Barely making their deadline, House and Senate leaders produced a two-year, $21 billion state spending plan early Thursday that would shave appropriations for colleges and universities by 4.5 percent while providing more than $1 billion in additional money for the struggling public pension systems.
The plan also leaves a way forward for the proposed $250 million expansion of the Lexington Convention Center, once in doubt, if the Senate approves a House bill that would help pay for the project by raising Lexington’s hotel tax.
A conference committee of top lawmakers reached a budget deal at about 2:45 a.m. The General Assembly is expected to vote on the budget Friday, the final day of the 2016 session, barely leaving legislative staff with enough time to print the necessary documents.
House Speaker Greg Stumbo and Senate President Robert Stivers provided a broad outline of the compromise plan at a pre-dawn news conference. They said they would not provide further details to the public until they first can relay the information to their respective caucuses. Even some state agency heads who called legislative offices Thursday to ask for their own budget numbers said they were denied.
“It is an adequate and effective blend of the priorities, I believe, contained in both the governor’s recommendation, the House budget and the Senate budget,” said Stumbo, a Prestonsburg Democrat.
Overall, most of state government will be chopped by 9 percent, following previous waves of cuts since 2008. Some state agencies and constitutional offices already have seen their budgets shrink from 10 percent to 37 percent. There will be no money for pay raises for most state workers or school teachers, with specific exceptions, such as Kentucky State Police officers.
A few spending areas — notably, K-12 schools and Medicaid — would be spared any reductions in the budget. Republican Gov. Matt Bevin recommended in January that higher education join in the 9 percent cuts, and Senate Republicans concurred, but House Democrats managed to get that halved. Most of the university presidents have said they reluctantly would accept a 4.5 percent cut.
Kentucky State University, the small, historically black college in Frankfort that faces severe financial challenges, would be exempt from the higher education cuts. Instead, the state will try to help KSU through its current difficulties, the lawmakers said. KSU officials declined to comment Thursday.
The budget plan does not address the 4.5 percent budget cuts Bevin recently ordered for higher education for the remainder of this fiscal year, ending June 30. Democratic Attorney General Andy Beshear is suing Bevin to block those current-year cuts, arguing that a governor cannot change an enacted budget unless it’s justified by an actual revenue shortfall.
As state appropriations have shrunk since 1999, the responsibility for supporting Kentucky’s universities has shifted from the state to students and their families through soaring tuition and fees. The Prichard Committee for Academic Excellence warned Thursday that the newest budget would make a college education even less affordable for Kentuckians.
“The public pension crisis has placed a significant strain on the rest of the state budget, making it more challenging to fund education at all levels. The substantial funding included for the public pension funds will hopefully ease this pressure in future years and not crowd out funding for education,” the Prichard Committee said in a statement.
Bevin recommended widespread budget cuts in order to put more money into the state’s two pension systems, for state workers and school teachers, which face a cumulative $36 billion funding shortfall. Lawmakers wouldn’t say exactly how much they plan to give the pension systems, but they described it as “north of” $1 billion in additional money apart from the annual recommended contributions.
The budget also would give Bevin the “permanent fund” he sought to save money toward a massive stabilization of the pension systems. Bevin wanted $500 million for the fund, taken from a massive surplus in Kentucky’s public employee health insurance trust fund. Stumbo and Stivers would not say Thursday how much money they have budgeted for the fund, or for the state’s “rainy day” reserve fund.
“They’re healthy,” Stumbo said.
“I think they’ll both be very healthy,” added Stivers, a Manchester Republican.
Pension system leaders on Thursday said they were grateful for the additional money.
“I would anticipate that would provide a substantial amount for KTRS, but we haven’t been able to get any details from anyone today,” said Beau Barnes, deputy executive secretary of the Kentucky Teachers’ Retirement System.
Kentucky Retirement Systems could use $250 million extra annually for the next few years, said KRS executive director Bill Thielen. The primary pension fund for state workers has dropped from $2.3 billion last summer to $1.9 billion at present, with about $900 million every year in payments due to retirees. Investments have not been making up the difference, Thielen said.
“We need additional money to stem that negative cash flow,” Thielen said.
Bevin released a statement thanking Stivers, Stumbo and other negotiators “for the hard work that was put into this budget agreement.”
“For the first time in decades, we can say that Kentucky is investing in our pension system in a meaningful way,” Bevin said. “We look forward to reviewing the details of the compromise and its final passage.”
The Kentucky Chamber of Commerce, composed of state business leaders, quickly chimed in as well.
“This is the most responsible budget in years because it deals with our pension problems head-on,” said Dave Adkisson, the chamber’s president and chief executive. “This budget should send a strong message to Wall Street that Kentucky is acknowledging the severity of its pension obligations and is making a serious down-payment toward a longer-term solution.”
In other areas, the budget plan:
▪ Includes $60 million in bonds for the proposed expansion of the Lexington Convention Center. However, the project — a top priority for Lexington leaders — depends on the Senate agreeing to pass House Bill 441 on Friday, which would authorize the city to raise its hotel room tax by 2.5 percent. That would generate an estimated $4 million a year in new revenue toward the project’s costs.
Previously, Senate Republican leaders have expressed opposition to the hotel room tax increase and advised Lexington to spend its own city budget surpluses on the convention center. But Stivers said Thursday that HB 441 is now likely to be approved by his chamber.
“I think there is sufficient enough votes in the Senate to pass it,” Stivers said. “It’s already cleared the House.”
Lexington Center Corp. officials said they were relieved that money for their project made it into the budget.
“Last night’s budget agreement is a major step forward for Lexington downtown development and Central Kentucky tourism,” said Bill Owen, president and chief executive of Lexington Center. “We look forward to final approval by the legislature on Friday. The Lexington Convention Center expansion has successfully rallied support from the business and hospitality communities and local and state leaders who recognize the economic impact this will have on our city and region.”
▪ Includes $25 million for the House’s “Work Ready” tuition aid program for new high school graduates seeking two-year associate degrees, either at community colleges or four-year universities. Students would have to maintain a 15-hour schedule and a 2.5 grade point average.
▪ Includes the performance-based funding that Bevin and the Senate wanted for higher education. A portion of state appropriations for colleges and universities would be based on a competitive and complex funding formula to be determined by a committee by Dec. 31. Other states have used criteria such as graduation rates, achievement gaps and research spending when they’ve implemented such funding formulas.
The funding formula would take effect in Fiscal Year 2018 with 5 percent of state appropriations, then climb to 15 percent in Fiscal Year 2019 and 25 percent in Fiscal Year 2020.
▪ Includes a $100 million workforce development bond pool with specific criteria, allowing one project in each of Kentucky’s six congressional districts.
In January, Bevin proposed a $100 million bond for public-private construction projects to improve workforce development — an initiative modeled on the Kentucky Federation for Advanced Manufacturing Education, or KyFame, which pairs manufacturers with high schools and community colleges in their region. The House dropped this idea from its own version of the budget.
▪ Allows the Executive Branch Ethics Commission to raise lobbyist registration fees to help offset the 9 percent budget cuts. Without some fiscal relief, the ethics commission warned that it faced a $60,000 annual deficit that would force it to lay off its investigator and auditor. The lawmakers would not say what the new fees would be; commission officials on Thursday said they could not get that information.
▪ Excludes controversial language that Bevin and the Senate wanted to repeal the state’s prevailing wage law on public construction projects and to prohibit public funds from going to Planned Parenthood or other organizations that provide abortions or refer women to an organization that does.
▪ Fully funds Operation UNITE, an anti-drug task force in Southeastern Kentucky. The House version of the budget moved Operation UNITE to the Justice and Public Safety Cabinet without passing along the $2 million in annual funding the agency currently receives from coal severance money.
▪ Provides more coal severance tax money to the coal-producing counties of Eastern and Western Kentucky. At present, there’s essentially a 50/50 split between the state’s General Fund and the coal counties, although county leaders have lobbied for years to let them keep all of it — especially as the region’s coal production has collapsed, dragging severance tax revenue down with it.
Stivers said he could not provide an exact figure, but the budget would let the coal counties keep about 60 percent of the money.
Staff writers Linda B. Blackford and Beth Musgrave contributed to this report.