Tuesday, April 18, 2017

Free Kansas

Kansas is thrashing in Governor Brownback’s grip. Tax reform to restore desperately needed financial stability? Vetoed. Medicaid expansion? Vetoed. A fair and adequate school finance formula? That bill has not yet arrived at the governor’s desk, but the prospect of a signature doesn’t look good.

The governor’s vetoes strike right at the heart of practical, fair-minded, fiscally conservative, give-a-hand-to-your-neighbors Kansas.

Deep down, Kansans know the state must bring in enough revenue to pay for necessary services. It’s basic fiscal responsibility. But, as recent polling shows, Kansans have figured out it’s not happening in the state budget, and a large majority want that changed. Education, highways, and Kansas’ future depend on sound finances. The vetoed tax reform bill that would have ended the Brownback “experiment” was passed with strong bipartisan support (40 Republicans and 36 Democrats in the House, 14 Republicans and 8 Democrats in the Senate).

Medicaid expansion offers health coverage to tens of thousands of uninsured Kansans, and is firmly pro-business by helping hospitals stay in operation. Kansans want to help their neighbors in this way. 82 percent favor expansion! Just like the tax reform bill, large bipartisan majorities in the House (41 Republicans, 40 Democrats) and Senate (16 Republicans and 9 Democrats) sent the Medicaid expansion bill to the governor.

The state is under court order to fix school finance by June 30. Schools stand as the backbone of many Kansas communities. Again, polling shows a large majority of Kansans in support of public education, and very wary of putting schools at risk with inadequate resources.

Brownback held Kansas back with his vetoes, but not singlehandedly. Legislators tried to achieve a two-thirds majority to override, but each time missed by just a few votes. The difference between override success and failure? Legislative leaders. President Wagle, Majority Leader Denning, and Speaker Ryckman voted with Brownback, and they are still trying to negotiate with him on these issues despite the fact that super majorities in their respective legislative chambers, and most Kansans, are not with them.

Negotiating with Brownback on tax reform can only lead to a very weak outcome, one that still leaves Kansas broke, borrowing, postponing bill payment, and diverting highway dollars. The governor’s only answer on Medicaid expansion appears to be “no.” On school finance, lawmakers are heading toward an updated version of the school finance formula that Brownback scuttled in favor of unconstitutional and inadequate block grants.

When legislators return from break on May 1, Kansas needs meaningful action. Legislative leaders have to quit Brownback, and move the state forward. Bypassing the governor may be hard for them, and out of the norm for Kansas politics, but that’s what the situation requires, and it’s what Kansans want.

Please, leaders and legislators, don’t make Kansas wallow in financial stress for another year. Don’t cut out the Kansans who need health care. Don’t risk having schools closed in August. Unclasp us from Brownback’s grip. He’s not the one who will be standing for re-election. He’s not the future. Override. Free Kansas.

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

Friday, March 17, 2017

Name Your Budget Cuts

Kansas budget cutters: the time has come to get real and very specific. Which expenses can be cut to balance the state budget? What’s your plan? Put out the details so that Kansans can judge the best course of action.

Despite multiple rounds of budget cuts over the last years, some legislators and groups like the Kansas Chamber of Commerce and Americans for Prosperity have continued to make vague, abstract pronouncements that Kansas has a spending problem. They suggest that financial trouble in Kansas can be solved by getting rid of “inefficiencies.”

That kind of talk nurtures a popular stereotype of government, but does it at all ring true in Kansas anymore? If true, those saying such things should have no trouble naming the spending that needs to be eliminated. Surely, with the financial health of Kansas on the line, would-be budget cutters can muster specificity.

In the wake of a new court ruling, what part of school funding can be cut? Saying “put students first” is not an adequate answer though.

How about chopping Medicaid? Doctors, hospitals, and nursing homes providing services had their Medicaid reimbursement rates cut 4 percent this year. Can that cut be made deeper?

Vast amounts of money have been lifted from the highway fund, causing many road projects to be cancelled. Should Kansas spend even less on highway maintenance and bridge repair?

State employees have not had a raise in 9 years. How about making it 10? Or maybe cutting their health benefits can save money.

Without specifics, claims of an inefficient, overspending state government come up empty and lead nowhere.

When explaining his recent veto of a revenue-raising bill, Gov. Brownback chided lawmakers for not considering more expense cuts, but his own budget does not show the way. His main proposal to reduce spending shorts the required payments into the already precarious public employee retirement fund. That’s like a homeowner skipping mortgage payments. It doesn’t actually eliminate the expense, just piles it onto the obligations in future years.

Kansas faces a festering budget gap between income and expense that now exceeds a billion dollars. Only two approaches can effectively solve the problem: cut expenses—in a real way—or raise revenue. Lawmakers have not done enough of either to cure the structural imbalance in the budget.

Instead, they have resorted to short-term patches that kill Kansas financially—blowing through the reserves, borrowing, putting off bill payments, raiding the highway fund, trying to sell assets. With each of these maneuvers, Kansas has become poorer, but without fixing the problem. These misguided efforts have to stop.

If there was ever a time for serious budget cutters to shine, this is it. Put your proposals out on the table and explain them. But if you are only able to talk in generalities, don’t waste everyone’s time. Either offer credible ways to reduce expenses, or let the Legislature proceed to rollback the 2012 income tax cuts.

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

Friday, March 10, 2017

Open Letter to Kansas Lawmakers: Evacuate from Fiscal Hell

Last week’s Supreme Court ruling requiring increased funding for Kansas schools did not surprise many people, but it still complicated an already challenging legislative session.

So, now what?

Here are three observations from a budgetary perspective:
  1. The goal post moved…a lot. Lawmakers must adjust accordingly. House Bill 2178 was a good first attempt at fixing our broken tax code, making needed structural reforms to stop future revenue hemorrhaging. But it only generated $460 million annually — far short of closing the $900 million structural shortfall created by Governor Brownback’s tax policy. Many still supported it (myself included) because a school finance ruling was likely to offer a later opportunity to finish the job. Now that the school finance ruling is upon us, lawmakers must restore $500-$800 million to schools in addition to filling the $900 million structural shortfall. House Bill 2178 generates far too little revenue to still be considered a responsible solution.
  2. Comprehensive tax reform should still come before any budget action. Many reports continue to characterize the gap as $350 million in 2017 and then $580 million in 2018. That’s only accurate if lawmakers raise $350 million in recurring revenue this year or make another $350 million in cuts. There hasn’t been much appetite for either of those options. It seems more likely the Legislature will borrow its way out of 2017 instead, as proposed in House Bill 2052 (the House rescission bill). If that happens, Kansas will face a $932 million gap in 2018. Just look at the basic numbers: the 2018 revenue estimate is $5.536 billion. Meanwhile, delivering the current level of services in 2018 is projected to cost $6.468 billion. Bear in mind that figure does not account for any payback for a Fiscal Year 2017 loan. Nor does it include any additional investment necessary to comply with the court’s order. There is simply no way to proceed without first stabilizing the revenue stream.
  3. Ten hundred million one way, one billion the other. Absent hundreds of millions more in budget cuts, Kansas faces a minimum structural gap of $1.4 billion. Billion. With a “B.” A tax reform package that fails to close this minimum gap guarantees yet another devastating shortfall next year – even if a school finance formula is phased in over time. Is that really how we want to spend 2018? This is the moment to end the crisis in its entirety.
Governor Brownback’s tax experiment dumped Kansas into a fiscal hell. Now even he reportedly seeks an emergency evacuation plan. Except – assuming it’s true – the Governor’s plan would only save himself. Kansas is on its own.

If even Governor Brownback can’t summon the courage to stay and fight for his failed tax experiment, why should any lawmaker defend it – or preserve any part of it – at the expense of Kansas schools and communities?

These are jaw-dropping figures, leaving no good options. Legislators deserve our thanks for not jumping ship and for demonstrating courage to put Kansas back on a practical path forward. Please keep going. It won’t be easy, but please do not stop short of ending this experiment once and for all.

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

Thursday, February 9, 2017

Repeal the Loophole, and More

The LLC loophole has come to epitomize budget-busting tax policy in Kansas. It appears that a majority in the new Kansas Legislature know the loophole must be repealed, and fully intend to end it. But if viewing the situation with clear-eyed honesty, those legislators also know that loophole repeal corrects only a fraction of the problem. To fix Kansas financially, lawmakers must produce a more comprehensive solution.

The loophole, put in place in 2012 as part of the Brownback tax experiment, set up a highly unfair tax situation. Individual Kansans who receive income through a limited liability corporation (LLC), self-employment, a farm, or rental property pay no Kansas income tax. But people who receive a pay check, do owe tax. An owner pays no tax on personal income taken from a business, yet employees of the business pay taxes.

Exempting such a large swath of income from tax has obviously lowered receipts and contributed to financial woes in Kansas, but with little economic payoff. The promise of explosive job growth failed to pan out, maybe because creating a job was never required as a condition of receiving the tax cut. Since the loophole opened, Kansas job creation has been anemic, running far behind our region and the U.S. as a whole.

The loophole has to go. No other state does tax policy this way.

While most Kansans have figured this out, they may not realize that just killing the loophole still leaves Kansas in deep financial trouble. Thanks to the 2012 tax changes, Kansas does not have nearly enough income to pay bills. The loophole caused about one-third of the revenue loss. Income tax rate reductions, which especially benefit the wealthiest Kansans, caused the rest.

The current dire Kansas financial situation will not cure itself; nor will one-time tricks and maneuvers work. Lawmakers need a comprehensive solution that raises enough recurring revenue to meet expenses. “Comprehensive” does not necessarily mean a complete return to pre-2012 tax law, but lawmakers at least need to consider moving the upper income tax rate back where it once was, in addition to closing the loophole. If money continues to be siphoned from the highway fund, a higher gas tax could allow a reasonable level of road maintenance.

The governor’s proposals are of little help: borrow, sell assets, renege on retirement funding, and grab even more from highways. Legislators have to produce the real solution on their own. Strategically, legislators may even need to vote against a stand-alone loophole repeal in order to force a vote on a broader revenue package. A piecemeal approach in which lawmakers cast individual votes on each potential revenue change will likely doom a comprehensive solution.

Irresponsible decisions made five years ago have left a huge mess in Kansas today. Our situation was a lot easier to get into than to unwind. Clean-up requires realistic assessment, courageous votes, and comprehensive tax reform. Anything less leaves Kansas in the same downward spiral.

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

Friday, February 3, 2017

January Revenue In Perspective

January general fund tax revenue turned out to be a bit “higher than estimated.” Good. That’s certainly a better situation than if monthly revenue were lower than estimated, as has been the case so many times over the last four years.

However, the January result does not alter the grim financial situation facing Kansas. Nor does it indicate that Kansas is now on some new financial trajectory.

The key words to consider are “higher than estimated.”

Remember, last November Kansas officials made revisions that dramatically lowered the estimate of FY 2017 revenue. The target was set so low that Kansas now expects to receive less tax revenue in FY 2017 than in FY 2016, and far, far less than in FY 2013, the year before income tax cuts fully kicked in. Beating the revenue estimate in January is not exactly a high bar.

In FY 2014, general fund tax revenue fell $700 million when income tax rate reductions and the LLC loophole were implemented. Receipts never recovered, staying at that lowered level in succeeding years.

Think about it this way: Even if revenue collections meet the “estimate,” Kansas has an almost $700 million structural budget gap in FY 2017. The official estimate forecasts recurring general fund revenue at $5.6 billion, against expenses of nearly $6.4 billion. A portion of that gap has already been closed by transferring hundreds of millions from the highway fund and other funds, but lawmakers still have around $350 million to go. The Legislative Research Dept. projects that the gap between revenue and expenses in FY 2018 will grow to around $900 million.

Through the month of January, FY 2017 general fund tax revenue is $32 million higher than officially expected, but $11 million lower than the same period of the last fiscal year. The $32 million helps, but has essentially already been offset by a lower-than-expected amount from the sale of the Bioscience Authority and higher-than-planned-for Medicaid costs. If anything, the current gap between revenue and expense has grown, not diminished.

Kansas’ financial troubles remain very, very serious. The financial wound inflicted by unaffordable income tax cuts will not heal on its own or through accounting tricks and one-time maneuvers. The amount of recurring revenue must be raised back up in order to reasonably meet expenses.

Kansas lawmakers have to face the hard fact that they need a comprehensive revenue reform package to bring structural balance back to the Kansas budget.

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

Sunday, January 29, 2017

Governor’s Budget: Don’t Look Here for Structural Balance

The governor claimed he was producing a structurally balanced budget.  The lieutenant governor predicted that a structurally balanced budget was coming.  And after its unveiling, the governor’s staff asserted the budget was indeed structurally balanced.

But it’s not.  Not even close.  Unfounded claims and assertions can’t make it so.

“Balancing recurring revenue with recurring expenditures is the foundation of a structurally balanced budget ... A truly structurally balanced budget is one that supports financial health for multiple years into the future.”  A&M KansasStatewide Efficiency Study, 2016

Kansas faces a giant gap between recurring revenue and recurring expenses, a gap that opened up immediately when revenue dropped sharply upon implementation of the 2012 income tax cuts.  Subsequently, the FY 2014, FY 2015, FY 2016, and FY 2017 budgets have all been structurally unbalanced, the general fund kept barely solvent by using up reserves, grabbing money from the other funds, borrowing, and one-time tricks.  In each of those years, Kansas became poorer—bank accounts depleted, debt way up, credit rating down.

The governor’s revised FY 2017 budget and newly proposed FY 2018/FY 2019 budget brings more of the same!

FY 2017 (July 1, 2016 to June 30, 2017).  In this half-completed fiscal year, the general fund is $350 million short of being able to meet expenses, even though hundreds of millions have already been transferred from the highway fund, and deep emergency budget cuts applied to higher education and Medicaid providers.   The governor’s budget recommends two main things to address the $350 million shortfall:
  • Borrow.  The governor proposes to borrow $317 million to be paid back over 7 years.  If the Legislature agrees, that would increase expenses over the next 7 years, widening the structural imbalance.
  • Don’t pay bills.  In order to stay financially afloat in FY 2016, the state simply did not pay $87 million worth of bills, including $75 million owed to school districts.  The bills were carried over to FY 2017 to be paid as soon as money was available.  The governor now recommends not paying those bills at all.  (A $96 million KPERS bill also went unpaid in FY 2016, with a promise that it would be paid with interest in FY 2018.  The governor also now recommends not paying that.)

FY 2018/FY 2019.The Legislative Research Dept. calculates the gap between revenue and expenses at about $900 million per year.  The governor’s recommendations to close the gap can essentially be distilled down to four main financial moves:
  1. Sell the tobacco settlement revenue stream.  “Securitization” would sell the next 30 years of tobacco settlement payments (which currently pay for early childhood programs) for a lump sum to prop up the general fund in the short term.  It’s the same concept as a payday loan.
  2. Gut the highway fund.  Between directly transferring money to the general fund and sending general fund bills to the highway fund for payment, more than $500 million of highway fund resources would be diverted to the general fund each year. Administration officials claim this would not harm highways, but that’s as believable as the claim that the budget is structurally balanced.
  3. Don’t make required KPERS payments.  Kansas law sets out a clearly defined schedule of payments into the state retirement system. The governor’s budget proposes paying almost $600 million less than required over the next two years.  Defaulting on these payments doesn’t reduce the state obligation, just pushes it off to future years.
  4. Tax increases.  The governor wants to raise about $180 million per year with a package of tax hikes that include doubling the taxes Kansans pay when they make purchases at liquor stores, and adding $1.00 to the per-pack tax on cigarettes.
Except for the proposed tax increases, none of these recommendations move Kansas toward structural balance by upping recurring revenue or lowering recurring expenditures.  And even if all components of the governor’s tax recommendation would pass, at best the revenue raised only closes about 20 percent of the structural gap. 

The governor’s budget appears designed to avoid the obvious.  The income tax cuts that broke the Kansas budget must be revisited and a comprehensive tax reform plan put in place.   That’s the only realistic way to regain structural balance without severely damaging education, key services, and the state’s infrastructure.   

The proposed budget from the governor does not open a path to a stable financial future.  It’s a recipe for yet another credit downgrade.  Legislators will serve the state best by disregarding much of it and starting fresh.

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

Saturday, January 14, 2017

Happy New Year Legislators, Now Fix the Budget

By Duane Goossen

For Kansas legislators, the new year may not feel all that happy. Veterans and first-termers alike have to be wondering why they ran for the job. In the upcoming legislative session, they face a daunting task, brimming with political risk.

Brownback’s “Kansas experiment” has brought the state budget to crisis. Kansas lacks the income to pay its bills, and not by a little. By hundreds and hundreds of millions. The politically thankless task for lawmakers: either restore revenue to meet obligations, or chop up education, highways, human services, and public safety. Doing nothing will result in damaging service cuts by default.

In the current, already half-completed fiscal year, the general fund has come up $350 million short, even after huge one-time transfers from the highway fund and emergency budget cuts to Medicaid providers and higher education. Most lawmakers will feel obligated to address that immediate pressing problem before grappling with the much larger structural gap between income and expense in next year’s budget.

But they should not proceed in that order. Addressing the long-term structural problem in the Kansas budget must have the highest priority! That may seem counter-intuitive, but it’s a bit like the safety instruction you hear from an airline attendant, “If the oxygen masks come down and you are traveling with a child, put your own mask on first; then attend to the child.” Stabilize the budget structure first, and then deal with the current fiscal year.

Only financially awful alternatives exist to cure the $350 million shortfall. Lawmakers cannot logistically raise new revenue fast enough. So that leaves either sudden budget cuts concentrated at year’s end, or some kind of one-time patch. With the bank account empty and the highway fund tapped out, the “easy” one-time patches have already been used up, but insiders talk of selling something (tobacco settlement revenue, the turnpike), or paying bills late, or grabbing the unclaimed property of Kansas citizens, or somehow borrowing the money.

One-time patches do not solve the real problem. Without a long-term solution in place, selling assets or borrowing become just another hopeless component in the downward spiral of Kansas finances.

But if lawmakers can muster the political will to put a long-term plan in place first, Kansas has hope for financial stability. Then a $350 million patch solution in the current year becomes a “bridge” to a more hopeful future, rather than a step into deeper crisis.

Kansas simply must raise revenue to structurally balance the budget. Closing the LLC loophole alone will not fix the problem. Hopefully Kansans will give their legislators political breathing room to pass a broad revenue reform plan correcting the irresponsible decisions of the past. Otherwise, we’ll face damaging cuts to education and key services.

Lawmakers, make it a happy new year for Kansas. End the ill-fated experiment and structurally fix the budget. Do it early in the legislative session. Do it quickly.

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

Thursday, January 5, 2017

The Gap Lawmakers Must Close

The Kansas budget has a huge structural imbalance, a daunting gap between income and expense. For the Kansas general fund to remain solvent, lawmakers must close the gap.

The general fund became structurally unbalanced immediately after the 2012 income tax cuts were implemented, but the situation has become especially dire now with reserves used up and the highway fund tapped out.

Look closely at revenue. The latest Consensus Revenue Estimate (CRE) forecasts total general fund revenue in FY 2017 at just under $6.0 billion, but that total already includes previously authorized one-time transfers of about $400 million from many different funds (especially the highway fund). That means real income, actual money coming in during FY 2017 to pay bills, is just under $5.6 billion. And the CRE forecast for FY 2018: Just under $5.6 billion. And for FY 2019: Just under $5.6 billion. Before the tax cuts the general fund took in more than $6.3 billion annually, but by FY 2017 income has dropped under $5.6 billion without any prospect for improvement.

Now consider expenses. Even a constrained set of expenses for FY 2017 totals over $6.3 billion. Block-granted school funding, and emergency budget cuts to Medicaid providers and higher education have already been baked into that number. And those expenses will certainly grow in FY 2018 and beyond. Medicaid costs always rise. Required contributions to the retirement system (KPERS) increase each year. Enormous pressures across state government—no raises for state employees in 9 years, understaffed hospitals and prisons, underfunded schools—will push costs up.

The Legislative Research Department’s general fund profile outlines the grim structural problem. If the gap is closed only by cutting expenses, another $349 million must be chopped during the 6 months that remain of FY 2017, then an additional $582 million cut from services in FY 2018. Closing the gap by forcing expenses below $5.6 billion may be theoretically possible “on paper,” but highly dangerous and irresponsible, if actually done.

Alternatively, the governor and some lawmakers may promote some type of one-time solution—selling assets, borrowing, paying bills late—to address the remaining $349 million shortfall in FY 2017. (Remember, lawmakers have already approved about $400 million in one-time transfers for FY 2017.) But doing that does nothing to fix the structural problem. It only delays the inevitable reckoning and makes Kansas poorer in the process.

Kansas simply needs more ongoing revenue. The recent Rise Up coalition proposal provides a plan that restores financial solvency and tax fairness, without resorting to damaging program cuts or one-time solutions. The situation that Kansas faces requires a broad plan, more than just closing the LLC loophole. It’s either restore revenue to meet expenses, or whack away at education, highways, human service programs, and public safety.

The task ahead is critically important, though not politically easy. Many key services, which have already been cut or constrained, now hang in the balance. Hopefully when the next legislative session ends, Kansas will be moving toward financial stability, no longer consigned to downward descent.

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

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