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.

Monday, January 11, 2016

It’s Like Déjà Vu All Over Again

Happy New Year, Kansans!  A new legislative session begins soon, and troubled state finances once again top the agenda.  Kansas staggers forward in a perpetual budget crisis that our lawmakers have been unable—or unwilling—to solve.

The basic problem is simple.  Kansas does not have enough income to meet expenses. 

The cause of the problem stems directly from the Brownback income tax cuts.  Those tax policy changes indisputably led to a sharp decline in the state’s revenue stream.  As a result, in the last three years, Kansas has consistently spent more than it takes in, a practice that makes the state poorer and poorer.

At first, lawmakers made up the difference between declining income and growing expenses by drawing down cash reserves.  A $709 million bank balance went to zero in less than two years. 

With the bank account empty, lawmakers began drawing hundreds of millions from other state government accounts.  The highway fund has been the prime target, but many other funds, including those set aside for early childhood programs and economic development, were also sacrificed in the attempt to keep the general fund solvent.

Of course, lawmakers also tried hard to cut expenses.  Funding for public schools, a prime responsibility of the state, has been pulled down far below where it should be.  State hospitals and prisons remain understaffed.  The current budget slashes planned maintenance on roads and bridges.  Yet, even these efforts have not lowered expenses nearly enough to make them fit within the dramatically diminished revenue stream. 

The budget imbalance became so acute last year that even conservative lawmakers voted to raise the sales tax rate, a move that further shifted the state’s tax burden to low- and middle-income Kansans.  The sales tax increase improved the overall revenue stream, but it did not come close to solving the problem.

The Brownback tax cuts brought the revenue stream down so significantly that truly damaging expense cuts coupled with a sales tax increase have not repaired the budgetary mess.

The financial problem and its cause are easy to identify, and so is the solution.  Revisit the income tax cuts, which were far too deep.

Don’t expect that, though. 

Gov. Brownback has announced that he does not want to deal with any tax changes this session.  Nor do the conservative legislators who voted to raise the sales tax.  2016 is an election year for all members of the Legislature, so many would prefer that Kansans forget what happened in the last legislative session.  It’s also unlikely that expenses will go down.  In their latest gambit to lower spending, lawmakers voted to pay a consulting firm $2.6 million to find “efficiencies” for them.  The results are not all in, but the early recommendations from the contractor suggest selling KDOT woodchippers and paying bills late—a very inauspicious start.

When baseball great Yogi Berra died in September, the media replayed many of his famous witticisms.  A favorite, “It’s like déjà vu all over again,” was reportedly first uttered by Yogi when Mickey Mantle and Roger Maris repeatedly hit back-to-back home runs in the 1961 season.  Yogi didn’t know it then, but his phrase applies to the Kansas budget now.

Another year.  Another budget crisis.  Déjà vu.  If our lawmakers again avoid the real solution by taking even more money from the highway fund, or by borrowing, or by exercising “creative accounting,” and if we buy the governor’s recent declaration that “we are going to be in good shape,” then Kansas will arrive at January 2017 with yet another budget crisis.  But our state will be poorer and another year behind.  It will be like déjà vu all over again.    

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

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