Gov. Matt Bevin signed a budget reduction today last week, meeting the Constitutional mandate that the Commonwealth of Kentucky end the fiscal year with a balanced budget. General Fund revenue receipts fell short of budgeted amounts by $138.5 million, requiring today’s action.
The Governor’s veto of a portion of the budget bill allowed an additional $5 million in lottery receipts to be dedicated to scholarships and not lapse to the General Fund. In addition, a lower than expected lapse of debt service raised the total resource requirements to meet the shortfall to $152.2 million.
“This year’s budget shortfall validates the need for conservative spending plans, and it dramatically underscores the critical need for fixing Kentucky’s broken pension systems and modernizing the state’s tax code,” said Gov. Bevin. “A solid financial foundation is essential before the Commonwealth can reach its full potential.”
The actions taken today to close the fiscal year 2017 budget gap included a combination of General Fund appropriation reductions and fund transfers from restricted funds. Also included were one-time savings in Medicaid costs due to the favorable renegotiation of contracts with the managed care organizations (MCOs) and lower than expected pharmacy costs. The Governor’s order to balance the budget does not include any reduction to the state’s Budget Reserve Trust Fund.
“We are expecting an ongoing challenge with revenues in the next fiscal year and the next biennium,” stated John Chilton, the State Budget Director. “Today’s actions by the Governor responsibly preserves the Rainy Day Fund as we prepare for the tight fiscal environment in front of us.”
In anticipation of the budget shortfall, the Office of the State Budget Director directed the Governor’s Cabinet Secretaries to identify a reduction in their General Fund expenditures. These reductions, plus reductions by the Legislative and Judicial branches, amounted to $59.3 million. Fund transfers of various excess restricted funds totaled $77.3 million. General fund lapses and fund transfers in excess of budgeted amounts accounts for the remaining $15.5 million of the total $152.2 million shortfall. Programs funded through coal severance revenues are automatically adjusted when receipts fall short of projections. That resulted in a $17 million reduction in money going to the Local Government Economic Assistance Fund.
The Medicaid portion of the original budget was based on MCO contract rates in effect in 2015. Prior to Governor Bevin taking office, Kentucky ranked number 1 in the nation in profits earned by MCO providers; their profits were more than 4 times the national average for all MCOs. As part of Governor Bevin’s Medicaid transformation, the administration renegotiated these contracts resulting in lower than budgeted cost.
Final fiscal year 2017 General Fund receipts were 1.3 percent less than the official estimate. If the fiscal year 2018 revenue shortfall approximates this year’s amount, significant additional spending reductions will be needed to balance the budget in fiscal year 2018. The current balance of the Budget Reserve Trust Fund, $150.5 million, remains unaffected by today’s action.