Standard & Poor’s Rating Services said Monday it had placed Kansas on a “credit watch” with “at least a one-in-two possibility” of lowering the state’s AA credit rating.
S&P cited the current budget shortfall and concerns about Gov. Sam Brownback’s proposals for filling the gap.
New revenue estimates for Kansas recently projected a $290 million budget shortfall through June 2017. The Legislature is set to address the budget gap when it reconvenes on Wednesday.
The recent downward revision in projected revenue for the state follows successive downward revisions in 2015 and 2016, pressuring Kansas’ finances, said S&P credit analyst David Hitchcock.
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Two of Brownback’s proposals to the Legislature for addressing the shortfall — a tobacco revenue bond sale and a delay in a payment to the state’s employee pension system — could widen the state’s structural budget deficit, Hitchcock said.
“The concern is for the ability to balance the budget the next year if you’re balancing a budget with one-time revenues,” Hitchcock said.
Brownback last week presented three options for the Legislature to consider to address the shortfall. One option would sell off future payments from a tobacco settlement lawsuit to bondholders for $158 million. The second would delay a $99 million payment to the state employee pension system until fiscal year 2018, with a requirement that it be repaid with 8 percent interest.
Those two options “provide a bridge through fiscal years 2016 and 2017, until a new two-year budget is developed addressing structural reform and any implications from the upcoming Supreme Court decision on education funding,” said Eileen Hawley, Brownback’s spokeswoman. “The third option reduces state spending and would create a more structurally balanced budget, as indicated by S&P.”
The third option would reduce spending for most state agencies by 3 percent to 5 percent, including for K-12 public schools and state universities. The cut to K-12 spending would be $57 million.
The rating service said that it would resolve its credit watch based on the Legislature’s action within 90 days. If the state’s structural budget balance “remains challenged,” S&P could lower the state’s AA rating.
Structural balance means that ongoing revenues and ongoing expenditures will match, Hitchcock said. An AA rating is typical for states, he said.
“Quite frankly, it’s scary,” House Minority Leader Tom Burroughs, a Kansas City, Kan., Democrat, said in a statement.
“It’s clear what the Legislature needs to do to create a ‘structurally balanced budget,’ which is why Democrats are fighting for a financially responsible and sustainable plan that doesn’t rely on transfers, fees sweeps, increased bonding, or other one-time dollars,” Burroughs said.
Democrats and some Republicans have called for rolling back a Brownback-led income tax exemption for 330,000 business owners, part of the Republican governor’s plan to cut state income taxes. Brownback has maintained that the state’s revenue shortfalls are due to a sluggish state economy and not due to tax policy.
Credit ratings affect the interest rates that investors demand when they buy bonds that the state issues to finance various activities. A lower rating would raise those rates and make borrowing through bond issues more expensive for the state.
The Star’s Mark Davis contributed to this report.