JANUARY 25, 1996

President Rose, Speaker Richards, and members of the General Assembly; Chief Justice Stephens and members of the judiciary, Lieutenant Governor Henry and other constitutional officers, distinguished guests, fellow Kentuckians: I come before you to report on the state of our great Commonwealth and offer to you a fiscal plan for the next two years that will best serve our people.

I compliment the General Assembly and past governors for your courageous actions in recent years to make our state government more progressive.

You've enacted legislation to improve education, grow our economy, raise the standards of ethical conduct of public officials, reduce the influence of big money on our elections, and strengthen laws protecting the most vulnerable in our society.

Compared to the rest of the nation, our economy is strong, our tax burden low, our state government financially sound, our environment clean, our crime rate low, and our commitment to education real.

But tonight, we stand at the threshold of a new era.

It's an era of great change and great opportunity.

Shortly after I took office, I received a letter from Kentucky's Historian Laureate, Dr. Thomas Clark.

In his letter, Dr. Clark reminded me of the awesome responsibility I had assumed and the need to be guided by the lessons of history.

Dr. Clark wrote "this is an age which cries out for leadership at all governmental levels."

"Kentucky has enormous potentials, but it must have the dream and the leadership to realize them."

I've accepted that admonition in the spirit it was sent and I'm determined to lead this state with a sense of history and an eye to the future.

We can learn from our history.

If we were to go back 150 or 200 years, we'd find a very progressive Kentucky, a leader in the heartland of a vibrant and growing nation.

With Louisville as the transportation hub of the midwest, Lexington the seat of education excellence, Bardstown the center of religious leadership, Danville the home of pioneering medicine, and commerce, industry and agriculture flourishing all over the state, we had the opportunity to provide our people with a quality of life unexcelled in interior America.

There's no reason in the world why this state can't regain that status in this nation and the world as we move into the 21st Century.

I believe we're off to a good start.

Because as gridlock grips our nation's capitol, we here in Kentucky have unlocked a new spirit of cooperation.

I 've tried in my first days as Governor to reach out to all Kentuckians, crossing the lines of race, gender and political party to bring together the best and brightest to solve the complex problems we face and lead this Commonwealth into the next millennium.

But if we're to realize the full potential of this state and its people and enjoy the prosperity that can be brought about through the application of modern science and technology, we must accept the fact that there are some basics, like education, infrastructure, and protecting the environment that we as a people must do through government.

For example, through government we've developed education systems to prepare our people to be productive in a changed economy.

Through government we've developed partnerships with businesses to grow our economy.

Through government, we've developed a plan to improve the practices of agriculture and reduce its impact on the environment.

Through government we've stopped the ravaging of our land by regulating mining and oil and gas extraction.

But we must be careful about over regulation.

It can stymie industry and commerce and cost all of us money and jobs.

In fact we need to reevaluate all our regulatory policies and insure that we're not regulating the problems of the 60's and killing the opportunities which exist in the 90's and beyond.

We, as a people, have understood that business is the source of economic prosperity and we've maintained a relatively friendly environment for commerce and industry.

I challenge those who complain that we have an onerous business tax climate in Kentucky.

The recent study of the tax structure of Kentucky and surrounding states showed Kentucky had the 6th lowest overall business tax burden measured in 16 key industries.

The area of personal taxation is another matter.

In that same tax study, Kentucky ranked second in individual income tax burden.

And from 2nd to 6th in overall household personal tax burden, depending on income level.

I'm not proposing that we become the lowest state in individual taxation, but I am proposing that we not be so close to number one.

It was one year ago that you in this joint body dealt with two other unfair personal taxes, the inheritance tax, and the private pension tax, and you did it in a fiscally responsible manner.

You downsized those taxes over a 4 year period.

This allowed the loss in revenue to be replaced by growth revenue and didn't require the cutting of existing services to our citizens.

I propose that we apply that same philosophy to the individual income tax and the provider tax on physicians.

After July of this year, the provider tax on physicians should be reduced by one-half of one percent each year so that three years from now, the tax will be completely removed from these healers who we must have, and whose services we will gradually lose unless we treat them fairly.

I further propose that the standard deduction allowed on the Kentucky individual income tax be increased over a four year period from the current $650, to $1700 beginning January 1, 1999.

After that it should be indexed to inflation so this basic deduction will never again become unfair because of rising costs and wages.

This will provide needed tax relief to more than half of Kentucky's taxpayers.

We can absorb these tax cuts without taking existing services from deserving citizens.

But I must warn you that to cut any more taxes, or to accelerate the implementation of either of these tax equity measures, will cause some Kentuckians to suffer a loss of service.

My budget, which I'll discuss shortly, is very tight, and cannot, without pain, be cut any further.

The Governor's Office of Policy and Management has projected that during the next three years, as our revenue streams absorb these four tax cuts, there will be no new money to begin new programs unless we cut the cost of existing services.

Now I don't want to cut services but I'm also unwilling to wait three years before we start providing our people with more and better services.

I'll be proposing a rational and measured program to reduce the cost of state government without cutting services.

And I'll work to increase state revenue by keeping jobs and creating jobs.

One way we've been able to do that is through tax credits to new and existing businesses and industry.

This investment has enabled the state to keep or create thousands of new jobs for our people, 46,400 at last count.

Many of those new jobs will require a high level of education, the kind of education already attained by many Kentuckians but an education still unattained by many others.

The Kentucky Education Reform Act, though not perfect, is still the most progressive legislation enacted in Kentucky during my lifetime.

Many in this audience can take substantial credit for that success.

I'm committed to working with you to improve it, and stand by you to defend it.

Yes, there're a lot of things we've done right in Kentucky and the results are beginning to show in hard statistics.

Our unemployment rate has been below the national average for 46 consecutive months.

Our welfare roles are down 22.9% and 400,000 more Kentuckians are working today than there were 10 years ago.

Kentucky ranks 4th in manufacturing job growth in the 90's.

Our per capita income is among the fastest rising in the nation, up 29 percent in the past five years.

We're ranked seventh in new capital investment, fourth in new industrial facilities and third in new jobs created during the past three years.

This admirable economic growth has resulted in substantial growth in state revenue, which contributes to the unprecedented surplus cash balance in the state treasury.

This surplus, and especially the $200 million in the budget reserve trust fund, has earned us an outstanding bond credit rating.

Only thirteen states have a better rating.

We've earned the ranking of the seventh best financially managed state in the union.

So why have I been talking about a continuation budget?

The non-recurring increase in state revenue in fiscal year 94-95 of 10.9% has created a situation where, not withstanding the cash in the bank, we've appropriated from the general fund, substantially more than we expect to receive in general fund revenue during the current fiscal year.

We could continue this practice for another two or three years, but to do so would undo all the good we've done by being frugal in the past.

We should never plan to spend in any year more on ongoing obligations than we expect to receive in sustainable revenue.

I'll never present you a budget that does that and I trust you will never pass one.

We've worked hard to put the budget together that I present to you tonight.

I pause to thank Dr. Jim Ramsey and his staff for the outstanding job and dedicated service they've given to me and the people of Kentucky.

They're prime examples of the thousands of talented and committed state employees who labor in obscurity to make this government work.

We in the spotlight must never forget nor take for granted their service and their vital role in helping us do the job we were elected to do.

On taking office, my first instruction to the Governor's Office of Policy and Management was to project the financial condition of the state for the next four years.

That projection showed we would run a structural deficit for each of the next three years and finally break even in the fourth year.

We would have spent all the surplus balance and almost half the budget reserve trust fund.

That's unacceptable to me and I hope unacceptable to the General Assembly.

After this initial review of the budget we began a detailed review of current year appropriations and expected expenditures.

I'm pleased to report that we've identified $83 million of appropriations that we can save and I expect to save an additional $15 million in other unnecessary expenses.

At the end of this fiscal year, we'll have an estimated $205 million in cash, over and above the $200 million already in the budget reserve trust fund.

Of course any revenue estimate is just that, an estimate, and could vary $30 million either way, so we'll have from $175 million to $235 million in non-recurring surplus.

We cannot, under any circumstances commit that money to ongoing obligations.

To do so would invite disaster a few years down the road.

It's appropriate however, to invest that money.

Even with these reductions in the expenditure of current year appropriations, we're spending almost all of our current year revenue, but at least we will have this year's budget structurally balanced.

Assuming current economic growth continues, we'll have new, unobligated growth revenue of about $20 to $30 million each year of the foreseeable future.

We can obligate this growth revenue to new programs or to tax cuts for our people.

I propose, and my budget reflects the allocation of the new money to the phasing-in of the tax cuts for doctors and working people will absorb virtually all the growth revenue.

I believe that's the fair thing to do and I'm asking the General Assembly to concur in this action.

But I'm unwilling to go three years without implementing the new or expanded programs I've talked about over the past year.

Now let me explain to you the budget which I propose for the next 2 fiscal years.

First there are considerable uncertainties about the federal budget, upon which we are very dependent.

That could change our budget situation next week, next month, or any time during the next year.

Should these changes not become apparent until after the General Assembly adjourns, we'll do our best to complete the next year before calling you back into special session.

We will, no doubt, need to address the fiscal 98 budget in special session, perhaps about this time next year, not only to adjust for changes in the federal budget, but also to address the changes we anticipate in the structure of state government and to appropriate the savings I expect to be realized from that restructuring.

In view of the fact that these tax cuts and the ongoing expenses necessary to sustain programs and obligations already assumed by state government will consume all of the projected revenue, I'm proposing, for all practical purposes a continuation budget for the next 2 fiscal years.

That means, with one exception, there are no new programs funded nor are any existing programs cut or expanded in this budget beyond that required by law or existing agreements.

The one exception is the funding of an engineering program to be offered cooperatively by the University of Kentucky and Murray State University in a new building on the campus of Paducah Community College built with funds donated by the citizens and businesses of that area of the state.

This controversial proposal, which has divided the Purchase Area and the General Assembly, has been agreed to by all parties directly involved.

I believe the ongoing cost of $1.3 million in fiscal year 1998 is a good investment for the Commonwealth.

It's also an appropriate response to settle a difficult controversy which has gone on too long, and caused too much disharmony here and in the Purchase.

The central focus of our budget will be the security and safety of our people, the education of our children and the growth of our economy.

As a government our first responsibility is to protect the life and property of our citizens and one way to do that is to remove violent and repeat offenders from society through incarceration.

We intend to pursue that course and we're funding the increased prison space necessary to achieve our goals, 2000 new prison beds over the biennium.

This will require an increase in the Corrections budget of 9.3%, but this will afford our people the protection and peace of mind they deserve which is well worth the price we will pay.

Let no criminal ever think they can endanger our people and avoid the penalty because we don't have the will to build the prisons to house them.

If they violate our laws, we will take their freedom and if they do it again, we'll treat them even more severely.

The same goes for juveniles who violate our laws.

In this budget we'll fund the Consent Decree entered into by the Commonwealth last fall, and insure that juvenile lawbreakers in our custody will be treated legally, fairly, and humanely.

We'll also let them know they're in custody because they've violated the law.

All residential treatment facilities will be operated by a new Department of Juvenile Detention within the Justice Cabinet.

There, juveniles will be assigned to appropriate facilities operated to insure that their treatment program is appropriate to their age, maturity, psychological condition and the seriousness of their crime.

Our budget will continue to meet the basic social needs of our people.

It will match all Medicaid funds anticipated to be available from the federal government if the capped entitlement program as proposed by President Clinton is enacted.

It will also hold the increase of these programs to 4%, the same as revenue growth.

I am committed to improving and increasing funding for higher education.

This budget insures that higher education gets its full share of revenue growth.

This 4% increase will be distributed according to the recommendations of the Council on Higher Education.

This results in at least a 3.2% increase for each of our 8 universities and a 9.5 % increase for community colleges.

This increase is not enough to suit me, but it's substantially better than they've experienced over the past few years.

Our technical schools, a very important part of our higher education system, will receive a 7 percent increase in funding.

With that they can continue to prepare our working people to operate and maintain the increasingly complex machines, business systems, and technical processes that will make our economy grow.

Our elementary and secondary schools will receive their full share of the 4% revenue growth and I've also included an extra $33 million to fund the larger portion of a 2.6% cost of living raise I believe all our teachers should be guaranteed.

People are the most important element of any enterprise and that's especially true when it comes to our teachers.

Most teachers in Kentucky receive annual increments because of their increased experience and education as they move through the accepted step and rank career development process.

All too often, these earned raises are less than the increase in cost of living.

If we're going to continue to attract good people into the teaching profession, we must develop an effective and continuing program of assuring these professionals that they'll not lose the purchasing power of their wages through inflation and that they'll receive real raises as they acquire experience and improve their skills.

The same goes for state workers.

State law mandates an annual 5% raise for state employees and our budget funds that increase.

State employees, like teachers, must be assured that they'll receive real wage increases as they gain experience and improve their skill and productivity.

They must also be protected from loss of purchasing power because of inflation.

This 5% raise on average probably compensates for all those factors. Within the next year I expect to propose a revision of the pay scale program for state workers that will account for cost of living increase, experience, skill development and wage equity.

Another area where we are committed to continuing progress is economic development.

While I can't increase the rate at which we can fully fund the coal severance tax appropriation to the Local Government Economic Development Fund, beyond the 3 percent per year of the past 4 years, I will continue to promote this program and plan for the future and build the infrastructure which is vital to economic growth in any place in the state but is missing from most of the coal fields.

As successful as our tax increment financing programs have been in developing new and expanded industries, we must still do more to help existing industries and promote entrepreneurship.

Therefore I'm proposing a new tax incentive program to share half the cost of skills upgrade training.

The training is designed to develop higher productivity and produce higher wages for our existing employees who've worked at least 1 year for companies which have been in Kentucky for at least 3 years.

To promote entrepreneurship I'm proposing the establishment of the Kentucky Investment Fund, a unique approach to government assistance in the development of venture capital organizations.

Unfortunately Kentucky lags far behind most other states in domestic venture capital companies.

The Kentucky Investment Fund is designed to induce the investment of $50 million in small businesses in Kentucky by granting $20 million in tax credits by the year 2002.

Neither of these programs is expected to have a measurable effect on revenue in the current biennium but I expect both to provide positive revenue growth in the future.

Now, what do we do with the unobligated cash surplus?

I believe we can continue to invest it in basic infrastructure.

I propose that a portion of the surplus be appropriated to fund 20 life safety projects in the amount of $27 million recommended by the Capital Planning Advisory Board.

I then propose that one-half of the surplus be appropriated to finance 25 projects, distributed all over the state.

These projects include juvenile detention centers, higher education classroom facilities and will fund the construction of 12 parks projects authorized for design by the 1995 extraordinary session of the General Assembly.

These projects will be funded in the priority order listed in the budget.

The other half of the surplus will fund our new initiative to empower our workers with efficient resources.

This new program, called EMPOWER, will fund new business systems designed to reduce the cost of operating state government through technology, emulating the techniques proven to be effective in private business, using computers, state of the art software, new communication systems and employee training.

By rethinking and redesigning the way government services are delivered, we intend to free up money now committed to the operation of state government while continuing to deliver the same services better.

I intend to come back to you in about a year and show you the results of this program and ask you to appropriate the funds saved to needed programs like juvenile treatment and higher education.

Meanwhile I've begun a series of meetings with the leadership of our various systems of higher education.

I'm challenging them to come up with new systems and non-traditional strategies that will enable them to educate more people for less.

Private industry has done it, state government is going to do it, and if higher education expects to get more funding, they too must be willing to change.

They need to work closer together, share resources, and forget the turf battles.

We need a governing structure which insures that these things happen.

We'll propose new laws to pierce the veil of secrecy surrounding juveniles convicted of certain serious crimes.

We'll address the issues of mine safety, workers' compensation, Medicaid and domestic violence.

And right now, we're revisiting the issue of health care.

As well intended as the health care reforms embodied in House Bill 250 might be, the program has major problems.

Insurance rates have skyrocketed for some people, while creating only modest savings for others.

The government bureaucracy set up to administer this program has not functioned as it should.

People are upset at having long standing benefits and programs changed for reasons they don't understand.

Since mid November, under the leadership of Lt. Governor Henry, we've been monitoring the implementation of HB 250.

Since the Legislature has been in session, a scant 3 weeks, the crisis has intensified.

One week ago, I began a series of meetings with the bipartisan leadership of both houses of the General Assembly.

The meetings we've had so far have been positive and productive, as we deal with one of the most difficult and important issues to face this session.

As much as we might differ on a variety of issues, I urge all of us to put aside our differences, and negotiate in good faith a reasonable compromise.

If we are to provide our people with quality health care at anywhere close to an affordable price, we must have doctors and nurses, hospitals and pharmacies, insurance companies and HMOS and government all working together.

Because in the end, it's the people we're serving and it's the people who must come first.

That's my commitment and I know it's yours too.

Yes, in many ways the state of the Commonwealth is good, but we must not rest.

Much work still needs to be done, and we're assembled here to right the things that are wrong.

That will always be our goal.

No matter how far we may travel, no matter how much progress we make, no matter how far up that mountain we have climbed, we have not, nor will we ever reach the summit, the point at which we can go no further.

Our struggle is continuous, our energy boundless, our determination unaltered, and our potential unlimited.

It's with pleasure and anticipation that I join you in this adventure as we approach the new century.

And it's with confidence I predict our future success.

The people of Kentucky expect no less, they will accept no less and together we will deliver no less.

Again, I thank you for the opportunity to share with you my goals for Kentucky and I look forward to working with you to make Kentucky the best it can be.

Thank you, good night, and God bless Kentucky.