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.

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