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.

Friday, June 10, 2016

Set Up for More Financial Trouble


Expect financial turmoil in Kansas to continue.

Lawmakers left Topeka after approving revisions to the budgets already in place for FY 2016 and FY 2017, but failed to solve the underlying problem facing the state.

As a result of unaffordable tax cuts, Kansas does not receive enough revenue to pay bills.
Here’s the high-level general fund profile for FY 2016 based on legislative action:

Now let’s go one step further and break out the one-time transfers from total revenue:


The FY 2016 budget that lawmakers passed has a large structural imbalance, and would leave the general fund $140 million below zero at the end of the fiscal year. To avoid the negative ending balance, lawmakers are expecting the governor to use his powers to transfer yet another $70 million from the highway fund. That would technically increase general fund revenue, but it’s more one-time money that does not narrow the structural imbalance. Lawmakers also expect the governor to “delay” a $96 million payment to the retirement system until FY 2018, which would lower total expenditures in FY 2016 but increase expenditures in FY 2018.

Now, look at FY 2017 based on the recent legislative budget action:


Again, let’s go one step further and break out the revenue projection to show one-time transfers:


The FY 2017 budget also has a large structural imbalance, and a negative ending balance. Lawmakers are expecting the governor to order an additional transfer of $115 million from the highway fund, and to also cut expenditures (details of the cuts unknown) enough to avoid the negative ending balance.

Now consider FY 2018. When lawmakers convene a new legislative session in January, they must create a brand-new budget for FY 2018. How will that work?

Recurring revenue in FY 2017 totals $5.9 billion. With luck, that might grow a little in FY 2018, but under current policy, hoping for much more than $6.0 billion would be quite optimistic. Legislators set expenses for FY 2017 at $6.324 billion, but in FY 2018 expenses will be higher. The 4th quarter KPERS payment from FY 2016 must be paid. Add $96 million plus 8 percent interest for that. Medicaid costs will go up $60 or $70 million, maybe more. Of course other costs will rise as well, but just the Medicaid and KPERS increases alone will push expenses to $6.5 billion, far above recurring revenue. And the bank account will be empty and the highway fund tapped out.

Will lawmakers be able to address problems in the budget like staffing shortages at state hospitals and prisons? Not without making the overall financial situation worse.

What if happens if the Kansas Supreme Court declares school funding constitutionally inadequate? The state will have little recourse.

What happens if the economy actually goes into recession? Everything gets worse.

The Kansas budget has been structurally unbalanced every year since the 2012/2013 tax cuts went into effect, putting the state in a highly precarious financial situation. Budget actions in this legislative session did not address or correct that.

The state’s grim financial prognosis will persist until the underlying problem gets fixed.


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

Friday, May 13, 2016

Unseat the Illiterates


Governor Brownback declared April to be Financial Literacy Month in Kansas. Yes, that’s true, although unbelievably ironic given the state’s current financial condition.

But don’t fault the governor for making such a declaration.

The purpose, to encourage Kansans to be well-prepared to manage money, credit, investments, and debt, is a fine idea. The concept of a financial literacy month has been promoted nationally, and other governors made similar declarations.

Kansas even has a website, KansasMoney.gov, devoted to improving financial literacy. During April, Kansans had the opportunity to win an I-pad mini by registering on the site, and filling out five learning modules “designed to increase your financial IQ.”

Do fault the governor, though, and the legislators backing his policies, for ignoring the very principles they believe the rest of us should use in our own personal financial management.

Take stock of what happened in Kansas during our April financial literacy month. The official revenue estimate was revised downward, plainly showing that Kansas does not have enough income to pay bills. But that’s no surprise. The Kansas budget has been upside down ever since the governor’s “fiscal experiment” kicked in three years ago, dramatically lowering income to the general fund.

The state has survived financially only by using up every dollar in the state savings account, by raiding other funds to shore up the general fund, and by borrowing. Now the governor proposes more of the same.

Here’s one of his solutions: Make only three quarterly payments into the retirement system this year, but promise to make the fourth payment next year, or the year after. Kansans, try that kind of maneuver with your personal finances and see what happens. Call your mortgage company and say you just can’t make 12 house payments this year, so you’ll do 11, but promise, promise, promise that next year you’ll do 13. Don’t expect to win an I-pad mini.

Or get this: The governor’s preferred option would sell future income that Kansas receives from the nationwide tobacco settlement, income that currently pays for early childhood programs. That amounts to a giant payday loan with a terrible interest rate. Kansas would receive a lump sum payment to plug the budget hole this year, but would pledge a much greater sum in future paychecks to pay off the loan.

And this: The governor has announced the cancellation of many planned road projects. Highway maintenance and bridge repair efforts have already been zapped. All so that even more money can be taken from the highway fund to pay general fund bills.

The governor’s “solutions” leave Kansas poorer and less flexible while insuring that the state’s budget problems will repeat the very next year. If you do not have enough money to pay your bills, cleaning out your savings account or taking out a high-interest payday loan or no longer maintaining your house and car will not fix your problem. That’s financial literacy 101.

The governor and lawmakers are flunking state financial literacy, and Standard and Poor’s essentially told them so at the end of April by putting Kansas on a negative credit watch. Kansas already has one of the least favorable credit ratings for U.S. state governments. S&P warned that if Kansas opted for more gimmicks over real solutions, the state’s credit rating, its financial report card, would notch down again.

Election season looms with every Kansas House and Senate seat on the ballot. It’s nice that April was designated for citizens to improve their financial literacy, but it seems most Kansans already have a better grasp than their lawmakers. Before voting, check out legislative candidates carefully. If a candidate supported Brownback’s fiscal experiment and wants to stay the course, being a financially literate voter requires marking your ballot for somebody else.


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

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