Kansas’ budget reserves have fallen “to what we consider very low levels during a period of national economic expansion,” said Standard & Poor’s analyst David Hitchcock.

DALLAS – Kansas absorbed a downgrade Tuesday, as S&P Global Ratings dropped the state's issuer credit rating one notch to AA-minus.

The downgrade came after S&P placed the credit on its negative watch list on April 25 as lawmakers struggled again to produce a balanced budget after a multi-year battle with falling revenues. In the end, lawmakers left the final budget cuts to Gov. Sam Brownback.

"The downgrade reflects what we believe to be structural budget pressures, as reflected by drawdowns in reserve levels to what we consider very low levels during a period of national economic expansion, despite four rounds of midyear adjustments in fiscal 2016," said S&P Global Ratings credit analyst David Hitchcock.

S&P also lowered the rating on the state's appropriation secured debt to A-plus from AA-minus. The outlook on both ratings was returned to stable.

Moody's Investors Service assigned a negative outlook to Kansas' Aa2 rating in May.

Kansas estimates fiscal 2016 ended with a general fund balance equal to $41.2 million, or 0.7% of expenditures. That incorporates a recent $76.2 million shortfall in May and June tax receipts compared to its budget.

Four budget adjustments during the 2016 fiscal year included $97 million of state pension contribution deferrals.

"We also view a substantial increase in transfers from Kansas' transportation fund to pay general fund operations in recent years as an additional sign of budgetary stress," Hitchcock said.

"The transfers from the transportation fund could potentially continue," he added. "However, the transfers have resulted in the halting or delay of previously planned transportation capital projects."

S&P analysts also believe the current fiscal year that began July 1 could be pressured, based on May and June revenues that fell short of projections and the relatively low $95.8 million budgeted ending balance for fiscal year-end 2017, or 1.5% of budgeted expenditures.

"The stable outlook reflects our view that reserve levels are likely to remain low in the near future, but that Kansas will take timely midyear budgetary action through a mix of recurring and nonrecurring measures to maintain a small, but positive budgetary fund balance,"

The Kansas general fund balance turned negative in fiscal 2015.

"We also believe that state funding of its poorly supported pension systems will remain pressured to the extent that the retirement system falls below its assumed 8% rate of return," Hitchcock said.

The state is a direct employer contributor to the school retirement plan, which does not expect to meet its actuarially determined contribution for at least the next several years under a state statutory funding formula.

Kansas considers about $163.4 million of its fiscal 2016 budget to have consisted of one-time budget actions, including the $97 million pension deferral, or about 2.6% of fiscal 2016 budgetary expenditures, Hitchcock said.

That does not include increased transfers of about $260 million from the transportation fund.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.