Attorney General Derek Schmidt, a candidate for governor, urged the 2022 Legislature to deal with record revenues by placing $1 billion in the pension system, $500 million in a savings account and move t cut sales tax on food. Gov. Laura Kelly, a Democrat, also embraced deletion of the food sales tax and paying down debt. (Tim Carpenter/Kansas Reflector)
TOPEKA — Republican gubernatorial candidate Derek Schmidt opened the 2022 Legislature with a proposal for investing $1 billion in the state pension system, depositing $500 million in a rainy day fund and clipping the statewide sales tax rate with an emphasis on exempting grocery purchases.
Each of the attorney general’s recommendations, and dozens of others already floated by Gov. Laura Kelly and legislators of every political persuasion, will come into play because state tax receipts in Kansas vastly exceeded estimates. Phenomenal growth in state general fund revenue, inspired by federal spending during the COVID-19 pandemic, followed a crazy arc: $7.36 billion in 2019, $6.9 billion in 2020 and $8.86 billion 2021.
Current revenue estimates for the current and upcoming fiscal years, which start annually in July: $8.87 billion in 2022 and $9.04 billion in 2023.
“The state of Kansas has an unprecedented amount of cash on hand and projections to collect much more for several years to come. As legislators and the governor craft the new state budget, I strongly encourage a cautious approach,” Schmidt said.
Kelly, a Democrat running for re-election, proposed $450 million of the surplus be used to eliminate the state’s sales tax on food and $445 million be applied to a tax rebate.
The governor and attorney general cautioned lawmakers convening Monday for the legislative session to resist the temptation to launch an unsustainable spending spree.
“We know the money that we’re going to spend on the food sales tax we really do see as sustainable going forward,” said Kelly, who delivers the annual State of the State speech Tuesday. “There’s other money in that ending balance that we believe is most likely one-time money, created by all the stimulus funding that came in over the last couple of years. This would be an opportunity for us to look at paying down debt.”
In November, the Kelly administration repaid $300 million borrowed from a state fund in 2017 to deal with revenue shortfalls created when Republican Gov. Sam Brownback was still in office.
$1 billion to KPERS?
Schmidt, a Republican in his third term as attorney general after serving in the Kansas Senate, said the state should apply $1 billion to reduce the unfunded liability of the Kansas Public Employees Retirement System. State lawmakers have in recent years lowered that unfunded obligation to $5 billion, primarily by injecting more tax dollars into KPERS and through issuance of bonds for investment purposes.
The unfunded liability is the debt owed to members of KPERS many years into the future. No benefit to current retirees is in jeopardy.
“This is a legal debt that eventually must be paid,” Schmidt said. “Aggressively prepaying at least $1 billion now will save taxpayers hundreds of millions of dollars in debt service.”
In the past, Kelly recommended the Legislature refinance KPERS’ obligations to lower current state contributions to the pension system and leave more on the table for other government initiatives. The strategy would raise the state’s debt burden over the long term. The proposal has been deflected by the GOP-led Legislature.
The Legislature has authorized KPERS to sell bonds and invest proceeds in international markets. The idea is to make a profit that would improve the pension system’s bottom line. In 2021, lawmakers approved a bill allowing $500 million in bonding for this purpose. That followed a $1 billion bond issue in 2015 and a $500 million bond issue in 2004. The earlier bond issues have generated more than $700 million for the system, KPERS officials said.
Sen. Caryn Tyson, a Republican from Parker, said the pension system had become too reliant on whims of the stock market and had taken on too much debt. She proposed the Legislature use one-time money in the treasury to finance the voluntary transition of current or former government employees in KPERS to a private 401(k)-type retirement plan.
“We cannot continue down the path we are on,” said Tyson, who is running for state treasurer. “Everybody knows we have to fix it.”
Riding a wave
Schmidt said he was concerned rosy forecasts of state tax collections could turn sour if the economy faltered. Many states are reporting high revenue numbers, he said, but these financial house of cards generated by high levels of federal spending could abruptly end.
“The point is that Kansas is riding a national wave,” Schmidt said. “Our state caused very little of this revenue boom and will be ill-equipped to stop a revenue bust. The state’s current revenue projections aren’t sustainable. What goes up will one day come down.”
He proposed the Legislature dedicate $500 million from the budget surplus to a rainy day fund for state government use during economic downturns. He said the reserve would “protect state services like public education, transportation and social services.”
However, the Legislature for years has ignored a legal requirement for adoption of a 7.5% ending balance in the state budget. Work by Republicans and Democrats to set money aside in reserve funds hasn’t proven popular.
Schmidt said the state could afford a significant reduction or elimination of the 6.5% state sales tax on groceries. Kelly recommended ending the state sales tax on food.
“Eliminating the state sales tax on food benefits every family in Kansas,” Kelly said. “The importance of delivering food sales tax relief is recognized by legislators and policymakers on both sides of the aisle.”
In 2010, a state budget crisis prompted the Legislature and Democratic Gov. Mark Parkinson to approve a surge in the state sales tax from 5.3% to 6.3%. The law required the rate to retreat to 5.7% after three years. Brownback fought in 2013 to keep it at 6.3%, but the Legislature balked. Negotiations led to a shift in the rate to 6.15%. Brownback signed legislation in 2015 boosting the state sales tax to the current 6.5%.
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