Jonathan Shorman
January 18, 2016

An efficiency study purporting to show how the state can save up to $2 billion over five years also exhorts Kansas to create a rainy day fund.

When the consulting firm Alvarez & Marsal released its report last week, the 260-page document drew attention for its call to move all state workers onto a high-deductible health insurance plan and for its recommendation that school districts begin using a statewide health plan.

But the report also contains a whole section devoted to critiquing and improving the state’s budget process itself.

The first budget process recommendation of more than a dozen “smart practices” identified: establish a risk-based revenue policy. In simpler terms, that means creating a rainy day fund.

Kansas is one of only four states without such a fund, the report said. The impetus for a rainy day fund, A&M said, is that while government revenues decrease during economic downturns, demands for government services increase. A rainy day fund can be used temporarily to close budget gaps during a contracting economy.

In the past, Kansas has used its general fund ending balance to make up for lost revenues — a kind of rainy day fund. In theory, the fund should replenish itself over time. That is because, legally, the fund balance should be 7.5 percent of expenditures.

But the requirement largely has been ignored recently as revenues underperform expectations, leaving the state with razor-thin ending balances.

The A&M report said the end balance requirement doesn’t constitute a rainy day fund, because the fund doesn’t change in response to changing economic conditions. The report said Kansas likely would want reserves that amount to about 10 percent or 11 percent of annual revenue.

In response to questions Monday, Eileen Hawley, a spokeswoman for Gov. Sam Brownback, said: “We are reviewing the recommendations contained in the report.”

In the past, the administration has proposed creating a rainy day fund. In January 2015, Brownback proposed a “budget stabilization fund.”

Under that proposal, revenue growth greater than 102 percent but less than 103 percent would go into the stabilization fund. Revenue growth greater than 103 percent would go to tax reductions.

“What we’re trying to do through the tax policy is create, through revenue growth, a rainy day fund,” State Budget Director Shawn Sullivan said at the time. He added: “So if we get to a situation again in a couple of years that there are resources to pull from instead of where we are now.”

Establishing a rainy day fund where money couldn’t easily be swept or transferred unless Kansas faced a true economic downturn likely would require voter approval to change the state constitution.

Legislative efforts in years past to place the question on the ballot have failed — though the idea has been supported by both Republicans and Democrats. And the Kansas Chamber of Commerce on its website currently advocates for setting aside rainy day funds for an economic downturn.

Sen. Laura Kelly, D-Topeka, has pushed for a rainy day fund in previous years. Any fund would need to be constitutionally mandated to be effective, she indicated.

“This won’t work unless it’s constitutional and it’s really safeguarded,” Kelly said. “Because we have a statutory contingency fund — the 7.5 percent — which we throw out any time it’s inconvenient. So unless we put this in the constitution, I don’t think it works.”

Creating a rainy day fund at a time when the state budget is experiencing shortfalls could prove difficult. The revenues coming into the state haven’t been enough to pay for the budget passed by lawmakers last spring, prompting transfers and cuts by the Brownback administration. Establishing a rainy day fund of any significance immediately would probably take further budget cuts to free up cash for the fund.

Annie McKay, director of the Kansas Center for Economic Growth and a registered lobbyist, said creating a fund valued at 10 percent or 11 percent of the state’s annual revenue is a great goal, but currently overwhelming given ongoing budget pressures.

“Starting out with something small and working up incrementally to get to that place would be a great long-term strategy,” McKay said.

Read more from the Topeka Capital Journal here

ClayTOPEKA CAPITAL JOURNAL: Efficiency report calls for state to create rainy day fund