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State revenues beat projections for first half

FRANKFORT — State revenues came in well above projections during the first half of the fiscal year, but officials cautioned that Kentucky will probably still face a major shortfall this year.

Revenue increased slightly in December from the year-ago period, according to numbers released Friday by the Office of State Budget Director.

Overall, receipts have increased 2 percent for the first six months of the fiscal year, which is better than a group of economists known as the Consensus Forecasting Group had predicted.

The state's official revenue forecast calls for a 2.7 percent decline in revenues this fiscal year, which ends June 30. Such a decline would create a $456.1 million shortfall in the General Fund.

However, revenues must decline 7 percent over the final six months of the fiscal year to meet the projection.

To make up the projected shortfall, Gov. Steve Beshear has proposed additional cuts to most state agencies and a 70-cent increase in the state cigarette tax. Legislators will probably reconvene next week to begin negotiations on how to deal with the problem.

Although state revenue continues to increase slightly, those gains are slowing, said John Hicks, acting state budget director. Such a slowdown is in line with what the Consensus Forecasting Group predicted, he said, noting that many economists expect the first six months of 2009 to be worse than 2008.

"We're seeing an indication for a downward trend," Hicks said. "Sales tax receipts, which are closely tied to economic activity, grew by 3.2 percent in the first quarter but declined by 2 percent in the second quarter," Hicks said. "With a rapidly slowing economy, we anticipate that our major taxes will begin to decline accordingly."

Senate President David Williams, R-Burkesville, has questioned the revenue forecast, noting that economists used the "worst-case scenario" economic model to set their projections.

Williams said earlier this week that he expected revenues to go up in December but said he did not believe there was a need for the Consensus Forecasting Group to revise its projections.

Hicks said his office does quarterly reviews of the economy and revenue projections. The latest quarterly review — for the last three months of 2008 — will be completed soon. That information will be given to legislators in coming weeks as they work to come to an agreement on how to address the shortfall.

Road Fund receipts, which depend largely on gasoline taxes and are used to build roads, have continued to decline. Receipts were down 7.5 percent in December from the year before.

Overall, road fund receipts are down 5.6 percent from the previous year.