LEXINGTON, Ky. — Kentucky lawmakers have approved a two-year state budget that includes significant reductions to most state agencies while leaving a major shortfall in Medicaid funding, according to an analysis by the Kentucky Center for Economic Policy.

The budget agreement, contained in House Bill 500, implements 7% cuts to many state agencies and falls $691 million short of fully funding continuing Medicaid benefits. To partially offset the Medicaid gap, lawmakers set aside $290 million in the Budget Reserve Trust Fund that could be released to Medicaid next year if deemed necessary. The budget does not include a cost-of-living adjustment for state retirees, who have not received such payments since 2011.

The agreement provides essentially flat funding for K-12 schools while most higher education institutions face cuts. The state's SEEK school funding formula will remain 25% below 2008 inflation-adjusted levels, with approximately 82% of school districts receiving less funding in the coming two years after adjusting for inflation. No additional funds were provided for teacher raises or preschool expansion, leaving school funding to continue falling behind inflation for the long term.

Higher education will see a 12.2% funding reduction over the biennium compared to 2026 levels, with total postsecondary funding down 41% compared to 2008 when adjusted for inflation. Murray State University, Morehead State University and Kentucky State University are exempt from the cuts and will see frozen funding instead.

The judicial branch faces cuts of approximately 7%, which could force reductions in specialty courts for drug and mental health treatment. The Chief Justice previously warned that such courts helping address addiction, mental illness and other challenges could face elimination.

In a separate spending bill, House Bill 900, lawmakers earmarked $1.76 billion for over 300 projects and programs, including $230 million for highway projects and $100 million in matching funds for federally-funded infrastructure projects. The measure draws down pandemic-era economic stimulus funds that had been accumulated in the state's reserves.

The budget agreement reflects revenue losses from previous state income tax cuts but does not appear likely to trigger additional tax reductions under the legislature's current formula.