Fletcher came under increasing criticism from both parties after his involvement in a state employee hiring controversy, in which Fletcher was accused of illegally hiring civil service employees for their political affiliations and loyalties. An investigation by the Attorney General of Kentucky and a special grand jury led to the indictment of 13 Fletcher administration officials. Fletcher issued a blanket pardon for anyone in his administration (other than himself) who was or may have been involved in the scandal. Fletcher himself was later indicted by a grand jury for three misdemeanors: conspiracy, official misconduct and political discrimination. All were related to the merit system investigation. On August 24, 2006, Fletcher reached a deal with the Attorney General's office that led to the dismissal of the charges in exchange for Fletcher's acknowledgment that "the evidence strongly indicates wrongdoing by his administration with regard to personnel actions within the merit system. Further, the governor hereby states that these actions were inappropriate and that he regrets their occurrence and accepts responsibility for them as head of the executive branch of state government." (See Ernie Fletcher: Merit system investigation) Fletcher's approval rating as of May 11, 2007 was at 38%, putting him among the lowest governors in the nation.
Anne Northup, who was defeated for re-election to the House of Representatives in 2006, and Paducah businessman Billy Harper challenged Fletcher in the Republican primary. Both had supported and worked for Fletcher's 2003 campaign. Despite his troubles, Fletcher was able to fend off the primary challenge, winning a majority of the vote (see below).
On the Democratic side, an increasingly competitive primary campaign developed. Louisville businessman Bruce Lunsford spent over five million dollars, most of it being his own money, in the campaign. On May 7, Kentucky State TreasurerJonathan Miller withdrew from the race and endorsed Steve Beshear. Lunsford, Beshear, State House Speaker Jody Richards, and former Lt. Governor Steve Henry consistently polled significantly ahead of the other candidates. Given the crowded field, many believed a runoff election was likely between the top two finishers—which polls suggested would be Beshear and Lunsford—if no candidate was able to obtain at least 40% of the vote. Beshear, however, was able to avoid a runoff with 40.9% (see below).