FRANKFORT — Gov. Steve Beshear on Tuesday proposed a $20.3 billion, two-year spending plan for Kentucky that would return much of the state's lost funding for K-12 schools; provide long-delayed pay raises for school employees and state workers; restore child-care assistance for low-income working parents; and fully fund the required contributions to the struggling state pension system.
But the trade-off for that good news would be nearly $100 million in cuts to much of the rest of state government, including the University of Kentucky and Kentucky State Police, both of which have ordered layoffs in recent years. Some agencies will have lost 41 percent of their funding since the economic recession of 2008, making it possible they'll have to lose more employees, close offices, steeply increase the fees they charge to the public and take other severe steps, Beshear said.
"I am deeply disturbed by the damage these reductions will do," Beshear, a two-term Democrat, told the General Assembly in a televised speech. "Some cuts went way too deep. These are the agencies which ensure that the water we drink is clean, that protect us in times of weather-related disasters, that make sure our workplaces are safe, that protect us in our homes and on the roads from criminal elements."
The 2014-16 General Fund budget would be balanced with $19.8 billion in revenue, $98 million in cuts, $370 million in fund transfers from and $166 million in savings from the federal Affordable Care Act, among other sources, Beshear said. Under the Affordable Care Act, several costs for which the General Fund once was responsible have been shifted to private insurers or Medicaid, such as some mental and public health services, indigent care at hospitals and certain hospitalization costs for state inmates.
Sign Up and Save
Get six months of free digital access to the Lexington Herald-Leader
The budget would issue $1.9 billion in new debt for buildings, statewide broadband access and other projects, roughly split between General Fund bonds and state agency bonds, for which those agencies are responsible for repaying. That would take the state's debt-capacity ratio, or how much the state plans to borrow as a percentage of the General Fund, from its current level of 6.72 percent up to 7.05 percent.
Beshear said he was "very comfortable" with the bonding. He said the state's outstanding debt level — reflecting what it actually has borrowed, not what it proposes to borrow — has not exceeded 6 percent of General Fund revenue on his watch. But Senate Republican leaders expressed concern after his speech.
"I think it's something we should be very cautious about," said Senate President Pro Tem Katie Stine, R-Southgate. "This would be the highest we've ever seen."
Responding to the governor's budget, critics late Tuesday said the state can't keep cutting. Already, they said, a college education has become too expensive for some Kentucky families to afford because of steady tuition hikes resulting from the loss of state support.
"The money shouldn't be this tight this far along into the economic recovery," said Jason Bailey, director of the Kentucky Center for Economic Policy. "We need to have a tax system that provides the necessary revenue for the programs that make life better for all Kentuckians, and we're not getting that."
At the end of his speech to the legislature, Beshear referred to a need for more revenue from state tax reform and legalized casino gambling, but he offered no details. He said he "will present to you soon a tax modernization proposal with specific recommendations on how to move our tax system into the 21st century." Tuesday was the 10th day of the 60-workday legislative session.
House budget chairman Rick Rand, D-Bedford, will file the governor's budget proposal as a House bill on Wednesday. The House and the Senate then will get separate opportunities to make changes before they are supposed to pass it no later than April 15, when the session ends.
Beshear said his budget would add $189 million over two years to the state's primary source of K-12 school funding. That would cover a 2 percent raise for teachers and other school employees in fiscal year 2015, which starts July 1, and a 1 percent raise in fiscal year 2016. He also would partially restore state grants that help local schools pay for textbooks, teacher training, school safety and extended school services.
He would give state workers their first pay raises in four years, ranging from 1 percent to 5 percent in fiscal year 2015, with lowest-paid employees getting the larger raises and highest-paid employees getting the smaller raises. All state workers would get a 1 percent raise in fiscal year 2016.
Beshear said he would fully fund the Kentucky Retirement Systems pension contributions for employees of state government and nearly all "quasi-public agencies" enrolled in KRS, costing $207 million extra over two years. Beshear and the legislature committed to that last year as part of "pension reform." The key KRS fund that covers about 90,600 people has $2.6 billion in assets and $11.3 billion in assumed liabilities, making it only 23 percent funded.
However, the governor rejected a plea from the Kentucky Teachers' Retirement System for $800 million more to strengthen its own pension fund. "The short answer is, we don't have any extra money to infuse into that system at this time," Beshear told reporters Tuesday.
Compared to the state workers' fund, the $16 billion teachers' fund is in relatively good shape, with a 54 percent funding level. However, under federal accounting rules expected to take effect in 2015, the system will have to recalculate its unfunded liability from $12 billion to $23 billion if there is no plan in place to stabilize the fund, KTRS officials warn.
"We're putting that system at risk," said Fayette County school superintendent Tom Shelton, chairman of the KTRS board of trustees. "It's part of our education system, and it should be considered that way."
The few areas of additional spending in the governor's budget would mean bad news for agencies facing a one-time 5 percent cut, including his own office and those of the other elected constitutional officers; the Energy and Environment Cabinet; the Labor Cabinet; the Public Protection Cabinet; the Tourism, Arts and Heritage Cabinet; and the legislative branch. Agencies facing a one-time 2.5 percent cut include state police, state universities and the judicial branch.
To mitigate the pain for universities, Beshear said he would push hundreds of millions of dollars in state and agency bonds for building construction and renovation at campuses statewide. In Lexington, that would include a revamped UK law school and an expansion of the new Bluegrass Community and Technical College campus on Newtown Pike.
Two of state government's biggest expenses — Medicaid and prisons — would be exempt from cuts. Medicaid, in fact, would get 4 percent more for each of the two years, totaling $190 million from the General Fund, to deal with increasing enrollment and health care costs. That does not include the tens of thousands of Kentuckians enrolling in Medicaid as part of the Affordable Care Act, because the federal government had pledged to pay the full costs for that population for the first three years.
Beshear would take millions of dollars in coal-severance tax money from single-county and multi-county projects in Eastern Kentucky and dedicate it to improving the region's ailing economy as part of his Shaping Our Appalachian Region, or SOAR, initiative.
From the coal taxes, $4 million over two years would go to a regional strategic development fund to diversify the economy beyond coal mining; $400,000 over two years would be matched by another $400,000 in privately raised funds to pay for a SOAR administrative agency; and $2 million a year would fund college scholarships for more than 500 students from the Eastern and Western Kentucky coal-producing counties.
Beshear told reporters on Tuesday that he has not yet heard complaints about that plan from any Eastern Kentucky legislators or county judge-executive.