AG Derek Schmidt: Prepay $1B in KPERS debt, increase rainy day fund

Legislature should proceed with caution on ‘surplus’

TOPEKA – (January 9, 2022) — Kansas Attorney General Derek Schmidt, Republican candidate for governor, today issued the following statement urging the Legislature to proceed cautiously in responding to projected large increases in state revenues:

“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.

“We’ve seen these sorts of rosy projections before. When I served as Senate Majority Leader, state revenue projections showed money would flow robustly into state coffers for years to come. It didn’t. The 2008 financial crisis came abruptly, and everything quickly changed. That led in 2009 and 2010 to painful budget cuts and broken promises in many important services and to the then-largest sales tax increase in state history (over my objection).

“Let’s not do that again. Projected revenues sometimes never actually appear. So proceed conservatively.

“There is added reason for caution this time around. Nearly EVERY state currently has booming revenues because of reckless spending decisions made by Congress and the Biden administration, which are spending money at breakneck pace, on top of federal monetary policy that for years has inflated the nation’s money supply like a balloon.

“The point is that Kansas is riding a national wave: 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.

“Kansas should responsibly prepare for that day now. Far better to proceed cautiously knowing that if revenues in fact continue to grow as projected, Kansas can consider further priorities in future years. A measured approach is better than overcommitting now and having to break promises in the future.

“To that end, I recommend the following:

“First, Kansas should act boldly to dedicate at least $1 billion this year to pay off state debt in the Kansas Public Employees Retirement System (KPERS). The state has made significant progress in recent years in shoring up KPERS, but Kansas still owes a further $5 billion in unfunded liability to the system. That is a legal debt that eventually must be paid, and aggressively prepaying at least $1 billion now will save taxpayers hundreds of millions of dollars in debt service – more than $400 million saved over the next five years. That would benefit taxpayers, current and future public retirees, and all Kansans who rely on stable state services because it would free up more than $70 million each year to help sustain public education, transportation, and social services or make future tax relief possible. It also would bring the state public pension system to more than 80 percent funded – an industry target we long have worked toward. This fiscally responsible approach stands in stark contrast with unwise and failed proposals in recent years to increase debt in the KPERS system by ‘reamortizing’ payments at a cost to taxpayers of more than $4 billion in added debt service.

“Second, Kansas should set aside a significant amount of money in its rainy day fund to help protect vital state services like public education, transportation, and social services when the next economic downturn inevitably comes. If Kansas had a rainy day fund when the bottom fell out of the economy in 2008, some of the broken promises to Kansans who rely on state services – or perhaps the enormous tax increase of 2010 – would have been avoided or at least minimized. The more the better, but setting aside at least $500 million for a rainy day seems possible and prudent.

“Even after taking the responsible steps above for long-term stability, other important state priorities still can be met with funds currently available. For example, it will remain possible to:

  • Significantly reduce or eliminate the sales tax on groceries, a policy I previously called for and that long has enjoyed bipartisan support. It may also be possible to reverse the remaining 2010 overall sales tax rate increase.
  • Protect our long-term investment in transportation and permanently close the ‘Bank of KDOT’ by ending transfers out of the transportation fund.
  • Keep a sufficient ending balance in the state’s general fund to avoid cash-flow problems.
  • That still leaves room for the Legislature to responsibly support many of the other core priorities important to Kansans such as mental health, education, public safety and disaster relief for areas damaged by the December wildfires.”