Federal policy a factor in S&P's outlook cut for Kansas

S&P Global Ratings revised Kansas' rating outlook down to stable from positive, marking its first state credit action driven in part by potential Trump administration policies that could dampen economic growth and pressure finances.

Geoff Buswick, a S&P managing director, said the Kansas outlook change was the first time the current uncertainty at the federal government level played a role in a state rating-related action.

"We are hearing from the state managers that they're having a hard time understanding what's going to come next, and so they're putting in conservative budget measures," he said, adding that S&P is closely watching the situation "and how it could impact state operations, state budgets, and state revenue."

On-again, off-again federal funding freezes and tariffs on major trading partners, as well as a massive overhaul of federal government agencies under the Trump administration, have fueled fiscal anxiety for states and local governments.

S&P's action Wednesday on Kansas' outlook, which included affirmation of the state's AA-minus issuer rating and other ratings, came ahead of a $125.6 million Kansas Development Finance Authority revenue bond issue that S&P rated A-plus.

"The outlook revision reflects an evolving budget environment created by state's recently enacted tax relief package and potential actions taken at the federal level that could create a weaker revenue environment and budget pressure for the state, making it more challenging for it to address projected structural budget imbalances," analyst Joseph Pezzimenti said in a statement, adding S&P expects Kansas to manage these pressures.

S&P said it expects growth in Kansas to slow this year, mirroring expectations for the nation due to uncertainty at the federal level, including around tariffs, that could deter business investment and curb consumer spending.

The rating agency pointed to Kansas' November consensus revenue estimates, which indicated a budgetary net operating deficit of as much as $774 million for fiscal 2025, as well as "very strong" projected budget balances.

"We expect the state's forthcoming April 2025 consensus revenue estimates, proposed adjustments by the governor, and further actions by the legislature will provide more clarity as to what actions the state is willing to take to better align expenditures and revenue for fiscal years 2025 and 2026 in this evolving budget environment," S&P said in a report.

Gov. Laura Kelly is focusing on common sense budgeting, growing the economy, and paying off debts, according to Grace Hoge, her press secretary.

"Despite uncertainty at the federal level, Gov. Kelly will continue to prioritize fiscal responsibility to ensure that Kansas remains in a strong position moving forward," Hoge said in an email. Kelly is a Democrat but the state legislature is dominated by Republicans.

Under legislation enacted into law last June, Kansas shrank the number of individual income tax brackets to two from three beginning in tax year 2024, reduced the top rate to 5.58% from 5.7%, exempted Social Security payments from state taxation, and increased tax deductions.

In her State of the State address in January, Kelly called for pumping the brakes on further tax reductions until the full impact of the 2024 tax legislation is known.

S&P had lifted the state's outlook to positive in February 2023, citing strong combined general fund and budget stabilization fund balances.

At that time, the rating agency warned the outlook could return to stable during a two-year period if the budget becomes structurally imbalanced due to actions like tax cuts that are not offset by spending reductions.

The upcoming Kansas bond issue was rated Aa3 with a stable outlook on Wednesday by Moody's Ratings, which maintained its Aa2 issuer rating and stable outlook for the state.