DALLAS – Kansas is on Standard & Poor's watchlist for a possible downgrade.
The rating agency took the action Monday, which applies to Kansas' AA issuer credit rating and AA-minus appropriation secured ratings. S&P cited the state's continuing revenue shortfalls and one-time measures proposed for balancing the budget.
The move follows Kansas' announcement on April 20 of additional midyear revenue shortfalls and Gov. Sam Brownback's proposal for various options to close the budget gap "that include measures we believe could widen the state's structural budget deficit," said Standard & Poor's analyst David Hitchcock.
"The recent downward revision in the state's projected revenue follows previous successive downward revisions in fiscal years 2015 and 2016 that, in our opinion, have pressured Kansas' finances," Hitchcock said.
Midyear budget closing measures Brownback has listed as options include using proceeds from a tobacco revenue bond sale and additional underfunding of annual pension contributions. The state has already announced a temporary delay in its April pension payment to allow the legislature flexibility. That could amount to a $98.5 million additional underfunding of state payments to the retirement system in fiscal
2016, to be repaid with interest in fiscal 2018, Hitchcock said.
"We believe both of these options could materially increase the state's structural budget deficit," Hitchcock said.
Either a tobacco bond or a pension deferral would require legislative action. The Kansas Legislature is scheduled to return to Topeka this week for its annual "Veto Session," so-called because it allows lawmakers to override the governor's vetoes with a two-thirds majority.
S&P already had a negative outlook on Kansas' rating.
Moody's Investors Service downgraded the state one notch to Aa2 in 2014 and still had a stable outlook as of Monday.
The S&P action came five days after a revised Consensus Revenue Estimate that showed revenues falling $229 million below projections in the coming fiscal year. The downward revision was the second since November.
Despite the lower forecast, Kansas revenues continued to fall below expectations.
Brownback, whose tax cuts have been blamed by some for the ongoing budget imbalance, outlined three scenarios to fix the problem, but dismissed the idea of restoring tax rates.
"Instead, we will focus our support and attention on controlling government spending more efficiently," Brownback said in a written statement.
One option would include issuing bonds backed by tobacco settlement funds to create a cash infusion. Other states have issued bonds securitizing revenue from a multi-state settlement with the tobacco industry.
Brownback would also reduce most of the remaining sales tax going into the State Highway Fund, transferring $70 million to the State General Fund in fiscal year 2016 and $115 million in FY 2017.
That scenario brought an immediate announcement from the Kansas Department of Transportation that it was putting 25 modernization and expansion projects on hold through fiscal year 2018, saving more than $550 million.
