Thursday, April 28, 2016

Kansas Budget Goes Deeper Underwater

Kansas revenue forecasters just lowered expectations for tax revenue In FY 2016 and FY 2017 by $348 million, putting the budgets for those two years deeply in the red.

Make no mistake. The problem directly results from steep income tax cuts enacted in 2012 and 2013.

Note the chart below. In FY 2013, general fund tax revenue reached a high of $6.333 billion, and then fell to $5.632 billion in FY 2014 after the income tax cuts were fully implemented. Tax revenue stayed at that low level in FY 2015, growing only a scant $85 million. The revised revenue estimate now predicts tax receipts will grow to $5.865 billion in FY 2016 and to $6.039 billion in FY 2017. But remember, that growth only occurs as result of tax increases, passed in the last legislative session, that were supposed to be worth more than $375 million each year.

Again, tax revenue fell sharply in FY 2014, and has never come close to recovering, even after lawmakers imposed the biggest tax increase in Kansas history. Yes, current economic conditions have some effect on revenue collections, but it’s the 2012 and 2013 income tax cuts that have brought down the state budget.

Let’s plug in the new revenue estimate to analyze the effect on FY 2016 general fund finances. The result: With just over 2 months left, the FY 2016 budget is now $137 million underwater. That deficit occurs after a $17 million cut to universities in March, after numerous other program cuts, after freezing school funding in a block grant, and after transferring $280 million from other funds. And that’s after raising the sales tax to the point where Kansas has the highest sales tax on food in the nation.

Now look at FY 2017. Same story. Assuming the governor and legislators somehow erase the FY 2016 deficit, FY 2017 will open on July 1 with a beginning balance of zero, but estimated revenue does not nearly pay for the scrunched-up expenditures approved for FY 2017, leaving an ending balance $174 million below zero.

Between now and the end of June 2017, lawmakers will have to somehow adjust the budget by more than $300 million, not so that Kansas can flourish, but so that Kansas can just barely scrape by with no money in the bank.

This situation will keep repeating itself and continue to drag Kansas down, until lawmakers go to the source of the problem and correct it.

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

Kansas Needs a ‘No Excuse’ Revenue Estimate

General fund tax collections have failed to meet the mark every month but one in FY 2016. Each instance has triggered expressions of anguish, frustration, and despair, because every miss means something negative—more money transferred away from children, cuts to higher education, lost hope for public schools, or crumbling roads.

Kansas finances have become a high wire act with no net. Lawmakers have an empty bank account and limited options when revenue collections underperform. The financial hole stemming from the 2012 income tax cuts is so deep that even two sales tax rate hikes did not balance the budget.

The revenue estimating misses in FY 2016 follow a rocky record in FY 2014 and FY 2015, mostly a result of inaccurate forecasts of income tax receipts. In FY 2014, the consensus estimate at one point predicted income tax receipts would reach $2.525 billion, but when the fiscal year ended, collections only totaled $2.218 billion—a $307 million miss. In FY 2015, estimators again predicted income tax receipts would hit $2.525 billion, but the actual amount turned out to be $2.277 billion—a $248 million miss. The same pattern may be taking place in FY 2016. The current estimate predicts $2.450 billion, but through March the state has fallen behind last year’s pace.

Granted, establishing an accurate and predictable revenue trend does not come easily when tax policy changes dramatically, or goes where no state has gone before. But the excuses being offered for the recent estimating misses don’t add up.

Multiple administration sources have tried to place the blame on a bad economy. Yet, that does not explain the forecast errors. The revenue estimators had a realistic view of the economy last November. Read their report, and some sample excerpts below:

“Most major economic variables and indicators have been adjusted downward since the Consensus Group last convened in April.”

“Kansas Gross State Product (GSP) growth for 2015 has been reduced to 1.2 percent from the previous estimate of 2.3 percent.”

“Specific to the Wichita area, neither total employment nor manufacturing employment has returned to pre-Great Recession levels.”

“The forecasted price per taxable barrel of Kansas crude has now been reduced to $35.”

The weakening Kansas economy is not a surprise.

Lately, the governor has tried to blame the estimating process itself, intimating that some different method would work better. Don’t buy it.

The Consensus Revenue Estimate (CRE) is a consensus between the State Budget Director (on behalf of the governor) and the Director of Legislative Research (on behalf of the legislature). The two directors and their staffs receive economic data and advice from 3 consulting economists, and they rely on tax data and advice from the Secretary of Revenue.

Nothing gets into the CRE without agreement from the governor’s budget director. Everything in the CRE is based on tax information brought by the Secretary of Revenue. The governor is not a victim of some broken process. Key people in his administration are in charge of it.

The governor’s budget director and revenue secretary have been architects and supporters of the governor’s tax plan. They wanted a different revenue outcome from the one we have, maybe even truly believed in a different outcome, and perhaps that is why they have had so much trouble getting the CRE low enough. Sinking tax collections continue to put the lie to the original promises.

Huge income tax cuts, benefitting mainly the wealthy, have not brought economic prosperity to Kansas. Rather, those unprecedented tax cuts have wrecked the state budget.

Kansas does not need a change in the process of estimating revenue. What our state does need is for the key players to provide a hardheaded assessment of what really is going to happen, not what they hope will happen.

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

Friday, April 1, 2016

‘A tragic, mind-blowing loss to Kansas’

$1 billion forfeited, with more money lost each day, each hour. Inaction makes the problem worse with every passing minute. Surely such a situation should spur Kansas lawmakers to action.

For two years running, Kansas has turned down the opportunity to expand Medicaid eligibility, and to have the federal government pay the full cost. This winter the tab for saying “no” topped $1 billion and continues to mount.

Did the refusal to accept these federal dollars bring some other benefit to Kansas? Will anyone pay lower taxes as a result?

No. The money is simply relinquished, gone from the state economy, a tragic, mind-blowing loss to Kansas.

150,000 more Kansans could have had health coverage for the last two years. Most of these individuals work, but their earnings are too low for them to afford health insurance, and they are not eligible for an insurance subsidy.

Some still received health services by showing up at hospital emergency rooms, but those hospitals took a loss by providing uncompensated care. Especially for rural hospitals, such losses make financial survival much more difficult.

Most states have already expanded Medicaid eligibility. Kansas remains one of 19, predominantly southern states, that have held ideologically firm against Obamacare. That’s the reason—a blind objection to anything that might be connected to Obamacare. Policy challenges over cost or implementation strategy have all been answered.

Do you want Medicaid to look more like a private insurance plan? Then set it up that way. Arkansas did. Should recipients pay something? Fine. Indiana requires that. What about incentivizing healthy behavior? Okay. Iowa took that approach. Should expansion be budget neutral, now and in the future? Sounds great. A bill proposed in Kansas does exactly that.

Kansas lawmakers could solve this in a hurry if they did their policymaking job and figured out how to make expansion work on Kansas terms. Call it KanCare expansion, if that helps, but go forward.

When Republican Asa Hutchinson became the new governor of Arkansas in 2015, he sought to continue the state’s expansion that had been previously put in place. Explaining why, he argued that turning away federal dollars that more than 30 other states were receiving would punish Arkansas. "It is perfectly consistent, it is perfectly conservative and logical to oppose Obamacare as a federal policy and yet accept federal dollars under the Medicaid program in Arkansas."

Exactly. Hurting ourselves to protest Obamacare conjures up the old adage of cutting off the nose to spite the face.

Most Kansas citizens have arrived at that same conclusion. Whatever Kansans may think of Obamacare, independent surveys by the Docking Institute and by the Kansas Hospital Association both show wide approval of expanding Medicaid eligibility.

When Gov. Brownback dismissed expansion in his State of the State address, when House Speaker Merrick removed potential yes-votes from the health committee, when Americans for Prosperity began targeting pro-expansion legislators with negative mailers, they clung to an anti-Obamacare ideology at the expense of the economic and physical health of citizens. By refusing these federal dollars, Kansas engages in needless self-destructive behavior.

More than $1 billion has already been lost to the Kansas economy. These funds cannot be recovered, but losses can be cut going forward. A bill is ready that legislators can still pass this session. If lawmakers wait, they’ll be shortchanging Kansas hundreds of millions more.

— This column originally ran in a variety of Kansas newspapers last weekend. A version also aired on Kansas Public Radio affiliates, which you can listen to here.

Saturday, March 5, 2016

A No Confidence Budget

By Duane Goossen

Kansas lawmakers just passed a revised budget that covers the remainder of this fiscal year, but they showed little confidence that their budget would actually work. To hedge, they added provisions allowing the governor to “delay” the final retirement system (KPERS) payment, or simply cut appropriations at the last minute in order for Kansas to escape financially from FY 2016.

The KPERS provision allows the governor to make only 3 quarterly payments into the retirement system this fiscal year, if money runs out. The fourth payment must still be made, but not until next year, and then with 8 percent interest tacked on. That means 3 payments in FY 2016, but 5 in FY 2017. In other words, the KPERS payment gets put on the credit card. The state slides by now, but pays big time next year.

Alternatively, or in addition, the governor can unilaterally make cuts to almost any part of the budget before the end of the fiscal year. Not enough money to pay expenses? Just don’t pay.

These provisions have a “trigger mechanism” that has already triggered. The governor receives the authority to delay the KPERS payment or cut spending when the general fund balance falls below $100 million, a mark hit long ago.

Lawmakers gave the governor this authority knowing the unlikelihood of the state having enough money to meet budgeted expenses. These extraordinary provisions allow lawmakers to dump the situation back on the governor and leave town without addressing the real problem—a large structural budget imbalance caused by unaffordable income tax cuts.

Consider expenses. The revised budget sets general fund expenses at $6.298 billion. That budget already imposes many spending cuts, leaves school funding with inequities, accepts operational problems up and down state government, and shifts $106 million of school transportation costs to the highway fund for payment.

But Kansas will not receive enough revenue to meet that conservative set of expenses. Even though sales tax rates were raised to record levels, the official revenue estimate only forecasts $5.972 billion in recurring revenue, but Kansas is not currently on pace to garner that. To get the rest of the way, lawmakers have agreed to transfer more than $300 million from other funds. And when that’s not enough, the governor can delay the last KPERS payment, or cut programs some more.

Uncertainty prevails. Agencies and schools do not have assurance that they can count on their appropriations. Kansas lives day-to-day on the financial margin.

The fallout from the income tax cuts is exacting a high toll on Kansas finances, a crippling problem that will continue until lawmakers face the mistake that has been made.

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

Thursday, February 18, 2016

Tax Plan’s Back Door Success

By Duane Goossen

Has the “real live experiment” in Kansas tax policy been a success? Did it live up to its billing?

If we simply judge whether it met publicly stated objectives, then no, the plan failed miserably. But in another important respect, the plan achieved exactly what many lawmakers hoped for, the squeezing down of state government.

Recall claims from four years ago when Kansas decision-makers dramatically lowered income tax rates and exempted more than 300,000 individuals from paying any tax on “business income.” Citizens were told to expect a “shot of adrenaline right to the heart of the Kansas economy,” a shot so potent, that despite tax cuts, the state budget would still balance.

After implementation of the tax cuts, all of that adrenaline talk soon turned sour. Sure, Kansas has grown economically coming out of the Great Recession, but slowly. More slowly than our region, and more slowly than the nation. In new job creation — a key measure for this experiment — Kansas ranks among the lowest 10 of all 50 states. Economic indicators show no correlation that the tax cuts helped Kansas boost its economy.

And state finances? What a mess. The revenue loss from the income tax cuts put the state budget drastically in the red. In response, lawmakers raised sales tax rates twice, which transferred more of the state’s tax burden to low-income Kansans but did not come close to correcting the budget imbalance. Lawmakers also blew through the state’s reserves and transferred hundreds of millions away from highways and children to barely eke out a budget.

But therein lies the secret to the “success” many lawmakers really sought. If you want to cut programs and force state government to be smaller, starving the revenue stream provides the easiest route.

No politician wants to look a constituent in the eye and say “I’m going to cut schools,” or “I’m going to reduce maintenance on the highway you travel.” But with a tamped down revenue stream, politicians can say, instead: “We have to live within our means.”

Indeed we do. In Kansas, if the general fund bank account has no money, then no spending can take place. At the federal level, the “starve the revenue” approach does not work as effectively because the federal government has the ability to run up deficits and borrow money to fill the gap. Kansas cannot do that, at least not directly.

So in the name of “living within our means,” lawmakers cut operational aid for schools, then froze funding in place through block grants. State employees have lost benefits, and received no raises in 8 years, leading to critical staff shortages at state hospitals and prisons. Maintenance on roads and bridges has been chopped, services for low-income Kansans cut off, Medicaid expansion turned away, and the Bioscience Authority demolished.

And it will get worse. Kansas cannot even afford the current scrunched-up level of spending. This year’s budget only balances by using large one-time transfers from other funds. All budgetary efforts now focus on downsizing and cutting back, with little thought given to how our state should invest for a better future.

Evidence shows up everywhere that the tax plan fundamentally failed to provide sound finances or deliver economic prosperity, but the governor and supporters of the tax plan brush it off. Maybe they disregard the evidence because they don’t care. After all, it appears that the real goal of Kansas tax policy went undisclosed at the front end. The architects of this plan may well be pleased with reductions of services to the state’s citizens.

If you truly bought into the argument that giant tax cuts would lead to prosperity without hurting schools and highways, you’ve been had.

Meanwhile, those wanting Kansas to spend less, regardless of the consequences, have met success.

— This column originally ran in a variety of Kansas newspapers over the weekend.

Thursday, February 11, 2016

Small Ripples in a Big Pond of Troubles

By Duane Goossen

Kansas lawmakers paid $2.6 million for a 257-page, recently released efficiency review of state government. What should we make of it?
  • The most important section of the report—budget process review—tells lawmakers to structurally balance the budget (recurring revenue equals expenses), and establish a rainy day fund, two critical financial practices that have been completely upended in Kansas by the 2012/2013 tax cuts.
  • Even if lawmakers implement every single “efficiency reduction,” Kansas will still not achieve structural budget balance or have a rainy day fund. $2 billion in potential savings may sound big, but that amount represents a cumulative 5-year total, a substantial share of which does not accrue to the general fund. Plus, the savings estimates for some of the components are just guesses, and likely too high. Further, items like the sale of surplus property, or depleting cash balances in school districts, produce only one-time dollars. And lawmakers will never, even in the wildest of dreams, ever implement all the recommendations.
  • A large swath of the recommendations do not represent efficiency savings at all, just plain cuts. For example, $543 million in “savings” over 5 years, more than a fourth of the grand total, would be garnered by reducing health benefits to state employees and teachers. State employees would all be moved to a high deductible health plan. In this scheme, the state pays less and employees pay more; not a good move when the state struggles to fill positions at state hospitals and prisons.
  • Several items actually propose an increase in spending in order to secure more revenue. Spend more to get more. Supposedly, about $50 million a year could eventually be garnered by hiring 54 new tax auditors and collection agents. If that is true, staff reductions of the last few years have seriously hurt the efficiency of the Department of Revenue, just as they have also damaged the operations of state hospitals and prisons.
  • The review turned up some things that are worth doing—such as better coordination of insurance purchases, and energy savings ideas. Certainly state government should always work to provide the most efficient services possible with taxpayer dollars. However, items that might be classed as easy or “low-hanging fruit” were already accomplished long ago as the state struggled through the Great Recession and then grappled with reduced revenue as a result of tax cuts.
So, charge ahead, lawmakers. Implement every item that truly makes Kansas government more efficient. But remember that the key issue you face is not inefficiency. The 2012-2013 tax changes so damaged the state revenue stream that Kansas does not have enough income to meet even a conservative or “efficient” set of expenses. That’s the real problem that must be fixed so that Kansas can once again invest in the future.

— This entry was originally posted on the Kansas Center for Economic Growth website.

Saturday, January 30, 2016

Governor’s Budget Prolongs Financial Trouble

The two most important recommendations in the recently released Alvarez and Marsal “efficiency review” of Kansas government went unheeded in the governor’s budget.

The efficiency report tells lawmakers that in order to be financially healthy, Kansas must have a structurally balanced budget—one in which recurring revenue at least equals expenses. And the state needs a rainy-day fund or reserves. The governor’s budget proposes neither.

FY 2017 will be the fourth fiscal year in a row with general fund income well below expenses. Each year lawmakers have scrambled to fill the resulting gap, first by blowing through $709 million in reserves, and then by withdrawing record amounts from the highway fund and other funds. The governor’s revised budget for FY 2017 proposes more of the same.

Brownback’s 2012 income tax cuts, which disproportionately benefitted the wealthiest Kansans, first damaged state finances in FY 2014. In a normal time, income tax revenue would rise, but in FY 2014 it fell $700 million, and then stayed down at a dramatically diminished level. Today, annual income tax collections would be $1 billion higher, if not for the 2012 tax cuts. Instead, recurring general fund revenue only reaches an estimated $6.1 billion in FY 2017, even after lawmakers raised sales and cigarette tax rates last year.

The governor’s proposed $6.4 billion in expenditures exceeds expected FY 2017 income by $300 million, even though the governor applied spending cuts to state programs in July, again in November, and now again in January. And remember, the $6.4 billion spending level has schools stuck in block grants, disregards state employees, leaves troubles at state hospitals unaddressed, and does not provide enough Highway Patrol troopers. In addition, the state has taken on unprecedented debt in an attempt to cut spending in the short term.

On paper, the governor’s budget shows FY 2017 ending with a small bank balance. His budget is built using the November revenue estimate, but already in December revenue collections missed the mark, basically wiping out the paper balance. Any further revenue deterioration will require even more budget cuts or transfers in what remains of FY 2016 and in the proposed budget for FY 2017. State law requires the general fund ending balance to be 7.5 percent of expenditures. For a budget that spends $6.4 billion, that calculates to $480 million.

Until lawmakers acknowledge that the 2012 income tax cuts went much too far, and fix the problem, Kansas will stagger from budget crisis to budget crisis. Schools and state agencies will continually face an uncertain future, in which funding can be pulled out from under them at any moment. And the state’s political energy will be focused on crisis resolution rather than investing in education and other essential services that matter for the future.

To be financially healthy again, Kansas must raise its income stream to cover expenses, as well as build back reserves. The simplest, most direct solution would repeal the gaping tax loophole that exempts most businesses, including some very, very large limited liability corporations, from paying any income tax at all.

Adopting the governor’s structurally unbalanced FY 2017 budget only guarantees that Kansas will continue to struggle, and face financial troubles again next year.

— This entry was originally posted on the Kansas Center for Economic Growth website.

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