08 March 2023 | Tax and Budget

2023 State Budget Update

Karuva Kaseke | March 8, 2023

It’s that time of the year when lawmakers are in the fiscal weeds, trying to determine what is worth the use of Kansas taxpayers’ dollars and what isn’t. The state budget outlines the Legislature’s priorities through how it plans to spend money and determining how much revenue it expects to collect.

As the authorizing document for all money the state spends, the state budget is the most important piece of legislation that lawmakers pass. The constitutional requirement that it be balanced (meaning expenses cannot surpass revenue) further complicates the budget process as lawmakers try to balance different priorities and constraints.

Each January, the Governor proposes two distinct budgets:

The supplemental budget that adjusts spending levels for the current fiscal year (FY 2023) that ends June 30 to reflect actual tax collections, and any spending changes over the remaining months of the year; and
The full budget that lays out a new spending plan for the next fiscal year (FY 2024) starting July 1.

Over the last month, lawmakers in the two “money committees” – Senate Committee on Ways and Means and House Committee on Appropriations – have been meeting in subcommittees to review these budgets, recommending changes to agency requests. The full committees have begun their approval process for these budgets, which will then be voted on by all legislators in both chambers to send the budgets to the Governor to sign into law.

Highlights of the FY 2023 Supplemental and FY 2024 Budgets

After two consecutive years of record budget surpluses – aided by historic federal pandemic relief – and the current fiscal year anticipated to close out above the $2.0 billion mark, Governor Kelly’s proposed total $24.1 billion budget, including $9.5 billion from the State General Fund (SGF), for Fiscal Year (FY) 2024 focuses on providing relief for Kansas taxpayers, as well as prioritizing one-time expenses that will not create additional expenditures in the future. After spending much of the FY 2022 surplus to make major payments into the state rainy day fund, state retirement fund, and paying off a significant amount of debt, there is much less low-hanging fruit for FY 2024.

FY 2023 Changes

Much of the proposed expenditure adjustments for FY 2023 will use part of the projected $2.3 billion surplus revenue, with a total of $814.3 million planned for recommendations, including the following one-time expenses as follows:

Depositing $500 million into the rainy day fund, bringing the total to just under $1.5 billion;
Setting aside $270.0 million from which state agencies and Kansas communities can apply for money to meet matching requirements on federal grant programs;
Eliminating $53.0 million in debts earlier than required to save millions on future interest payments; and
Modernizing some of the state’s outdated IT infrastructure to improve safety and efficiency, at a cost of $21.2 million.

If enacted, an additional proposal to expedite the full elimination of the state sales tax on groceries to April 2023 will reduce expected FY 2023 revenues by an estimated $43.6 million, as the sales tax revenue anticipated with the currently legislated gradual reduction will be foregone this fiscal year and beyond. The proposal also includes a tax cut for necessities like diapers and feminine hygiene products, at a FY 2023 combined cost of about $700, 000. If no changes pass, the elimination of the state sales tax on groceries will proceed as planned to be at 0% in January 2025.

FY 2024

Policy items KAC is currently watching that are highlighted in the FY 2024 Recommended Budget include the following.

Tax and Fiscal Policy

An annual four-day sales tax holiday on back-to-school shopping, which will reduce revenues by $5.5 million for FY 2024 and have an ongoing fiscal impact.
Increasing the state tax exemption on social security income tax for filers earning more than $75,000. This will reduce SGF revenue by $20.5 million in FY 2024, $16.0 million in FY 2025, and $16.1 million in FY 2026.
Continuing SGF costs from the expedited end to the sales tax on groceries, diapers, and feminine hygiene products of $293.0 million in FY 2024 and $123.5 million in FY 2025.

Early Childhood and K-12 Education

Continuing full funding of K-12 education (beginning in FY 2024), including an adjustment for inflation on the base aid for student excellence (BASE) rate.
Beginning a five-year plan to increase Special Education funding by $76.8 million each year to ensure the state is meeting the statutory requirement to fund 92.0 percent of excess costs above regular education for the first time since 2011.
A $1.5 million SGF increase to maximize the match for the federal Child Care and Development Fund, which provides access to child care so parents can work, attend school, or obtain other training.
A $2.5 million SGF increase to develop a child care pilot project in a high-need area.
A $3.0 million SGF increase to expand the Mental Health Intervention Team Pilot Program to 15-25 additional school districts.

Health

With the ending of the Public Health Emergency (PHE) set for May 2023, a significant amount of the federal assistance the state has been receiving will be scaled back before it is withdrawn completely. In part to address longstanding needs within the KanCare system, the budget proposed:

Full expansion of Medicaid to cover an approximate 150,000 Kansans in the coverage gap, as well as others who may lose insurance during the PHE unwinding redetermination process.

Emerging Budget Issues

Along with these important items are many others that directly impact the lives of Kansas families and children. Lawmakers must determine which of these policies can be funded with finite resources in order to balance the budget. In the few weeks of budget hearings, some emerging topics that lawmakers will continue to weigh throughout the session include:

A looming increase in the cost of providing health coverage as federal pandemic aid expires and Medicaid expansion continues to fail without meaningful deliberation;
Medicaid eligibility redeterminations for more than 500,000 Kansans likely to result in the loss of coverage for thousands of adults and children;
Concerning state employee turnover and vacancies (for which low pay seems to be a major contributor) impeding work in some agencies and impacting services for Kansas residents;
Increasingly outdated state IT infrastructure, which hampers efficiency and creates cybersecurity risks;
Critical shortage of affordable child care options for parents across the state;
Continued lack of affordable low- and middle-income housing, particularly in rural areas as recent federal aid investments are yet to materialize; and
Increasing need for targeted relief to low-income taxpayers as high global inflation raises the cost of living.

High revenues and surpluses (which, as mentioned earlier, were partly due to pandemic relief that enabled the state to supplant SGF funds with federal funds) have the danger of creating a somewhat false sense of security in what the state can fiscally manage. While bold measures can and should be taken to invest in programs to help all Kansans — but especially the most vulnerable — careful consideration for the future fiscal impact is part of the responsibility of crafting a good budget.

In the two days of floor debates and votes held before the Turnaround period, each chamber passed costly bills that could, if passed by the other chamber and signed into law by the Governor, reduce future state revenues by about $3.2 billion over the next three fiscal years. Most of this projected revenue loss will be caused by tax cuts that promise to do more to benefit businesses and the wealthiest residents than to address the needs of everyday Kansans. With significant streams of federal relief set to expire in coming months and economists still warning of a potential global recession that could upend state budgets, the current trend of robust revenue collections is not guaranteed. Choosing to cut future revenues so drastically simply because things look financially secure at this moment in time is irresponsible. By design, the state’s (finally) healthy rainy day fund could provide a few crucial weeks of coverage if remaining tax collections plummet, but it should never be expected to make up for poor long-term planning.

Next Steps

Lawmakers will continue agency budget hearings and recommendations before they begin working on the budget bill as a whole. After each chamber has passed its respective budget bill, points of disagreement between each side will be resolved in conference committees before the FY 2024 budget is finalized. KAC will continue to monitor the process to advocate for a sensible budget that balances current windfalls with considerations for the state’s strong fiscal future.

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