Wednesday, May 27, 2015

How Big is Kansas' Budget Hole Anyway?

By Duane Goossen

Kansas has nearly an $800 million gap between revenue and expenses.

However, as lawmakers struggle to balance income and expense, press reports often refer to a $400 million-plus gap. Why?

Start with expenses.

The Legislature has not yet passed a budget for FY 2016 (which starts July 1, 2015), so an exact expenses total is not yet available. However, based on negotiations in the budget conference committee, State General Fund spending (which includes school block grants) is being set just above $6.5 billion.

Now consider revenue.

The official revenue estimate for FY 2016 (revised on April 20) forecasts income of $5.7 billion.

With $6.5 billion in expenses, but only $5.7 billion in revenue, the budget gap is roughly $800 million.

Here's what many media reports are leaving out...

It appears quite likely that lawmakers will agree to fill part of the $800 million gap by:
  • Transferring an additional $132 million from the highway fund,
  • Transferring $72 million from other funds, and
  • Stopping a planned transfer of $54 million from the general fund to a local government tax reduction fund.
Most of those transfers are short-term solutions, and should not be considered as ongoing revenue. That said, if they are approved, they lower the FY 2016 gap to about $540 million.

In addition, lawmakers have been debating whether to increase the fee that managed care companies pay to operate in Kansas. Passage is still uncertain, but if implemented, the proceeds would be used to draw down additional federal Medicaid funds and close the budget gap by another $60 million or so.

That still leaves $400 million-plus — the number often cited in press reports — to be raised from tax increases in order for the state to have enough revenue to barely meet a conservative set of expenses. The use of that $400 million-plus number assumes that all of the transfers will be accomplished, and the managed care fee increase authorized.

Even if lawmakers do close the FY 2016 $800 million gap with a combination of taxes and transfers, the state will still be in rough financial shape. As long as one-time transfers from the highway fund and other funds are used as gap fillers, the long-term problem will not be solved.

Again: expenses are $6.5 billion and growing. Revenue, brought down by dramatic income tax cuts, is hovering around $5.7 billion with little prospect for increase. While $400 million in tax increases may begin to address the problem, it does not solve it. A long-term solution requires an ongoing revenue stream that matches expenses.

And remember: just closing the gap leaves nothing for an ending balance. State law — not to mention financial prudence — requires that each budget approved by lawmakers have an ending balance equal to 7.5 percent of expenditures. With expenses of $6.5 billion, the ending balance should be about $500 million. But lawmakers will almost certainly pass a provision exempting themselves from that legal requirement.

How exactly this Legislature will pass a budget remains to be seen. One thing, however, is certain: The deep and unaffordable income tax cuts of 2012 continue to wreak havoc on the Kansas budget.

Sunday, May 10, 2015

Kansas Has Lost Its Balance

By Duane Goossen

The selling point for hefty Kansas tax cuts was irresistibly seductive.  Kansas can lower income tax rates, exempt business profits from the income tax entirely, and state revenue will still remain the same, or maybe even grow, and the state economy will prosper.

But this premise proved to be completely false. General fund revenue did not replenish. It fell $700 million (11 percent) in one year, and the recently revised official revenue forecast now predicts that receipts will stay at that low level into the future. Nor did the economy prosper. The Kansas economy is plodding along, but growing at a rate below our surrounding states and the national average.

Also proving false was the idea that Kansas could easily cut expenses. Our conservative lawmakers have labored during this 2015 legislative session to bring spending down, but they cannot do it. They have converted school funds to a block grant which is already causing problems in many school districts. They have authorized bonds for the retirement system so that regular payments into the system can be lowered. They have reduced many programs. Still, revenue has fallen so low that the budget currently in play for the next fiscal year spends $800 million more than the state expects to receive.

The concept of “balance” is not hard to understand. To be financially healthy, ongoing regular revenue must equal or be greater than expenses. Every Kansan works with that same concept in managing personal finances.

As a state, Kansas has lost its balance and its traditional fiscal responsibility. Ongoing expenses, calculated conservatively, are $6.5 billion and rising, while income has fallen to $5.7 billion annually for the foreseeable future.

In the face of this growing chasm, our state leaders have so far only used short-term measures to slide by. First, they went to the savings account. Not quite two years ago, Kansas had $709 million in the bank. That’s now gone.

Next, they cleaned out the reserves of almost every other fund in state government, including money set aside for early childhood programs in the Kansas Endowment for Youth Fund.

Then, they put part of the problem on the credit card. Here’s how that works: Through the gasoline tax, a portion of the sales tax, and car registration fees, Kansas raises money for its highway fund. But in this fiscal year, 40 percent of the money raised will be transferred to prop up the general fund while our state government borrows $298 million to keep the highway fund afloat. For the next fiscal year, the governor proposes further large transfers from the highway fund while borrowing $250 million to pay for a diminished road program.

Using up reserves and transferring money from other funds does not correct the imbalance. Those short-term measures only delay the reckoning, while making Kansas more destitute in the process.

Although lawmakers have been unable to reduce spending enough to match the low level of revenue, it is still possible that expenditures might go down further, but in a damaging, unplanned way. Education and other state programs are at great risk. Without new revenue, the bills will go unpaid. If that happens, lawmakers have utterly failed.

Restore balance, lawmakers. Show fiscal responsibility and make ongoing receipts match expenses. Deep and unaffordable income tax cuts caused this problem. That’s the place to look for a correction.

— This column originally ran in a variety of Kansas newspapers May 3 and 4.

Sunday, May 3, 2015

Revised Forecast Predicts Deeper Hole for Kansas

By Duane Goossen

Kansas has a newly revised revenue forecast which further lowers expectations for future general fund receipts. Take notice of three key things:

1. Revenue has fallen sharply, with no rebound in sight. The 2012 and 2013 tax cuts led to a $688 million drop (10.8 percent) in overall revenue in FY 2014, the first full fiscal year in which the tax cuts were in effect.

The tax cuts did not produce anything magical. Revenue did not replenish itself. The economy did not grow any faster than normal. Rather, the new estimate predicts a stagnant revenue stream of about $5.7 billion through FY 2017.

2. The revised revenue estimate may not be low enough yet. Corporate income tax receipts, sales tax receipts, and severance tax receipts underperformed expectations in the first nine months of FY 2015. So, the estimators revised the forecast for those revenue sources downward.

However, individual income tax receipts have trailed last year’s low pace, but the estimators made no change to their previous prediction that income tax receipts would grow slightly in FY 2015. During April, May, and June, income tax receipts must be $147 million higher than that same period last year in order to meet the estimate. That may happen — but it may be too optimistic.

Watch closely, because Kansas has very little flexibility left to absorb a revenue shortfall in the last three months of FY 2015.

3. The budget gap became larger for FY 2016. The general fund budget passed by the Kansas Senate sets expenditures at $6.478 billion in FY 2016, but the revised revenue estimate now predicts overall revenue of only $5.713 billion — a gap of $765 million.

Undoubtedly, a portion of that gap will be filled by transferring money from the highway fund and doing some other one-time financial maneuvers still available to lawmakers. However, with the general fund bank account empty, a large portion of the gap must be filled by passing tax increases, or by implementing even more spending cuts.

The budget that lawmakers are currently working with in a conference committee is far from funded. Even after converting school finance to a block grant system, state expenses are $6.5 billion and growing, while the revised revenue estimate shows a revenue stream that is basically flat at about $5.7 billion.

To be financially healthy, the state needs $6.478 billion in ongoing revenue in order to spend $6.478 billion. If tax policy had been left alone three years ago, Kansas would now have enough income to fund the budget being considered. Instead, deep tax cuts have reduced the state’s revenue stream far below the amount needed to responsibly fund education and other key programs.

— This post first appeared on the Kansas Center for Economic Growth website on April 24.

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