Kansas budget impasse could affect state bond rating

? Some Kansas lawmakers are now openly saying that the continuing impasse over how to balance the state budget could have a negative effect on the state’s bond rating.

In particular, they are worried about the $1 billion in pension obligation bonds the state hopes to issue to help shore up the troubled Kansas Public Employees Pension System.

“It’s a deal-breaker if you don’t have a structural balance to your budget,” said Rep. Steven Johnson, R-Assaria, who chairs the House Committee on Pensions, Investments and Benefits.

“That will be an issue, certainly for the pension bonds, and it will be a consideration for other bonds that we have, whether they’re renewing or issued,” he said. “So having a stable budget plan is a foundation for making the rest of this work.”

In the budget bill lawmakers passed and sent to Gov. Sam Brownback — a budget that does not yet have enough revenue to pay for it — lawmakers included a provision to issue $1 billion in pension obligation bonds.

But the language of the bill says the state can only issue those bonds if the total cost of issuance, including the net interest rate, is less than 5 percent.

In recent days, Johnson said, interest rates on state and municipal bonds have been rising, in part because the Federal Reserve System is slowing its program of buying up government bonds to hold down interest rates, a program known as “quantitative easing.”

The theory behind the plan is that the state would deposit the $1 billion directly into the KPERS fund, where it would earn investment returns. KPERS traditionally assumes about an 8 percent annual return on investment, and the state has been hoping to pay something less than 5 percent interest on the bonds.

That would save the state about $30 million over the life of the bonds and speed up the time needed to bring the underfunded system back into actuarial balance.

On Tuesday, though, there was growing talk in the Statehouse that lawmakers simply might adjourn the session, having passed only a budget but not a tax package to fund it, thus leaving it to Brownback to make line-item vetoes in the budget and across-the-board “allotment” cuts to bring the budget into balance.

David Jacobson, a spokesman for Moody’s Investors Service, one of the state’s bond rating agencies, said that company has been monitoring the Kansas budget situation, as well as similar budget problems in other states.

“This happens to a few states every year,” he said.

In April 2014, Moody’s downgraded Kansas’ bond rating to Aa2, the third highest rating category, but still below the median for all states, which is Aa1. But he said that’s far better than the state of Illinois, the lowest-rated state in the country, which is rated A3 — five notches below Kansas.

Jacobson wouldn’t comment on what the impact would be if lawmakers fail to resolve the situation.

But Sen. Jim Denning, R-Overland Park, vice chair of the Senate Ways and Means Committee, said he thinks it would result in another downgrade of the state’s bond rating. At best, that could push the total cost over the 5 percent limit, and at worst it could make investors unwilling to buy the bonds, Denning said.

A downgrade also could affect Kansas University’s plans for a number of bond issues over the next two years.

Tim Caboni, KU’s vice chancellor for public affairs, said the university is rated separately from the state, but the rating is tied in many ways to the state’s rating.

He said KU is planning to issue $36.9 million in bonds In December or January for a new parking facility at the Medical Center in Kansas City. And it plans to issue nearly $70 million in fiscal year 2017 for various other projects.

“As folks well know, uncertainty is never good when you’re dealing with financial institutions, so we’re hopeful this gets resolved quickly,” Caboni said.