DALLAS — Moody's Investors Service downgraded Kansas Wednesday, dropping the state's issuer rating to Aa2 from Aa1, citing the state's weak economy and piecemeal approach to balancing the state budget.
As a result, Moody's downgraded to Aa3 from Aa2 $1.23 billion of subject-to-appropriation bonds, and also downgraded $1.6 billion of state highway revenue bonds from to Aa2 from Aa1.
Outlooks returned to stable from negative.
"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 actually required contributions," Moody's lead analyst Lisa Heller wrote.
At the urging of Republican Gov. Sam Brownback, the Kansas Legislature cut income tax rates in 2012, reducing the top rate to 4.8% from 4.9% and the bottom rate (on incomes below $15,000) to 2.7% from 3%. The 2012 tax cuts eliminated the top rates of 6.25% and 6.45% and consolidated rates at 3% and 4.9%. Tax measures passed in 2013 ratchet tax rates lower every year through fiscal 2018.
"Depletion of financial reserves will likely result from the tax cuts in future years, without offsetting actions," Heller wrote.
"Reduction in year-end balances is a significant credit weakness compared with similarly rated entities who have begun to rebuild rainy day funds again," she added. "Inability to maintain a positive, audited general fund balance position would indicate that the state is also no longer adhering to its traditionally conservative financial management practices."
Heller said that the downgrade of state highway revenue bonds is based on Moody's view that Kansas Department of Transportation revenues are "insufficiently insulated" from state general operating needs.
Revenue shortfalls or liquidity needs could pressure KDOT's outstanding variable-rate debt portfolio, which is among the largest of state highway bond issuers, the analysts said.
In the wake of the tax cuts, total tax receipts are dropping from $6.33 billion last year to $5.97 billion this year, and then staying relatively flat next year at $6.05 billion, according to state budget analysts.
The Moody's downgrade came as Kansas lawmakers were analyzing an April report showing state revenues lagged $92 million behind projections, potentially undermining an earlier economic forecast showing higher revenues.
The drop in collections was announced hours after a House committee approved a budget increasing spending for disabled Kansas residents based on a forecast of $177 million more in available revenue for the next 18 months.
Before the revenue report, legislators were projecting cash reserves of more than $350 million on June 30, 2015.
Kansas Revenue Secretary Nick Jordan and Republican Gov. Sam Brownback blamed President Barack Obama for the state's plight, saying that federal tax increases and a weak national economy reduced state revenues.
"The failed economic policies of the Obama administration are affecting states throughout the nation," Brownback said in a prepared statement about the revenue report. "It is more important than ever that we continue our focus on growing jobs and creating a business-friendly environment that benefits Kansans."
Democrats responded that tax cuts by Brownback and the Republican-led Legislature were the cause of the revenue decrease.
"This isn't someone else's fault. It is a self-inflicted budget crisis that is a direct result of Brownback's failed experiment and the people of Kansas are once again suffering the consequences," Senate Minority Leader Anthony Hensley said in a written statement.
While the Legislature is still wrestling with budget issues, Brownback has already signed a $129 million education bill to satisfy a Kansas Supreme Court decision on state aid to school districts. A lower court is scheduled to review the bill July 11 to determine if it complies with the state Supreme Court ruling.
Standard & Poor's rates Kansas AA-plus with a stable outlook.
Kansas' economic recovery has been slower than many of its peers, according to Moody's, with an economy that is only expected to enter expansion mode in 2015.
Moody's Analytics estimates that the state has regained about three-quarters of jobs lost to the recession. Unemployment is relatively low at 4.9% versus the national average of 6.7% as of February 2014, but employment growth has been sluggish, analysts noted, in part because of the state's slow population growth.
