Monday, November 28, 2016

KASB Tallman Report: New Revenue Estimates Part 2

Tuesday, November 22, 2016

New Revenue Estimates Part 2: Tax revenue lagging behind income by Mark Tallman, KASB Associate Executive Director

The latest official consensus revenue estimates for the Kansas state general fund were released Nov. 10. Much of the attention has focused on a $345 million drop in expected revenues in the current year, as well projections for significant budget deficits in the next two years. KASB takes a more detailed look at how the new projections compare to longer term economic and budget trends in Kansas, and what it means for education funding.

The first part shows how Kansas personal income has consistently fallen below projections and trails the national average. The second part shows how state tax revenues have not kept up with income growth since the major income tax cuts of 2012 have decreased revenue to the state, resulting a lower percent of economic growth invested in education and public services. The third part shows how the failure of the Kansas economy to recover from the Great Recession and the failure of the tax cuts to stimulate the economy have squeezed state spending, including education.

Part 2: State tax revenue has not kept up with state personal income growth.

Part 1 of this post discussed how the Kansas economy, measured by Kansas personal income, has grown much more slowly since the Great Recession of 2008 than it has over the past 20 years, and has also lagged behind the rest of the United States. With income growth lagging, what has happened to state tax revenue?


Kansans pay two major state taxes: income taxes (both individual and corporate) and sales taxes. Most - but not all - of the revenue from these taxes goes into the state general fund (SGF). Almost all of the SGF comes from these two sources, with some additional revenue from cigarette, liquor, severance (oil and gas) taxes and insurance premiums making up about 5 percent.

The state general fund is typically about half of the state “all funds” budget. The all funds budget contains all other state revenues, most significantly, federal aid. Except for the general fund, the all funds budget revenues must be spent on specific purposes. These include all federal funds, revenues from gas taxes for highway construction, state university tuition and other income. In other words, the all funds budget includes not only taxes but fees and other revenues.

(Kansas lottery money does not go into the state general fund. It goes into something called the Economic Development Initiatives Fund and mostly spent for programs in the Department of Commerce and a few higher education and tourism programs. It does not support K-12 education and never has.)

The state general fund receives and spends general state taxes; the state all funds budget receives and spends restricted state taxes and fees and federal aid. Not included in either are local taxes raised and spent by cities, counties and, of course, school districts.

During the 1970’s, 1980’s and 1990’s, the state of Kansas took over more responsibility for many government functions, whether to provide more uniform and coordinated services, to reduce local property taxes, or both.

A good example was school finance. From mid-1970’s to the early 1990’s the School District Equalization Act used state aid to assist lower wealth districts and reduce tax rates, although the majority of school funding come from local property taxes. The 1992 school finance raised state income and sales taxes in order to increase education funding but also reduced local tax levies. For the first time, the state provided a majority a school funding.

(A more recent change concerns the 20 mill statewide school levy, which used to remain with local school districts. Starting in 2015, the 20 mill levy has been sent to the state, deposited in the “School District Finance Fund” - part of the all funds budget but not the state general fund - and then sent back to school districts as general state aid.)

Between 1975 and 1995, when the 1992 school finance law was fully implemented, state general fund expenditures, which are mostly financed by state sales and income taxes, grew from 4.2 percent to 5.8 percent of Kansas personal income. The all funds budget, which includes the state general fund, increased proportionately, from 9.3 percent in 1973, to 12.7 percent in 1995.

Between 1994 and 2012, state general fund spending averaged 5.3 percent of Kansas personal income, and all funds spending averaged 11.9 percent.

The growth in the state general and all funds budgets did not entirely results in a higher overall tax burden (compared to personal income). A report from the Tax Foundation shows that Kansas state and local tax budget as a percent of state personal income - which would include local taxes but not state federal aid and fees such as student tuition-  was 9.7 percent of personal income in 1977, 10.3 percent in 1995, and 9.5 percent in 2012 (the last year available).

In summary, state spending as a share of personal income has changed relatively little in the past 40 years, and much of the increase has been offset by lower local spending in education and other areas.

However, this relative stability began to change in 2012 when major state income tax cuts were passed. State general fund expenditures were 4.9 percent of personal income. Despite several major increases in sales and other excise taxes since then, state general expenditures have dropped to an estimated 4.5 percent of personal income in 2016.

The Legislatively  approved state general fund expenditures for the current year, 2017, would drop to 4.4 percent of personal income. But if the state has to cut spending by $349.1 million to avoid a deficit, as indicated by the Legislative Research Department, expenditures would drop to 4.3 percent of personal income - the lowest level since 1976.

All funds spending has also declined, from 11.8 percent in 2012 to an estimated 11.1 percent in 2017 - and the all funds spending is inflated by over $600 million from the statewide mill levy added in 2015.

These trends are expected to continue. The new CRE expects Kansas personal income to grow at 3.9 percent in both 2017 and 2018, but projects state general fund tax revenue to grow at just 1.4 percent in 2018 and 2.2 percent in 2019. In addition, the CRE expects inflation to increase by almost 2.0 percent each of the next two years, which means state tax revenue growth won’t keep up with inflation.

In  other words, not only is Kansas personal income growing at historically low rates, the current tax structure is generating a shrinking percentage of that income for state programs, such as education.

Why does this matter? It may sound good for the taxpayer to return state spending as a share of income to 1970’s levels. But are citizens willing to accept a 1970’s level of government services?

Consider some of the changes in education alone. Special education services really began in the 1970’s and costs have accelerated for children with high cost medical needs and autism. Preschool and all kindergarten have expanded to meet educational needs and parental demands. Graduation rates have increased and schools are expected to prepare far more students for college and technical programs as the share of jobs requiring advanced skills has doubled - which also has expanded the need for technical and community college and university programs.

Education at all levels is the state’s biggest expenditure, but social services are second. The cost of medical and related services today is far greater than in the 1970’s. Demands for public safety have expanded the pressure for correctional programs. Roads and infrastructure requirements have also increased.

An obvious reason for declining state revenues was the major reductions in income tax rates. However, Gov. Sam Brownback and some others have proposed shifting more of the tax burden to “consumption” taxes, which in Kansas is mainly the sales tax. But a growing share of sales transactions are exempt from tax, such as services, healthcare, and Internet sales. As a state expert explained when the November CRE was presented, people are spending more on things that are NOT taxed, and less on things that ARE taxed. As a result, the sales tax isn’t keeping up with economic growth.

Therefore, if it seems school funding and other public services are stretched more than ever and funding is not keeping up with costs and demands, it’s because it is true. Kansas has been experiencing historically low growth in its economy. At the same time, the state tax structure is providing a shrinking share of that growth for public services. For the next two years, tax revenue growth isn’t even expected to cover inflation, even with an uptick in the economy.

Tuesday, November 22, 2016

Tallman Education Report Part 1

November 21, 2016


by Mark Tallman, Kansas Association of School Boards Associate Executive Director

New revenue estimates reveal economic, tax and education funding issues (Part 1: historically weak economic growth)

The latest official consensus revenue estimates for the Kansas state general fund were released Nov. 10. Much of the attention has focused on a $345 million drop in expected revenues in the current year, as well projections for significant budget deficits in the next two years. KASB takes a more detailed look at how the new projections compare to longer term economic and budget trends in Kansas, and what it means for education funding.

The first part shows how Kansas personal income has consistently fallen below projections and trails the national average. The second part shows how state tax revenues have not kept up with income growth since the major income tax cuts of 2012 have decreased revenue to the state, resulting a lower percent of economic growth invested in education and public services. The third part shows how the failure of the Kansas economy to recover from the Great Recession and the failure of the tax cuts to stimulate the economy have squeezed state spending, including education.

Part I: Kansas economy continues to struggle.


A new consensus revenue estimate (CRE) is released each April and November by a group of state fiscal and tax experts and economists to predict tax and other revenues into the state general fund. A key factor in state revenue projection is growth in Kansas personal income, the total income of all residents in the state.

The U.S. Bureau of Economic Analysis defines personal income as “the income received by, or on behalf of, all persons from all sources: from participation as laborers in production, from owning a home or business, from the ownership of financial assets, and from government and business in the form of transfers. It includes income from domestic sources as well as the rest of world. It does not include realized or unrealized capital gains or losses.”

State personal income is important because it is the total income of the state population. Growth in personal income measures the economic well being of the state and how much people can spend, save and invest.

The CRE also includes estimates of inflation, measured by the Consumer Price Index. Subtracting annual changes in the CPI from changes in personal income shows to what extent the population is getting ahead of or falling behind the cost of living.

As has happened in almost every CRE in recent years, the estimated personal income growth for Kansas was lowered. For the current year (2016), the new estimate is 2.0 percent growth. The CRE also predicts that inflation will be 1.1 percent - so the “real” growth income after inflation is expected to be 0.9 one percent.

To put this in an historical context, the average annual growth in Kansas personal income since 1975 has been 5.7 percent. However, during much of that time, inflation has been higher than now. If adjusted for the average annual change in the consumer price index, average annual personal income growth has been 2.0 percent since 1975. This means the new estimate for 2016 is less than half the historical average for the past 40 years.

In fact, this low income growth has been the norm since the Great Recession began in 2008. Since then, average annual Kansas personal income growth has been 2.3 percent, or 1.0 percent if adjusted for inflation - slightly better than 2016 but far below the average since 1975.

The state’s slow economic growth has been even weaker following major state  income tax cuts in 2012. From 2009 to 2012, personal income grew 2.7 percent per year (1.0 percent after inflation); and from 2013 to 2016, growth was 1.9 percent per year (0.9 percent after inflation).

In addition, Kansas income growth has been noticeably worse than the U.S. average. U.S. personal income growth is now projected at 3.4 percent, compared to 2.0 percent in Kansas. Since 2008, U.S. income growth was 3.1 percent, compared to 1.8 percent in Kansas.

Between 2001 and 2008, between the post-911 recession and the Great Recession, Kansas personal income grew 5.0 percent - higher than the U.S. average of 4.7 percent.

In there any improvement on the horizon? The Bureau of Economic Analysis reports that Kansas personal income has risen more than the national average during the first two quarters of 2016, and the new CRE projects that Kansas personal income will increase 3.9 percent in both 2017 and 2018. However, it also projects that the U.S. average will increase at 4.1 percent and 4.0 percent.

In short, Kansas has experienced historically weak growth since the Great Recession, has recovered less than the nation as a whole; and the 2012 income tax cuts do not appear to have helped improve that trend.

Wednesday, November 16, 2016

KS Association of School Boards Blog Re Next School Finance Formula

Schools tell governor what is needed in next school finance formula

Numerous emails meant to provide input to Gov. Sam Brownback and the Legislature in devising a new school finance formula repeatedly come back to a simple message and a stark warning: It’s the amount of funding that is most important and the future of Kansas is at stake.
After a community meeting hosted by El Dorado USD 490, Superintendent Sue Givens wrote the governor, “I will close by letting you know that the dedication and commitment for K-12 public education was clearly evident in this meeting. Our community stands behind the importance of adequate and equitable funding for our schools in order to meet the increasing demands of the workforce toward economic growth and health Kansas communities.”
In August, Brownback called on Kansans to provide input to himself, education leaders and the Legislature as the state embarks on writing a new school finance formula during the next legislative session to replace the block grant system, which essentially froze the level of K-12 spending.
Since then, numerous local meetings have been held across the state with parents, students, educators and community members to discuss how Kansas should fund public schools and how to respond to Brownback.
Brownback asked that their input be submitted to StudentsFirst@ks.gov by Nov. 30. Additionally, KASB, the Kansas State Department of Education and United School Administrators of Kansas asked school districts to copy their submissions to schoolfundinginput@kasb.org.
In reviewing those submissions sent to KASB so far, the amount of funding is among the top issues on the minds of Kansans. And the level of concern about the next school finance formula is intense.
Tawn Hawes, a kindergarten teacher in Dodge City, sent a short note: “We have 25 kindergarteners in one classroom and if we don’t Put Students First our class sizes will rise and our children, the future, will not succeed to their full potential. Put Students First! The future is in your hands.”
Humboldt USD 258 urged Brownback and legislators to “visit various school districts and visit with the community, teachers, administrators, board member and more importantly, the students.”
Many of the recommendations on school finance call for adequate and equitable funding so that students have an equal opportunity to receive a quality education no matter where they live in Kansas. The emails also suggest a much higher base level for each student and making sure there are additional funds to help students who have special needs.
And many responses noted that the state budget is facing huge problems and suggested repealing the state income tax on certain businesses and looking at other funding sources, such as lottery revenues.
Also high on the list of priorities is for the state to fund full-day kindergarten and expand preschool and career and technical training. And several districts called for eliminating attempts to privatize public education through vouchers of tax credits to private schools.
While there will most likely be calls from some to close small schools in the name of efficiency, there is also a cost to such actions.
Julie Fischer, an elementary school teacher at Prairie Hills USD 113, said Kansas was losing teachers because they were either changing careers, retiring or moving to other states. “These people are amazing teachers and it is a great loss to the students in Kansas that they are no longer teaching in our state,” she said.
She said the uncertainty of funding affects her students. “They often talk about what will happen if our school closes down. We have an excellent school and should not have to worry that it will be closed down because of money,” she said.

Friday, November 11, 2016

KASB Blog on State Budget Problems

State budget problems worsen

The threat of cuts to public schools rose Thursday as officials announced the state faced a nearly $350 million state budget hole in the current year.

Despite the spiraling fiscal problems, Gov. Sam Brownback’s budget director, Shawn Sullivan, said the governor would wait to present a budget plan to the Legislature in January at the start of the 2017 session instead of making any immediate cuts.

Even so, with public school funding making up half of the state budget, the possibility of cuts loomed.

State budget experts revised downward earlier revenue projections by $346 million for the current fiscal year — a drop of almost six percent — and for the next fiscal year, which starts July 1, 2017, another $444 million. That means there is an $800 million hole to fix just to balance the books for the remainder of this fiscal year and the next one. Current state spending is approximately $6 billion per year.
 
Legislative researchers said the reductions in revenue estimates may be a record.

Officials lowered the estimates for the current year in large part because the Kansas economy is in bad shape. Gross state product for the current year is not expected to grow at all and Kansas personal income will grow only two percent. Projections for growth next year were also reduced and state officials said they didn’t expect any kind of turnaround for the next two years.
As a result, tax receipts for the year ending June 30 are now expected to be $345.9 million lower than projected by the last official estimate in April - a drop of almost 6 percent.
For the upcoming year, Fiscal Year 2018, tax receipts are expected to increase by a modest 1.4 percent. But the official revenue estimate uses “current law” for transfers into and out of the general fund. That means it assume the Legislature will not shift funding from the state highway fund into the state general fund, and will start making payments into other funds.
Instead of transferring $182 million INTO the general fund, as is planned in the current year, by state law $287 million should be transferred OUT of the general fund in FY 2018. This means total state general fund receipts would drop by 7.4 percent in 2018
The Legislature has relied on these transfers to help close the budget gap in recent years, and these would be an option to close the budget shortfall. However, such shifts from programs such as the state highway fund have become more controversial.
Raney Gilliland, director of the Kansas Legislative Research Department, said the state woes are the result of a combination of factors: slumping agriculture and energy prices and the large income tax cuts under the Brownback administration.

Since the first tax cuts were implemented, the state has fallen short of revenue estimates in 33 of 46 months. The state budget has been cut, payments delayed, reserve funds swept, and the state sales tax increased to make up the shortfalls.

Many of Brownback’s legislative allies, who helped push through the tax cuts, have been voted out of office or retired. The Legislature has moved more towards the center with many incoming legislators promising to undo Brownback’s tax changes.

Thursday, November 3, 2016

KASB Blog about Possible Budget Cuts

Unless state tax revenue rebounds, budget cuts could occur

Unless the state revenue situation turns around, the current state budget will not balance and cuts could come soon.
According to figures released Tuesday by the Kansas Department of Revenue, tax collections for October fell $12.7 million below projections, plunging the budget into further danger just days before voters will decide state legislative races.
For the fiscal year, which started July 1, the state has missed the revenue estimate mark by approximately $80 million.
Because the budget started with a razor-thin balance, that means state officials are looking at severe fiscal difficulties and education leaders are on alert because K-12 funding makes up half of the state budget.
The state faced a similar revenue picture one year ago. Tax collections were running approximately $80 million below estimates for the first four months of the fiscal year, state budget experts met and lowered the revenue assumptions for the remainder of the year and Gov. Sam Brownback announced $124 million in transfers, cuts and fund sweeps to keep the bottom line above zero.
On Tuesday, Brownback declined to say what actions he would take this time around. The Consensus Revenue Estimating Group, which sets revenue forecasts, will meet on Nov. 10, two days after the general election, to reassess the state’s fiscal condition and revenue projections. (KASB will conduct a webinar on the new revenue estimates on Fri. Nov. 11).
Kansas has been in budget crisis mode since Brownback and his Republican allies slashed state income taxes in 2012 and 2013. Since then, the sales tax has been increased, budgets have been cut, reserves spent and state payments to schools and the pension system delayed.
Democrats and some Republicans blame the budget ailments on the income tax cuts. Brownback has said the state has been buffeted by economic struggles in oil, gas and agriculture.
In June, the Brownback administration delayed the last school payment of the fiscal year so that the previous fiscal year could close without a deficit. The state also issued $900 million in certificates of indebtedness, which allows the use of agency funds to manage cash flow.
In May, Brownback cut $97 million, mostly to higher education and Medicaid providers. Also in May, the administration announced delaying a $100 million payment to the state pension system.
Last March, Brownback cut $17 million from higher education after tax receipts in February fell $53 million short of estimates. In July 2015, Brownback ordered $63 million in cuts and budget shifts.
The October revenue report released Tuesday showed state income tax collections surpassing projections by 5.2 percent, but sales tax revenues missed by 5.4 percent and corporate income tax fell under estimates by nearly 40 percent.
A news release from Brownback’s Revenue Secretary, Nick Jordan, focused on growth over last year in actual collections for income taxes and said sub-par performance of sales and corporate income taxes was caused by outside forces.
“We are very pleased to see individual income tax receipts continue to grow and particularly strong withholding tax receipts,” Jordan said. “We remain concerned by the larger national downward trend of corporate and sales tax receipts,” he said.

Wednesday, November 2, 2016

Kansas Supreme Court and School Finance Litigation

In the past few weeks and over the next week, you have seen or will see a great deal of ads relating to several issues regarding retention of Supreme Court justices by groups wishing to oust or retain the Kansas Supreme Court Justices. Regardless of your stance on the issues, please be aware of this school-related information that you may not see mentioned by any advertising.  There are differing views of the retention issue for the Kansas Supreme Court and Court of Appeals justices; the impact of a change in composition of the Courts could directly affect rulings on school finance.  The duty of the Courts is to rule on technical issues without imposing a political agenda.  The Kansas Supreme Court will be ruling on the Gannon case (adequacy of school funding) soon and all schools will be affected by the ruling. A “yes” vote retains the justices; a “no” vote removes them from the bench, meaning the governor appoints replacements.  With five justices up for retention election, should they lose the retention election, compliance with any constitutional funding requirements would be interpreted by a panel of new appointments by the governor.


Monday, October 24, 2016

Mark Tallman KASB Report on School District Spending Choices

Key Facts: How have Kansas school district spending choices changed?

School districts have directed more operating dollars to teaching and to programs helping students, and reduced the percentage of operating spending on almost everything else. The total dollars available for operating costs are limited by the state and federal government. Capital expenditures for buildings and payments for school construction bonds, which are approved by local voters, have been increases more than operating costs.




According to data from the Kansas State Department of Education, in 2015 school districts spent 61.4 percent of operating funds on direct instruction (teachers, special education paraprofessionals, classroom aides, coaches and classroom materials), up from 56.7 percent 15 years ago.


Districts spent 5.4 percent of operating funds on student support programs (such as counselors, nurses, attendance officers, social workers and school psychologists); up from 5.1 percent in 2000, and 4.0 percent on teacher support (libraries, media centers and professional development); the same percent as in 2000.


Spending on school administration (principals and school office personnel) dropped from 6.2 percent to 5.5 percent. Central administration costs are 5.1 percent of operating costs, down from 5.4 percent.


Operations and maintenance costs, which include utilities, insurance, custodial services and security, make up 9.6 percent of operating expenditures, down from 11.1 percent. Transportation costs for students to and from school and activities is 4.3 percent, down from 5.4 percent. Non-instructional spending, which is mostly food service programs (breakfast and lunch) is 4.7 percent, down from 6.1 percent.


Operating expenditures dropped from 91.7 percent of total expenditures to 88.0 percent. This is primarily because local voters have approved school construction bonds at a faster rate than the Legislature has approved increases in general operating aid and local option budgets (which are limited by the state). Local boards and voters cannot shift funding from building and equipment funds to operating funds.


Follow-up: Some say only about half of student spending actually “gets to the classroom.”

That’s only true if you accept the idea that “instruction” is the only thing that matters “in the classroom.” However, student learning in the classroom would not be possible without the other areas of the budget - including buildings and operating the classroom, supervising and supporting teachers, and transporting, feeding and providing support services for students.

Friday, October 21, 2016

Kansas State Dept. of Education News Release: Graduation Rate Reaches New High



NEWS
Ann Marie Bush, Communications Specialist     (785) 296-7921

FOR IMMEDIATE RELEASE
Oct. 21, 2016

America’s graduation rate reaches new high; Kansas remains above average
Kansas’ goal is to have every student graduate

President Barack Obama on Monday announced that America’s high school graduation rate has reached a record high of 83.2 percent. The president made the announcement at Benjamin Banneker Academic High School in Washington, D.C.

The high school graduation rate has steadily risen during Obama’s time in office, growing by about four percentage points since the 2010-2011 school year, which is the first year all states used a consistent, four-year adjusted measure of high school completion.

In Kansas, the 2015 four-year public school graduation rate was 85.9 percent. While this is above the national average, it isn’t enough, said Kansas Commissioner of Education Randy Watson.

The vision for education in the state is Kansas leads the world in the success of each student. One of the five outcomes that will be used to measure the progress of the vision is graduation rates.

The goal is to have every high school student graduate and have a plan in place that will lead to success, Watson said.

The Kansas State Department of Education is focusing on several initiatives, such as kindergarten readiness, family engagement, civic engagement and social-emotional growth, to help improve graduation rates in the state.

Kansas uses the four-year adjusted cohort graduation rate, which is the number of students who graduate in four years with a regular high school diploma divided by the number of students who entered high school four years earlier (adjusting for transfers in and out).

During the past four years, Kansas’ graduation rates have increased in every subgroup. The highest percentage increases from 2011-2012 to 2014-2015 have been in the free/reduced lunch subgroup (1.6 percent increase); the Hispanic subgroup (1.9 percent increase; the Limited English Proficient (3 percent) subgroup; and the African-American subgroup (3.3 percent).

Obama said nearly every state across the country has seen progress since 2010-2011. The biggest increases across the nation have been in the English Learners, African-American and Hispanic groups.

While this is good news for Kansas, we still have more work to do. Kansas can’t lead the world in the success of each student without ensuring that all students graduate and have a plan in place for their future.