Kansas on track for $2.6 billion state revenue surplus, $1.6 billion stash in rainy day fund

TOPEKA — Kansas budget director Adam Proffitt said Tuesday the state government was on track to meet revenue projections necessary to create a $2.6 billion ending balance in the current fiscal year and reinforce the state’s financial position with $1.6 billion in a rainy day emergency account.

He told participants at Washburn University’s economic outlook conference the state generated $2.2 billion in revenue during the initial three months of the fiscal year. That was a 0.5% or $10 million above the estimate issued in April. If all goes as assumed, he said, the state would spend only $9.4 billion of $10.3 billion in revenue flowing into the state general fund during the year ending June 30, 2024.

“So, what does that mean?” Proffitt said. “That means that as we head into our next revenue estimate meeting in about a month, we’re going to look this and say, ‘Ok, for fiscal ’24 we’re tracking pretty close to what we thought we were going to see.’ Do we really need to make any changes to fiscal ’24? Maybe some shifts between the buckets, but overall we seem to be on a relatively strong trajectory. We think we have the forecast right.”

Lack of volatility in state revenue, primarily drawn from sales and income taxes, would offer a clear view of the economic horizon as state economists updated the revenue forecast in November. Consistency would help Gov. Laura Kelly and the Kansas Legislature in January as they began collaboration on a new state budget. Lawmakers are certain to propose major tax cuts during the 2024 legislative session that would substantially draw down the projected $2.6 billion ending balance.

Kelly’s tax cut agenda

On Monday, the Democratic governor said she was heartened state tax collections in September totaled $991 million or $42 million more than predicted for the month. That September total was $30 million more than what the state received in September 2022.

“Because of my administration’s work to put our state on solid financial footing, we have been able to grow our economy and make historic investments in schools, roads and law enforcement,” Kelly said. “Now, it’s time to give money back to Kansans through responsible tax cuts.”

She urged the Republican-led Legislature to reduce property taxes, grocery sales taxes and drive down taxes on retirees. GOP House and Senate leaders have said they would advance a plan to create a single state income tax rate for individuals, which would replace the state’s three-bracket system based on income level. Kelly said she remained opposed to the flat tax model.

In addition, Kelly was poised to recommend additional spending on K-12 special education and to expand eligibility for Medicaid to working-poor families. Both ideas didn’t get sufficient traction in the 2023 session.

Proffitt, who also serves as secretary of the Kansas Department of Administration, said Kansas had recovered jobs lost when COVID-19 crippled the economy three years ago. In that health calamity, Kansas surrendered 158,000 jobs in the public and private sectors. In the past three years, he said, Kansas added 172,000 jobs. He said 112% of that post-COVID-19 expansion was within the private sector of the economy.

He said the Kansas unemployment rate contracted from double digits during the pandemic to 2.7% in August. The rate could rise under the state’s forecast to 3.4% in 2024 and 2025, he said.

He said Kansas had two job openings for every available person in the workforce. Part of the explanation was 41% of people 55 or older were in the workforce, compared to 68% among people 16 to 24 years of age and 87% of those 25 to 54 years old.

“That’s a buyer’s market,” Proffitt said. “Anytime an employer puts out a job posting, there’s only a half a person that’s qualified for that job posting.”

A national perspective

Conference attendees were presented a national economic perspective by Joseph Gruber, executive vice president and director of research for the Federal Reserve Bank of Kansas City. It serves Kansas, Colorado, Nebraska, Oklahoma, Wyoming, 43 counties in western Missouri and 14 counties in northern New Mexico.

Gruber said the underlying narrative of the U.S. economy hadn’t changed profoundly in the past year. When he gave a similar presentation in 2022, he pointed to strong demand, limited supply and inflation. The key question one year ago was how aggressively the Fed could raise interest rates in an attempt to soften inflation.

“I think at the end of last year a lot of people were calling for recession this year,” he said. “They were expecting recession by the middle of this year. They pushed it back and back and back. We’ve had really resilient growth at the same time we’ve actually made considerable progress on inflation.”

He said inflation was trimmed from 7% in June 2022, which was near a 40-year high, down to 3.5%. That’s still above the Fed’s target of 2% target, he said.

The inflation puzzle

Movement in the cost of energy, strength of supply chains, evolution of the labor market and residential rental prices would likely to be influential considerations in the effort to further trim inflation, Gruber said.

Gruber said he was skeptical contraction in oil prices would contribute much more to lowering inflation. He said there was a big spike in the price of goods, but not services, during COVID-19 as factories shut down, transportation networks bottlenecked and demand stayed strong.

Supply chain disruptions have largely been resolved, he said. The services or labor side of the economic equation must come into balance to drop inflation, he said.

He said the U.S. labor market remained tight despite a reasonably low unemployment rate. He said lack of child care was a big reason women left the labor market during the pandemic. Decline in immigration and exit of people 65 years of age or older from the workforce where factors, he said.

“Immigration is pretty much back to normal,” he said. “Labor force participation by working-age women actually is at an all-time high. The place we still have a gap where we haven’t made up everything is that 65-plus population.”

Another consideration in terms of inflation was the rise in housing rental prices, Gruber said. Rental costs have dipped, he said, but it was a lagging indicator in the economy.