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.

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