Topeka Moody’s Investors Service has downgraded Kansas’ state bonds, citing the state’s sluggish economic recovery, the use of non-recurring measures to balance the budget and revenue reductions resulting from tax cuts.
In addition, the firm downgraded Kansas’ highway revenue bonds because Kansas Department of Transportation revenues are being shifted to support other areas of the state budget.
In all, the downgrade affects more than $2.8 billion of outstanding bonds. A lower credit rating could mean higher interest rates on debt.
Moody’s says the outlook for the state’s debt is stable but that the downgraded rating incorporates risks from Gov. Sam Brownback’s plan to eliminate the state income tax. The service also cited significant underfunding of the state pension system.
The state’s economic picture doesn’t look bright, according to Moody’s.
“Flat population growth, tempered government spending in health care and manufacturing uncertainty will likely mean underperformance in employment and income growth compared to the nation in the long run,” the agency said.
In a statement, Brownback’s spokesperson Eileen Hawley focused on the positive aspects of the Moody’s report, which included a state unemployment rate of 4.9 percent while the national average is 6.7 percent.
Hawley also said he inherited an under-funded pension system and has worked to increase contributions to the plan.
Overall, she said, “This points to the importance of growing our economy, creating jobs and controlling our spending.”
The downgrade was the second hit of bad economic news for the state this week.
On Wednesday, as legislators reconvened for the wrap-up session they learned that total Kansas tax receipts fell sharply in April, dropping 30 percent below April 2013.
Republicans in the Legislature passed and Brownback signed cuts in state income tax rates and repealed state income taxes paid by nearly 200,000 business owners. The state income tax accounts for the largest share of revenue the state receives.
For April, the state collected $226 million in individual income taxes. That was half of what it collected in April 2013, and it was 28 percent less than budget experts thought the state would get in an estimate put out less than two weeks ago.
Moody’s downgraded the state’s issuer rating to Aa2 from Aa1 and notched ratings to Aa3 from Aa2 on the state’s $1.23 billion of outstanding bonds that are subject to appropriation, and $1.6 billion of state highway revenue bonds from Aa1 to Aa2.
Kansas Aa2 rating puts it below the national average.
Brownback has said his tax changes would stimulate the economy like an adrenaline shot.
But Moody’s said “aggressive growth assumptions based on elimination of income tax” could make the bond rating go down further.
Moody’s said that some states, Florida, Alaska, and Texas, are doing fine without a state income tax.
“However, eliminating a tax that has been in place for many years and has accounted for a large share of revenue entails risks. In Kansas’ case, income and inheritance taxes have accounted for about half of general fund revenues. As the state income tax is removed, Kansas’ revenue structure will become more dependent on excise and severance taxes and the full economic impact is unclear,” Moody’s said.
Moody’s said the rating could be improved if Kansas increased funding to the state pension system, rebuilt and maintained healthy ending balances and established a trend “of structurally balanced operations.”
Democrats have long complained that Brownback’s tax cuts went too far and would benefit mostly the wealthy.
House Minority Leader Paul Davis, D-Lawrence, and Brownback’s likely challenger in the November election, said the Moody’s report shows, “The governor’s reckless policies have failed and the evidence continues to pile up.”
Senate Minority Leader Anthony Hensley, D-Topeka, said the Moody’s report confirmed that the tax cuts will damage state government.
“Our general fund is just going to go into the tank and this is Moody’s acknowledgement of the dire consequences that we face in the future,” he said. “This report from Moody’s is clearly at the governor’s feet,” he said.
This is not the first time that Moody’s has expressed concern over the Brownback tax changes.
In 2013, Moody’s downgraded nearly $200 million in outstanding debt in the Kansas Department of Commerce’s program known as IMPACT, or Investments in Major Projects and Comprehensive Training.
Moody’s said the income tax cuts put bondholders at risk unless another revenue source was substituted.