The original HB 500, introduced late last month, was met with significant public criticism, including for its cap on employer health insurance contributions and cuts to Medicaid and education. The new version voted on in committee today makes improvements in some areas — including removing the language capping state health insurance contributions — but it cuts funding in others. It still presents an austere budget that reflects the harms of recent income tax cuts, freezing funding levels for many services that have seen funding erode over the last 20 years and cutting funding in other areas. And it leaves money on the table, appropriating $854 million (of which a potential $250 million could be used to fund Medicaid claims if needed) to the already huge $3.7 billion Budget Reserve Trust Fund (BRTF).
The plan also still leaves a massive shortfall of $1.5 billion in Medicaid funding from all sources over the two-year period. The budget also freezes funding for SEEK transportation at $89 million a year below what state law requires, and its small increases in the SEEK base are not enough to keep state funding from continuing to fall behind inflation. It cuts higher education institutions by a remarkable 16% compared to the last budget’s appropriations, and appears to make cuts to funding for child care, senior meals, public health and other human services.
By appropriating substantial funds to the BRTF and routing restricted funds through the BRTF to help fund Medicaid claims, it makes possible additional income tax cuts over the next two years according to the state’s tax cut trigger.
Plan includes small SEEK base increase, freezes funding for school buses and provides no educator raise or preschool increase
The House proposal increases the SEEK base per-pupil guarantee from its 2026 level of $4,586 per-student to $4,626 for 2027, less than 1% increase, and $4,792 for 2028, a 3.6% increase. SEEK transportation costs are frozen at the 2026 level of $399 million for 2027 and 2028, or $89 million below what the law requires. The Tier 1 level funding under SEEK is matched at the slightly higher 17.5% level used in the last budget. Total SEEK funding will remain flat at 25% below 2008 levels after adjusting for inflation.
No additional funds are provided for teacher and school employee raises, and the budget does not allow teachers to keep 3.75% of their salary that had been going to pay off the liability in their medical insurance plan.
The budget does not increase funding for preschool and extended school services, which remain at their 2019 level through 2028. Also frozen is funding for Family Resource and Youth Service Centers and the Center for School Safety. There is no dedicated money for textbooks and teacher professional development.
Budget includes deep cuts to higher education institutions, less in financial aid
The total funding for postsecondary education is cut by 16% over the biennium compared to last budget’s enacted appropriations. Base funding for higher education institutions is cut even more than that, while the plan includes $115 million in the performance-based funding that requires postsecondary institutions to compete for resources. In total, funding for postsecondary institutions will be 43% below 2008 levels by 2028 once inflation is taken into account.
Funding for college financial aid programs through the Kentucky Higher Education Assistance Authority is $28 million less than the governor had recommended in his budget. The governor had noted that his appropriations levels would result in first-come, first-served funding or cuts in grant levels.
Medicaid underfunded by $1.5 billion compared to official request
The House budget underfunds Medicaid benefits by $690 million in General Fund dollars over the biennium — $269 million in 2027 and $420 million in 2028. Because there are federal matching funds associated with Medicaid, that means the loss of $819 million in federal money over the biennium, for a total shortfall of $1.5 billion.
The House budget potentially closes a portion of that gap through a fund transfer. It proposes to take $350 million from Kentucky Insurance Regulatory Trust, which is funded by insurance agent license fees and other sources, to the Budget Reserve Trust Fund (BRTF). It then says “it is the intent of the 2026 General Assembly to reserve $250 million for potential appropriation for Medicaid Benefits in the 2027 Regular Session if deemed necessary for claims payments in fiscal year 2026-2027 or fiscal year 2027-2028.” Because that $250 million goes to the BRTF first rather than the General Fund, it would not be considered spending toward the state’s income tax trigger according to the rules the legislature adopted.
The budget includes the requested $8.1 million in 2027 and $1.5 million in 2028 included in the governor’s budget for technology changes needed to implement new work reporting requirements mandated by H. R. 1. It includes funding for 450 new slots in Medicaid waiver programs for people with special care needs, lower than the 1,250 in the governor’s plan. The new version of the House Budget includes the 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.
The House budget makes no mention of over $40 million a year that was included in the last budget to help maintain reimbursement rates for childcare centers and keep them in operation. The budget also does not mention replacing 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. Funding is cut for the Department of Aging and Independent Living by $19 million compared to the governor’s budget, and there is no funding increase dedicated for senior meals to reflect increased demand. The Department of Community Based Services is cut by $104 million compared to the governor’s recommendation.
Funding is essentially flatlined for the Department of Public Advocacy, which had requested additional funds to deal with employee turnover and high caseloads. Funding for a number of agencies are at levels less than the governor requested, including Kentucky Educational Television, Workforce Development and Public Health. For many agencies, there is a cut of 4% in 2027 and another 3% in 2028. There is no increase in funding for behavioral health or for foster care/out-of-home care funding.
Budget does not include cap on health insurance contributions, has no cost-of-living payment for retirees
The budget removes the language in the original version of HB 500 that capped employer contributions for health insurance. However, there are new requests for detailed monthly information to be provided by the Kentucky Employees’ Health Plan. The budget provides for a 2% raise for state employees in 2027 and another 2% in 2028. The budget releases $27 million of $67 million that had been appropriated several years ago by the General Assembly to address pay compression for state employees in recognition of many years without raises, which it earmarks for a “pilot program” for Cabinet for Health and Family Services and Transportation Cabinet employees. The remainder of $40.6 million lapses to the state’s BRTF rather than being allotted for its original purpose of addressing wage compression.
State retirees do not receive a one-time payment to address the erosion of their pension benefits in this proposal. HB 500 makes the full actuarially determined contribution to the Teachers’ Retirement System. The proposal makes a payment of $78.5 million from the Permanent Pension Fund to the unfunded liability in the Kentucky Employees Retirement System nonhazardous pension fund.
Plan makes possible more income tax cuts under formula, grows the already huge Budget Reserve Trust Fund
Even while these cuts are made, the House budget leaves unappropriated the $3.7 billion in the BRTF and adds $854 million more to it, or $604 million excluding what HB 500 says could be used to pay Medicaid claims. $504 million of that comes from a direct appropriation while another $100 million comes from the Kentucky Insurance Regulatory Trust mentioned above. That would grow the BRTF to an enormous $4.4 billion. Based on comments from House leaders, spending from the BRTF may be included in a separate bill not yet introduced. But funds that are appropriated to the BRTF or spent out of the BRTF to help fund Medicaid do not count as spending according to the state’s tax cut triggers. Thus, the House budget makes room for potential additional income tax cuts over the biennium.
