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Schools, pensions, tax cut triggers: How Beshear and House GOP budget plans differ

Kentucky Rep. Jason Petrie looks at a stack of papers with House Majority Floor Leader Steven Rudy.
Legislative Research Commission
Republican Rep. Jason Petrie, of Elkton, (left) and House Majority Floor Leader Steven Rudy, of Paducah, look over various proposals Tuesday for state’s next biennial budget.

The Kentucky House GOP budget plan had some major differences with Gov. Beshear’s proposal, such as dismissing his request for K-12 raises and universal pre-K.

House Republicans of the Kentucky General Assembly filed their budget bills Tuesday to fund state government over the next two years, drawing some distinct differences from the budget proposal last month of Democratic Gov. Andy Beshear.

Republican budget committee chairman Rep. Jason Petrie, of Elkton, filed House Bill 6 to fund the executive branch in the next two fiscal years, as well as House Bill 1, which directs $1.7 billion from the state’s budget reserve trust fund go towards one-time infrastructure and pension spending.

The GOP has a dominant 80-seat supermajority in the House, but their budget proposals have drawn some early criticism from various advocacy groups and a thorough denouncement from Beshear on Thursday.

Among Beshear’s criticisms were that the House GOP chose not to fund two of his highest priorities for the next two years – mandating 11% raises for all K-12 public school staff and universal pre-kindergarten, at a price tag of $1.4 billion over the next two years.

There are three budget drafts that aspire to guide Kentucky’s priorities for the next two years.

Here’s a closer look at some of the major differences between proposals from House Republicans and the Democratic governor, and what key groups are saying about the new GOP bills.

Rainy day spending, bonds and tax cut triggers

With a record $3.7 billion budget reserve trust fund (often called a “rainy day fund”), a projected $1.4 billion surplus coming at the end of the current fiscal year this summer and a projected $31 billion of General Fund revenue coming in the next two fiscal years, leaders of both parties agree that Kentucky is in pretty good financial condition.

Among the key differences between the budget plans of the governor and the House GOP is what the state should save and what it should spend – all with potential tax cut triggers looming in the background.

Whereas Beshear’s budget called for keeping the rainy day fund at $3.7 billion, Republicans instead would spend $1.7 billion of it over the next two years, all detailed within HB 1. This funding included $950 million to pay down the unfunded liability of state employees’, police and teachers’ pension plans, with nearly $800 million mostly directed to infrastructure projects.

At a press conference Wednesday, Republican House Speaker David Osborne said Kentucky has one of the largest rainy day funds in the country and will remain so even after the spending of HB 1. He said it made sense to start spending some of it.

“I think at some point it gets to be hoarding,” Osborne said.

This is where House Bill 8 comes into play, as the legislature in 2022 passed this trigger mechanism to incrementally lower the state’s individual income tax rate until it is eliminated.

The tax rate would be lowered each calendar year by half a percentage point, so long as:

  • the budget reserve trust fund at the end of the fiscal year was at least 10% of the General Fund revenue;
  • if the tax rate had been one percentage point lower in that fiscal year, the General Fund revenue would have been more than the General Fund spending.

Kentucky hit that tax cut trigger in 2022, so it was allowed to lower the income tax rate to 4% at the beginning of 2024. However, it failed to do so last summer, preventing a decrease to 3.5% in 2025. While the state easily hit the budget reserve trust fund trigger, General Fund spending was $435 million too high to hit the second trigger.

Republicans have dismissed the notion they may amend the HB 8 mechanism to make hitting the tax cut trigger easier, but the language of HB 1 clearly gives them a path to skirt around the spending trigger requirements.

The original law stated that spending to pay down public pensions beyond what the law requires does not count towards the spending trigger, which applies to the $950 million of pension payments in HB 1.

However, HB 1 includes a “notwithstanding” clause on the rest of its spending, declaring that the nearly $800 million of other appropriations do not count as General Fund spending under the trigger provisions of HB 8 – essentially sidestepping that part of the law.

Petrie, the lead sponsor of HB 1, said its spending mechanism doesn’t intend to increase the odds of hitting the tax cut trigger in future years, as the lawmakers were only focused on budgeting to the states’ needs instead of wants.

He also added that the $800 million of non-pension spending within HB 1 was just for non-recurring expenses and should not be subject to the triggers, “just like the pension over-and-above payments were thought of when HB 8 was first passed. It fits in that same mindset.”

Essentially, Petrie asserts that $800 million shouldn’t be counted as General Fund spending under the terms of HB 8.

The progressive Kentucky Center for Economic Policy rejected that reasoning in a report this week, saying House Republicans are already moving the goalposts on HB 8 to rig faster tax cuts.

“Supporters of the formula have maintained that it is working as intended despite the triggers not being hit this year, but the House’s budget suspends the existing rules to make hitting them easier in this budget,” stated the advocacy group.

The Kentucky Center for Economic Policy also added that overall General Fund spending in the House GOP budget remained significantly lower than revenues, which could end up growing the budget reserve trust fund to as much as $6 billion by 2026 – despite the spending of HB 1.

In a press conference Thursday, Beshear also added that the House GOP budget includes $2.7 billion of new bond spending – $888 million more than his budget proposed – saying this amount of new debt is not fiscally responsible.

Beshear also suggested this bond spending was so high in order to avoid General Fund spending that would have made hitting the tax cut triggers harder.

“Let me tell you, if you want to get down to half a point in the income tax, maybe you do this so you can hide all the money you're really spending,” Beshear said.

Andrew McNeil, president of the conservative Kentucky Forum for Rights, Economics & Education, said the House GOP budget bills were fiscally responsible and showed that “state government can make historic investments in education, strengthen the safety net for vulnerable Kentuckians, and keep us on track to further reduce the personal income tax in future years.”

K-12 raises, universal pre-K and school transportation

While the House GOP budget raised the state’s per-pupil SEEK spending to a record amount, it did not include the biggest items on the governor’s education budget wishlist – 11% raises for all K-12 public school staff and universal pre-K.

The SEEK per-pupil base formula in HB 6 – sponsored by Rep. Petrie – increases by 4% to $4,368 in the first fiscal year and increases by another 2% to $4,455 in the following year. It also funds full-day kindergarten for the second straight budget cycle.

Beshear’s budget had a slightly smaller per-pupil formula in the second year, but it also included an additional $1.1 billion through SEEK to mandate the 11% salary increases for all K-12 staff.

Osborne said that nearly every superintendent he spoke to asked for more money in the GOP budget, but he added they all wanted enough flexibility “to put those monies where they're most needed.”

“I think it's more appropriate to allow them to make those decisions locally,” Osborne said. “I understand that some people disagree with that, but we believe it's the best form of budgeting.”

The Kentucky School Boards Association reacted to the House GOP budget with a statement praising the increase to base SEEK funding, but added that moving the needle to address unprecedented personnel shortages “will ultimately require significantly more investment.”

“Local school boards and administrators are willing and able to make difficult decisions on behalf of the students they serve, but merely incremental increases to SEEK will make real progress impossible.”

The KSBA statement also expressed concerns with the GOP budget language threatening penalties if they don’t make progress in recruiting and retaining teachers and staff with their “very limited resources.”

Jim Waters, president of the conservative Bluegrass Institute, praised the GOP budget for providing “the flexibility needed by all 171 local school districts to address other pressing issues unique to their schools and personnel.”

The House Republican budget also increases state spending on schools’ transportation costs, but is $121 million less than what Beshear proposed. The state currently covers 70% of these costs, but the GOP budget would increase this to 80%, then 90% over the next two fiscal years, while the governor’s budget fully covers it, as required by law.

While the governor’s budget directs $34 million for schools’ instructional resources and $25 million for teachers’ professional development, the Republican budget does not include any such funding.

And then there is universal pre-K, which Beshear’s budget directed $344 million to through the state’s preschool program. It was not much of a surprise that the GOP budget did not include these funds, as Republican leadership had already indicated they wouldn’t.

Much of Beshear’s plan to address the looming child care crisis in Kentucky – with large federal subsidies to providers expiring – was through his universal pre-K initiative.

Outside of pre-K, the GOP and Beshear budget plans have similar spending proposals for child care, which some advocacy groups do not appear impressed with.

Terry Brooks, the executive director of Kentucky Youth Advocates, said the GOP budget was a “fumble” on child care, saying it would make more than 10,000 families now receiving child care assistance ineligible going forward.

“Without quality, affordable, and accessible child care programs, parents cannot maintain stable employment and children can end up in the care of unsafe adults – a reality our lawmakers cannot realistically want for their constituents,” Brooks stated.

The Prichard Committee had called for $251 million added to the state’s Child Care Assistance Program, but noted the GOP budget increased it by only $52 million, with no increase at all to state preschool funding.

GOP budget lifts spending on prosecutors, Medicaid waivers

There are several areas of the House Republican budget where they intend to spend significantly more than what the governor’s budget proposed.

In addition to the $950 million of additional spending to pay down the unfunded pension liabilities of state workers, teachers and police in HB 1, HB 6 also includes an additional $500 million to pay down the liabilities of the most-underfunded state retirement plan.

Beshear’s budget only provided $200 million of spending on public pensions above what was actuarially required, just a fraction of the nearly $1.5 billion delivered by the House GOP bills.

State and county prosecutors also received $26 million more General Fund spending in HB 6 than the governor’s proposal. Most of this additional spending is focused on hiring more Commonwealth’s Attorneys and county attorneys and raising their salaries.

The GOP budget also significantly increases the number of Medicaid waiver slots for Kentuckians with disabilities, more than tripling the 750 additional slots in the governor’s budget. These waivers typically allow people to remain in their home instead of being institutionalized by giving them money directly to spend on services.

It also directs $77 million towards two new Medicaid waivers for adults with mental illness and addiction and kids with emotional and intellectual disabilities.

GOP spends less on state workers, libraries, affordable housing

While the House GOP budget does spend far more to pay down the liabilities of state workers’ pension plan, Beshear blasted it this week for cutting funding to hire workers for more than 2,700 currently vacant positions.

Beshear said the GOP budget would eliminate funding for up to 95% of these positions across state governments, which amounts to more than $300 million of General Fund spending over two years. He said this would gut the effort to increase the number of state social workers, veterans center nurses and staff for prisons and youth detention centers.

“This is just taking a hatchet and hacking at the executive branch without even looking,” Beshear said. “It's like putting on a blindfold and trying to cut something up.”

The GOP budget also left out Beshear’s proposal to spend $100 million on a “13th” monthly check to state retirees, which would serve as a cost-of-living increase after more than a decade without one.

Jim Carroll, the president of Kentucky Government Retirees, thanked Republicans for adding significant pension payments, but added that “there are resources to both overfund (the state worker retirement plan) AND provide a badly needed inflation adjustment for retirees.”

Libraries across the state would also see $7 million less funds in the GOP budget. While the governor’s budget included $5 million of per capita grants to local libraries, HB 6 did not include these funds.

The governor’s budget also included $10 million to the state’s affordable housing trust fund and $75 million to the eastern Kentucky flood disaster relief fund, which the House GOP budget omitted.

However, Petrie said this week that the $450 million directed in HB 1 to a new federal infrastructure grant program may also be used to address housing needs.

This story has been updated.

Joe is the enterprise statehouse reporter for Kentucky Public Radio, a collaboration including Louisville Public Media, WEKU-Richmond, WKU Public Radio and WKMS-Murray. Email Joe at jsonka@lpm.org.