Kansas Center for Economic Growth, Aug. 25, 2016

R.I.P. FY 2016 — Another Year of the Downward Spiral Posted: 25 Aug 2016 09:33 AM PDT By Duane Goossen 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? Posted: 25 Aug 2016 09:21 AM PDT By Duane Goossen 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.