DALLAS — Standard & Poor's downgraded Kansas' issuer credit rating to AA from AA-plus Wednesday, retaining a negative outlook, citing income tax cuts that have not been matched by reduced spending.
"The negative outlook reflects our belief that there will be additional budget pressure as income tax cuts scheduled in future years go into effect, or if midyear revenue shortfalls resume, although the state recently announced a small positive revenue variance for July," analysts David Hitchcock and Henry Henderson wrote in the ratings report.
The downgrade follows a similar action from Moody's Investors Service May 1. Moody's returned the outlook to stable after lowering Kansas' issuer credit rating to Aa2 from Aa1.
The state's income tax cuts have generated controversy during this election year, with Republican Gov. Sam Brownback's Democratic challenger, Paul Davis calling them a "failed experiment." Brownback blames President Obama's actions on the federal budget for causing the state's problems.
Brownback promoted the income tax cuts in 2012 as a means of stimulating the economy.
"Recent shortfalls in income taxes will leave both fiscal years 2014 and 2015 with ending general fund balances much less than projected in the enacted fiscal 2015 budget," the analysts said.
"We calculate that if fiscal 2015 revenues come in close to the 2015 budgeted amount, the $333 million revenue shortfall that occurred in fiscal 2014 and is not reflected in the fiscal 2015 enacted budget would leave the state at year-end with a very low general fund budgetary balance of only 0.6% of budgeted disbursements and a drawdown from a fiscal year-end 2013 general fund balance of 11.6% of disbursements.," they added.
Officially, the enacted fiscal 2015 budget projects a strong fiscal 2014 year-end general fund balance equal to 11.6% of expenditures, and 5.9% fund balance at fiscal year-end 2015.
"However, the 2015 budget is based on the most recent state consensus revenue forecast released April 17, and does not include substantial shortfalls in individual income taxes that have occurred since then," S&P said.
" If these shortfalls are subtracted from the 2015 budget balance projections, the ending fiscal 2015 fund balance would fall to what we view as a low level," the S&P analysts wrote. "The next consensus revenue forecast will not be released until November, and we believe the state is unlikely to make midyear budget changes until then."
Top income tax rates fell to 4.8% from 4.9% in tax year 2014, and are scheduled to fall to 4.6% in tax year 2015, with a bigger cut to 3.9% in tax year 2018.
Additional rate reductions beyond 2018 go into effect if state revenue grows faster than 2% per year. Kansas projects the cuts to reduce receipts by $112.7 million in fiscal 2016, $100.6 million in 2017, $163.5 million in 2018, and $305.2 million in 2019.
In his campaign, Davis, the state House minority leader, has called for suspension of the upcoming tax cuts in order to protect schools from funding cuts.
The state is dealing with an ongoing lawsuit regarding the adequacy of state school funding.
The Kansas Supreme Court deemed reductions in state aid to certain poorer districts in fiscal years 2010, 2011 and 2012 as funding disparities. The ruling also disagreed with the state legislature's assertion that school funding cuts were necessary because of the state's large tax cuts.
