After being required to fill a nearly $1 billion hole in last year’s budget with federal stimulus dollars, state fund transfers and Kentucky’s fifth round of budget cuts since 2007, state lawmakers had hoped we were done making painful cuts. We followed the financial reports and heard about a turnaround in the national economy, increasing consumer confidence, rising home sales. We were hopeful.

Now we will have to hope for better days ahead, because the turnaround we wanted has not come quickly enough to Kentucky. State officials expect more budget cuts—possibly as deep as six percent for some agencies—will be needed to address an approximately $160 million shortfall in the state budget this fiscal year. Within the next week, most state agencies have been asked to provide the state Budget Director’s Office with plans explaining how a possible six-percent cut would affect their programs and workforce. Several other agencies, including state universities, funding for K-12 education, prosecutors and public defenders, Medicaid and mental health, would be exempt from possible cuts as in past budget cycles.

The possible cuts are not a complete surprise. An independent group of economists that makes economic forecasts for the state each year told us months ago that Kentucky’s economic growth was not as strong as growth of the national economy. Still, we held on to the hope that the economy would improve. It could improve yet — the same group of economists meets again in December to revise its forecast — but state budget officials are not counting on any miracles.

What the budget shortfall we now face tells us is the economy hasn’t improved much at all — at least not to the point that state General Fund revenues for the first quarter of fiscal year 2010 exceeded General Fund revenue from the first quarter of FY 2009.

General Fund receipts for the first quarter of FY 2010 were down across the board compared to receipts from FY 2009, with the exception of revenues from cigarette sales and a slight rise in lottery receipts. Those funds helped, but they could not do what the Budget Director’s Office described as preserving “positive General Fund growth in the first quarter.”

 A summary of the FY 2010 first-quarter revenue report released last month by the State Budget Director’s Office spells out the revenue decrease in stark percentages, beginning with a 5.6 percent decrease in overall General Fund receipts over the past three months. The decrease was the third consecutive quarterly decline in the fund, the report states, while revenue in the state Road Fund fell by 3 percent— the sixth consecutive quarterly decline for that fund.

Looking only at the General Fund, we see in the report that the first quarter ended with a lack of revenue from individual income and sales taxes — revenue sources that make up about 3/4 of the state’s General Fund revenue. Revenue from individual income tax and the sales tax, which depends on employment and wage growth, decreased by 7.1 percent and 7.7 percent respectively.

I would like those revenues to pick up by the end of this fiscal year, but new budget projections from the Budget Director’s Office that predict FY 2010 will end with a $160 million shortfall make such a swift turnaround unlikely. Instead we are told in the report that the depth of the current recession makes “a clean, robust and immediate recovery appear(s) rather unlikely.”

For business, this means a continued slump in production and employment. For state agencies, it could mean more budget cuts for agencies that have, in some cases, already had their budgets cut by almost 20 percent since early 2008.

Is there any good news in all this? A little. The Budget Director’s Office tells us that the nation is expected to experience gross domestic product growth of 0.5 percent in the final three quarters of the fiscal year, ending a recent decline in national production. That will unfortunately come after a continued slide in employment that will likely cost the nation another 3 million jobs by next summer, but life will begin to look up and Kentucky’s economy, as well as the nation’s, will continue to recover.

“Production will eventually increase, excess capacity will be worked through, and higher sustained demand for goods and services will trigger a period of employment and business investment,” the Budget Director’s Office reports. It just will not happen during the last three quarters of FY 2010.

I will keep you informed of all proposals on how to handle the current shortfall, whether it be using a portion of the $485 million left in federal stimulus funds to reduce the deficit or some other method. And I will keep hoping for a better forecast in December. Either way, we must be prepared.

Let me take a moment to wish you and yours a wonderful Thanksgiving and the best of holiday seasons, and thank you for allowing me to serve you in Frankfort.