DALLAS – Facing a $900 million shortfall, Kansas Gov. Sam Brownback is proposing a combination of tax increases, cuts in transportation and pension funding and the sale of tobacco settlement securitization bonds.
"Most immediately, we must address the imbalance between state revenues and expenditures," Brownback said in his 2017 State of the State address Tuesday. "As a first step, I encourage the Legislature to put a bill adjusting the 2017 budget on my desk by the end of the month."
In a proposal that anticipates flat revenue growth through the 2019 fiscal year, Brownback is calling for $6.25 billion in spending for the 2018 fiscal year that begins July 1. That represents a slight increase from the $6.07 billion available in the current fiscal year.
The Kansas Legislature opened its 2017 session this week facing a $350 million revenue shortfall in the current fiscal year and $550 million in the next.
"Tax receipt estimates are now estimated to be $713.0 million, or 11.1%, less than what the FY 2017 budget was based on when passed at the end of the 2015 Legislative Session," Brownback's budget report said. "The FY 2017 budget originally passed with a planned $199.2 million ending balance is now facing a shortfall due to the continued missed revenue estimates."
To cover the current shortfall, Brownback is asking to borrow $317 million in idle funds. He also proposes transferring $45 million in interest the state has earned on investments from the unclaimed property fund and collecting another $27 million in accrued interest on other investments.
The budget proposal would freeze state payments into the Kansas Public Employees Retirement System at 2016 levels, saving $86 million for the general fund.
If the Legislature accepts the revenue plan, Kansas would have an ending balance of $99.6 million on June 30.
Over the next two fiscal years the state's ending balances would grow from one-time measures and a series of tax increases.
The budget proposals continue to drain funds from the Kansas Department of Transportation's road fund. Highway fund transfers in fiscal 2018 would come to $288 million, while the transfer in fiscal 2019 would be $293 million.
Last year, a number of highway projects were sidelined, despite Brownback's promises in previous years to complete billions of dollars in highway and road improvements under the T-Works program adopted in 2010.
Selling bonds backed by future tobacco settlement payments would provide $530 million over two years, officials estimate.
Tobacco settlement receipts are funds received annually from tobacco manufacturers by states that are party to the Master Settlement Agreement. Tobacco settlement receipts are primarily driven by annual domestic cigarette consumption. More than 20 states have issued bonds backed by the revenue stream.
"Preliminary analysis shows that the state could receive net proceeds between $480 million and $775 million, depending on the bond issuance structure utilized and prevailing market rates," according to the budget report.
The plan calls for raising cigarette taxes by $1 per pack and doubling the tax on other tobacco products to 20%.
Brownback, whose controversial income tax cuts enacted in 2012 are often blamed for the state's revenue shortfall, would accept some adjustments to increase revenue.
The plan calls for taxing all passive income that has been exempted from income taxes since tax year 2013.
"While guaranteed payments were taxed beginning in tax year 2015, this proposal would extend to all passive income, including income from certain rents and royalties," the report said. "Taxing all passive income beginning in tax year 2017 is estimated to generate an additional $40 million in both FY 2018 and FY 2019."
Brownback also recommends freezing the individual income tax rate for income under $15,000, or $30,000 for married couples filing jointly, at 2.7% in tax year 2018.
The tax rate was set to reduce from 2.7% to 2.6% in tax year 2018.
Kansas Democrats and some Republicans criticized Brownback's proposed measures.
Duane Goossen, a senior fellow at the Kansas Center for Economic Growth who served as budget director under two previous governors, said the proposals follow the same template that has been used in recent years.
"Borrowing a lot of money, selling important assets, further de-funding roads and bridges, and canceling payments to our state retirement system are all temporary stopgaps that we've tried and failed before," Goossen said in a news release. "This is the 10th budget crisis Kansas has faced since the Governor's tax plan took effect, and the budget offered today will all but ensure an 11th."