Kentucky Budget Breakdown: Medicaid, Cuts, and Vetoes

Kentucky’s 2026-2028 budget, enacted as House Bill 500 on April 1, 2026, spends more than $31 billion in General Fund dollars over two years, cuts most state agency base budgets by 4% in fiscal year 2027 and 7% in fiscal year 2028, protects K-12 education and Medicaid from those reductions, and drains more than $1.7 billion from the rainy day fund for local projects.¹² The Republican-led General Assembly overrode most of Governor Andy Beshear’s line-item vetoes on April 14, 2026, leaving the plan largely as passed.³

Why Revenue Is Tighter This Cycle

Kentucky’s individual income tax rate fell from 5% in 2022 to 3.5% effective January 1, 2026, under a phased reduction launched by House Bill 8 in 2022 and accelerated by House Bill 1 in 2025.⁴ Those cuts have delivered roughly $2.5 billion in cumulative annual savings to taxpayers and eroded the General Fund’s recurring base. The Consensus Forecasting Group projected General Fund revenues of $15.9 billion in FY 2027 and $16.2 billion in FY 2028, with FY 2027 collections nearly 1% below the enacted estimate for FY 2026.⁵

Kentucky came within $7.5 million of triggering a further cut to 3% for the 2027 tax year.⁶ The Office of State Budget Director must analyze FY 2026 results by September 2026, and if the rainy day balance and revenue surplus tests are met, the General Assembly could vote to drop the rate to 3% for calendar year 2028.⁷ Legislative leaders have stated their long-term goal is eliminating the individual income tax entirely.⁴

Agency Cuts and What’s Protected

House Bill 500 imposes base budget reductions of 4% in FY 2027 and 7% in FY 2028 on most state agencies, projected to save $275 million over the biennium.¹ Legislative leaders framed the reductions as controlling growth and prioritizing “needs over wants.”⁸

A long list of programs is shielded from the cuts:

SEEK funding, Learning and Results Services, the School Facilities Construction Commission, and Kentucky Educational Television.
Adult correctional institutions, juvenile justice, local jail support, and Commonwealth and county attorneys.
Medicaid benefits and family resource and youth service centers.
Veterans Affairs, pension systems, the Department of Revenue, the Secretary of State, and the Registry of Election Finance.¹

Agencies that are not exempt still have to absorb rising personnel costs inside their shrinking bases. State employees receive 2% raises in each year, and state health insurance premiums rise 14% in FY 2027 and another 10% in FY 2028.⁹

K-12 Education

The budget puts more than $7 billion in General Fund dollars into SEEK (Support Education Excellence in Kentucky) and raises per-pupil funding by 2% in each fiscal year.¹⁰ That is less than Governor Beshear proposed. His plan called for 2.5% annual per-pupil increases and a 3% across-the-board raise for school personnel funded at $158.8 million per year.¹¹ The enacted budget contains no separate teacher pay raise; Senate Republicans said the governor’s proposal was rejected because it lacked a plan for long-term funding sustainability.

Other education line items include more than $254 million for career and technical education, over $46 million for school resource officers and school safety, $5 million for the Dolly Parton Imagination Library, and $2 million for a principal leadership development program under Senate Bill 4. The Teachers’ Retirement System receives more than $2.23 billion above the actuarially determined employer contribution over the biennium, and more than $213 million covers retiree health insurance for teachers not yet eligible for Medicare.¹⁰

Higher Education and Student Aid

Public universities and community colleges avoid the House’s proposed 4% and 7% cuts. The Senate’s approach prevailed: current funding plus a 1% annual increase, with an additional $15 million in performance-based funding for FY 2028.¹² Institutions receiving new capital projects have their base reduced by the associated debt service, except Kentucky State University and Morehead State University, which are held harmless.¹⁰

The Kentucky Education Excellence Scholarship (KEES) is funded at more than $187.3 million over the biennium, but the minimum GPA for eligibility tightens to 2.75. Students who receive veterinary or optometry scholarship support starting in the 2027-2028 academic year must practice in Kentucky at least one year for each year of assistance, or the aid converts to a repayable loan with interest.¹⁰

Medicaid: The Central Fight

Medicaid received more than $6 billion in General Fund revenue and over $36 billion in federal funds across the biennium.¹⁰ Lawmakers also set aside roughly $290 million from the Insurance Regulatory Trust Fund as a “lockbox” reserve that requires legislative approval to release.¹³

The Beshear administration projected a $681 million Medicaid shortfall under the legislature’s figures and said the budget contained “underfunding and unfunded mandates” that would force “significant programmatic changes.” Republican lawmakers called Medicaid “the fastest-growing area of state spending at an unsustainable level” and said the governor’s own plan relied on delayed payments and one-time money.¹³

Federal changes under H.R. 1, effective January 2027, add pressure. New work and community engagement rules and a switch from annual to semiannual eligibility redeterminations are projected to reduce Kentucky Medicaid enrollment by roughly 28,500 by FY 2028. The maximum provider tax rate used to draw federal match will phase down from 6% to 3.5% by 2032, starting January 2028.⁵ Separately, an omnibus Medicaid bill imposes $5 copays for health care services and $1 copays for prescriptions beginning October 1, 2028.¹³

State Workers, Public Safety Pay, and Pensions

State employees get 2% raises in each year of the biennium. Kentucky State Police receives targeted raises of $3.8 million in FY 2027 and $7.4 million in FY 2028, and public defenders receive $3.6 million and $5.4 million. Pension obligations are funded at required levels, including $78.5 million in FY 2027 toward the unfunded liability of the Kentucky Employees Retirement System.¹⁴

Roads and Local Infrastructure

The biennial road plan, House Bill 502, totals $4.6 billion. About $1.1 billion in annual federal highway funds is matched with state dollars, and $230 million from the Budget Reserve Trust Fund is used to stabilize highway construction and accelerate shovel-ready projects. Funding continues for the Brent Spence Bridge, the I-69 Ohio River Crossing at Henderson, and the Mountain Parkway expansion.¹⁵

Local governments get $190 million over the biennium for county and city road projects, $25 million annually for local bridge improvements, and $70 million in FY 2027 for the Local Assistance Road Program.¹⁵ Municipal Road Aid falls about 22% from the prior biennium because motor fuels tax collections are down.¹⁶

Rainy Day Fund Spending on Local Projects

Kentucky’s Budget Reserve Trust Fund reached a record $3.7 billion in October 2025.¹⁷ Through House Bill 900, the General Assembly directed more than $1.7 billion from the fund into over 300 one-time local and regional projects. The bill passed with no dissenting votes in the House and one in the Senate.²

Roughly $1 billion went to water and sewer infrastructure, economic development, and road projects, with another $450 million flowing through the Department of Local Government.² Louisville received the largest single allocation: $90 million for downtown revitalization around The Belvedere, the convention center corridor, and the waterfront, plus more than $17 million for the airport authority. Other allocations include $18 million for a regional water treatment plant serving eight counties in the Buffalo Trace area, $11 million for a Frankfort convention center, and $42 million in escrow for Eastern Kentucky University’s osteopathic medicine program.¹⁸

The League of Women Voters of Kentucky said the process lacked transparency. HB 900 started as a single-page placeholder and was replaced in conference committee by a 58-page bill whose items became public only at the end of the session.¹⁸ After the withdrawals, the fund’s unobligated balance sits at roughly $2.6 billion. Fiscal analysts have warned that this pace of spending may not be sustainable as pandemic-era surpluses fade and tax cuts continue to reduce recurring revenue.¹⁷

Nuclear Site Readiness Pilot

The budget dedicates $75 million to the Nuclear Reactor Site Readiness Pilot Program, created by Senate Bill 57 and signed on April 8, 2026.¹⁹ Grants of up to $25 million per project cover roughly one-third of the cost of obtaining early site permits or combined operating licenses from the U.S. Nuclear Regulatory Commission, with the remainder borne by utilities and private partners. Host communities must first obtain a “nuclear-ready community” designation. Recipients must apply for an early site permit within one year, seek a construction or operating license within five years, and begin construction within ten years or repay the grant.²⁰ The bill passed the Senate 37-0 and the House 82-11.

Vetoes, Overrides, and What Hit the Courts

Governor Beshear issued line-item vetoes on the executive branch budget (HB 500) and the judicial branch budget (HB 504). On HB 500 he targeted several Medicaid provisions, including a requirement to make 12 equal monthly payments to managed care organizations, which he said would eliminate a lever the state uses to control costs, and a provision directing how service reductions should be prioritized if costs exceeded appropriations. On HB 504 he cited the Chief Justice’s warning that funding levels were insufficient to maintain mandatory court functions.²¹

On April 14, 2026, the Republican supermajority overrode more than 30 of Beshear’s vetoes largely along party lines. The legislature accepted two vetoes: one on kinship and out-of-home care language and one on aerial mapping requirements.³

HB 504 left the Court of Justice facing a projected $30 million combined deficit over the biennium. Chief Justice Debra Hembree Lambert announced that 170 positions would be abolished effective August 1, 2026, while 108 new positions would be established in a restructuring. Drug, mental health, and veterans courts will not close, but state funding for specialty court treatment is eliminated, and drug testing costs will be reduced by capping participant numbers or cutting test frequency. Other measures include ending the paid judicial intern program, eliminating state-funded out-of-state travel for judges, and switching from printed legal publications to online resources. An additional $5 million was added to the judicial operating budget after public advocacy, though the Chief Justice said the branch remains significantly underfunded.²²

What to Watch Next

Three questions run through the next two years. Whether Medicaid costs come in closer to legislative or administration projections will determine if the $290 million lockbox is enough or if mid-cycle adjustments become necessary. Whether the September 2026 revenue analysis clears the way for another income tax cut will shape recurring revenue for the following biennium. And whether the rainy day fund, now at roughly $2.6 billion, keeps absorbing local project demands as the surplus that built it recedes will shape how much room the next budget has to maneuver.¹⁷

1
Kentucky Center for Economic Policy. Budget Agreement Cuts and Freezes Funding for Most Services
2
LPM. Kentucky Lawmakers Pass $32B State Budget
3
Spectrum News 1. General Assembly Easily Overrides Gov. Beshear’s Vetoes
4
Baldwin CPAs. Kentucky Tax Overhaul Guide to 2025-26 Tax Changes
5
Office of State Budget Director. 2026-28 Executive Budget in Brief
6
LPM. Kentucky Barely Misses Budget Trigger for Income Tax Cut in 2027
7
Kentucky Legislative Research Commission. 26 RS BR 1340 – HB 13
8
Kentucky League of Cities. General Assembly Sends Biennial Budget to Governor
9
Kentucky Center for Economic Policy. State Budget Base Funding
10
Kentucky Senate Republicans. General Assembly Finalizes Disciplined, Balanced Two-Year State Budget
11
Kentucky Lantern. 2026-2028 Executive Budget Summary
12
Kentucky Lantern. Senate Republicans Restore Funds to Kentucky Public Universities in Their Budget Proposal
13
Kentucky Lantern. Beshear Criticizes Finalized GOP State Budget as Underfunding Medicaid, Other Needs
14
Kentucky Chamber Bottom Line. General Assembly Passes Two-Year State Budget
15
Kentucky Senate Republicans. Lawmakers Finalize Responsible, Fully Funded Road Plan
16
Kentucky League of Cities. Kentucky Approves Transportation Plan for Upcoming Biennium
17
Kentucky Lantern. How Kentucky’s Rainy Day Fund Showered Nearly $2 Billion on Towns and Counties
18
News From the States. How Kentucky’s Rainy Day Fund Showered Nearly $2 Billion on Towns and Counties
19
Kentucky Legislative Research Commission. SB 57 – Acts Ch. 56
20
WKMS. Kentucky Senate Sends Bill to Fund $75 Million Nuclear Site Readiness Program to House
21
Kentucky Lantern. In Veto, Beshear Cites Warning That Legislature’s Budget Would Force Cutbacks on KY Courts
22
Kentucky Lantern. KY Specialty Courts Safe but Staff Positions Cut in Challenging Times