Standard & Poor's Ratings Services said it has placed its AA issuer credit rating (ICR) and its AA-minus appropriation secured ratings on the state of Kansas on CreditWatch with negative implications.
"The CreditWatch placement follows Kansas' announcement on April 20 of additional midyear revenue shortfalls and Governor 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 credit 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."
Midyear budget closing measures that the governor 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 to use this latter option, which 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.
Both of these options could materially increase the state's structural budget deficit, S&P said. Either a tobacco bond or a pension deferral would require legislative action. The governor also laid out a third option of 3% to 5% spending reductions to various state agencies and universities in fiscal 2017.
When the 2016 budget was originally enacted, Standard & Poor's calculated the state's structural deficit as equal to about 5% of expenditures, including annual pension underfunding.
The April forecast for fiscal 2016 is for revenues to be $253 million below what was projected at the time the original 2016 budget was adopted, or 4.0% below originally budgeted revenues.
Due to earlier midyear shortfalls and adjustments, the gap the legislature will need to solve reflects a smaller difference between the state's previous November forecast and the new April forecast. This gap amounts to $93.5 million for fiscal 2016, or about 1.5% below November's forecasted revenue, and $134.7 million for fiscal 2017, or about 2.1% lower than projected in November. S&P expects the legislature to address these new gaps in May.
The rating agency expects to resolve its CreditWatch within the next 90 days based on the legislature's response to the revised revenue estimates. To the extent it believes long-term structural budget balance will remain challenged, it could lower the rating, which it views as at least a one-in-two possibility.
Should the fiscal 2017 budget be revised to move the state substantially closer to structural budget balance, with prospects for restoration of what the rating agency views as essentially depleted general fund reserves, it could remove the ratings from CreditWatch.
