Doubling Down In Kansas

Are you familiar with the expression: if you find yourself in a hole, stop digging? The humorist Will Rogers popularized the witticism during the Great Depression, when he joked about government economic policies that appeared to be perversely designed to take bad situations and make them far worse.

Although Rogers hailed from Oklahoma, that advice could easily apply to the current state government of Kansas. Just last month, the fiscal engineers of the Sunflower State’s government budget made a decision that may come back to haunt them.

The tale of Kansas’ fiscal woes began two years ago, when newly elected Governor Sam Brownback’s massive tax reductions first took effect. He promised citizens that the tax cuts would serve as a “shot of adrenaline” that would jump-start the state’s economic prosperity.

But the growth spurt never emerged, and the tax reductions on existing income caused an immense government fiscal deficit. It also worsened the state’s unfunded pension liability, which soared to $9.8 billion.

Last month, in an attempt to reduce this $9.8 billion shortfall, the state decided to borrow $1.5 billion and contribute it to the pension plan. Budget Director Shawn Sullivan claimed that the transaction would prove to be beneficial because the fund’s “investment earnings would rise more than enough to offset annual bond payments.”

Huh? What did he mean by that? Well, Kansas officials are gambling that their investment acumen will generate sufficient total profits to pay off the bonds and still contribute significant surplus funds for the plan.

Is there anything wrong with such a gamble? In essence, the strategy is analogous to taking out a fixed mortgage on one’s house and investing the proceeds in the capital markets. On the one hand, there is always a chance that the capital markets will soar and generate huge profits. But on the other hand, there is also a chance that the markets will collapse, leaving the investor with no options for repaying the debt. And that scenario would result in a financial catastrophe.

Is it possible that Kansas’ investment strategists will actually make brilliant decisions that reduce the pension shortfall? Well, sure … that’s indeed possible. In fact, anything is possible. But if these investment strategists had made brilliant choices in the past, they probably would not have produced such a deep pension shortfall in the first place.

Nevertheless, the Kansan state government appears to have doubled down on its recent debt-plagued fiscal decisions by voluntarily plunging itself $1.5 billion deeper into debt. Few individuals — in fact, even few gamblers — are likely to bet on the state returning to fiscal health any time soon.