Kentucky Projects a Better Economy for 2018 but Still Faces $155 Million Shortfall

Posted on January 3, 2018

     Some of the state’s top economists seemed lost for words Friday morning as they tried to wrestle with new economic forecasts for Kentucky for Fiscal Year 2018. Members of the Consensus Forecasting Group were asked by the Office of the State Budget Director to revise their revenue estimate for the General Fund. New data released for October showed a more optimistic view of the national and state economy than originally predicted. The more positive predictions perplexed some members of the Group and left them struggling with how and if they needed to revise predictions the Group made for Fiscal Year 2018 when it last met in August.

     Various members of the Office of the State Budget Director testified for three hours Friday morning about the new economic predictions. Michael Jones, deputy executive director for policy and research, told the economists back-to-back hurricanes in August and September impacted the national economy, but members of the Group questioned if that economic impact would reach into Kentucky.

     The Group voted in August to go with a pessimistic view of the expected economy. Friday, members of the Group were told that view had improved, with a higher expectation for jobs and wages but a slight decrease in expected personal income. Kentucky uses forecasting data from Global Insight to set its Fiscal Year expectations. University of Kentucky professor Doctor Chris Bollinger was puzzled by the new forecast. “I don’t see any substantial change in the Kentucky economy from what we saw in August,” questioned Dr. Bollinger.

     David Sinclair, a vice president with LG&E, has been on the Consensus Forecasting Group since 2013. He warned other members to not get too enamored with the new predictions. “Given what we see in Washington, it’s hard to get too excited about what we see here,” said Sinclair. Eastern Kentucky University economics professor Dr. Frank O’Connor is also a member of the Group. He pointed out Global Insight had a different view, believing “the economy is growing at a very steady clip.” Kentucky saw a 1.7 percent growth in the economy in Fiscal Year 2017; the most pessimistic view offered by Global Insight’s new forecast has the state’s economy growing by 2.3 percent in Fiscal Year 2018.

     When the Group adopted the pessimistic view at its August meeting the state was left with a $206 million budget shortfall. The new approach adopted Friday gives the state back $50 million for the General Fund. The Group could make tweaks to the forecast when it meets again in December. Still, Greg Harkenrider, a deputy director with the Office of the State Budget Director, told members it’s important to make the adjustment now. “It’s a short-term estimate for ‘18, but it’s an important one when you’re talking about action from the budget office,” said Harkenrider.

     State Budget Director John Chilton told reporters after the meeting that the new forecast helps his office plan. “It gives us the ability to make adjustments over a longer period of time,” said Chilton. He did not provide specifics on how the new forecast might impact a budget reduction plan put in place by Governor Bevin last month. At the time, the governor ordered a 17.4 percent cut in spending for most state agencies.

     The Consensus Forecasting Group is made up of seven economists, most from Kentucky colleges and universities, who forecast for national and state economic conditions. The projections are used to develop expenditure plans for the state. Friday the group also set a pessimistic forecast for Kentucky’s General Fund for FY’s 2019 and 2020. Members voted to continue with the plan approved in August for the Road Fund.