Kentucky Budget: Spending, Tax Cuts, and Vetoes

Kentucky’s 2026-2028 state budget, enacted as House Bill 500, authorizes more than $31 billion in general fund spending over two fiscal years for the executive branch, with a total of $154.8 billion from all fund sources.¹² The Republican-controlled General Assembly passed the plan in April 2026 and overrode nearly all of Governor Andy Beshear’s line-item vetoes. A companion bill, HB 900, directs roughly $1.7 billion in one-time money from the state’s rainy day fund toward infrastructure, economic development, and local projects. The budget cuts most state agencies, keeps the income tax on its path toward zero, and leans heavily on reserves to fund projects outside the operating base.

Agency Cuts and What’s Exempt

To keep spending within revenue projections, the budget imposes a 4% base reduction on most state agencies in fiscal year 2027 and a 7% reduction in fiscal year 2028.³ House Appropriations Chair Jason Petrie said the budget funds “needs, not wants.”⁴

A long list of agencies and programs is exempt from the reductions: Corrections, Juvenile Justice, Kentucky State Police, the Department of Revenue, SEEK education funding, pension contributions, postsecondary institutions, Family Resource and Youth Service Centers, the Department of Public Advocacy, and Veterans Affairs, among others.³ Everything not on that list must absorb the cuts out of existing operations.

Income Tax Cuts and the Revenue Squeeze

The budget takes shape against Kentucky’s ongoing effort to phase out its individual income tax. A law signed in February 2025 lowered the rate from 4% to 3.5% effective January 1, 2026, continuing a series of cuts that began at 5% in 2022.⁵ Further reductions can proceed whenever certain revenue triggers are met, with an explicit goal of eventually reaching zero.⁶

The Kentucky Center for Economic Policy estimates the cumulative annual revenue loss from the income tax reductions at roughly $2.1 billion, with the most recent cut from 4% to 3.5% alone accounting for about $700 million per year.⁷⁸ The Office of the State Budget Director projected general fund revenue in FY 2027 to come in nearly one percent below the FY 2026 enacted estimate, with modest 2.2% growth assumed for FY 2028.⁹ Individual income tax receipts have already dropped: year-to-date collections through the third quarter of FY 2025 fell 11.7%, with a further 3.8% decline projected for the first half of FY 2026.¹⁰

To preserve the path to further cuts, the General Assembly suspended the income tax trigger law so that the $2.9 billion in rainy day fund spending would not count toward future tax-reduction calculations, according to the Kentucky Center for Economic Policy.¹¹

K-12 Education Funding

Per-pupil funding through the SEEK formula rises 2% in each fiscal year, moving from $4,586 to $4,626 in FY 2027 and to $4,792 in FY 2028. Total SEEK funding from the general fund exceeds $7 billion over the biennium.¹²¹ Overall K-12 funding is up $369 million compared to the prior biennium.

School safety receives more than $46 million to reimburse districts for school resource officers at up to $20,000 per officer, and $30 million for the Center for School Safety. Other Learning and Results Services funding includes $170 million for preschool, $98 million for Family Resource and Youth Services Centers, $48 million for Extended School Services, and $25 million for the Kentucky Educational Collaborative for State Agency Children.¹ Transportation funding for school buses stays flat at $398 million annually, and the budget does not include Governor Beshear’s proposed universal pre-K program for four-year-olds.¹³

Whether the funding is adequate remains contested. The Kentucky Center for Economic Policy reports that total SEEK funding in FY 2026 was 25% below 2008 levels after adjusting for inflation, and that the state’s share of the per-pupil base has fallen nearly 40% in real terms since 2008 while the local share has risen.⁷ A lawsuit filed in January 2025 by the Kentucky Student Voice Team alleges the state has failed to meet its obligations under the 1989 Rose v. Council for Better Education ruling. Franklin Circuit Judge Phillip Shepherd denied a motion to dismiss in February 2026, and the case is moving toward trial.¹⁴

Higher Education

Performance-based funding for public universities holds at $115 million annually. Asset preservation is funded at $10 million per university in FY 2027 and $100 million in FY 2028. The Kentucky Education Excellence Scholarship receives more than $187.3 million over the biennium, now with a 2.75 GPA minimum. The Dual Credit Scholarship Program receives $8 million annually, supplemented by $6.29 million from lottery funds.¹²

Universities are exempt from the agency base cuts. Kentucky State University and Morehead State University are held at base-level funding and exempt from debt-service offsets applied to other institutions receiving capital projects.¹ One-time funding through HB 900 includes $42 million for Eastern Kentucky University’s osteopathic medicine school (held in escrow), $60 million for a Murray State veterinary technology facility, and nearly $12 million for cancer research split between the University of Kentucky and the University of Louisville.¹³

Medicaid and Health Care

The budget allocates more than $6 billion in general fund revenue to Medicaid over the biennium, supplemented by more than $36 billion in federal funds. It also establishes a Medicaid “lockbox” of approximately $290 million.¹ The legislation introduces new fees for some Medicaid recipients using services such as dialysis and chemotherapy, which legislators described as accountability measures for providers and participants.¹⁵

The Beshear administration contends the budget underfunds health and social services by roughly $1 billion relative to what is needed to maintain current service levels.¹⁶ In June 2026, Cabinet for Health and Family Services Secretary Steven Stack announced that most Medicaid providers would face rate reductions beginning in FY 2027, and that the senior meal program, Temporary Assistance for Needy Families, and behavioral health services would all see cuts.¹⁷

Federal Funding Risks

The federal “One Big Beautiful Bill Act,” passed by Congress in 2025, compounds the pressure. The Kentucky Center for Economic Policy reports the law cuts an estimated $38 billion from Kentucky’s Medicaid program over ten years, caps state-directed payments, reduces the allowable provider tax rate to 3.5%, and imposes new work requirements and six-month eligibility redeterminations for expansion enrollees.¹⁸ The executive budget estimates these changes will reduce Medicaid enrollment by about 4,300 in FY 2027 and roughly 28,500 by FY 2028.⁹

Beginning in FY 2028, the same federal law requires Kentucky to pay a share of SNAP benefit costs. Estimates place Kentucky’s new annual SNAP obligations between $57.5 million and $172.5 million, plus $66.8 million more in administrative costs starting in 2026.¹⁸ The Cabinet for Health and Family Services estimates that eliminating the Medicaid expansion population entirely would cause more than 450,000 residents to lose coverage and cost the state economy $3.8 billion.¹⁹

Social Services and Foster Care

The Department for Community Based Services faces a 9.1% budget reduction across the biennium, amounting to $118.5 million below the cost of maintaining current services. DCBS employs more than 5,200 people and had reduced social worker vacancies from 312 in 2023 to 54 in 2025; those staffing gains are now at risk, according to the Kentucky Center for Economic Policy.²⁰ Layoffs have already begun at some partner organizations.²¹

A week after the cuts were announced, Governor Beshear said he was reallocating $30 million to partially offset them: $25 million from an economic development project that fell through and $5 million from a failed housing project at Eastern Kentucky University. The governor said the funds would maintain current foster care payment levels for 8,841 children in care and prevent 1,500 people from losing TANF benefits. He estimated the move would “blunt about half” of the cuts but warned the funds could be challenged by the legislature or attorney general.²²

Pensions

The budget continues the legislature’s policy of fully funding actuarially determined pension contributions. Pension spending in HB 500 is nearly $500 million higher than the prior biennium, with the Teachers’ Retirement System alone receiving more than $2.23 billion.¹ An additional $213 million supports health insurance for retired teachers not yet eligible for Medicare.

The legislature took several targeted actions on the Kentucky Employees Retirement System nonhazardous fund, the most poorly funded of the state’s plans. It directed a $78.5 million payment from the Permanent Pension Fund toward the KERS nonhazardous unfunded liability, reallocated $67 million originally appropriated for state employee pay compression to the same purpose, and transferred $350 million from the Kentucky Insurance Regulatory Trust. Of that, $80.3 million provides a one-time “13th check” to state retirees who have not received a cost-of-living adjustment since 2011, with the remaining $269.7 million applied to the KERS nonhazardous insurance fund’s unfunded liability.²³

Even with the infusions, funded ratios remain low. As of June 30, 2025, KERS nonhazardous stood at 28.6%, CERS nonhazardous at 61.4%, and CERS hazardous at 57%.²⁴ All plans are projected to reach full funding by the late 2040s or early 2050s if actuarial assumptions hold and contributions continue at required levels.²⁵

Transportation and the Road Plan

The biennial road plan totals $4.6 billion, backed by a $7 billion transportation operating budget. The legislature committed $230 million from the rainy day fund to stabilize highway construction and accelerate shovel-ready projects.²⁶ Major priorities include the Interstate 69 Ohio River Crossing at Henderson, the Brent Spence Bridge in Northern Kentucky, and the Mountain Parkway expansion. Local road and bridge funding includes $190 million for county and city projects over two years, $25 million annually for local bridges, and $70 million for the Local Assistance Road Program in FY 2027.

Rainy Day Fund and HB 900 Projects

Kentucky’s Budget Reserve Trust Fund had reached a historic high above $5 billion in recent years and sat at approximately $3.7 billion in late 2025. The final budget agreement draws $2.9 billion in total one-time spending from the fund, primarily through HB 900 and companion measures, leaving an estimated $2.6 billion in unobligated reserves.²⁷

HB 900 alone funds more than 300 projects. Among the largest allocations are $230 million for highway construction, $100 million for the GRANT program (state matching funds for local projects), $90 million for the Kentucky Infrastructure Authority’s troubled water and sewer systems program, $90 million for downtown Louisville revitalization, $80 million for mega-development economic projects, $50 million for Eastern Kentucky University’s osteopathic medicine initiative, and $50 million for the Kentucky Product Development Initiative.²⁸ The one-time spending also includes $100 million directed to the KERS nonhazardous pension fund, $80 million to the Teachers’ Retirement System, and $50 million to the State Police Retirement System.¹¹ Senate Appropriations Chair Chris McDaniel described the approach as using “known revenue” rather than relying on economic projections.

Vetoes and Overrides

The General Assembly gave final passage to HB 500 on April 1, 2026. Governor Beshear issued line-item vetoes across the budget and several related appropriations bills on April 13. The legislature returned the following day and overrode nearly every veto; the House voted 74–19 and the Senate voted 32–6 to restore the vetoed provisions.²⁹ Only three line-item vetoes on HB 500 were allowed to stand, described as relatively minor, including a provision related to mapping data for county property valuation administrators.³⁰ The enacted budget was recorded as Acts Chapter 168.

1
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NASBO. Kentucky Budget
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WPSD Local 6. Kentucky Budget Cuts Threaten Services for Children in Foster Care
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Kentucky Senate Republicans. Lawmakers Finalize Responsible Fully Funded Road Plan
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Kentucky Lantern. How Kentucky’s Rainy Day Fund Showered Nearly $2 Billion on Towns and Counties
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Lexington Herald-Leader. House Bill 900 Projects
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LPM. Republicans Tore Through Beshear’s Vetoes Tuesday, Overriding Nearly All of Them