March 1, 2015 - In This Issue:
Quick Facts
Employer's Unemployment Insurance Fund
  • Employers have replenished their fund following the great recession
  • Fund is projected to have $300 million ending balance by June 30, 2015
  • Fund is projected to have $550 million ending balance by June 30, 2016 
Unemployment Rate Decreasing in Region (1)
  • JoCo               3.3%
  • KCMO             5.0%
  • Kansas            4.0%
  • U.S.                 5.4%
Johnson County Residents Employed - Historical High (1)
  • Avg 2013     286,000
  • Avg 2014     290,000
Consumer Confidence Improves - Johnson County (1)
  • Dec 2014      95.0%
  • Dec 2013      80.4%
Retail Sales Exceed $1 billion monthly in Johnson County (1)
  • 8th consecutive month exceeding $1 billion
(1) - Source: CERI
TURNAROUND

Friday February 27th marked the important deadline known as "Turnaround," which is the official halfway point for the Legislative Session.  By "Turnaround", a bill, with a few exceptions, must have passed the Senate to be considered by the House, and vice versa. In total, the Senate has passed 79 bills, which the House will now review, debate, and possibly amend.


 

In addition to working on the House bills coming over the remainder of the session will be concentrated on the Budget and Tax Policy.

FEBRUARY 2015 TAX COLLECTIONS
8-Months into the Fiscal Year

The month of February tax receipts came in $22 million over estimates for the month which was a positive. However, for the eight month period ending February 27th, total tax collections remain down $79 million from the prior year period.

 

 

 

 

 

The biggest outlier remains in personal income tax collections. These are down $114 million or 7.4% compared to same period last year. As mentioned previously Budget and Tax Policy will be the priority items for the legislature for the remainder of this session.  

TAX AND BUDGET
Heavy Lifting

The Tax policy was to accomplish three (3) major objectives.  Incent small business to grow jobs, move the state to relying more on consumption taxes and less on income taxes, and reduce the overall tax burden on employees.  All three objectives have been accomplished.  There are currently 1,436,564 Kansans working, that's 31,329 more Kansans working since December 2013 (KDOL).  Kansas is now a low tax state.  See how Kansas compares to our border states.


 



 

Kansas has moved to relying more on consumption taxes and less on income taxes.  Following is
a graph demonstrating the shift away from income taxes to consumption or sales taxes.

 

Since 2011 Kansas has reduced its dependency on income taxes from 52% of total taxes collected to 45%.  At the same time Kansas has increased its dependency on consumption/sales taxes from 40% of total taxes collected to 46%.  Consumption/Sales taxes are broad based, more consistent through economic changes, and generally more predictable. The following graph shows how volatile income taxes projections are compared to consumption/sales taxes.

Speaking only for myself; not the caucus, leadership, or the governor.  As with any major policy change unintended consequences occur and must be corrected.  As the graph at the left details, the legislative intent of the tax policy was to provide an incentive for small businesses to grow jobs. The legislative intent on the small business pass through tax exemption was to not tax "non-wage income", also known as working capital. The unintended consequence or loop hole which is occurring is a large percentage of the pass-through entities are sheltering wages and passive income along with working capital income. That was not the legislative intent. In order to make the tax policy fair, be able to continue lowering personal income taxes, the loop holes must be closed this session and made effective January 1, 2015.


 

Tax policy changes should include taxing ALL WAGEs and passive income in the pass through entities and define what a multiple employee entity is. These tax policy modifications will make structural changes to stabilize the budget in the long term. With the acute and large tax collection shortfalls short term liquidity solutions will also be necessary. The budget fix will require both; a short term liquidity fix as well as this long term structural correction on the pass through entities.

 

KANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM (KPERS)

I have worked on stabilizing and modifying KPERS since joining the legislature in 2011.  First major change was to get away from the Defined Benefit (DB) design for all new hires effective January 1, 2015. The new design is known as a Cash Balance Account and is much closer to a Defined Contribution (DC) design. All new hires go into the Cash Balance plan. This provided the structural change necessary to have a sustainable retirement plan for teachers and other state employees.  This year we focused our work on the Defined Benefit legacy part of KPERS.  Like other state run Defined Benefit plans KPERS has been underfunded for 40 years while increased benefits were implemented without providing for the funding to pay for the enhancements. 

 

Currently KPERS School Group has an unfunded liability of $7.26 billion. To help reduce the unfunded liability the Senate Select Committee on Pensions worked on Senate Bill 168 (SB 168).  SB 168 allows Kansas to issue bonds up to $1 billion and place the proceeds directly into KPERS. The logic is very straightforward.  We are currently in a historic low interest rate environment. Kansas can issue bonds at 4.43%, deposit the proceeds into KPERS, and over the lifetime of the bonds make a higher return on KPERS investments to cover the cost of the bonds. The profit is known as arbitrage and is basically the difference in the spread between 8%  KPERS historically has earned on its investments and the cost of the bonds at 4.43%   The unfunded School Group liability would decrease from $7.26 billion to $6.28 billion during 2015. The Government Accounting Standards Board (GASB) has made it very clear that pension unfunded liability is a debt and should be reported as such.  Therefore, with Kansas reducing its unfunded pension debt by the same amount of bond obligation debt, the overall debt remains the same after this transaction. Here is an illustration of the desired effect the bond payment will have on the state.


 

The Senate passed SB168 and it is on the way to the House.

SCHOOL FINANCE FORMULA

The legislature is working on a new school finance formula.  The current formula is financially unsustainable and has been litigated for over a decade. The plan is to have a block grant replace the funding formula for the next two (2) years.  This will give our schools funding certainty while we work on a new formula.  Below is the school funding formula. Are there any questions on why it needs to be changed?  Bureaucratic insanity?

 



OTHER NEWS

Marearl's health is improving. She has had a tough winter. Thank you to everyone for including her in your prayers. She is looking forward to coming to the Capitol in a few weeks. 


 

 

Capitol Office
300 S. W. 10th Street, Room 541-E
Topeka, KS 66612
785.296.7394
Jim.Denning@Senate.KS.Gov

Overland Park
8416 W. 115th Street
Overland Park, KS 66210
913.345.9416
JDenning@Discovervision.com

 

www.JimDenning4Kansas.com



Paid for by Jim Denning for Kansas Senate - Kathy Vance, Treasurer