Tax cuts hurt Moody’s rating of Kansas bonds

Moody’s Investors Service says Kansas’ financial outlook is negative as a result of revenue shortfalls caused by the 2012 tax cuts championed by Gov. Sam Brownback.

The rating service this week assigned a Aa3 rating to $49 million worth of revenue bonds issued by the Kansas Development Finance Authority. The rating is one notch below the Aa2 issuer rating assigned to the state itself. The one-notch distinction reflects “appropriation risk, because debt service on the bonds is subject to annual legislative appropriation,” Moody’s said in a written statement.

The statement continued: “The state’s Aa2 rating recognizes its stable tax base and fundamental economic capacity to balance its budget and fund its pension liabilities. The rating also incorporates the state’s financial shortfalls caused in part by large tax cuts, as well as a long history of underfunding its pension plans. The outlook is negative.”

Both Aa3 and Aa2 are still considered high-quality ratings.

Moody’s said the negative outlook is “consistent with the state’s ongoing difficulties in regaining structural budget balance and getting on a path to sounder funding of its pension liabilities. By continuing to balance its budget with unsustainable, nonrecurring resources, including pension underfunding, it is accumulating large and expensive long-term liabilities that it will be paying off for a long time.”

Moody’s said the negative outlook could be changed by sustained revenue growth or expenditure cuts leading to structural balance in state finances, improvement in reserve levels or a demonstrated path to sounder funding of pension plans. A further downgrade might be caused by continued underfunding of pension plans and growth in unfunded pension liabilities and failure to adopt measures to increase revenues or decrease expenditures sufficient to restore structural balance

The state’s KDFA-issued appropriation bonds are payable by annual legislative appropriations. Under a Pledge Agreement, the Kansas Department of Administration pledges revenues appropriated by the state legislature for debt service on the bonds. There is no requirement for the legislature to appropriate funds to pay debt service each year, and bondholders have no recourse if the legislature fails to do so.

Proceeds of the bonds will be used to refund KDFA’s 2007M and 2008L bonds for savings of about 10 percent of par.