Friday, December 2, 2016

Bipartisanship Required to Fix Kansas Financially

When the Kansas Legislature convenes in January, one-third of the seats will be filled by someone new. The election results show that many voters recognized the serious financial trouble in Kansas and now expect a change in direction.

But will they get it?

Lawmakers face a daunting task. To successfully alter the situation, they must take a big risk and do something that does not come naturally to politicians — gather a bipartisan coalition and reform the tax system to raise revenue.

State finances have so soured that the current budget sunk $350 million underwater even after record amounts were taken out of the highway fund and large spending cuts were unceremoniously applied to universities and Medicaid providers. This leaves Kansas schools and other key state services highly vulnerable to another round of debilitating cuts.

Kansas simply does not have enough revenue to pay even a constrained set of bills. The 2012 income tax cuts unbalanced the Kansas budget from the moment of implementation, but the situation has become especially dire today because lawmakers emptied reserves and exhausted other one-time budget maneuvers in earlier efforts to patch up the budget.

We have few options left. Without more revenue, lawmakers must make deep cuts-to-the-bone in state programs. For those legislators who voted in 2012 to deliberately starve the state’s revenue stream in order to downsize government, this is a happy climax. But that group lost heavily in the elections.

In the 2017 Legislature, moderate Republicans and Democrats now have enough numbers in each chamber to pass policy changes, if they work together. But forming coalitions becomes challenging whenever there’s hard medicine to swallow. Kansas lawmakers will face headwinds as the Trump administration and a Republican Congress attempt to pass the very kind of tax legislation on a national scale that Kansas seeks to undo here.

Then, even if tax policy changes pass the Legislature, the governor may not sign the bill. But despite the barriers, lawmakers must forge ahead because the stakes for Kansas are enormous. The financial sickness will not heal up on its own without corrective action.

One obvious step forward would close the LLC loophole which allows business income to go untaxed. The recent Kansas Speaks survey showed that 61 percent of Kansans support this action. Some lawmakers may be tempted to do only this and declare victory, but that alone will not fix the budget.

At a minimum, lawmakers must make revenue equal expenses, which requires ending the LLC loophole as well as enacting a package of other financial corrections. Reducing sales tax on food as part of this package — as some lawmakers propose to do — would require further upward adjustments to balance the cost.

Can lawmakers work across party lines to enact change? Will the governor sign a bill rescinding at least a portion of the 2012 tax cuts?

Unless the answer to both questions is “yes,” the financial suffering of Kansas will worsen, plunging our state into a further downward spiral.

—This entry was originally published this week in a variety of Kansas newspapers.

Sunday, November 20, 2016

Budget Disaster Deepens

Kansas finances have come to a tragically grim place.

The official estimate of revenue for this fiscal year has just been revised sharply downward, and brand new forecasts for FY 2018 and FY 2019 show a meager, unworkable revenue stream. This new information means that lawmakers must immediately cut $340 million from the current budget, just to keep the general fund barely solvent.

The cause of this disaster traces straight back to the Brownback income tax cuts of 2012. After implementation, income tax receipts fell $700 million, from $2.9 billion in FY 2013 to $2.2 billion in FY 2014, and never recovered. Now, the new revenue estimate forecasts that same $2.2 to $2.3 billion level of income tax receipts all the way through FY 2019.

A huge swath of revenue that Kansas formerly depended on to pay bills has simply disappeared.

As a result, for the fourth year in a row, Kansas does not have nearly enough revenue to pay bills. This year, though, the situation is dire because lawmakers have already used up all of the reserves ($709 million at the beginning of FY 2014), and tapped out the highway fund, leaving little flexibility. Plus, the governor earlier applied deep emergency budget cuts to state agencies, higher education, and Medicaid providers.

Even so, another $340 million must somehow go before June 30. Public education and every other state service stand in serious danger.

This problem will not heal on its own. Without corrective action, things only get worse in FY 2018.

In this current fiscal year Kansas expenses are pegged at about $6.3 billion, and that’s a constrained set of expenses with emergency spending reductions already baked in.

In FY 2018 expenses will only grow: Estimators have already predicted that Medicaid costs will rise $30 million. A $100 million retirement system payment (an unpaid bill from FY 2016) comes due. A Supreme Court decision on education looms. And problems exist throughout state government from years of cutbacks and constraints.

So what’s the new forecast for total revenue in FY 2018? $5.5 billion. And in FY 2019? $5.5 billion.

Even if expenses do not go up a dime from current levels, a completely unrealistic assumption, Kansas revenue is $800 million off the mark in FY 2018 and again in FY 2019.

Kansans, we have to fix this! We have to stop the bleeding and reform our tax structure. We have to start now. The serious damage from the 2012 tax policy deepens every day.

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

Tuesday, October 25, 2016

Trump: Brownback Economics for America

Sam Brownback’s approval ratings as governor of Kansas are dismally low, yet polls show Donald Trump winning Kansas. How can both of those things be true? It does not make sense for Kansans to boo Brownback, but vote for Trump.

Over the last year, Brownback has consistently polled in the 20% approval range, the lowest of any governor in the nation. That almost unimaginable level of repudiation from Kansas citizens stems directly from his failed “Kansas experiment.” Brownback and his legislative allies cut income taxes in a big swoosh four years ago on the premise that the tax cuts would bring jobs and economic prosperity. Instead, the tax cuts broke the state budget and imperiled education, highways, and key services without delivering the promised economic jolt.

The experiment, which primarily benefitted the wealthiest Kansans, did not “trickle down” to middle or low-income Kansans. Rather, with the loss of credits like the food sales tax rebate, and increases in sales tax rates, lower-income taxpayers now pay more than before. Kansans noticed, and blame Brownback for the trouble.

But wait! Donald Trump has an almost identical economic plan: cut taxes sharply for wealthy Americans on the premise that this policy brings economic prosperity. He proposes creating the same kind of loophole for “business income” that Kansans have come to understand as deeply unfair. Past promoters of the Kansas experiment are now key members of Trump’s economic team.

Listen to Sam Brownback’s now famous words from four years ago:

“Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy. It will pave the way to the creation of tens of thousands of new jobs, bring tens of thousands of people to Kansas, and help make our state the best place in America to start and grow a small business.”

Now listen to Donald Trump from the first presidential debate:

“Under my plan, I'll be reducing taxes tremendously, from 35% to 15% for companies, small and big businesses. That's going to be a job creator like we haven't seen since Ronald Reagan. It's going to be a beautiful thing to watch.”

Same thing! Seductive words in the beginning, but the plan doesn’t work. Kansas provides powerful evidence.

Certainly this presidential election is more than a referendum on economic plans. Voters must weigh many important and complex issues. For Kansans, though, the economic plan should be a prime one. After all, it’s our issue. We are the ones in the front row seats, the on-the-ground witnesses to what happens when leaders go down an irresponsible path.

If you like what Brownback has done in Kansas, Trump may well be your guy.

However, to the majority of Kansans who are Brownback disapprovers: Giving Trump our six electoral votes, even by the slimmest of margins, would foist our troubles on the rest of the nation, and show that we have not yet fully learned the lessons from the Brownback years.

—This entry was originally published this week in a variety of Kansas newspapers.

Monday, October 17, 2016

Who Benefited for the Kansas Tax Cuts?

The hard evidence is in.

The bulk of benefits from the income tax cuts that broke the Kansas budget went to a small number of wealthy individuals, while Kansans at the low end of the income scale actually paid more.

The Kansas Department of Revenue publishes an annual report containing many tax collection statistics. Data on individual income tax receipts takes time to appear, but the 2015 annual report (page 22) now shows information for tax year 2013, the first year the tax cuts were in effect.

The annual report from a year earlier (page 22) provides tax year 2012 stats. Place the two sets of information side by side (chart below), and it becomes easy to see how the benefits were distributed.

Look first at the totals for All Kansas Residents. From 2012 to 2013 income tax revenue drops roughly $700 million.*

A $700 million tax break!

Did the lowest income Kansans receive any of that? No.

Taxes for those making $25,000 or less actually increased, from a $16 million credit in 2012 to a $12 million payment in 2013—a $28 million swing.

The next income levels up have a slight tax break, but hardly noticeable. The majority of the benefit—about $400 million—went to about 20,000 returns with an income level of $250,000 and up.

Note that Kansas Adjusted Gross Income (KAGI) drops about $6 billion from 2012 to 2013. Did the real income of Kansans actually go down that much? No.

Federal Adjusted Gross Income for those years does not show that drop (see IRS tax statistics) because it still includes “business income.” The first year that Kansas completely exempted “business income” from Kansas tax liability was 2013, which when excluded, causes KAGI to go down and yields up a tax break mostly for people in the highest income category.

Kansans with the lowest income paid more. Kansans with the highest income received an enormous tax break.

That is not speculation. That is not an estimate. That is precisely what happened, and continues to happen each year.

And remember that these numbers only reflect what occurred with the income tax. They do not show the effect of sales tax rate increases that gave Kansas the highest sales tax on food in the nation, or increased fees for services, all of which take a much larger percentage bite from the incomes of Kansans with the least wealth.

A small group of high-income individuals got a giant tax break.

Kansas got severe financial troubles, poorer services, a budget that does not work, and economic indicators that lag behind our neighbors and the nation.

Was it worth it?

* Note: Tax years correspond to calendar years. In terms of fiscal years, income tax revenue dropped $701 million in FY 2014 and then stayed down at that very low level in FY 2015 and FY 2016.

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

Monday, October 3, 2016

October Update: The FY 2017 Budget Won’t Work

It’s even clearer now. The FY 2017 budget won’t work, which means mid fiscal year budget cuts are ahead. And those budget cuts must be taken from a set of expenditures already squeezed down and chopped up.

New information allows an update of the official version of the FY 2017 budget. We now know the actual beginning balance—$37 million—that carried over from FY 2016. We also now know the amount of FY 2016 unpaid bills—$87 million—forwarded for payment in FY 2017.

The carryover balance was above zero “on paper,” but only because Kansas did not pay all its bills in FY 2016. Had the bills been paid on time, the carryover balance would have been $50 million below zero. (That does not count the $96 million KPERS payment due for payment in FY 2016, but deferred until FY 2018. Timely payment of the KPERS bill would have taken the carryover balance even further below zero.)

The updated general fund profile (shown below) starts with the beginning balance of $37 million. The unpaid FY 2016 bills add onto FY 2017 expenditures. After pushing FY 2016’s unpaid bills forward, the gap between ongoing revenue and expenses grows to $430 million in FY 2017. This updated version of FY 2017 projects an ending balance of $5 million, but with two great big “IFs.”

The ending balance will be barely positive IF the sale of the bioscience authority brings in $48 million. That’s not likely.

And the ending balance will be barely positive IF revenue comes in as projected. However, three months into the fiscal year, general fund tax receipts are already $67 million below projections.

July tax revenue missed projections by $13 million, August missed by $10 million, and September missed by $44 million. The updated FY 2017 general fund profile shown above does not yet account for those misses. In early November, the FY 2017 revenue estimate will be revised—revised downward—and then the general fund will be “officially” underwater, triggering the necessity for more budget cuts.

Given actual experience in the first 3 months of FY 2017, the revised revenue estimate could potentially be $200 million (or more) lower than the current one.

Kansas does not receive nearly enough revenue to pay its bills, but that’s not a new phenomenon. The budget became structurally unbalanced four years ago, immediately after the implementation of unaffordable income tax cuts. Make no mistake. Kansas’ current troubled finances originate right there.

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

Tuesday, September 20, 2016

School Funding Dreams

Recently, Gov. Brownback held a press conference to invite Kansans to email him ideas for a new school finance formula. That sounds nice. Can anything be wrong with asking people for input? Well, actually, quite a bit.

The big problem: A new school finance formula requires resources—money—and Kansas does not have any. The governor asks Kansans to think expansively, but offers no means to make those ideas real.

Tell someone to imagine their dream home. Encourage them to draw plans, and do it up just right. But if that home is financially out of reach, cheerleading has done little for them. The exercise is just something fleeting, a dream, a temporary escape from reality.

The governor’s own policies created the grim education finance situation that Kansas now faces. Income tax cuts and the LLC exemption caused a large block of general fund revenue to disappear. Before the tax cuts, Kansas had a workable school finance formula, but one which logically boosted funding for schools when enrollments and operational costs went up. With state finances spiraling downward, a formula requiring increased state aid could not stand. The governor and his legislative allies summarily scrapped it for block grants, first cutting classroom aid and then freezing that lowered funding level in place.

The block grants have not worked well. They immediately caused unequal funding between school districts, and further, they have failed to provide for the future as student counts rise and needs increase.

Beyond these problems though, the dirty little secret is that Kansas cannot even afford the block grants. In the fiscal year that just ended June 30, the Kansas general fund spent $500 million more than it took in, even with block grants in place. That happened despite the fact that $100 million in bills were deferred for payment in a future fiscal year. The general fund only stayed afloat by grabbing huge amounts from the highway fund, and raiding the balances of other funds, including those set aside for kids.

In our current fiscal year, the same thing. Higher education and Medicaid providers—doctors, hospitals, nursing homes—have already been hit hard with emergency budget cuts, but more reductions will have to be applied somewhere, just to keep the general fund solvent.

Yet, suddenly the governor wants citizens and schools to dream about a new education formula. For now he instructs you to not even talk about what a new formula might cost. That’s for later. Just concentrate on the components you want.

This approach is nothing more than a big diversionary tactic that takes the voters’ focus off the real issue until the November elections pass.

Participate if you wish. Email those ideas in, but don’t be deceived. Until the governor faces up to the severe budget problems his policies have caused, until lawmakers close the LLC exemption, until Kansas rights its financial ship, any hope for an improved school funding formula remains completely unrealistic. You—and the governor—are just dreaming.

—This post originally appeared in a variety of Kansas newspapers.

Monday, August 29, 2016

The FY 2017 Budget Won’t Work

The FY 2016 budget did not work, and it’s already clear that FY 2017 will not work either. Mid-fiscal year budget cuts are quite likely ahead.

It’s the same problem that has existed since unaffordable income tax cuts were implemented. Kansas does not have nearly enough revenue to pay even a constrained set of bills. We’re broke.

Look at the “official” or approved version of the FY 2017 budget (from FY 2017 Comparison Report, page 12). Note the large imbalance between recurring revenue and expenditures. And that’s after the governor cut expenditures from the total that lawmakers approved last May. Medicaid providers—doctors, hospitals, nursing homes—have had their payments chopped by 4 percent to save about $57 million, and higher education funding was hit for $31 million. With those cuts incorporated, the official version shows an ending balance of $96 million, a positive number at least, but far below the statutorily required 7.5 percent of expenditures. (7.5 percent of expenditures in this budget equals $470 million.)

But the official version will not hold! The imbalance between revenue and expense will grow, and the ending balance will go negative without more budget cuts or other remedial action.

First of all, the official version assumes a beginning balance of $40 million. That did not happen. Rather, the state had to stop paying bills at the end of FY 2016 in order to keep the general fund balance just above zero.

Second and most important, the estimate of recurring revenue in the official version comes from the April Consensus Revenue Estimate (CRE). We now know that the April CRE overestimated FY 2016 tax revenue by $106 million, which means the FY 2017 estimate will almost certainly be revised downward when the forecasting group meets in November. Revenue was already short by $15 million in the first month of FY 2017. If the FY 2017 revenue assumption is lowered by $106 million to match what happened in FY 2016, the general fund will immediately be insolvent, triggering more expenditure cuts.

Third, the official version counts on one-time income of $48 million from the privatization or sale of the Kansas Bioscience Authority (KBA). Quite likely that figure is overly optimistic.

On top of all that, the state pushed payment of $75 million of school finance bills from FY 2016 into FY 2017 in order to get out of FY 2016. That expenditure shift does not show up in the official version, but if it did, the expenditure total would be $75 million higher. How will that $75 million be dealt with? We don’t know, maybe through more cuts, or maybe $75 million in FY 2017 bills will be pushed to FY 2018. Remember, the state also deferred $96 million in KPERS payments to get out of FY 2016 and promised to pay those bills in FY 2018 with interest.

Kansas lives on the financial edge, unable to move confidently into the future. Income tax cuts caused this. When lawmakers convene in January, they must build a budget for FY 2018, but without changes in tax policy, it too is destined to fail.

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

Thursday, August 25, 2016

R.I.P. FY 2016 — Another Year of the Downward Spiral

Fiscal year 2016—another year in the downward spiral of Kansas finances after unaffordable tax cuts. Financially, Kansas lived day-to-day, and in the end only managed to cross over to the next fiscal year by not paying bills. And all that trouble earned Kansas another credit rating downgrade.

Let’s briefly review the extraordinary budget actions of FY 2016, actions allowed by state law during times when the budget is in crisis:
  • July 30, 2015—The governor uses allotment authority to order $38 million in budget cuts and $63 million more of one-time transfers.  This action comes less than one month into the fiscal year and right on the heels of the longest legislative session in Kansas history.
  • November 10, 2015—To keep the general fund solvent the governor uses allotment authority again, this time to make $124 million in expenditure cuts and one-time transfers.
  • March 10, 2016—The governor uses allotment authority to hit universities for $17 million in immediate cuts.
  • May 18, 2016—Once again the governor’s allotment authority is used, this time to cut the approaching FY 2017 budget by $97 million, mostly through reductions to universities and Medicaid providers.
  • May 27, 2016—The budget director announces that the 4th quarter payment to KPERS will be delayed until FY 2018, reducing expenses in FY 2016 by almost $100 million, but adding that expense plus 8 percent interest to what must be paid in FY 2018.
  • June 22, 2016—The budget director announces at a State Finance Council meeting that the state will need to delay the last school payment of the year in order to close FY 2016 above zero, and then recommends that Kansas borrow $900 million on July 1, so that the state will have cash to operate in the new fiscal year.
No wonder it seems that Kansas has been precariously on the edge. We were. We still are.

Spending in the FY 2016 budget was constrained from the start, repeatedly cut during the fiscal year, and lowered further by delaying the fourth quarter KPERS payment, but in the end, expenses were still $506 million above recurring revenue, and that’s recurring revenue which included a big sales tax increase.

To bridge the structural gap, $277 million was transferred from the highway fund and $99 million from a series of other funds, and the small beginning bank balance was depleted. (The highway fund is also being used to directly pay expenses for things like school transportation.) Without all of those transfers the general fund would have been deeply in the red, but even with them, the general fund did not balance. To finish, the state pushed FY 2016 school finance bills into FY 2017 and then paid them with borrowed money in order to keep FY 2016 in the black on paper.

The $506 million structural gap, the lack of any cash reserves, the extraordinary use of one-time transfers, the delay of bill payments, and no plan in place to fix any of it caused Standard and Poor’s to again downgrade Kansas’ credit rating—our financial report card.

Unaffordable income tax cuts produced all this!

Next up for trouble: FY 2017.

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

Which Way, Kansas?

Kansas has come to a “T” in the road and must decide whether to turn one way or the other. A more apt way to say it: Kansas has come to a “T” in the road, overshot the intersection, gone down in the ditch on the other side, and must struggle up out of the ditch and go one way or the other.

It’s a ditch of serious financial trouble. Kansas simply does not have enough revenue to pay bills. For more than 3 years running, expenses have outpaced tax revenue by hundreds of millions a year. How has Kansas survived financially? By blowing through every dollar held in reserve, borrowing, and moving money from kids’ programs and the highway fund. The state only escaped the last fiscal year by leaving approximately $175 million in bills unpaid, promising to make payment sometime in the future.

Kansas cannot do that anymore. All those use-up-the-savings, pay-later maneuvers made the state poorer and poorer, garnered yet another credit downgrade, and took us into the ditch. We are left with a stark directional choice: impose more spending cuts, or raise revenue. Deciding how to respond constitutes the most critical job lawmakers will have when they arrive at the 2017 legislative session in January.

Many current lawmakers acknowledge the financial ditch, but say it’s a spending problem. “Clearly we’re here because we haven’t cut expenses enough,” Senate President Wagle said in June.

Certainly there have been cuts—to road projects, universities, hospitals, classrooms—just not “enough.” Yet supporters of the cut-more direction often speak abstractly, rarely specifying what “more” means. In July Gov. Brownback signaled his willingness to make even deeper budget cuts, but would not name them, saying he wants the Legislature to lead the way.

In theory at least, cuts could go a lot deeper. Cut school funding in half! Withdraw all state support from universities! Put fewer highway patrol officers on the road! Dramatic, service-ending cuts can resolve the financial imbalance, and may be what some lawmakers have intended all along. Easy reductions were implemented long ago. Even a $3 million “efficiency study” commissioned by the Legislature yielded little to alter the current dynamic.

The other route open to Kansas adds revenue back. The 2012 income tax cuts—lowered rates and “business income” exemption—caused a huge swath of receipts to disappear. Income tax collections dropped $700 million the first year and cumulatively the revenue loss now exceeds $2 billion.

Lawmakers did raise sales and cigarette tax rates in 2015 to compensate, but the new revenue only dented the amount needed to make up the income tax revenue loss. So far, lawmakers have not been willing to revisit the income tax cuts that caused the state’s financial problems in the first place.

The business income exemption has elicited the most criticism. It’s unfair. People who receive paychecks, pay taxes. People who receive self-employment income, rental income, LLC income, or farm income, don’t pay. No other state sets up its tax system in such manner, so rescinding the exemption seems an obvious first step to financial health for Kansas, although that alone will not fix everything.

Which way? That’s the question at the heart of this year’s election cycle. A choice between deeper cuts to services or raising revenue has become unavoidable. Primary election voters expressed dissatisfaction with the current state of affairs by voting out many incumbent legislators. General election voters may well choose to fire some more. Election outcomes cannot remove the unpleasant choice ahead, but what happens in November will determine the path that Kansas takes.

—This post originally appeared in a variety of Kansas newspapers.

Wednesday, July 20, 2016

Income Tax Cuts Broke the Kansas Budget

Another year of revenue data just went into the statistics books. The 2016 fiscal-year-end revenue report offers more evidence of how dramatically the 2012 income tax cuts have affected the Kansas budget.`

Kansas does not receive nearly enough revenue to pay bills.

In FY 2014, general fund tax revenue fell $701 million, immediately destabilizing the budget. The revenue stream never recovered. Even after sales and cigarette tax rates were increased for FY 2016, tax revenue has not come close to reaching pre-tax cut levels.
Individual income tax receipts have been the key driver in the revenue loss, with FY 2016 collections $28 million below FY 2015, and $683 million less than in FY 2013. FY 2016 became the third year in a row in which a huge hunk of general fund tax receipts simply disappeared. Normally, income tax receipts would grow, but while other states were experiencing post-recession receipt growth, Kansas income tax revenue fell backward dramatically and stayed down. Had Kansas income tax receipts grown in a similar way to the rest of the nation, Kansas collections would have been more than a $1 billion higher in FY 2016.
Sales/use tax and cigarette tax receipts both rose in FY 2016, but as a result of rate hikes. Pushing the state sales tax rate to 6.5 % was projected to raise $176 million. In FY 2016, sales/use tax receipts were $174 million higher. Moving the per-pack cigarette tax from 79 cents to $1.29 was predicted to bring in $41 million, and actual collections grew $50 million.

Corporate income tax (tax on full corporations) fell backward by $63 million in FY 2016, but no one should be very surprised. Corporate income tax receipts are quite volatile, moving up and down, depending on economic conditions. Likewise, receipts from the severance tax on oil and gas are tied to price. With oil prices low, FY 2016 severance tax receipts ended up $71 million lower than the year before. States must plan and be prepared for variations in tax receipts from these sources. But Kansas has been left unprepared for even small variations in tax receipts because of the damage done by income tax cuts.

Certainly the reduced collections from corporate income tax and severance tax contributed to the dismal FY 2016 revenue results, but they pale in comparison to the income tax collection loss.

To deal with the severe budget problems created by the income tax cuts, lawmakers have blown through reserves, borrowed, raided the highway fund, taken money from children’s programs, cut services, and raised the sales tax rate. But they have not addressed the source of the problem—unaffordable income tax cuts. As a result, Kansas literally scrapes by financially, day by day, unable to invest in the future.

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

Sunday, July 10, 2016

A Special Session That Should Not Have Been

A last-minute special legislative session? Kansas schools brought back from the edge after being on the brink of closing? How can such things possibly be happening?

This is Kansas, after all: practical, straight-talking, fiscally conservative, always-be-prepared Kansas. Surely lawmakers must comprehend that Kansans want stability, and want to be reasonably positioned to face future challenges.

If the governor and legislators do understand, they have not shown it with their financial management of the state. The Brownback fiscal experiment has left Kansas in a highly precarious financial position. A crisis over school funding and a special legislative session are just the latest examples of the chaotic environment born of unaffordable tax cuts.

The state’s long-running school finance formula logically called for more money to go to classrooms as costs and enrollments increased. However, with finances in a downward spiral, lawmakers opted to sack the school finance formula and cut funding. Then they froze that lowered aid level in place through a block grant.

Of course, without a formula, funding inequities between school districts quickly developed. Don’t blame the Kansas Supreme Court for this. The Court did not create the situation, but rather pointed out that distributing funds inequitably does not meet constitutional muster, and ruled that lawmakers must fix it.

If Kansas had retained a properly funded school finance formula, no families would have worried about whether schools would open in August. A special session should never have been necessary.

In the crisis atmosphere of a special session, lawmakers managed to add enough money to keep schools open—certainly a positive thing—but by counting on one-time dollars from the hoped-for sale of the Kansas Bioscience Authority. Their solution may last through the November elections, but not much longer.

For three years running, Kansas has not received enough revenue to pay bills, leaving the general fund bank account utterly empty. Kansas has a rainy day fund on paper, but without money in it. The highway fund has borrowed to its limits, with road maintenance cut to a fraction of normal, bridge maintenance cut in half, and many construction projects cancelled.

Each month, as revenue falls short of expectations, something more must be cut. In March the cuts fell on universities, then on road projects, then on hospitals and doctors who provide Medicaid services, then on the universities again. Finally, to finish the fiscal year at the end of June, the governor simply decided that millions of dollars in bills would go unpaid, pushing them off for payment in a future fiscal year.

In January, the next Legislature will face the daunting task of building a new budget in which even a constrained set of expenses outpaces revenue by hundreds of millions. Plus, those future legislators will be saddled with the bills that current legislators and the governor left unpaid this year.

What happens when the next recession comes? What happens as roads and bridges continue to deteriorate? What happens as rural hospitals close? What happens as school funding proves to be inadequate? Kansas is ill-prepared to deal with any of it.

Scraping by for a time, tapping savings, and using up one-time resources might be justified if those tactics were a bridge to a more permanent solution. But there is no correction in place, no fix ready to kick in. The current financial trajectory leaves Kansas destined to stumble from crisis to crisis, dealing constantly with financial uncertainty.

Special sessions. Fights with the Court. Schools on the brink. Unwelcome national publicity. Bills paid late. Waiting lists for services. Deteriorating bridges. Get used to it, Kansans, because this will be our new normal unless we chart a different financial course.

—This post originally ran in a variety of Kansas newspapers last weekend.

Friday, July 1, 2016

The Big Shift

The income tax cuts of 2012 that continue to wreak havoc on the Kansas budget did not actually yield a reduction in taxes for many Kansans. Lawmakers raised other taxes and fees to partially offset the loss of income tax revenue. The net result: Wealthy Kansans still benefitted, but the overall tax burden for a wide range of working Kansans went up.

The newest shift cropped up at the end of the legislative session. As a result of income tax cuts, Kansas cannot afford enough highway patrol troopers, so legislators passed a bill to raise vehicle registration fees to cover the cost of hiring more.

But that’s a small example of the shift in progress. The following list shows the more consequential changes implemented in the attempt to compensate for income tax cuts:
  • Sales tax raised from 5.7% to 6.15% and then raised further to 6.5%
  • Renters no longer eligible for homestead property tax refunds
  • Food sales tax rebates limited
  • Child care income tax credit, along with many other credits, eliminated (for those who still pay income tax)
  • Cigarette tax raised
  • Many income tax deductions limited (for those who still pay income tax)
The chart below estimates the average net effect of all the tax changes. (The figures come from the Institute for Taxation and Economic Policy, which has the best model for measuring these types of changes in any state.)

Kansans with the lowest income have seen their tax burden go up. For middle-income Kansans, it’s been about a wash. Upper-income Kansans, especially those earning more than $500,000 annually, have come out well.

Of course, 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. Many states exempt food purchases from sales tax, or at least apply a lower rate. Not Kansas. We now have the highest sales tax rate on food in the nation.

The chart does not even count other kinds of shifts taking place. Property taxes push up as schools and local governments try to react to dwindling state resources. Tuition rises at universities when the state withdraws support. Future taxpayers get saddled with debt because the state borrows to pay for retirement system costs, and borrows through the highway fund to shore up the general fund.

However, even with all this shifting, Kansas remains broke. The hole created by the income tax cuts has been so significant that shifts to other tax sources have not come close to stabilizing the state’s finances.

Income tax cuts benefitted the wealthiest Kansans, but without any obligation to create a job or even spend their tax savings in Kansas. In return, the state received financial turmoil. Many Kansans now pay more to fund state government at the same time that school class sizes go up, and highway maintenance gets put aside.

If you are a Kansan and do not feel like you’ve had a tax cut, that’s because you probably did not get one.

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

Friday, June 10, 2016

Set Up for More Financial Trouble

Expect financial turmoil in Kansas to continue.

Lawmakers left Topeka after approving revisions to the budgets already in place for FY 2016 and FY 2017, but failed to solve the underlying problem facing the state.

As a result of unaffordable tax cuts, Kansas does not receive enough revenue to pay bills.
Here’s the high-level general fund profile for FY 2016 based on legislative action:

Now let’s go one step further and break out the one-time transfers from total revenue:

The FY 2016 budget that lawmakers passed has a large structural imbalance, and would leave the general fund $140 million below zero at the end of the fiscal year. To avoid the negative ending balance, lawmakers are expecting the governor to use his powers to transfer yet another $70 million from the highway fund. That would technically increase general fund revenue, but it’s more one-time money that does not narrow the structural imbalance. Lawmakers also expect the governor to “delay” a $96 million payment to the retirement system until FY 2018, which would lower total expenditures in FY 2016 but increase expenditures in FY 2018.

Now, look at FY 2017 based on the recent legislative budget action:

Again, let’s go one step further and break out the revenue projection to show one-time transfers:

The FY 2017 budget also has a large structural imbalance, and a negative ending balance. Lawmakers are expecting the governor to order an additional transfer of $115 million from the highway fund, and to also cut expenditures (details of the cuts unknown) enough to avoid the negative ending balance.

Now consider FY 2018. When lawmakers convene a new legislative session in January, they must create a brand-new budget for FY 2018. How will that work?

Recurring revenue in FY 2017 totals $5.9 billion. With luck, that might grow a little in FY 2018, but under current policy, hoping for much more than $6.0 billion would be quite optimistic. Legislators set expenses for FY 2017 at $6.324 billion, but in FY 2018 expenses will be higher. The 4th quarter KPERS payment from FY 2016 must be paid. Add $96 million plus 8 percent interest for that. Medicaid costs will go up $60 or $70 million, maybe more. Of course other costs will rise as well, but just the Medicaid and KPERS increases alone will push expenses to $6.5 billion, far above recurring revenue. And the bank account will be empty and the highway fund tapped out.

Will lawmakers be able to address problems in the budget like staffing shortages at state hospitals and prisons? Not without making the overall financial situation worse.

What if happens if the Kansas Supreme Court declares school funding constitutionally inadequate? The state will have little recourse.

What happens if the economy actually goes into recession? Everything gets worse.

The Kansas budget has been structurally unbalanced every year since the 2012/2013 tax cuts went into effect, putting the state in a highly precarious financial situation. Budget actions in this legislative session did not address or correct that.

The state’s grim financial prognosis will persist until the underlying problem gets fixed.

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

Friday, May 13, 2016

Unseat the Illiterates

Governor Brownback declared April to be Financial Literacy Month in Kansas. Yes, that’s true, although unbelievably ironic given the state’s current financial condition.

But don’t fault the governor for making such a declaration.

The purpose, to encourage Kansans to be well-prepared to manage money, credit, investments, and debt, is a fine idea. The concept of a financial literacy month has been promoted nationally, and other governors made similar declarations.

Kansas even has a website,, devoted to improving financial literacy. During April, Kansans had the opportunity to win an I-pad mini by registering on the site, and filling out five learning modules “designed to increase your financial IQ.”

Do fault the governor, though, and the legislators backing his policies, for ignoring the very principles they believe the rest of us should use in our own personal financial management.

Take stock of what happened in Kansas during our April financial literacy month. The official revenue estimate was revised downward, plainly showing that Kansas does not have enough income to pay bills. But that’s no surprise. The Kansas budget has been upside down ever since the governor’s “fiscal experiment” kicked in three years ago, dramatically lowering income to the general fund.

The state has survived financially only by using up every dollar in the state savings account, by raiding other funds to shore up the general fund, and by borrowing. Now the governor proposes more of the same.

Here’s one of his solutions: Make only three quarterly payments into the retirement system this year, but promise to make the fourth payment next year, or the year after. Kansans, try that kind of maneuver with your personal finances and see what happens. Call your mortgage company and say you just can’t make 12 house payments this year, so you’ll do 11, but promise, promise, promise that next year you’ll do 13. Don’t expect to win an I-pad mini.

Or get this: The governor’s preferred option would sell future income that Kansas receives from the nationwide tobacco settlement, income that currently pays for early childhood programs. That amounts to a giant payday loan with a terrible interest rate. Kansas would receive a lump sum payment to plug the budget hole this year, but would pledge a much greater sum in future paychecks to pay off the loan.

And this: The governor has announced the cancellation of many planned road projects. Highway maintenance and bridge repair efforts have already been zapped. All so that even more money can be taken from the highway fund to pay general fund bills.

The governor’s “solutions” leave Kansas poorer and less flexible while insuring that the state’s budget problems will repeat the very next year. If you do not have enough money to pay your bills, cleaning out your savings account or taking out a high-interest payday loan or no longer maintaining your house and car will not fix your problem. That’s financial literacy 101.

The governor and lawmakers are flunking state financial literacy, and Standard and Poor’s essentially told them so at the end of April by putting Kansas on a negative credit watch. Kansas already has one of the least favorable credit ratings for U.S. state governments. S&P warned that if Kansas opted for more gimmicks over real solutions, the state’s credit rating, its financial report card, would notch down again.

Election season looms with every Kansas House and Senate seat on the ballot. It’s nice that April was designated for citizens to improve their financial literacy, but it seems most Kansans already have a better grasp than their lawmakers. Before voting, check out legislative candidates carefully. If a candidate supported Brownback’s fiscal experiment and wants to stay the course, being a financially literate voter requires marking your ballot for somebody else.

—This post originally ran in a variety of Kansas newspapers last weekend.

Thursday, April 28, 2016

Kansas Budget Goes Deeper Underwater

Kansas revenue forecasters just lowered expectations for tax revenue In FY 2016 and FY 2017 by $348 million, putting the budgets for those two years deeply in the red.

Make no mistake. The problem directly results from steep income tax cuts enacted in 2012 and 2013.

Note the chart below. In FY 2013, general fund tax revenue reached a high of $6.333 billion, and then fell to $5.632 billion in FY 2014 after the income tax cuts were fully implemented. Tax revenue stayed at that low level in FY 2015, growing only a scant $85 million. The revised revenue estimate now predicts tax receipts will grow to $5.865 billion in FY 2016 and to $6.039 billion in FY 2017. But remember, that growth only occurs as result of tax increases, passed in the last legislative session, that were supposed to be worth more than $375 million each year.

Again, tax revenue fell sharply in FY 2014, and has never come close to recovering, even after lawmakers imposed the biggest tax increase in Kansas history. Yes, current economic conditions have some effect on revenue collections, but it’s the 2012 and 2013 income tax cuts that have brought down the state budget.

Let’s plug in the new revenue estimate to analyze the effect on FY 2016 general fund finances. The result: With just over 2 months left, the FY 2016 budget is now $137 million underwater. That deficit occurs after a $17 million cut to universities in March, after numerous other program cuts, after freezing school funding in a block grant, and after transferring $280 million from other funds. And that’s after raising the sales tax to the point where Kansas has the highest sales tax on food in the nation.

Now look at FY 2017. Same story. Assuming the governor and legislators somehow erase the FY 2016 deficit, FY 2017 will open on July 1 with a beginning balance of zero, but estimated revenue does not nearly pay for the scrunched-up expenditures approved for FY 2017, leaving an ending balance $174 million below zero.

Between now and the end of June 2017, lawmakers will have to somehow adjust the budget by more than $300 million, not so that Kansas can flourish, but so that Kansas can just barely scrape by with no money in the bank.

This situation will keep repeating itself and continue to drag Kansas down, until lawmakers go to the source of the problem and correct it.

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

Kansas Needs a ‘No Excuse’ Revenue Estimate

General fund tax collections have failed to meet the mark every month but one in FY 2016. Each instance has triggered expressions of anguish, frustration, and despair, because every miss means something negative—more money transferred away from children, cuts to higher education, lost hope for public schools, or crumbling roads.

Kansas finances have become a high wire act with no net. Lawmakers have an empty bank account and limited options when revenue collections underperform. The financial hole stemming from the 2012 income tax cuts is so deep that even two sales tax rate hikes did not balance the budget.

The revenue estimating misses in FY 2016 follow a rocky record in FY 2014 and FY 2015, mostly a result of inaccurate forecasts of income tax receipts. In FY 2014, the consensus estimate at one point predicted income tax receipts would reach $2.525 billion, but when the fiscal year ended, collections only totaled $2.218 billion—a $307 million miss. In FY 2015, estimators again predicted income tax receipts would hit $2.525 billion, but the actual amount turned out to be $2.277 billion—a $248 million miss. The same pattern may be taking place in FY 2016. The current estimate predicts $2.450 billion, but through March the state has fallen behind last year’s pace.

Granted, establishing an accurate and predictable revenue trend does not come easily when tax policy changes dramatically, or goes where no state has gone before. But the excuses being offered for the recent estimating misses don’t add up.

Multiple administration sources have tried to place the blame on a bad economy. Yet, that does not explain the forecast errors. The revenue estimators had a realistic view of the economy last November. Read their report, and some sample excerpts below:

“Most major economic variables and indicators have been adjusted downward since the Consensus Group last convened in April.”

“Kansas Gross State Product (GSP) growth for 2015 has been reduced to 1.2 percent from the previous estimate of 2.3 percent.”

“Specific to the Wichita area, neither total employment nor manufacturing employment has returned to pre-Great Recession levels.”

“The forecasted price per taxable barrel of Kansas crude has now been reduced to $35.”

The weakening Kansas economy is not a surprise.

Lately, the governor has tried to blame the estimating process itself, intimating that some different method would work better. Don’t buy it.

The Consensus Revenue Estimate (CRE) is a consensus between the State Budget Director (on behalf of the governor) and the Director of Legislative Research (on behalf of the legislature). The two directors and their staffs receive economic data and advice from 3 consulting economists, and they rely on tax data and advice from the Secretary of Revenue.

Nothing gets into the CRE without agreement from the governor’s budget director. Everything in the CRE is based on tax information brought by the Secretary of Revenue. The governor is not a victim of some broken process. Key people in his administration are in charge of it.

The governor’s budget director and revenue secretary have been architects and supporters of the governor’s tax plan. They wanted a different revenue outcome from the one we have, maybe even truly believed in a different outcome, and perhaps that is why they have had so much trouble getting the CRE low enough. Sinking tax collections continue to put the lie to the original promises.

Huge income tax cuts, benefitting mainly the wealthy, have not brought economic prosperity to Kansas. Rather, those unprecedented tax cuts have wrecked the state budget.

Kansas does not need a change in the process of estimating revenue. What our state does need is for the key players to provide a hardheaded assessment of what really is going to happen, not what they hope will happen.

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

Friday, April 1, 2016

‘A tragic, mind-blowing loss to Kansas’

$1 billion forfeited, with more money lost each day, each hour. Inaction makes the problem worse with every passing minute. Surely such a situation should spur Kansas lawmakers to action.

For two years running, Kansas has turned down the opportunity to expand Medicaid eligibility, and to have the federal government pay the full cost. This winter the tab for saying “no” topped $1 billion and continues to mount.

Did the refusal to accept these federal dollars bring some other benefit to Kansas? Will anyone pay lower taxes as a result?

No. The money is simply relinquished, gone from the state economy, a tragic, mind-blowing loss to Kansas.

150,000 more Kansans could have had health coverage for the last two years. Most of these individuals work, but their earnings are too low for them to afford health insurance, and they are not eligible for an insurance subsidy.

Some still received health services by showing up at hospital emergency rooms, but those hospitals took a loss by providing uncompensated care. Especially for rural hospitals, such losses make financial survival much more difficult.

Most states have already expanded Medicaid eligibility. Kansas remains one of 19, predominantly southern states, that have held ideologically firm against Obamacare. That’s the reason—a blind objection to anything that might be connected to Obamacare. Policy challenges over cost or implementation strategy have all been answered.

Do you want Medicaid to look more like a private insurance plan? Then set it up that way. Arkansas did. Should recipients pay something? Fine. Indiana requires that. What about incentivizing healthy behavior? Okay. Iowa took that approach. Should expansion be budget neutral, now and in the future? Sounds great. A bill proposed in Kansas does exactly that.

Kansas lawmakers could solve this in a hurry if they did their policymaking job and figured out how to make expansion work on Kansas terms. Call it KanCare expansion, if that helps, but go forward.

When Republican Asa Hutchinson became the new governor of Arkansas in 2015, he sought to continue the state’s expansion that had been previously put in place. Explaining why, he argued that turning away federal dollars that more than 30 other states were receiving would punish Arkansas. "It is perfectly consistent, it is perfectly conservative and logical to oppose Obamacare as a federal policy and yet accept federal dollars under the Medicaid program in Arkansas."

Exactly. Hurting ourselves to protest Obamacare conjures up the old adage of cutting off the nose to spite the face.

Most Kansas citizens have arrived at that same conclusion. Whatever Kansans may think of Obamacare, independent surveys by the Docking Institute and by the Kansas Hospital Association both show wide approval of expanding Medicaid eligibility.

When Gov. Brownback dismissed expansion in his State of the State address, when House Speaker Merrick removed potential yes-votes from the health committee, when Americans for Prosperity began targeting pro-expansion legislators with negative mailers, they clung to an anti-Obamacare ideology at the expense of the economic and physical health of citizens. By refusing these federal dollars, Kansas engages in needless self-destructive behavior.

More than $1 billion has already been lost to the Kansas economy. These funds cannot be recovered, but losses can be cut going forward. A bill is ready that legislators can still pass this session. If lawmakers wait, they’ll be shortchanging Kansas hundreds of millions more.

— This column originally ran in a variety of Kansas newspapers last weekend. A version also aired on Kansas Public Radio affiliates, which you can listen to here.

Saturday, March 5, 2016

A No Confidence Budget

By Duane Goossen

Kansas lawmakers just passed a revised budget that covers the remainder of this fiscal year, but they showed little confidence that their budget would actually work. To hedge, they added provisions allowing the governor to “delay” the final retirement system (KPERS) payment, or simply cut appropriations at the last minute in order for Kansas to escape financially from FY 2016.

The KPERS provision allows the governor to make only 3 quarterly payments into the retirement system this fiscal year, if money runs out. The fourth payment must still be made, but not until next year, and then with 8 percent interest tacked on. That means 3 payments in FY 2016, but 5 in FY 2017. In other words, the KPERS payment gets put on the credit card. The state slides by now, but pays big time next year.

Alternatively, or in addition, the governor can unilaterally make cuts to almost any part of the budget before the end of the fiscal year. Not enough money to pay expenses? Just don’t pay.

These provisions have a “trigger mechanism” that has already triggered. The governor receives the authority to delay the KPERS payment or cut spending when the general fund balance falls below $100 million, a mark hit long ago.

Lawmakers gave the governor this authority knowing the unlikelihood of the state having enough money to meet budgeted expenses. These extraordinary provisions allow lawmakers to dump the situation back on the governor and leave town without addressing the real problem—a large structural budget imbalance caused by unaffordable income tax cuts.

Consider expenses. The revised budget sets general fund expenses at $6.298 billion. That budget already imposes many spending cuts, leaves school funding with inequities, accepts operational problems up and down state government, and shifts $106 million of school transportation costs to the highway fund for payment.

But Kansas will not receive enough revenue to meet that conservative set of expenses. Even though sales tax rates were raised to record levels, the official revenue estimate only forecasts $5.972 billion in recurring revenue, but Kansas is not currently on pace to garner that. To get the rest of the way, lawmakers have agreed to transfer more than $300 million from other funds. And when that’s not enough, the governor can delay the last KPERS payment, or cut programs some more.

Uncertainty prevails. Agencies and schools do not have assurance that they can count on their appropriations. Kansas lives day-to-day on the financial margin.

The fallout from the income tax cuts is exacting a high toll on Kansas finances, a crippling problem that will continue until lawmakers face the mistake that has been made.

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

Thursday, February 18, 2016

Tax Plan’s Back Door Success

By Duane Goossen

Has the “real live experiment” in Kansas tax policy been a success? Did it live up to its billing?

If we simply judge whether it met publicly stated objectives, then no, the plan failed miserably. But in another important respect, the plan achieved exactly what many lawmakers hoped for, the squeezing down of state government.

Recall claims from four years ago when Kansas decision-makers dramatically lowered income tax rates and exempted more than 300,000 individuals from paying any tax on “business income.” Citizens were told to expect a “shot of adrenaline right to the heart of the Kansas economy,” a shot so potent, that despite tax cuts, the state budget would still balance.

After implementation of the tax cuts, all of that adrenaline talk soon turned sour. Sure, Kansas has grown economically coming out of the Great Recession, but slowly. More slowly than our region, and more slowly than the nation. In new job creation — a key measure for this experiment — Kansas ranks among the lowest 10 of all 50 states. Economic indicators show no correlation that the tax cuts helped Kansas boost its economy.

And state finances? What a mess. The revenue loss from the income tax cuts put the state budget drastically in the red. In response, lawmakers raised sales tax rates twice, which transferred more of the state’s tax burden to low-income Kansans but did not come close to correcting the budget imbalance. Lawmakers also blew through the state’s reserves and transferred hundreds of millions away from highways and children to barely eke out a budget.

But therein lies the secret to the “success” many lawmakers really sought. If you want to cut programs and force state government to be smaller, starving the revenue stream provides the easiest route.

No politician wants to look a constituent in the eye and say “I’m going to cut schools,” or “I’m going to reduce maintenance on the highway you travel.” But with a tamped down revenue stream, politicians can say, instead: “We have to live within our means.”

Indeed we do. In Kansas, if the general fund bank account has no money, then no spending can take place. At the federal level, the “starve the revenue” approach does not work as effectively because the federal government has the ability to run up deficits and borrow money to fill the gap. Kansas cannot do that, at least not directly.

So in the name of “living within our means,” lawmakers cut operational aid for schools, then froze funding in place through block grants. State employees have lost benefits, and received no raises in 8 years, leading to critical staff shortages at state hospitals and prisons. Maintenance on roads and bridges has been chopped, services for low-income Kansans cut off, Medicaid expansion turned away, and the Bioscience Authority demolished.

And it will get worse. Kansas cannot even afford the current scrunched-up level of spending. This year’s budget only balances by using large one-time transfers from other funds. All budgetary efforts now focus on downsizing and cutting back, with little thought given to how our state should invest for a better future.

Evidence shows up everywhere that the tax plan fundamentally failed to provide sound finances or deliver economic prosperity, but the governor and supporters of the tax plan brush it off. Maybe they disregard the evidence because they don’t care. After all, it appears that the real goal of Kansas tax policy went undisclosed at the front end. The architects of this plan may well be pleased with reductions of services to the state’s citizens.

If you truly bought into the argument that giant tax cuts would lead to prosperity without hurting schools and highways, you’ve been had.

Meanwhile, those wanting Kansas to spend less, regardless of the consequences, have met success.

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

Thursday, February 11, 2016

Small Ripples in a Big Pond of Troubles

By Duane Goossen

Kansas lawmakers paid $2.6 million for a 257-page, recently released efficiency review of state government. What should we make of it?
  • The most important section of the report—budget process review—tells lawmakers to structurally balance the budget (recurring revenue equals expenses), and establish a rainy day fund, two critical financial practices that have been completely upended in Kansas by the 2012/2013 tax cuts.
  • Even if lawmakers implement every single “efficiency reduction,” Kansas will still not achieve structural budget balance or have a rainy day fund. $2 billion in potential savings may sound big, but that amount represents a cumulative 5-year total, a substantial share of which does not accrue to the general fund. Plus, the savings estimates for some of the components are just guesses, and likely too high. Further, items like the sale of surplus property, or depleting cash balances in school districts, produce only one-time dollars. And lawmakers will never, even in the wildest of dreams, ever implement all the recommendations.
  • A large swath of the recommendations do not represent efficiency savings at all, just plain cuts. For example, $543 million in “savings” over 5 years, more than a fourth of the grand total, would be garnered by reducing health benefits to state employees and teachers. State employees would all be moved to a high deductible health plan. In this scheme, the state pays less and employees pay more; not a good move when the state struggles to fill positions at state hospitals and prisons.
  • Several items actually propose an increase in spending in order to secure more revenue. Spend more to get more. Supposedly, about $50 million a year could eventually be garnered by hiring 54 new tax auditors and collection agents. If that is true, staff reductions of the last few years have seriously hurt the efficiency of the Department of Revenue, just as they have also damaged the operations of state hospitals and prisons.
  • The review turned up some things that are worth doing—such as better coordination of insurance purchases, and energy savings ideas. Certainly state government should always work to provide the most efficient services possible with taxpayer dollars. However, items that might be classed as easy or “low-hanging fruit” were already accomplished long ago as the state struggled through the Great Recession and then grappled with reduced revenue as a result of tax cuts.
So, charge ahead, lawmakers. Implement every item that truly makes Kansas government more efficient. But remember that the key issue you face is not inefficiency. The 2012-2013 tax changes so damaged the state revenue stream that Kansas does not have enough income to meet even a conservative or “efficient” set of expenses. That’s the real problem that must be fixed so that Kansas can once again invest in the future.

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

Saturday, January 30, 2016

Governor’s Budget Prolongs Financial Trouble

The two most important recommendations in the recently released Alvarez and Marsal “efficiency review” of Kansas government went unheeded in the governor’s budget.

The efficiency report tells lawmakers that in order to be financially healthy, Kansas must have a structurally balanced budget—one in which recurring revenue at least equals expenses. And the state needs a rainy-day fund or reserves. The governor’s budget proposes neither.

FY 2017 will be the fourth fiscal year in a row with general fund income well below expenses. Each year lawmakers have scrambled to fill the resulting gap, first by blowing through $709 million in reserves, and then by withdrawing record amounts from the highway fund and other funds. The governor’s revised budget for FY 2017 proposes more of the same.

Brownback’s 2012 income tax cuts, which disproportionately benefitted the wealthiest Kansans, first damaged state finances in FY 2014. In a normal time, income tax revenue would rise, but in FY 2014 it fell $700 million, and then stayed down at a dramatically diminished level. Today, annual income tax collections would be $1 billion higher, if not for the 2012 tax cuts. Instead, recurring general fund revenue only reaches an estimated $6.1 billion in FY 2017, even after lawmakers raised sales and cigarette tax rates last year.

The governor’s proposed $6.4 billion in expenditures exceeds expected FY 2017 income by $300 million, even though the governor applied spending cuts to state programs in July, again in November, and now again in January. And remember, the $6.4 billion spending level has schools stuck in block grants, disregards state employees, leaves troubles at state hospitals unaddressed, and does not provide enough Highway Patrol troopers. In addition, the state has taken on unprecedented debt in an attempt to cut spending in the short term.

On paper, the governor’s budget shows FY 2017 ending with a small bank balance. His budget is built using the November revenue estimate, but already in December revenue collections missed the mark, basically wiping out the paper balance. Any further revenue deterioration will require even more budget cuts or transfers in what remains of FY 2016 and in the proposed budget for FY 2017. State law requires the general fund ending balance to be 7.5 percent of expenditures. For a budget that spends $6.4 billion, that calculates to $480 million.

Until lawmakers acknowledge that the 2012 income tax cuts went much too far, and fix the problem, Kansas will stagger from budget crisis to budget crisis. Schools and state agencies will continually face an uncertain future, in which funding can be pulled out from under them at any moment. And the state’s political energy will be focused on crisis resolution rather than investing in education and other essential services that matter for the future.

To be financially healthy again, Kansas must raise its income stream to cover expenses, as well as build back reserves. The simplest, most direct solution would repeal the gaping tax loophole that exempts most businesses, including some very, very large limited liability corporations, from paying any income tax at all.

Adopting the governor’s structurally unbalanced FY 2017 budget only guarantees that Kansas will continue to struggle, and face financial troubles again next year.

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

Three Key Questions

Kansas remains in a perpetual budget crisis as another legislative session begins. Lawmakers have already approved budgets for FY 2016 and for FY 2017, but both must be adjusted just to keep the general fund solvent.

Is it possible to get through FY 2016 without further cuts?

A very high risk exists for further mid-fiscal year program cuts.

In November, the state’s revenue estimators markedly lowered expectations for the amount of tax revenue that Kansas would receive in FY 2016. The new estimate put the general fund underwater by more than $100 million, even though lawmakers had hiked the state sales tax rate in June and directly transferred more than $200 million from other state funds.

In response, the Brownback administration took emergency action in November to take yet another $50 million from the highway fund and $9 million from early childhood accounts, and imposed deeper spending cuts on programs. These actions just inched the general fund balance above zero by a few million dollars.

If actual tax collections do not meet the lowered targets, further budget cuts will be required. Kansas does not have any reserves left to deal with further revenue erosion. Even with lowered expectations, the new estimate predicts that tax collections will increase by 5.7 percent in FY 2016 . However, through the first 6 months of FY 2016, actual collections have grown less than 2 percent from the previous year. The revenue estimators likely still have the revenue estimate set too high.

What must be done to the existing FY 2017 budget — at minimum?

At least $175 million must either be added to revenue or subtracted from approved expenses to stay solvent. That’s the bare minimum required to keep the ending balance above zero, and would only eke the state through to the next year. Keep in mind that the revenue estimate for FY 2017 already includes $180 million in one-time transfers from other funds.

Doing the bare minimum does not account for any action that may be required from the school finance court case, does not provide any ending balance, and does not deal with understaffed prisons and hospitals. And if the revenue estimate for FY 2016 is still too high, the one for FY 2017 likely is, as well.

What’s the fix?

To be financially stable, Kansas must adequately fund key programs, have a balance between income and expenses, and keep a reasonable amount of reserves. Not even one of those three things is occurring now.

The problem rests with unaffordable income tax cuts that dramatically diminished the state’s revenue stream and produced a perpetual budget crisis. Fixing the problem requires revisiting those income tax policies and correcting them.

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

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