The Kentucky Legislature overrode the governor’s veto of the state’s two-year, $22 billion budget in the final days of the regular session, while providing line-item funding for bonds that funded the state’s broadband initiative.

The spending measure includes 6.25% baseline cuts for most state agencies, but includes specific funds for Kentucky Wired’s debt service. Without those funds, Fitch Ratings had said both Kentucky and the public-private partnership could have faced downgrades.

Kentucky state Sen. Damon Thayer, R-Georgetown
“What this bill does is what Republicans have talked about for many years on tax reform,” said Kentucky Sen. Damon Thayer, R-Georgetown.

Gov. Matt Bevin’s veto of the budget in House Bill 200 was overridden in the Senate 26-12 and in the House 66-28 on Friday. The session concluded Saturday.

Sen. Christian McDaniel, R-Taylor Mill, said the budget boosts base per-pupil funding for K-12 education to a record level of $4,000 per student in each fiscal year while providing money for school buses, and fully funding the Department of Veterans Affairs and state police.

“It makes sure we fully fund the request of the Kentucky Teachers’ Retirement System for a full pension contribution,” said McDaniel, chairman of the Appropriations and Revenue Committee.

Kentucky’s other pension plans are also fully funded at the levels recommended by actuaries.

The original budget that Bevin vetoed classified debt-service appropriations for Kentucky Wired as necessary government expenses, but didn’t include line-item funding for the bonds. Fitch said it considers the necessary-government-expense designation a “solid financial commitment” by the state, although the governor would have been required to find offsetting budget actions to ensure funding.

A budget amendment adopted Saturday states that funding for the Kentucky Communications Network Authority broadband project may be paid from the general fund.

The amendment also provided financing authority for the issuance of up to $110 million of bonds to pay for a tentative settlement agreement with the private parties involved with the project.

To fund portions of the state budget, lawmakers also overrode Bevin’s veto of House Bill 366 by a vote of 20-18 in the Senate, and a vote of 57-40 in the House. It takes a simple majority to override a Kentucky governor's veto.

HB 366 introduces a 5% flat rate for personal and corporate income taxes while expanding the state sales tax to include car repairs, landscaping, cleaning, laundry and small-animal veterinary services. The bill also increases the cigarette tax by 50 cents per pack to $1.10.

“What this bill does is what Republicans have talked about for many years on tax reform,” said Sen. Damon Thayer, R-Georgetown, the Senate majority floor leader.

Thayer said the measure lowers the state’s tax rates and increases the sale tax base by moving the state “away from taxes on production and moving to taxes on consumption.”

HB 366 is expected to generate about $400 million in additional revenue over the next two years.

While the budget fully funds pension contributions, lawmakers also addressed changes in the state’s retirement plans by passing SB 151. The governor signed the bill into law on April 10.

The bill, which has already been challenged in a lawsuit, shifts 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 also makes 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.

“The legislation is credit-positive for the commonwealth, local governments and public universities,” said Moody's Investors Service analyst Timothy Blake. “Contribution increases for certain employees will slightly improve retiree health care funding for several plans.”

Blake said changes to benefit formulas and a mandatory hybrid plan for new teachers will reduce future benefits, and will lower Kentucky's exposure over time to investment performance and longevity risk.

SB 151 moves toward a more level repayment schedule for unfunded liabilities of the Teachers' Retirement System, and largely maintains previously enacted increases in employer contributions to the Kentucky Employees Retirement System and County Employees Retirement System through actuarial changes, according to Moody’s.

“While those are positive for the plan's funding, they also result in higher costs for employers,” Blake said.

Kentucky had the fourth-largest adjusted net pension liability relative to gross state domestic product out of the 50 states in Moody’s most recent survey in September. It placed the state’s aggregate unfunded liabilities at $31.14 billion.

On April 11, state Attorney General Andy Beshear filed a lawsuit to block the implementation of SB 151, saying that it violated the state constitution.

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Corrected April 16, 2018 at 5:50PM: The final Kentucky budget legislation does fund debt service for the Kentucky Wired broadband P3. The original version of the story said the debt service hadn't been included.