Governor Ernie Fletcher’s Communication Office
Commonwealth ends fiscal year 2005 in strong financial shape

Press Release Date:  Wednesday, July 27, 2005  
Contact Information:  Carla Blanton
Michael Goins
Jodi Whitaker

FRANKFORT, Ky. – Governor Ernie Fletcher announced today that Kentucky is in good financial shape and that under his management, the state ended the fiscal year ending June 30, 2005, with a budget surplus. 

 “We are happy to report that the nation’s economy is strong and the Kentucky economy is growing, resulting in additional unexpected revenues,” Governor Fletcher said. “In addition, strong fiscal management has maximized the effectiveness of every tax dollar spent.”

Both the General Fund and the Road Fund ended the year with unpredicted revenues and unspent appropriations, resulting in budget surpluses.  Fiscal Year 2005 represents the first full fiscal year of the Fletcher Administration.

The General Fund surplus equals $214 million, which represents 2.8 percent of enacted appropriations.  The Road Fund surplus equals $29 million, which represents 2.5 percent of enacted appropriations.

The General Fund surplus is the product of two key factors: revenue growth beyond budgeted levels and strong fiscal management of the commonwealth’s expenditures. General Fund revenues grew 9.6 percent over Fiscal Year 2004, $195 million more than budgeted.

The healthy national and Kentucky economies resulted in across-the-board revenue growth from almost every tax.  Sales tax receipts were up by 6.0 percent, the highest growth since FY ’96. Individual income taxes were up by 8.6 percent, reflecting job growth and increasing wages in the state.

Corporation income taxes grew by 57.8 percent, reflecting increased corporate profitability and the shift of income tax from the individual level to the business entity level for pass-through entities

The surge in corporation income taxes experienced in Kentucky was also seen by most other states and the federal government, which realized a 41 percent increase in corporate tax receipts. The revenue increase also includes the enacted increases in cigarette taxes that became effective June the 1st, including the inventory, or floor stocks tax.

“I am most proud to announce the significant savings achieved by our fiscally conservative Cabinet and their strong management skills,” Governor Fletcher said.  “As a result of their efforts, $67 million of enacted appropriations were not spent and lapsed to the bottom line, accounting for approximately one-fourth of the surplus.”

Through good stewardship and better management practices, the cabinets returned almost 1 percent of the entire General Fund – even though they were operating on budgets that already had been reduced through a $302 million budget reduction, then held flat.

Except for Fiscal Year 2004, when the government implemented a Budget Stability Initiative to save $110 million, the lapse amount for Fiscal Year 2005 is the highest on record since 1996.

Governor Fletcher announced that he will take a measured and conservative approach to determining the best use of these unexpected resources.

“We have several options to consider, which will be guided by the overall fiscal outlook for the commonwealth, as well as the needs of our citizens in some key areas,” he said. 

Governor Fletcher added that he will wait to see the outcome of revenue projections for the next two years due in mid-August before allocating any of the surplus.

Budget Director Brad Cowgill said: “The revenue outlook will help us understand how much of the surplus we can expect to be sustainable in the future. In addition, we have expenditure pressures in several areas on which we are working diligently to predict their impact on the budget, including Medicaid and health insurance for public employees.”

The Governor expressed a need to rebuild the Budget Reserve Trust Fund, the “rainy day fund” to assure the bond rating agencies and financial markets that Kentucky is in good fiscal condition.

Governor Fletcher and Acting Secretary of Transportation Bill Nighbert also announced that the Transportation Cabinet successfully managed the Road Fund to result in a surplus of $29 million for Fiscal Year 2005. This represents 2.5 percent of enacted appropriations, no small accomplishment when revenues grew by less than 1 percent in the Road Fund over Fiscal Year 2004. Although revenues did grow $6.9 million beyond budgeted levels, the significant news is that the Transportation Cabinet saved $22.5 million from cabinet activities that now can be dedicated to state highway construction.

Budget Director Cowgill cautioned that while Kentucky closed Fiscal Year 2005 strong, the commonwealth faces challenges in the next biennial budget.

“We have problems in our state that need attention,” he said. 

He added that the enacted budget for Fiscal Year 2006 is based on several non-recurring sources of revenue, including: a large beginning balance; an unsustainable level of fund transfers; and a planned one-time bump in revenues from the tax modernization bill.

In addition, there will be an increased expenditure base for health insurance, Medicaid, corrections, state employee and teacher retirement systems, a full year of debt service for all bond obligations authorized in the 2005 session; and the need to appropriate funds for necessary government expenses and judgments that are not in the appropriation base.

Governor Fletcher acknowledged that the commonwealth faces some tough budget choices in the next legislative session. 

“It is in that context that I have decided to gather more information about our revenue and expenditure outlook for the next biennium before making any decisions regarding how the surplus from last year should be allocated,” he said.