Tuesday, December 15, 2015

It’s the Income Tax

The Kansas general fund revenue stream is not large enough to cover even a scaled-down, conservative set of expenses, and the problem lies squarely with the income tax.

Earlier this month, Kansas revenue estimators lowered the forecast for FY 2016 and FY 2017 revenue. They revised their previous estimate of sales tax receipts downward sharply, but only dropped their estimate for income tax collections slightly. This caused some observers to say, “See, sales tax is our problem, income tax receipts are doing fine.” But that is a big analytic miss.

The only reason that income tax receipts are close to meeting “expectations” in the first four months of FY 2016 is because the expectations have by now been set amazingly low.

Travel back just a few years. In FY 2012, Kansas received $2.908 billion from individual tax collections. Then in FY 2013 the Brownback income tax cuts started to kick in. The tax cuts only affected a portion of that fiscal year, so tax receipts still grew 0.8 percent to $2.931 billion, but in that same year nationwide, the average state benefitted from a 13.8 percent income tax receipt increase.

The Kansas tax cuts hit full force in FY 2014. Income tax revenue plummeted 24.3 percent, a $713 million drop down to $2.218 billion. Other states experienced weak collections in FY 2014, with the average state down 1.2 percent, but nothing like the catastrophic drop in Kansas.

In FY 2015, Kansas income tax collections barely inched up, growing 2.7 percent from their rock bottom FY 2014 level, while other states experienced 9.0 percent average growth. During the last legislative session, lawmakers eliminated most income tax deductions and offered a tax amnesty to pull in delinquent payments, and so estimators now expect income tax receipts to reach $2.450 billion in FY 2016 and $2.485 billion in FY 2017, but still hundreds and hundreds of millions below where receipts once were.

What if Kansas had not changed income tax policy? Instead, what would have happened if our income tax receipts had grown at the average national pace? Take a look. In FY 2015 Kansas would have collected $3.563 billion, well over a billion more than we actually received.

By this measure, Kansas has given up $2.715 billion as a result of income tax cuts in FY 2013 through FY 2015, and we are on pace to give up another billion-plus in FY 2016. Although we cannot know exactly what might have been, it is quite plausible that Kansas income tax receipts would have grown at the national average.

If the income tax cuts had never occurred, the Kansas budget would easily balance today. The sales tax rate would be at 5.7 percent, not 6.5, the state would have reserves, and with careful management there might even be enough resources to lower the sales tax rate on food. But that’s only a dream now.

Kansas produced a self-inflicted financial crisis. The way out of it is to go to the source of the problem: income tax cuts.

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

Thursday, November 26, 2015

For the Welfare of the Wealthy

Take stock of what has happened to Kansas tax policy, and then ask the question, “Who benefitted?”  Here’s a hint:  It wasn’t middle class or low income Kansans.

Big changes in Kansas tax policy began in 2012 when Governor Brownback signed sweeping tax cuts into law. Income tax rates were lowered across the board and individuals who receive their income through “business” sources were exempted entirely from paying state income taxes.

Yes, in that action, income tax rates went down for everyone, but at the same time, lawmakers also raised the sales tax and took away credits that helped low income Kansans. Even with the offsetting sales tax increase, the income tax cuts proved so costly that they triggered a severe budget crisis. 

In the first year, general fund revenue dropped $701 million, more than 11 percent, jerking the state budget badly out of balance. Lawmakers covered the ballooning gap between expenses and rapidly falling income by using up all of the state’s financial reserves.

With the bank account emptied, lawmakers tried to close the gap by cutting programs, including school funding. And they transferred unimaginably large sums of money from the highway fund and from virtually every other fund in the state treasury that had cash. Despite these irresponsible actions, they fell far short. At that point, even the most conservative lawmakers decided to raise taxes.

Sales tax rates rose again. Lawmakers hiked cigarette taxes sharply, and eliminated most income tax deductions. Property taxes continued to go up, largely because school districts tried to survive reductions in state aid.  

What’s the net result of all those tax changes? For the 20 percent of Kansans who earn the least, below $23,000 a year, average taxes actually went up by $197 a year. For the next 20 percent, net taxes also jumped higher. Middle income Kansans essentially broke even. But the top 20 percent of Kansas earners came out far ahead, and the top 1 percent, those who earn more than $500,000 a year, picked up an average tax break of about $25,000. All these figures come from the Institute for Taxation and Economic Policy, a group that has developed probably the best model for measuring these types of changes in any state.

But it doesn’t take a study to tell us what has happened. Any Kansan can see it. 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.

Kansas now has the second highest state sales tax rate on food in the nation. The shift to sales tax has contributed to making our state’s tax system one of the ten most regressive. The poor pay a far higher percentage of their income in taxes than the wealthy, not a statistic of which Kansans can be proud.

Yet even after shifting the burden of state taxes onto middle class and low income Kansans, the budget is still not working. The tax breaks for the wealthiest of Kansans produced such a huge revenue loss that the state budget remains in the red. Just this month, state officials announced yet another downward revision of the future revenue forecast. So more “fixes” are ahead.

If the real goal was to shift more resources to the wealthiest Kansans, this policy has worked like gangbusters. But if the goal was to adequately fund state programs with a fair taxation system, it’s a wreck. The state budget is in shambles. Unless we change course, the lowest income Kansans and the Kansas middle class will bear even more of the burden of fixing it.

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

Friday, November 6, 2015

What Does Financial Health Look Like?

By Duane Goossen

Kansas is in a perpetual budget crisis! In October, general fund revenue fell below estimates - again. The October results mean that Kansas will not have enough money to cover expenses in the approved FY 2016 budget. Without more revenue, Kansans face mid-fiscal year cuts to an already beleaguered budget.

If the state's general fund was actually healthy, what would that look like?

Step 1: Programs for which the state is responsible would be adequately funded. Public schools are a prime example. A financially healthy state provides enough resources for schools to allow them to grow and improve. Kansas, however, hovers on the verge of losing a court case for inadequate funding. School funding has been switched to a block grant, not because that's a more equitable way to distribute funding, or because it is what students need, but because it limits state spending on schools. The same kind of story pervades other parts of the budget-human service programs, higher education, the arts, the state workforce, and economic development.

Step 2: Ongoing revenue would at least equal expenses. When yearly, ongoing revenue equals expenses, a budget is in "structural balance." Kansas lost structural balance with the income tax cuts of 2012, and has not regained it, even after subsequently eliminating income tax credits and deductions, raising the sales tax rate twice, and upping cigarette taxes. The FY 2016 budget is still heavily dependent on one-time money transferred in from the highway fund and many other funds in state government.

Step 3: Kansas would have a rainy day fund and a healthy ending balance. Almost every state has a rainy-day fund, but not Kansas. Plus, states also normally carry a balance from fiscal year to fiscal year. Across the 50 states, the average total balance - rainy day fund plus carryover - at the end of FY 2014 was 9.9 percent of expenditures. According to the National Association of State Budget Officers that average was projected to be a slightly lower figure of 7.1 percent at the end of FY 2016. Kansas law does have a requirement that the year-end carryover balance be 7.5 percent of expenditures. If Kansas actually met that requirement the ending balance would be at least $475 million, not zero. Without a rainy day fund or an ending balance, Kansas is ill-prepared to face the next recession.

50-State Average of Reserves in FY 2016: 7.1% of Expenditures

Reality in Kansas: 0%

Kansas is a long, long way from financial health. Hundreds and hundreds of millions of dollars away. The state lives from paycheck to paycheck, with no reserves. All of the state's energy goes to cutting back, downsizing, and trying to make a growing set of expenses fit within an anemic revenue stream, rather than investing in the future. If that's the new normal, Kansans should be very concerned.

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

Status of the General Fund

By Duane Goossen

Three months into Fiscal Year 2016 the general fund’s fragile balance has evaporated. The FY 2016 budget is at high risk for mid-fiscal year cuts. If revenue continues to fall below expectations, the governor and lawmakers will have no choice but to take action to either quickly increase revenue or reduce current appropriations.

The chart below shows the October status of the general fund.

The general fund began FY 2016 with $71 million in the bank—far below a financially healthy level. A portion of that small beginning balance resulted from $16 million which remained unspent in FY 2015 because of project delays or other reasons, but the cash carried over to be spent in FY 2016.

Tax revenue in the first quarter of the fiscal year was below expectations each month: $5 million down in July, $30 million in August, and $31 million in September. In late July, the governor ordered transfers to the general fund from the balances of other funds. Those transfers count as revenue, but even after including that extra one-time cash, general fund revenue is $42 million below expectations through September.

Lawmakers approved expenditures of $6.372 billion for FY 2016 and gave the governor the authority to somehow cut $50 million from that total. The governor did make cuts at the end of July, but less than $50 million, choosing instead to enhance revenue with one-time transfers. Counting the cuts that the governor did make and the $16 million of authorized spending carrying over from FY 2015, expenditures for FY 2016 now total $6.350 billion.

That leaves a minuscule ending balance of $4 million, assuming revenue comes as estimated in the remaining 9 months of the fiscal year.

What if revenue continues to underperform? Recently, Governor Brownback announced that he would not seek tax increases or spending cuts. Then the only realistic option left is to transfer more one-time money from the highway fund or other funds.

It’s important to remember that lawmakers have already approved more than $180 million of one-time transfers to prop up general fund revenue. Ongoing revenue is estimated to only reach $6.1 billion, but may fall short of that. However, even the conservative set of expenditures that lawmakers authorized totals more than $6.3 billion.

Transferring more one-time money will not fix Kansas’s financial problems. The 2012 tax cuts were unaffordable and too deep. Even after the Legislature shifted more of the tax load to the sales tax, Kansas lacks a revenue stream that supports minimal expenditures, and our state continues to be in a perpetual budget crisis.

— This column originally ran on the Kansas Center for Economic Growth website.

Thursday, October 15, 2015

An Unfair Tax Policy Persists

By Duane Goossen

Did you get a paycheck this week? If you did, quite likely your employer withheld money from it to cover your obligation to pay state income taxes. Sorry, but you are part of the group that funds state government.

Do you draw your income from selling things, renting houses, farming, or some other type of business venture? Congratulations! You don’t owe any state income tax.  Enjoy the money. It would be great if you used it to create a job, but you have no obligation to do so. 

For the last 3 years, income tax policy in Kansas has roughly divided the citizenry into the paycheck people who pay and others who don’t. It’s fundamentally unfair.

Put in place by the 2012 Legislature, the policy completely exempts individuals who receive business income from any state income tax liability. No other state requires the paycheck people to pay but entirely exempts business income. 

Much of the public discussion of this policy has focused on limited liability corporations (LLC’s).   Setting up an LLC is relatively easy. These can be tiny entities or great big businesses, but little or big, the profit individuals make through their LLCs is exempt from Kansas income tax.

However, the policy goes much further than that. Any individual reporting income as business income rather than a wage, or receiving rental income or farm income, is also exempt. In Kansas, more than 300,000 tax filers took advantage of the exemption in the first year.

This creates all sorts of unfair situations. A lawyer who owns his or her own office does not pay state income tax, but everyone else working in the office does. A farmer does not pay, a factory worker does. A self-employed doctor does not pay, a doctor working for a hospital does. A landlord does not pay, a renter does. A writer working on contract does not pay, a newspaper reporter does. A food truck vender does not pay, a food service worker does.

The policy was ostensibly put in place to create jobs, but those receiving the tax break were given no requirement to do so. They could just as easily bank the money or spend it on out-of-state travel. As a result, the policy has not produced the intended effect. In the years it has been in place, Kansas job creation has been anemic, running behind both the geographic region and the U.S. average.

Legislators, even some of those who originally supported the policy, know it is flawed. “One of the impacts it has created is what I call horizontal inequity,” Senate President Susan Wagle said earlier this year. Wichita Republican Mark Hutton called it an equity issue.  “I’ve had a lot of emails from business owners that want to be included…. They don’t like the fact that people out there believe they’re getting a free break. That’s not good for their business and it’s not good for Kansas and they understand that.”

Legislators made a run at modifying the policy in the last legislative session, but Gov. Brownback stopped them in their tracks by threatening to veto any change.  So unfairness persists.

In June, lawmakers raised the sales tax rate and moved money from the state’s highway fund to narrowly avert a full-blown budget crisis, caused by the income tax changes. However, even after shifting to the much more regressive sales tax, Kansas is still just barely sliding by financially. Each month revenue collections are falling behind expectations, putting even a conservative set of school expenditures and other programs at risk. Tax policy will need to be revisited.

Few of us like to pay taxes. If you have benefited from the business income exemption—nice. If you are a wage earner with a paycheck—tough. And you are right. It’s not fair. 

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

Tuesday, October 13, 2015

Block Grants Are a Bad Recipe (Part 2)

By Duane Goossen

Kansas school districts face a multi-year decline in classroom funding while statewide enrollment grows, and while costs for supplies, utilities, student transportation, and salaries rise.

An important accounting of this trend can be found in the table “Major Categories of State Aid for K-12 Education in Kansas” in the FY 2016 Comparison Report (page 60). The table contains the governor’s numbers, reported by his Kansas Division of the Budget. The budget office uses FY 2011 as the comparison point to the current fiscal year, but if the FY 2016 numbers were compared to FY 2009, the trend would actually be even starker.

The chart below, reprinted from the previous blog post on this topic, summarizes the numbers from the Comparison Report table.

Taking a deeper look at the Comparison Report table numbers, three items are important to note:
  • The switch to block grant funding serves to hide the trend.  In the Comparison Report table’s FY 2011 column, it’s easy to see the numbers separated out for General State Aid (classroom dollars) and for special purposes such as Retirement System Payments (KPERS), Local Option Budget Aid, etc., but in the FY 2016 column most of those categories are mushed together under the block grant.  However, an earlier table on page 59 shows how to unpack the block grant numbers to gain a clear comparison between the years.
  • Statewide mill levy money is included in the comparison.  For many years, Kansas has had a 20-mill statewide levy for schools.  The property tax proceeds from that levy used to go directly to school districts, but in FY 2015 the state began routing the money through the state treasury and counting it as state aid.  The block grant incorporates that statewide mill levy money.  For the purpose of comparing FY 2011 to FY 2016 the table correctly includes that property tax funding in both years, even though it did not pass through the state treasury in FY 2011.
  • Federal recovery act (ARRA) dollars are appropriately counted as “state aid” in FY 2011.  In FY 2010 and FY 2011 all states received federal ARRA funding to support Medicaid and Education as part of the federal government’s attempt to help states through the Great Recession.  Kansas lawmakers chose to use the federal education dollars as a substitute for state general fund dollars, knowing that the federal money was only available for two years.  To school districts it was all “state aid,” whether the source was ARRA funds or the general fund, just as the Comparison Report table appropriately shows. School districts expected that lawmakers would shift the source of school finance funding back to the SGF when the state no longer had access to ARRA funds. 
School districts also garner funding through local property tax levies for local option budgets, and bond issues. While the Comparison Report table does not show those sources, it does show the portion of school finance for which state lawmakers are responsible.

School block grants are a direct result of the state’s financial crisis. With revenue dropping as a consequence of unaffordable tax cuts, the switch to block grants provided a way to shut off increases for schools. Yes, as the chart shows, the amount for KPERS, capital improvement aid (buildings), capital outlay aid, and local option budget aid (mostly property tax relief) has grown. But the remaining state aid — the money that is used for classrooms — has declined.

If Kansas lawmakers want more money to go to classrooms, they should put more money there. The current block grant setup does not accomplish that.

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

Thursday, September 24, 2015

Block Grants Are a Bad Recipe

By Duane Goossen

Unsurprisingly, 16 school districts applied to the State Finance Council for “extraordinary needs” funding in August to help cover growing enrollments. Under the new block grant system, that’s the only way to get additional funds. However, the Finance Council granted only a fraction of each request. The districts were told that block grants already provide a record $4 billion in aid.

Is that true? Is more money going to the classroom than ever before? Are schools out of line in asking for more funding when enrollments go up?

For an answer, consider the chart “Major Categories of State Aid for K-12 Education in Kansas” on page 60 of the Comparison Report released recently by the Kansas Division of Budget. The chart traces state aid history from FY 2011 to the present. According to the chart, in FY 2011 the grand total of state aid was $3.802 billion. In FY 2016, the current budget year and current school year, the total rises to $4.059 billion—the number often referred to by the governor as a “record.”

Over a 5-year period that’s an increase of $257 million, but what does that increase pay for?

The numbers from the Comparison Report show that aid went up in 4 categories:
  1. Retirement System Payments (KPERS) — The amount school districts must put into the public retirement system for education employees rises every year. In FY 2011 this payment was a separate funding category. In FY 2016 it become part of the block grant, but school districts must still pay the bill.
  2. Local Option Budget Aid — The Kansas Supreme Court ordered lawmakers to increase this aid to solve “equalization” problems between districts. Almost all of the increase was used to lower local property taxes, and did not produce additional classroom resources.
  3. Capital Improvement Aid — These funds are disbursed through a formula to help some districts with bond payments for buildings, but do nothing to cover enrollment increases.
  4. Capital Outlay Aid — The Kansas Supreme Court also ordered this funding to help some districts cover equipment purchases.
These 4 areas more than explain the entire $257 million increase. Each one, considered separately, is a worthy and necessary item, but these areas do not provide general classroom aid—the heart of day-to-day educational activity.

State aid for classrooms has actually gone down in the 5-year period covered by the chart, even when the amount set aside for “extraordinary needs” is included in the FY 2016 total. Yet enrollment in that period went up by 6,420 students. Costs for things like electricity, transportation, salaries, and supplies also went up.

Classroom aid goes down, but costs go up. Of course school districts are going to seek more funding. Under the now-expired school finance formula, a rise in enrollment brought more funding to a district. With block grants, school districts must appeal to the Finance Council, but have no assurance that the larger enrollment will be covered.

And what about next year? The costs that school districts face will keep going up, but the block grant will stay flat, and that’s the best-case scenario. The state’s financial outlook is so tenuous that even flat funding may not be possible.

This block grant system is not a recipe for creating world-class schools. It allows lawmakers to say they put more money into the classroom, but they didn’t.

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

Another Bad Month for Kansas Revenue

By Duane Goossen

August general fund tax collections were startlingly bad, down $30 million (6.8%) from expectations. August was not a one-month outlier. Tax collections have missed expectations every month since the last official consensus revenue estimate.

Anemic tax collections spell trouble for Kansas finances. Lawmakers based the FY 2016 budget on the consensus revenue estimate completed in mid-April. They assumed enough revenue would come in during the remaining months of FY 2015—April, May, and June—and in FY 2016 to leave a meager $88 million in the bank on June 30, 2016. There is little room for error. Everything must work perfectly for the state to just scrape by.

But revenue immediately began going off track. April/May/June revenue fell $26 million short of expectations. Now in July and August, the first two months of FY 2016, tax revenue is already $35 million below expectations. That puts general fund tax revenue $61 million below the assumptions made when the budget passed, wiping out most of the hoped for ending balance.

The Department of Revenue released its August report in a new format. Rather than only containing information about the taxes collected by the Department, it also included transfers, interest income, and other small revenue sources. The report format is new for the Department of Revenue, but not new for the state. Kansas Legislative Research and the Division of Budget have been producing reports containing that information for many years, issuing their reports a few days after the end of each month.

The “new” report does present a more complete view of state general fund revenue, but if misinterpreted can lead to a misunderstanding of the state’s financial situation. The amount collected from tax sources still remains the most important information to track in the report. August tax collections were $30 million less than estimated. However, the report also showed $24 million of “unexpected” transfers into the general fund, allowing the Department to imply August revenue was only off by $6 million.

The transfers were not calculated into the August estimate because they had just been ordered at the end of July by the governor. The final version of the FY 2016 budget included $50 million in unidentified expenditure cuts that the governor would make later. The governor did make cuts, but instead of reducing expenditures by the full $50 million the governor chose to transfer $24 million from other funds. The revenue estimators did not know the governor would substitute transfers for cuts when the August estimate was produced.

The transfers do not change the financial situation that lawmakers had counted on in their FY 2016 budget, but the shortfall of $30 million in tax revenue in August certainly does.

Kansas finances are still reeling from the 2012 and 2013 tax cuts which dropped the state’s revenue stream far below the amount needed to cover basic expenses. Lawmakers have not fixed that yet.

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

Friday, September 4, 2015

Kansas Is Dissing State Employees and Teachers

By Duane Goossen

State employees and teachers should be celebrated. They provide valuable service in all parts of Kansas, yet have been on the receiving end of both low pay and disrespect, a direct result of the state’s financial crisis.

State leaders talk about employees as a problem, or as a cost that must be borne. Last fall, Speaker of the House Ray Merrick told the Wichita Eagle that “Government employees produce nothing. They’re a net consumer.” Governor Brownback has not spoken quite as blatantly, but delivers the same message when he insists on only counting “private” jobs in Kansas to measure his economic experiment. “Public” jobs don’t seem to matter to the governor.

Along with the talk, lawmakers have cut away civil service protections, making the state workforce less professional and more subject to political allegiance, and eliminated due process rights for teachers.

Then consider pay. This is the seventh year in a row in which employees have not received any kind of cost-of-living or general pay increase. That perhaps was understandable when the state was mired in recession, but as our economy has recovered, Gov. Brownback has not even proposed an employee pay increase for the Legislature to consider.

Average Kansas teaching salaries have fallen almost to the bottom at 43rd in the nation last year.

Our statewide financial crisis prevents improvement. The Brownback income tax cuts routed Kansas’s budget without bringing any tangible economic benefits. Things became so unbalanced that the record tax increase passed by lawmakers in June barely allows the state to stay financially solvent, let alone address employee issues.

Last week 38,000 state employees showed up for work. They engineered our roads and repaired bridges. Some inspected the food we eat. Social workers checked on children at risk for abuse and neglect. At state hospitals and prisons, many worked the night shift or put in overtime hours. Professors, cooks, and maintenance personnel geared up for a fresh contingent of students at universities. Highway patrol officers responded to accidents. Emergency management employees prepared to assist after the next tornado or flood.

In Kansas’s public schools more than 60,000 teachers, administrators, bus drivers, and staff took on a half million students who have a wide range of abilities and learning needs.

We should be glad all of those Kansans came to work, but we must change our approach to keep a vibrant state workforce. The recent Washington Post article, “Why Teachers Can’t Hotfoot it Out of Kansas Fast Enough” lays out why teachers are leaving. The U.S. is experiencing a national teacher shortage. Kansas will never successfully compete for teachers with an offer of low pay and with lawmakers who malign the profession.

The same thing is true in other parts of state government. The Topeka Capital Journal just reported on the staffing problems at state hospitals — for example, 189 out of 501 positions are vacant at Osawatomie State Hospital. KAKE News did a story on similar vacancy problems rampant in the state prison system, a direct result of low pay. The prison system dropped age requirements, and now, for the first time, recruits 18-year-olds as prison guards to fill the void.

State employees and teachers understand the message being sent. If you knew that an employer never gave raises, suggested employees were just a financial drain, and routinely took away benefits and privileges, would you want to work for them?

Treating employees fairly is fundamental to good business practice and management. Making Kansas public employees bear the brunt of self-imposed financial problems will not serve the state’s future well.

Primary responsibility to set the tone and policies rests with the Brownback administration, but Kansas citizens should not look the other way. Especially as Labor Day approaches, be thankful for the dedicated state workers we have, and tell our leaders to fix state finances and quit dissing the employees.

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

Sunday, August 30, 2015

Record Borrowing Indicates Financial Instability

By Duane Goossen

What does the State of Kansas do when bills must be paid but the bank account is empty? Answer: Borrow. Get a payday loan and promise to repay when more revenue comes in.

On July 1, the first day of fiscal year 2016, Kansas took out a payday loan of $840 million. This record-high amount highlights the precariousness of the state’s financial situation.

During July, the state needed to pay out hundreds of millions to schools, Medicaid providers, universities, and state employees. (On average the state spends about $600 million per month from the general fund.) Yet Kansas only expected to receive a portion of the amount needed from tax revenue in July. In addition, the bank account (cash reserves) had been depleted to almost nothing as a result of unaffordable income tax cuts, so Kansas had no way to pay its bills in a timely manner without borrowing.

In Kansas, the payday loan has a fancy name—Certificate of Indebtedness. The Certificate allows the general fund to temporarily use money from other funds within state government. Bills must be paid from those other funds too, but the timing of the payments varies enough that when the cash from the other funds is pooled, enough is available to allow the general fund to temporarily use or borrow it.

This practice is not new. On the positive side, a Certificate allows the general fund enough cash flow to pay bills on time, but the FY 2016 amount is unprecedented. The more difficult the state’s financial position, the larger the Certificate. Previously the highest amount borrowed came during the Great Recession in FY 2009 when almost all states were experiencing significant financial stress. After that, the Certificate amount gradually decreased as the state started to recover financially. However, in FY 2013 the income tax cuts which have wreaked havoc on the state budget began to kick in, leading to a $675 million Certificate in FY 2015, and then the record $840 million in FY 2016.

That means that at the lowest cash flow point of the fiscal year, likely sometime in March, the state’s general fund bills will total $840 million more than the revenue received up to that point to cover them. The general fund must repay the Certificate before the end of the fiscal year using revenues from April, May, and June that are hopefully much greater than the bills that need to be paid in those months.

If Kansas were financially stable, it would have a large enough cash balance to avoid borrowing.

What if April/May/June revenue does not come in as estimated? The Certificate still needs to be repaid, so in that scenario, program cuts would have to be applied to keep the general fund solvent.

In FY 2016 Kansas expects total general fund revenue of $6.334 billion, which includes about $200 million in unusual one-time transfers from other funds, mostly the highway fund. Lawmakers approved spending of $6.322 billion, an amount that does not adequately cover schools and many other programs, but does barely fit within available revenue. (To cover cash flow issues within the fiscal year, the state borrowed and will have to repay $840 million.)

Everything must go perfectly in order to slide by with even this meager budget. But things usually don’t go perfectly. Unexpected costs appear, or revenue underperforms expectations. Recessions come as part of the business cycle. Kansas is not ready.

Kansas has little flexibility, and is operating on the financial margins. Lawmakers cut the state revenue stream too deeply and used up cash reserves to eke through the last two fiscal years.

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

Friday, August 21, 2015

Kansas Is Scraping By

By Duane Goossen

Three recent events provide further evidence that Kansas is just scraping by financially. July general fund revenue was below expectations, the governor cut $63 million out of the current budget, and the state’s pension bonds received a low rating.

July revenue fell $4 million below expectations. While $4 million does not represent a huge drop, the July loss is part of a long string of disappointing monthly revenue reports, and a trend that will likely continue. Individual income tax receipts tell the story. Dramatic income tax policy changes began to take effect in 2013, causing a sharp revenue decline, and now income tax receipts are staying down at that low level. Lawmakers raised the sales tax to try to make up for the diminished income tax stream. However, they have also depended heavily on transfers from the highway fund and other funds, leaving a structural budget imbalance in which ongoing expenses are still much higher than ongoing revenue.

The expenditure cuts announced by the governor were part of the final FY 2016 (July 1, 2015 to June 30, 2016) budget deal passed by the Legislature in June. To keep the general fund solvent, at least another $50 million had to be cut from the already conservative FY 2016 budget. The governor’s cuts transferred more money from the highway fund, and grabbed federal money that could have been used for children’s health programs. For the most part, the cuts were one-time transactions to save some general fund money in the current fiscal year but do not alter the longer-term imbalance between revenue and expenditures.

Kansas is preparing to sell $1 billion in bonds to shore up the state’s retirement system. Last year, Moody’s Investor Service lowered the state’s bond rating to Aa2 because of the expanding budget imbalance caused by falling revenue. This new pension bond issue has been rated one-notch lower at Aa3, and the rating analysis clearly outlines Kansas’ financial problems:

“The below-average rating also recognizes the structural imbalance in the state's budget and reliance on interfund borrowing, as well as an underfunded pension plan to which the state is not making actuarially determined contributions.”

In the 2015 record-long legislative session, lawmakers faced a budget crisis with general fund expenditures almost $800 million above revenue. They raised sales and cigarette taxes and dropped spending to a low level. That averted a full-blown financial disaster, but did not solve the state’s financial problems or put Kansas on a stable, forward-looking fiscal path. Rather Kansas has been left to live month-by-month scraping by with few reserves, a cramped budget, and little hope that the situation can improve in the future.

The root of Kansas’ financial problems is an unfair and unsustainable income tax policy that has garnered too few resources to adequately cover expenses. Lawmakers must reconsider that policy to get Kansas back to financial health.

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

Friday, July 24, 2015

Our state’s ‘pay-fors’ are coming due

By Duane Goossen

Last January, Sam Brownback was trying hard to shift the blame for an expanding state budget crisis.  Referring to the 2012 Kansas income tax cuts, he told the Topeka Chamber of Commerce, “What I got from the Legislature was a naked tax cut with none of the pay-fors."

But in 2012, Brownback did not admit any misgivings.  He happily signed the income tax cut bill, the most consequential act of his governorship and the beginning of the so-called Kansas experiment.  Until the state budget crisis hit, he trumpeted his decision as a shot of adrenalin to the Kansas economy.

Now, three years in, Kansans and the nation are realizing how high the costs of our tax experiment have been.  The income tax cuts were indeed not free.  “Pay-fors” have definitely been required.

The most visible pay-fors have been tax increases.  The 2012 income tax cuts blew such a hole in the state budget that lawmakers had no real choice during the 2015 legislative session but to raise taxes somewhere.  They chose the sales tax, cigarette tax, and a few others.  The state sales tax has increased to 6.5 percent, and only Mississippians pay a higher sales tax rate on food than Kansans.  Unwilling to challenge a veto threat from the governor, legislators could not correct the income tax policy that unfairly gives huge tax cuts to some of the wealthiest, but still requires working Kansans to pay.

The income tax cuts have also been paid for by cutting back state services.  The most prominent example is the switch of school aid to a block grant formula.  The block grant lowered classroom funding and then froze that diminished funding in place for the next two years.  The block grant was not implemented because it was a better, fairer way to distribute funds.  Rather, the key purpose was to put a chokehold on school finance in order to make up for a portion of the revenue loss from the income tax cuts.   In response, school districts have shortened their school year, chopped programs, and raised property taxes.  And in ongoing school finance litigation, the Kansas district court has already ruled the block grant system inadequately funds schools, thus violating the state constitution.

One of the biggest costs of the Kansas experiment, although not as easily quantifiable, has been stagnation.  With the state in financial crisis, all thoughts go toward surviving the chaos, pulling back, and making do.  The Kansas political environment currently offers no capacity to consider questions like:  How do we make our schools world-class?  What are the next steps for our road system?  Can we improve the health of our citizens?  Progress requires a stable budget and fiscal situation which Kansas still does not have.  While Kansas lawmakers were spending a record-long legislative session agonizing over finances, other states were thinking about their future and passing us by.

The pay-fors have come into focus:  Higher sales and property taxes.  Cut-back services.  Crisis-management politics overtaking future planning.

What are the benefits?  Did Kansas get anything for all these pay-fors? 

The Brownback administration cites economic statistics that show the Kansas economy has been growing.  That’s true.  Kansas has been on a slow economic path upward, but below the national average.  Other states that did not apply tax cuts have been growing faster.   The tax cuts did not give the Kansas economy any kind of measurable positive jolt. Instead, Kansans have been on the receiving end of a lot of pay-fors.

The 2015 legislative session is over, but next year lawmakers have another chance to put Kansas on a better path, by ending an experiment that has already cost us dearly.

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

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