Japan, china, korea, india, france and germany. Four years ago, the Auto Industry was in crisis. Last year, kentucky auto makers produced more than a million cars and light trucks for the First Time Since 2007. And the construction of two bridges in Jefferson County after 40 years of talk will create 4,000 construction related jobs over the next six years. So yes, our momentum is accelerating. But as we emerge from this recession poised to do great things, fundamental weaknesses stand in our way, weaknesses that both require substantial investments in our future and at the same time prevent us from making those investments. What are those weaknesses . A tax system that works against us, not for us. A workforce that isnt as trained and skilled as it needs to be. An Education System that isnt as efficient and rigorous as the world demands. A population whose health ranks among the worst in the nation. And a heavy sword called the public pension unfunded liability that dangles by a thread above us. Ladies and gentlemen, if we solve those challenges, kentucky will lead the nation out of this recession. If we dont, well begin slipping backward, and our progress will fade away. Can go either way. The good news is we know what we have to do. But delay could be deadly. And my friends, it over the past year, in National Debates about the fiscal cliff and other issues, youve heard warnings about kicking the can down the road. Its almost become a national slogan, and yes, that phrase is a cliche. But phrases become cliches because they ring with truth and here in kentucky right here, right now that cliche rings true. We have to stop putting off uncomfortable decisions for future generations. We have to stop pretending that these problems arent holding us back. Because they are. Aboutt im going to talk a way forward on addressing these weaknesses. And let me tell you upfront im realistic. Were already six days into this 30day session. Its 20 percent over. Theres not a lot of time. And so the agenda im setting forth tonight is not only for this short session but also for the year ahead. The biggest challenge is finding the resources we need to strengthen our core. I know this isnt a budget writing year. But fiscal considerations loom over every decision we make. After inheriting a global recession, you and i spent five years bringing common sense to state spending and weve done so in three ways one, cuts. We reduced the state budget 13 times in five years, cutting spending by 1. 6 billion and trimming the state workforce to its smallest size in nearly four decades. Some agencies have been slashed up to 38 percent. Two, we found more efficient ways to run daily operations. Through our multiyear smart government initiative, weve realized both onetime windfalls and annual savings by selling surplus land, buildings and vehicles, consolidating offices, renegotiating contracts and bids, and changing how we buy goods and services. And three, we made revolutionary changes to huge budget drains closing a state prison as part of a wider corrections reform, privatizing medicaid and reining in benefits for public employees. In many ways, you and i have remade state government. Our goal is simple make every tax dollar count. Now many changes and cuts were desperately needed. State government had become bloated and inefficient. We will not restore those cuts, and we will not return to the old way of doing business. But efficiency alone wasnt enough to balance those budgets, and so we made cuts to certain programs that hurt, cuts that none of us would have made if we had not been forced to make them to survive. Well, we survived better than most states but now we must ask ourselves what damage did we do . Let me describe some of it. We froze funding in our k12 classrooms, despite rising costs. We eliminated funding for textbooks, going from 21. 7 million in 2008 to zero. Instead of taking books home to study, students often must leave them for the next class. We cut School Safety funding by 60 percent at a time in which we must be more vigilant, not less. We cut funding to our universities causing tuition to go up an average of 4 percent a year at our community and Technical Schools and nearly 7 percent a year at our largest fouryear universities. At the same time, we reduced aid to needy students. In fact, we were forced to slam the door in the faces of some 73,000 wouldbe students in just one year who came to us asking for help to go to college. We cut funding for childcare assistance programs that help lowincome families return to the workforce and that allow relatives to care for children taken from their parents. As a result, for the next year and a half, we wont be helping any more lowincome parents return to work. And because eligibility requirements will become stricter, some parents who are already working will no doubt have to quit. We cut funding to local health departments, meaning fewer children received immunizations, fewer pregnant women received prenatal care and fewer diabetics received comprehensive care. And we cut agencies that help our senior citizens. In one agency alone, the number of meals delivered was reduced by almost 300,000. I could go on and on. But, now that were emerging from the recession, its time to repair the worst of this damage, rebuild those programs we never wanted to cut, and reinvest in our future. But where will the money come from . Well, some say we dont need to do anything, because a growing economy and the accompanying revenue will be enough to both pay the bills and create a stronger kentucky. My friends, with all due respect, that is simply not reality and the math shows it. Yes, the economy and our revenues are projected to grow, but not fast enough to even keep up with expenses, much less to address fundamental weaknesses. Secretary of the cabinet mary lassiter, who has been putting together state budgets for 15 years, testified in great detail yesterday before a joint meeting of the appropriations and revenue committees. She showed with overwhelming evidence how anticipated growth will be more than eaten up by decisions you and i made in previous sessions. Assuming we hit the consensus forecasting groups outyear prediction of about 3 percent growth and yes, thats an assumption any new revenue will have to be used to cover things like structural imbalances, obligations to health care and pensions, inflationary growth in medicaid, and Health Insurance for teachers and state employees. The projected growth in revenues and more is already spent. And that doesnt leave a single penny for addressing critical investments in our future. F for example depending upon whose estimates you use, it will take up to 300 million a year to fully fund the arc for the kentucky retirement system. Fully funding seek the basic formula for classroom instruction will also take substantial new revenues. Now im very proud and i know you are too that we have protected seek from cuts. Bu but preserving funding doesnt mean making progress. From 2000 to 2008, seek grew an average of 3. 4 percent each year. Year. From 2008 to 2014, it grew zero percent zero percent in a time when enrollment was growing, maintenance and other costs were increasing, and local support in some areas was dropping. Our schools arent treading water. They are slowly sinking. If we had maintained that 3. 4 percent a year growth for seek, we would be spending right now an additional 550 million more than half a billion dollars more on classroom instruction. Obviously, at this point, thats an unreachable figure. But even if we adopt a more realistic goal to increase seek by 3. 4 percent for just one year, next budget year it will take 98. 6 million. Now, in addition to seek, it will take 75. 8 million to restore cuts made since 2008 to textbooks, ongoing teacher training, School Safety, technology, and programs like afterschool and tutoring that prevent dropouts by helping struggling students catch up. In postsecondary education, weve reduced funding by 166 million since 2008, leading to higher tuition, increased class sizes, fewer academic programs and course offerings, delayed repairs, more reliance on part time teachers and layoffs. Last budget, we lifted 24 million from lottery proceeds to keep the general Fund Balanced money that would have gone to financial aid. Well also need money for new debt service for critical maintenance projects, to reduce caseloads for social workers and for Health Insurance. And then, we need to start looking at fully funding allday kindergarten, expanding preschool to reach more 3 and 4yearolds, as well as increasing substanceabuse treatment. [applause] meanwhile, state employees havent had a pay raise in four years and most of them had furlough days. So my friends, anticipated Revenue Growth will not be rigorous enough to transform this state. Again, thats not rhetoric thats math. The numbers are just too big. The need is just too great. We will not be able to invest in critical areas like job training and education, nor solve monstrous problems like pension liabilities, unless we think strategically and act aggressively and courageously. In fact, if we dont act, well [applause] , well if we dont act begin slipping behind. Let me use k12 as an example. Last month, the National Publication education week, in its annual Quality Counts assessment of public schools, ranked kentucky no. 10 in the country for School Achievement and progress up from 34th just two years ago. We got an a on efforts to connect the k12 system with early learning, Higher Education and the world of work, and an aminus on our accountability and standards policies. Moving up 24 spots in just two years is stunning improvement. But you know why we didnt score higher . One word funding. In the alltelling area of funding adequacy, we received an f. And a low f at that. More than 88 percent of our students attend schools in districts where per pupil spending is lower than the national average. Now, we have a lot to celebrate in that report and our students, teachers, principals, administrators, boards, staff, parents and volunteers should be proud of what theyve done. [applause] but just think of how much more they could accomplish if we were adequately funding our schools. Money doesnt solve every problem, but when we dont spend even a dime on textbooks, progress is difficult. The question for us in this room is simple but soul searching are we courageous enough to invest in our childrens future . Another looming problem is public pensions. I made pension reform a priority during my first year in office, and in 2008 i worked with you to pass wideranging changes. We reduced Employee Benefits for future hires, improved governance, introduced Innovative Solutions to address Retiree Health care, and created a payment schedule to get funding back on track. But the work isnt finished. As you know, a legislative Task Force Led by senator damon thayer and former representative mike cherry worked hard on this issue over the last year. Th the task force has recommended further reducing benefits for future hires and paying down our unfunded liability by increasing the states annual employer contribution. Much has been made of the fact that the state hasnt fully funded the arts for quite awhile. That is true. We have not. While i cannot speak to the years before me, i can tell you exactly why we havent fully funded the courts since i became governor. Because we have insufficient revenues and it would require us to gut our most fundamental priorities, k12 education, public safety, and jb rcreation. I refuse to do it and previous legislatures agree with me. I refuse to do it in the years ahead. As we work to make our public Pension System whole again, i will not allow our School Children to be collateral damage. [applause] i agree that we need to reduce our unfunded liability. I agree that the longer we put this off, the bigger the problem will be. The question is where will the money come from. The answer is obvious, we must organize our outdated textbooks. We must modernize our outdated textbooks. Kentucky has commissioned 12 studies of its tax system since 1982. I created another one last year. Every study has reached the same conclusion, kentuckys tax code works against us, not for us. We need a tax structure that is fair to all our citizens and easy to understand. That helps recruit business, not drive it away. And that because it is aligned with 21st century economy, it is able to bring in the revenue we need to fund critical services. [applause] we must strengthen kentucky possibility to compete with other states to attract and retain jobs. Ability to compete with other states to attract and retain jobs. It could be better. The world is changing. The Commission Recommended several ways to improve our tax climate for business. Other goals concern what is called elasticity and inadequacy. We need a system that grows with the economy, bringing in money and not because it increases tax rates but because it is aligned with the des world commerce. Recommendations included changes to include a 21st century tax code for a 21st century economy. I want to thank the commission for their hard work. I know several of them are up in the audience, i wish they would stand up. We want to thank all of you. [applause] i have been evaluating their recommendations and started meeting with leadership in both chambers to discuss what progress is seasonable. Is siezable. What may be able to pass is not clear. We must use this time to begin finding consensus on both of these complex topics. We Must Find Solutions to them this year. [applause] by the end of this session, we must move closer to an agreement of both what needs to be done and how to pay for it. There are other Critical Issues that i hope we will address the session. We need to treat we need to tweak house bill 1. Notice i said tweak. We are not going to backtrack because our families are suffering too much. Can the passage of house bill 1 declared our intent to bring integrity to the prescription pain medication. By protecting patients who need a legitimate relief, by better educating about the dangers of those drugs, and by targeting those destroying our communities with greed and recklessness. These men should be commended for their tireless efforts on this issue. Please give them a round of applause. [applause] progress has been measurable. When it came to nonmedical use of prescription painkillers, kentucky had the sixth highest rate in the nation. Prescription drug abuse in kentucky has dropped so much that we have improved 24 spots. Nearly half of the states known Pain Management clinics have closed, rather than submit to new rules that protect patients. The use of our National RecognizedPrescription Monitoring Program has increased almost sevenfold as providers work to ensure that pain killers are used legally and effectively. And prescriptions for some of the most abused drugs have cropped up to 14 from just a year ago. As with most reform efforts, there are minor instances where we can improve upon the new regulatory system. We should move quickly to do so. We are not going to return kentucky to the prescription playground that it was before house bill 1. [applause] another big priority is the graduation bill. Let this be the year. We must keep our teenagers in school. A democratic senator is pushing changes that would phase in increases in mandatory schooling from 16 to 18. This was set in 1920, in a world that barely resembles the world we live in today. In kentucky alone 6000 students drop out every year. They are more likely to be unemployed, to earn significantly less money if they do find work and to find themselves on welfare or in prison. Every School District in kentucky now has alternative and support programs available for students at risk of dropping out. We just have to keep them in school to take advantage of those programs. Every Education Group in this state supports this legislation. A new survey reveals that 85 of parents favor it. It is time to commit to our childrens future. [applause] another priority is Child Welfare legislation. You will be asked to pass bills that protect our children and get them off to a better start. These include closing a gap in booster seat rules, toughening the penalties for texted while driving, how to define the review panel on deaths due to neglect. Improving our response to child victims of Human Trafficking and improving prenatal care. A special focus of this screening will be babies born addicted to drugs and suffering withdrawal. This is a horrendous and worsening problem. In 2000, reports show 29 babies in the kentucky born addicted to drugs. In 2011, there were 730 babies, more than 25 times as many. That figure is starting to go unreported. The image of an innocent baby born into this world suffering drug withdrawal is almost too horrible to visualize. Let it inspire us to act now. We also need to authorize agency bonds. A few weeks ago many of us gathered to endorse letting our public universities self funded building projects on their campuses. That was a refreshing display of bipartisan consensus. The universities are seeking authorization for six schools to issue bonds worth of 363 million for projects. They have identified Revenue Streams and will require no money from the general fund. In addition, it is estimated that those projects will create over 5100 jobs. We should not delay in improving that proposal. [applause] finally, we need to continue improving the health of our people. Over the years we have taken numerous steps to reduce kentuckys historic addiction to tobacco. We still ranked either dead last or next to last in the number of adults who smoke, teens who smoke, and pregnant women who smoke. Our addiction hurts productivity, it jacks up healthcare costs, and it literally kills our people. Our smokingrelated mortality rate is the worst in this count