Ironic twist of politics as Governor Brownback warns legislators of possible credit downgrade

TOPEKA, Kan. (KSNT) – Thursday Kansas Governor Sam Brownback cautioned of “serious consequences” if legislators seek to override his veto of Senate Bill 250. The near-unanimous passage of the bill could be enough for a bipartisan override of Brownback’s veto. The bill seeks to prevent any state money from being used to demolish the Docking State Office Building or build a new power plant for the Capitol Complex before the summer of 2017. Legislators were furious over a multi-million dollar deal negotiated by the administration without legislative oversight or approval. Brownback eventually ordered the agreement be terminated.

In a written statement from his office issued Thursday afternoon, the governor wrote:If an override of Senate Bill 250 is viewed as an unwillingness to fund debt in accordance with priority payment status by the rating agencies, this could lead to a downgrade of the State’s credit rating, possibly into the “BB” range.” Thursday the Senate took up discussions of a possible override of Brownback’s veto, however the motion was withdrawn.

The irony of this ominous warning is that it was less than a year-and-a-half ago that the state’s credit rating was downgraded by Standard & Poor’s (S&P). The ratings service specifically noted the effects of income-tax cuts endorsed by Governor Brownback. The August 2014 downgrade dropped Kansas’ two primary ratings by one notch each, meaning it will be slightly more expensive for the state to borrow money. At that time, S&P also called the outlook for the state’s economy ‘negative’, citing those income tax cuts and revenue shortfalls earlier that year. Little has changed. As KSNT News reported, last week, state revenues for February were $53 million below expectations. That’s after the state lowered revenue projects in November for the remaining months in this fiscal year that runs through the end of June.

Just months before the S&P downgrade in August of 2014, Moody’s Investors Service, another ratings service downgraded Kansas’ issuer rating and notched ratings as well as KDOT highway revenue bonds.

In the middle of a campaign for re-election at the time of the downgrades, Brownback’s opponent, former Democratic State Representative Paul Davis blasted the governor. He released a statement saying:

“This downgrade will cost Kansans even more money at a time when we can least afford it. Sam Brownback’s irresponsible policies are blowing a hole in the state’s finances, putting our schools at risk of more cuts and causing our economy to lag behind our neighbors,” Davis argued in August 2014.

While the credit ratings agencies blamed the Republican governor-backed tax cuts, Brownback blamed Democratic President Barak Obama’s tax policies. The Kansas governor blew off the downgrades in an email to Bloomberg:

“Breaking our addiction to high taxes and soaring debt is difficult, but necessary if we are to continue growing,” the Kansas governor wrote in August 2014.

Just months later, an article from Forbes.com showed support for the governor’s tax policies. The contributor compared Kansas’ deep tax cuts to Illinois’ significant tax increases. He wrote that Kansas saw an increase in gross domestic product as well as numbers that showed employment growth from January 2013 through August 2014 was 72% higher in Kansas compared to Illinois.

“We need jobs and we have proven the way to that is through lower taxes,” Brownback wrote in that earlier email to Bloomberg.

Despite the continued revenue shortfalls in the many months since, the governor has remained resolved not to un-do the tax cuts he pushed through. Earlier this month in a statement the governor made it clear that he will “not support a tax increase on small businesses.” He wrote that he wants to “focus on managing government spending” and keeping government small.

In Thursday’s statement, Brownback warned Democratic and Republican legislators alike that an override of SB 250 could have “serious consequences” for the State of Kansas and could have a negative impact “for years to come”. He wrote:

“An override of Senate Bill 250 may signal sufficient uncertainty to bond rating agencies and the credit markets, such that the result could be higher rates and increased expense for any future debt obligations of the State.”

The state was admonished by both Moody’s and Standard and Poor’s credit downgrades that the tax cuts of 2012 were cause for their concern. Now, the governor who pushed for the cuts is warning the legislature who passed them, not to override his veto for fear the state’s credit rating will tumble even more.

S&P analysts affirmed and explained in detail why the outlook of Kansas’ ratings were lowered to negative. In an August 2015 report, a year after the downgrade, analysts blamed “low general fund balances” on prior income tax cuts and a “substantial mid-fiscal 2015 shortfall that the state met with a mixture of ongoing and one-time budget adjustments.” It’s a ploy that the governor and the legislature have continued to employ as revenue shortfalls have continued over the majority of months since. Analysts also referenced the “significant long-term pension liability” the state faces. The credit rating agency wrote that “the state is in effect exchanging one liability for another—the unfunded pension liability for debt…” and warned that it “poses an additional risk to the state because debt comes due on specific annual due dates in fixed amounts, unlike pension liabilities…” Those many months ago S&P predicted the possibility that the “structural budget imblanace could widen…due to shortfalls in revenue…”

The positive note in the S&P report was the hope that should revenues and expenditures come in near or better than budgeted, analysts wrote they could potentially revise the outlook to stable. However, a modest improvement must be seen in the general fund balance and pension funded ratios must improve as well. The state had projected that positive outlook for fiscal 2017 which is rapidly approaching.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s