Kentucky faced a $457 million shortfall. Then it had a surplus. Here’s what happened.
After COVID-19 shut down Kentucky’s economy in the spring, a panel of economists predicted that Gov. Andy Beshear would have to slash hundreds of millions of dollars in spending in order to balance the state budget.
That dire forecast didn’t prove to be accurate.
Instead, as Beshear announced at a news conference last Monday, Kentucky ended the fiscal year in the black on June 30 with General Fund revenues of $11.56 billion, a 1.5 percent increase over the previous year. The state actually wound up with a $177.5 million surplus, most of which Beshear is putting into the “rainy day” reserve fund.
Beshear publicly credited his administration with serious belt-tightening in recent months.
“We cut our spending significantly inside our portion of the executive branch,” the governor told reporters at the Capitol.
“It’s a positive outcome for Kentucky,” he added. “I hope they know how fiscally responsible this administration is committed to being, especially during this crisis.”
In reality, his belt-tightening only did so much.
Asked for more specifics by the Herald-Leader, the Beshear administration produced a two-page summary sheet identifying $18.2 million in end-of-the-year spending reductions at state agencies, including $62,600 cut by his own office. That’s a small fraction of the $457 million General Fund shortfall Kentucky was projected to face in May.
Other factors helped to keep Kentucky solvent, according to state budget documents.
For one thing, the state enjoyed robust economic growth during the first nine months of the fiscal year preceding the coronavirus pandemic. For instance, sales and use taxes collections from Kentucky’s businesses grew by an average of 6.7 percent over the first three quarters, according to the state budget office. Fiscal Year 2020 was on track for a strong performance.
But then Beshear ordered most businesses closed in March to curb the spread of the virus.
During the fourth quarter, which covers the shutdown period from April through June, sales and use tax collections dropped by 5.9 percent. It would have been even worse if not for Internet retailers sending Kentucky its fair share of taxes collected from booming online sales during the shutdown, according to the state budget office.
In the end, this tax — the General Fund’s second-largest revenue source — produced $4 billion, a 3.4 percent increase over the previous year.
What also helped is that Kentucky, like many other states, taxes unemployment insurance just as it does other sources of income. Kentuckians thrown out of work during the pandemic have collected more than $3.3 billion in jobless benefits so far, and they’re still paying income taxes just as they were before.
So instead of sinking by 5.5 percent from April through June, as would be expected based on Kentucky’s jobless numbers, individual income tax collection rose by 1 percent, according to the state budget office. For the full year, that meant $4.7 billion in General Fund revenue, a 4.9 percent increase over the previous year.
Kentuckians can thank Uncle Sam for this largess, said Jason Bailey, executive director of the Kentucky Center for Economic Policy in Berea.
The average state unemployment check is only $332 a week, but under the CARES Act, the federal government added $600, Bailey said. Of the $3.3 billion in benefits taxed, $2.5 billion came from federal funds.
Unfortunately, he said, Senate Republicans oppose continuing federal jobless aid at that level, so Congress recently allowed the extra $600 to expire.
“Expanded unemployment benefits have been a massive help,” Bailey said. “And the $600 a week doesn’t just help with income taxes. That money has been spent into the economy, and is a major reason our sales tax receipts didn’t fall farther than they have.”
Back to the end-of-year spending cuts: Some agencies, such as the Kentucky State Police ($1.19 million) and the Cabinet for Health and Family Services ($7.27 million), declined to say from where their savings came. Susan Dunlap, a spokeswoman for the health cabinet, would only say that no positions or programs were reduced.
Others agencies said they saved money by continuing to reduce staffing through attrition as employees retired or quit. The size of state government’s payroll already had shrunk by 14 percent over the past decade, down to 33,235 people as of last year, because of previous rounds of budget cuts.
The Kentucky Department of Agriculture gave back $179,200 in part by leaving jobs open in the offices of the State Veterinarian, Agricultural Marketing and Consumer and Environmental Protection, spokesman Sean Southard said.
At the Kentucky Department of Public Advocacy, which provides public defenders for the poor in felony cases, $161,000 was saved by not filling vacancies, mostly “experienced attorneys who had opportunities for higher compensation elsewhere,” said Public Advocate Damon Preston.
Agencies also saved money by not spending on training programs or conferences that were going to be canceled anyway, because the coronavirus pandemic made it unsafe for people to travel and gather in groups.
Similarly, at the Kentucky Department of Education, COVID-19 made it impossible to conduct some student testing and summer programming, so savings were realized there, spokeswoman Toni Konz Tatman said. That and “unspent balances in various smaller accounts” made it possible for the department to give up $3 million without cutting any positions, Tatman said.
Fiscal Year 2021, which started July 1, will be a different story, State Budget Director John Hicks said. The nation and Kentucky are deeply mired in a pandemic-induced recession, so there won’t be a healthy period to push the General Fund over the rough patches.
Beshear and Hicks have called on Congress to give the states direct assistance for their cash-strapped budgets. The CARES Act provided states with funds, but it was limited to programs responding to the coronavirus.
“Without federal fiscal relief, Kentucky state and local governments will be facing a substantial retrenchment in critical public services,” Hicks said this week.
Spending reductions for end of Fiscal Year 2020
Here’s a breakdown of the $18,235,357 in spending cuts implemented by the executive branch of Kentucky government in the fourth quarter of the fiscal year that ended June 30.
General Government: $1,063,557
Office of the Governor: $62,600
Office of State Budget Director: $35,300
Homeland Security: $2,600
Veterans’ Affairs: $258,100
Kentucky Infrastructure Authority: $11,400
Military Affairs: $106,600
Commission on Human Rights: $20,100
Department for Local Government: $93,300
Executive Branch Ethics Commission: $5,600
Secretary of State: $22,500
Registry of Election Finance: $15,300
Attorney General: $123,700
Treasury: $22,000
Agriculture: $179,200
Auditor of Public Accounts: $57,357
Kentucky River Authority: $2,900
ANOC - Misc Appropriations: $45,000
Economic Development Cabinet: $338,100
Department of Education: $3,071,600
Operations and Support Services: $576,100
Learning and Results Services: $2,495,500
Education & Workforce Development Cabinet: $661,300
General Administration and Program Support: $52,100
Workforce Investment: $386,200
Deaf and Hard of Hearing: $9,700
Kentucky Educational Television: $150,000
Libraries and Archives-General Operations: $63,300
Energy and Environment Cabinet: $735,100
Environmental Protection: $248,000
Natural Resources: $377,000
Energy Policy: $110,100
Finance and Administration Cabinet: $1,200,700
General Administration: $78,900
Controller: $64,200
Office of Inspector General: $8,000
Facilities and Support Services: $60,100
County Costs: $28,000
Revenue: $961,500
Health and Family Services Cabinet: $7,272,600
General Administration and Program Support: $92,900
Children with Special Health Care Needs: $58,500
Health and Data Analytics: $4,800
Income Support: $71,200
Behavioral Health Development & Intellectual Disabilities: $1,616,400
Aging and Independent Living Services: $451,400
Community Based Services: $4,977,400
Justice and Public Safety Cabinet: $3,462,700
Justice Administration: $315,700
Juvenile Justice: $988,000
State Police: $1,194,900
Corrections Management: $135,800
Local Jail Support: $166,600
Public Advocacy: $661,700
Labor Cabinet: $27,300
Secretary: $6,000
Workplace Standards: $21,300
Council on Postsecondary Education: $113,100
Public Protection Cabinet: $78,300
Office of the Secretary: $6,500
Housing, Buildings and Construction: $26,400
Kentucky Claims Commission: $13,900
Horse Racing Commission: $31,500
Tourism, Arts, and Heritage Cabinet: $152,600
Office of the Secretary: $32,100
Artisans Center: $4,900
Travel: $31,600
Arts Council: $17,300
Kentucky Historical Society: $59,500
Kentucky Heritage Council:$7,200
Transportation Cabinet: $58,400
Public Transportation $58,400
