Kansas Gov. Laura Kelly’s budget proposal represents progress in the state’s march toward structural balance, but new outlays will still require some legislative patchwork, analysts at S&P Global Ratings said.
“The state continues to grapple with fiscal pressures despite some relief from the recent boost in revenues,” wrote analysts Ladunni Okolo and David Hitchcock. “We have stated that the state’s ability to manage finances with growing expenses starting in 2020 will be an important credit factor.”
S&P has a stable outlook on Kansas’ AA-minus rating. S&P downgraded the state from AA in July 2016 and imposed a negative outlook in February 2017. The outlook returned to stable in May after tax increases enacted in 2017 and an improved economy began to produce more revenue.
Years of tax cuts under previous Gov. Sam Brownback led to chronic revenue shortfalls, new debt and the transfers from the Highway Fund to the general fund to make ends meet.
By S&P’s latest reckoning, Kansas faces a calculated budget gap of $137 million or 1.8% of budgetary expenditures in fiscal year 2020 following an anticipated gap of $34 million or 0.5% in fiscal 2019 after adjusting for delayed statutory pension payments.
“While we consider this budget gap moderate, it indicates that the state continues to grapple with fiscal pressures despite some relief from the recent boost in revenues,” analysts said.
Kelly said that improving the state’s bond rating could be achieved through reduction of debt, some of which was acquired during the Brownback era. Kelly’s proposed budget would repay a $317.2 million loan issued in 2017 from the Pooled Money Investment Board five years earlier than planned.
The proposed fiscal 2020 budget would use revenue growth from tax increases in 2017, a re-amortized pension fund schedule, expanded revenue from economic growth, and a slight drawdown in the fund balance to increase general fund expenditures.
“While certain proposed one-time payments in 2019 could improve structural balance, proposed increased school spending in fiscal 2020 might lock in higher ongoing expenses, and other budget changes could defer current costs and increase overall future spending,” S&P said.
For fiscal 2020, general fund expenditures would rise by $440 million or 6% over fiscal 2019, including an additional $133 million in school funding above legislatively approved amounts and $22 million in employee pay increases.
The 2008 recession resulted in three consecutive years of declining state revenue. . In 2012 Kansas enacted a tax cut plan in 2012 supported by Gov. Brownback.
To regain some lost revenue, taxes on tobacco and sales were added in 2013, 2015, and 2017 to stabilize the budget. Uncertainty in key sectors of the state’s economy such as agriculture and oil and gas, combined with major federal tax policy changes, created even more challenges throughout 2018, according to Kelly’s budget report.
In 2017 the Republican-controlled Kansas Legislature overturned the tax cuts enacted under Brownback. Kelly, a Democrat, was a member of that Legislature, which remains under GOP control.
“Fortunately, Kansas’ fiscal health has finally begun to stabilize,” Kelly’s budget report said. “Revenues repeatedly exceeded expectations in recent months and the state’s credit rating has improved. However, after a full decade of fiscal volatility, Kansas’ recovery will be long and precarious. Both caution and fiscal discipline will be essential to continuing the progress made by the Legislature in 2017 and 2018.”