Executive Summary

This study proposes a budget stabilization plan for Kansas, which is a rules-based approach to state budgeting. A tax-and-expenditure rule is linked to rules for the disposition of surplus revenue. Absent these rules, surplus revenue is annualized to expand funding for ongoing programs. Under a rules-based approach to budgeting, surplus revenue is used to meet emergencies, stabilize the budget over the business cycle and/or earmarked to fund one-time capital projects. Once those needs are met, remaining surplus revenue is returned to taxpayers in rebates or used to reduce tax rates.

While there are multiple ways to design such a plan, this plan suggests how the variables should be set based on the volatility of tax revenues due to Kansas' reliance on high marginal income tax rates and to maximize overall taxpayer benefit. One unique aspect of this particu- lar design is the counter-cyclical nature of setting spending limits. General Fund spending is allowed to increase faster in times of actual revenue decline as economic downturns bring increased demand for welfare, health care and other human services. Once actual revenues increase, spending is forced down as the demand for recession-related services dissipates.

A budget stabilization plan is needed in Kansas because the state created a structural deficit in the budget over the past decade. Instead of planning for the inevitable downturns in the eco- nomic cycle, the state chose to ratchet up spending during good times and depleted reserves when revenue growth slowed. State general fund revenue has grown more slowly and has become very volatile over these business cycles and declined each of the last three years. Despite cuts in state spending, the state has incurred almost a billion dollars in deficit spend- ing over the last three years.

Simulation of a budget stabilization plan for Kansas reveals it would stabilize the budget over the business cycle and constrain spending growth in the long run. Had this plan been in place since 1994, simulated Fiscal 2010 spending would have been within 3% of actual spending but instead of starting Fiscal 2011 with a $27.1 million deficit, there would have been.  $245.1million in an Emergency Fund $782.5 in a Budget Stabilization Fund $6.8 billion set aside in a Capital Investment Fund or distributed as tax rebates or cuts

A Budget Stabilization Fund promotes more stable growth in state expenditures in the long run. To the extent that some surplus revenue is allocated to tax rebates/cuts it would constrain the growth of spending and provide tax relief. Those tax rebates/cuts would also promote long term economic growth.

Kansas state government can no longer conduct fiscal policy as usual, as doing so will only make today's budget challenge much worse. Legislators and the Governor must constrain the growth in spending and eliminate the structural deficit in the state budget or the state will continue to suffer stagnation in job creation and income growth. A budget stabilization plan will impose the fiscal discipline required to accomplish these objectives. By learning to live with the budget constraints imposed by these rules, the state will experience stronger economic growth and avoid future budget crises.