Plunging revenue forecast creates challenges for state budget, school funding

Plunging revenue forecast creates challenges for state budget, school funding

State tax and fiscal experts have lowered the estimate for Kansas state general fund revenues by nearly $827 million in the current fiscal year (FY 2020), which ends June 30, and $445 million next year (FY 2021), compared to the official revenue estimates released last November. (April 20 CRE Memo)

The state was expected to end the current year with an ending balance of almost $930 million, or nearly 12 percent. The new estimates would reduce the ending balance to $205.2 million, or 2.7 percent. The revised estimates for next year mean the budget approved by the Legislature in March would result in a $653.5 million deficit for FY 2021.

Because the state cannot run a deficit, the Governor and Legislature will have to close that gap by some combination of spending cuts, shifts in expenditures or new revenues.

The Kansas Legislature is tentatively scheduled to return next Monday, April 27, but it is very possible that will be further delayed by the Coronavirus pandemic. The Senate Ways and Means Committee and House Appropriations Committees are meeting by remote technology Thursday and Friday, respectively, to review the consensus revenue estimates, human services consensus caseload estimates, unemployment benefits, federal Covid-19 funding, and related discussions. It is unclear whether they will take any action to adjust the budget.

The Legislature could make changes to the budget if it reconvenes before final “sine die” adjournment in May. After that, unless there is a special session, the Legislature would not meet until January of 2021, more than halfway through the fiscal year.

If the state general fund ending balance is projected to fall below zero, the Governor is authorized to reduce spending through “allotments” or spending cuts to balance expenditures and revenues. With some exceptions, the Governor can decide where to make those reductions.

Approximately 52 percent of the state general fund is spent on K-12 education. Another 11 percent is appropriated for higher education, 26 percent goes to human services, including mandatory state matching for federal Medicaid programs; and 6 percent to public safety, such as state prisons. All other government programs make up the remaining 5 percent. (See Kansas Legislative Research Department’s Fiscal Facts for 2019.)

The reduction in projected state revenues was due to the Coronavirus pandemic, which is reducing economic activity and employment. In addition, the Governor has moved the deadline for filing and paying state income taxes owed until July 15, which will push revenues into the next fiscal year.

As a result, state income tax receipts are expected to fall 13 percent in the current year, or $552 million. Last November, incomes taxes were expected to increase $176 million this year. That combined swing of $728 million is responsible for most of the $823 million reduction in overall revenue estimates this year.

For next year, the new estimate projects income tax revenues will rebound by almost $500 million as the economy reopens, but that is almost $400 million less than expected for 2021 in November. The new estimate expects retail sales tax collections to remain basically flat from 2019 through 2021, compared to the November estimate which projected an increase of $95 million. The new estimate also projects severance tax collections from oil will drop from $32 million last year to just $5.6 million next year.

In total, the new estimates project that total state general fund receipts will be $7.23 billion next year, or $140 million lower than last year. But the approved budget increases state general fund spending from $7.03 billion last year to $7.73 billion in the current year and $8.09 billion next year – a two year increase of over $1 billion.

Of the total increase in state general fund spending from 2019 to 2021, approximately $560 million (55 percent) was school district state aid. Nearly half of that increase went to the underfunded Kansas Public Employees Retirement System, with payments for school districts increasing from $260 million in 2019 to $530 million in 2021 ($270 million). About $250 million was higher base state aid to address the Gannon school finance case ($173 million this year and $81 million next year). The remaining $44 million over two years was for Local Option Budget and Capital Outlay equalization aid and Special Education state aid. (These amounts are from the state general fund only, and do not include revenues from the 20-mill state levy and capital improvement state aid.)

School district base state aid and equalization aid are funded in the approved budget at levels accepted by the Kansas Supreme Court. The base budget amounts are part of a six-year plan to restore school districts operating funds to approximately 2009 levels when adjusted for inflation. The equalization funding is based on formulas to avoid greater disparities in local funding raised by different local taxable wealth.

The Gannon school finance case was filed in 2009 after the Legislature reduced base funding and equalization aid below levels approved in the previous Montoy case. In Montoy, the court had dismissed the case, so a new case had to be filed and make its way through a district court trial and arguments before the Supreme Court. In Gannon, the court retained jurisdiction so the plaintiffs could immediately seek relief if the Legislature fails to provide funding at levels approved by the Court. It is not known whether the Court would agree to reduced school funding due to the unforeseen economic crisis if requested by the state.

The KPERS payments were not part of the Gannon settlement. However, if the Legislature does not contribute funding at the scheduled payment rate, it increases the “unfunded liability” of the system, which is the cost of paying promised future benefits not covered by current assets and estimated contributions and investment earning. The unfunded liability is likely to increase in at least the near future because of deep declines in the stock market, where most KPERS funds are invested.

This is not first time in recent memory the state has faced significant revenue declines. During the Great Recession, SFG revenues dropped from $5.8 billion in 2007 to under $5.2 billion in 2010, or a total of $600 million over three years. In 2014, SGF revenue dropped from $6.34 billion in 2013 to $5.66 billion, or over 10 percent, following deep state income tax cuts.

In response, the Legislature has variously reduced base state aid per pupil, frozen equalization funds, adopted block grants for two years to freeze school district operating funds, reduced funding for most other state programs, transferred hundreds of millions from the state highway fund to the state general fund, reduced or delayed KPERS payments, delayed or shifted school district aid payments from one year to the next, borrowed from state investment funds, “swept” or captured cash balances in state agencies, and continued to defer aid to cities and counties.

Over the past several years, after reversing most, but not all, of the state income tax cuts, the Governor and Legislature have been attempting to reverse or restore most of these actions. The new revenue estimates suggest many or all of these choices will have to be considered again.

During the Great Recession of 2008-10, Kansas received hundreds of millions of dollars in federal stimulus aid to lessen the impact of revenue loss. Kansas will receive $85 million in direct aid to school districts, $26 million for the Governor that can be spent on either K-12 or higher education, plus funding earmarked for higher education. The state will also receive an estimated $1.2 billion to address costs of the Coronavirus pandemic, but it is not clear if those funds can be used to replace lost revenues for state and local operating budgets. Additional funding could be considered in future federal aid programs if Congress and the Trump administration can agree.