Wednesday, December 10, 2014

Breaking: Gov. Announces Cuts, Reality Remains Unchanged

By Duane Goossen

The allotment plan just issued by the governor buys a little time with mostly short-term budget fixes to get Kansas through fiscal year 2015. However, the plan does little to alter the main dynamic at play in the Kansas budget: Even though the current set of expenses are lean, they far exceed a diminished revenue stream.

The governor’s plan to plug the FY 2015 budget hole does two basic things. First, it proposes transfers of $217 million
 (*) to the general fund from various other funds. These transfers require legislative approval. If approved, they will count as one-time revenue to the general fund. Second, the governor uses his allotment authority to unilaterally cut approved FY 2015 expenses by $62 million. (*)

Here’s how the FY 2015 general fund profile looks as a result of the governor’s actions, assuming legislators approve the transfers:

Under the governor’s plan, by using up the beginning bank balance, raiding other funds, and making some spending cuts, the general fund will finish FY 2015 with a zero balance — the bare minimum.

That moves the focus for the state’s budget problems squarely to FY 2016. The general fund profile below shows the new outlook for FY 2016.

Without new revenue, lawmakers will need to cut approximately $669 million just to keep the general fund solvent in FY 2016. That would be more than a 10 percent cut to every single item, on top of the cuts the governor already imposed in FY 2015.

Even under the governor’s new plan, the reality remains the same:

Lawmakers had better find a way to increase revenue, or the cuts to education and other state programs are going to be deep and highly distressing.

* Some of the expenditure "cuts" shown in the governor’s plan are actually revenue transfers to the general fund. For example, Dept. of Transportation expenditures are cut by $7.8 million, which benefits the Highway Fund, but the savings from the Highway Fund would be transferred to the general fund if approved by the Legislature.

Sunday, December 7, 2014

Momentous Budget Session Ahead

By Duane Goossen

Lawmakers have quite a job awaiting them. During the next legislative session they must first fix the existing FY 2015 budget, and then look into the future and create new budgets for FY 2016 and FY 2017.

None of it will be pleasant.

Fiscal year 2015 (shown below) is almost half over. Expenses total $6.427 billion, but estimated income only reaches $5.768 billion, leaving a $659 million gap to bridge.

A portion of that gap can be closed by using up the $380 million that was in the bank at the beginning of the year, but that still leaves another $279 million to go, just to get to an ending balance of $0.

Zero is the minimum balance. It should actually be much higher. State law and financial prudence require an ending balance equal to 7.5 percent of expenses — about $500 million. However, that’s an impossible goal for this year. Just achieving a zero balance will not be easy. 

The Speaker of the House and several other lawmakers have announced their intention to solve the problem with spending cuts alone.

Good luck.

That almost certainly means cuts to public education. Kindergarten through 12th grade education accounts for over half of general fund expenses. Medicaid, an unrealistic area for reduction, accounts for another 20 percent. Without reductions to K-12 education, the cuts to the remaining portions of the budget — higher education, other human service programs, and public safety — would be impossibly deep.

Other legislators have expressed the hope that revenue will turn out to be better than estimated. Not likely. The current FY 2015 revenue estimate was dramatically revised downward after the elections, but may still be too high.

Many budget watchers are predicting that a transfer from the Highway Fund will ultimately be used as a short term repair to the FY 2015 budget and a way to avoid education cuts. A $279 million transfer would require cuts to road programs, but the transfer would count as a revenue increase to the general fund, allowing FY 2015 expenses to remain at $6.427 billion. But in that scenario, the real pain is simply delayed until FY 2016 (see below).

The FY 2016 beginning balance will be zero under almost any scenario. Estimated revenue totals $5.811 billion. That means, without more revenue, there will be $5.811 billion to spend. That’s it. In FY 2016, some one-time expenditures can be taken out of the spending base, but the state will face new costs for Medicaid and KPERS, pushing expenses above $6.5 billion, and creating a more than $700 million imbalance.

In FY 2017, the official revenue estimate totals $5.877 billion. New Medicaid and KPERS costs will keep coming.

Here’s what lawmakers cannot escape: Current expenses are more than $6.4 billion a year and rising.

Without new, ongoing revenue, that set of growing expenses must somehow be whittled down and made to fit within a revenue stream that appears to be roughly $5.8 billion per year and staying relatively flat.

Kansas had better figure out a way to get some more revenue, or a lot of program cuts lie ahead.

• • •

Readers: The Kansas Budget Blog will take a holiday break. Watch for new posts in early January. Thanks for reading! And Happy Holidays!

Sunday, November 30, 2014

Say "Yes" to Medicaid Expansion

By Duane Goossen

Click on this link. Spend a few moments watching the ticker there.

If you clicked, you saw dollars, fleeting before your eyes. Those dollars are fleeting away from Kansas because our political leaders have so far said “no” to expanding eligibility for Medicaid. Their decision has negative economic and negative moral implications.

Medicaid is a health program for low-income Americans. In Kansas, about 400,000 citizens, mostly children, receive health services through Medicaid. The federal government pays about 57 percent of the program's cost and Kansas pays 43 percent. However, if Kansas were to expand eligibility for Medicaid to more adults, the federal government will pay all of the costs for those newly eligible, until January 2017. After that, the cost split gradually goes to 90 percent federal, 10 percent state.

This new opportunity to cover more people began last January 1, and as that ticker shows, in less than a year, Kansas has already foregone more than $300 million and counting. More than half of states — 27 — so far have expanded Medicaid eligibility. Two more are actively considering doing so. Kansas is among the minority who have declined these federal funds to insure our most vulnerable citizens, but we still have the opportunity to change course.

Despite what many may think, it’s currently very difficult for an adult to receive Medicaid services in Kansas. Most childless adults do not qualify, regardless of income. Adults with children must have an annual income (family of four) below $9,063 to qualify.

Expanding eligibility would potentially allow 150,000 adults to gain access to health care, many of whom do not have any health insurance now. Uninsured Kansans often show up at hospital emergency rooms when they need care. The hospital provides the care, but in most cases receives no payment.

Why would Kansas turn away $400 million a year that the federal government would willingly spend here? Why would Kansas pass on the opportunity to have thousands of people gain health insurance coverage?

I cannot think of a good reason.

Consider a comparative example: Kansas political leaders from both parties have worked exceptionally hard to land the National Bio and Agro-defense Facility (NBAF) in Kansas. The project has the potential to bring in some hundreds of millions of federal construction dollars along with several hundred future jobs. Kansas has already issued $45 million in bonds and committed more than $100 million to attract the federal project. Great — but why not a similar effort to pull in an even greater amount of federal dollars and to give health insurance and peace of mind to fellow Kansans?

The Kansas budget is in trouble — now. The revenue stream has fallen so low that it no longer supports even a lean set of expenses. Expanding Medicaid eligibility would not add to the short-term problems. However, tragically, our self-imposed budget crisis has put our lawmakers in such a defensive posture that it’s a hard sell to agree to a future 10 percent match in order to attract $400 million now and each year going forward.

Break out of this crippling mindset, Kansas. Don't miss the opportunity to benefit our economy, Kansas hospitals, and uninsured Kansas citizens. Say "yes" to Medicaid expansion.

Sunday, November 23, 2014

Lawmakers! Put the Money in the Classroom

By Duane Goossen

If you own a car, you know there are a bunch things to pay for: taxes and tags, insurance, oil changes, tires, and probably monthly installment payments. You also have to buy gas. Even if you spend a lot of money on those other things, without gas the car won’t go far.

The same is true for public schools in Kansas.

Producing high quality education requires buildings, computers, school lunches, and a retirement program for teachers. But it also requires classroom operating funds — the gas. Over the last six years, Kansas has let up on the gas for education, and the danger of more cuts is now quite high.

The best measure for judging whether Kansas is letting up or pushing down on the education gas pedal is Base Aid Per Pupil (BAPP). The main operating budget of each school district is determined by BAPP multiplied by the number of students. That basic budget is funded by a 20 mill statewide property tax levy which raises just under $600 million in FY 2015, and by “general state aid” from the Kansas general fund. During the past six years, the amount of money for general state aid has decreased, while the number of pupils has increased, leaving the BAPP $548 — or 12 percent — lower than it was in 2009.

The chart below lists the major areas of school funding provided by Kansas and the federal government. The first line shows the General State Aid drop.
Note that some areas of school funding have gone up, which has enabled Gov. Brownback to claim that total school funding is growing, even though the critical money for “gas” has been cut.

Kansas lawmakers have little discretion on most items in the chart:
  • Last spring the Kansas Supreme Court ordered lawmakers to increase Supplemental Aid, which provides a partial match to local property taxes to help less wealthy school districts fund local option budgets. 
  • Federal rules require Special Education to be maintained at minimum levels.
  • The state pays the employer share of Retirement costs for teachers and must increase that amount each year.
  • Some school districts receive state Bond and Interest Aid to help make loan payments on buildings, a promise to those districts that cannot be easily broken. 
Lawmakers do have discretion over general state aid, and they have chosen to let it decline. The result: classroom sizes are growing and Kansas districts are less able to competitively attract and retain high-caliber teachers.

As the budget debates heat up, keep your eye on Base Aid Per Pupil — the gas that runs the education system. Simply maintaining the present level is not good enough, especially given that the BAPP has fallen for years while classroom sizes have grown.

For the future of our state, our governor and legislators should be pushing the BAPP back up.

Monday, November 17, 2014

So, What’s On The Kansas Budget Chopping Block?

By Duane Goossen

Kansas faces a very immediate budget crisis. At least $279 million of expenses must be removed from the current budget just to keep the state financially solvent.

Where will the cuts come from? Is it possible to protect education?

The pie chart below shows how State General Fund expenses are currently allocated for fiscal year 2015.

A $279 million spending cut is roughly equal to a 4.5 percent across-the-board cut to everything in the chart.

But not everything can be cut.

Medicaid costs are going up, not down, and the state has little choice but to pay these costs in full. That’s especially true since Kansas has signed contracts with three private managed care companies to provide Medicaid services via KanCare.

So take Medicaid out of the calculation. (Note: that's 20 percent of the budget.)

Without touching Medicaid, a $279 million spending reduction would require about a 5.5 percent cut to everything else. That’s why public education advocates are very concerned. A 5.5 percent cut — implemented after more than half the school year has gone by — would be quite serious.

Now consider this: what if K-12th grade education is protected from cuts along with Medicaid?

Then, a nearly 15 percent across-the-board cut would be required on the remaining items: higher education, public safety, other human service programs, and general government. And that's just to achieve the $279 million expenditure reduction needed to stay solvent for this fiscal year. Grim, to say the least — particularly with even more tax cuts scheduled for coming years.

There’s another option legislators will likely consider: Take money from the Highway Fund. Separate from the state’s general fund, the Highway Fund receives income from fuel taxes, vehicle registration fees, a portion of state sales tax receipts, and the federal government. 

But no, there isn’t money simply sitting around in the fund that can be easily and painlessly transferred out. The Highway Fund just borrowed $250 million this past summer, and has outstanding debts of about $2 billion from previous borrowings. However, by canceling or delaying projects, and cutting back on highway maintenance, it would be possible for lawmakers to free up money to transfer to the State General Fund. However, unless lawmakers are prepared to make transfers every year into the future, moving money from the Highway Fund is simply a short-term measure that temporarily delays the required general fund cuts.

Once lawmakers figure out how to solve the $279 million problem in FY 2015, they get to determine how to cut spending by another $400 million or so, just to stay above water in FY 2016.

And what if the Kansas courts rule that school finance is inadequate? What if the recently revised revenue forecast is still too optimistic? 

Well...then the cuts will have to be even deeper still.

Tuesday, November 11, 2014

Now It’s Official: The Kansas Budget is Crashing

By Duane Goossen

It is now official: Kansas must make deep budget cuts yet this fiscal year just to stay financially solvent.

The state’s revenue estimators met Nov. 10 and significantly lowered the official outlook for the amount of income that Kansas is expected to receive.

The new forecast released yesterday shows receipts far below expenses.

First, look at fiscal year 2015.

Expected revenue — plus the beginning balance in the state bank account — total $6.148 billion.

Approved spending plus additional costs required to pay for Medicaid and school finance total $6.427 billion.

Even after completely draining the reserves in the state bank account, $279 million must still be cut from already approved spending just to keep the state solvent.

However, that's a small problem compared to the next two years.

Think about this: while the state budget is in serious trouble now, expenses will continue to grow next year. At the very least, the state will need to add $76 million for Medicaid costs in FY 2016, and another $52 million to cover commitments to the state retirement program, according to projections by the nonpartisan Kansas Legislative Research Department. (Not to mention, the state should also be planning for more students in school, higher costs for road maintenance, and salary increases for state employees.)

But what is the official forecasted revenue for FY 2016 from yesterday's report? $5.811 billion.

For FY 2017? $5.877 billion.

Remember: current expenses are $6.427 billion. Costs are growing. Revenue is falling. And even more tax cuts are scheduled to take effect.

It’s not possible to sugarcoat this. The current set of Kansas services must be dramatically downsized.

Here’s the saddest part: Everyone is now on defense. Advocates for public education, higher education, human service programs, public safety, and highways will all be working hard to defend what they have.

All of the state’s political energy will go toward figuring out how to constrict and pull back. No one will be thinking about things like offering a world-class education to Kansas students or otherwise investing in the state's future.

Saturday, November 1, 2014

Final Pre-Election Budget Report Confirms: Time To Change Course

By Duane Goossen

This is serious, Kansas!

Our state is now a third of the way through fiscal year 2015 and revenue collections are far below last year’s pace, as reported today. Mid-fiscal year budget cuts are ahead! Education and other key state services are in peril!

Do the math:

Expenses in the legislature's approved FY 2015 budget total $6.325 billion.

The state began FY 2015 with a reserve balance of $380 million.

But even after draining that reserve, the state would have to collect $5.945 billion just to stay above zero.

Is Kansas on track to collect that much? Not at all.

In all of the last fiscal year, revenue totaled only $5.653 billion — and that was a drop of $688 million from FY 2013. If FY 2015 revenue were to just stay even with FY 2014 — and that's a big 'if' — the state still would have to cut expenses $292 million before this fiscal year is over. But FY 2015 revenue is not even keeping pace with last year — it’s falling, as today's report shows. 

Meanwhile, unavoidable costs are rising: expenses for Medicaid, the retirement system, education, and other public services — yet more income tax rate reductions are scheduled for each year until 2018.

The math simply doesn’t work.

The state budget is crashing, and the Brownback administration pretends not to notice. The administration's election campaign message is to stay the course!

Don’t look away, Kansans. Take notice, and change course!

Monday, October 27, 2014

Save Kansas from Disaster: Elect Davis and Docking

By Duane Goossen

Each day, the string of national news articles about Kansas finances continues unabated — including recent stories from The New York Times, The Washington Post, NPR’s Planet Money, Rolling Stone, Business Insider, and The Daily Show, just to name a few. It’s as though our financial policy has six toes and three ears and everyone wants to have a look.

Financially, Kansas has been taken way out to the very end of the spectrum among states. We Kansans have become the subjects of the now infamous “fiscal experiment.” We have gone where other states don’t go. No wonder those outside Kansas are interested in how we are conducting business.

However, for those of us who live in Kansas, the fiscal experiment is far more worrisome than it is interesting. State revenue fell $688 million in fiscal year 2014 and continues to decline in FY 2015. Economically, we have underperformed our neighboring states. Our lawmakers face a huge budget imbalance that enlarges to $672 million in FY 2015 if revenue just stays flat — but in the first three months of FY 2015, revenue is falling. Education and other key services are in peril.

Kansas badly needs a change of direction. The damage from the fiscal experiment has already been incalculable and has the potential to get far worse.

Turning things around though, will be quite challenging. It will require leaders who know Kansas and have great skill at working within Kansas government — leaders who will take a bipartisan approach and govern with a strong coalition of Democrats, Republicans, and Independents. An understanding that Kansas must be fiscally healthy in order to achieve a quality education system will be critical.

Paul Davis and Jill Docking have those attributes. They are joined and supported by Kansans from all parties. Many current and former Republican and Democratic officeholders publicly voice enthusiastic endorsements of Davis and Docking. Educators from across Kansas have rallied in support of Davis and Docking, knowing that the future of Kansas education rests on a change in political course. Kansans committed to running human service programs in a respectful way also back Davis and Docking. Citizens who would not dream of “experimenting” on their own personal finances in such a risky way, have signed on with Davis and Docking to get Kansas back on a responsible track.

The fiscally responsible thing to do now is to vote for change — vote for Davis and Docking. Our state has been taken out to the edge. Davis and Docking, walk us back to a moderate, commonsense, practical Kansas.

Sunday, October 19, 2014

Fiscal Irresponsibility

By Duane Goossen

A year ago, the Brownback administration cut off $70,000 of federal grant funding that local charities were using to connect Kansans who need food with the federal food stamp program. 

Stopping the grants did not save Kansas taxpayers a dime. Nor did it help the Kansas general fund.

But that financial decision did hurt hungry Kansans and the charities trying to help them, and denied the Kansas economy some federal dollars that now flow elsewhere.

Such a decision, which saves no money, takes dollars out of the Kansas economy, and hurts Kansas citizens all at the same time, is fiscally irresponsible and also just plain mean.

The governor has also kept Kansas from expanding Medicaid eligibility to more people. For the first three years, the federal government would have paid the entire cost of Medicaid expansion and then 90 percent of the cost after that. As many as 180,000 Kansans could have benefitted and received health care coverage. A majority of states have already done an expansion. The constantly running “ticker” on the Kansas Hospital Association website shows that Kansas has missed out on over $270 million federal dollars just since January 1, dollars that would have helped Kansans, the state's hospitals, and our economy.

That’s fiscally irresponsible.

The decisions to cut outreach grants and deny Medicaid expansion came in addition to the Kansas fiscal experiment. The state sales tax rate was kept high, which means Kansans pay more for their food. But income tax rates were lowered sharply, and the income for many businesses, including some very large businesses, was exempted from state income tax entirely.

The net result has been a dramatic drop in state revenue, down $688 million in FY 2014 and dropping further in the first quarter of FY 2015. Expenses are hundreds of millions above receipts. The savings account being used to pay the difference is almost gone.

The premise of the tax policy changes was to create jobs and economic activity, but Kansas has been surpassed by its neighbors in job creation. The Brownback policies have shifted more tax responsibility toward low-income Kansans, and at the same time have left Kansas in a financial position where we must cut back and pull away from critical education and service programs.

The financial decision the governor made to implement the experiment was fiscally irresponsible and utterly reckless.

Don’t reward fiscal irresponsibility. Return Kansas to a commonsense, practical approach.

Monday, October 13, 2014

Time to Foreclose on the "Fiscal Experiment"

By Duane Goossen

Walk into any Kansas bank and say, “I’ve got an idea and I want to borrow some money.”

Will the bankers give you a loan? Not without a lot more information. Not without a business plan that shows calculations of how your idea might reasonably work.

Yet in Kansas we have embarked on a far-reaching fiscal experiment without any kind of hard-nosed business plan that calculates how it might function or how it will impact the state budget.

  • If income tax rates are cut, how will that revenue be replaced?
  • With sales tax receipts? With property tax increases?
  • With economic growth?
  • If new jobs must be created to replace the revenue, how many new jobs will it take?
  • And by when must those jobs be created?
  • Will education and other state services be affected?
We have no plan that even pretends to show how the experiment might succeed. No spreadsheet that outlines details. No timeline. No metrics for what would constitute success or failure.

Rather, we simply have a promise that something grand will happen, and state revenue will almost magically replenish.

That promise has not been borne out by the results so far:

  • Revenue fell $688 million in fiscal year 2014. 
  • In the first three months of FY 2015, revenue has continued to go lower. 
  • The state’s savings account has been emptied out to pay for the growing imbalance between revenue and expenses. 
  • Kansas faces a financial crisis that imperils education and other vital services. 

So now the promise has changed to: Just wait long enough, and something grand will happen.

How? The governor says he will create 100,000 jobs over the next four years, but provides no details.

Even if that much job growth were realistic and could actually occur, would that fix the budget? Let's see.

Imagine 100,000 new jobs each paying a $50,000 salary (about $25 an hour). If the holder of each job paid $1,500 in state income tax, the revenue would eventually total $150 million each year. Eventually.

However, the imbalance in the state budget is far greater than that right now and is growing.

Notably, the Kansas Policy Institute, an organization outside state government but with close ties to the governor, gives us a look at the consequences of the fiscal experiment by modeling a five-year budget plan. Their plan proposes state cuts to education and other programs, and a giant raid on the Highway Fund. It’s all about pulling in, cutting back, downsizing, and making do with less. The plan provides no hope for investing, improving, or taking Kansas education into the future.

In round one, a fiscal experiment was begun without any hard numbers on how things might work, and it failed.

Now the governor wants to go on to round two, and there are still no hard numbers showing how it's supposed to work.

Kansans, it's time to foreclose on the experiment. Don’t wait for it to get even worse.

Monday, October 6, 2014

Revenue Down! What Does It Mean?

By Duane Goossen

In fiscal year 2014, receipts fell $688 million from the previous year.

Now three months into FY 2015, revenue is coming in below the FY 2014 level. That has very serious implications.

Travel through the numbers, looking first at a comparison of first quarter collections

Several things are of note:
  • Individual income tax collections are down $51 million from last year, a 9 percent drop. Total revenue has fallen $33 million for the quarter.
  • Corporate income tax collections were up. That’s not too surprising given that tax rates for full corporations have not changed. The exemption from state income tax given to LLCs and S Corporations affects individual income tax collection amounts.
  • The Department of Revenue has been actively trying to settle outstanding tax cases to pump up receipts, so there is likely one-time revenue in the first quarter FY 2015 totals. Plus, the state is $26 million behind on planned transfers out of the State General Fund, transfers which, if made, would have reduced the FY 2015 total even more.

What does it all mean?

The “official” FY 2015 profile for the State General Fund (shown below) assumes revenue will be $321 million higher than the amount actually received in FY 2014. Even with that optimistic assumption the ending balance is projected to be only $29 million.

If the revenue estimate were changed to assume no growth from FY 2014 to FY 2015 (shown below), the ending balance immediately goes far below zero. Remember, FY 2015 first quarter receipts are actually below the FY 2014 level right now, not flat.

The State General Fund cannot go under zero, so a scenario like this means mid-fiscal year budget cuts.

More importantly, this signals big trouble for the future. Current expenses are set at $6.325 billion. If FY 2015 revenue does not grow — which is more and more likely — it will be $672 million below expenses: a huge structural budget imbalance.

But future expenses will keep going up, while at the same time, even more tax rate reductions are scheduled to kick in.

Kansas is on a financially irresponsible path that will be very painful and difficult to fix.

 → Info sheet on the Kansas Budget
 → Duane's presentation slides from recent speaking engagements

Monday, September 29, 2014

A Regressive, Math-Challenged, Five-Year Plan

By Duane Goossen

Kansas revenue has dropped dramatically and no longer comes close to covering expenses. Standard & Poor’s and Moody’s have downgraded the state’s bond rating because the gap between revenue and expense has grown very wide following the implementation of Gov. Sam Brownback’s tax plan.

Under the governor’s tax policy, what happens if Kansas only maintains current spending levels, adding just enough each year to cover growing bills for a few things that must be paid (such as Medicaid)?

Kansas Legislative Research Department (KLRD) estimates show that within five years, the state bank balance would be $1.284 billion below zero. But the state is not allowed to go in the hole. Something must give. The gap will have to be closed.

But how?

The Kansas Policy Institute (KPI) believes they have an answer in a recently issued five-year budget proposal. Pay attention, because it provides one example of what the governor’s tax policy may mean for the future, and given KPI’s close ties to the governor, this plan may be what he intends.

Using the $1.284 billion below zero estimate from KLRD as a starting point, KPI advocates both revenue and expenditure changes over a 5-year period to get to a positive $1.131 billion balance.

That’s a $2.416 billion swing. The chart at right shows how they do it.

Wow! A billion dollars from the Highway Fund. It’s possible to add to the State General Fund in that manner, but there is an offsetting consequence: a billion dollars of cuts to road maintenance and highway projects. (Note that the Dept. of Transportation just borrowed $250 million this summer, and still has an outstanding principle balance of about $2 billion on previous borrowings.)

And what happens for public education and higher education if there indeed is a willingness to take a billion from the Highway Fund? In the KPI plan, public education gets a $148 million cut in state funding this fiscal year, higher education gets a $38 million cut in this fiscal year, and then they both go nowhere. Stuck.

That’s how bad the budget outlook is.

A billion dollars out of the Highway Fund and the associated transportation cutbacks do not yield new investment in education or anything else. It just props up a broken State General Fund.

And then there is the matter of the math error. (*See below.) Another $802 million must be cut from somewhere — education, state employees, prison system, etc. — to arrive at the balance claimed by KPI. And that’s in KPI’s optimistic scenario, which has revenue growing by $321 million in FY 2015. If, in the likely event that revenue comes in lower, more unspecified cuts would have to be applied in addition to the $802 million.

Take notice, Kansas.

Kansas public education, state universities, Highway Fund supporters, and the unnamed recipients of an $802 million looks like you are the “beneficiaries” of the Kansas fiscal experiment.

* The KLRD model can be used to show that the ending balance would be $1.284 billion below zero in five years without adjustments. But remember, the balance is not allowed to go below zero, so in the KLRD model, spending is reduced enough each year to get to a zero balance. KPI starts its calculations from the spending assumptions in the KLRD profile and fails to identify $802 million in cuts that in the KLRD model are assumed to already have been made, somewhere.

Monday, September 22, 2014

Kansas Out on the Edge

By Duane Goossen

Remember how state revenue plummeted in April, May, and June? Well, we finally have information that compares the Kansas experience to that of other states.

No other state dropped as far as we did — yet more evidence that Kansas is out on its own at the very end of the spectrum.

The Rockefeller Institute of Government — the go-to source for information about state revenue collections — just issued numbers on what happened across states in the April-May-June quarter.

Kansas income tax collections came in 43 percent below the same period a year earlier. We already knew that, but we did not know how Kansas compared to the rest of the nation.

The answer: Kansas had the steepest drop of all states in both individual income tax and in combined revenue.

Nationally, the average income tax decline was 7.1 percent. Income tax collections in most states went down somewhat, confirming that the timing of capital gains income likely played a small part in the Kansas decline.

However, given that the Kansas drop-off was comparatively so large, these new numbers clearly show that the Kansas decline had far more to do with tax policy changes.

The Kansas Department of Revenue wanted us to believe the drop in that period was all about capital gains, when it simply was not. That should make reporters and everyone else very cautious about taking at face value what the Department says, particularly as reports about September revenue collections emerge.

The Department has political incentive to make the September numbers look as high as possible, and has been working to settle outstanding tax collection cases — so watch carefully for one-time receipts that are counted into the total.

Also: watch carefully what the state does with revenue transfers. Delaying scheduled transfers makes monthly revenue appear higher, but only temporarily.

Kansas revenue went down $688 million in fiscal year 2014 and it's staying down at that level now during FY 2015. More income tax rate reductions are scheduled to kick in all the way through 2018, further depressing receipts. Revenue no longer comes close to covering expenses.

The dramatic changes in Kansas tax policy have caused budget problems and service reductions, but so far the effect has been softened by spending down the state bank account to cover the difference between revenue and expense. The bank account will be gone within this fiscal year.

The most profound consequences of Gov. Brownback's tax policy are still yet to come.

Monday, September 15, 2014

An Unfair Tax Policy

By Duane Goossen

Kansans like things that are fair, practical, and commonsense — but those words don't describe Gov. Sam Brownback’s tax plan. 

Low-income Kansans pay more. The wealthiest Kansans receive a huge break without any requirement to keep their newfound tax savings in Kansas. The resulting revenue shortfall has put the state budget on a path to default.

The governor’s tax plan, which passed the Kansas Legislature in two phases, simultaneously decreases some taxes and raises others. The net effect is a dramatic reduction in state revenue. 

The plan decreased state revenue significantly by lowering income tax rates, and entirely eliminating state tax on business “pass through” income. Those revenue decreases were partially offset by keeping the sales tax rate at 6.15 percent instead of letting it drop to 5.7 percent, and by limiting income tax deductions and credits. (A March 27 article from the Center for Budget and Policy Priorities provides more detail and discussion.)

Kansans do not benefit from the tax changes equally.

A revealing graphic from the Kansas Center for Economic Growth shows who paid and who benefitted in tax year 2013, the first year of the plan.

Lower income Kansans get an income tax rate cut, but pay more in sales tax. They are no longer eligible for refundable food sales tax credits and homestead property tax credits for renters. Net outcome: They pay more taxes to the state. (Steve Rose gives examples in a May 3 Kansas City Star editorial.)

Middle income Kansans receive the income tax rate cut, but their income tax deductions are limited, and they pay more in sales tax than they otherwise would have. Their net outcome is a slight reduction in overall tax payments that many likely did not notice.

Upper income Kansans pay the higher sales tax rate and have more limited deductions, but the benefit from income tax rate reductions far exceeds any new tax costs. Upper income taxpayers often have a more complex structure for receiving income, also allowing many to benefit from the elimination of tax on “pass through” business income. (Josh Barro, in a June 27 New York Times piece, uses himself as an example to provide an understandable account.)

All Kansans bear the brunt of the state budget problems that are now playing out because revenue has dropped so dramatically. K-12 education has been hurt by reduced funding to classrooms. Human service programs have been cut. The Highway Fund has been tapped to pay for other things. 

And even still, the budget does not balance.

Monday, September 8, 2014

Kansas Revenue Remains in Critical Condition

By Duane Goossen

Don’t be misled by campaign season rhetoric.

Income to the State General Fund (SGF) remains critically low. As a result, Kansas is headed toward current year spending cuts that will affect education and other key programs.

Here’s the summary: In FY 2014, SGF revenue dropped dramatically — $688 million from the previous fiscal year. In order for the SGF to barely stay solvent this fiscal year, revenue must rebound by $300 million. If revenue does not grow, spending will have to be cut. After the first two months of FY 2015, receipts are below the FY 2014 level. Revenue went way down in the last fiscal year, and is staying down.

The Kansas City Star was on the mark with its September 2 editorial about revenue collections.

For readers who want to dig deeper into the numbers: Look first at the current FY 2015 SGF budget summary below. Kansas began FY 2015 two months ago with $380 million in the bank. The official revenue estimate of $5.974 billion (established last April with incomplete information about individual income tax receipts) is $321 million higher than the amount received in FY 2014.

Approved spending has been set $351 million above the optimistic revenue estimate. Even if the revenue estimate somehow comes true, the state will end FY 2015 with a dangerously low $29 million bank balance.

Now look at the figures below comparing receipts from the first two months of FY 2015 to that same period in FY 2014. Revenue is flat and not on track to grow. In fact, the FY 2015 amount of $764 million is artificially high because $34 million in transfers — transactions that reduce revenue — were not made as planned in August, and instead will reduce revenue in some future month.

Revenue during September is likely to follow the same pattern. For taxpayers making quarterly income tax payments, the third quarterly installment is due in September. Quarterly payment amounts in April and June were significantly below previous years. Low quarterly payments in September could easily cancel revenue gains that might come from sales tax or corporate income tax.

FY 2015 looks bad, but it’s only a warm-up for FY 2016. Expenses will keep growing, but even more income tax rate cuts are set to take effect all the way through 2018. The governor’s tax plan has produced a dismal outlook for the State General Fund.

Monday, September 1, 2014

Get a Grip, Regents

By Duane Goossen

I was struck by the recent comment of a University of Kansas official: “Flat is the new up.” He was referring to state funding for Kansas higher education, and the now diminished hope for what the state can provide.

He’s right, of course. Flat funding is the best that the Kansas higher education system can expect. But even that has become a high bar and an unlikely outcome.

Current state financial policies have placed resources for kindergarten through 12th grade education in severe jeopardy, but post-secondary education is even more vulnerable. Look where things are now:

In actual dollars, state funding for higher education reached a high in fiscal year (FY) 2008, then took a big hit during the Great Recession and has floundered since. As the chart shows, support goes up $28 million in the approved FY 2015 budget, but before getting too excited about that, consider that the FY 2015 amount — $794.1 million — is $35 million less than 7 years earlier.

Is the FY 2015 appropriation even realistic? Can state support grow enough to get back to where it once was?

Revenue to the State General Fund has been reduced so severely that spending in the approved FY 2015 state budget is $351 million above expected income. If revenue comes in as estimated, the SGF can just barely stay solvent by using up the remaining balance in the state bank account. However, the official revenue estimate was completed last April with incomplete information and is far too optimistic. A much more likely scenario requires current fiscal year spending cuts.

For FY 2016 and beyond, the state faces a situation in which the revenue stream will be hundreds of millions below current spending levels. Unavoidable expenses like Medicaid will continue to rise, even as more income tax rate reductions take effect and further restrict revenue.

State finances are badly out of balance. Something will have to give way.

Get a grip, Regents! You are headed down a rocky path. The current set of state policies has made your state support anemic, and will hurt higher education even more in future budgets.

Watch out, students and parents! The direct result of declining state support is higher tuition and more fees. That’s been happening, and it will get worse.

Brace yourselves, Kansans! We have had a higher education system that we can be proud of, but that won’t last if we do not nurture and invest in it.

Monday, August 25, 2014

Yes, Kansas Education is in Trouble

Many numbers about Kansas public education finance are flying. It can all seem confusing and complicated.

But don’t let the thick flock of numbers obscure two simple truths about our situation:

     1) Kansas classrooms have been hurt.
     2) Under current policies, the future will be worse. 

If you want to dig deeper into what’s happened with school finance, carefully read Mark Tallman’s excellent blog post: "Facts about Kansas school funding: up, down or flat?" 

Tallman — Associate Executive Director of the Kansas Association of School Boards — helps readers understand how the various components of school finance add up. The key chart from his post is shown below.

School district funding that can be used for classrooms and educational programs has been declining. At the same time, the total number of students statewide has been going up, leading to increased classroom sizes and diminished educational opportunities for each child.

The trend in the chart corresponds to the per pupil funding decline in the Kansas school finance formula from $4,400 per pupil six years ago to $3,852 this school year — and the reduction in state appropriations for General State Aid from $2.175 billion in FY 2009 to $2.030 billion in FY 2015.

That brings us back to the two simple truths:

1) Kansas classrooms have been hurt. The governor and a slim majority of legislators have chosen a path that has reduced the resources going to classrooms.

School districts have received new dollars to cover costs of the Kansas Public Employees Retirement System, for building construction, and for federal food assistance — all funding that Kansas lawmakers have little choice over, and funding that does not pay for classroom operations.

Some like to add all of that up and say, “See, school districts have plenty.” But that’s a cover-up for what is happening at the heart of the system, and an attempt to make us look away from the real issue.

2) Under current policies, the future will be worse. The Kansas revenue stream has been cut so severely that it does not even cover school finance at present levels, let alone allow for classroom growth. The state’s bank balance is being drawn down to pay expenses that are hundreds of millions above income. 

But the bank balance will soon be gone. Spending in the current FY 2015 state budget needs to be cut back. Even greater spending reductions will be required to balance the budget in the next fiscal year as additional income tax rate reductions kick in. The budget situation has the state hamstrung.

In truth, Kansans, we have a growing problem right at the heart of our education system.

Monday, August 18, 2014

New Budget Numbers Show Hard Reality

By Duane Goossen

The Kansas Legislative Research Department (KLRD) has released updated budget numbers.  We now know exactly what happened in fiscal year 2014, and have confirmation of the very difficult financial situation ahead.

In FY 2014, State General Fund revenue plunged $688 million from the year before as a result of dramatic tax policy changes instituted in 2012 and 2013.  Even though FY 2014 spending was lower than 6 years earlier, expenses still exceeded the diminished revenue amount by $329 million, bringing the state bank balance down to $380 million.*

For FY 2015, the governor and lawmakers have already approved a budget that sets spending** $351 million higher than estimated revenue, pulling the bank balance all the way down to $29 million.***

But remember, the FY 2015 revenue estimate is far too optimistic.

The FY 2015 revenue estimate was set last April with incomplete information.  The estimate forecasts growth of $321 million over actual FY 2014 receipts.

That’s not going to happen.

In July, the first month of FY 2015, receipts were already $31 million lower than the previous July.  Not a good start.

What if receipts in FY 2015 only equal the receipts received in FY 2014? Then, before this fiscal year is over, the state will need to cut approved spending by $292 million just to keep the State General Fund solvent.

Imagine the bright side for the moment. Imagine that receipts do come in as predicted and the state ends FY 2015 with $29 million in the bank. What does that then mean for FY 2016?

Expenses will be growing just to cover new Medicaid costs and required increases for the state retirement system. Revenue will at best be flat as even more income tax rate reductions kick in.  KLRD predicts that lawmakers will have to cut $238 million to keep the SGF balance above zero.

Again, that’s the optimistic scenario.

The KLRD profile shows that if Kansas stays on the present course, the state will have a $1.3 billion negative balance by the end of FY 2019. However, the state cannot let the SGF go below zero, so something must give way.

Kansans, we have to face a hard reality.

The governor’s tax plan has torn up the budget. The problem is coming fast and hitting hard. Education and key state services are in great jeopardy.

* Last month the state budget director reported a FY 2014 balance of $434 million, but without any of the supporting revenue and expenditure information that KLRD now provides.  As it turns out, that reported balance figure was only “cash-on-hand” and did not take into account encumbrances—essentially, checks written but not yet cleared.

** The FY 2015 approved spending amount includes expenditures of $24.1 million that have “shifted” from FY 2014 to FY 2015.  The spending was approved for FY 2014 but was not spent—perhaps because a construction project was behind schedule or some similar reason.  Although not spent in FY 2014, that spending authority has shifted forward to FY 2015.

*** State law requires the ending balance to be 7.5 percent of expenditures.  With spending set at $6.325 billion, the ending balance should be $474 million.  Lawmakers exempted themselves from the ending balance law for FY 2015.

Monday, August 11, 2014

Woe to Education Finance

By Duane Goossen
Funding for public education in Kansas is in big trouble!

Costs for supplies, electricity, transportation, and teachers’ salaries are all increasing. But for the coming academic year, schools must cover those growing expenses with $548 less for each student than they had 6 years ago — 6 years ago. And the state’s grim financial situation imperils any prospect for improvement.

The Kansas school finance formula may seem complicated on the surface, but the key calculation is easy to understand. At its root, a school district’s budget is determined by an amount per pupil multiplied by the number of students. School districts can then add on a “local option budget” of up to 33 percent of the basic budget. Schools must run their classrooms and education programs within that total.

In the 2008/2009 school year, school budgets were based on a per pupil amount of $4,400 — the high point for school finance in Kansas. For the upcoming 2014/2015 school year, lawmakers budgeted $3,852.

School budgets are financed by a combination of state funding and local property tax funding. A change in either state funding or property tax funding affects the per pupil amount. The per pupil figure has dropped because state funding has dropped.

Yes, school districts also receive funds for to pay for other things:  the Kansas Public Employees Retirement System (KPERS), special education, school building construction, capital outlay, food service, etc. However, that funding must be used for its intended purpose. In fact, in most districts, special education aid does not cover the full cost of providing services and must be supplemented from the district’s general budget.

Most notably, the cost of the employer share of school employee KPERS contributions has increased dramatically as the state works to repair an underfunded retirement system. The state sends funding to cover the KPERS expense to school districts, and they in turn send it immediately to KPERS. The KPERS funding makes it look like the state is putting more money into schools, but it’s a so-called “pass-through.” That increased funding does not pay the electric bill or a teacher’s salary, for example.

Is the state in a position to add money to push the per pupil amount up? Definitely not.

In fact, the $3,852 per pupil budgeted for the upcoming school year is probably unreachable given that midyear cuts likely will have to be imposed on the FY 2015 state budget.

For the year following, Kansas faces a situation in which the state’s expenses — without any increase for school finance — will be hundreds of millions higher than revenue. The state’s bank account will be empty and unable to make up the difference.

The fallout from the governor’s tax plan has made investment in Kansas public schools impossible.  At best, the state can only tinker with school finance, which leaves two options: more funding from property taxes, or more school district cuts.

That’s not a recipe for progress.

Total Pageviews