By Bryan Lowry
April 2, 2016
Gov. Sam Brownback is considering sweeping money from the state’s highway fund and delaying a June payment to the pension system as possible ways to fill a $30 million budget hole, according to the Legislature’s budget chairmen.
With three months left in the current fiscal year, policymakers must act before the end of June to ensure Kansas can pay its bills.
The budget outlook could improve or worsen later this month when the state’s economists revise revenue estimates. In the meantime, the Brownback administration is weighing a variety of options, including a controversial plan to sell future proceeds from a tobacco settlement to get cash now.
However, it’s more likely that Brownback will rely on the state’s highway fund or pension system as a source for cash, the Legislature’s budget chairmen say. Both are options he has the power to use without additional legislation.
Nothing has been decided yet. Brownback’s office said it would not comment until after new revenue estimates are released April 20.
“I don’t think there’s anything off the table,” said Sen. Ty Masterson, R-Andover, who chairs the Senate Ways and Means Committee.
Senate Minority Leader Anthony Hensley, D-Topeka, criticized the options and said the administration is avoiding the real problem, the income tax cuts that Brownback ushered into law in 2012.
“It doesn’t surprise me that they find themselves in this position where they’ve got to raid the retirement fund and the highway fund,” he said.
Brownback has opposed efforts to roll back the 2012 tax cuts, which lowered all income tax rates and eliminated income tax for the owners of limited liability companies and some other businesses.
Since then, state officials have had to cut spending, take money from the highway fund and raise sales taxes to balance the budget in the face of declining revenue. Still, tax revenue continues to fall below expectations.
Some Republican leaders have grown increasingly leery of short-term budget fixes.
“I think whatever we do, it’s got to be a permanent solution, not a Band-Aid,” said House Speaker Ray Merrick, R-Stilwell, when asked which option he preferred.
Merrick did not specify what he thought that permanent solution would be. Senate President Susan Wagle, R-Wichita, has called for across-the-board budget cuts.
Here’s more about the options the administration has discussed:
“KDOT is an option,” Masterson said. “I think it’s because everybody concedes we have a great transportation system and if you were going to delay something, that’s where you would go.”
About 17 percent of the money the state generates from its sales tax goes to the highway fund, which also draws money from motor fuel tax, vehicle registration fees and federal aid.
Only the sales tax portion could be shifted to the general fund, Masterson said.
About $83 million would still be available for this fiscal year; the state has already transferred $435 million from the fund in this budget year, according to the Kansas Department of Transportation.
Brownback already has the authority to transfer money from the highway fund “to put us in a position to pay our bills,” said Rep. Ron Ryckman, R-Olathe, the House Appropriations chair.
The state has taken nearly $1.2 billion from the highway fund since 2011, said Steve Swartz, the public information officer for KDOT.
Despite those sweeps, KDOT has moved forward with major construction projects in Wichita and other parts of the state.
However, the agency has delayed preservation work.
Bob Totten, executive vice president of the Kansas Contractors Association, said that delaying maintenance work could affect road safety and cost the state more in repairs in the future.
He voiced concern that any more sweeps from the highway fund could begin to affect major projects, which would negatively affect construction jobs.
Swartz said he couldn’t say for sure if an additional sweep would affect already-announced projects. That would depend on the amount and the timing of the sweep.
“There’s just too many unknowns to know exactly what would we do or how,” he said.
It doesn’t surprise me that they find themselves in this position where they’ve got to raid the retirement fund and the highway fund.
Senate Minority Leader Anthony Hensley, D-Topeka
Pension payment delay
Another option the governor is considering is delaying the state’s June payment to the Kansas Public Employees Retirement System, the pension fund for state employees and teachers, until September.
The Legislature gave the governor the authority to do this when it passed a budget earlier this year. But it required the state to repay the money with 8 percent interest. The delay could free up $100 million for the end of the fiscal year.
Ryckman said delaying the quarterly payment until September would give the state “a little more flexibility” with its cash flow. He said the delay would not have an impact on benefits for current retirees.
Masterson said the requirement of 8 percent interest ensures “there is zero effect on the pension system” from a delay.
Even so, the idea has been strongly criticized by the Kansas Organization of State Employees, the union that represents state workers.
“State employees have to contribute 6 percent of their pay,” said Rebecca Proctor, the union’s executive director. “And they don’t get to take a break from their contribution. I’m sure a lot of them would like to be able to take a break to improve their families’ cash flow, but that’s not an option available to employees.”
Proctor said her organization is concerned that delaying payments will affect the state’s ability to pay off the pension system’s $9 billion unfunded liability in the long term.
Masterson said previous administrations underfunded the pension system for years. In 2012, Brownback signed into law a series of reforms, including increased contribution rates for state and public employees, to shore up the pension system.
I think if there was one do-over for the administration they probably wouldn’t have put all of the effort into fixing KPERS. They would have just kicked the can down the road like every other administration before them.
Sen. Ty Masterson, R-Andover
“I think if there was one do-over for the administration, they probably wouldn’t have put all of the effort into fixing KPERS,” Masterson said. “They would have just kicked the can down the road like every other administration before them, and we’d have another $300 million in the bank.”
Administration officials have met with CitiGroup and discussed with lawmakers the possibility of selling the state’s future tobacco settlement payments to generate cash now.
The state receives a perpetual payment from the 1998 master tobacco settlement, which varies from year to year based on a variety of factors, including tobacco sales. This year, it is expected to bring the state about $62 million.
The money now pays for early childhood programs, such as Tiny K and Parents as Teachers.
The proposal has sparked a backlash from advocates for children’s programs.
Masterson said he knew of no plan that would monetize the entire tobacco settlement. He said he has heard of proposals to issue securities bonds for a portion of the annual tobacco payment, while leaving the rest intact to fund the children’s programs.
“It happens in private markets all the time. You can monetize lease payments and things that are guaranteed,” Masterson said. “It’s a little wonky.”
Shannon Cotsoradis, president of the advocacy group Kansas Action for Children, said statutory protections for the fund would have to be removed to allow the state to sell any portion on the bond market to get cash now. The state would then have to use its annual payment in the following years to pay off the bonds.
“That’s kind of like saying, ‘We’re just going to take part, trust us,’ ” said Cotsoradis, who first brought the issue to light last month.
Many lawmakers are uneasy about the idea. Wagle called it desperate last month, and Ryckman said it should be one of the last options for policymakers.
I think there is a recognition that we promised these dollars to little kids in Kansas and no matter how bad the budget situation gets, this is not the solution to our problem.
Shannon Cotsoradis, Kansas Action for Children
“There doesn’t seem be a lot of appetite for this on either side of the aisle,” Cotsoradis said. “I think there is a recognition that we promised these dollars to little kids in Kansas and no matter how bad the budget situation gets, this is not the solution to our problem, because it will be a one-year fix and we will be forgoing that revenue for a decade.”
Masterson said those aren’t the only possibilities.
“I think there are additional options out there as well beyond what everybody just has in their typical bag of tricks,” he said.
For example, the sale of the Kansas Bioscience Authority’s assets is estimated to bring in about $25 million for the state. Masterson thinks it could bring in more. The state could also look to liquidate other assets, he said. The Bioscience Authority was created under former Gov. Kathleen Sebelius as a way to spur investment in the biotech sector.
“Another thing on this is still asset liquidation. And people make that sound like we’re getting rid of necessary functions of government or necessary assets. It’s not necessarily a government role to be an economic developer,” Masterson said in reference to the Bioscience Authority.
“… I think there are other potential areas that we could look at like that – that are not core functions – where there is a change that could be made.”