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Kentucky facing budget shortfall of nearly $500 million due to conditions caused by pandemic


By Tom Latek
Kentucky Today

A report issued Thursday by the state budget director’s office shows a potential general fund revenue shortfall of $318.7 to $495.7 million for the 2020 fiscal year that ends June 30, due to conditions caused by the coronavirus.

In the Quarterly Economic and Revenue Report for the third quarter of fiscal year 2020, state Budget Director John Hicks said, “The revenue outlook has changed dramatically due to the COVID-19 pandemic. While General Fund revenue growth was 3.9 percent through the first three quarters of FY20, a large drop in revenues is projected in the fourth quarter. This would be the first annual General Fund decline since FY10.”

The general fund figures reflect a 3.8 to 4.7 percent revenue shortfall compared to the official estimate of $11. 4 billion. Fourth quarter General Fund receipts are estimated to range from 18.2 to 23.7 percent less than fourth quarter receipts in FY19.

John Hicks

The road fund revenue shortfall is projected to range from $116.4 to $194.6 million, reflecting a 7.5 to 12.5 percent revenue shortfall compared to the official estimate of $1,551.8 million. Fourth quarter Road Fund receipts are estimated to range from 36.8 to 55.2 percent less than the prior year.

According to the budget office, the projected downturn in revenues is remarkable in the overall magnitude, but equally so in the swiftness in which it will impact the General Fund and Road Fund.

General fund revenues in the first half of FY21 are expected to fall another 10.5 to 17.2 percent, and the budget office presents two scenarios, control and pessimistic.

In the control scenario, nearly all major accounts are expected to decline in the first two quarters of FY21. The two largest percentage declines are in the sales and use account, which is expected to fall 13.8 percent, and the business taxes, with an expected decline of 43.3 percent. The pessimistic scenario has deeper declines in these two accounts, but it also contains a projected loss of 18.6 percent in the individual income tax.

According to the U.S. Labor Department, over 500,000 Kentuckians have filed for unemployment benefits in the past five weeks. To put that in perspective, roughly 25 percent of Kentucky’s workforce is currently without employment.

Real Gross Domestic Production (real GDP) rose by 0.7 percent in the third quarter of FY20. This is a significant reduction in growth compared to the last six quarters, where quarter-compared-to-same-quarter-last-year growth was over 2.1 percent per quarter. On an adjacent-quarter basis, real GDP fell by 0.9 percent compared to the second quarter.

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Nationally, both the control and pessimistic forecasts assume a nine-month recession, starting in the third quarter of FY20. Additionally, the forecast assumes consumers are hesitant to bounce back to normal consumption patterns. Year-over-year GDP growth in the pessimistic scenario is anticipated to drop to 16.4 percent in the fourth quarter of FY20 and decline by 21.6 percent in the first and second quarters of FY21. By historical standards these rates of decline are quite severe.

The report states the economic outlook continues to look bleak. In comparison to the second quarter Quarterly Economic and Revenue Report published in January 2020, Kentucky employment and personal income projections have taken a turn for the worse due to the necessity to mitigate the spread of the COVID-19 virus through social distancing and the closure of many private businesses.

But Kentucky is not alone, as the report says all states are anticipating a particularly large disruption to growth over the forecast horizon. Even with the most up to date national variables factored in the outlook, a significant degree of uncertainty looms over Kentucky’s forecast horizon as economic outcomes will heavily depend on the rate of COVID-19 cases.

According to the U.S. Labor Department, over 500,000 Kentuckians have filed for unemployment benefits in the past five weeks. To put that in perspective, roughly 25 percent of Kentucky’s workforce is currently without employment. Unprecedented job loss, declining wages, and social distancing mandates are expected to cripple consumer spending and real disposable income in the short-term, which in turn will negatively influence the overall economic climate of the Commonwealth.


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