A deserved downgrade of Kansas’ bonds (Guest Post: Michael Leachman)

Michael Leachman is the Director of State Fiscal Research with the Center on Budget and Policy Priorities. This post previously appeared on the Center’s Off the Charts blog.

The meaning of Standard & Poor’s recent downgrade of Kansas’ credit rating, in which it cited Kansas’ “structurally unbalanced budget,” is clear: Kansas’ budget is a train heading off a cliff.

Here are the details:

• Kansas’ massive tax cuts have sharply cut state tax revenues. Since Kansas’ massive tax cuts took effect a year and a half ago, revenues have nosedived. Revenues were down about $700 million in the last fiscal year. That’s much more of a drop-off than the state’s official forecasters expected.
• There’s not enough revenue coming in this year to cover the state’s budget. Hoping the tax cuts would produce more economic growth and wanting to avoid additional spending cuts, Kansas lawmakers approved a budget for this fiscal year that’s $326 million larger than the state forecasts it will collect in revenue. In reality, the imbalance is even worse, because the budget is based on overly optimistic revenue projections. The state assumes revenues will surge over the next year — even though more tax cuts will kick in in January. That’s why Duane Goossen, the state’s former budget director, recently wrote, “[t]he Kansas budget appears to be teetering on the edge of a fiscal cliff, but that’s an illusion. We’ve already gone over the edge.”
• Kansas is avoiding immediate budget cuts only by drawing down its operating reserves. The state isn’t in emergency mode already because it’s using its only operating reserves to cover the cost of state services. (Kansas is one of only four states with no formal “rainy day fund,” so its operating reserves are not well protected and can be used in this imprudent way.)
• The reserves likely will run dry sometime in the next few months, creating a budgetary emergency. Once the reserves are gone, Kansas will be forced to make emergency cuts to state services, or to raise new revenue. And any cuts would come on top of deep cuts the state has already made in recent years to its schools and other services.
• The future looks even worse. The new tax cuts taking effect at the beginning of 2015 will be followed by even more income tax rate cuts in each of the subsequent three years. The additional cuts in 2016 alone will reduce revenues by about another $113 million. So when the legislature comes back in session next January to write the state budget for 2016, lawmakers will have even lessrevenue to work with, making it even harder for Kansas to fund its schools and other services.

It’s no wonder that Standard & Poor’s downgraded Kansas’ credit rating, or that another major credit rating agency — Moody’s — did so earlier this year. The rating agencies rightly understand that Kansas’ fiscal policy is a disaster.

The opinions stated above are not necessarily those of OK Policy, its staff, or its board. This blog is a venue to help promote the discussion of ideas from various points of view and we invite your comments and contributions. To see our guidelines for blog submissions, click here.