Moody's Investors Service said it has lowered the rating on the Kansas Department of Commerce's IMPACT program bonds to A3 with a negative outlook, from Aa3, affecting almost $200 million of outstanding debt.
The bonds were placed on review for possible downgrade on March 28.
Because IMPACT program bonds are backed by a statutory allocation of revenue from income tax withholding, efforts to eliminate the state income tax without defeasing the debt or substituting a new revenue source will expose bondholders to risks greater than previously anticipated.
IMPACT debt has historically been supported by steadily growing revenues from a source that was broad-based and important to the state's continued operations. Last year's major income tax rate reductions, followed by additional cuts this year, constitute what Moody's expects to be a trend of repeated cuts in the revenues pledged to these bonds.
The final maturity on the IMPACT bonds is 2023, by which time Kansas may have fully removed the income tax. So far, there is no assurance the state will allocate revenue from a different source or take other steps protect bondholders.
