Tuesday, September 20, 2016

School Funding Dreams


Recently, Gov. Brownback held a press conference to invite Kansans to email him ideas for a new school finance formula. That sounds nice. Can anything be wrong with asking people for input? Well, actually, quite a bit.

The big problem: A new school finance formula requires resources—money—and Kansas does not have any. The governor asks Kansans to think expansively, but offers no means to make those ideas real.

Tell someone to imagine their dream home. Encourage them to draw plans, and do it up just right. But if that home is financially out of reach, cheerleading has done little for them. The exercise is just something fleeting, a dream, a temporary escape from reality.

The governor’s own policies created the grim education finance situation that Kansas now faces. Income tax cuts and the LLC exemption caused a large block of general fund revenue to disappear. Before the tax cuts, Kansas had a workable school finance formula, but one which logically boosted funding for schools when enrollments and operational costs went up. With state finances spiraling downward, a formula requiring increased state aid could not stand. The governor and his legislative allies summarily scrapped it for block grants, first cutting classroom aid and then freezing that lowered funding level in place.

The block grants have not worked well. They immediately caused unequal funding between school districts, and further, they have failed to provide for the future as student counts rise and needs increase.

Beyond these problems though, the dirty little secret is that Kansas cannot even afford the block grants. In the fiscal year that just ended June 30, the Kansas general fund spent $500 million more than it took in, even with block grants in place. That happened despite the fact that $100 million in bills were deferred for payment in a future fiscal year. The general fund only stayed afloat by grabbing huge amounts from the highway fund, and raiding the balances of other funds, including those set aside for kids.

In our current fiscal year, the same thing. Higher education and Medicaid providers—doctors, hospitals, nursing homes—have already been hit hard with emergency budget cuts, but more reductions will have to be applied somewhere, just to keep the general fund solvent.

Yet, suddenly the governor wants citizens and schools to dream about a new education formula. For now he instructs you to not even talk about what a new formula might cost. That’s for later. Just concentrate on the components you want.

This approach is nothing more than a big diversionary tactic that takes the voters’ focus off the real issue until the November elections pass.

Participate if you wish. Email those ideas in, but don’t be deceived. Until the governor faces up to the severe budget problems his policies have caused, until lawmakers close the LLC exemption, until Kansas rights its financial ship, any hope for an improved school funding formula remains completely unrealistic. You—and the governor—are just dreaming.


—This post originally appeared in a variety of Kansas newspapers.



Monday, August 29, 2016

The FY 2017 Budget Won’t Work


The FY 2016 budget did not work, and it’s already clear that FY 2017 will not work either. Mid-fiscal year budget cuts are quite likely ahead.

It’s the same problem that has existed since unaffordable income tax cuts were implemented. Kansas does not have nearly enough revenue to pay even a constrained set of bills. We’re broke.

Look at the “official” or approved version of the FY 2017 budget (from FY 2017 Comparison Report, page 12). Note the large imbalance between recurring revenue and expenditures. And that’s after the governor cut expenditures from the total that lawmakers approved last May. Medicaid providers—doctors, hospitals, nursing homes—have had their payments chopped by 4 percent to save about $57 million, and higher education funding was hit for $31 million. With those cuts incorporated, the official version shows an ending balance of $96 million, a positive number at least, but far below the statutorily required 7.5 percent of expenditures. (7.5 percent of expenditures in this budget equals $470 million.)

But the official version will not hold! The imbalance between revenue and expense will grow, and the ending balance will go negative without more budget cuts or other remedial action.


First of all, the official version assumes a beginning balance of $40 million. That did not happen. Rather, the state had to stop paying bills at the end of FY 2016 in order to keep the general fund balance just above zero.

Second and most important, the estimate of recurring revenue in the official version comes from the April Consensus Revenue Estimate (CRE). We now know that the April CRE overestimated FY 2016 tax revenue by $106 million, which means the FY 2017 estimate will almost certainly be revised downward when the forecasting group meets in November. Revenue was already short by $15 million in the first month of FY 2017. If the FY 2017 revenue assumption is lowered by $106 million to match what happened in FY 2016, the general fund will immediately be insolvent, triggering more expenditure cuts.

Third, the official version counts on one-time income of $48 million from the privatization or sale of the Kansas Bioscience Authority (KBA). Quite likely that figure is overly optimistic.

On top of all that, the state pushed payment of $75 million of school finance bills from FY 2016 into FY 2017 in order to get out of FY 2016. That expenditure shift does not show up in the official version, but if it did, the expenditure total would be $75 million higher. How will that $75 million be dealt with? We don’t know, maybe through more cuts, or maybe $75 million in FY 2017 bills will be pushed to FY 2018. Remember, the state also deferred $96 million in KPERS payments to get out of FY 2016 and promised to pay those bills in FY 2018 with interest.

Kansas lives on the financial edge, unable to move confidently into the future. Income tax cuts caused this. When lawmakers convene in January, they must build a budget for FY 2018, but without changes in tax policy, it too is destined to fail.


—This post originally appeared on the Kansas Center for Economic Growth website.



Thursday, August 25, 2016

R.I.P. FY 2016 — Another Year of the Downward Spiral


Fiscal year 2016—another year in the downward spiral of Kansas finances after unaffordable tax cuts. Financially, Kansas lived day-to-day, and in the end only managed to cross over to the next fiscal year by not paying bills. And all that trouble earned Kansas another credit rating downgrade.

Let’s briefly review the extraordinary budget actions of FY 2016, actions allowed by state law during times when the budget is in crisis:
  • July 30, 2015—The governor uses allotment authority to order $38 million in budget cuts and $63 million more of one-time transfers.  This action comes less than one month into the fiscal year and right on the heels of the longest legislative session in Kansas history.
  • November 10, 2015—To keep the general fund solvent the governor uses allotment authority again, this time to make $124 million in expenditure cuts and one-time transfers.
  • March 10, 2016—The governor uses allotment authority to hit universities for $17 million in immediate cuts.
  • May 18, 2016—Once again the governor’s allotment authority is used, this time to cut the approaching FY 2017 budget by $97 million, mostly through reductions to universities and Medicaid providers.
  • May 27, 2016—The budget director announces that the 4th quarter payment to KPERS will be delayed until FY 2018, reducing expenses in FY 2016 by almost $100 million, but adding that expense plus 8 percent interest to what must be paid in FY 2018.
  • June 22, 2016—The budget director announces at a State Finance Council meeting that the state will need to delay the last school payment of the year in order to close FY 2016 above zero, and then recommends that Kansas borrow $900 million on July 1, so that the state will have cash to operate in the new fiscal year.
No wonder it seems that Kansas has been precariously on the edge. We were. We still are.

Spending in the FY 2016 budget was constrained from the start, repeatedly cut during the fiscal year, and lowered further by delaying the fourth quarter KPERS payment, but in the end, expenses were still $506 million above recurring revenue, and that’s recurring revenue which included a big sales tax increase.


To bridge the structural gap, $277 million was transferred from the highway fund and $99 million from a series of other funds, and the small beginning bank balance was depleted. (The highway fund is also being used to directly pay expenses for things like school transportation.) Without all of those transfers the general fund would have been deeply in the red, but even with them, the general fund did not balance. To finish, the state pushed FY 2016 school finance bills into FY 2017 and then paid them with borrowed money in order to keep FY 2016 in the black on paper.

The $506 million structural gap, the lack of any cash reserves, the extraordinary use of one-time transfers, the delay of bill payments, and no plan in place to fix any of it caused Standard and Poor’s to again downgrade Kansas’ credit rating—our financial report card.

Unaffordable income tax cuts produced all this!

Next up for trouble: FY 2017.


—This post originally appeared on the Kansas Center for Economic Growth website.


Which Way, Kansas?


Kansas has come to a “T” in the road and must decide whether to turn one way or the other. A more apt way to say it: Kansas has come to a “T” in the road, overshot the intersection, gone down in the ditch on the other side, and must struggle up out of the ditch and go one way or the other.

It’s a ditch of serious financial trouble. Kansas simply does not have enough revenue to pay bills. For more than 3 years running, expenses have outpaced tax revenue by hundreds of millions a year. How has Kansas survived financially? By blowing through every dollar held in reserve, borrowing, and moving money from kids’ programs and the highway fund. The state only escaped the last fiscal year by leaving approximately $175 million in bills unpaid, promising to make payment sometime in the future.

Kansas cannot do that anymore. All those use-up-the-savings, pay-later maneuvers made the state poorer and poorer, garnered yet another credit downgrade, and took us into the ditch. We are left with a stark directional choice: impose more spending cuts, or raise revenue. Deciding how to respond constitutes the most critical job lawmakers will have when they arrive at the 2017 legislative session in January.

Many current lawmakers acknowledge the financial ditch, but say it’s a spending problem. “Clearly we’re here because we haven’t cut expenses enough,” Senate President Wagle said in June.

Certainly there have been cuts—to road projects, universities, hospitals, classrooms—just not “enough.” Yet supporters of the cut-more direction often speak abstractly, rarely specifying what “more” means. In July Gov. Brownback signaled his willingness to make even deeper budget cuts, but would not name them, saying he wants the Legislature to lead the way.

In theory at least, cuts could go a lot deeper. Cut school funding in half! Withdraw all state support from universities! Put fewer highway patrol officers on the road! Dramatic, service-ending cuts can resolve the financial imbalance, and may be what some lawmakers have intended all along. Easy reductions were implemented long ago. Even a $3 million “efficiency study” commissioned by the Legislature yielded little to alter the current dynamic.

The other route open to Kansas adds revenue back. The 2012 income tax cuts—lowered rates and “business income” exemption—caused a huge swath of receipts to disappear. Income tax collections dropped $700 million the first year and cumulatively the revenue loss now exceeds $2 billion.

Lawmakers did raise sales and cigarette tax rates in 2015 to compensate, but the new revenue only dented the amount needed to make up the income tax revenue loss. So far, lawmakers have not been willing to revisit the income tax cuts that caused the state’s financial problems in the first place.

The business income exemption has elicited the most criticism. It’s unfair. People who receive paychecks, pay taxes. People who receive self-employment income, rental income, LLC income, or farm income, don’t pay. No other state sets up its tax system in such manner, so rescinding the exemption seems an obvious first step to financial health for Kansas, although that alone will not fix everything.

Which way? That’s the question at the heart of this year’s election cycle. A choice between deeper cuts to services or raising revenue has become unavoidable. Primary election voters expressed dissatisfaction with the current state of affairs by voting out many incumbent legislators. General election voters may well choose to fire some more. Election outcomes cannot remove the unpleasant choice ahead, but what happens in November will determine the path that Kansas takes.


—This post originally appeared in a variety of Kansas newspapers.



Wednesday, July 20, 2016

Income Tax Cuts Broke the Kansas Budget


Another year of revenue data just went into the statistics books. The 2016 fiscal-year-end revenue report offers more evidence of how dramatically the 2012 income tax cuts have affected the Kansas budget.`

Kansas does not receive nearly enough revenue to pay bills.

In FY 2014, general fund tax revenue fell $701 million, immediately destabilizing the budget. The revenue stream never recovered. Even after sales and cigarette tax rates were increased for FY 2016, tax revenue has not come close to reaching pre-tax cut levels.
Individual income tax receipts have been the key driver in the revenue loss, with FY 2016 collections $28 million below FY 2015, and $683 million less than in FY 2013. FY 2016 became the third year in a row in which a huge hunk of general fund tax receipts simply disappeared. Normally, income tax receipts would grow, but while other states were experiencing post-recession receipt growth, Kansas income tax revenue fell backward dramatically and stayed down. Had Kansas income tax receipts grown in a similar way to the rest of the nation, Kansas collections would have been more than a $1 billion higher in FY 2016.
Sales/use tax and cigarette tax receipts both rose in FY 2016, but as a result of rate hikes. Pushing the state sales tax rate to 6.5 % was projected to raise $176 million. In FY 2016, sales/use tax receipts were $174 million higher. Moving the per-pack cigarette tax from 79 cents to $1.29 was predicted to bring in $41 million, and actual collections grew $50 million.

Corporate income tax (tax on full corporations) fell backward by $63 million in FY 2016, but no one should be very surprised. Corporate income tax receipts are quite volatile, moving up and down, depending on economic conditions. Likewise, receipts from the severance tax on oil and gas are tied to price. With oil prices low, FY 2016 severance tax receipts ended up $71 million lower than the year before. States must plan and be prepared for variations in tax receipts from these sources. But Kansas has been left unprepared for even small variations in tax receipts because of the damage done by income tax cuts.

Certainly the reduced collections from corporate income tax and severance tax contributed to the dismal FY 2016 revenue results, but they pale in comparison to the income tax collection loss.

To deal with the severe budget problems created by the income tax cuts, lawmakers have blown through reserves, borrowed, raided the highway fund, taken money from children’s programs, cut services, and raised the sales tax rate. But they have not addressed the source of the problem—unaffordable income tax cuts. As a result, Kansas literally scrapes by financially, day by day, unable to invest in the future.


—This post originally appeared on the Kansas Center for Economic Growth website.

Sunday, July 10, 2016

A Special Session That Should Not Have Been


A last-minute special legislative session? Kansas schools brought back from the edge after being on the brink of closing? How can such things possibly be happening?

This is Kansas, after all: practical, straight-talking, fiscally conservative, always-be-prepared Kansas. Surely lawmakers must comprehend that Kansans want stability, and want to be reasonably positioned to face future challenges.

If the governor and legislators do understand, they have not shown it with their financial management of the state. The Brownback fiscal experiment has left Kansas in a highly precarious financial position. A crisis over school funding and a special legislative session are just the latest examples of the chaotic environment born of unaffordable tax cuts.

The state’s long-running school finance formula logically called for more money to go to classrooms as costs and enrollments increased. However, with finances in a downward spiral, lawmakers opted to sack the school finance formula and cut funding. Then they froze that lowered aid level in place through a block grant.

Of course, without a formula, funding inequities between school districts quickly developed. Don’t blame the Kansas Supreme Court for this. The Court did not create the situation, but rather pointed out that distributing funds inequitably does not meet constitutional muster, and ruled that lawmakers must fix it.

If Kansas had retained a properly funded school finance formula, no families would have worried about whether schools would open in August. A special session should never have been necessary.

In the crisis atmosphere of a special session, lawmakers managed to add enough money to keep schools open—certainly a positive thing—but by counting on one-time dollars from the hoped-for sale of the Kansas Bioscience Authority. Their solution may last through the November elections, but not much longer.

For three years running, Kansas has not received enough revenue to pay bills, leaving the general fund bank account utterly empty. Kansas has a rainy day fund on paper, but without money in it. The highway fund has borrowed to its limits, with road maintenance cut to a fraction of normal, bridge maintenance cut in half, and many construction projects cancelled.

Each month, as revenue falls short of expectations, something more must be cut. In March the cuts fell on universities, then on road projects, then on hospitals and doctors who provide Medicaid services, then on the universities again. Finally, to finish the fiscal year at the end of June, the governor simply decided that millions of dollars in bills would go unpaid, pushing them off for payment in a future fiscal year.

In January, the next Legislature will face the daunting task of building a new budget in which even a constrained set of expenses outpaces revenue by hundreds of millions. Plus, those future legislators will be saddled with the bills that current legislators and the governor left unpaid this year.

What happens when the next recession comes? What happens as roads and bridges continue to deteriorate? What happens as rural hospitals close? What happens as school funding proves to be inadequate? Kansas is ill-prepared to deal with any of it.

Scraping by for a time, tapping savings, and using up one-time resources might be justified if those tactics were a bridge to a more permanent solution. But there is no correction in place, no fix ready to kick in. The current financial trajectory leaves Kansas destined to stumble from crisis to crisis, dealing constantly with financial uncertainty.

Special sessions. Fights with the Court. Schools on the brink. Unwelcome national publicity. Bills paid late. Waiting lists for services. Deteriorating bridges. Get used to it, Kansans, because this will be our new normal unless we chart a different financial course.


—This post originally ran in a variety of Kansas newspapers last weekend.

Friday, July 1, 2016

The Big Shift


The income tax cuts of 2012 that continue to wreak havoc on the Kansas budget did not actually yield a reduction in taxes for many Kansans. Lawmakers raised other taxes and fees to partially offset the loss of income tax revenue. The net result: Wealthy Kansans still benefitted, but the overall tax burden for a wide range of working Kansans went up.

The newest shift cropped up at the end of the legislative session. As a result of income tax cuts, Kansas cannot afford enough highway patrol troopers, so legislators passed a bill to raise vehicle registration fees to cover the cost of hiring more.

But that’s a small example of the shift in progress. The following list shows the more consequential changes implemented in the attempt to compensate for income tax cuts:
  • Sales tax raised from 5.7% to 6.15% and then raised further to 6.5%
  • Renters no longer eligible for homestead property tax refunds
  • Food sales tax rebates limited
  • Child care income tax credit, along with many other credits, eliminated (for those who still pay income tax)
  • Cigarette tax raised
  • Many income tax deductions limited (for those who still pay income tax)
The chart below estimates the average net effect of all the tax changes. (The figures come from the Institute for Taxation and Economic Policy, which has the best model for measuring these types of changes in any state.)



Kansans with the lowest income have seen their tax burden go up. For middle-income Kansans, it’s been about a wash. Upper-income Kansans, especially those earning more than $500,000 annually, have come out well.

Of course, a sales tax hike takes a far bigger bite out of a small income than a large one. Lower- income Kansans spend a much higher proportion of their resources on food and other items subject to sales tax than wealthy Kansans do. Many states exempt food purchases from sales tax, or at least apply a lower rate. Not Kansas. We now have the highest sales tax rate on food in the nation.

The chart does not even count other kinds of shifts taking place. Property taxes push up as schools and local governments try to react to dwindling state resources. Tuition rises at universities when the state withdraws support. Future taxpayers get saddled with debt because the state borrows to pay for retirement system costs, and borrows through the highway fund to shore up the general fund.

However, even with all this shifting, Kansas remains broke. The hole created by the income tax cuts has been so significant that shifts to other tax sources have not come close to stabilizing the state’s finances.

Income tax cuts benefitted the wealthiest Kansans, but without any obligation to create a job or even spend their tax savings in Kansas. In return, the state received financial turmoil. Many Kansans now pay more to fund state government at the same time that school class sizes go up, and highway maintenance gets put aside.

If you are a Kansan and do not feel like you’ve had a tax cut, that’s because you probably did not get one.


—This post originally appeared on the Kansas Center for Economic Growth website.

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