(Updated to correct that the governor wants to end the existing nonrefundable food sales tax credit and replace it with a refundable tax credit)
Gov. Laura Kelly proposed a $19.7 billion budget for 2021 that draws down reserves and counts on using new money that could come from restructuring payments into the state retirement system.
State Budget Director Larry Campbell laid out the new budget for lawmakers Thursday, walking them through the governor’s plans to cut food and property taxes while imposing sales taxes for the first time on digital products.
The budget puts $73 million more into transportation by reducing transfers from the agency to the general budget with the goal of stopping the longtime practice by 2023.
The budget also provides money for Medicaid expansion. It would fund employee pay raises. It also allocates more money for adoption assistance, replacing Highway Patrol aircraft and adding more beds for mental health.
And it leaves an ending balance of about $628 million.
Campbell also offered a robust rebuttal to critics of the governor’s plan to restructure payments to the state’s retirement system, an initiative that could be doomed from the start.
The budget comes at a time when the state has been beating revenue estimates with the state expected to see “modest” economic growth through 2021.
Campbell called the budget a plan to “restore fiscal responsibility,” notably because the budget year will end with so much held in reserve.
“Maintaining a healthy ending balance is one of the best tools in our tool box to meet our future financial challenges,” Campbell said.
Campbell gave a full-throated defense of Kelly’s plans to refinance payments to the state retirement system, something the governor tried to do unsuccessfully last year.
The governor’s plan would reduce the state’s contributions to the retirement system while stretching out the long-term payment schedule by 10 years.
Refinancing payments into the system could free up about $131 million in 2021, $132 million in 2022 and $158 million in 2024, Campbell said.
The current payment schedule calls for the state to put $702 million into the retirement system in 2021, growing to about $1 billion in 2032.
Under the governor’s plan, the state’s payment would be about $515 million in 2021, growing to $762 million in 2032.
While the budgeting move might free up money for taxpayers services now, it is expected to cost about $4.4 billion in extra interest.
Taking time to clear up “misinformation” about the reamortization proposal, Campbell emphasized that state employees and retirees would not be adversely affected by the governor’s plan to restructure retirement system payments.
“I would ask that if anyone is intentionally spreading misinformation, please stop,” he said. “You are scaring a lot of retirees and state employees that just don’t deserve it.”
Campbell said the governor understands the cost of refinancing retirement system payments.
“But the cost of not doing it is going to be much greater,” Campbell said.
Reamortization frees up state general funds that can be used to “rectify the budget devastation of the past decade caused by the great recession and failed tax policy.”
“The governor believes this is a reasonable cost to not only achieve (retirement system) payment sustainability but improves (general fund) sustainability,” he said.
“That allows us to fund education, provide more resources to (transportation) and provide resources to critical need areas of the state,” he said.
The governor’s reamortization proposal is likely to receive the same cool reception that it did last year when the House overwhelming killed the plan.
Senate Majority Leader Jim Denning said the restructuring of the retirement system payments is a replay of last year’s legislative session.
“She’s overspending the amount of revenue that’s coming in and she’s trying to mask it with a (retirement system) reamortization,” Denning said.
“In my opinion, we need to act on it very quickly and get that off the table.”
In his response to the governor’s State of the State speech Wednesday night, House Speaker Ron Ryckman Jr. said he was “disappointed” that the governor brought the refinancing plan back to the Legislature.
“The governor has again turned to this option, another Band-Aid approach that would amass a mountain of debt for our children and grandchildren to pay off in order to generate quick cash for her spending.
“Last year, House Republicans, joined by our Democratic colleagues voted down the governor’s credit-card tactic,” he said. “We will vote it down again.”
Campbell also rolled out the governor’s proposal to cut sales taxes on food and property taxes, two initiatives proposed by her tax council.
The governor is proposing a refundable sales tax credit that would cost about $53 million in fiscal year 2021. She wants to end the existing nonrefundable tax credit that applies to far fewer people.
The current program costs about $10 million and covers about 69,000 Kansans. The new proposal would cover about 540,000 people.
The tax credit would provide $60 to single filers making up to $30,000 a year and $240 credit to a married couple filing jointly that earns up to $40,000.
The goal is to offset the state’s high sales tax on food, something Kelly promised to address when she ran for governor in 2018.
The governor also is proposing to return $54 million to local governments across the state to help with property tax relief as part of a program that hasn’t been funded since 2003.
The governor followed the lead of her tax council, which last year proposed applying a sales tax on digital products such as music downloads, movies, books and apps.
The proposed legislation applies a tax created in 1937 to consumer products that have evolved into a digital format with the growth of the internet.
The Revenue Department projected last year that the tax would generate about $30 million a year, of which about $6.3 million would go to local governments.
Ryckman criticized the recommendation last year, pointing out the governor vetoed a bill saving Kansas taxpayers money because they would have been allowed to itemize on their state taxes if they didn’t itemize on their federal return.
“Laura Kelly promised she wouldn’t keep raising taxes on our families,” Ryckman said.
“Yet, here we go again, another proposal from her administration that would raise taxes on our families, nickel and diming Kansans every time they buy a book or their kids listen to music online.”
