By Edward M. Eveld
April 20, 2016

Plugging a $290 million gap projected in the Kansas budget over the next 15 months will require taking $185 million from the state highway fund, and that might not be the worst news.

Shawn Sullivan, Gov. Sam Brownback’s budget director, presented three options Wednesday for the Legislature to consider in response to the lowering of the state’s revenue forecast through June 2017.

“Option three,” which Sullivan said was Brownback’s least recommended, would cut 3 to 5 percent from most state operations, including K-12 education.

All three options include the diversion from the highway fund and cuts to higher-education spending.

Not found in any of the three scenarios was a repeal of the state’s business income tax exemption, an idea that some lawmakers say is gaining momentum.

The exemption for 330,000 business owners is considered by critics to be an unfair tax break, costing the state up to $250 million a year.

Brownback said in a statement that after reviewing the new estimates, he doesn’t believe “it would be useful to have a debate about raising taxes on small businesses or anyone else. Instead, we will focus our support and attention on controlling government spending more efficiently.”

But Senate Minority Leader Anthony Hensley, a Topeka Democrat, said it was clear that “everything else is being sacrificed on the altar” of retaining the business income tax break.

“There are no good options here at all,” Hensley said about the budget proposals.

Although the diversion from the highway fund would not affect projects already underway, it would delay 25 highway projects slated to begin the next two years.

“It’s frustrating on a lot of levels,” said Bob Totten, executive vice president of the Kansas Contractors Association, who noted the projects were developed based on community needs.

“The quality of life that we expect in Kansas is being diminished because we just haven’t managed our money correctly,” he said.

The governor’s “option one” includes the highway fund sweep and an approximately $17 million reduction to state universities in fiscal year 2017, which begins July 1, carrying forward the cut he ordered last month.

The final piece in the first option is a controversial proposal to sell part of the state’s share of a settlement with tobacco companies on the bond market. The state uses the settlement money to fund children’s program, such as Early Head Start.

That move would create a one-time revenue infusion of about $158 million for fiscal year 2017, which begins July 1, Sullivan said. Some 20 states have taken similar action with their tobacco settlement money, he said.

Sullivan said the plan wouldn’t impact children’s programs funded by the settlement. The state’s annual settlement is about $62 million, and it spends about $42 million annually on the programs.

The state would leave $42 million from the settlement intact each year to pay for the children’s programs, while other portions of the settlement would go to the banks that purchase the state’s future revenue stream from the settlement for the next 20 to 30 years.

But Shannon Cotsoradis, president and CEO of Kansas Action for Children, said in a statement that the funds were intended for children’s programs and shouldn’t be used to help fix the budget crisis.

“Why would we permanently destroy our state’s thriving legacy for early childhood education in exchange for a temporary, one-time budget fix that does nothing to solve the problem?” she said.

“Option two” includes the highway fund diversion and the university cut. It would delay a $99 million state contribution to the Kansas state employee pension system into fiscal year 2018.

Sullivan said the delay would not affect current retirees’ pension benefits.

“Option three” includes the highway fund sweep and reduces spending for state agencies by 3 to 5 percent in fiscal year 2017.

That would mean a $57 million cut to K-12 school funding in the midst of a lawsuit over school financing in the state Supreme Court. The third option also would cut funding for the University of Kansas, Kansas State University and Wichita State University by 5 percent and other universities by 3 percent.

The Kansas Department for Aging and Disability Services would lose $11 million, and the Kansas Department for Children and Families would lose $4.2 million.

House Minority Leader Tom Burroughs, a Kansas City, Kan., Democrat, said in a statement that none of the options addresses the underlying problem of a lack of revenue.

“In fact, these short-term ‘fixes’ create a larger long-term problem.” he said.

The Legislature will hold committee meetings this week. The full Legislature returns from a spring recess on April 27.

The new revenue forecast Wednesday was issued by the state’s Consensus Revenue Estimating Group, a panel of state officials, university economists and legislative researchers.

The panel lowered revenue estimates by about $94 million for the current fiscal year, which ends June 30, and by about $135 million for fiscal year 2017. The group also lowered its estimates in November.

Budget problems have plagued the state since Brownback and the Legislature cut income tax rates in 2012. Brownback said his tax policy would be a “shot of adrenaline” to the state’s economy, spurring business and job growth.

Tax collections have been short of estimates in 11 of the past 12 months, prompting Brownback and the Legislature to address the resulting budget shortfalls with spending cuts and budget transfers.

Brownback has maintained that his tax policy is not to blame for the state’s revenue shortfalls. He points to big downturns in three chief sectors of the state’s economy — aviation, agriculture, and oil and gas.

As for any effort to end the business tax exemption, part of Brownback’s tax cut policy, it’s uncertain how such a move would fare when lawmakers return April 27 for the veto session. All House and Senate seats are up for election this year, and many legislators want to wrap up the session quickly.

“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,” said Wagle, a Wichita Republican.

Bryan Lowry of the Wichita Eagle contributed to this report.

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