By Bryan Lowry
April 20, 2016

Gov. Sam Brownback plans to take more money from the state’s highway fund, cut higher-education spending and scrutinize other options – including cutting funding for schools – to close a widening budget gap.

The highway department announced it would delay 25 projects slated to start in the next two fiscal years, including ones in Harvey and Reno counties. State universities would see funding cut between 3 and 5 percent.

The state faces a projected shortfall of more than $290 million over the next 15 months, based on projections offered by the state’s economists on Wednesday.

This is the fourth time in less than two years that the state’s projected revenue has been scaled back, a trend many analysts blame on income tax cuts that Brownback ushered into law in 2012.

Budget director Shawn Sullivan presented what he called the best three options to fill the budget hole at a news conference Wednesday evening. None involves raising taxes.

“The governor doesn’t believe it’s useful right now to have debate about raising taxes on small businesses or anyone else,” Sullivan said, predicting that proposals to roll back the tax cuts would fail to pass the Legislature.

One option would cut state government funds across the board for the fiscal year that begins in July. That would reduce K-12 education funding by $57.2 million.

A second option would be to delay payments to the state’s pension fund.

The governor would prefer a third option – to sell off the rights to part of the state’s portion of a national tobacco settlement for $158 million, Sullivan said.

The state’s economists lowered revenue estimates by $93.9 million for the current fiscal year, which ends in June, and by $134.7 million for the next fiscal year.

The reduction comes because individual income taxes are now projected to bring in $233 million less over the two-year period than the state had forecast in November. The drop was partly offset by increases from nontax revenue sources.

The state now faces a $140.1 million budget hole for the current year and $151.3 million budget hole for next year.

Budget options

Under all three scenarios, the governor plans to sweep, or take, $70 million from the state’s highway fund this fiscal year and $115 million next fiscal year. The state already has swept more than $1 billion from the highway fund since 2011.

The Kansas Department of Transportation will delay 10 projects in 2017 and 15 projects in 2018. Those include a $47 million modernization project on K-14 in Reno County that was slated for October and a $12 million reconstruction of an interchange at I-135 and 36th Street in Newton that was slated for December 2018.

“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.”

All three scenarios also would include a cut in spending for higher education.

Option 1

The governor would ask the Legislature to empower him to move forward with a controversial proposal to use the state’s expected proceeds from a tobacco settlement to issue bonds to close the budget hole for next year.

About 20 other states have made similar moves.

Sullivan said the change would have no impact on the early childhood programs that are funded by the settlement.

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

Sullivan said this plan would allow the state to avoid cuts to state agencies and K-12 education. “It provides a bridge until we get a new two-year budget in ’18 and ’19,” he said.

Shannon Cotsoradis, president of Kansas Action for Children, a child advocacy organization, blasted the proposal in an e-mail, contending that it would drain long-term funding for children’s programs despite Sullivan’s assurances.

“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. “Kansas babies and toddlers didn’t create this budget crisis, and they shouldn’t be forced to pay for it.”

The governor would carry a 3 percent cut to higher education into the next fiscal year. He cut this amount from universities’ current budgets earlier in the face of underperforming revenue.

Option 2

Instead of using the tobacco settlement, the governor would rely on the state’s pension fund. Brownback’s office announced earlier this month that it would delay a $93 million April pension payment.

He is required to pay back that money by September with 8 percent interest. Under this option, he would ask the Legislature to push back the repayment deadline by 12 months.

Sullivan said this would not affect current retirees’ benefits or the state’s ability to pay off the pension fund’s unfunded liability in the long term.

He said it was likely the governor would have to use some portion of the pension payment in any scenario, even if the Legislature does not push back the repayment deadline.

Rebecca Proctor, the executive director of the Kansas Organization of State Employees, the union for state workers, called the proposal irresponsible and said state employees don’t have the option to delay their paycheck contributions to the pension fund.

Under this scenario, the governor would proceed with the highway fund sweep and 3 percent cut.

The administration would still need to cut another $25 million from the budget.

Option 3

The final option is to enact across-the-board cuts to state government, trimming spending for most agencies by 3 percent. Under this plan, K-12 education would lose $57 million.

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.

Wichita State University would undergo a 5 percent cut – or $3.7 million – in state funding under this plan. Kansas State University and the University of Kansas would also face 5 percent cuts, losing $5.1 million and $6.8 million, respectively.

The Kansas Department of Health and Environment would see its environmental funding reduced by 3 percent and its health funding reduced by 5 percent, resulting in an overall cut of nearly $36 million.

Sullivan said that the “realistic view is that if you’re doing options one or two, you have to balance the budget in some manner and it would take this level of expenditure reductions.”

Asked whether the cut to K-12 education could affect a pending court decision on school funding, Sullivan replied, “I’m sure the Legislature will need to consider that.”

Rep. Ron Ryckman, R-Olathe, the House budget committee chairmen, said the House and Senate budget committees would meet Thursday to discuss the various options.

“Our work will be focused on finding reasonable long-term solutions to address the current fiscal concerns while still maintaining our commitments in the budget to the block grant funding for K-12 schools,” Ryckman said.

Cuts or a tax increase

Senate Minority Leader Anthony Hensley, D-Topeka, said the Brownback administration was trying to use the prospect of across-the-board cuts to intimidate lawmakers into supporting the proposal to sell off the tobacco settlement on the bond market.

He said the simpler solution would be to close a tax break for pass-through business owners, Brownback’s signature policy, which has eliminated state income taxes for more than 330,000 business owners.

Many economists say the policy has failed to spur economic growth as promised by Brownback and has instead fueled the state’s revenue woes.

“It’s been a consistent underperformance and I think that is because of this hallmark feature of the 2012 tax cuts,” said Scott Drenkard, an economist with the Washington-based Tax Foundation.

Sullivan pushed back in support of the tax exemption for business owners and said the administration regularly hears from business owners who have moved to Kansas specifically because of it.

Hensley suggested changing the state’s name from Kansas “to the state of denial” and criticized the governor’s reluctance to roll back the tax break.

“Everything else is being sacrificed on the altar of giving basically wealthy people a tax break,” Hensley said.

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