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Moody’s Investors Service downgrades state bonds, citing Kansas’ sluggish economy, tax cuts

May 1, 2014, 2:35 p.m. Updated May 1, 2014, 2:35 p.m.


— 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Republicans in the Legislature passed and Brownback signed cuts in state income tax rates and repealed state income taxes paid by nearly 200,000 business owners.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.

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Tracy Rogers 3 years, 11 months ago

Wake the hell up people!!! He's taking us down and blaming everyone but himself.

James Howlette 3 years, 11 months ago

Who knew that a tax policy predicted to cut revenue by about a third would actually cut revenue by about a third?

Bob Forer 3 years, 11 months ago

Everyone except the intellectually honest (read: ignorant) republicans. The intellectually dishonest republicans (Brownie among them) know, or should know, that Laffler's theories have long since been discredited. But when you hand out windfall tax cuts to the wealthy, you have to come up with an rationale besides "i'm paying back my rich crony friends who got me elected."

Cait McKnelly 3 years, 11 months ago

Tell me again how Brownback is so "good for Kansas"?

Phillip Chappuie 3 years, 11 months ago

I would say that the "Roadmap for Kansas" has taken a wrong turn some where down the pike. Hey, just cut taxes more. At least for the big donors and so called lobbyist.

Steve Jacob 3 years, 11 months ago

Kind of hard for Brownback to spin this as Obama's fault with the quote "citing the state's sluggish economic recovery compared with peer states"

Armen Kurdian 3 years, 11 months ago

You've got a federal government that has gone completely haywire with higher taxes, govt. control of health care, and a clear disposition that is not business friendly, and we are seeing anemic GDP growth of 0.1% and a lower and lower workforce participation rate. At least KS' unemployment rate is going down too, much less than the national average. However as much as I'm in favor of lower taxes, something more gradual might have made more sense.

The stimulative effect of zero income tax certainly won't be felt in the first year. It will come later. Hopefully it will encourage more businesses to come to KS or at least not to leave. It's working for TX, though their property tax rates are higher and their total revenues they get from energy royalties is probably huge compared to what we have in KS.

What has been the growth rate in KS real GDP?

Kendall Simmons 3 years, 11 months ago

Uh...exactly what higher federal taxes, what government control of health care, and what clear disposition that is not business friendly are you talking about????

James Howlette 3 years, 11 months ago

So you're saying it's Obama's fault that Kansas in particular has grown more slowly than surrounding midwestern states seeing the same "haywire" federal taxes? Like, he really really hates Kansas specifically, so the economy here grows slower than Missouri? And that even though we business owners have already had the benefit of this "adrenaline shot" tax cut, we won't actually use that money to stimulate the economy for at least another year? I've seen pretzels that were less twisted than that reasoning.

Bruce Bertsch 3 years, 11 months ago

News flash Armen...Huge tax cuts do not stimulate an economy. It is not working for Texas unless you like having the highest HS drop out rate in the US, no pre natal care for mothers and wages above minimum wage. Then there is the $28 billion deficit that Texas covered with accounting tricks. Taxes are not high. They are at their lowest since Warren G Harding was POTUS. Turn off Fox, unjoin the Laffer fan club and join the real world where low taxes are so far down the list on why companies move to a state it doesn't register. Brownback's policies are good for the Koch Brothers and the upper 1%. For everyone else, they are a train wreck.

Richard Heckler 3 years, 11 months ago

"a state unemployment rate of 4.9 percent " This administration has no idea = typical ALEC rhetoric some call these things lies. Aka cooking the books.

Where do income taxes go?

--- Worker's taxes siphoned off by their bosses -

Where is the $47 million tax dollars that belong to Kansas taxpayers?

My congratulations to workers in 16 states – from Kansas to Maine to Georgia, New Jersey to Colorado! Many of you will be thrilled to know that the income taxes deducted from your paychecks each month are going to a very worthy cause: your corporate boss.

--- Rosy Kansas Revenue Numbers Don’t Add Up from Steve Rose Read more here:

--- New Study Rips Kansas Tax Cuts

Richard Heckler 3 years, 11 months ago

"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."

Cooking those books = destructive and reckless management.

When Sam,ALEC,Wal-Mart family and Koch boys get around to issuing pink slips to thousands of teachers the economy will definitely go straight to hell. How will they accomplish this feat? Declare Kansas public education under the jurisdiction of the governor's office. This has happened elsewhere under ALEC led state governments…… of which there are 18 including Kansas.

Lynn Grant 3 years, 11 months ago

Overall, she (Hawley) said, “This points to the importance of growing our economy, creating jobs and controlling our spending.” Thought that's what we were doing the last 4 years under Brownback. Boy I must have been wrong. Or someone was.

Steve King 3 years, 11 months ago

Oh please. Two weeks ago the numbers are positive (fluffy) and then the real numbers come out, our rating is dropped and it's the Presiden'ts fault? What a bunch of garbage.

So we're to believe they were "surprised" about some Federal Tax Change that was passed a year ago that everyone knew about. Except them. Not exactly bright bulbs in Topeka. Their track record in economic forcasting is horrible.

And someone needs to tell Eileen Hawley that the reason unemployment is dwon is because people are leaving the state. We have a verifiable net loss of migration.

It's the ultra right wing conservatives pushing these fool ideas and it's killing the state. The same guys that had to attach a rider in the wee hours of the morning with questionable announcement) to the school finance bill to whack the teachers. They must live in a fantasy. This act alone will cost them 10's of thousands of votes next November and we need to join that crowd.

And what is the unfunded liability amount for pensions? At the end of 2012 it was $10.3 billion. Yeah, that's billions. Where are the going to get that money? Raise the sales tax? Increase property taxes?

Michael LoBurgio 3 years, 11 months ago

In Kansas If tax revenues are off, it’s Obama’s fault?

It has been almost comical to hear the shifting responses by Brownback administration officials to changes in state tax revenue collections. When the March tax collections came in higher than projected, Kansas Revenue Secretary Nick Jordan boasted about how “we’re seeing the Kansas economic engine running.”

But when the April collections came in $93 million less than projections (which were made only two weeks ago), Jordan and Gov. Sam Brownback blamed President Obama and the national economy. Meanwhile, Moody’s Investors Service has downgraded Kansas’ state bonds, citing the state’s sluggish economy, budget problems and revenue reductions resulting from tax cuts. Is that Obama’s fault, too?

Fred Whitehead Jr. 3 years, 11 months ago

Thisis no surprise. With a governor and state legislature that is waging open warfare on the black guy in the White House and the Federal Government he is in charge of, it is no wonder that the state is in this predicament.

Hey Brownie!! Better call Koch Castle and order up some of those billions that you get for selling the control of the state government. We need some help now.

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