Gov. Sam Brownback plans to divert more than $100 million from state highways, reduce pension spending and cut numerous other agencies’ budgets by 4 percent to help plug a projected budget hole for six months.
The state also will transfer more than $100 million from other dedicated funds into the general fund, including $55 million from fee revenue in the Kansas Department of Health and Environment.
The plan does not cut funding to Medicaid and largely leaves schools and public safety agencies untouched.
The deficit, fueled in large part by tax cuts, is projected to be $279 million by June, the end of the fiscal year.
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“These first steps are a down payment in resolving the immediate budget issue,” said Brownback, who had said repeatedly during his re-election campaign that such cuts would not be needed this fiscal year.
He added that he would present a full budget proposal and recommendations to the Legislature in January. The state faces a larger budget shortfall for the next fiscal year.
“Our job now is to address this situation through good fiscal governance while maintaining our investment in education, sustaining funding for public safety and allowing T-WORKS (the state’s highway plan) to be completed,” he said.
Duane Goossen, a former budget director, likened the governor’s plan to making a minimum payment on a credit card debt.
“It’s a short-term fix that buys time,” he said. “It doesn’t fix your imbalance, it doesn’t solve the bigger issues that are at stake, but it’s the minimum payment.”
Goossen, who served under three governors – two Democrats and one Republican – said he didn’t see anything too unusual in the governor’s proposal.
“Something like this had to be done to get the state out of fiscal year 2015,” Goossen said. “That $280 million gap had to be filled somehow.”
The big bill will come due in the next fiscal year, which starts in July.
The Legislative Research Department said next year’s shortfall, initially expected to be $436 million, would be closer to $600 million because many of the changes in this first round of cuts can be made only once.
Some of the changes the governor proposes – including diverting money from the highway fund – parallel recommendations from the Kansas Policy Institute, a conservative small-government think tank.
Dave Trabert, president of the institute, said he agrees with some of the plan but that some aspects need work.
“In broad strokes, the use of cash balances” is supported by the institute, he said. But the institute is wary of the across-the-board cuts contained in the plan.
“That’s not the thorough review (needed) to find ways to bring down the cost of government,” he said.
Some of the reductions, known as allotments, can be made by the governor without the Legislature’s approval. Transferring money from the dedicated funds will require a vote by the Legislature, as will reductions to legislative agencies.
Senate President Susan Wagle, R-Wichita, usually one of the governor’s closest political allies, voiced frustration that he left most of the cutting to the Legislature.
“We are still studying the details, but there is no doubt the Governor’s announcement has put the Legislature in a difficult position,” she said in a statement.
House Speaker Ray Merrick, R-Stilwell, did not praise or criticize the governor’s plan but said lawmakers would “find the balance between protecting taxpayers and protecting core state services.”
The state will reduce its contribution to KPERS, the state’s pension system, by $40.7 million by dropping the employer contribution rate to 9.5 percent from 12.1 percent.
That move won’t affect the pensions of current retirees. But it could mean that the state won’t be able to pay all it owes in pensions in the future. It has an unfunded pension liability of $7.4 billion, which was projected to go down to zero over 20 years.
Brownback had repeatedly highlighted during his re-election campaign the state’s efforts to shore up its pension system under his administration.
The pension cut, which does not require legislative approval, rankled the Senate’s top Democrat and one of its top Republicans.
“Brownback is unilaterally reneging on a compromise he touted,” said Senate Minority Leader Anthony Hensley, D-Topeka. He noted that public employees are still set to see their contributions to KPERS increase by 1 percentage point come January.
Senate Vice President Jeff King, R-Independence, a conservative who rarely sides with Hensley on policy issues, blasted the governor’s plan.
“Basically, I think that all 290,000 of the KPERS-eligible workers and retirees in the state should be deeply disappointed by the actions taken by Gov. Brownback,” said King, who chairs the joint committee on pensions and benefits. “Over the last four years, we’ve become a model for pension reform in Kansas ... and by raiding the KPERS fund today, Gov. Brownback’s threatening to undo all the hard-fought work we’ve done in the last few years.”
Ernie Claudel, vice chairman of the Kansas Coalition of Public Retirees, called the move astounding.
“It’s just starting the underfunding cycle all over again,” Claudel said. “Obviously, the employees can’t say, ‘well, because you guys aren’t keeping your promise we’re not going to keep ours.’ ... They don’t have that option.”
Trabert said he was surprised by the cuts to KPERS. His institute has recommended replacing the current defined-benefit system with a 401(k)-style defined-contribution plan for new hires that would shift retirement savings responsibility from the state to individual employees.
If cutting KPERS is the first step toward that – and the idea has some credence among legislators – then it’s a good idea, he said.
“If that (cutting contributions) is all they’re doing with KPERS, that’s not a good thing,” Trabert said.
Budget Director Shawn Sullivan said the state does need to make long-term structural changes to the pension system.
Cuts hit highways
The state will transfer almost $96 million from the highway fund, which goes toward construction projects, and reduce the operating budget for the Department of Transportation by $7.8 million, a total reduction of $103.4 million.
Secretary of Transportation Mike King promised last week that transportation projects scheduled to begin in 2015 and 2016 – including projects on East Kellogg and West Kellogg/I-235 – would proceed as planned.
A news release from the department Tuesday said announced projects will continue as planned. It noted that projects so far have cost less than expected, while revenue has been higher and bond rates more favorable than expected.
Goossen said the highway fund isn’t free money, because the Transportation Department has to pay off about $2 billion in bonds it has borrowed to pay for projects. The state is “making payments on that borrowed money right now, every year,” he said.
“Another way to think of this is yeah, OK, you can go take that $95 million, but it leaves the state in debt for a longer period of time or leaves the highway fund in debt for a longer period of time.”
The cuts will not affect the state’s universities or school districts, officials said. The Department of Education will see its administrative budget cut by $230,000.
The Department of Corrections will see a cut of $153,000 to its operations budget.
“The way I attacked this was trying to exclude K-12, higher ed and public safety and Medicaid, so that left everyone else on the table, which is a smaller percentage of the budget,” Sullivan said in an interview Tuesday.
Wagle said in an e-mail that she “would have preferred to see the burden spread evenly throughout the state. That would certainly be a more fair approach than picking winners or losers and asking the legislature to fill the gap.”
However, Sullivan signaled that changes to school funding, which makes up more than half of the state’s budget, are on the horizon.
“We can’t continue this unsustainable path of spending on nonclassroom spending,” Sullivan said. “So we’ll be working with legislative leadership, legislators on structural, fundamental reform to the school finance formula that will work to get more money into the classroom.”
The state will also sweep into the general fund $14.5 million from the Kansas Endowment for Youth, a fund meant to pay for programs that benefit children in the future.
Sullivan said that sweeping the KEY fund, which gets its money from the state’s tobacco settlement, would not affect funding for early childhood programs in the current budget year.
“It’s taking the excess money they have,” he said.
Christie Appelhanz, vice president for public affairs for Kansas Action Children, disagreed, saying the move threatened to “decimate early childhood programs in the state of Kansas.” She noted that the money in the KEY fund is slated for the Children’s Initiatives Fund, which the governor also proposes to sweep of $500,000.
The Department for Children and Families will also see its budget reduced by about $4 million.
Tax cuts debated
Many have blamed the state’s fiscal woes on income tax cuts, which Brownback championed and signed into law in 2012.
The plan combined income tax brackets, lowered rates and exempted about 190,000 business owners from paying taxes on their profits.
In 2012, the last full year under the old tax plan, the state brought in $6.4 billion. This year, the first full year under Brownback’s tax plan, revenue dropped about $759 million to $5.65 billion.
Annie McKay, executive director of the Kansas Center for Economic Growth, called the governor’s actions Tuesday “the latest sign of how unprecedented and unaffordable tax cuts are eroding key investments that make up the economic foundation of our state.”
Sullivan said the state “would be in a tough position anyway” without the tax cuts, based on its education, Medicaid and pension expenses.
“As far as the tax policy, the governor and we continue to work on that, and that will be communicated if there is any changes. … Still, nothing is off the table in that regard,” he added.
Hensley said that by filling the budget hole primarily through one-time changes, the Brownback administration will exacerbate the state’s budget problems next year. He also said that the allotments prove Brownback’s re-election campaign “was nothing more than a list of false promises.”
The governor said last month that he was not aware the state would face a shortfall this fiscal year until Nov. 10, six days after the general election, when the state’s consensus estimating group met to review the revenue and budget outlook.
Revenue projections were reduced about $206 million for the year, while spending estimates for K-12 education were increased by $64 million and Medicaid by $46 million based on new caseload numbers. Sullivan said the education and Medicaid expenses caught policy makers by surprise.
“Without those two pieces, this would be an entirely different conversation and plan. That was $110 million out of this, a major piece. … It wasn’t until Nov. 10 that the full picture was known,” he said.
Here are key elements of the governor’s planned cuts and fee transfers.
▪ Pensions: A $41 million cut to state contribution should not affect current retirees, but the state will fall further behind on funding future commitments.
▪ Highways: A $96 million transfer from the highway fund to the state general fund could affect repayment of the department’s construction loans, but the state says it will not affect projects for 2015 and 2016. Gov. Sam Brownback also wants to cut $7.8 million from the Department of Transportation’s operating budget.
▪ Health and environment: $55 million will be swept from income the Department of Health and Environment receives from various fees it charges. Medicaid will not be affected.
▪ Agencies: A 4 percent cut in budgeted spending from January through June.
▪ Children’s programs: $15 million from a tobacco lawsuit settlement will be swept from funds intended to pay for future early childhood and parent education programs. Also cut: nearly $4 million from the Department for Children and Families.
▪ Education, public safety: Brownback protected school districts and universities – and public safety – from cuts.
▪ Economic development: The state will transfer $14.2 million intended for a workforce development program and $5 million from the Kansas Bioscience Authority, a public-private partnership that invests in the bioscience sector.