••• Tax & Spending •••

Gov. Brownback budget proposal: a lot to like but a few tax disappointments

There is a lot to like in Governor Brownback’s budget proposal for FY 2016 and FY 2017 but there are also a few disappointments.

It’s good that the Governor is keeping most elements of the tax reform plan in place but we’re disappointed that he wants some income tax and excise tax increases. Instead, the Governor should push for more cost reductions and use of unnecessary carryover cash reserves.  Kansas does not have a revenue problem.  2014 tax revenue was ahead of the ten-year inflation pace; it was 28% higher than in 2004 while inflation was 24%.  And the gap is expected to grow wider in the near future.  If inflation maintains the current pace, FY 2017 tax revenue will be 39% greater than inflation-adjusted tax revenue from FY 2004.Taxrevenuetable
The proposed spending reductions from this year’s record-setting level of $6.322 billion are very encouraging.  Other may criticize the decline in spending, but it should be noted that FY 2016 and FY 2017 spending will still exceed that of any year prior to this year’s record.  Still, there remains much more to do in reducing the cost of government.  As shown here, proposed FY 2017 spending will be $547 million greater than inflation-adjusted FY 2004 spending.

(Using FY 2004 as the base is merely to show what occurred with spending over the same time fram that tax revenue out-paced
inflation.  The real gap between proposed and necessary spending is even greater than $547 million, as there is no evidence indicating that FY 2004 spending was efficient.)

Part of the cost reductions come from proposed changes to the state employee retirement program – KPERS.  The Governor proposes the issuance of $1.5 billion in bonds, with the proceeds going to reduce the unfunded KPERS liability; he also proposes extending the amortization period for the remaining liability.  Bonding is a good idea if, AND ONLY IF, all new hires are placed in a defined contribution plan rather than the cash balance plan scheduled to go into effect this year.  The cash balance plan has a potential future liability for taxpayers that would not exist in a DC plan.  Extending the amoriization plan is what some might call an ‘accounting gimmick’ that should be avoided.  To his credit, the Governor indicated that he is open to other ideas on KPERS and it is hoped that a defined contribution plan for new hires would be viewed favorably.

Governor Brownback also proposes sunsetting the school funding formula and block-granting K-12 funding while a new formula is being designed over a two-year period.  Creating a new formula is a very strong student-focused approach and is long overdue.  As explained in our 2013 publication of Student-Focused Funding Solutions for Public Education, we believe the school funding formula is irreparably broken.   The current formula funds districts rather than students and is providing more money than is needed to efficiently operate schools.  It is based on an old cost study that was deliberately skewed to produce inflated numbers and it is well-established that schools are not operating efficiently.

Developing a new formula is a complex undertaking but it should approached with extreme urgency.  Every effort should be made to complete the process in the current legislative session for implementation on July 1.  If that cannot be done, block-granting the amount each district was scheduled to receive this year (based on the dollar amount of equalization agreed to by the Legislature last year) would be appropriate.

All told, it’s a fairly good plan that would be greatly improved if the Legislature strips out the tax increases and further reduces the cost of government.