An international rating agency revised its credit outlook for Kansas to negative on Tuesday and criticized the two biggest financial moves the state expects to use to keep its budget balanced through June 2017.
The announcement by Moody’s Investors Services came a day after the Republican-dominated Legislature approved a plan that dumps most of the budget-balancing work on GOP Gov. Sam Brownback. The plan is designed to eliminate projected shortfalls totaling more than $290 million in the current state budget and the one for the next fiscal year beginning July 1.
The plan assumes Brownback follows through on previously announced plans to delay 25 major highway construction projects so that he can divert $185 million in road funds to general government programs. It also allows him to delay nearly $96 million in contributions to public employee pensions due this spring, possibly until July 2018.
Moody’s affirmed the state’s Aa2 rating for issuing bonds, but its change in the credit outlook to negative from stable suggests a downgrade is possible.
Another agency, S&P Global Ratings, put Kansas on a “credit watch” last month.
The state has struggled to balance its budget since Republican legislators slashed personal income taxes in 2012 and 2013 at Brownback’s urging in an attempt to stimulate the economy. Both Moody’s and S&P downgraded the state’s credit ratings in 2014.
“The state still has time – and certainly the economic capacity – to reverse its fiscal erosion,” the Moody’s report said, adding that the steps the state takes will be crucial to its ratings going forward.
A downgrade in a credit rating could increase the state’s borrowing costs. Moody’s gives most states higher ratings than Kansas; nine others have the same rating, and only six have lower ones. Thirty-eight states have a stable or positive outlook.
The budget plan approved by legislators assumes that Brownback will make up to $92 million in as-yet-unspecified cuts in its $16 billion budget for the next fiscal year, something Brownback spokeswoman Eileen Hawley noted in responding to the Moody’s report.
Hawley said the state must control spending but education funding and Medicaid health coverage for the poor and disabled accounts for more than 60 percent. Legislators’ plan blocks Brownback from touching aid to public schools.
“We have made considerable progress in slowing the rate of government spending and the budget passed on Monday by the Legislature will further reduce the gap,” Hawley said in an emailed statement.
Dan Seymour, a Moody’s assistant vice president and analyst, said the agency began reviewing its credit outlook for Kansas after Brownback announced in early April that the state would delay $93 million in contributions to public school and community college employees’ pensions at least a few weeks.
The Legislature’s plan allows slightly more contributions to be delayed and gives the state longer to pay them back than under current law. The Moody’s report said deferring contributions essentially represents borrowing from the pension system, calling the move “particularly credit-negative.”
Seymour described deferring pension contributions and diverting highway funds as “unsustainable” moves.
“We saw that the state was struggling to balance its budget every year,” he said.