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Outlook gets gloomier for Ky. economy

The state's budget woes will undoubtedly get worse next week after a group of leading economists told budget officials Friday to change revenue projections based on the worst-case scenario for the economy.

That means a projected $294 million shortfall in state funds will probably grow when the group meets next Friday to determine new projections for the state's General Fund.

Gov. Steve Beshear will then use the new projections to determine what budget cuts must be made. He has also said he will consider asking the General Assembly to approve additional sources of revenue, such as an increase in the state cigarette tax.

The Consensus Forecasting Group, a panel of independent Kentucky economists who determine revenue projections for the state, made the unanimous decision to use a more pessimistic economic forecast after hearing that key economic indicators for Kentucky and the country show that the state and nation are already in recession.

What no one knows is how long that recession will last.

State budget personnel had proposed basing revenues on a more optimistic projection that showed the economy slowing but eventually regaining its footing. However, several of the economists at Friday's meeting said they think the current slowdown could be even deeper than recessions in 2001, 1982 and the 1970s.

Lawrence Lynch, chair of the group, said the problem for economists is that there is too little information about this recession, unlike previous downturns. The lack of information makes it difficult to predict what is going to happen over the next 18 months.

"I think there is no question that we're in a recession," said Virginia Wilson, a professor at the University of Kentucky and member of the group. "I don't know how long that recession will be."

This is only the second time that a governor has had to recall the forecasting group to change its revenue projections in the first year of a two-year budget cycle. The last time that happened was during the 2001 recession.

The group will meet next Friday to come up with the revenue projection for the current fiscal year, which began in July.

Thomas Jones, an economist with the Governor's Office for Economic Analysis, told the group that the leading indices economists generally use to determine the health of the overall economy — such as the number of unemployment claims and new manufacturing orders — have been consistently down in Kentucky.

"It's not very common for all to be negative at the same time," Jones said of the indices. In August alone, the indices decreased by 9.7 percent.

Kentucky's unemployment rate was 7.1 percent in September, the highest in 16 years, officials with the state budget office said.

Many economists thought that once gas prices came back down from historic highs in August, consumers would have more to spend and the economy would begin a slight rebound. But indicators show that there are problems in nearly all sectors of the economy — from exports to credit.

"It's not just a broken arm," said Greg Harkenrider, deputy director of the Governor's Office for Economic Analysis. "It's a systemic problem."

The current projected shortfall of $294 million is roughly 3.3 percent of the total General Fund revenue projection. General Fund revenues are used to carry out the day-to-day operations of state government.

The state's Road Fund, used to fund infrastructure projects, is in even worse shape. The Road Fund depends on a host of transportation-related taxes, such as motor-vehicle use, license fees and gas taxes, which have taken a hit over the past year.

The Road Fund has a shortfall of $71 million. State officials have said that they have been cautious with the use of those funds, advertising for bids on few road projects over the past year.

Beshear, in an October news conference, said the state would be putting together a plan to address the shortfalls that officials hoped to release in December.

Beshear has already told his Cabinet secretaries to prepare for spending cuts. He has also said that he would not rule out calling a special session to ask the legislature to address the state's economic woes.