Kansas lawmakers face another big budget hole, controversial solutions from Brownback

Lawmakers return to the Kansas Statehouse this week to stare down a $290 million hole in the budget.

If that sounds familiar it’s because a similar plot line was written about a year ago, except the hole was $400 million.

A bruising, multi-week debate ensued, resulting in 2015’s record-long legislative session and increases in sales and cigarette taxes.

Gov. Sam Brownback’s recommended fixes for the latest shortfall center on budget maneuvers and spending cuts, and all have drawn controversy.

Brownback would take $185 million from the state highway fund, delaying more than two dozen projects, and he would cut spending to state universities by 3 percent, about $17 million, for the fiscal year beginning July 1. That would continue a 3 percent cut he ordered earlier this month.

Other moves would require approval by the Legislature, which returns from a spring recess on Wednesday. One option would sell off a portion of the state’s future tobacco settlement money for quick cash. Another would delay a $99 million payment to the state employee pension system.

Brownback says he’s not interested in rolling back the tax cuts he championed in 2012 and 2013, including an income tax exemption for some 330,000 businesses owners. The exemption is costing the state as much as $250 million a year in revenue.

“I do not believe it would be useful to have a debate about raising taxes on small businesses or anyone else,” Brownback said in his budget message.

Some lawmakers have ramped up the volume for rolling back the income tax exemption, but others, including some top legislative leaders, say now is not the time.

Pulling money from the highway fund has been a major go-to response to budget shortfalls for the administration the past several years.

More than $1.5 billion has been shifted from the highway fund to the state’s general fund and other state agencies since 2011. Until now, Brownback made assurances that all highway projects would go forward.

But his budget message last week led the state Department of Transportation to announce the delay of 25 projects slated to begin over the next two to three years, including a Kansas 68 widening project in Miami County. Projects currently underway aren’t affected.

“It’s terribly unfortunate,” said Bob Totten, executive vice president of the Kansas Contractors Association. “They’ve been saying for years that everything was going to be OK, and it isn’t.”

Totten questioned whether the new projects, counted on by communities across Kansas and worth more than $500 million, are really just being delayed.

“Where are they going to get the money to do those projects?”

Transportation Department officials said that new projects would be delayed “until remaining state highway funds allow or new money is made available.” Maintenance projects such as pavement repair and resurfacing would continue at current levels, they said.

Totten said the state’s highway construction program creates jobs for Kansans. And he said the state’s maintenance schedule had already suffered, reduced from 1,200 miles a year to 200.

“The safety of our citizens is going to be in jeopardy due to the fact that we’re not taking care of the roads as we’ve done in the past,” he said.

In response to the cut to higher-education funding, Shane Bangerter, chairman of the Kansas Board of Regents, called on the Legislature to make stable funding a top priority.

“Higher education provides the workforce that keeps Kansas companies competitive and our state economically strong,” Bangerter said in a statement. “Reducing funding to our state universities increases the cost of education to our students and is detrimental to the future prosperity of Kansans.”

Besides the highway fund diversion and the spending cut to state universities, Brownback’s budget director Shawn Sullivan outlined three options for the Legislature to consider to address the rest of the $290 million shortfall, which is the combined projected shortfall in the current budget and the next fiscal year’s budget beginning July 1.

The first option was to sell a portion of the state’s future payments from a national tobacco settlement, which Kansas dedicates to early childhood education programs, to bondholders for a one-time infusion of $158 million. It’s a contentious idea.

Kansas along with most other states receives a payment each year from a 1990s lawsuit against tobacco companies. The amount for Kansas is about $58 million, although the annual payment is expected to decline in the future as smoking declines.

The state spends about $42 million of the payment annually on children’s programs such as Early Head Start. The remainder of the payment was to be invested for future programs.

But the “securitization” plan would sell off those remaining funds in a long-term bond deal, and the state would get one check for about $158 million. Other states have made similar deals.

Sullivan said the plan keeps $42 million intact for children’s programs. But critics said inflation would erode program funding over time, and the additional money above the $42 million would be gone, owed to bondholders.

A second option would delay a $99 million state payment to the Kansas Public Employees Retirement System until fiscal year 2018. Current retirees’ benefits wouldn’t be affected by the delay, he said.

A third option would make 3 to 5 percent cuts to most state agencies, including funding to K-12 public schools and state universities. A 3 percent reduction to K-12 schools would be about $57 million.

The chairmen of the Legislature’s budget committees, Sen. Ty Masterson of Andover and Rep. Ron Ryckman Jr. of Olathe, both Republicans, said the budget fix could come from Brownback’s suggestions and other ideas.

“We’ll be looking at parts of all three of the options,” Ryckman said. “My personal preference is that we keep our commitment to K-12 funding,” he said, but added that nothing was off the table.

Legislators touted stable funding as a benefit for school districts when they passed a two-year, block-grant plan for school financing last year.

Dave Trabert, president of the Kansas Policy Institute, a conservative research group, said the tobacco settlement bond sale should be the preferred option of the three. It provides upfront cash at a time when the state needs to quickly balance its budget, he said.

“And they’re doing it in a way that the programs won’t be harmed, so it’s not a bad idea,” he said.

Putting off a payment to the state pension system is troubling, he said. Even if the state makes up the payment with 8 percent interest in fiscal year 2018 as planned, that just puts stress on a future budget, he said.

As for across-the-board reductions to state agencies, they typically go awry, Trabert said. Agencies tend to make their cuts in a way that protects the bureaucracy and reduces services, which is not in the best interest of citizens, he said.

The state’s budget problem isn’t due to the income tax reductions in 2012, Trabert said, but because they weren’t accompanied by a one-time reduction of 8 percent in the cost of government programs. Not cutting programs, he said, but reducing costs by running them more efficiently.

“That’s easily doable,” he said. “But there was bipartisan resistance.”

Annie McKay, executive director of the Kansas Center for Eonomic Growth, a research organization critical of Brownback’s tax policies, referred to the first and second options as shell games. The third, which cuts public school funding, makes no sense, she said.

“It’s so absurd to offer an option that cuts K-12 spending when you have a court case pending,” McKay said, referring to the Gannon v. Kansas school finance lawsuit currently in the state Supreme Court.

The first option is risky and upends the state’s longtime commitment to early childhood education, which has a “tremendous return on investment” in terms of later school success and job readiness, she said.

“Selling off a future guaranteed revenue stream is perhaps the biggest mistake we could make,” McKay said.

The option of delaying a $99 million payment to the state’s pension system is irresponsible, she said.

“I think there’s a fourth option, and it’s revisiting tax policy,” McKay said.

Some lawmakers agree, including some Republicans.

Senate Vice President Jeff King, an Independence Republican, said a committee meeting will be scheduled for Thursday on SB 508, which would roll back the business tax exemption.

And Sen. Jim Denning, an Overland Park Republican, recently offered a different proposal to alter the tax exemption, which Brownback heralds as supporting small businesses and boosting jobs.

To receive the exemption, business owners would have to file a state tax form showing they have at least one employee and pay wages. Some 85 percent of businesses receiving the tax exemption have no employees, Denning said. The change would bring in $158 million a year, he said.

But with all House and Senate seats up for election this year, many legislators hope to avoid a tax debate and a repeat of 2015’s end-of-session turmoil. They want to complete the remainder of the session, called the veto session, as quickly as possible.

That seems to be the view of top leadership.

“Neither the House nor Senate appears to have a majority of members willing to address future tax policy during the veto session, which we intend to keep short and focused on present business,” Senate President Susan Wagle said in a statement. “While veto session is characterized by the art of the possible, our goal is balancing the budget and adjourning the session.”

This story was originally published April 25, 2016 at 9:43 AM with the headline "Kansas lawmakers face another big budget hole, controversial solutions from Brownback."