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Governor says state revenues have fallen

State revenues took a tumble last month and funding for road construction dropped sharply, Gov. Steve Beshear said Thursday, as shock waves from what he called the "unsettling and tumultuous" economic times rumbled through Kentucky.

Kentucky's government brought in $804.6 million last month, down 4.6 percent, or nearly $40 million less, from September 2007. Buoyed by a strong month of tax receipts in August, state revenue has grown by 0.9 percent since the fiscal year began in July. But that figure is well below the projected 2.6 percent growth on which lawmakers built this year's state budget.

Beshear repeatedly told reporters Thursday morning that "times are so uncertain right now" that he couldn't predict whether the state would meet revenue targets. To do so, the state's tax revenue must grow 3.1 percent between now and the end of the fiscal year, June 30, 2009.

Frank O'Conner, professor of economics at Eastern Kentucky University and a member of the group that makes state revenue estimates, said it will probably be early 2009 before economists can gauge whether the state will face a shortfall.

"If we have a serious recession in this country, we'll have a decline in state revenues," O'Conner said. "We cannot escape the national business cycle."

But he said the next month will "be critical" in determining whether some of the steps the federal government is taking — interest rate cuts and last week's $700 billion financial bailout — will work.

Kentucky's new numbers come just one day after the Rockefeller Institute of Government, which tracks revenue trends, issued a report warning state governments that "the damage is just beginning."

The report said that, with sales and property taxes weakening, "the situation will only worsen as the year progresses" for most states, although it noted that states slammed by falling home prices, including Florida, Arizona and Rhode Island, are most at risk.

Although Kentucky is among 36 states that have seen a decline in overall economic activity over the last year, it is somewhat insulated from severe problems facing other states. For example, it is among the bottom 10 states in reliance on the financial services sector, which has been shaken by the epidemic of bad mortgages, according to the report.

Among Kentucky's funding areas, the state's road fund took the biggest hit. It relies largely on receipts from the state's 21.1 cents-a-gallon tax on gasoline, revenue from which dropped 11.4 percent last month compared to September 2007. The fund has declined by 4.5 percent through the first quarter of the current fiscal year.

Charles Wolfe, a spokesman for the Transportation Cabinet, said the cabinet had planned for the tough economic times and was using conservative revenue estimates to plan its projects. The Transportation Cabinet, through a new initiative designed to maximize road dollars and concentrate on less costly design, has already begun to evaluate projects for cost savings.

No projects that were previously bid have been scrapped yet, Wolfe said. But the total spent on state road projects has steeply declined by more than $1 million from the previous year.

Beshear, flanked by state economic and finance officials, sought on Thursday to reassure Kentuckians, who like the rest of Americans are anxiously watching the financial turmoil on Wall Street.

The administration is creating a Web site with links to state resources on health insurance, home mortgages and other financial sectors.

Beshear formed two new work force training and education task forces, as well as a state "Economic Action Team" of his high-ranking aides to monitor the volatile economy and determine whether further state actions need to be taken.

He also touted the state's move earlier this week to go ahead with plans to sell $390 million in bonds on Wall Street for state construction projects, such as water and sewer lines and university buildings.

"We've been told that, because of our success this week, other states may now follow suit with their bond issues, which could play a role in restoring confidence in the credit market," Beshear said.

As for the health of Kentucky's banking industry, Charles A. Vice, the commissioner of the Department of Financial Institutions, said state banks largely insulated themselves from some of the problems that have felled larger national lenders. Primarily, they were more conservative by limiting sub-prime mortgage lending.

Just 11 percent of mortgages held by Kentucky banks are considered sub-prime, which are at the root of the current financial crisis.

"I'm very proud to report that we have not had a failure in the state of Kentucky in 20 years and that trend will continue," he said, adding that regulators sift through state banks' management practices and finances in a thorough review every 12 to 18 months.

Larry Hayes, Beshear's secretary of the cabinet and acting economic development secretary, said the state is proceeding with projects and economic development to try to spur growth.

"The easiest thing to do would be to hunker down," he said. "And the governor has said what we need to do is manipulate those things that are within our control here to continue to grow Kentucky's economy."

The governor would not say whether he will push for new measures to boost revenue, such as increasing the 30-cent tax on packs of cigarettes.