Governor Paul E. Patton
January 22, 2002
A copy of the budget is available
President Williams, Speaker Richards, and members of the General Assembly, members of the Judiciary, Governor Henry and other members of the Executive, my fellow Kentuckians.
For the fourth and final time I appear before you to discuss the financial status of the Commonwealth and to outline our budget proposal for the next biennium. I ask you to use this proposal as the starting point from which you can begin to develop Kentucky’s budget for the 2003 and 2004 fiscal years.
This proposal will be dramatically different from the three previous
recommendations I’ve made to you. For
the first time since at least 1981, the state will be required to enact a budget
with less General Fund revenue in the next fiscal year than we’re spending in
the current fiscal year because our economy is the worst it’s been in at least
20 years; the growth of personal income is down 57 percent from expectations,
corporate income tax collection is down 20 percent from the estimate of two
years ago and the unemployment rate is up 40 percent since last December!
This national recession is affecting more than just state revenue; it’s
impacting the lives of thousands of Kentuckians even more dramatically.
We’ve lost over 20,000 good-paying manufacturing jobs in just the past
two years!! Bob Jackson and Buddy Buckingham, you know the personal
and community trauma caused by the 980 jobs that are being lost in Murray as
Mattel closes. Richie Sanders and
Rob Wilkey, you know the impact of Sumitomo’s workforce reduction of 926 jobs
in your part of the state; and Robert Stivers and Barbara Colter, the loss of
the 110 jobs in Clay County caused by the closing of Columbia Forest Products is
a major blow to your community.
effect of this economic slowdown on our budget is a
current-year revenue of $533 million, or 7.4 percent below our
originally budgeted level of expenditure. How
did we cope with this shortfall? We
cut administrative expenses, we used some of our reserves, and we improved
efficiency; we didn’t slash and burn.
of our cuts to the original appropriations for this current fiscal year have
been absorbed within our cabinets. I’ve
been extremely cautious about trying to push the problems off to other agencies
like our public schools, colleges or contract social service agencies.
In fact, we haven’t cut elementary and secondary education at all.
The two percent cut to our colleges and universities hurt me deeply but I
believe these institutions can tighten up their administrative costs just like
we have and not affect student services. The
two percent cut in Medicaid hasn’t yet resulted in a direct cut in essential
services to needy people but I fear that such cuts will be inevitable sometime
in the next two years. All
the rest of our part of state government has been cut on average 5%.
The bottom line is that with these cuts and using some of our reserves,
we’ve absorbed this revenue shortfall without substantially affecting direct
states are experiencing similar revenue shortfalls.
How are they coping? Ohio
laid off 200 mental health workers. Michigan
laid off 500 prison employees. We
laid off no employees. Tennessee
shut down state parks. Ours are
still open. South Carolina
cut elementary and secondary education 5 percent.
We haven’t cut our local school boards.
Indiana, Iowa, Kansas, North Carolina, West Viriginia and Tennessee have or are
considering raising taxes!
highest priority has been to keep our current commitments.
Just as I value my word as an individual, I expect government to provide
its citizens the services its leaders have agreed to provide.
It’s the legacy of my parents and their constant admonishment, “Paul
Edward, always do what you say you’ll do.
Keep your promises.” To
the people of Kentucky who depend on Kentucky State Government, which is all of
our four million people, I say to you, this is a document of promises kept!
I ask this legislature to work with me to make these promises a reality,
even if a few have to be delayed to the next biennium.
Our economy measures have had minimal affect on services for the current
year but we’ve had to be creative to achieve this goal.
We’ve cut $255 million in expenses but we’re also using $278 million
of our reserves. In addition to
$159 million from our Budget Reserve Trust Fund, we’ve taken $119 million from
other programs which won’t need those funds to carry on their work at present
levels. We can’t do that forever
so all of the revenue growth next year, in fact for the next two years, will go
to pay for services that are currently being provided with non-recurring funds,
creating a condition I’ve preached against for six years, a structurally
imbalanced budget. This is bad
fiscal policy if used to increase services beyond a level which can be
sustained. It’s a sound, humane policy, if used temporarily to keep from
cutting services that our people have come to depend on.
I want to emphasize that this proposal anticipates that the nation will
come out of this recession and we’ll have General Fund revenue growth of 3.3
percent in 03 and 4.1 percent in 04 but this revenue increase will be needed to
replace the one-time money we’re taking from our reserves to keep from cutting
services. There will be no money
for new services in the next biennium.
having served as your governor for over six years, I think I know the needs of
the people of Kentucky as well as anyone who’s ever held this office.
I know as clearly as I’ve ever known anything in my life that we need
to provide more services for our needy people.
I know that we need to provide more infrastructure like roads and water
and sewer and community facilities all over Kentucky if we’re going to be the
world-class society that we want to be. I
know that we need to provide more education for our children if they’re going
to be able to succeed in a world where other children are getting more
our challenge during these next two years is going to be to keep the commitments
we’ve already made and to not lose ground in the key areas of education and
economic development that are critical to Kentucky’s long-term future. I want you to realize the magnitude of the problem!
In the second year of the next biennium, General Fund revenue is
estimated to be less than the expenditures which we originally budgeted
for the current fiscal year.
How can we even hold our own, under these circumstances? By managing wisely, by being more efficient and by spending
down our reserves. That’s what I
These past eight months have been very difficult as we’ve had to
reduce, using the criteria you provided, the appropriations in the budget you
adopted two years ago.
The exact opposite was true in my first two budgets. Revenue exceeded estimates.
We had money left over at the end of the year and you and I both were
able to go about the state announcing major state investments in the
infrastructure of the Commonwealth. That is not the case this year.
the most important thing we didn’t do during times of plenty was commit all of
these excess revenues to ongoing programs.
Some other states are finding their fiscal situation much worse than
ours. Indiana is proposing to cut
the state’s contribution to Medicaid by 10%; Idaho is cutting its
appropriation to state police by 15%; and Michigan is considering rescinding
previous tax cuts.
One reason we’ve been able to cope better than some of our neighbors is
that when the economy was strong, we built our Budget Reserve Trust Fund, what
some people call our rainy day fund, to an unprecedented high, 279 million
dollars, 3.7 percent of our General Fund revenue.
And we had reserves in other funds of nearly 220 million dollars.
It’s a good thing we did because these reserves have allowed us, with
few exceptions, to keep the commitments we jointly made over the past six years.
Using these reserves until state revenue catches up with the level of
expenditures needed to fund programs we’ve already established will allow us
to keep our promises.
Let me emphasize that we aren’t proposing a deficit because our
reserves and some one-time revenue will allow us to meet our obligations.
Some of the major fund sources we propose to use include $92 million from
the Petroleum Storage Tank Removal Fund. This
will still leave the fund with enough revenue to continue their expenditure at
the average level of the past few years.
We’ll also use 49 million dollars from the Kentucky Access Health
Insurance Fund, again leaving the fund more money than it expects to need during
the biennium. We won’t transfer
the $38 million of coal severance tax to the Special Fund but we do prohibit any
increase in the assessment on workers’ compensation insurance premiums during
the biennium. We credit $30 million
worth of the Blue Cross-Anthem stock received by the Kentucky Employees
Retirement System against the state’s obligation to the System in fiscal 03.
This will in no way affect employee benefits or endanger the fiscal
integrity of the Pension Fund. We
declare a tax amnesty which will net $30 million over the biennium.
We propose to sell the NOx credits set aside for merchant power plants
for about $13 million. And we’ve
used about $45 million from other sources.
worked harder this time than we have on any of our three previous budget
proposals. I’ve never presented
to you a starting point for a budget that’s been examined in such detail by
our cabinets, the Governor’s Office for Policy and Management and by me and
the staff in the Governor’s Office.
proposal has no new programs. It
also doesn’t have any substantial cuts of essential services.
It spends down our reserves. It
doesn’t have a deficit. That’s
the best balance I can achieve under these adverse fiscal conditions.
This has been the most difficult fiscal challenge I’ve faced as
governor; but as difficult as it’s been, our administration was better
prepared to meet it than any you’ve ever worked with before.
Because of succession, this
budget proposal has been prepared by the most experienced and capable group of
public administrators ever to serve the people of Kentucky. Five of our fourteen cabinet secretaries have been on the job
six years and have prepared their fourth budget, an unprecedented record.
The rest of our cabinet secretaries are experienced, capable individuals
with an average of over 11 years in state government.
And my core leadership team - Skipper Martin, Crit Luallen and Jim Ramsey
- has been here since day one.
It’s because of this dedicated, experienced team that I can propose to
you tonight a budget which, in almost every respect, keeps the commitments
we’ve already made, with less revenue than we’re spending in the current
fiscal year. And I remind you that
we’ve already cut the expenditure of all state government except education and
Medicaid to five percent below the level you authorized two years ago.
As we began to prepare this proposal, we had five goals in mind.
We were hopeful we wouldn’t have to substantially cut services.
We were determined to protect the purchasing power of our teachers and
state employees. We were committed
to keeping Kentucky safe by keeping criminals off the streets. We were keenly aware of our promises to our most vulnerable
people, our mentally ill and mentally retarded. And for the sake of the future of Kentucky, we knew we had to
keep our support for education at an acceptable level.
general we asked our cabinets to prepare a budget for the next two years with
the same amount of money they have in this fiscal year, after the 5 percent cut;
essentially a flat-funded budget, with some exceptions.
We know that some costs are going to increase which means other costs
will have to be cut. But to
minimize the impact on services, we instructed our cabinets to look at every
single dollar being spent on administrative costs before touching a dollar going
to critical programs or services. Each
cabinet identified specific cost savings that would result from these management
initiatives. We began in July by
limiting overtime and this change alone is saving nearly a million dollars every
me summarize for you just some of the other administrative cuts that we’ve
made this year and the next two years to reduce the impact on direct service
cut the use of cell phones, pagers and other communication services – $2
million; we’ve cut travel – $2.5 million; we’ve cut printing – $5.5
million; we’ve cut the use of state cars – $3.5 million; we’ve eliminated
or reduced almost $12 million worth of contract services; we’ve cancelled $5.5
million in purchases of furniture; we’ve eliminated $1.3 million in rent and
utilities and there are other similar cuts totaling over 90 million dollars over
a three-year period. And while we
propose no layoffs, we do reduce the number of authorized personnel in the
executive branch by 4,500.
though our actions will require existing employees to work more efficiently, we
haven’t called on them to bear the brunt of the revenue shortfall because
building and retaining a qualified professional workforce is essential to
maintaining quality service. This
is true of any organization and it’s especially true of our government and
schools. Job security and wage
stability are two of the essential characteristics of employment which build
loyalty and continuity in a workforce. That’s
the reason we worked so hard to meet this crisis with no layoffs and to assure a
cost-of-living wage adjustment for all employees of state government and local
you’ll remember, the cutbacks of the early 80’s resulted in thousands of
layoffs which created a sense of insecurity in the state workforce that
reverberates even today. One of my
highest priorities for public employees since I’ve been a public manager has
been to not endanger the job security or cut the purchasing power of the people
I work with because to do so is to bring on personal stress and will lower their
standard of living. Nothing can be
more destructive of morale and commitment than to think your employer is
insensitive to your peace of mind or your increased costs at home.
while some private employers are reducing their commitment to employee health
insurance, we continue to fund the entire cost of a high-quality health care
plan for our 44 thousand state employees and for all of the 130 thousand of our
retirees and the employees of our local school boards and other government
agencies have absorbed the increased labor costs and the eleven percent annual
increase in the cost of health insurance within their flat-funded base budget.
Others have had to have more money to cover some or all of these costs.
After all, once you’ve already absorbed a 5 percent budget cut, your
options to absorb increased costs without cutting services is somewhat
The employees of our school boards are equally
important to the welfare of our people and are equally deserving of protection
from cuts in their purchasing power and our budget does that!!!
to its people is the essence of government and our employees are essential to
our efforts to provide services to our people.
One of these important services is our criminal justice system. As I’ve often said, protecting the lives and the property
of its citizens is the first responsibility of government, and the improvements
we’ve made in our criminal justice system over the past 6 years are making
Kentucky safer every day. But these
improvements also result in more people in our prisons and this is a cost
increase we can’t avoid. We
can’t tell judges to impose stiffer sentences and then refuse to provide
prison space. One of the largest
increases over this year’s adjusted budget, 7.3 percent for the biennium, goes
to Corrections; for more parole officers and more prison beds.
we’re legally required to house convicted felons, we’re morally obligated to
care for our mentally retarded and mentally ill.
One of the most important pieces of social legislation passed while
I’ve been governor is House Bill 144. In
that law we agreed to reduce the backlog of underserved mentally retarded and
developmentally disabled people eligible for community-based services.
We’re providing 500 placements for these vulnerable Kentuckians in the
current biennium and our proposal provides for another 500 in the next
better serve our mentally ill neighbors and those suffering from substance
abuse, we fund the recommendation of the commission established by House bill
843 which requested that we complete our system of crisis stabilization centers
by adding ten to the already existing eighteen centers around the state.
Our proposal does that!!!
also address issues raised in the Olmstead Supreme Court decision by providing
new dollars to the Department of Aging for important home care services and new
dollars to the Workforce Development Cabinet for supported employment and more
money for wrap-around services for the mentally ill in their community.
Overall these programs for our most vulnerable people receive an increase
of 7.1 percent over the biennium. We are keeping our promises.
vital as our social service and criminal justice programs are, our largest and
most important job in state government is education and we’ve kept our
our proposal pays for the increased cost of health insurance for school board
employees in both years and for the cost-of-living wage adjustment in the second
year of the biennium, it does require local school boards to provide a
cost-of-living wage adjustment to all their employees in the first year of the
biennium with current funding and to pay the cost of health insurance for
federally funded employees out of their new federal dollars.
Our local school boards will have almost twice as much new federal money
as this health insurance will cost. The
excess new federal money will help these districts absorb some of the employee
wage adjustment so that the overall impact on school services will be minimal.
Let me assure you that no other program impacted by this budget will be
understand that states like California, Oregon, Florida and Georgia are
considering cutting their support for elementary and secondary education. We’ve certainly treated our schools better than these
only have we provided for our teachers and other school employees, we’ve
maintained our commitment to pre-school, school technology and school rewards
and our commitment to build 100 million dollars worth of new school buildings in
the next biennium. We’ve kept our
promises to our school children!!!
certainly not been able to treat our colleges and universities quite as well.
In the most important initiative of my administration, we’ve challenged
our institutions of higher learning to create the intellectual capital we need
to build a new economy where we can have the increased standard of living and
quality of life that we all want.
proposal doesn’t do all we need to do to enable them to make the progress they
need to make over the next two years, but we do fund the two most important
parts of the Council on Postsecondary Education’s recommendations.
fully fund the Council’s recommendation for the enrollment and retention fund. After all, we’ve charged all of these institutions, but
especially our community and technical colleges and our comprehensive
universities, to increase enrollment and to keep the students they enroll in
school. We can’t expect them to
continue to pursue our goal of college completion rates equal to the national
average if we can’t keep our promise to reward them if they do the job.
similarly with our two research universities, and our comprehensive
universities’ programs of excellence. That’s
why we propose to continue the Bucks for Brains program at the level of 100
million dollars for the University of Kentucky and the University of Louisville
and $20 million for our six comprehensive universities, only this time we revert
to our original 1998 proposal of Bonds for Brains.
We also authorize $67 million of bonds for agency-supported capital
construction at our universities.
Of course, the most important element of our postsecondary education
program is our students. And we
fully fund our commitment to their scholarships.
We’ve increased the appropriation to our needs-based and merit-based
scholarship programs by 52 percent. This
demonstrates how important these programs are and how well they’re working!
Overall enrollment in postsecondary education is up 14 percent!
The really amazing statistic is that enrollment in our community and
technical colleges is up 38 percent! We’re
ahead of schedule on our quest to achieve a college-going rate equal to the
national average by 2020!!!
This budget also maintains our commitment to move forward on the next
critical step of building on higher education reform and that’s ensuring that
Kentucky is competitive in the New Economy.
By providing continued funding to begin implementation of our New Economy
strategic plan, we’ll be growing the quality jobs we need to keep our quality
graduates here in Kentucky.
We keep our promise to the coal regions, made in 1992, to return 50
percent of the coal severance tax to help grow their economy and bring their
infrastructure up to par.
And we keep our commitment to spend 50 percent of the tobacco settlement
proceeds on maintaining our rural way of life and 25 percent on our youngest
citizens to give them a better start in life.
Our agricultural economic revitalization program is by far the most
progressive in the nation and will enable us to maintain our unique family farms
and our high quality rural lifestyle.
childhood development is another area where Kentucky leads the nation. Only California, according to nationally known child advocate
Rob Reiner, does more. This is
really a matter of pay now or pay later. Children
with high-quality childhood programs go on to earn 60 percent more when they
reach adulthood. Low-income
children who receive high quality, early child care are more likely to remain in
school, attend college and get good jobs. For
every one dollar invested in early childhood development, seven dollars is saved
in the cost of remedial education, welfare and incarceration.
No program we’re operating now will have a higher rate of return to our
society in 20 years!!!
as far as the other 25 percent of the tobacco settlement money goes, we continue
to fully fund the lung cancer research program and the smoking cessation and
substance abuse programs and adequately fund the Kentucky Access Health
insurance program for high risk individuals.
Yes, in many ways, and in spite of the most dire financial problems
we’ve experienced in a generation, this is a budget of promises kept.
But not all promises can be kept in this biennium.
The three capital construction projects not funded that trouble me the
most are the Lexington Convention Center and the Muhammad Ali Center in
Louisville and the suspension of work on the multi-year, multi-administration
renovation of the state Capitol complex.
To the supporters of these projects, we made our promise to you believing
that we would continue to have a community development program large enough to
fund these and other needed projects throughout the Commonwealth.
We were too optimistic. Considering
our financial circumstances, I cannot, in good conscience, recommend
construction projects while so many human needs go unmet.
The General Assembly has endorsed these projects by partially funding
them, knowing that more money was needed. I
trust they’ll be fully funded in 2004.
there are other important areas that this budget doesn’t address. It certainly doesn’t do all we need to do to reach our
education goals for the year 2020. It
contains no state funds for construction at our colleges and universities; no
new classrooms, no new research laboratories, no new student service facilities.
While our proposal funds the cost of utilities and janitorial services
for the new construction in progress as a result of our past capital
construction programs, it doesn’t adequately fund the cost of the additional
faculty that’ll be needed. And it
makes no progress towards achieving benchmark funding.
our elementary and secondary schools our proposal provides no money for real
wage increases for our teachers and no money to extend the school year to the
national average or to provide more pay to teachers in hard to fill disciplines
or difficult schools.
For state employees, we still can’t put those 18,000 people
who are in a grade lower than they should be into the correct grade and
we can’t give a fair raise to the long-time employees who may have had their
job grade raised but received no raise because they’re still above the
But most of all, I’m very concerned about our Medicaid program.
During the past six years we’ve increased funding for Medicaid by
forty-six percent, more than any other major program except juvenile justice.
This proposal will recommend no increase in state funds for Medicaid over
the biennium but we do anticipate actual spending increases of nearly 190
million dollars through efficient management of resources.
The problem is that we’re still about 200 million dollars short of the
money required to pay for the anticipated needs in the second year of the
biennium. Absent a source of this
money, our only recourse will be to reduce the optional services available in
our Medicaid program and eliminate coverage for some optional demographic
groups. There’s no doubt about
it, Medicaid is the most seriously underfunded program in our proposal. The funds we recommend won’t cover the inevitable and
unavoidable increase in the cost of healthcare and the constantly increasing
demand for services created by an aging population and the new pressures
occasioned by a deteriorating economy.
pains me more than any other part of this proposal but I can find no other
option. I know many of you will be
equally anguished but you’ll also find it difficult to propose a less painful
Another deficiency in this proposal that’ll affect you and your
communities in a more visible way is the lack of funding to continue to improve
our community infrastructure. There
are no community development projects; no arena for Northern Kentucky, no money
for the Center for Women and Families in Louisville, or no money for the Clay
Community Center in Mount Sterling, or for any of the hundreds of other
recreational, service or life-safety facilities that our communities need and
you legislators want to provide for your constituents.
though we propose 11.2 million dollars to match available federal funds for
water and sewer programs, we don’t have other General Fund appropriations to
continue our 2020 program to provide safe adequate water to our rural areas by
the year 2020.
for the Fairgrounds, nothing to complete our golf courses under construction,
and nothing for the proposed regional business park in the Purchase. The fact of the matter is that we just don’t have the
We’re presenting you with a proposal which increases General Fund
expenditures in fiscal year 03 over the reduced fiscal year 02 base by only $65
million or .9 percent. This is 146
million, or 2 percent below what you appropriated for fiscal 02 in the
budget enacted in the 2000 session. This
expenditure level is $100 million more than we expect to receive in recurring
revenue in fiscal 03; a structural imbalance of 1.4 percent.
As we look at the 04 proposal, it anticipates a level of expenditure
above the proposed 03 budget of $247 million, or 3.5 percent, with a structural
imbalance of $58 million, or 0.8 of one percent.
The $298 million of new bonded indebtedness recommended for the next
biennium is the lowest amount authorized in any biennium that we can find in the
records available. This maintains
our debt service at 6 percent of state-generated revenue, which is the guideline
I’ve used to gauge the level of debt we should carry.
This proposal seriously depletes our reserves and so we must act as
quickly as we can to rebuild them, especially our Budget Reserve Trust Fund.
We don’t use any of the remaining $120 million in the Budget Reserve
Trust Fund because to budget this money to fund ongoing expenses would be the
worse of all fiscal policies and would in fact be a mockery of the principle of
a reserve fund. I will resist all
efforts to use any of this money. At
the same time, we don’t make a direct appropriation to the fund, directing
only that all of any lapses or excess revenues be appropriated to it.
Our current experience demonstrates that we need a Budget Reserve Trust
Fund of at least five percent of General Fund Revenue, about $360 million based
on our 2004 estimate of revenue. Let
me urge you to make direct appropriations to the Budget Reserve Trust Fund in
the next biennium and continue to appropriate all lapses and excess revenues to
the fund until it’s reached this 5 percent level.
we don’t need to get to 5 percent in the next budget but we should be
determined to get there in eight to ten years.
Hopefully, it’ll be that long before we have another recession like
we’re in now.
I know this proposal doesn’t do everything we want or need to do but to
my friends in the legislature who want to improve other services for your
constituents, let me assure you that I share your concerns, but in my opinion,
it’s going to be difficult with current revenue. I ask for you to not raise
expectations of more money for important programs without providing a source of
that money. I call upon the leaders
of each body of the legislature to join with me and not allow the passage of a
law calling for an expenditure which is not in the budget and to resist those
who try, regardless of party.
In summary, we face the most severe revenue shortfall since 1981.
But we’ve managed our way through it and we’ve presented to you a
proposed budget that cuts administrative costs, maintains faith with our
employees and teachers, keeps criminals off the streets, protects our most
vulnerable citizens and ensures continued progress in education.
won’t be able to start new programs that our people need or fund the many
projects that are important to your local communities but this proposal does,
with very few exceptions, keep the promises we’ve already made.
There’s nothing in this proposal that hasn’t been endorsed by
previous legislative action. We
have kept faith with our people. This
is a document of promises kept.
I fully realize that you must make the final decision. We stand ready to provide you any information in our
possession. We caution you against
reducing any item in this proposal without carefully evaluating the impact.
We recognize our responsibility to work with you to do the best we can
for our people during these difficult times.
Again, I thank the people of Kentucky for the opportunity to work with
you to serve them and generations to come.
Good night and God bless you, God bless America.