Kentucky

State Fiscal Briefs

November 2020

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Kentucky’s budget basics

According to the National Association of State Budget Officers (NASBO), Kentucky’s total expenditures in fiscal year (FY) 2020 were $39.8 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2020 were $2.3 trillion, ranging from $4.7 billion in Wyoming to $337.7 billion in California.

Each state allocates spending and taxes differently among different levels of governments, and local governments often administer programs with state funds, so combined state and local government data show a more complete picture of individual benefits and contributions when comparing states.

Per the US Census Bureau, Kentucky’s combined state and local direct general expenditures were $39.4 billion in FY 2017 (the most recent year census data were available), or $8,847 per capita. (Census data exclude “business-like” activities such as utilities and transfers between state and local governments.) National per capita direct general expenditures were $9,446.

Kentucky’s largest spending areas per capita were public welfare ($2,570) and elementary and secondary education ($1,644). The Census Bureau includes most Medicaid spending in public welfare but also allocates some of it to public hospitals. Per capita spending is useful for state comparisons but is an incomplete metric because it doesn’t provide any information about a state’s demographics, policy decisions, administrative procedures, or residents’ choices.

Kentucky’s combined state and local general revenues were $37.5 billion in FY 2017, or $8,410 per capita. National per capita general revenues were $9,592. Kentucky uses all major state and local taxes. After federal transfers, Kentucky’s largest sources of per capita revenue were charges ($1,427), such as state university tuition and highway tolls, and individual income taxes ($1,313).

Kentucky’s politics

Governor Andy Beshear, a Democrat, was elected in 2019 with 49.2 percent of the vote. The next gubernatorial election is in 2023.

Kentucky has a divided government. Republicans control both the House of Representatives (60 Republicans to 37 Democrats) and Senate (29 Republicans to 9 Democrats), with veto-proof majorities in both houses. All Kentucky House seats are on the ballot in 2021 because representatives serve two-year terms. Senators serve four-year terms; roughly half the senatorial seats are on the ballot in 2021, and the other half will be up for election in 2023.

Kentucky’s budget institutions, rules, and constraints

Kentucky uses a biennial budget. The legislature must pass a balanced budget, but it can carry a deficit over into the following year. A Kentucky budget rule also limits the amount of revenue the state can raise, and because it’s a binding rule, a legislative supermajority is required to override it. A supermajority is also required for any bill that raises taxes. There are limits on total debt service incurred by the state, but not on authorized debt.

(Note: Some states have informal budget institutions that constrain overall spending growth or a specific expenditure’s growth.)

Kentucky’s recent fiscal debates

  • Kentucky has one of the nation’s worst-funded public pension systems: as of 2017, it has only a third of the assets necessary to fully fund its pension liabilities. In 2019, then-governor Matt Bevin signed legislation that allows quasi-government agencies (e.g., local health departments and universities) to leave the state’s pension system and transition employees to 401(k)-style retirement plans. Bevin said the reforms provide “much needed financial relief.” Critics argued the legislation did not address the state’s pension debt and could leave many low-income workers without retirement benefits. Concerns over pensions led to teacher strikes in both 2018 and 2019.
  • Kentucky was one of the few southern states that expanded Medicaid under the Affordable Care Act. In 2013, then-governor Steve Beshear, a Democrat, was able to unilaterally accept the new federal funds and broaden eligibility rules. His successor, Governor Bevin, campaigned on ending the expansion, but after his election he instead pushed for reforms such as imposing premiums on enrollees and adding work requirements. A federal district judge blocked the work requirements twice, arguing that the plans failed to consider the loss of coverage the requirements would lead to. Governor Bevin threatened to end the state’s Medicaid expansion if work requirements were not implemented. However, Bevin lost the 2019 election, and his successor, Governor Andy Beshear (Steve Beshear’s son), pledged to rescind the state’s work requirements.

Kentucky’s current budget

Kentucky did not enact a budget in 2019 because it enacted its biennial budget (for FY 2019 and FY 2020) in 2018. Governor Matt Bevin’s proposed budget in 2018 recommended “spending reductions in most areas of state government.” Among the cuts were funds for student transportation, teacher services, and Medicaid. The governor’s budget presentation described his proposal as “difficult but honest” and argued the state should pass his plans for pension and tax reform to prevent future spending cuts.

The legislature passed its budget in April 2018. It differed substantially from Governor Bevin’s budget and made several changes to Kentucky’s tax code, including cutting individual income tax rates, lowering the corporate income tax rate, broadening the state’s sales tax base, and increasing the cigarette tax rate. These changes were projected to raise nearly $250 million in new revenue in FY 2019 and FY 2020, although, whether the legislation increased or cut taxes for individuals varied by income. Governor Bevin vetoed the budget, arguing that although he approved of the shift toward consumption taxes, the state needed more comprehensive tax reform. The legislature overrode his veto and enacted its budget and tax changes.

Governor Beshear released his proposed FY 2021 and FY 2022 budget and gave his 2020 state of the state address in January 2020.

For more on Kentucky’s budget, see the