Kansas Governor Sam Brownback became a hero to conservatives when he slashed taxes during his first term, but he’ll soon be paying the price for that popularity. His state faces a deficit of about $280 million this year, and a whopping $648 million in the fiscal year beginning in July.Brownback will get the money by cutting agency expenditures and transferring money from various state funds, including the highway fund and the Department of Health and Environment fee fund. All these cuts have met with resentment, especially his decision to redirect some of the city’s pension contributions into the breach, instead of into the pension fund as promised. As Bloomberg reported last week:
Brownback, a Republican who starts his second term in January, last week proposed shortchanging the state’s pension contributions by $58 million to close a $280 million budget hole caused in part by tax cuts the governor championed. Kansas, with the fifth-weakest pension system among U.S. states, had its issuer ratings downgraded by Standard & Poor’s and Moody’s Investors Service this year.To close a $7.35 billion funding shortfall, the state needs to keep commitments that were part of a 2012 pension overhaul, said [Kansas Treasurer Ron] Estes, a Republican who also won re-election last month. The plan called for more funding from the state, including revenue from casinos it owns, and raised the amount employees pay.
And how will Brownback fix the pension shortfall now on his hands? He’ll sell bonds, which is no safe bet:
The strategy is to invest the proceeds [from the bond sales], usually in stocks, and earn more than it costs to repay bond investors. The approach can backfire if issuers borrow when equities are at historic highs, said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. The S&P 500 Index this week posted its best two-day gain in more than three years.“There are instances where they can work, but they can be risky financial tools for cash-strapped borrowers,” Aubry said in a phone interview. “They’re gambling on the market and should be undertaken by those with the appetite for the risk and the ability to absorb the risk.”
The Governor is also looking at other ways to revivify the pension fund; one option is “converting pension benefits into annuities managed by a private insurer,” the AP reports.Next year is shaping up to be a rough one for the newly-reelected governor. Will his tax cuts survive the political fallout? We’ve called Brownback’s ascent in Kansas a “red dawn” for good reason: it can’t last forever.