Analysis: Brownback’s view of Kansas economy as a ‘three-legged stool’ no longer accurate
TOPEKA — During a meeting last week of the State Finance Council, Gov. Sam Brownback used a common analogy to describe the Kansas economy.
“You recall the comment about the Kansas economy is a three-legged stool,” he said. “You’ve got agriculture, oil and gas, and aviation. You and I have been around the state for a long period of time. Those are the three primary legs of the stool.”
He made that comment during an exchange with Senate Minority Leader Anthony Hensley, D-Topeka, who was pressing Brownback to admit that the tax cuts that the governor championed in 2012 and 2013 have not worked as planned and that those failures are the reasons for the state’s budget shortfalls.
But Brownback rejected that idea, arguing that the state is going through a rare cycle when all three of the industries he says are the major underpinnings of the Kansas economy are going through downturns.
He cited the recent collapse of oil and gas prices, record low farm commodity prices, and recent mergers and consolidations in the Wichita-area aviation industry.
“So your three primary legs of the Kansas economy have been in great difficulty all together,” Brownback said. “Aviation has struggled for several years, but ag and oil were pretty good prior to that, but last year it was in tremendous difficulty.”
The phrase “three-legged stool” has been used for decades to describe the Kansas economy. But a review of economic data for the last several years shows that, with the exception of the aviation industry, it is no longer an accurate description of Kansas in the 21st century.
The Boeing Company first set up shop in Wichita in 1927. That same year, Clyde Cessna teamed up with two other partners to form Cessna Aviation, which later became a leading manufacturer of small aircraft.
But it was World War II that gave the industry a boost as the U.S. military moved many defense manufacturing operations to the interior of the country to keep them away from possible enemy bombardment from the coasts.
As recently as the 1990s, Boeing employed about 40,000 people and was the largest private-sector employer in Kansas. But in 2005, Boeing, now a global manufacturer of both commercial and military aircraft, began scaling back its Kansas operations by spinning off its commercial division to Spirit AeroSystems, which was once a division of Boeing but is now an independent company.
Then in 2012, Boeing announced it was closing its military operations in Wichita, moving them to Oklahoma, Texas and Washington state.
According to the Kansas Department of Commerce, Spirit was still the largest private-sector employer in Kansas in 2014, with roughly 10,900 employees. Cessna and Bombardier, which now owns Learjet, were also ranked in the top 11 employers.
Spirit spokesman Jarrod Bartlett said the company’s employment numbers are still about the same, at 10,830.
A major source of concern for the Wichita aviation sector recently has been Bombardier, whose stock is currently trading at under $2 per share.
“Learjet, which is owned by Bombardier, is having a great struggle at this point in time. They make great products, wonderful products, but they haven’t been selling very well,” Brownback said.
Bombardier officials could not be reached for comment Monday, but, according to corporate statements, the company did go through a major restructuring in 2015, issuing $868 million in new stock and taking out $2.25 billion in unsecured notes, some of which were used to pay off previous debt, but much of which was used for “general corporate purposes.”
For 2015, the company as a whole reported earnings of just 14 cents a share, down 71 percent from 2011.
Agriculture, oil and gas
Kansas has long been thought of as an agricultural state, and it is still common to hear people, including many legislators, refer to it as the state’s “biggest industry.”
Likewise, the oil and gas industry once played a significant part in the Kansas economy, and it continues to play a major role in some areas of the state where oil and gas production occurs.
But in terms of their overall impact on the Kansas economy, or on state tax collections, there is little evidence to suggest that agriculture and energy production are the major players they once were.
According to data from the U.S. Bureau of Economic Analysis, in the fourth quarter of 2015, the entire agriculture mining sectors combined accounted for only 4.3 percent of the state’s overall economy and just 5 percent of the private-sector economy.
The largest private-sector industries in Kansas, according to BEA, are manufacturing, including aircraft manufacturing, which makes up 15 percent of total Gross State Product; real estate and rental and leasing, which accounts for 10.6 percent; and wholesale and retail trade, which together make up 10.5 percent.
Government services, the public-sector slice of the economy, accounts for 15.3 percent of the state’s total economy.
During his comments last week, Brownback cited a recent study that he said showed the average farm income in the United States was less than $5,000 in 2015.
“Under $5,000, and that’s your second leg of the Kansas economy,” he said.
But the study, by the U.S. Department of Labor, was a survey of farm workers, not of farming operations, and therefore included the incomes of anyone who works on a farm, including migrant farm workers.
According to the U.S. Department of Agriculture, farm households earn income from a variety of sources, both on and off the farm, and most farm households earn about 86 percent of their income off the farm.
USDA’s projections for 2016 predict average farm household income in 2016 at $128,237, up 3.8 percent from last year, and well above the U.S. average household income of $75,738.
But the report did say most farm households can expect to earn only about $17,769 from their farming operations.
Brownback also cited recent declines in oil and gas prices as one reason for declining state revenues. But direct taxes on oil and gas production account for only a tiny part of the state’s overall tax mix.
The state of Kansas levies a severance tax on oil and gas production. The most recent report from the Department of Revenue showed that during the first 11 months of fiscal year 2016, Kansas collected $20.2 million in severance taxes, which was 0.4 percent of all revenues collected.
And even in fiscal year 2012, when oil and gas prices were at their peak, the governor’s Budget Office projected that severance taxes would make up only 1.6 percent of total revenues.
Oil and gas production also generate property taxes, both for the state, which levies a statewide 20-mill tax for public schools, and local governments, which rely more heavily on property taxes to fund their entire budgets.
But David Jacobson, a spokesman for Moody’s Investor Services, which rates Kansas’ bond issues, said Kansas has never been considered an “energy reliant state” in the same category with states like Alaska, Texas and Oklahoma.
Moody’s recently lowered its credit outlook for Kansas from “stable” to “negative,” but Jacobson said that had nothing to do with declining energy prices or the agriculture economy.
“We say Kansas’ challenges are more just a revenue issue,” he said. “It’s had tax cuts, a lot of trouble balancing the budget, and a habit of underfunding its pensions.”