Tuesday, January 27, 2015

Governor’s Budget Misses the Mark

What to do? Income to the Kansas general fund has fallen so low that it no longer comes close to supporting normal, reasonable expenses, and the bank account is empty.

The governor has sent the Legislature a proposed budget to address the situation, but his recommended solutions do not strike at the cause of the crisis.

Here’s the problem: Kansas general fund expenses currently total about $6.4 billion, and those expenses are growing. They will continue to grow. To cover expenses, Kansas needs a revenue stream that is also at least $6.4 billion and growing. But the Brownback tax policies, put in place in 2012 and 2013, cut income tax receipts dramatically. The governor’s own Department of Revenue estimates the loss of income tax revenue to be $886 million in this fiscal year, and more next year. As a result, overall general fund revenue has fallen below $5.8 billion. Under current policy, prospects for that income stream to increase remain slim.

The Kansas Legislative Research Department has calculated that revenue will be $650 million below expenses in FY 2016. If you accept that Kansas school finance spending is unconstitutionally low — as a Kansas district court has ruled recently — then the gap is actually much bigger. If you acknowledge that the general fund should have an ending balance larger than zero, then the gap is startlingly large.

For FY 2016, the governor proposed a combination of revenue increases and spending cuts to close a $650 million gap:

While the state’s budget problems are caused by falling income tax revenue, only a small portion of the governor’s proposed new revenue comes from a slight moderation of income tax policy. The governor wants to more than double cigarette taxes and apply a 50 percent increase to the sales tax on liquor, but even those high percentage increases do not come close to making up for the income tax revenue losses.

The governor is also proposing serious spending cuts, especially to public education. Kansas classrooms do not get more money — rather, $127 million comes out. Medicaid, which should be expanded, gets tagged for $50 million in as yet unidentified “savings.” Fixing the state’s retirement system is put off in the short term by adding more cost in later years. Plus, the proposed transfer of money from the Highway Fund will mean cuts to highway maintenance.

The cuts to education and other services are damaging, but will get even worse if more revenue is not found. Lawmakers no longer have the option of making up for low revenue by drawing down the general fund bank account. It is gone. They must bring revenue and expenditures together somehow.

The income tax cuts have left Kansas without enough resources to pay for education and other key programs. It’s unfortunate that the governor did not focus his budget squarely on correcting his tax policy — the root of the problem.

Note: This blog entry was first posted here on Feb. 5.

Wednesday, January 21, 2015

Tax Cuts Are Reason For Budget Shortfall

Look back 30 years. What did it cost to purchase a car? Eggs? Electricity? Blue jeans? A house? Certainly less than today.

Most of us know instinctively that prices will likely be quite a bit higher 30 years in the future. For example, although Americans are currently enjoying a reprieve in the cost of a gallon of gas, we would be fooling ourselves to believe the price will never again rise above two dollars.

State government services and programs are no different. Over time, state spending goes up. That’s normal. Inflation pushes routine expenses higher. Populations grow, requiring more services. Greater numbers of students show up at school. The ever-rising price of healthcare drives a steady increase in Medicaid costs.

The National Association of State Budget Officers tracks spending across all states. Over the past 30 years, the average 50-state general fund spending increase has been right at five percent a year. How does Kansas compare to the rest? A little below the average. The “normal” budget increase for Kansas over that 30-year period has been 4.85 percent. Recently, in the wake of the Great Recession, spending by states has moderated somewhat — 4 percent annual average growth nationally in the last four years, 3.3 percent in Kansas.

While spending patterns in Kansas have been mainstream, Kansas has deviated sharply from the norm on revenue collections.

Last year, Kansas income tax collections dropped 25 percent as a result of the Brownback tax policy. No other state experienced anything like that. In most states, revenue collections grew. That’s normal. But Kansas revenue fell dramatically.

Kansas has been left with a financial predicament in which general fund expenses are about $6.4 billion and rising, while revenue has fallen below $5.8 billion. With even more income tax rate reductions scheduled to kick in, it’s unlikely that revenue will grow much. That situation cannot go on for long.

So far, lawmakers have bridged the difference by spending down the general fund bank balance, but now, those funds have been depleted. Most states have a “rainy day fund” from which to draw in emergencies, but not Kansas. The time of hard decisions has arrived.

Some legislators will attempt to cut spending to fit the emaciated revenue stream. But resetting expenses to some lower level carries very real consequences. Kansas courts have ruled that schools already receive unconstitutionally inadequate funding. Further cuts will hurt classrooms and kids. Reducing stretched human service programs affects the most vulnerable Kansans. Less highway maintenance means more potholes.

Alternatively, lawmakers could choose to address the root of the budget problem. Revenue has been set unrealistically low. Lawmakers have failed to provide enough income to cover regular expenses, let alone pay to bring school funding back up to an adequate level. Options to correct this include stopping the next round of tax cuts, adjusting the business tax exemption, and rethinking income tax rates.

What will it be? Will the decision-makers put all their time and energy into downsizing schools, highway maintenance, and public safety programs, or will they make a realistic assessment of what it costs to pay for key services and figure out a fair way to fund that? The Kansas legislative session has begun. Our lawmakers are choosing for us now.

(An Insight Kansas column first published by various Kansas newspapers January 16-18.)

Sunday, January 18, 2015

The Budget Is Not Fixed Yet

Dear Readers: I am now writing and speaking about the Kansas budget and state finances as a Senior Fellow with the Kansas Center for Economic Growth. New blog entries will be posted by KCEG first and re-posted here later. You can sign up to receive emailed blog posts and other information from KCEG. As always, I welcome your inquiries at duanegoossen@gmail.com. Thanks for reading! Duane

Watch out! Even though the governor has proposed a way for Kansas to financially stumble through fiscal year 2015, most of his recommendations require legislative approval to become effective.

With the legislative session just beginning, anything could happen. Schools, human service programs, and other key state services are still very vulnerable to more cuts in the last half of this fiscal year.

The FY 2015 state budget is badly out of balance. General fund expenses total over $6.4 billion, but estimated revenue is less than $5.8 billion.

A portion of the $650 million-plus gap will be bridged by using up $380 million that was in the bank at the beginning of the fiscal year.

The governor has proposed transferring $217 million from other funds, most notably the Highway Fund. However, the governor does not have the power to do that without agreement from the Legislature. Moving the money creates new problems in the other funds, so lawmakers may not agree. If that happens, then something else — likely bigger spending cuts — would be imposed.

With the dire financial situation that Kansas now faces, the governor does have “allotment” power, which allows him to unilaterally cut the approved budget. He did that in December, but cut only $62 million, mostly by reducing the amount going into the Kansas Public Employees Retirement System (KPERS). He should not have cut KPERS funding. The cut breaks a state commitment and is unprecedented. Even Republican lawmakers have criticized the move, and may try to undo it. But, with the state in such a bad financial position, undoing the KPERS cut requires lawmakers to cut something else instead.

Two more things to consider:

  1. State officials determined in November that Kansas will have additional costs in this fiscal year for Medicaid ($46 million) and school finance ($59 million). However, those expenses are not yet part of the approved budget. Lawmakers must take action to put the funding in. If they don’t, it’s a cut to Medicaid and schools.
  2. Even though the FY 2015 revenue estimate was revised downward one week after the election, it may still be too high. The forecast predicts that FY 2015 revenue will grow $115 million from the amount received in FY 2014. However, after six months, FY 2015 revenue is $40 million behind last year’s pace. If revenue does not meet projections, lawmakers will need to make last-minute cuts.

Hopefully, lawmakers will settle the FY 2015 issues quickly before creating new budgets for FY 2016 and FY 2017. If they don’t, uncertainty about possible cuts late in the fiscal year will hang over state programs and schools. Plus, it’s important to know the starting point for the next budget.

Most likely the starting point for FY 2016 will be zero money in the bank. The revenue forecast for FY 2016 totals $5.8 billion. Realistic expenses for FY 2015 are already more than $6.4 billion. In FY 2016 they will be higher.

The 2015 legislative session promises to be very difficult.

(First posted January 15, 2015 by the Kansas Center for Economic Growth)

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