••• Tax & Spending •••

Reversing years of Kansas fiscal mismanagement

By Michael Austin|November 9, 2020|Kansas Policy Institute
fiscal mismanagement

It is needed now more than ever for the Kansas government to adjust its budget like many Kansas families and businesses are doing today. Kansans painfully adapted to life during the pandemic, but governments around the state have done little to no belt-tightening. With the state 2020 election behind us, Kansans must acknowledge that the state government’s billion-dollar shortfall results from years of fiscal mismanagement, not COVID-19.

FY 2019

If there’s one silver lining to the 2017 record income tax increase, it was that the state budget was solvent with nearly a billion dollars left as an ending balance. Putting aside the fact that Kansas families had fewer dollars to spend, the Kansas legislature had an opportunity to start anew with responsible fiscal management. Instead, Governor Kelly shortly came into office and proposed a budget that would ultimately set records for state spending, eat away at the reserves, and at the time, set up a 1.3 billion tax increase by 2023. To keep her preferred spending initiatives afloat, the Governor employed several budget tricks such as;

  • The budget proposal only showed a one-year budget instead of the conventional two-year budget
  • Denying a portion of the 2017 Federal Tax Cuts and Jobs Act to Kansans, raising their taxes
  • Delaying public pension payments
  • Transferring more than $400 million from the State Highway Fund

Despite a campaign to bring “financial stability” to the state budget, Governor Kelly enacted fiscal mismanagement. Ultimately, she employed the same “kicking the can” budget tricks she’s complained of in the past.

FY 2020

Before the Governor and Kansas legislature considered the fiscal year 2020 budget, national warning signs alerted the country to a potential incoming recession. In August 2019, yield curves of the U.S. Bond Market inverted; a market signal with a formidable record for predicting recessions. With the recession clock ticking, the need to structurally balance the budget and close shortfalls should have been a paramount concern for the Kansas government. It wasn’t.

For the fiscal year 2020, the Governor squandered another opportunity to build a structurally balanced budget. Instead, Gov. Kelly proposed spending $600 million more than tax collections, hitting another record spending level of $7.8 billion. It would drain the state’s ending balance to $533 million in that budget year, below the statutorily required 7.5% ending balance. Also, Gov. Kelly proposed;

  • Delaying public pension payments again
  • Taking $633 million from the State Highway Fund in 2019, 2020, and 2021
  • Violating U.S. Supreme Court guidance on online marketplaces
  • Expanding Medicaid to the tune of $70 million/year

The legislature ultimately rejected delaying public pension payments and Medicaid expansion. However, they approved the rest. Moody’s Analytics reported later that year, Kansas was among the worst prepared states in the nation to deal with emergencies. They said Kansas and Illinois are the only two states that don’t have a “rainy-day fund balance” to deal with emergencies.

COVID

As businesses and families responded to COVID-19, Governor Kelly took her steps. The Governor was the first in the nation to close schools, implemented a state shutdown of businesses her administration deemed “non-essential,” and told Kansans to stay home. Not only were such measures ineffective in fighting COVID-19, but had dramatic economic consequences, and through it, worsened the state budget. The U.S. Bureau of Economic Analysis reported that the Kansas economy fell 32.1% in the second quarter (annualized).

State forecasters estimated Kansas’ total receipts would drop $540 million from 2019 to 2020, with the biggest hit seen on personal income tax receipts. By June 2020, total state revenues fell 7.4% from the prior year, yet expenditures rose by 11.5% over the same time. The Governor made no allotments to state agencies but rather delayed loan payments and pushed spending into the following fiscal year. The divergence in revenues and spending left Kansas with an ending balance of $89.1 million. By July 2022, the state will need to find an extra billion to close its shortfall gap and honor state law to have an ending balance equal to 7.5% *See profile at the end of the post

To make matters worse, recovery from both COVID and government actions have been slow having devastating consequences for families and businesses across the state.

Solutions Kansans Need

Kansas does two-year budgeting in odd-numbered years. So, the 2021 legislative session could serve as the opportunity to right many prior fiscal wrongs. Policymakers must reduce the budget to solve the state’s financial problems. Additionally, Governor Kelly’s only solution has been to beg Congress for federal tax dollars. However, such a solution is a short-term fix that shifts more costs to the taxpayer. Over a longer horizon, congressional bailouts create a false sense of security, encouraging more fiscally irresponsible behavior. A healthy and sustainable solution to Kansas’s budget troubles should include but are not limited to

  • Stop diverting funds from the state highway fund
  • Make scheduled pension payments
  • Restore ending balances to 7.5% of expenditures

Additionally, the state can take additional expenditure reductions to finance a lower tax burden. Providing more relief to Kansas taxpayers will help in economic recovery and provide a stronger tax revenue stream in the long-term. Tax relief and reform ideas should include

For the newly elected state policymakers, Kansans are in desperate need of those willing to make tough choices to balance the fiscal house. Moreover, policymakers owe it to Kansans to make getting back up as easy as possible. That means paring back government spending and returning those resources to Kansans’ wallets.

CRE Nov 2020 Budget Profile