March 26, 2011 Newsletter

Rural Opportunity Zone

Last week the legislature passed and sent to the governor the Rural Opportunity Zone bill. I expect Governor Brownback will sign the bill very soon. Its purpose is to stimulate in-migration into those Kansas counties which have experienced significant population decline in the past ten years. Those counties are designated ROZ Counties, and the bill provides an income tax exemption for certain out-of-state taxpayers who relocate to those counties It also authorizes the counties to participate in a state-matching program to repay student loans of up to $15,000 for certain students who establish domicile in ROZ counties.

Income Tax Provisions

For tax years 2012-2016, taxpayers would receive a full tax credit against their own state income tax liability, provided they have been:

· Domiciled outside the state for five or more years immediately prior to establishing residency in a ROZ county;

· Had Kansas source income of less than $10,000 for each of the five years immediately prior to establishing residency in a ROZ county; and

· Were domiciled in a ROZ county during the entirety of the taxable year for which the credit is to be claimed.

Tax credits would be denied relative to returns which are not timely filed, as well as for individuals who are delinquent in any tax due to the state or any political subdivision.

Student Loan Repayment Provisions

ROZ counties would be authorized to adopt resolutions prior to January 1, 2012 (and every subsequent year through January 1, 2016) irrevocably obligating the counties to pay half of certain extant student loan costs, up to a maximum of $15,000, in equal increments over a five-year period. A state matching program, subject to appropriations, would provide for matching payments. (If the maximum $15,000 amount were to be adopted in a ROZ county resolution, the state and the county would each repay $7,500 in equal increments over a five-year period, or $1,500 per year per governmental entity.)

Resident individuals would be entitled to apply for the loan repayments relative to payments made to attend institutions of higher learning where they obtained an associate, bachelor or post-graduate degree, provided they have established domicile in a ROZ county on or after the date such county commenced participation in the program, and prior to July 1, 2016. Eligibility for the loan repayment 2-198 program would terminate upon relocation outside of the ROZ county from which initial eligibility was obtained.

My Perspective:

It is very good news that Governor Brownback recognizes the problem of declining population in rural Kansas. In the past ten years, 77 of the 105 Kansas counties have lost population, including every one of the counties in the 118^th District. Click on Kansas in this map to see changes by county. Hover over a county to get a look at changes over time. Here are the 2010 population numbers and percentage population declines for the counties of the 118^th District:

Lane County 1750 -18.79%

Wallace County 1485 -15.09%

Gove County 2695 -12.16%

Wichita County 2234 -11.73%

Ness County 3107 -10.05%

Trego County 3001 -9.58%

Logan County 2756 -9.52%

Rush County 3307 -6.87%

Every one of these counties is now designated as a ROZ county. Economic pressures and technological advances continue to reduce the need for on-farm labor, and so long as the rural Kansas economy is dependent on agriculture, the population declines are likely to continue. If it is any consolidation, Kansas is not alone.

The ROZ initiative is a good first step to attracting people back to rural Kansas, and I have high hopes it will be a great success. But it will take much more to really stem the tide of population decline. Here are just a few of the most pressing needs of rural Kansas:

· An economy that is diversified beyond production agriculture

· Access to quality health care

· A larger supply of decent, affordable housing

· A tax structure that allows main street businesses to survive and thrive

· Universal access to high-speed broadband internet

These are intimidating problems, but I am working with others in the legislature and administration to find solutions.

KPERS Reform

The time has come to make changes to the KPERS retirement system to insure that retirement benefits will be there for public employees when they reach retirement age. The KPERS system is severely underfunded, currently sitting at a 64% fund ratio. Investment bankers like for a defined benefit plan like KPERS to be in the 80-85% fund ratio range. Currently the KPERS unfunded liability is $7.9 billion. Some will claim that the deficit is due to large market losses on investments during the economic downturn of 2008 and 2009. That event was certainly a contributing factor, but the truth is that KPERS has been significantly underfunded and improperly structured for years.

The House has passed a bill that would start to address this problem in several ways:

Increase the cap on employer (state) contributions from 0.6% increase per year to 0.8% increase per year. Each year the employees contribute either 4% or 6% of their salary to KPERS, depending on whether they are a Tier I or Tier II employee. The state’s “match” is much more than an equal match, and is currently designed to increase over time, by a maximum of 0.6% per year. Under the current plan, if the state contribution increases 0.6% per year, by 2033 the state would be contributing 21.37% of the employee’s salary to KPERS, and the school portion of KPERS would still be below the actuarial required contribution! The House bill would step up the rate at which the employer contribution would increase, and this represents a rapidly growing obligation to the state over time.
Decrease the multiplier used to calculate retirement benefits from 1.75 to 1.4. The formula to calculate annual retirement benefit is: average salary x years of service x multiplier. So reducing the multiplier means that the annual retirement benefit is decreased. Two points must be emphasized. The reduction of multiplier is only applied to years of service starting July 1, 2012, and all prior years are still calculated at 1.75 multiplier. Secondly, some may remember that the multiplier has been changed before. In 1993 it was raised from 1.40 to 1.75. The House bill would merely take the multiplier back to what it was prior to 1993. The Senate is also working on a KPERS reform bill. Their approach would leave the multiplier unchanged at 1.75%, but would increase the contribution rate for employees.
Direct that all net proceeds from sale of state-owned real property be used to pay down state and school group unfunded actuarial liability.

Many KPERS employees have contacted me with concerns about what this might mean for their future benefits. Please understand that there are no easy solutions. I have great respect for the members of the House Pensions and Benefits Committee, and I have been impressed with the careful, deliberate approach they are taking in the search for solutions.

Here are the most important points to remember regarding KPERS Reform:

Present retirement benefits are unaffected. If you are currently a retiree, your retirement benefit will remain the same, regardless of what plan might eventually become law.
The magnitude of the KPERS funding shortfall is so great that both the House and Senate plans call for employee “participation” in a solution. The House would reduce the multiplier (reduced retirement benefit in the future) while the Senate would increase the employee contribution rate (greater employee cost now).
If the multiplier is reduced, that will only affect future years of service, starting July 1, 2012.
KPERS investment performance has been quite good recently. In 2010 KPERS investments earned an overall return of more than 14%.

Another component to the House plan was added as an amendment during floor debate. It would change the KPERS retirement plan for future employees from a defined benefit plan (the current KPERS system) to a defined contribution plan. A defined contribution plan would operate similar to a 401(K) retirement plan, whereby employer and employee make defined contributions to the plan, and the employee selects from a menu of investment vehicles for those funds to be invested in. At retirement, there is no defined, or guaranteed, retirement benefit. Instead, the funds that were invested, which grew and compounded over time, are then converted to a stream of retirement income. The amendment passed by a large vote, indicating widespread support among House members for moving to a defined contribution plan. However, since this was added as a floor amendment, the concept did not receive full hearings in committee, and I’m not sure the idea is really ready to be passed into law. The Senate plan does not include this component, and it may or may not survive the conference committee process. If it does not, I expect the concept to be considered again during the 2012 legislative session. I want to emphasize that the switch to a defined contribution plan is only being considered for new employees. No one is talking about converting from defined benefit to defined contribution for present employees.

Office of the Repealer Now Taking Recommendations Online

As part of his initiative to streamline government and make it more efficient, Governor Sam Brownback has established the Office of the Repealer. The Repealer is responsible for uncovering outdated laws and regulations and making recommendations for repeal. Governor Brownback’s office has announced the launch of a new website that allows Kansans to submit their ideas on laws or regulations they believe should be considered for repeal.

Governor Brownback named Kansas Department of Administration Secretary Dennis Taylor as the state’s Repealer. Secretary Taylor and his staff will send a status update within 30 days of receiving a recommendation. To view the new site or to submit a rule or regulation for review, please visit http://repealer.ks.gov.

Big Week Coming Up

The coming week will be the final week of the regular legislative session. We are scheduled to adjourn on Friday, April 1. The legislature will return for a one-week “wrap-up” session on April 27. Both chambers are scheduled to be on the floor working bills all day each day this week. Much work remains, and the biggest issue yet to be resolved is adoption of a budget for the upcoming fiscal year.

The House Appropriations and Senate Ways and Means Committees have both passed out a budget for Fiscal Year 2012, but neither bill has been considered by the full House or Senate. The Senate budget contains significant cuts and is fairly close to the budget recommended earlier by Governor Brownback. The House version contains more drastic budget cuts and aims for a larger year-end balance of $60 million. Can both chambers pass their own budgets? Can a conference committee then resolve the differences and produce a compromise that both chambers can support? There are many unanswered questions. Stay tuned…

Cowboy Logic: Life ain’t in holdin’ a good hand – but in playin’ a poor one well.