Moody’s says more state budget cuts may be needed to ‘achieve structural balance long-term’
Topeka ? Moody’s Investor Services, which downgraded Kansas bonds last month, has issued a more detailed report that says because of tax cuts, Kansas will need to make more spending cuts.
“The state’s ability to achieve structural balance long-term will depend to an increasing degree on its capacity for spending cuts,” the Moody’s report said.
Moody’s report said that more spending cuts will be difficult to achieve because of court-ordered school funding, federal mandates in programs such as Medicaid, and legal requirements to fund the state pension system.
“These constraints could also lead the state to continue to utilize credit-negative actions such as appropriation from other one-time sources like the state highway fund,” the report said.
The Legislature passed and Gov. Sam Brownback signed into law reductions in state income tax rates and elimination of income taxes for many businesses. The tax rates will continue to decrease through 2018.
Brownback has said the tax cuts will promote economic growth. The Moody’s report says Kansas’ economic growth is lagging.
Neither Brownback, nor Senate President Susan Wagle, R-Wichita, and House Speaker Ray Merrick, R-Stilwell, responded to requests for comment to the Moody’s report on Tuesday.
Moody’s says it doesn’t see lack of a state income tax as a credit risk, but added, “eliminating a tax that has been in place for many years and has accounted for a large share of revenue entails risks.”
The firm adds, “As the state removes the income tax, Kansas’ revenue structure will become more dependent on excise and severance taxes and the full economic and revenue impacts are unclear.”
On April 30, Moody’s downgraded Kansas bonds to Aa2 from Aa1and state highway revenue bonds from Aa1 to Aa2.
According to a Moody’s, 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.
The detailed report released Tuesday repeats many of the highlights of the earlier report: that Kansas’ economic recovery has lagged many of its peer states and the nation’s; state government is using non-recurring measures to balance the budget; and Kansas has failed to fund its public retirement system adequately.
The report also notes revenue collections in April fell $93 million below estimates and that pressure on the budget will increase because of the impact of the tax cuts.
Kansas’ former budget director said the state needs to re-do its revenue estimates in light of the inaccuracy of the estimate for April and to better gauge the impact of Brownback’s tax policies.
“The state’s official revenue estimate no longer appears reliable and should be redone,” Duane Goossen wrote in a blog for the Kansas Health Institute. Goossen, currently vice president for fiscal and health policy at KHI, said that at the least revenue estimators should reconsider the individual income tax portion of the estimate.
Tax receipts for April fell $93 million, or 14.7 percent, below an official estimate that had been released just two weeks earlier. Almost all of the decrease was due to less collected in individual income taxes. In addition, individual income tax collections for April were 50 percent less than April 2013.
The figures were a shock to many legislators and Democrats blamed Brownback for cutting income taxes too much.
But Brownback blamed the revenue decrease on President Barack Obama and said wealthy taxpayers filed their capital gains income in 2012 tax year instead of 2013.
Goossen said “that shift in capital gains income occurred across the country and was well documented over the last year. Why wasn’t that calculated into the April 17 estimate?”
On April 17, the Consensus Revenue Estimating Group, which is composed of Brownback’s budget director, legislative budget experts and economists, released its semiannual forecast of state general revenue fund receipts for the rest of the current fiscal year and the next fiscal year.
Goossen said legislators were told May and June revenue estimates may below previous estimates too, which could produce a serious budget crunch next year.
“A public release of more detailed data, and a fresh look at the income tax projection by the estimators, would help answer questions and provide confidence in the process,” said Goossen, who served as state budget director for 12 years under three governors, Republican Bill Graves and Democrats Kathleen Sebelius and Mark Parkinson.