Friday, June 16, 2017

After school finance and tax bills pass, where do we go from here?

The last five years have a seen a true revolution in Kansas politics - in the sense of moving in a circle. Voters have changed control of the Legislature twice. The Legislature passed major tax cuts which were subsequently reversed. A school finance formula was repealed in favor of block grants that froze school funding, then largely restored with additional funding. Which way will that wheel turn next?

A short political and economic history

In 2012, Gov. Sam Brownback and the more conservative Kansas House engineered a massive cut in state income tax rates that included an on-going reduction in future income tax rates to zero. Proponents of the tax cuts said they hoped it would stimulate the state economy and still allow a smaller but reasonable level of public services – K-12 and higher education, highways, health and welfare programs – and also begin to tackle the long-term unfunded liability of the Kansas Public Employees Retirement System.

Later that year, conservative Republicans swept to power in the Kansas Senate. Gov. Brownback was re-elected – although by a much narrower margin than his first victory – in 2014. By that time, it was already becoming clear that the tax policy was not having its intended impact. Using the broadest measure of economic prosperity, personal income growth, Kansas has had one of the worst economies in the nation over recent years. Employment growth has also lagged.

The consequences have been years of state revenues not meeting projections, budgets cuts or spending freezes as costs continue to rise, credit downgrades, diverting funds from one purpose to another and a sales tax increase that has made Kansas' food sales tax the highest in the country. Two of the Governor’s self-identified top achievements were restoring healthy cash balances and getting KPERS back on target for full funding. The first has been completely reversed, and part of the Governor’s plan for the current crisis was again delaying KPERS payments. The governor narrowly pushed through the Legislature a “block grant” funding system for school districts that turned out to be a two-year funding freeze and was ruled unconstitutional by the Kansas Supreme Court.

Apparently, voters in 2016 had had enough. The election significantly changed control of the Legislature to a point where a two-thirds majority of both houses overrode the governor and largely reversed the 2012 income tax cuts and subsequent tax changes – although the new income tax rates remain below 2012 levels. The Legislature also largely restored the previous school finance formula and added funding that in two years will raise operating budgets by more than $300 million, and restored much of the funding for KPERS (the largest group of KPERS employees work for school districts, so most of that funding goes to school districts and their employees). It remains to be seen whether this action and amount will satisfy the Kansas Supreme Court.

And the filing deadline for the 2018 general election, when Kansans will choose a new governor and control of the Kansas House, is now less than one year away (June 1). That means voters will again have a chance to approve – or disapprove – the direction of the state.

What do voters want?

It seems logical to assume that voters will look back on the big decisions of the 2017 session and whatever comes next and ask two questions: First, is this what we voted for? Second, is it working?

If the election of Sam Brownback and the shift to a more conservative legislature in 2010 and 2012 was a vote for change (as was claimed), it was likely in reaction to the growing belief that the “system” just isn't working very well for average voters. Remember, the "average" voter in Kansas is a white, non-college educated Republican who probably sees his or her tax burden going up, in part because so many other taxpayers are getting special tax exemptions while the cost of services continue to rise. Many such Kansans have been experienced many years of slow income growth, shrinking job prospects and economically distressed communities.

I remember some months ago looking at the "crosstabs" of a national opinion poll that surveyed attitudes by a variety of population groups. What I found striking was the differences in whether respondents felt "hopeful," "angry," "worried" and other adjectives based on education level and income, which are increasingly closely aligned. The differences were not a matter of a few percentage points – there were 20, 30, 40-point gaps. Essentially, most people with higher income and education felt things were on the right track. Most of those with less education and lower incomes did not. More Americans and more Kansans fall into the second category.

When the 2012 Kansas income tax cuts were passed, many legislators acknowledged it was a gamble; the governor himself called it an "experiment" (as opponents have never allowed him to forget)  but the justification was that something – almost anything – needed to be done. Deep tax cuts, especially income tax cuts, has long been “something" orthodox conservatives have long supported.

The problem is while almost everyone is happy to pay less in taxes, most really do not seem want to cut the level of government services supported by those taxes. Gov. Brownback certainly didn't; his budgets have continually included provisions to raise other taxes or "pay -fors" to offset the income tax cuts; shifting funds from one budget area to another and using short-term or one-time solutions. The Legislature never approved deep spending cuts either. (Remember this past session, when some Legislative leaders were urging the Governor to make “allotments” – which he refused to do – and discussed across the board cuts that never materialized.)

In fact, most Kansans seem proud of their public schools and colleges and if anything, want to spend more; want their roads maintained and want poor, elderly and disabled Kansans to get needed assistance. Providing such services is pretty much what state government does (these programs much up almost the entire state budget), and if there is a lot of waste, fraud and abuse, it is hard to explain why six years of Gov. Brownback's conservative administration and conservative legislative oversight hasn't found it.

Therefore, the Brownback experiment ran into immediate problems. It didn't generate hoped-for economic results. Because the tax cuts were so skewed to upper income taxpayers and business owners – and other taxes were raised to compensate – most voters got very little tax relief or ended up paying more. As a result, most voters didn’t feel better off. Austere budgets for schools and other services were tight enough voters saw services decline, but not tight enough to avoid continuing budget deficits, downgraded credit and an on-going sense of “mismanagement” at best, and “crisis” at worst.

In 2016, Kansas voters collectively seemed to say: this isn't what we wanted. It's not working.

How will voters look back on 2017?

Opinion polls, news stories and other data indicate that Kansans wanted to "fix" the budget problem, protect school funding and address perceived inequities in the tax system. There is a good case the 2017 Legislature addressed each of these issues, but even the supporters of the tax bill called it a "first step."  What might voters see when they look back from the ballot box next year?

First, voters will see that the tax increase went far beyond repeal of the "LLC" exemption that many voters came to see as unfair. In fact, income tax rates will rise across the board, including on those in lower brackets; and other recent tax increases, like the higher rate on food, were left in place. As a result, most voters will likely see an increase in income tax withholding or their tax bill when paid.

Second, despite a return to more reliance on income taxes, Kansas continues to rely heavily on sales taxes. Sales tax collections have been lagging because spending has shifted from taxable purchases (goods bought from merchants in Kansas) to non-taxed purchases (medical costs, services and internet sales). The Legislature made some effort to address this issue, but the bulk of the tax bill was simply reversing the cuts in income tax. This means state tax collections will continue to grow very slowly.

Third, the Kansas economy continues to lag, in part because of agriculture and energy prices, and that will also slow tax revenue growth unless rates continue to be raised. In other words, the new tax bill will bring in a lot more money in the first year or two as it is phased in, but this will slow down. In fact, the tax bill is expected to bring in LESS money after the first two years because previously lowered exemptions and deductions are being restored. Furthermore, if state personal income growth is barely keeping up with inflation, tax revenues will do likewise unless further rate increases are passed.

Fourth, the trajectory of state spending IS projected to grow faster than inflation. One reason is the unfunded liability in the KPERS system, which requires more than "normal" funding growth to make up for past underfunding. A second reason is school finance. If school leaders are correct, making improvements in student performance, especially for low performing students, will require additional resources to add programs and personnel.

These trends were presented to the Legislature the night of the tax vote in a document showing that the state general fund will again be at a deficit within four years. Of course, the economic outlook could improve in the next year or two, but it could also get worse.

In other words, it is entirely possible that after (yet another) "largest tax increase in state history," Kansas may still face budget challenges and many Kansas may still feel things are not getting any better for THEM.

What school leaders can do for voters in their communities

With all this in mind, there are several steps school leaders and supporters can take to give voters a deeper perspective on the choices made and what they mean for the future.

First, say thank you. Not just to legislators who had to make the politically difficult votes on taxes – and will face the consequences, good or bad – but to the taxpayers who will be paying more.

School leaders should consider formal, organized and on-going ways to thank their constituents, when tax withholding goes up this summer, when schools open in August, and when parents and patrons are at school events. Everyone feels better about making a contribution when it is recognized and appreciated, not merely expected.

Second, put the new money to work in ways that immediately helps students and families. Yes, there are millions of dollars in backlogged operating needs and salary requests. But Kansans – and the Supreme Court – expect to see visible progress in helping students do better.

It can't all be done at once, but opening schools this fall with a showcase of ideas to implement the "Big Five" Kansans Can goals – kindergarten readiness, individual plans for student, addressing social and emotional needs, raising graduation rates and getting more students successfully started in college and technical training – will show people how their tax dollars are being used to help students. Commissioner Randy Watson frequently told the legislature top teachers he speaks with always prioritize programs to help students over personal salaries.

Third, consider – prudently – reducing cash balances. Again, there are many justifiable reasons why districts have increased cash reserves, most notably during the years of state budget turmoil. But after this legislature took steps to finally provide stability for the next two years, districts should consider ways to reasonably invest money in one-time investments, like professional development to improve the educational outcomes.

Fourth, strengthen parent and community communications. The State Board’s new accreditation system requires a focus on relationships. Improving graduation and postsecondary readiness invites closer ties with employers and higher education. Individual plans of study require close communication with parents. Kindergarten readiness and addressing social/emotional issues will usually require working with other community providers as well as adding school services.

Fifth, take a stronger role in the economic development efforts in your community. We have learned that simply cutting taxes and sitting back to watch business take off isn't enough. But simply turning the clock back five years won’t be enough either. Even before the tax cuts, many Kansas were dealing with long-term trends eroding their individual and community vitality. School board members and administrators need to be involved in finding ways to reverse these trends.

Many school leaders are already involved, but it is important to strengthen this commitment. They may feel they lack the expertise to promote community development, but the experts haven’t always been right, either. The most important qualification may simply be commitment and a willingness to work other community organizations and interests.

Sixth, champion the long-term goals of Kansans Can. Each of these steps can help give voters a sense that their financial contributions are having an impact; that and the public school system is working better and more responsively. But the most important step may be for school leaders and supporters to fully commit to the goals of Kansans Can. As KASB explained in testimony several times this session, there is no meaningful correlation between state tax burden and economic prosperity – if anything, "high tax" states are somewhat MORE likely to have higher incomes and lower poverty than “low tax” states.

However, there IS a strong, positive correlation between education levels and income. That is because higher levels of education tend to result in higher salaries and employment, and because almost all of the job growth since the Great Recession has been for jobs requiring more than a high school diploma or less. No matter how low taxes are cut, it won't create jobs for people without the skills to fill them.

School leaders shouldn't be euphoric over the results of the 2017 Legislature. Neither should they be discouraged. Significant steps were taken to stabilize the state budget that provides over two-thirds of school funding; to restore a workable school finance system with the largest funding increase in over a decade; to provide a broader, more balanced tax system; and to agree on educational targets for the future.

The challenge now is to show Kansans how those changes will make THEIR lives and communities better.