Governor Beshear’s budget proposes using nearly $1 billion from the state’s $3.7 billion Budget Reserve Trust Fund (BRTF) to fill gaps in household affordability needs, address some of the fallout of H. R. 1, and for other infrastructure and education projects. The remainder of the budget contains a combination of small increases, frozen funding levels and reductions to a variety of ongoing services and programs. Given the lack of revenues due primarily to state income tax cuts, it transfers more than $500 million from other funds within state government to prevent even deeper cuts.
Governor spends reserve funds to address affordability and other needs
The governor’s budget includes $500 million in one-time investments from the BRTF, sometimes called the rainy day fund, to address affordability needs:
- $150 million to the Affordable Housing Trust Fund to build more homes
- $125 million to a Rural Hospital Assistance Fund to help hospitals at risk because of federal Medicaid cuts
- $100 million to support Kentuckians on Kynect facing health care price spikes due to the federal expiration of Affordable Care Act subsidies
- $75 million for a Utility Assistance Fund to help those facing unaffordable utility bills
- $50 million to Feeding Kentucky’s network of food banks to help address hunger due to Supplemental Nutrition Assistance Program (SNAP) cuts from H. R. 1 and rising grocery prices
The plan includes $462 million in other-one time spending from the BRTF, including $125 million to meet additional construction costs of the Brent Spence Bridge, $170 million for business site development and $50 million for Career and Technical Education facilities.
Plan contains modest K-12 education funds
The governor proposes a $496 million increase in K-12 funding in 2027 and another $126 million in 2028, for a total $622 million increase. However, the majority of those extra dollars is to cover rising employee benefit costs. A total of $389 million is to pay for increased employee health insurance expenses ($85 million of which is transferred from sport betting revenues otherwise dedicated to a fund to address pension liabilities) and $73 million within Support Education Excellence in Kentucky (SEEK) for additional Teachers Retirement System costs due to a lowering of that system’s investment return assumption. The remainder of the increase includes:
- $158 million in 2027 for a 3% dedicated raise for full-time school employees. No additional raise is provided in 2028. The budget proposes to suspend a 2025 law the governor vetoed (the legislature overrode that veto) that prevents teachers from keeping 3.75% of their salary that previously went toward pay down a liability in their medical insurance plan. That liability is now paid off, but the 2025 law redirected that 3.75% going forward to paying pension liabilities.
- $62 million more over the biennium to increase the SEEK base per-pupil guarantee by 2.5% each year.
The governor’s budget freezes funding for school transportation at 2026 levels for both 2027 and 2028. That is $89 million less than the amount required by law based on the most recent estimate (the law has not been followed since 2004). The Tier 1 level funding under SEEK is matched at the statutory amount of 15% rather than the higher 17.5% used in the last budget. Funding levels are frozen for many Learning and Results Services programs like Extended School Services and school-based mental health, and there is still no dedicated money for textbooks and teacher professional development.
The governor’s budget also includes $40.5 million more from sports betting revenues in 2028 to pay for preschool for 9,683 more four year-olds. This investment would begin a multi-year phase in of universal Pre-K, which the governor’s last budget had estimated at a full annual cost of $172 million. As with school health insurance above, those funds are transferred from the Permanent Pension Fund. The budget also includes $10 million for a data system to support the preschool expansion.
Budget provides slightly reduced funding for postsecondary institutions, less in financial aid
The budget does not include new performance-based funding for postsecondary institutions that had been part of previous budgets. In total, base funding for the state’s universities and community colleges is reduced slightly over the biennium.
Less is also provided for lottery-funded student financial aid programs than in the current budget. That will result in first-come, first served funding or cuts in grant levels for the need-based College Access Program, which had finally been fully funded in recent years, and the Kentucky Tuition Grant program. The budget also contains a 12%-13% shortfall in the merit-based KEES scholarship program, which may cause a reduction in the size of scholarships.
Medicaid and SNAP affected by H. R. 1
Medicaid is funded in the budget with the help of $350 million transferred in 2027 from the Kentucky Insurance Regulatory Trust. That trust is funded by insurance agent license fees and other sources and goes for the operations of the Department of Insurance. The budget also includes $8.1 million in 2027 and $1.5 million in 2028 for technology changes needed to implement new work reporting requirements mandated by H. R. 1. The Cabinet for Health and Family Services estimates that 28,539 fewer Kentuckians will be covered by Medicaid in 2028 due to these requirements and the new requirement to prove eligibility every six months.
Over the biennium, the governor’s plan also includes 1,250 new slots in waiver programs for people with special care needs, including 500 new slots for the Michelle P. Waiver program, 250 slots for the Supports for Community Living program and 500 slots for the Home and Community Based Services program.
The governor’s plan includes an additional $43.5 million in 2027 and $58 million in 2028 to cover the increased administrative costs of the SNAP food assistance program required by H. R. 1. Kentucky may also have to pay up to $180 million in additional program costs for SNAP in 2028 depending on its error rate. However, no funds are appropriated in the budget should those additional contributions be required.
The budget also includes $14.6 million in each year to fully fund Relative and Fictive Care foster care costs. It uses $22 million in General Fund monies to partially replace funds that have been diverted from the Temporary Assistance to Needy Families program this year to address a shortfall in out-of-home care services for youth. That diversion had caused a cut in cash supports for very low-income families. The budget includes funding for senior meals “with the goal of not having a waitlist.”
Budget provides 2% raise for state employees but funds to address pay compression taken back, no cost of living adjustment or payment for retirees
The budget provides for a 2% raise for state employees in 2027 and another 2% in 2028. However, the budget also takes back $67 million that had been appropriated by the General Assembly to address pay compression for state employees in recognition of many years without raises. The General Assembly had not yet released those remaining funds and had requested several studies from the Personnel Cabinet. In his last budget, the governor unsuccessfully proposed additional raises of 1%-7%, based on years of service, to help address the compression problem.
State retirees do not receive a cost-of-living adjustment or one-time payment to address the erosion of their pension benefits in this proposal.
Funding is provided to support criminal legal system capital construction
The governor’s budget includes bond funding to construct two female juvenile detention centers so that the requirements established by the General Assembly for separation of males and females in the juvenile system can be implemented, and the construction a new facility for high acuity youth to address a gap in the current system to serve these children.
The budget also includes funding for the construction of a reentry center at Northpoint that will provide technical and vocational education in conjunction with KCTCS to incarcerated people preparing to return to their communities.
Plan still leaves substantial reserves and does not aim at more income tax cuts
The governor’s budget leaves a still-substantial $2.8 billion in the Budget Reserve Trust Fund, or an amount equal to about 17% of annual General Fund revenues. Its overall appropriation levels are not aimed at triggering more reductions in the individual income tax under the legislature’s formula.
