Democrats have responded to the state of Kansas being placed on a “credit watch” today by S&P credit rating agency.
House Minority Leader Tom Burroughs, D-33rd Dist., from Kansas City, Kan., called for the state to adopt a “structurally balanced budget.”
In a news release, Standard & Poor’s Rating Services stated today that Kansas’ AA credit rating has been placed on a credit watch with negative implications.
“The CreditWatch placement 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 credit analyst David Hitchcock, in the news release.
“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 added.
“Quite frankly, it’s scary,” Rep. Burroughs said in a statement today. “Kansas has already experienced two successive credit downgrades as a result of Gov. Brownback’s mismanagement of the Kansas economy and budget. Given his refusal to change course, it wouldn’t surprise me if we received a third.
“It’s clear what the legislature needs to do to create a ‘structurally balanced budget,’ which is why Democrats are fighting for a financially responsible and sustainable plan that doesn’t rely on transfers, fees sweeps, increased bonding, or other one-time dollars,” Rep. Burroughs said.
Standard & Poor’s stated that 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.
“We believe both of these options could materially increase the state’s structural budget deficit,” Standard & Poor’s stated in the news release.
Either a tobacco bond or a pension deferral would require legislative action. The governor also laid out a third option of 3 percent to 5 percent 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When the 2016 budget was originally enacted, Standard & Poor’s calculated the state’s structural deficit as equal to about 5 percent of expenditures, including annual pension underfunding.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 percent below originally budgeted revenues.
Because of 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 percent below November’s forecasted revenue, and $134.7 million for fiscal 2017, or about 2.1 percent lower than projected in November. Standard & Poor’s expects the Legislature to address these new gaps in May.
Standard & Poor’s stated in the news release that it expects to resolve the 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, S&P could lower its 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 S&P views as essentially depleted general fund reserves, it could remove the ratings from CreditWatch, according to the S&P news release.