With state coffers flush with federal dollars and a historic budget surplus, the Republican-led Kentucky legislature passed a new budget with modest increases for critical state services that leaves about $1 billion unspent.
The two-year spending plan includes raises for state employees, full funding for all-day kindergarten, money to rehab state parks and assistance for the state’s pension systems.
The bill now heads to Democratic Gov. Andy Beshear. He will likely veto parts of the legislation, though Republicans can easily override him.
Republican leaders said the budget is fiscally responsible and leaves money aside for rainy days. But GOP lawmakers also passed a costly bill overhauling Kentucky’s tax code that will cost the state almost $1.4 billion over the next two years, according to an official analysis.
On the Senate floor, Republican Sen. Damon Thayer of Georgetown said Democrats would spend all of the budget surplus if it was up to them.
“Just because we have a surplus doesn’t mean we have to spend it all,” Thayer said. “We have to remember where this money comes from. It comes from the taxpayers, it comes from the hard working people of Kentucky.”
On Wednesday, Democrats said they didn’t receive copies of the budget until Tuesday night. Louisville Democratic Senate Minority Leader Morgan McGarvey said, from what he’s seen, more could be done.
“This budget is the opportunity for people to look back 20 years from now and say ‘that’s when we got this done, that’s when we got Kentucky moving in the right direction,” McGarvey said.
That sentiment was common among Democrats, though many also said this year’s budget was among the best they’d ever seen.
“It feels good to feel like we have some money to spend on the people that count on us,” said Democratic Rep. Angie Hatton of Whitesburg.
The budget fully funds kindergarten for two years, freeing up funding for local school districts that normally have to prop up the classes. It also increases the school funding formula known as SEEK, from $4,000 per pupil this year to $4,100 in 2023 and $4,200 in 2024. However, an analysis from the progressive Kentucky Center for Economic Policy found total state funding is actually declining, once inflation is taken into account.
The budget doesn’t include raises for teachers, and with Republicans making only marginal investments in education, education advocates say it will be difficult for school districts to provide adequate raises.
On the House floor, Democratic Rep. Rachel Roberts of Newport said she was concerned the increased education funding wasn’t enough to cover raises. Republican House budget chair Rep. Jason Petrie of Elkton said because the budget increases funding for kindergarten and transportation, it will free up local dollars for raises.
“There is a lot of room to deal with whatever kind of raises fit their local situation,” Petrie said.
In 2024, the per-student funding would be 27% lower than it was before the 2008 recession, according to the report.
The budget also provides more money for Family Resource and Youth Services Centers and career and technical education, but it doesn’t include the annual $2.5 million operating grant for local libraries.
The budget does increase funding for the state’s public universities and college by about $100 million for each of the next two years, though that too remains below 2008 levels when taking inflation into account.
Raises and the ‘rainy day fund’
The spending plan includes an 8% raise for state workers in the first year of the budget and the possibility of a 12% raise in the second year, depending on a Personnel Cabinet study. Social workers, public defenders, non-political judicial branch employees and state troopers would also see individual pay increases. Lawmakers and experts say those raises will help make salaries competitive for state workers.
Budget surpluses and federal stimulus dollars have pumped Kentucky’s ‘rainy day fund’ to the largest amount it has ever had – $1.5 billion, equivalent to 12.4% of annual spending, according to the Kentucky Center for Economic Policy. The new budget contributes another $250 million to the fund, and still leaves about $1.1 billion unappropriated.
However, that amount would be offset by a Republican tax plan that passed the legislature on Tuesday. The measure would reduce the state income tax and expand the sales tax to new services, costing the state about $1.4 billion in lost tax revenue over the next two years, according to an earlier version of the bill’s fiscal note.
The tax bill would reduce the state’s income tax from 5% to 4.5% in 2023 and lower it further in future years as long as tax revenues exceed expenses and the state has the equivalent of 10% of its budget in the Rainy Day Fund.
An analysis from the Kentucky Center for Economic Policy found that a 1% reduction in the income tax rate would largely benefit the state’s wealthiest residents. The richest 1% would save about $11,000 while the poorest 20% would save about $20.
Sen. Chris McDaniel, a Republican from Ryland Heights and chair of the Senate budget committee, disputed on the Senate floor that the bill would be a giveaway to the state’s top earners.
“When I hear the conversation about tax cuts for the wealthiest, I simply have to cringe at that misnomer because the income tax that’s reflected in House Bill 8 is an equal reduction for all taxpayers,” McDaniel said.
Democratic Gov. Andy Beshear’s veto period begins on Thursday. Lawmakers will return for the final two days of the legislative session on April 13 and 14 to consider overriding any vetoes.