThePaducah micro area is distinctive in the set of micropolitan areas because its share of K-12funding is lower than its population percentage in contrast to all other micro areas except forMurray (where a state university drastically alters the overall picture).

Lexington and Bowling Green fare well in overall General Fund spending in large part becausethey receive much larger shares of university spending than their percentages of the statespopulation. While Bowling Green received Education, Arts & Humanities cabinet expendituresequal to its population share, the Lexington metro area, like Louisville, received only about 70percent 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 forthe other functions of government, the Richmond-Berea micro area was a beneficiary of a greatdeal 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, andSomerset) that are mostly due to a lack of expenditures on construction and maintenance, butthese 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 andrevenue sharing money from the state than did the metropolitan areas. Northern Kentucky andAshland stand out as exceptions among the metro areas. Both received more in construction andmaintenance funding than their share of the states population. The Louisville metro area, on theother hand, fared the worst in terms of both construction and maintenance and revenue sharingexpenditures, receiving just 33 and 49 percent, respectively, of its share of the states population.



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Federal funds

The metropolitan areas do not fare much better when it comes to the distribution of federalfunds. The metro areas received 42 percent of all non-transportation expenditures from theFederal Fund and 50 percent of transportation related expenditures. The micropolitan areasreceived 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 transportationFederal Fund expenditures, respectively.

The big winners in non-transportation expenditures among the micro areas are Corbin andSomerset. In both cases this is largely due to much more spending per capita on Medicaid andK-CHIP benefits than the other micro areas. Corbin also received much more per capita infederal K-12 education spending than did the other micro areas.

Of the metropolitan areas, Bowling Green, Henderson, Ashland, and Owensboro all receivedabout their share of the states 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 fundsspent on economic development, while Ashland and Owensboro did well with K-12 funding.

In terms of non-transportation Federal Fund expenditures, Northern Kentucky, Lexington, andLouisville fared the worst, receiving only about two-thirds of their state population shares inthose expenditures. There were differences among the three areas, however. While NorthernKentucky and Lexington did relatively better in terms of education funding, Louisville faredquite a bit worse. Lexington did very well in terms of funding which passed through the GeneralGovernment cabinet (water projects and community development block grants in the peripheralcounties), but Northern Kentucky and Louisville did relatively poorly. And while Louisville didrelatively 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 morewas spent in the rural areas would have been on a per capita basis. In addition, the micropolitanareas received less than their collective share of the states population and what they did receivewas not spread evenly among them. Richmond-Berea and Somerset alone received over half ofall federal transportation funds that went to the micro areas.

Transportation funding was also not evenly distributed among the metro areas. Bolstered bymajor work on I-65, Bowling Green received 15 percent of the funds going to metro areas buthas less than 5 percent of the total metro population. Northern Kentucky and Hopkinsville alsodid well receiving federal transportation funds. On the other hand, Elizabethtown and Louisvillereceived 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 therevenues collected from a region) of General Fund, Transportation Fund, and Federal Funddollars for each of the metropolitan and micropolitan areas and the rural areas of the state. Our



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estimates of the actual revenues from and expenditures to these regions of the state are providedin the appendix (tables A-10 and A-11).

General Fund

Transportation

Fund Total

Non-


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 (Evansvil le) -$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 -$9,048,880Paducah -$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 c ounties) $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

Net cash gain or loss (State) Net cash gain or loss (Federal)

Net Cash Flows, General, Transportation, and Federal Funds, Fiscal Year 2003

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, $1.1billion, and $66 million more in General Fund, Transportation Fund, non-transportation FederalFund, and transportation Federal Fund revenues, respectively, than they received back inexpenditures. In terms of the return from a dollar of revenue invested in each fund, themetropolitan areas received back 73 cents on the dollar for the General Fund, 65 cents on thedollar for the Transportation Fund, 62 cents on the dollar for the non-transportation portions ofthe Federal Fund, and 79 cents on the dollar for the transportation portion of the Federal Fund.



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State Federal

Statewide Total $1.03 $1.00

Metropolitan Areas - Kentucky portionBowling 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 $1.20Corbin $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

Return on a dollar of revenue collected

from region

Net Returns, State and Federal Funds, Fiscal Year 2003

There are differences among the metropolitan areas. Bowling Green, Hopkinsville, andElizabethtown experienced cash flows more like those of the micropolitan areas than of the othermetro areas. They all experienced more than enough of a net gain in General funds to offset anet 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 Federalfunds (Bowling Greens loss was just 1 percent of the revenues the area contributed). WhileElizabethtown had net losses on the Federal side, it receives immense federal spending directlythrough Fort Knox.

The Louisville metro area was the big loser, both in terms of total dollars and return on the dollarof 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



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the dollar for its paid revenues. The Northern Kentucky metro area fares nearly as badly,however. Its net losses of $321 million and $237 million in state and federal cash flowsrepresents 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 revenuedollar 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 thetransportation portion of the Federal Fund. Our estimates are that the micro areas collectivelyreceived $698 million, $82 million, and $351 million more in General Fund, TransportationFund, and non-transportation Federal Fund revenues, respectively, than they supplied inexpenditures. We estimate that they experienced a net cash loss of $25 million in thetransportation part of the Federal Fund In terms of the return from a dollar of revenueinvested in each fund, the micropolitan areas received back $1.65 on the dollar for the GeneralFund, $1.38 on the dollar for the Transportation Fund, $1.51 on the dollar for the non-transportation 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 andadministrative 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 everydollar 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 areMiddlesborough ($2.07), Central City ($1.69), Danville ($1.63) and Murray ($1.61). The onlymicropolitan areas with a net cash loss in state funds are Paducah and Union City, but they eachfare about as poorly as the worst metropolitan areas. Paducah, in fact, also fares poorly in termsof Federal Fund spending, making it far more similar to the metro areas than any of the othermicro 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 interms 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 theirfederal highway taxes (Corbin being the lowest at 8 cents).

Even with Frankforts governmental functions, the micropolitan areas are not absorbing nearlyall of the net losses of the metropolitan areas. In fact, the rural areas of the state are picking upthe majority of the metro net losses. We estimate that the rural areas collectively experienced anet cash gain for each fund. Our estimates are that the rural areas collectively received $735million, $204 million, $819 million, and $38 million more in General Fund, Transportation Fund,non-transportation Federal Fund, and transportation Federal Fund revenues, respectively, thanthey supplied in expenditures. In terms of the return from a dollar of revenue invested in eachfund, the rural areas received back $1.64 on the dollar for the General Fund, $1.79 on the dollarfor the Transportation Fund, $2.15 on the dollar for the non-transportation portions of the FederalFund, and $1.31 on the dollar for the transportation portion of the Federal Fund.



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Equity of the distribution of the funds

There is a great deal of redistribution of state and federal government revenues among thevarious counties of Kentucky. That is an expected state of affairs, however, given commonlyheld notions of equity - that more developed and affluent areas should subsidize governmentspending on programs benefiting individuals and busi

coomes ky spending study fy03

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