The day after the state Legislature passed its latest budget bill, the international bond-rating agency Moody’s dropped Kansas’ credit outlook from “stable” to “negative.”
Moody’s cited the state’s use of one-time-only money and pension underfunding – key features of the budget bill passed early Monday – as reasons for caution in investing in Kansas bonds.
“The revision of the state’s outlook to negative from stable reflects the ongoing difficulties it is having restoring structural balance to its budget and getting on a path to sounder funding of its pension liabilities,” said the Moody’s release announcing the change.
“By continuing to balance its budget with unsustainable, nonrecurring resources, including pension underfunding, it is accumulating large and expensive long-term liabilities that it will be paying off for a long time,” the release said.
Overall, the state debt retains its Aa2 credit rating, Moody’s third-highest rating and still considered to be investment grade.
The state has held that position since being downgraded from the higher Aa1 rating in 2014 because of falling tax revenue, unfunded pension costs and the possibility of higher court-ordered spending on education.
Bond rating agencies use positive, negative and stable to give the outlook on a rating’s future potential moves.
A negative rating signals to investors that the state’s credit rating could again head downward, although there’s no guarantee one way or the other.
The budget bill the Legislature passed about 3 a.m. Monday delays $96 million in payments to the Kansas Public Employees Retirement System until June 2018, freeing cash for the state to pay bills through the end of this fiscal year in June.
The budget also envisions sweeping $185 million from state highway funds and leaves Gov. Sam Brownback to cut about $80 million on his own to balance the books.
In its report, Moody’s said factors that could lead to a rating downgrade include “continued underfunding of pension plans and growth in unfunded pension liabilities, along with failure to adopt measures to increase revenues or decrease expenditures sufficient to restore structural balance.”
Moody’s said factors that could help remove the negative outlook include “sustained revenue growth or expenditure cuts leading to structural balance in state finances” and “demonstrated path to sounder funding of pension plans.”
In response to the Moody’s action, Brownback spokeswoman Eileen Hawley blamed the cost of schools and medical services for the poor and disabled.
“We must continue our efforts to control spending which is most affected by the growing costs of Medicaid and education funding, which together account for more than 63 percent of the state’s budget,” Hawley said in a statement.
Hawley praised Monday’s budget bill.
“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 between expected expenditures and revenue as it calls for $92 million in additional spending reductions in FY 2017,” she said.
Rep. Gail Finney, D-Wichita, a member of the House Appropriations Committee, blamed the governor’s tax policy, which zeroed out the income tax for more than 300,000 business owners and substantially reduced the state’s income.
Finney scoffed at the governor’s office citing Medicaid and schools as the problem.
“I’m just surprised Obama wasn’t in there this time,” she said. “You’d think we would be more focused on fixing our tax situation.”
Finney said expanding Medicaid would actually help the situation because it would bring in federal health-care dollars. “It would definitely help our hospitals and medical clinics,” she said.
In addition to placing the negative outlook on the state overall, Moody’s also revised its outlook from stable to negative for Kansas Department of Transportation and some Kansas Development Finance Authority bonds.
▪ KDOT bonds moved from Aa2 stable to Aa2 negative. Because of the practice of transferring money from highways to general expenses, “the negative outlook on the Highway Revenue Bonds … reflects the downward pressure on the state’s general credit quality,” Moody’s said.
▪ KDFA bonds that are backed by legislative approriations moved from Aa3 stable to Aa3 negative, a slightly lower grade than the overall state debt.
▪ KDFA IMPACT Program bonds, backed by allocation of a state wage tax, retained their current rating at A3 negative, an upper-medium grade.
▪ KDFA bonds for the Law Enforcement Training Center, backed with court docket fees, were unchanged at A1 stable.