New revenue estimates predict strengthening Kansas economy; support for additional school funding

New revenue estimates predict strengthening Kansas economy; support for additional school funding

New Kansas consensus revenue estimates released earlier this month predict what is happening in the state and U.S. economy. These new projections indicate Kansas can support higher school funding with a lower share of personal income than most of the past two decades.

Key Points:

  • State personal income is expected to grow steadily but moderately; better than the past five years but not as strong as 2005 to 2010.
  • Inflation should rise slightly compared to recent years but remain moderate by historical standards.
  • Kansas Personal Income growth will catch up with the national average after years of lagging.
  • New school funding estimates indicate that total school spending from all sources as a share of Kansas personal income will rise slightly from 2012-2017 levels, but remain well below 2000 to 2011.

Deeper details:

State personal income is expected to grow steadily but moderately.

Kansas personal income – the total income of all residents of the state from all sources (wages, investments, farm, business, government benefits) is projected to increase just under 4 percent a year from 2018 through 2021, and about half of that rate after subtracting the expected rate of inflation.

That is higher than any year from 2013 to 2017, the years when lower state income tax rates were in effect. Income growth was much higher from 2005 to 2008, when the legislature was adding funding following the Montoy school finance decision.

Since 2000, the worst four years of income growth in Kansas were during the four years of the state income tax cuts. Since those cuts have been largely – but not entirely – reversed, stronger personal income growth is projected.

Inflation should rise slightly but remain moderate.

The consumer price index is expected to increase 2.3 percent in 2018 and 2.2 percent annually in 2019 through 2023.

Those rates are higher than any year from 2012 to 2017, but lower than most other years since 2000 except for the recession years of 2002, 2009 and 2010.

Kansas Personal Income growth will catch up with the national average after years of lagging.

Kansas personal income growth has been lower than the U.S. average every year since 2013 but has begun to catch up. State personal income is expected to increase at the same rate as the U.S. in 2020 and slightly higher in 2021. Kansas generally trailed the U.S. average from 2000 to 2004 but equaled or exceeded the nation from 2005 to 2012 – when the state was adding funding for school finance following the Montoy school finance decision, then during and following the great recession.

Kansas did worse than the U.S. average when state income tax rates were cut, and is projected to catch up after those cuts were largely reversed.

School funding as a percent of personal income of all Kansans remains low compared to the past 20 years.

Comparing school district expenditures – mostly funded by state, local and federal tax revenues – to total personal income in the state is a way of comparing how much of all Kansans’ income is going to fund K-12 Education.

For example, Kansas school districts spent a total of $6.49 billion in 2018. Total Kansas personal income was estimated at $147 billion in 2018. That means school spending was equal to 4.4 percent of income.

Total school expenditures were 4.6 percent of personal income in 2000, increasing to nearly 5 percent in 2004 and remained between 4.7 and 5.1 percent through 2010. Total expenditures then dropped to a low of 4.3 percent of income in 2017 before rising slightly to 4.4 percent in 2018.

District spending from general operating funds (general fund, local option budget and special education aid) dropped even more sharply, from 3.6 percent of personal income in 2000 to just under 3.0 percent in 2019, even after increased state funding in 2018 and 2019.

(The difference between the two amounts is that total expenditures include capital expenditures like new building construction and equipment, federal programs, most food service costs and employer contributions to the Kansas Public Employees Retirement System, as well as student fees and other local income.)

Based on new school finance estimates prepared by the Kansas Legislative Research Department, the Kansas State Department of Education and the Budget Division, KASB estimates that school district general funds, special education state aid and local option budgets will increase from $4.345 billion in 2018 to $4.787 billion in 2021, due to funding approved by the 2018 Legislature to address the Supreme Court’s Gannon decision (two additional years of increases have also been approved for 2022 and 2023). But under the projected growth in state personal income, this spending would actually drop from 2.96 percent to 2.90 percent of personal income.

The court approved that the Legislature’s plan to phase-in additional funding to provide constitutionally suitable funding, but said an inflation adjustment would have to be added due to changes in costs over the period. The Kansas State Board of Education has recommended adding $93 million more than already approved in Fiscal Year 2020 and $89 million in FY 2021.

Even with that inflation adjustment, general fund, special education and local option budgets compared to state personal income would be about the same as in 2018, and remain lower than any year from 2000 to 2016.

It is much harder to estimate total school spending, because it includes federal revenues which are not controlled by the state, as well as expenditures for bond and interest payments and capital outlay spending controlled by local voters, and other revenues such as fees for student meals, material and transportation.

However, KASB has made an estimate of total spending based on (1) the increase in general fund, special education and local option budgets, plus (2) debt service based on the expected growth in bond and interest aid, plus (3) capital outlay spending, based on the expected increase in capital outlay state aid, plus (4) KPERS state aid for school districts, based on the latest education consensus estimates, plus (5) all other expenditures, which KASB projects will increase at 2.0 percent per year.

Using these assumptions, total school district expenditures would increase from $6.492 billion in FY 2018 to $7.325 billion in FY 2021. About $300 million of that increase would be due to the the Legislature restoring KPERS contributions to the level required to address years of underfunding.

However, even if the inflationary adjustment of $93 million more than already approved in Fiscal Year 2020 and $89 million in FY 2021 was added, total expenditures in 2021 would be 4.49 percent of personal income, up from a low of 4.3 percent in 2017 but well below any year between 2000 and 2013 and the twenty year average of 4.65 percent.

In other words, based on the November consensus revenue projects for Kansas personal income growth, additional school funding, even adding an inflation adjustment, would remain well below average as a percentage of that income.

Sources:

Kansas and U.S. economic projections are contained in the Kansas Legislative Research Department “long memo” on the November consensus revenues estimates (link). Past Kansas and U.S. personal income growth from Bureau of Economic Analysis, Consumer Price Index inflation rate from the Bureau of Labor Statistics. November education finance estimates from the KLRD (link). KASB’s calculation of general fund plus special education aid plus local option budgets, and total expenditures below (this table does not include additional funding for inflation adjustment).