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137 8 Public Finance and State and Local Budgeting Lisa A. Cave The prolonged U.S. recession has had a major impact on state budgets, and Kentucky is no exception. From 2007 to 2009 state revenue has fallen by 5 percent, or approximately half a billion dollars. Projections for the 2010–2012 biennial budget showed a gap of $1.5 billion. The governor, faced with a projected budget shortfall, proposed a budget that relied on the expansion of gaming to reduce the budget gap. Although both the House and Senate dismissed this idea, they were unable to agree on a common budget that eliminated the budget shortfall by the end of the legislative session. Therefore, the governor called a special session during which an amended version of the biennial budget was eventually passed and signed into law. This chapter examines state and local financing in Kentucky. State and local financing mainly revolves around the taxing and spending of the jurisdiction. This chapter outlines the governor’s role in developing and submitting a budget to the General Assembly and the General Assembly’s role in enacting the budget into law. It then describes the politics and policies associated with developing optimal taxing and spending levels. This is followed by a discussion of the state’s revenue sources and main appropriations. The chapter concludes with a discussion of financing at the local level. The Budget Process in Kentucky State and local elected officials are charged with providing services to the constituents they serve. This requires both a political and an economic equilibrium about the level and quality of public goods and services and the distribution of tax shares to pay for these goods and services. Constituents collectively weigh their desire for individual freedom against social welfare and societal demands. Then, via a series of political interactions with elected 138 State and Local Institutions officials, they collectively determine the level and quality of services that the government is to provide and how the government will pay for these services. There are three methods through which the government can pay for the services: imposing taxes, charging fees, or borrowing the funds. Taxes are involuntary contributions that may be levied on the consumption of a specific good, service, or income. In addition to taxes, the government can also impose fees, such as highway tolls, on the use of certain services. The final avenue through which the government can raise revenue to pay for the desired level of services is by borrowing. Every even-numbered year the Kentucky legislature is required to pass a biennial budget that serves as the state’s financial plan for the next two fiscal years. According to the Kentucky Constitution, the General Assembly must pass a balanced budget— spending must equal revenue. The budget outlines the state’s plan for spending money on specific or general purposes from a variety of sources. This process starts with the governor soliciting information from the various state agencies about their expected spending needs for the next two fiscal years. Combining this information with the current economic conditions, public interest, and program priorities, the governor formulates a budget for the executive branch of the government. This budget represents the governor’s spending plan for the state for the next two years. The chief justice of the Kentucky Supreme Court and the head of the Legislative Research Commission (LRC) do the same for the judicial and legislative branches. The governor then submits the budget recommendations to the General Assembly. The Kentucky General Assembly convenes annually on the first Tuesday after the first Monday in January. It convenes for sixty days during even-numbered years, and the constitution requires that the session be completed no later than April 15. In addition to regular sessions, the legislature may also convene extraordinary special sessions at the call of the governor. The governor’s budget recommendations are converted into the form of bills, called appropriation bills, and are introduced into the first chamber of the legislature, the House of Representatives. These appropriation bills authorize a state agency to spend a predetermined amount of public funds during a fiscal year. There are four types of funds from which appropriations are made. The first and most common is the General Fund. This fund contains the majority of the state’s tax revenue. The second fund is the Road Fund, which obtains revenue via gas-tax receipts and sales taxes on automobiles. The third fund is the Restricted Fund, which includes revenues from...

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