BRADENTON, Fla. — Kentucky ended its annual legislative session Thursday night without passing a budget for the biennium, which begins July 1. The state is facing a $1.5 billion shortfall over the next two years.
With no budget, Kentucky postponed the sale of $250 million of new-money bonds and an $81 million restructuring for the Kentucky Turnpike Authority scheduled to price this week, Tom Howard, executive director of the Office of Financial Management, said Friday.
“Based upon the lack of a legislatively enacted budget for the executive branch of state government and the advice of bond counsel, we are delaying all new-money and refunding transactions until such time as there is an enacted budget,” Howard said.
“There are approximately $900 million of currently authorized but unissued bond projects which cannot be financed until a budget is passed. It is unclear at this time as to which specific projects will immediately be impacted.”
Gov. Steve Beshear recommended a $17.5 billion budget to lawmakers that included $1.53 billion of new debt. But it relied on cutting most state agencies 2% and on $780 million in revenue from a controversial proposal to expand racetrack gambling that lawmakers ultimately rejected along with Beshear’s budget.
The General Assembly failed to reach a compromise budget before the session ended.
The House’s version raised some business taxes and contained a $1 billion bond authorization for school construction, roads, and water and sewer infrastructure.
The Senate cut more spending than the House version and it rejected the business tax hike. Senate leaders also rejected the idea of new bonding, which they said would send the state into a “debt death spiral.”
Calling the failure to adopt a budget “a moment of abject failure,” Beshear said lawmakers’ inaction put at risk state programs at schools and the operation of prisons. It also meant taxpayers would have to pay for a special session. He said a delay in adopting a budget later than June 1 would jeopardize bond refunding opportunities.
“Because of the complexities of finance and bond issues, as well as the need to plan for significant reductions in the next fiscal year resulting from the national economy, we must have an executive budget in place by June 1,” Beshear said in a statement.
He said he would call a special session in May and asked lawmakers to immediately start work on a budget compromise.
Analysts have warned the state for some time that its double-A ratings are in jeopardy without structural balance. Kentucky does not have any general obligation debt outstanding and issues debt mainly through lease obligations with various state agencies.
Fitch Ratings earlier this month said its negative outlook reflected “the ongoing stress and limited flexibility in the commonwealth’s financial operations as well as increasing debt levels,” particularly because of the use of debt to fund operations.
Fitch, which rates the state’s $6.4 billion of appropriation bonds AA, said failure to stabilize financial operations and enact a structurally balanced budget could trigger a downgrade, as would a significant increase in debt levels.
Moody’s Investors Service assigns Kentucky a Aa2 issuer rating and also has placed a negative outlook on the state’s credits.
It warned last week that a downgrade could occur if the state failed to pass a timely budget that leads to an extended shutdown of state government, even if debt service continued to be paid.
Standard & Poor’s issuer credit rating for Kentucky is AA-minus with a stable outlook.
Last week, Standard & Poor’s analysts said they expected state officials to make adjustments that would “fix holes in the budget but also position it for long-term fiscal stability.”