November 27, 2016
Kansas’ new revenue forecast will face its first test this coming week when November tax collection figures are released, providing initial insight into whether estimators ratcheted-down expectations enough.
The forecast put out earlier this month cut the amount of revenue expected to flow into state coffers, leaving a projected $350 million budget shortfall. The November collection totals, which come out Thursday, offer the first fresh data since the new forecast.
The report at most will offer a hint as to whether forecasters were conservative enough. That’s because the first report after a new forecast is often the closest to estimates. And no single month provides a full picture of the state’s revenue situation.
But a monthly report well below expectations may suggest the forecast wasn’t cut sufficiently —and that Gov. Sam Brownback and lawmakers will confront a shortfall larger than $350 million. Indeed, any monthly report that comes in below expectations will only add to the overall shortfall.
Forecasters, who include State Budget Director Shawn Sullivan, legislative research staff and university economists, have indicated they attempted to keep the revenue forecast conservative. They cited economic headwinds: unemployment is expected to tick up, the agricultural sector has challenges and the total number of hours worked by Kansans has declined over the past 6 months.
“You have a situation where the economy generally is not robust, so we did not calculate the extent of the growth that we normally would for factors such as sales tax revenue, individual income revenue,” Raney Gilliland, director of the Kansas Legislative Research Department, told reporters earlier this month.
November revenue collections have beat estimates the past two years. November 2014 returns came in about $3 million above expectations, while November 2015 exceeded projections by about $8 million.
Yet those positive reports didn’t go on to mark the start of any kind of revenue turnaround. Reacting at the time to the November 2015 report, Revenue Secretary Nick Jordan said “we’re not going to throw too big a party yet.”
Jordan’s cautionary note was prescient. November turned out to be one of the few months over the past year with a positive report.
While a flat or slightly positive November report may not signify the beginning of a positive trend, collections significantly below estimate could offer a signal of further trouble ahead.
If the forecast is on the mark, or even too conservative, monthly revenue reports in excess of estimates will chip away at the $350 million shortfall. But revenues would have to massively exceed projections in the coming months to make significant inroads against the shortfall.
Brownback and the Legislature is all but guaranteed to face a large shortfall when lawmakers return to the Statehouse in January. The governor has said he won’t make cuts or lay out his plan of action before then, sparking complaints among some lawmakers.
In explaining why Brownback is waiting, Sullivan said that in the past two years he had gone into the revenue forecast with already-approved budgets. Kansas is currently at the end of a two-year budget cycle, however.
“He’s going to present a budget proposal in January that will most likely be in the form of a rescission bill and we will work — both he, I and others in the administration — will work on the best way to close the gap,” Sullivan told reporters.
The Legislature, with greater numbers of moderate Republicans and Democrats, is set to hold contentious debates over tax policy and revenue. The task of balancing the budget could prove even more divisive, however.
Few tax policy changes would generate significant revenue during the current fiscal year, which runs through the end of June. Instead, Brownback and lawmakers most likely will have to turn to spending reductions to make ends meet.
Yet the governor’s office said last week Brownback’s budget proposal will make significant cuts unnecessary. Some lawmakers fear Brownback will propose selling off tobacco settlement funds for a one-time boost of cash.
The twin tasks of balancing the budget and reassessing tax policy will consume much of the session, and a coalition of organizations involved in state policymaking will unveil a plan in early December. The organizations include Kansas Action for Children, Kansas Center for Economic Growth, Kansas National Education Association and others.
Calling their initiative Rise Up Kansas, the coalition aims to provide lawmakers a path forward.
“This may not be the plan policymakers ultimately embrace, but we have to start the conversation somewhere,” Annie McKay, Kansas Action for Children CEO, said at a Mainstream Coalition this month. “We do intend to introduce a bill when the legislative session starts.”
Read more from the Topeka Capital Journal here.