DALLAS – Kansas ended its 2016 fiscal year on June 30 the way it began, with state revenues falling short of projections.
On the last month of the fiscal year, revenues were $33 million below official estimates. That came on the heels of a $45 million shortfall in May, a month after the state lowered its revenue expectations for the second time.
After raising sales taxes, cutting spending, issuing $1 billion of pension bonds, and twice reducing its revenue forecast in the past year, the state still came up short of its needs for a $6.4 billion general fund budget approved in the longest regular session in the Legislature's history.
The Sunflower State began its 2017 fiscal year July 1 under another $6.4 billion budget that provides only a 0.9% increase in spending. Gov. Sam Brownback signed the budget bill, which is expected to end with a negative balance. The Republican governor then called lawmakers back into session to satisfy a state Supreme Court order to increase funding for public schools.
After lawmakers meeting in the two-day special session found a way to shift $38 million to public K-12 education, Brownback signed their Substitute for House Bill 2001, saving Kansas schools from a state Supreme Court threat of closure due to funding disparities deemed unconstitutional.
"I am pleased to sign this bill ensuring that Kansas schools remain open," Brownback said in a signing statement days before the threatened July 1 closure. "As I said when I called the special session, our focus was on making sure the Kansas Supreme Court did not close schools over 1% of the $4 billion spent on education in Kansas."
On June 28 – two days before the court-imposed deadline – the Kansas Supreme Court accepted the terms of the new legislation as resolution of one key aspect of the lawsuit.
"It's official," Kansas Attorney General Derek Schmidt said. "The Legislature has satisfied the Constitution's requirement for equitable school funding, and Kansas public schools will remain open and operating."
However, the ruling doesn't end the litigation over school funding. Attorneys for the school districts said that the court would consider the overall adequacy of school funding in the next phase of the case. Plaintiffs are seeking as much as $500 million a year in additional base state aid for public schools.
To manage its cash-flow needs for the coming fiscal year, Kansas, through the State Finance Council, will borrow $900 million from its state investment fund. Just as with tax and revenue anticipation notes, the loan must be paid off by the end of the fiscal year.
Other measures to make ends meet include diverting $16 million from the state highway fund and $45 million from the Medicaid Fee Fund. State budget director Shawn Sullivan said that another $3 million can be taken from the Kansas Department of Corrections.
Those adjustments follow steep cuts to higher education and a plan to reduce contributions to the state pension fund by issuing $1 billion of pension obligation bonds.
Hanging in the balance is the state's general obligation credit rating, currently at AA from Standard & Poor's Global Ratings and Aa2 from Moody's Investors Service. Both agencies have negative outlooks, with warnings of a downgrade based on analysis of the state's adjustment to revenue shortfalls.
"Should the fiscal 2017 budget be revised to move the state substantially closer to structural budget balance, with prospects for restoration of what we view as essentially depleted general fund reserves, we could remove the ratings from CreditWatch," S&P analyst David Hitchcock explained in an April 25 report. Hitchcock put the odds of a downgrade at one in two.
While Hitchcock agrees with Brownback's assessment that revenues are restrained by a weak economy, the basic structure of the state's budget remains an issue.
Democrats and critics say that the state revenue shortfall began with the Brownback-backed cuts to income and business taxes in the 2012 legislative session.
"Make no mistake. The problem directly results from steep income tax cuts enacted in 2012 and 2013," said Duane Goossen, former state budget director under Democratic Gov. Kathleen Sebelius, Brownback's immediate predecessor.
According to Goossen's assessment, the state's general fund tax revenue reached a peak of $6.33 billion in fiscal year 2013 before falling to $5.63 billion after income tax cuts were in place in the next fiscal year.
"Tax revenue stayed at that low level in FY 2015, growing only a scant $85 million," Goossen noted in his blog.
The state's revised revenue estimate now predicts tax receipts will grow to $5.865 billion in FY 2016 and to $6.039 billion in FY 2017, but only as a result of sales tax increases in the 2015 legislative session.
"Tax revenue fell sharply in FY 2014, and has never come close to recovering, even after lawmakers imposed the biggest tax increase in Kansas history," Goossen said. "Yes, current economic conditions have some effect on revenue collections, but it's the 2012 and 2013 income tax cuts that have brought down the state budget."
Goossen also said that the state shifted the tax burden from wealthy Kansans to those in the lower income brackets.
To offset the income tax cuts, lawmakers raised the sales tax to 6.5% from 5.7%, eliminated homestead property tax refunds for renters, limited sales tax rebates on food, eliminated the child care income tax credit, and raised cigarette taxes.
"Kansans with the lowest income have seen their tax burden go up," Goossen said. "For middle-income Kansans, it's been about a wash. Upper-income Kansans, especially those earning more than $500,000 annually, have come out well."
When Brownback was trying to sell the state income tax and business tax cuts in 2012, he described the strategy as an "experiment" that he believed would improve the state's economy by attracting more business.
However, Goossen said there is no evidence to support Brownback's hypothesis because Kansas's economy is not outperforming those of neighboring states that did not cut taxes.
"Income tax cuts benefited the wealthiest Kansans, but without any obligation to create a job or even spend their tax savings in Kansas," Goossen said. "In return, the state received financial turmoil. Many Kansans now pay more to fund state government at the same time that school class sizes go up and highway maintenance gets put aside."