Kentucky State Government Expected to Have a Tight Budget for 2026

By Z. E. Kendall

In this legislative session, the Kentucky state legislature is crafting its two-year budget. Now, according to the Consensus Forecasting Group, Kentucky state government has a projected shortfall of $156 million in the mid-2025 to mid-2026 fiscal year out of its $16 billion state budget. In other words, Kentucky is on track to fall short of a balanced budget by 1%. This is a slight improvement versus the expected 2% ($305 million) shortfall.

On KET, Gov. Andy Beshear said that we should “reduce general fund appropriations” in order to balance the budget. So, he is proposing a $77 million cut in spending from the executive branch, which is 3% of executive agency budgets. Some of those cuts would come from “vacancy credits.” The governor explained that these are reductions in job openings that the government was going to make to hire new staff. Instead, those positions will remain vacant or not created in the first place.

Gov. Beshear has said he will not make any executive cuts to spending on school-related funding, Medicaid, pensions, or state police. The state auditor’s office and state treasurer’s office have chosen not to make any job cuts to cut down on the deficit.[1]

Even with the governor’s moves here, Kentucky will be projected to have around an $80 million deficit. According to Bro. Lee Watts in his video “Beshear Spending $30 Million on Travel,” the state legislature is considering slashing the governor’s annual $30 million travel budget in half in order to make up for some of that deficit.[2]

Now, back in August, State Budget Director John Hicks testified at the Appropriations and Revenue Committee that the mid-2024 to mid-2025 fiscal year ended with a $313 million surplus, $35 million of which from FEMA disaster relief reimbursements. However, $62 million of that surplus also had to be spent on “necessary government expenses,” but the Kentucky government can put the remaining $251 million into the rainy day fund (which is called the Budget Reserve Trust Fund).[3]

So, if we go by the Consensus Forecasting Group, Kentucky should have the money in the rainy day fund from 2024-2025 fiscal year, for covering the expected deficit in the 2025-2026 fiscal year.

But the Kentucky Center for Economic Policy doesn’t have an optimistic viewpoint on the two-year budget that will be written in 2026 for 2026-2028. “Lawmakers are now facing a serious budget crunch,” they wrote, “due to the loss of federal funds, a weakening economy, and falling revenue because of state income tax cuts.”

The Covid pandemic federal money has been spent, and now, Kentucky has to deal with not having that money anymore. They would prefer “less spending on incarceration, and more on mental health, infrastructure, and college affordability.[4]”

Now, the rainy day fund had around $3.76 billion in it back in August 2025.[5] So, at first, it might seem like Kentucky is in a great financial position.

Simultaneously, however, according to Truth in Accounting, Kentucky lacks almost $16 billion to be able to afford its pension obligations for the long-term. That’s “a burden of $11,500 per taxpayer.” On the bright side, though, the situation has been improving since 2017, with “a significant $1.2 billion reduction in net pension liability, driven by strong investment performance” in 2024 due to the Kentucky’s Teachers’ Retirement System fund generating almost 12% annual return.[6]

So, it may be prudent to apply a large portion of the current rainy day fund surplus to cover more of the government’s pension obligations or to invest a substantial portion of that into a Sovereign Wealth Fund that can generate permanent cashflow for the state. (A Sovereign Wealth Fund invests savings in real and financial assets such as stocks, bonds, real estate, and precious metals, for investment return.)

If Kentucky used $1 billion from the rainy day fund to create its own Sovereign Wealth Fund, it could generate $40,000,000 to $50,000,000 per year in dividends and interest on a perpetual basis. That alone is enough money to fund all salaries of the Kentucky state legislature plus the salaries of all current Legislative Research Commission employees plus some grounds-keeping expenses. Alternatively, it could fund the State Auditor’s office in the executive branch. The Auditor’s office had a budget of $40,741,700 in the 2024-2025 fiscal year, according to Ballotpedia.[7]

The Kentucky state government could also decide to use some of the rainy day fund for fully funding the bussing for the public schools.

Unfortunately, however, as Kentucky State Senator Max Wise remarked, due to Medicaid cuts from the federal government in the Big Beautiful Bill, Kentucky will have to spend $1 billion more per year in Medicaid payments moving forward.[8] So, using $3 billion from the rainy day fund or even $2 billion for a Sovereign Wealth Fund or bus funding is unrealistic.

But the bottom line is this: Kentucky’s state legislature has the opportunity to set Kentucky up for a brighter future if it can maximize the returns on the money it already has stored away and will store away, and it can try to keep expenses down in order to continue to be able to pay its pension obligations.

[1]     Beshear, Andy and Renee Shaw. “Beshear Discusses Plan to Address Budget Shortfall.” KET. 18 Dec. 2025. https://ket.org/program/kentucky-edition/beshear-discusses-plan-to-address-budget-shortfall/. Accessed 28 Dec. 2025. Web.

[2] Watts, Lee. “Beshear Spending $30 Million on Travel!” Patriot Point. 6 Feb. 2026. https://www.youtube.com/watch?v=ow_JKGPhL1w. 7 Feb. 2026. Web.

[3]     Tremoulis, Scott. “State Ends Fiscal Year with $131 Million Surplus.” Kentucky League of Cities. 22 Aug. 2025. https://www.klc.org/News/12972/state-ends-fiscal-year-with-131-million-surplus. Accessed 28 Dec. 2025. Web.

[4]     Spalding, Ashley; Dustin Pugel; Patience Martin; Pam Thomas; and Jessica Klein. “A State Budget for an Affordable Kentucky: Preview of the 2026–2028 Budget of the Commonwealth.” KY Policy. 17 Dec. 2025. https://kypolicy.org/preview-of-the-2026-2028-kentucky-state-budget/. Accessed 28 Dec. 2025. Web.

[5]     Tremoulis, Scott. “State Ends Fiscal Year with $131 Million Surplus.” Kentucky League of Cities. 22 Aug. 2025. https://www.klc.org/News/12972/state-ends-fiscal-year-with-131-million-surplus. Accessed 28 Dec. 2025. Web.

[6]     Truth in Accounting. “Kentucky’s Financial Breakdown.” 2025. https://www.truthinaccounting.org/library/doclib/KY-2024-2pager.pdf. Accessed 28 Dec. 2025. Web.

[7]     Ballotpedia. “Kentucky Auditor of Public Accounts.” 2025. https://ballotpedia.org/Kentucky_Auditor_of_Public_Accounts. Accessed 28 Dec. 2025. Web.

[8] Wise, Max and Richard Nelson. “Preparing for 2026: Moral, Social, and Fiscal Priorities in Kentucky w/ Rep. Max Wise.” Commonwealth Policy Center. 19 Dec. 2025. https://www.youtube.com/watch?v=A1-NnGj2ysM. Accessed 30 Dec. 2025. Web.