Budget Stabilization Plan Prevents Major Cuts
'Rules-Based' Budgeting Provides Fiscal Discipline And Sustainable Government
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May 20, 2011 - Wichita - This budget year would have gone much differently if, instead of starting out with a $27 million deficit, it began with a $1.0 billion surplus and another $6.8 billion set aside for tax relief or capital projects. That could have been the reality if Kansas had followed the budget guidelines in a new study from Kansas Policy Institute. "A Budget Stabilization Plan for Kansas," would solve many of the problems that face the Legislature and Governor with each new session. In fact, if the rules-based plan proposed in the study were in place since 1994, state spending would have been within 3 percent of actual general fund spending in 2010 and Kansas would have nearly $8 billion in funds ready for stabilization, emergencies, investment, and tax cuts.
"A budget stabilization plan is needed in Kansas because the state created a structural deficit in the budget over the past decade," writes the study's author Dr. Barry Poulson, an adjunct fiscal policy fellow at KPI. "Instead of planning for the inevitable downturns in the economic cycle, the state chose to ratchet up spending during good times and depleted reserves when revenue growth slowed. Despite cuts in state spending, the state has incurred almost a billion dollars in deficit spending over the last three years."
KPI president Dave Trabert had this to add, "Much of the pain in the last two budget cycles was completely avoidable. Tax revenue grew 48% in the six years leading up to the recession; responsible budgeting would have set money aside for the inevitable downturn. A rules-based budgeting system is needed in Kansas because history shows that needed fiscal discipline won't occur naturally. The FY 2012 general fund budget just passed will increase spending by $376 million and give school districts access to a half billion dollars in carryover cash, yet some legislators still say we aren't spending enough."
Under the plan put forward in the new study, the incremental amount that can be spent each year is the sum of inflation and population growth for the prior year as long as actual revenues are increasing. Revenues that exceed the limit are diverted to an Emergency Fund; when the limit on the Emergency Fund is reached, surplus revenue goes to a Budget Stabilization Fund. Once the Budget Stabilization Fund limit is reached, surplus revenue goes to a Capital Investment Fund and/or is used to provide tax relief.
The plan also allows money to be withdrawn from the Budget Stabilization fund in years when revenues decline. This counter-cyclical aspect allows spending to increase more in recessionary times to meet the increased demand for social services. General Fund spending declined 13.7% between 2008 and 2010 but had this Budget Stabilization Plan been in place, spending would have increased 7.5%.
"Not only do we see sustainable growth in state spending, we also see a mandated system for the state to weather the inevitable economic storms. If we'd used this plan since 1994, Kansas would have $245 million in an Emergency Fund, $782 million in a Budget Stabilization Fund, and nearly $7 billion set aside for capital investment or able to be returned to taxpayers," continued Trabert. "That is how you responsibly fund services, create jobs and stimulate the economy, letting taxpayers keep more of their own money."
The crux of the problem for Kansas is that revenues increase rapidly when times are good and the Legislature often complies with spending to match. When the economy slows down, and revenues decline, the state is between a rock and hard place. There is more demand for social services and further demands are placed on the state budget. With a rules-based plan, Kansas would have the reserves to meet that demand and still return money to all Kansans.
Trabert concluded, "Kansas doesn't have a revenue problem, we have a spending problem. Until we get that under control, Kansans are going to continue the pattern of leaving the state for lower taxes and more stable governance. This kind of a spending limitation makes that a reality and even lets the legislators make it home on time."
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Kansas Policy Institute is an independent think-tank that advocates for free market solutions and the protection of personal freedom for all Kansans. Our work centers on state and local economic policy with primary emphasis on education, fiscal policy and health care. We empower citizens, legislators and other government officials with objective research and creative ideas to promote a low-tax, pro-growth environment that preserves the ability of governments to provide high quality services. To speak with Kansas Policy Institute, please contact James Franko (316) 634-0218.
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