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2009 Forecast

By Mark Green


Chastened by what everyone hopes was the worst economic year they will ever see in 2008, Kentucky business and economic leaders see a challenging 2009 ahead. They were cautiously optimistic last year even though the clouds were gathering, but no one foresaw the collapse of Bear Stearns, the disappearance of the U.S. investment banking industry, the near collapse of Detroit automakers, and hundreds and hundreds of billions of dollars in U.S. government bailouts.

We now know that the U.S. economy entered recession in early 2008. The question is when will it end, and what steps are necessary to survive and turn things around. The Kentucky leaders who provided The Lane Report with their forecast of economic fortunes expect a difficult year, but they do expect recovery and envision 2009 as a time to make their operations stronger.

There are bright spots
And even in difficulty there is potential opportunity. Economic development officials believe Kentucky’s low cost of doing business could prove attractive in the current climate. Although revenues will be lower for many sectors – especially for government agencies – state leaders uniformly say the commonwealth cannot take its eye off the goal it has set for itself in recent years of fostering a better economy by improving education.

Also on the brighter side, the repurposing and renovation of Fort Knox will pump money into the region around it, and Kentucky’s bourbon industry is experiencing growth and sales that are its best ever.

Overall, it is a time for companies to focus on strong customer service and bolstering core competencies. The customer this year is likely to be more local than is typically the case.

Here’s what business, government and professional leaders around the state are saying:

ARTS
“Kentucky’s arts community faces many challenges for 2009. The current economic situation has resulted in less sponsorship, declining attendance, fewer schools accessing educational opportunities, and a decrease in both public and private funding support for arts organizations, many of which are experiencing budget shortfalls. The arts are crucial to economic, tourism and community development and the effects of a down-turn in the state’s arts industry will be long-term.”

BUSINESS SERVICES
“In 2009, Kentucky companies should focus on investing in training for their employees. It is tempting to cut training during tough economic times. However, this sends a message to the employees that their position and professional development are unimportant, which decreases their morale and lowers productivity. Companies can opt for low-cost alternatives like eLearning to continue to develop well-trained, skilled employees that are crucial the organization’s long-term success.”

“There is no question 2009 is a difficult year to forecast. We would all like clarity in times like this, but the reality is we are going through an economic cycle seen about every 70 years or so.
The good news is the economy will recover. Over the past six months we spent the majority or our time focused on bad economic news. I believe the negative mindset promoted by the media has only made our current situation worse. It appears that the tide is turning and we are all tuning out the negative and looking for the positives. This will help speed our recovery.
Some of the positives we see are in the federal government market and the health care market. Fort Knox with its BRAC project will be a big boost to the Kentucky economy over the next couple of years. The demands for health care services will only continue to increase as the baby boomers get older and our health care system needs new and improved facilities to meet the demand.
2009 will be a challenge for Kentucky business but we learned some lessons after 9/11 and we have moved quickly to position our companies to weather this storm and excel as the economy improves.”

Governor’s Estimated $456.1 Million Revenue
Shortfall Is 5.3 Percent of the FY08-09 Enacted Budget

Gov. Steve Beshear released a revised revenue forecast based on new general fund revenue estimates for FY08-09 (July 1, 2008 – June 30, 2009) prepared Dec. 2, 2008, by the state Consensus Forecasting Group. Based on the new estimates, the governor’s office estimates FY08-09 general fund revenues and beginning balance will be $456.1 million less than the budget enacted by the General Assembly.

Gov. Beshear is recommending the following plan to balance the FY08-09 Budget:

Targeted spending cuts $ 147.1 million
Tobacco tax increase 81.5 million
Rainy Day Fund withdrawal 178.5 million
Other resources 40.6 million
Three-day employee furloughs 8.0 million
Total $ 456.1 million

The governor would use the proposed tobacco tax increase collected in FY 09-10 to replenish funds taken from the Rainy Day Fund in FY08-09.
Major spending cuts include:
• 2 percent cut for postsecondary education institutions
• 2 percent cut for state police
• 4 percent cut (excluding health care and education) for other areas of state government

If the CFG’s revised general fund revenue estimates are achieved, general fund revenues in FY08-09 will decline 2.8 percent compared to actual general fund revenues in FY08.

Based on the enacted 2009 FY budget of $8.885 billion (excluding tobacco settlement and transferred funds), the projected shortfall of $456.1 is 5.1 percent of the budgeted revenues.

General fund revenues have declined only once since 1991. That decline occurred in FY01-02, the year of the high technology stock market bubble and the 9/11 attack on the World Trade Center. The decrease in general fund revenue in FY01-02 was $87 million or about 1.4 percent of the FY08-09 general fund revenue. The FY08-09 forecast decline will be only the second year since 1991 when general fund revenues were less than those received in the preceding fiscal year.

ECONOMIC DEVELOPMENT
“Families and businesses across the commonwealth are feeling the rippling effects of our struggling economy. As we navigate through these difficult times, it will be more important than ever to be resourceful and strategic in our economic development activities. Now isn’t the time to back off. Under Gov. Beshear’s leadership, we will be coordinating the effort to improve our incentive programs to provide more flexibility, allowing us to help our existing businesses stay competitive. We remain committed to our efforts to create economic vitality for the citizens of Kentucky.”

“The downturn in our nation’s economy is certainly impacting businesses in the Louisville region, but it’s also challenging all of us to find new opportunities for growth. We’re well positioned for the long term by aggressively focusing on our core strengths in health and logistics and seeking new opportunities in areas such as energy and human capital management. As businesses across our nation look to reduce costs, Kentucky can emerge as an attractive location with low energy costs, a skilled workforce and an environment that encourages innovation and entrepreneurship. However, this requires a strong commitment to continued increases in educational attainment and improving the commonwealth’s climate for business – two essential components of our state’s long-term strategy for prosperity.”

“While the national economy continues to be a focal point for Americans, Lexington and Central Kentucky have shown signs of resilience. Our area benefits from a diverse economy and well-educated workforce – both of which give us a strategic and valued advantage for many businesses and industries. The key question as it relates to the local and national economies is not “if” the economic situation will improve, but rather “when.” Because of our community’s ability to weather the economic storms, we will be better positioned than most cities to help our manufacturing sector get back on track, while sustaining growth in the areas of health care, K-12 and higher education, bio-life sciences and technology. In 2009, Lexington will continue to build on its recent rankings as the 5th Best Place for Business and Careers (Forbes) and the 2nd Most Educated Workforce (Business Facilities).”

“Of course everyone is hoping for a broad-based recovery in 2009; the sooner the better! Meanwhile, I’m optimistic about the Fort Knox area because of the major expansion going on there, the coal sector and energy-related businesses pursuing alternative sources. Hopefully we will look back on the fourth quarter of 2008 as the bottom of the recession and we experience a conspicuous recovery in the New Year.”

“Our high-tech economy continues to expand, which makes Kentucky’s overall financial infrastructure stronger and more resilient. Many people in Kentucky are demonstrating tremendous innovation and entrepreneurship. These scientific and technological pioneers are leveraging their knowledge and business relationships to turn a variety of very promising projects into successful enterprises that create high-paying jobs. Cutting-edge ideas and hard-working Kentuckians will help lead us out of the current downturn and toward a stronger economic future.”

HIGHER EDUCATION
“Like most sectors of the economy, higher education in general and the University of Kentucky in particular face very tough conditions. State appropriations have been reduced by 6 percent over the last 14 months and will likely be reduced further in 2009. We have to balance the mandate we have been given to be a Top 20 university against the reductions we face, substantial increases in our fixed costs and the ability of our students to pay higher tuition.”

HIGHER EDUCATION
“While the U.S. economy experienced significant job loss throughout 2008, the Kentucky economy saw very modest employment growth through the first eight months of the year. September marked the beginning of significant employment loss in the state. I fully expect continued employment loss in the Kentucky economy throughout 2009, including a continued reduction in manufacturing employment. This job loss will result in reduced state income tax and sales tax revenue collection, which will create intense budgetary pressures for the education sector of our state’s economy. I expect job loss in education as a sector to be moderate as educational institutions at all levels manage reduced revenues by expenditure reduction and through the identification of alternative revenue sources. The next year will be a difficult year for the Kentucky economy; it will be a difficult year for education in our state. However, education will survive better than the rest of the state’s economy.”

BOURBON INDUSTRY
“Kentucky’s signature bourbon industry continues to enjoy a renaissance in sales and tourism. New production is expected to hit 1 million barrels in 2009, more than doubling the amount in the last 10 years. Bourbon-related tourism also is surging along the Kentucky Bourbon Trail, which will mark its 10th anniversary in 2009. Several distilleries are expanding their operations and tour experiences with a total capital investment exceeding $100 million. In all, Kentucky’s spirits industry accounts for more than 3,200 direct jobs and $3 billion in gross state product.”

INSURANCE SERVICES
“The workers’ compensation insurance market in Kentucky is expected to remain competitive for much of 2009. Employers should be cautious in their selection of insurers, making certain that competing carriers and group funds are financially stable and provide professional, responsive service. The economy will remain focal for everyone in the New Year. Businesses should evaluate their insurance provider and consider what their insurer is doing to help reduce their workers’ compensation insurance costs.”

LOCAL GOVERNMENT
“It’s going to be a difficult year for the entire nation – and Louisville is not immune. However, I am hopeful that 2009 is the year when the economy begins to turn. Despite a tough economic climate, in Louisville we are still moving the city forward. We’ll open two new firehouses and we’ll open a new downtown corporate high-rise – Zirmed Gateway Towers, the home of Zirmed health/technology company. And in suburban Louisville, we will move forward with our ambitious City of Parks plan to add 4,000 acres of new parks.”

BIOTECHNOLOGY
“With the market undergoing a difficult period, we feel it’s more important than ever to support our customers – people want brands they can trust and rely on. Our approach has always been to work in partnership with our customers. At a time when many are experiencing unprecedented challenges, we provide a level of support that goes way beyond our products. This could be marketing support, support with logistics systems, working on training their sales force, offering our advice on crisis management.

“The net effect has been, through teamwork between departments and across regions, we have achieved 20 percent growth in sales over the year. Rudyard Kipling wrote, “If you can keep your head when all about you are losing theirs and blaming it on you; If you can trust yourself when all men doubt you … you’ll be a man, my son!” This applies to Kentucky businesses today: Everyone needs to keep their heads and remind themselves what we are all good at. At Alltech we focus on what we are good at, we focus on our customers and we are focused on becoming a $1 billion company. This focus is key to our success. ”

MEETINGS AND CONVENTIONS
“Our projections for 2009 are very cautious … and that was before the economy crashed. Fewer people will travel. Attendance at meetings will most likely fall off. But perhaps a little bit of silver lining is that we are primarily a drive-in destination and have so many people living in close proximity to Lexington. As bad as things are, people have a very strong desire to get away. We just don’t know at what numbers.
“So if you live in Kentucky, take this opportunity to explore this fascinating place we call home. And invite your friends and relatives to come here for a visit (and stay in a hotel). 2010 should prove to be a banner year, but now we just have to work hard to make 2009 better than it appears to be … so far.”

RESEARCH
“The UK College of Agriculture’s research is ranked in the top 10 nationally. Our central mission is to grow the Kentucky economy with technologies and practices for those who use land resources in their business. As we look ahead to 2009, we will help Kentuckians use assets efficiently with a variety of programs ranging from personal finance to energy efficiency and renewable energy. We will continue to develop solutions for reducing carbon emissions, such as burning switchgrass with coal. And as always, we strive to enhance Kentucky’s workforce through our educational efforts. In the Lexington area, we have broken ground on the new Livestock Disease Diagnostic Center, a key facility to all animal producers and owners, and we plan to have critical operations in place by the 2010 Alltech FEI World Equestrian Games. We are also proud that the Maine Chance Equine Campus will be the site of the Legacy Trail, confirming our commitment to the community.”

TRANSPORTATION
“The nation’s airlines are projecting decreases in domestic capacity for the aviation industry over the next 12 months, and we expect to mirror the national trend through calendar year 2009. However, air travel will rebound as the nation emerges from the current economic slowdown. As airlines adjust their business models to adapt to changing conditions, Louisville International will continue aggressively capitalizing on opportunities and seek new ways of doing business. In the short term, we expect that freight volume at the airport may reflect the slowing economy. However, the future for air cargo is bright, and we expect continued growth in this segment of our business long-term. Currently, Louisville is the third-busiest cargo airport in North America and ranks ninth among airports worldwide.

UTILITIES
“Central Kentucky is on the threshold of receiving a significant regional asset with Kentucky American Water’s construction of a $162 million water treatment plant. The project includes a 20 million gallon per day water treatment plant in Owen County at Pool 3 on the Kentucky River. The project also includes a booster pump station and a 31-mile, 42-inch underground water transmission pipeline. The waterline will run through Franklin, Scott and Fayette counties and connect to our existing Kentucky American Water system near the Kentucky Horse Park. The new plant will address Central Kentucky’s water supply shortfall with a cost-effective, long-term and environmentally responsible solution to meet existing demand and future economic growth.”

“Louisville Water Company (LWC) delivers safe, great-tasting drinking water to approximately 850,000 people in Louisville Metro and parts of Oldham and Bullitt counties. LWC wholesales water to utilities in Shelby, Spencer, Bullitt and Nelson counties. Faced with declining residential and industrial water use, LWC is pursuing growth through regionalization efforts and new water-related business lines including water service line insurance and Louisville Pure Tap® bottled water.
“LWC is in the midst of building a $50 million Riverbank Filtration project that uses the natural filtering properties of sand and gravel in the ground to clean river water. The project will be complete by early 2010. This environmentally innovative project will secure a clean and abundant source of water for the next century.”

WORLD EQUESTRIAN GAMES
“The 2010 Alltech FEI World Equestrian Games is looking forward to an exciting year in 2009. Construction at the Kentucky Horse Park is ahead of schedule, and the new outdoor stadium will be ready to use for Rolex in April 2009. In addition, FEI-sanctioned test competitions will be conducted at the Kentucky Horse Park beginning in summer 2009 to test the park’s new venues as well as other operations and logistics for the Games. Hospitality packages will be available by spring 2009, and tickets will be available for sale in September of 2009. The Games are also moving ahead with sponsorships, including the recent addition of John Deere as the official equipment provider.”

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