Friday, June 27, 2014

Beware of Fiscal Year 2016

By Duane Goossen

The state budget that lawmakers have put in place for the fiscal year beginning July 1 is badly out of balance, making mid-year budget cuts the first order of business when the Kansas Legislature returns to session in January.  But as hard as it may be to make those cuts, an even bigger problem awaits—putting together a new budget for FY 2016.

Look at the situation in the State General Fund year by year:

FY 2014 (July 1, 2013 to June 30, 2014).  Revenue collections fell very sharply in FY 2014 as a result of dramatic tax policy changes in 2012.  When all of the numbers are finally tallied, spending will have exceeded receipts by about $350 million, cutting the state’s bank account in half.

FY 2015 (July 1, 2014 to June 30, 2015).  Lawmakers approved a budget for FY 2015 with spending set $322 million higher than the official revenue estimate, which essentially wipes out the rest of the bank account.  But that’s the best case scenario.  Given what we now know about revenue collections in FY 2014, the FY 2015 revenue estimate is almost certainly too high.  If revenue does not come in as estimated, spending must be cut to keep the bank balance above zero.

FY 2016 (July 1, 2015 to June 30, 2016).  Next January lawmakers will face setting a budget for FY 2016 at a time when the state is already set to spend over $300 million more than it takes in.   Spending pressures will only be upward from there.  Revenue will be flat or low growth.  The bank account will be empty. 

Spending pressures will be upward because of Kansas' Medicaid obligation and its Kansas Public EmploymentRetirement System (KPERS) obligation — both of which the state cannot avoid, because perpupil aid to public schools has been cut and needs to move back up, and because the state’s population and demand for quality services is growing.

Revenue will be flat or low growth because more income tax rate reductions are set to kick in.  The top rate has already dropped substantially, but in calendar year 2015 it will drop further from 4.8 percent to 4.6 percent.  The resulting revenue reduction hits full force in FY 2016.  The bottom rate drops from 3.0 percent to 2.7 percent in calendar year 2016, affecting revenue in the last half of FY 2016.




Somehow, spending and revenue will have to be equalized in FY 2016 just to keep the bank balance above zero.  However, financial prudence and state law call for the bank balance to be at 7.5 percent of expenditures, which is about $500 million, not zero.

The fallout from the tax policy sometimes termed the “Kansas experiment” is now hitting the Kansas budget hard and fast.  The state’s bond rating has been downgraded.  Short-term borrowing to pay bills is way up.  The state’s financial problems will become steadily more apparent.  Without a change of course, Kansas faces years of difficult budgets.

→ Have a question for Duane? Email: duanegoossen@gmail.com.

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