‘Otherworldly.’ Kentucky faces shortfall of up to $500 million unless Congress helps
Kentucky’s state government could see a revenue shortfall of nearly $500 million this fiscal year because of the novel coronavirus pandemic and the economic shutdown that has thrown hundreds of thousands of Kentuckians out of work, according to a budget report released Thursday.
If the forecast proves true, this would be the first decline in Kentucky’s roughly $11 billion General Fund since the last recession a decade ago, state budget director John Hicks told Gov. Andy Beshear in a letter accompanying the report.
That would pressure Beshear in coming months to severely cut the state budget in a time of crisis, unless Congress approves a COVID-19 relief bill that includes aid for state governments, something that U.S. Senate Majority Leader Mitch McConnell, R-Ky, has opposed. Instead, McConnell is urging the states to consider filing for bankruptcy, which at this time they cannot legally do.
“I don’t see how there wouldn’t be huge cuts and even layoffs when you’re talking about the scale of what we’re likely to see,” said Jason Bailey, who studies the state budget as executive director of the Kentucky Center for Economic Policy.
“We would be putting public sector workers on the unemployment line alongside private sector workers, which doesn’t help anything,” Bailey said. “But this is like nothing we’ve ever seen before. It’s otherworldly.”
Beshear told MSNBC last week that he is not interested in pursuing bankruptcy.
“Not only states but also local governments have to have direct stimulus funds from the federal government,” Beshear said. “If we don’t, it will make our economic downturn a lot longer. It will make it harder to protect the most vulnerable and provide the resources that people desperately need to get through this worldwide health pandemic.”
Congress did include money for the states in the original CARES Act, including $1.59 billion for Kentucky. But that money only can be used to pay for the state’s response to the pandemic, not to cover its budget shortfall as a result of the shutdown.
As thousands of businesses closed across the state and far fewer people paid income taxes or sales taxes, state government collected much less money, Hicks said.
“The declining economic activity which began in March will appear in April receipts. Receipts are expected to soften in the month of April before getting dramatically worse in May and June.,” Hicks wrote.
For the fiscal year ending June 30, General Fund revenue is projected to fall short by $318.7 million to $495.7 million, according to the state budget office’s report. That’s a drop of 18.2 percent to 23.7 percent from the same period last year.
The estimated $1.5 billion Road Fund is projected to fall short by $116.4 million to $194.6 million in revenue over the remainder of this fiscal year.
General Fund revenue in the first half of Fiscal Year 2021, which begins July 1, is expected to fall an additional 10.5 percent to 17.2 percent, according to the report.
“The two largest percentage declines are in the sales and use account, which is expected to fall 13.8 percent, and business taxes, with an expected decline of 43.3 percent,” the report states. “The pessimistic scenario has deeper declines in these two accounts, but it also contains a projected loss of 18.6 percent in the individual income tax.”
Kentucky’s economic outlook is “bleak,” the report continues. Income from wages and salaries could “drop a staggering 37.4 percent in the first half of FY21.”
“According to the U.S. Labor Department, over 500,000 Kentuckians have filed for unemployment benefits in the past five weeks,” the report states. “To put that in perspective, roughly 25 percent of Kentucky’s workforce is currently without employment. Unprecedented job loss, declining wages and social distancing mandates are expected to cripple consumer spending and real disposable income in the short-term, which in turn will negatively influence the overall economic climate of the commonwealth.”
Already braced for bad news, the General Assembly a month ago approved a quickly written one-year state budget that will maintain most government spending at current levels while allowing for cuts as necessary.
During the last recession, in 2008-09, the federal government sent about $3 billion in economic stimulus relief to Kentucky, Bailey said. At that time, unemployment in the state hovered between 10 percent and 11 percent, far less than it is today, he added.
“It wasn’t enough money, honestly, but it did keep the recession from turning into a depression,” Bailey said.
This story was originally published April 30, 2020 at 11:56 AM.
