How much a downgraded credit rating will affect Kansas in the years to come remains to be seen, but such a decline is never good news for a state.
Moody’s Investors Service announced last week that it had downgraded the state’s bond rating from Aa1 to Aa2. The decision, Moody’s said, was based on several factors. Kansas’ economic recovery has been slower than that of its peers, the service said, and “employment growth has been sluggish.” Moody’s also noted that revenue reductions from recent tax cuts “have not been fully offset by recurring spending cuts” and that the state continues to fall short in efforts to shore up its underfunded retirement system.
The state’s decision to divert money from the Kansas Department of Transportation to other parts of the budget also contributed to a downgrade of $1.6 billion in state highway revenue bonds. Moody’s noted that KDOT “revenues are insufficiently insulated from state general operating need for KDOT’s debt to achieve a rating higher than the state’s issuer rating.”
The practical impact of the downgraded rating may be felt when the state seeks buyers for new bonds, such as the $25 million in bonds approved for a new medical education building at Kansas University Medical Center. According to Moody’s, KUMC retains its Aa1 rating, but because the bonds for the new education building will be backed by the state, the market for the bonds will be based on the state’s Aa2 rating. It’s impossible to know how that downgrade will affect the market for those bonds, but it’s possible that the bonds will be perceived as higher risk because of the lower Moody’s rating, which may mean that investors will expect to be paid a higher interest rate for their investment. That would raise the state’s overall costs to finance the project.
According to a Moody’s report issued on April 2, 12 other states share Kansas’ Aa2 rating. Fourteen states have the next higher rating of Aa1, and 15 states have the top Aaa rating. Five states are ranked at Aa3 and below.
How does Kansas measure up against its neighbors? Oklahoma is in the same boat as Kansas with an Aa2 rating, Colorado is a notch above at Aa1 and Missouri has the top Aaa ranking. Nebraska is in a slightly different category because it has no general obligation debt, but also is ranked at Aa2, according to Moody’s.
Kansas isn’t alone in its Aa2 rating and, as noted above, the practical impact of the rating remains to be seen. Nonetheless, the downgrade raises some valid questions about whether the state is moving in the right financial direction.