The Week in Frankfort, from the LRC

In Sunday’s editorial, we weighed in on the budget process in Kentucky, which is driven more by politics than policy and leads to many of the final, lasting details of the budget being decided behind closed doors with lawmakers asked to vote for the measure just hours after seeing it.

As “This Week in Frankfort” from the Legislative Research Commission notes this week, the House’s passage of its budget bill is just Act 1 in this play, and “we could be in for a memorable Act 3.”

Read on for the latest.

THIS WEEK IN FRANKFORT

The 2010 Kentucky General Assembly: Week 10

LRC Public information

FRANKFORT – After seven weeks of grinding effort, scouring state government for savings, casting a wide net to find more revenue without raising taxes – and under the gun of writing a state budget footer-to-roofbeam in limited time — the House this week passed its version of a two-year spending plan for state government.

The climax came on a near-party-line vote of 65-33 Wednesday after three hours of lively, sometimes contentious, floor debate.

But while a major hurdle had been cleared, it simply marked the end of Act 1. It’s now the Senate’s turn to take center stage in the budget drama. And leaders of that chamber have already expressed skepticism about parts of the House bill — especially changes in the business-tax code to raise revenue, and the bonding and allocation of some $2.2 billion in construction projects.

If, as seems certain, the Senate makes major changes to the measure, we could be in for a memorable Act 3: A House-Senate conference committee suitably dramatic to cap the unprecedented step the Legislature took this year in writing its own state budget after discarding the governor’s slots-based plan as politically unworkable. All in the face of an unprecedented billion-dollar-plus revenue shortfall.

Compounding the narrative tension is time. Only 14 working days remain to pass a budget, 13 if lawmakers want to keep the option to override a veto or line-item veto by a governor who has expressed his own doubts about the House budget plan.

But first things first. The $17.5 billion budget bill we have in front of us largely fills in the outline that has emerged in fits and starts from House leaders in recent weeks.

It envisions spending cuts of around 2 percent at most state agencies, dropping two instructional days from the K-12 school calendar, freezing salaries for state employees and teachers for two years, changing the state-employee health plan to offer a lower-cost option, and cuts in the number of non-merit political appointees and personal-service contracts. Higher education would face a 1.5 percent cut the first year, less the second year.

The plan assumes (with no official assurance from Washington yet) federal stimulus money of $250 million to help offset recessionary increases in Medicaid costs. It contains no general tax increases, no mass layoffs or furloughs of state employees, preserves SEEK funding for schools, and maintains funding for Medicaid and social services.

The bill makes no direct cuts in corrections funding, but proposes savings of around $30 million by ordering the Department of Corrections to parole 1,000 nonviolent inmates by the start of fiscal year 2012.

It also includes over $2 billion in bond issues for school construction, roads, and water and sewer infrastructure. The bill’s supporters touted this as, in part, a jobs measure that would put as many as 25,000 unemployed Kentuckians back to work ‘getting mud on their feet, dirt on their hands’ as one said.

But exactly where those projects will be located quickly became highly politicized in the House debate, a partisan dispute over fair statewide distribution that will no doubt dog the bill as it heads first to the Senate, then to its final compromise resolution in a House-Senate conference.

Plus there’s more uncertainty on the money side. New revenue in the budget comes from what was on the House floor – and promises to be in the Senate – a practical and philosophical sticking point: A three-year suspension of business and corporate ability to carry forward losses from past years to deduct from current-year taxable income, coupled with accelerated collection of sales taxes from business.

Supporters say these aren’t tax increases, just tweaks of the business-tax code to bring in money more quickly to meet the current shortfall emergency. But opponents counter that the changes would nonetheless require businesses to pay more taxes over the three-year period than they otherwise would – at a time when unemployment is high and the money could be used for staying in business and keeping or growing payrolls.

New spending in the plan includes $20 million over the biennium to restore funding for social-worker protections authorized in a 2007 bill named in honor of slain social work aide Boni Frederick. It also provides full funding for the state retirement system, restores funding to the teachers’ retirement system that had been used in prior years to cover health insurance costs, and boosts funding for vocational education, energy development, agriculture and base realignment and closure (BRAC) relocation needs at and around Fort Knox.

The House also passed budgets for the Judicial and Legislative branches. All three bills now go to the Senate for its consideration.