TOPEKA — A national credit rating agency has upgraded Kansas from a negative to stable outlook.
S&P Global Ratings affirmed its "AA-" issuer credit rating for the state and attributed the revised outlook to increased revenue.
"The revision of the outlook to stable reflects the state's better-than-estimated revenues in the current fiscal year following the repeal of income tax cuts beginning in 2018 and our view that deficits in the current biennium have narrowed significantly due to stronger revenue collections," said S&P Global Ratings credit analyst Ladunni Okolo. "While weak economic trends and structural budget pressures persist, we believe that the better-than-estimated revenues allow the state to stabilize these pressures through fiscal 2019."
In the report issued Friday, Okolo also cautioned that the state's ability to manage its finances given expected growth in expenses beginning in 2020 will be an important credit factor.
"We would view a return to budgeted structural deficits due to either missed revenue estimates or increased expenditures, which are not matched with ongoing revenue enhancements, as detrimental to credit quality," she said.
In addition to looking at the issuer credit rating, or ICR, S&P also revised the outlook on the state's appropriation-secured debt to stable from negative and affirmed "A+" rating on that debt.
Gov. Jeff Colyer praised the ratings increase.
"Today’s upgrade of Kansas’ credit rating is a reflection of a growing Kansas economy and a focus on fiscal responsibility," he said in a release. "I will continue working to improve our economy and grow our tax base to reduce the burden on taxpayers. While there is still much work to do, today’s news is proof that we are moving in the right direction.”
The "AA-" rating reflects the S&P opinion that Kansas' economy is showing weaker growth than the rest of the nation and a moderate concentration in the manufacturing sector, although the unemployment is below national average, Okolo said.
She also cited as issues:Absence of constitutional limits on the legislature's ability to raise revenue or cut major expenditures; History of making midyear budget adjustments, when necessary, although sometimes using budget items that we would consider of a one-time nature; and ability to support cash flow needs through the use of interfund certificates of indebtedness and manage disbursements between fiscal years to preserve liquidity even in periods of low fund balances.
The S&P report cited offsetting credit factors to include:Low general fund balance on a budgetary basis due to weaker economic growth, previous income tax cuts, budgeted fund balance drawdowns, and substantial midyear revenue shortfalls in the last four fiscal years. Kansas ended fiscal 2017 with a general fund balance of 1.6 percent of expenditures and currently projects a 4 percent balance for fiscal 2018; Structural deficits for the last three fiscal years on a budgetary basis ranging from 1.8 percent in 2016 to 5 percent in 2015 although updated projections for 2018 show structural balance in 2018 and a 0.5 percent deficit in 2019 which S&P said it considered small; Significant unfunded pension liabilities and annual pension contributions that are projected to remain below the actuarially determined contribution (ADC) until 2020 and deferral of statutory payments to the plan, which further exacerbate the pressures on the system.