2004 State Budget Dispute
Throughout Fletcher's term, the Kentucky Senate was controlled by Republicans, while Democrats held a majority in the state House of Representatives. Consequently, Fletcher had difficulty getting legislation enacted in the General Assembly. Early in the 2004 legislative session, he presented a plan for tax reform that he claimed was "revenue neutral" and would "modernize" the state tax code. The plan was drafted with input from seven Democratic legislators in the House, none of them in leadership roles, leading to claims that Fletcher was trying to circumvent House leadership. As the session wore on, Republicans insisted on tying the tax reform package to the proposed state budget, while Democrats wanted to vote on the measures separately. Despite last minute attempts at a compromise as the session drew to a close, the Assembly passed neither the tax reform package nor a state budget. The contentious session ended with only a few accomplishments, including passage of a fetal homicide law, an anti-price gouging measure, and a law barring the state public service commission from regulating broadband Internet providers beyond what restrictions were put in place by the Federal Communications Commission.
The 2004 session marked the second consecutive session in which the General Assembly had failed to pass a biennial budget; the first occurred in 2002 under Governor Patton. When the fiscal year ended without a budget in place, responsibility for state expenditures fell to Fletcher. As it had been in 2002, spending was governed by an executive spending plan created by the governor. Democratic Attorney General Greg Stumbo filed suit asking for a determination on the extent of Fletcher's ability to spend without legislative approval. A similar suit, filed after the 2002 session ended in deadlock, was rendered moot when the legislature passed a budget in a special session prior to the conclusion of the lawsuit. A judicial review by a Franklin County circuit court judge approved Fletcher's spending plan but forbade spending on new capital projects and programs. In late December 2004, a judge ruled that Fletcher's plan could continue to govern spending until the end of the fiscal year on June 30, 2005, but "thereafter" executive spending was to be limited to "funds demonstrated to be for limited and specific essential services."
On May 19, 2005, the Kentucky Supreme Court issued a 4–3 decision stating that the General Assembly had acted unconstitutionally by not passing a budget and that Fletcher had acted outside his constitutional authority by spending money not specifically appropriated by the legislature. The majority opinion rejected the lower court's exception for "specific essential services", saying "If the legislative department fails to appropriate funds deemed sufficient to operate the executive department at a desired level of services, the executive department must serve the citizenry as best it can with what it is given. If the citizenry deems those services insufficient, it will exercise its own constitutional power — the ballot." Chief Justice Joseph Lambert dissented, claiming the executive spending plan was necessary. Two other justices, in a separate opinion, disagreed with the majority that federal and state constitutional mandates should still be funded in the absence of a budget. In their dissent, they argued that the threat of a government shutdown would act as an impetus for the General Assembly to engage in timely budget-making. The decision took no retroactive steps to change the actions it ruled unconstitutional, but it served as a precedent for any future cases of budgetary gridlock.
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