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Kansas governor seeks to use cash reserves to pay off debt

Democratic Gov. Laura Kelly proposed Kansas burn through more than half of its cash reserves to pay off some debt early while taking longer to close a long-term funding gap for the state pension system for teachers and government workers.

Kelly’s budget director, Larry Campbell, outlined her proposed spending blueprint during a joint meeting of the House and Senate budget committees. He called it a “plan to restore fiscal responsibility” and later told reporters that it “smooths out the ride” for state government in future years.

“There are critical things that need to be done now,” Campbell said during a budget briefing for reporters. “We have commitments to the schools; we have other commitments to foster care and our prisons, and this is just good business.”

Several key Republican legislators said they are open to her proposals for reducing debt, though they might choose other targets.

But Kelly’s plan to free up tax dollars for each of the next 15 years by cutting the state’s annual payments to the Kansas Public Employees Retirement System appeared to be a non-starter with top Republicans in the GOP-controlled Legislature. They viewed it as a gimmick that helps Kelly cover overspending while keeping the pension system from improving its financial health quickly enough.

“I don’t think it has a chance,” said House Appropriations Committee Chairman Troy Waymaster, a Bunker Hill Republican.

Kelly’s proposed budget for the fiscal year that begins July 1 includes additional funding for public schools and anticipates that a bipartisan plan to expand Medicaid health coverage to as many as 150,000 additional people would cost the state an extra $35 million a year.

The Democratic governor and Kansas Senate Majority Leader Jim Denning, an Overland Park Republican, struck a deal last week that likely clears the way for Kansas to become the 37th state to expand Medicaid. Kelly would get a straightforward expansion, and Denning would get a version of his proposal for a program aimed at lowering private health insurance premiums.

For the second consecutive year, Kelly is proposing what would be the state’s largest annual budget ever, nearly $19.8 billion in spending from all funding sources. It would increase total spending about $1.1 billion, or 5.8 percent, with much of the increase tied to the Medicaid expansion that would be financed largely with federal funds.

The state expects to begin July with more than $1.1 billion in cash reserves, thanks to a solid economy, low unemployment and months of better-than-expected tax collections. Kansas also is seeing some businesses and individuals pay more to the state in income taxes because of changes in federal tax laws at the end of 2017.

Many Republicans want to cut state income taxes to lessen or eliminate what they consider the state’s undeserved revenue “windfall.” Kelly is proposing more modest initiatives to help ease the burden of the state’s sales tax on groceries for poor families and to boost aid to cities and counties in hopes that they’ll cut property taxes.

Kelly also wants to pay off $532 million in internal debts that the state used to patch budget holes in recent years and pay off $70 million in bonds early.

Kelly’s administration projects that the mix of policy changes still would leave the state with cash reserves of more than $628 million or more each of the next four years.

The debts Kelly wants to pay off early include $268 million in payments to the pension system that the state skipped during past budget woes and agreed to pay back over two decades. The rest is an internal loan used to patch budget holes.

“The more debt we can pay off, the better — I mean, just even as individuals or as a state,” Campbell said.

But Kelly’s budget ties her plan to retire about $602 million in debt early to her proposal to slash the state’s annual payments to the pension system. That move would save $131 million in state tax dollars during the next budget year and $584 million over four years.

A 2012 law ramps up the state’s annual payments over time to close a projected $9.2 billion gap in the pension system’s long-term funding by 2033. This year’s payment is supposed to be more than $700 million, and it would top $1 billion in 2033.

Kelly is proposing to give the state an extra 10 years, until 2043, something that would add $4.4 billion to the long-term cost, just as refinancing a home mortgage to lower monthly payments can.

Campbell told lawmakers in his presentation that the benefits of the move include budget stability and “outweigh the costs.” He also told reporters that the state is going to have to take such a step in coming years anyway to make the pension payments manageable while keeping promises to boost funding on public schools, sustain social services and fund other parts of state government.

Top Republicans agree that a smoothing-out of pension payments is coming. But Senate Majority Leader Jim Denning, an Overland Park Republican, said the state should wait until the pension system is 70 percent funded long-term; the figure is now 68 percent.

Kelly proposed a similar plan last year and it died quickly, with little support among lawmakers.

Denning said, “They’re just pushing a rope.”

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