Wednesday, October 15, 2014

Tax Choices Shape Education Funding

Educational funding continues to be a major theme in this fall’s election campaigns. It is worth noting how school funding has historically been affected by economic trends and tax policy choices.

Over the past 25 years, the Legislature has generally allowed state aid for K-12 education to grow at the same rate as the Kansas economy, even if it required tax increases.  Following the Great Recession, however, Governor Brownback and the Legislative majority passed significant income tax cuts with the goal of boosting the state economy.  Although total state school aid has increased, the income tax cuts have also lowered state education funding relative to Kansans' personal income.

KASB has released a new report showing that states with the highest student achievement levels tend to spend more money per pupil, raising concerns that less funding for education will make it harder to prepare students for successful postsecondary education and careers.

History of State General Fund Budget and School Funding

The chart below shows 25 years of historical data, and future projections through 2019.  In 1990, total State General Fund spending (red line) was about $2.4 billion, slightly more than SGF revenues (green line).  Total state aid to school districts (which excludes federal aid and local revenues) was just under $1 billion, or less than 40% of the state general fund (blue line).

In 1992, the Legislature raised state sales and income taxes to increase school state aid by over 50%.  Part of this increase resulted in higher school spending, but part of the increase was to “equalize” local property taxes for schools by reducing tax rates in lower wealth districts through more state aid.  As a result, K-12 state aid increased to about 50% of state general fund expenditures, where it has generally remained ever since.

During the healthy state and national economy of the 1990s, state tax revenue and spending grew steadily.  State school aid also increased significantly, although as in the early 1990s, not all of the increases went to higher school budgets.  Hundreds of million of dollars were used to further reduce property taxes, dropping the statewide levy from 35 to 20 mills.

After a decade of solid growth, state revenues dropped in 2002 during the post-9/11 recession, resulting in a cut in school aid in 2003. To avoid further cuts, the Legislature increased certain taxes in 2002.  Combined with a strong economic recovery, state revenues grew from $4.1 billion in 2002 to $5.8 billion in 2007.  This allowed the Legislature to comply with the Supreme Court’s 2005 Montoy decision without raising additional taxes.  K-12 aid increased approximately 50% between 2003 and 2009, from $2.2 billion to $3.2 billion.

There trends changed dramatically as a result of the Great Recession.  From 2007 to 2010, SGF revenues dropped $600 million, or over 10%.  General fund expenditures dropped even more, from nearly $6.2 billion in 2009 to $5.3 billion in 2010. To avoid even deeper cuts in state programs, the 2010 Legislature passed a one-cent increase in the state sales tax for a three-year period.  The additional sales tax revenue, combined with a recovering state and national economy, allowed general fund revenues to rebound to $6.4 billion in 2012.

During these gyrations in the state general fund, K-12 school aid dropped $130 million from 2009 to 2010, but the reduction would have been much greater without $477 million in federal stimulus funding spread over 2010 and 2011.  (These federal dollars are included in K-12 state aid in the chart above, but not in the state general fund.)  Total K-12 state aid remained relatively flat during from 2009 through 2013, averaging about $3.2 billion.  During this period, inflation and student enrollment increased, and funding for KPERS pension payments and bond and interest payments rose, while funding for general operating costs declined.

Based on previous history, state school aid would have risen as the economy improved.  However, in 2012, the Legislature approved and the Governor signed a major income tax rate reduction that cut state revenues by an estimated $231 million in 2013 and $495 in FY 2014.  (The 2014 reduction would have been over $800 million if the Legislature had not approved an extension of the higher sales tax rate and other revenue changes.) The Governor and Legislature also supplemented school funding by using state highway fund dollars for school transportation aid and expanded lottery revenues for KPERS funding.

Projections for Future Years

State general fund revenues and expenditures for 2015 through 2019 on the previous chart are based on projections from the Kansas Legislative Research Department, and assume both “normal” economic growth and the impact of future tax cuts already approved by the Legislature.  Under these assumptions, state general fund revenues will continue to grow, but more slowly than the overall state economy.  (That is the whole point of the tax cuts - to collect a smaller share of income for governmental programs and allow individuals and business to keep and spend more.)

K-12 state aid for 2015 through 2019 is also based on the KLRD projections.  It assumes the Legislature will fully fund the appropriated school aid budget levels for 2015, add $50 million each year for state and school district KPERS pension contributions, and add over $50 million each year for general state school aid for enrollment increases or other costs.  In addition, KLRD estimates also show that the state will have to add between approximately $70 million and $80 million each year for human service caseloads.

Based on projected revenue available, after making the additions previously listed, the Legislature will have to REDUCE spending by nearly $250 million in 2016, $25 million in 2017, $38 million in 2018, and $181 million in 2019 to avoid an unconstitutional deficit in the state general fund.  If any of these reductions are applied to school finance programs, the level of state aid shown above will drop.

The current KLRD projection indicates that state spending and school district aid will continue to increase, but at a slower rate.  However, the school funding increase will only occur IF the state can deal with anticipated overall SGF funding shortfalls WITHOUT reducing school aid.

State Spending and K-12 State Aid Compared to Kansas economic growth

Another way to look at the impact of state budget choices is to compare these trends to the overall in the Kansas economy.  Kansas personal income is a widely accepted economic measure of the total income of all residents from all sources.  Comparing state general fund revenues and expenditures and state aid to total Kansas personal income shows the percentage total taxpayer income going to state programs funded by the SGF, as well as to state aid for public schools.  (Note: the chart below does not include federal and local school revenues.)

This chart indicates the state general fund and state aid to K-12 schools increased relative to total personal income income in 1993 and 1994 as the school finance system was changed, then remained quite constant until the 2002 recession.  After declining compared to Kansas personal income in 2003 and 2004, both the state general fund and K-12 state aid gradually climbed back up to 1990s levels.  Since 2009, however, both the state general fund and K-12 state aid have dropped significantly compared to the overall state economy.

This shows Governor Brownback and the current Legislature have made a very different choice than has been done in the past.  Instead of increasing state general fund revenues to allow K-12 education funding to keep up with the overall state economy, current projections indicate the share of state income going to state education aid will drop to the lowest level in at least 20 years, and will continue to fall for the foreseeable future.

Consequences of tax and budget policy on school funding

The Governor and his supporters note that total state aid for K-12 education has increased since his first budget, and is projected to continue to rise - although he has offered no specific plan to deal with projected SGF deficits.  However, state aid would be much higher if Kansas had continued to provide the same level of support compared to taxpayer income as has been done in the past two decades.

Specifically, had state aid been funded at 2.7% of personal income (the average since 1994) rather the projected 2.4%, school districts would be receiving over $400 million more in state aid this school year.  That is enough to raise the base per pupil by nearly $600.  In program terms, it could entirely fund the Governor’s all-day kindergarten program, expand other early childhood programs, restore teaching positions that have not been replaced since 2009, add school career counselors and other services, and expand technical education programs.

Governor Brownback says the income tax cuts will cause a significant improvement in the state’s economic growth.  The income tax cuts have reduced the revenue available for education, especially in operating budgets.  As noted earlier, KASB has released a new report showing that states spending more on education tend to have higher student achievement - and that Kansas is already an “overachiever” in terms of results for the money spent.

The Governor and his supporters say the tax cuts will create more jobs and economic opportunity for Kansans when they leave the school system. They indicate school funding has increased in recent years, if not as much as most school leaders would like, and that an improving economy will ultimately allow graduates to find jobs in Kansas and provide additional revenue to fund schools.

The Governor’s opponents say the tax cuts have not caused any more economic growth than the state experienced under the previous tax structure, but have hurt the ability of school districts to ensure high school graduates leave school with the skills to take advantage of economic opportunities.  They fear the state’s budget situation will require either further reductions in school funding and quality or higher local property taxes - or both.

Which of these visions most voters believe will likely determine their choice for Governor and their Legislators.

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