Sunday, June 1, 2014

What state tax shortfalls may mean for K-12 funding

State general fund receipts for May were $217 million below expectations, on top a of $92 million shortfall in April.  What does that mean for the state budget and education funding?  The state general fund can handle the shortfall in the short term, but the long-term impact will likely further limit K-12 funding.

As illustrated in the chart below from the Kansas Legislative Research Department, the official consensus revenue estimate (CRE) released in mid-April projected the state general fund (SGF) would have $5.96 billion in receipts this fiscal year, which ends June 30.  That was down about $300 million from last year as a result of state income tax cuts.  However, the SGF began the year with a balance of over $700 million.  With expenditures of just under $6 million - also reduced from the previous year - the SGF was still expected to have a healthy FY 2014 ending balance of $695 million, or 11.6%.

The actual receipts for April and May, however, indicate that the June 30 ending balance could be closer to $385 million, or 6.4%.  The real impact would be in Fiscal Year 2015, which was projected to have an ending balance of $391 million.  Assuming receipts this June (the last month of FY 2014) and receipts for all of 2015 are exactly as projected by the April CRE, the FY 2015 ending balance would drop to approximately $80 million or less than 1.3 percent.

Of course, the CRE is just an estimate.  If actual receipts begin to begin to pick up, the ending balance would be higher.  But it means there is little margin for error - if actual revenues continue to drop, the state would face a budget deficit that would require corrective active action, such as reducing funding for state programs.  K-12 education receives over 50% of SGF spending..

The Brownback administration’s spokesmen say the drop in April and May is a one-time event, due to investors taking capital gains in 2012, which reduced their income in 2013 and therefore income tax revenues in 2013-14.  In fact, there is little evidence that the overall Kansas economy is slumping.  On the other hand, despite the tax cuts, the April CRE projected Kansas personal income to grow at a lower rate than the national average in both 2014 and 2015.

The real problem may be in FY 2016.  Note that SGF spending increased from $5.999 billion this year to $6.273 billion in 2015.  Of that $270 million increase, over $200 million was for K-12 education aid, including $109 million for local option budget aid; $25 million for capital outlay aid; $35 million for KPERS payments; $33.5 million for special education; and $7 million for bond and interest aid.

Because SGF revenues were projected to increase just $40 million (due to continuing income tax rate cuts), SGF expenditures were already projected to exceed revenues by $282 million, dropping the ending balance from almost $700 million to under $400 million.  The shortfall in April and May would lower that balance to less than $100 million.

Assuming that shortfall was a one-time occurrence as the administration believes and the revenue forecast for 2015 is accurate, state general fund revenues will have to increase at least $200 million in 2016 to avoid a deficit, a growth rate of 3.4 percent.  However, the Kansas economy will have to grow at an even faster rate to generate that much revenue, because another income tax rate cut will take effect in 2016.  Even that growth rate would leave no ending balance and provide no additional funding for state programs, including a scheduled increase in KPERS contributions; payments of bond issues approved by voters, increased state aid to match local option budgets, and rising special education costs.  This does not include ANY increase in base state aid per pupil for district operating costs, or higher enrollment.

In short, even if the shortfalls of the past two months are temporary, the outlook for state school funding beyond next year is likely to be extremely challenging unless the state economy begins to grow far more rapidly than current projections.

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