Kentucky Gov. Matt Bevin ordered $158 million in spending cuts for fiscal 2018, while warning that $1 billion in reductions could be necessary over the next biennium due to rising pension and Medicaid costs.

Bevin issued a budget reduction plan Thursday saying the state’s Consensus Forecasting Group revised the official estimate of tax receipts downward for the current year. Most agencies must cut 1.3% from their budgets by June 30 to avoid a deficit.

Kentucky Gov. Matt Bevin
Kentucky Gov. Matt Bevin said the state should prepare for $1 billion in spending reductions over the 2019-2020 biennium. Bloomberg News

The order doesn’t apply to “important governmental activities,” including K-12 schools, corrections, state and county attorneys, pensions, elections, the ethics commission, economic development, School Facilities Construction Commission, Local Government Economic Assistance and Development Funds, and the Kentucky Higher Education Assistance Authority.

Those activities may not be protected from cuts that will be required in the 2019-2020 budget, which State Budget Director John Chilton’s office said could total about $1 billion.

“Protecting those categories from reductions in the next biennium will be difficult, if not impossible,” he said. “There is just not enough revenue to satisfy all of the funding needs.”

Although forecasters project modest revenue increases in the next two years - $287.5 million in fiscal 2019 and $284.1 million in 2020 – Chilton said the state will need to address “various budgetary strains associated with pension funding, Medicaid, and other funding requests,” as well as replenishing the budget reserve trust fund.

The state’s fiscal problems will be a top priority for the Legislature during this year’s session, which started Tuesday and runs through April 15.

Bevin will submit his budget recommendations for the upcoming biennium on Jan. 16.

“I encourage you to contact your legislators during this very important budget and legislative session,” Bevin said on Twitter Tuesday morning.

The governor pitched pension reforms in the late summer to restructure the state’s eight retirement plans – which are among the worst funded in the country - but retirees and others pushed back on the proposal forcing him to delay a special session to address the issue.

Bevin has said reforming the state’s pension systems is a top priority during this year’s legislative session.

When he first announced details of the plans in October, Bevin said Kentucky has been downgraded repeatedly by different rating agencies in recent years “because of this looming pension crisis.”

Bevin said his plan will “stop the bleeding.”

In July, Moody's Investors Service cut Kentucky’s issuer rating to Aa3 from Aa2, driven mainly by pension costs.

S&P Global Ratings has a negative outlook on its A-plus issuer credit rating and other Kentucky debt citing the pension problem.

“Absent reform, these costs are projected to increase nearly $700 million in fiscal 2019, pressuring the state's already-strained budget,” S&P analyst Timothy Little said in October.

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