Citing Kansas’ “very strong” combined general fund and budget stabilization fund balance, S&P Global Ratings on Tuesday revised the outlook on the state’s ratings to positive from stable.

The outlook change covers the state’s AA-minus issuer rating, A-plus appropriation-backed debt rating, and AA Kansas Department of Transportation highway revenue bond rating. 

“The positive outlook reflects our view that there is at least a one-in-three chance we could raise the ratings during the two-year outlook period if we believe the state can maintain its recent healthy fund balance levels and structural balances; and if the state demonstrates stronger budget management practices, including realistic revenue forecasting and timely adjustments to address potential out-year gaps,” S&P analyst Joe Pezzimenti said in a statement.

The rating agency warned the outlook could return to stable during that time period “if we expect the state will revert to a pattern of structurally unbalanced budgets, such as tax cuts that are not offset by spending reductions, or if it is slow to implement adjustments when immediate shortfalls occur.”

Democratic Gov. Laura Kelly welcomed the improved outlook, saying it makes it even more likely the state will be seen as “a smart investment.” 

“It is clear that we have put Kansas back on track by growing our economy and paying off debts,” she said in a statement. “I will continue to promote fiscal responsibility and cut taxes for working families in a way that maintains a balanced budget.”

Her administration has been pushing for higher ratings as the state paid down debt, built up budget reserves, and ceased budget maneuvers such as delayed payments and interfund borrowing.

The state ended fiscal 2022 on June 30 with a record-high rainy-day fund balance of $969 million after lawmakers approved $750 million in deposits and higher-than-estimated revenue led to an additional $219 million deposit. The general fund balance was roughly $1.4 billion.

S&P said the fiscal 2023 budget and budget recommendations for fiscal 2024 indicate continued strong balances. 

Issuer ratings for Kansas have not changed since the state was downgraded during the prior decade when tax cuts under then-Gov. Sam Brownback, a Republican, were not offset with spending reductions resulting in budgetary imbalance. 

Moody’s Investors Service rates Kansas Aa2 with a stable outlook.

Kelly, who began her second term in office in January, is pushing for a three-part “Axing Your Taxes” plan totaling more than $500 million in cuts over the next three years.

The governor, who faces a GOP-dominated legislature, wants to immediately eliminate the sales tax on groceries that is being phased out, create an annual state sales tax holiday for school supplies, and increase the earnings threshold for taxing retiree social security payments. 

Lawmakers have their own tax cut plans with the Senate last week passing a bill that would replace the state’s graduated personal income tax rates with a flat 4.75% rate at a cost of more than $1.3 billion from fiscal 2024 through fiscal 2026.

On the debt front, a bill to use $250 million in surplus revenue to repurchase term bonds from a 2021 $504.5 million taxable pension bond sale through a tender offer has support from the Kelly administration.

Republican State Treasurer Steven Johnson, who testified in favor of the move before a House committee in February, said Monday the plan may be folded into a budget bill. Kansas also issued pension bonds totaling $500 million in 2004 and $1 billion in 2015 to reduce the unfunded liability of its public employees retirement system.

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