A major rating agency on Tuesday downgraded Kansas’ credit rating for the second time in two years because of the state’s budget problems.
S&P Global Ratings dropped its rating for Kansas to AA-, from AA, three months after putting the state on a negative credit watch. S&P also dropped the state’s credit rating in August 2014.
Forty-one states now have a higher rating from S&P. Only three – Illinois, New Jersey and Kentucky – have worse ratings. The ratings agency cited the state’s lack of cash reserves, even after multiple rounds of budget adjustments over the past year.
“The downgrade reflects what we believe to be structural budget pressures,” S&P credit analyst David Hitchcock said in the agency’s statement.
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Kansas has struggled to balance its budget since Republican Gov. Sam Brownback successfully pushed the GOP-dominated Legislature to cut personal income taxes in 2012 and 2013 in an effort to stimulate the state’s economy.
“It’s just the fundamental, ongoing budget crisis that’s been caused by Sam Brownback’s failed tax experiment,” said state Senate Minority Leader Anthony Hensley, a Topeka Democrat. “The sooner they acknowledge that, the better off this state will be.”
Brownback blames continuing shortfalls in monthly tax collections on slumps in agriculture, energy production and aircraft manufacturing. He contends that the tax cuts have blunted the effects of broader economic trends. His administration also has noted the state’s low unemployment rate – 3.8 percent in June.
The S&P report cites the state’s ongoing diversion of funds for highway projects to general government programs and says the state continues to underfund pensions for teachers and government workers.
State Budget Director Shawn Sullivan said he takes issues with both criticisms but acknowledged during an interview that Kansas must do more to bring spending and revenues in line with each other. He also said the state needs to build up cash reserves that have been depleted by shortfalls in tax collections.
“The administration doesn’t want to keep continuing the cycle that we’re in now,” Sullivan said. “I feel like we need to fix this and put ourselves on a better financial footing.”
Brownback spokeswoman Eileen Hawley said in a statement that the governor would work with lawmakers “to address higher than anticipated government expenditures, caused in part” by state Supreme Court orders on school funding.
An education funding lawsuit is still before the high court, with the justices considering whether legislators are required by the state constitution to spend hundreds of millions of dollars more than the $4 billion-plus a year in current state aid to public schools. S&P said a ruling could provide “additional budget pressure.”
Senate President Susan Wagle noted in a statement that “clearly markets are growing more concerned about Kansas’ ability to pay our bills. We must tighten our belts and live within our means. Kansas must once again return to its conservative roots and be a national leader in fiscally responsible budgeting and management.”
Another major ratings agency, Moody’s Investors Services, changed its credit outlook for Kansas in May to “negative” while affirming its rating of Aa2. Moody’s also downgraded Kansas’ rating in 2014.
On S&P’s scale, an AA rating still suggests that the holder’s ability to meet its financial obligations is “very strong.” Sullivan said while downgrades can increase the state’s borrowing costs, the 2014 actions didn’t and Kansas doesn’t plan any major bond issues in the near future.
“I think it has more of a perception-public opinion effect more than anything else, more than a practical effect on our ability to borrow,” Sullivan said.
Both S&P and Moody’s have criticized Kansas for not bringing its revenues and spending into line with each other – and its diversion of highway funds to the general fund. Sullivan said it’s unfair to see diverted highway dollars as a one-time source of funds to help balance the budget because the state has done it regularly for years.
He also took issue with the criticism of Kansas for underfunding its public pension system, which includes delaying nearly $96 million in payments otherwise due under the current budget. Sullivan noted that with funding improvements mandated in 2012, the state is spending significantly more on pensions than it did in the past.
“We’re being punished for years and years and years of underfunding,” he said.
Contributing: Bryan Lowry of The Eagle