“Kansas will continue to struggle to balance its budget,” said Moody’s analyst Dan Seymour.

DALLAS – The Kansas Legislature's failure to override Gov. Sam Brownback's veto of an income tax increase is a negative credit factor for the state, according to Moody's Investors Service.

Moody's has a negative outlook on the Sunflower State's Aa2 credit rating.

"With the state for now sticking with a lower-tax policy, Kansas will continue to struggle to balance its budget, consider deferring pension contributions again, and drain its highway fund of funding for crucial transportation projects," Moody's analyst Dan Seymour noted in a market comment.

House Bill 2174 cleared both houses of the legislature earlier this month but was vetoed by Brownback. While the House voted to override the veto, a Senate vote fell three votes short of the two-thirds needed.

The bill would have raised the top income tax bracket in the state to 5.45% from 4.60% and reinstated the tax on nonwage business income.

"Although the incremental revenues from this bill might not have closed Kansas' budget gap entirely – or addressed an embedded problem of chronic pension underfunding – it would have been an important step in a more positive direction following several years of credit deterioration," Seymour said.

The veto means deliberations on the fiscal 2018 budget will be crucial, Seymour said. "Continuing to resort to stop-gap measures that do not resolve, or may even worsen, the state's long-term structural problems would intensify the pressure on Kansas' credit quality."

On Feb. 8, S&P Global Ratings revised the outlook on Kansas's AA-minus issuer credit rating to negative from stable, citing "what we believe to be continued recent weak economic trends and structural budget pressures which are expected to persist through fiscal 2019, despite multiple midyear adjustments in fiscal years 2016 and 2017."

In Brownback's biennial budget proposal released in January, the state projects a structural budget gap that equals about 8.8% of expenditures in 2017 and 6.1% in 2018, according to S&P.

The adjustments consist primarily of one-time revenue from sale of the Kansas Biosciences Authority's assets, liquidation of a capital reserve, sale of a tobacco settlement securitization bond to be used for current budget relief, and underfunding of the actuarial annual pension contribution.

The funding shift does not include significant transfers from the state highway fund, which are proposed to be ongoing despite resulting slowdowns in the state's long-term highway capital plan, S&P noted.

"The governor's proposed budget projects the state returning to structural budget balance in fiscal 2019, but this does not include continued underfunding of the pension system on an actuarial basis which, based on our calculation, will lead to another structural deficit of 2.2% in fiscal 2019," S&P said.

"It is our opinion that proposed underfunding of the pension system and the tobacco securitization bond will raise out-year budget costs and put additional pressure on future state budgets," the S&P report said.

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.