Kentucky lawmakers sent a $22 billion biennial budget to the governor on Monday bolstered by revenue-raising measures, transfers and 6.25% in baseline cuts for most state agencies.

The spending plan for 2019 and 2020 fully funds annual required pension contributions, but education cuts and retirement benefit changes drew educators from across the state to protest at the capitol in Frankfort.

Kentucky Sen. Christian McDaniel, R-Taylor Mill
“Ultimately, we have to come together and do what’s best for the commonwealth,” Kentucky Sen. Christian McDaniel, R-Taylor Mill, said about the state budget. LRC Public Information

Written by the Republican-led Legislature, the budget in House Bill 200 passed largely along party lines in the Senate 25 to 12. It passed the House by a vote of 59 to 36.

In the spending measure, kindergarten through 12th grade schools would see cuts to certain programs and some additional per-student funding, but much of the higher education budget was cut at the same 6.25% level as most state agencies.

Some $87 million in reserves would be set aside in 2019 and $209 million in 2020. The amount of bonding authorized in the budget was not immediately available.

To support the budget, lawmakers passed House Bill 366 broadening the state sales tax to cover more items such as certain labor and repairs, increasing the tax on cigarettes to $1.10 per pack from the current $0.60, transferring more than $500 million from certain agencies, and implementing some tax reform measures.

Sen. Christian McDaniel, R-Taylor Mill, said while the budget was difficult to prepare it is structurally balanced for the first time in more than two decades.

“Ultimately we have to come together and do what’s best for the commonwealth and for 4.3 million people who count on us to ensure the appropriate functions of their government continue,” said McDaniel, chairman of the Senate Appropriations and Revenue Committee.

Ashley Spalding with the Kentucky Center for Economic Policy disagreed with McDaniel’s assessment. Spalding said $310 million of the transferred funds would come from the Kentucky Employees Health Plan.

Another area of concern, she said, is language designating the state’s high-speed Internet broadband initiative, Kentucky Wired, as a necessary government expense. With no line item in the budget for the program, she said the money would come from the budget reserve trust fund.

“Funding these items in this manner increases Kentucky’s already large structural deficit,” Spalding said.

HB 366 also contains significant tax changes.

The bill would set the state’s personal income tax rate at a flat 5%, abolishing the current brackets ranging from 2% to 6%. It would also implement a flat 5% corporate income tax rate instead of the current brackets ranging from 4% to 6%.

An inventory tax would be phased out over a four-year period and some deductions would be eliminated.

“This will increase the competitiveness of this state when it comes to attracting jobs,” said Senate Majority Floor Leader Damon Thayer, R-Georgetown.

Gov. Matt Bevin, a Republican, has 10 days to sign or veto the budget-related bills, or use his line-item veto authority – all of which the Legislature can override.

On Monday, teachers at the capital protesting changes in pension benefits and education budget cuts closed schools in all 120 county school districts.

Their response was partly due to Thursday’s passage of Senate Bill 151, a measure lawmakers said would reduce unfunded pension costs by more than $40 billion by shifting new teachers into in a hybrid “cash balance” plan instead of the existing defined benefit plan. New state employees were placed in a similar plan in 2014.

SB 151 would also make newly hired teachers ineligible to be covered under the state’s inviolable contract, meaning that their retirement benefits could be reduced in the future, and increase the retirement eligibility age for new teachers to 65 from 60.

Sponsored by Sen. Joe Bowen, R-Owensboro, SB 151 would also prevent current teachers and workers from applying sick days toward retirement eligibility.

“This is an attempt to salvage the pension systems,” Bowen said.

Kentucky’s eight pension plans had $62.3 billion of combined unfunded liabilities as of June 30, 2016.

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