Moody’s calls school finance ruling a negative credit factor for Kansas

Moody’s Investors Services is calling last week’s court ruling on school finance a negative credit factor for Kansas.

“Although subject to appeal, this ruling is credit negative for Kansas (Aa1 negative) and underscores challenges the state faces as it tries to offset revenue losses from the income tax cuts it enacted last year,” Moody’s said in a report Thursday.

“The latest education-funding ruling comes at an inopportune time for Kansas,” the report continued. “The state last year passed a law that consolidates its personal income tax rates at 3% and 4.9%, removing the 6.45% and 6.25% top rates as well as the low rate of 3.5%. The income tax cuts have been projected by the state legislature to reduce general fund revenues by about $800 million, or 13%, in fiscal 2014, which starts 1 July. In addition, prior sales-tax hikes sunset this fiscal year, returning the state’s sales-tax rate to 5.7% from 6.3%.”

David Jacobson, a spokesman for Moody’s Public Finance Group, said the negative outlook does not have any immediate impact on the state’s credit rating, but signals the possibility that the credit rating could be downgraded in the next 12 to 24 months.

Over the last two years, as the state has cut school funding and pressured school districts to spend down their cash reserves, Moody’s has issued cautionary statements about bond issues from individual school districts.

For example, in 2011 when the Leavenworth school district issued $8.8 million in new bonds, Moody’s assigned the district an Aa3 rating, noting that one of the challenges facing the district was the fact that “Kansas’ restrictive school funding structure limits (the) district’s ability to grow reserves.”

The Lawrence school district, however, received positive marks last month when it refinanced a series of 2006 bonds. Moody’s gave the Lawrence district an Aa2 rating and listed as one of the district’s strengths “stable financial operations with healthy reserves within the parameters of the state education funding structure.” But it noted as a challenge “state per pupil revenue reductions in recent years.”

On Jan. 11, a special three-judge panel ruled that the Kansas Legislature has failed to provide suitable funding for public schools as required by the state constitution. The court effectively ordered the Legislature to add an estimated $442 million in base per-pupil aid to schools.

It also said the entire system of levying local taxes is unconstitutional, unless or until the Legislature resumes funding “equalization” aid that subsidizes those funds for less wealthy districts.

Before the ruling, Kansas was already facing a projected $267 million budget shortfall, mainly because of revenue reductions stemming from income tax cuts enacted in 2012.