KEPC WEEKLY UPDATE: Block grants, effects of SB 7, passive income, rural/urban opportunity zones, STAR bonds

In this issue …

  • Block grant for schools given tentative approval
  • What happens to your school district with SB 7?
  • Hearing held on passive income change
  • More tax hearings next week
  • Rural opportunity zones
  • Urban opportunity zones
  • STAR bonds


Block grant for schools given tentative approval

After four hours of debate Thursday, the Kansas House of Representatives approved the proposed K-12 block grant bill and scrapped the 23-year-old school finance formula. The vote came less than a week after the legislation was available for review by the state’s school districts.

The vote was a narrow 64 to 58 approval. A majority is 63 votes. It is possible that the measure could gain or lose votes by the time final action takes place on Friday morning.

The House goes in at 8 a.m. Friday morning. The bill is House Substitute for Senate Bill 7. If it passes, it will go to the Kansas Senate, where it could be passed on a simple up or down vote. That’s not likely to happen until next week.

The legislation is key to dealing with the state budget by restricting the amount of money spent on K-12 for the next few years. Holding that spending flat helps protect the Governor’s 2012 and 2013 income tax cuts. Without it, legislators may have to face the difficult task of raising taxes to fill the budget gap.

The funding for individual school districts in the bill includes retirement funding (KPERS), which makes the money for all local school districts look like increases.

During the debate, House Education Chair Amanda Grosserode (R-Lenexa) was the main presenter of the bill

Here’s what it does:

  • Repeals the current school finance formula.
  • Reinstates the 1.5% allotment (cut) to the base budget per pupil that Governor Brownback cut for the current school year.
  • Replaces the current formula with block grants for the 15/16 and 16/17 school years.
  • Creates a new formula for capital outlay and bonded interest state aid.
  • Honors the current commitments for bonded interest state aid.
  • All funds except bonded interest, special education, and KPERS can be transferred.
  • The bill sunsets June 30, 2017, which forces a future legislature to take some sort of action.

Grosserode argued the current formula leads to uncertainty in the budget process. She said the bill spends more than the Governor’s budget and fully funds the KPERS increase that schools were going to have to fund with existing funds.

Representative Ed Trimmer (D-Winfield) said the bill does not get money to the schools where it is needed. He gave the example that Kansas City would get $235,466 more, while Winfield would lose $256,000. Trimmer said the only local control is in deciding which programs to cut.

There is a strong consensus among education groups that the bill was rushed through the process so that there is not enough time for educators to react. An often cited fact is that most school boards in Kansas have not met since the bill became available.

If it passes, SB 7 does not solve the state’s budget problems and revenue increases are likely still on the legislative agenda. The Tax Committees of the House and Senate are hearing a variety of ideas to find revenue, but holding off on action until May.

That action would be during the veto session after March and April revenues are available and the consensus revenue estimating group has had a chance to meet and adjust their predictions.


What happens to your school district with SB 7?


Operating Funds Summary  - 2015 block grants SB 7_Page_1We have a chart that shows just that but it’s not from the State Department of Education. It was developed by a former school district financial person who was able to put the numbers together for each district in a way that has not been provided by the state.

We believe it gives a better picture of what school districts face because KPERS payments are subtracted along with virtual aid. It also shows the original budget state aid for each school district, as passed last summer (before the Governor’s allotments and the rescission bill).

Column 1 is the 2014-15 enrollment.

Column 2 is the original state aid budget.

Column 3 is the state aid budget for the rest of this year with Senate Bill 7

Column 4 is the state aid loss or gain for the rest of this year with Senate Bill 7.

Column 5 is the 2015-16 state block grant.

Column 6 is the loss or gain for 2015-16 compared to this year.

Column 7 is the 2016-17 state block grant.

Column 8 is the 2017-17 state aid loss compared to the original 2014-15 state budget.

Don’t let the above explanation scare you. The chart is really easier to understand once you look at it.

Here’s the link to the chart.


Hearing held on passive income change

After the House debate on school finance, the House Taxation Committee met Thursday afternoon to consider HB 2392, which modifies the 2012 income tax law to allow passive income taxation.

The committee heard the state could pick up an estimated $65 million by adjusting this part of the break for business income. Passive income is rental income or income from a business in which a person does not actively participate.

There were no proponents of the bill during the hearing.

It was opposed by the Kansas Chamber of Commerce. Eric Stafford of the Chamber argued the state should be looking at being more efficient before raising taxes.

Dan Murray, Kansas State Director of the National Federation of Independent Business, also opposed the bill, saying it injects uncertainty into business.

Gary Allerheiligen of the Kansas Society of CPAs was a neutral testifier. He said oil well royalty income is passive, as well as oil and gas income. Allerheiligen said it would likely also impact non-residents with interest in a Kansas business.

A similar hearing was held earlier Thursday in the Senate Assessment and Taxation Committee on a bill that is essentially identical. It’s Senate Bill 260.


More tax hearings next week

  • On Monday, the Senate committee hears SB 257, which puts a ten-year limit on property tax exemption for renewable resources technologies.
  • On Tuesday, the committee considers SB 270, which deals with tax credits for low income student scholarships enacted as part of last year’s school finance legislation. The bill appears to make the money available to a private school, not just an individual student attending a private school.
  • Thursday’s scheduled hearing is on SB 261, which imposes the sales tax on gas, electricity, heat and other fuel sources for residential premises and agricultural use.

Meanwhile the House Taxation Committee has this activity scheduled:

  • Monday will see an informational hearing on sales tax exemptions.
  • Tuesday is HB 2399, which increases the sales tax rate to 6.3% from the current 6.15%. However, the rate returns to 6.15% on July 1, 2018.
  • On Wednesday, the committee will hear HB 2400, which repeals the local ad valorem tax reduction fund. Lawmakers have not put any money in the fund for several years. It was designed to provide property tax relief by sending state revenue to local governments.
  • There’s another tax increase bill on Wednesday, HB 2401. It imposes an excise tax on ethanol production and electricity generated by renewable resources.
  • Thursday sees a hearing on HB 2396, which imposes a ten-year limit on property tax exemptions for renewable energy resources or technologies.


Rural opportunity zones

A couple of bills on rural opportunity zones (ROZ) were heard in the House Taxation Committee this week.

HB 2298 removes the sunset for the program. It’s set to expire after tax year 2016. There are currently 77 participating counties in the program

The Commerce Department testified the program has been a compelling reason for some people to move to and stay in Kansas. There are 330 individuals who will receive income tax waivers. The estimated economic impact is more than $44 million.

The committee also held a hearing on HB 2367, which would include Miami County as a rural opportunity zone.


Urban opportunity zones

We are getting our first look at the Governor’s proposal to create “urban opportunity zones” this week. It’s in House Bill 2406, just introduced on Wednesday.

The bill only impacts these zip codes within cities:

  • 66101 (Kansas City, Kansas)
  • 66102 (Kansas City, Kansas)
  • 66104 (Kansas City, Kansas)
  • 67210 (Wichita)
  • 66603 (Topeka)

These are supposedly urban core areas. It provides tax credits for investment, but the legislation is not clear because the language is imbedded in the rural opportunity zone statutes.

The Wichita zip code (67210) has a lot of people scratching their heads. It’s Southeast Wichita, including the Planeview area and parts of Oaklawn, but not all of it.

No one would argue that Oaklawn and Planeview need the help, but McConnell Air Force Base and Spirit Aerosystems are also in that zip code, along with a considerable rural area. Not included are areas of Northeast Wichita that most in that city would consider prime candidates for such legislation.


STAR bonds hearing held

A hearing was held Thursday afternoon on HB 2402

The bill says metro areas which are defined as “blighted areas” by statute have to qualify for STAR bonds with a minimum $25 million capital investment and $25 million in project gross annual sales.

Another new section says 0.05% of the revenues collected are to be sent to a Department of Revenue “STAR Bond administration fund.”

Meanwhile, there’s considerable angst about the use of STAR bonds to purchase Topeka’s Heartland Park to save it.

Heartland Park contains a dirt track, drag strip and road course. The National Hot Rod Association holds drag races at Heartland Park May 22 to 24 this year. It’s an event that brings many competitors and race fans to Topeka. In the past (and probably this year) and legislators are often kicked out of their hotel rooms and end up searching for lodging if the legislature is still in session.

A Legislative Post Audit cited several areas of concern and recommended some changes to the STAR Bonds law. The Post Audit staff is being requested to draft a bill to be introduced. One of the items for consideration would require economic impact studies to be done by outsiders.


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