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Moody’s downgrades Kansas’ credit rating, citing sluggish recovery, tax plan

  • The Wichita Eagle
  • Published Thursday, May 1, 2014, at 7:31 p.m.
  • Updated Wednesday, July 23, 2014, at 1:12 p.m.

— Citing a sluggish recovery from the recession, risk inherent in the governor’s tax plan and uncertainty over the Legislature’s ability to keep cutting spending, one of the nation’s two major debt rating agencies downgraded Kansas’ credit rating Thursday.

Moody’s Investors Service dropped Kansas from its second-highest bond rating, Aa1, to its third highest, Aa2. The Kansas Department of Transportation also took the same downgrade.

The lowered rating could mean that Kansas and KDOT will have to pay higher interest rates to borrow money for public spending.

“The downgrade reflects Kansas’ relatively sluggish recovery compared with its peers, the use of non-recurring measures to balance the budget, revenue reductions resulting from tax cuts which have not been fully offset by recurring spending cuts, and an underfunded retirement system for which the state is not making required contributions,” the report said.

In addition, the report criticized Kansas for taking money from the state highway fund to pay for general government expenses.

Kansas had held an Aa1 rating for at least the past 13 years and probably longer, said Moody’s spokesman David Jacobson.

Only one other state has been downgraded by Moody’s in the last year, Illinois in June of 2013, he said.

House Minority Leader Paul Davis, D-Lawrence, said the downgrade is “more bad news for the state of Kansas and further evidence that (Gov. Sam) Brownback’s tax plan is failing in a number of ways.”

Davis, who’s running against Brownback, said the state is “lagging behind” its neighbors because of the governor’s plan to try to spur economic growth by cutting tax rates and eliminating income tax on certain business types.

“We need to get back to basics of good public schools, good universities and a transportation plan that not only maintains our infrastructure but creates jobs,” Davis said.

Brownback’s office declined to directly answer questions on the Moody’s downgrade, instead issuing a short statement highlighting areas the rating firm noted as strengths.

“The Moody report also cites our strengths which include fiscal best practices, a continued low unemployment rate, a strong ending balance and a debt service ratio which is lower than the national median,” the statement said. It also noted that the governor inherited an underfunded pension plan for state employees when he took office.

Moody’s calculated the state’s net pension liability at $16.7 billion and said the state is not setting aside enough money to meet its obligations. However, the report was optimistic that laws enacted to put more money in the system will improve performance by 2019.

The report showed less confidence in Brownback’s tax plan, which has elimination of the state income tax as its eventual goal. The report noted income and inheritance taxes have historically made up about half of the state general fund.

“We do not view the lack of a state income tax, in and of itself, as a credit weakness,” the report said. “However, eliminating a tax that has been in place for many years and has accounted for a large share of revenue entails risks.

“As the state income tax is removed, Kansas’ revenue structure will become more dependent on excise and severance taxes and the full economic impact is unclear.”

The downgrade comes on the heels of a dismal report on April tax income that found Kansas had brought in $93 million less than projected for the month. Overall, the state has taken in $480 million less overall than it had by this point in the last fiscal year.

Rating firms pay less attention to a state’s current fiscal problems and more to whether the government has a reasonable plan to solve them, said Ken Kriz, regents’ distinguished professor of public finance at Wichita State University’s Hugo Wall of Urban and Public Affairs.

Moody’s had Kansas on a “negative” outlook since April of 2011, Jacobson said.

While that is not as serious as an actual downgrade, it’s “a shot across the bow that you need to change something,” Kriz said.

Senate tax and budget leaders said they’re more worried about spending than income.

“I’m not overly concerned” about the downgrade, said Ty Masterson, R-Andover, chairman of the Ways and Means Committee. If the state runs into serious fiscal trouble, “we just do what you have to do to make it work,” he said.

Assessment and Taxation Chairman Les Donovan, R-Wichita, said he agreed that “if we don’t get our spending in line with our income, we’re always going to be in trouble.”

Moody’s however, said it’s going to be hard for the state to cut enough.

“The state’s ability to impose budget cuts over time may be limited in several areas: by court mandates in K-12 funding, by federal program mandates in Medicaid and by state legal requirements (for) pension funding,” the report said.

By itself, the Moody’s downgrade shouldn’t have too much effect on the interest rates the state will have to pay to borrow money, Kriz said.

However, he said that could change if the other major rating firm, Standard & Poor’s, follows suit.

“When they both go, that’s when markets start bidding down,” Kriz said.

He said both firms have similar rating methodologies, so “It would not surprise me if Standard & Poor’s at least had an eye on the state.”

Reach Dion Lefler at 316-268-6527 or dlefler@wichitaeagle.com.

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