May 4, 2018 / 8:16 PM / a year ago

S&P brightens outlook on Kansas' rating as revenue outperforms

May 4 (Reuters) - S&P Global Ratings revised the outlook on Kansas’ AA-minus credit rating to stable from negative on Friday, citing the state’s stronger-than-expected revenue.

But the credit rating agency warned Kansas faces funding pressures related to pensions and K-12 public schools, and has a weakened economy that is vulnerable to a global trade war.

“While weak economic trends and structural budget pressures persist, we believe that the better-than-estimated revenues allow the state to stabilize these pressures through fiscal 2019 leading to our stable outlook,” S&P said in a report.

As of the end of April, fiscal 2018 general fund tax receipts were 1.17 percent over estimates and nearly 20.3 percent higher than the same period in fiscal 2017, according to the Kansas Revenue Department.

Lawmakers last year rolled back 2012 income tax rate cuts over then-Governor Sam Brownback’s veto.

His successor, Governor Jeff Colyer, called S&P’s action “a reflection of a growing Kansas economy and a focus on fiscal responsibility.”

Meanwhile, the state’s new plan to increase school funding by more than $500 million over five years will be the subject of oral arguments before the Kansas Supreme Court on May 22.

“The continued uncertainty on additional school funding required will keep Kansas’ finances vulnerable and pressure its credit rating until the state provides a sustainable funding solution for its schools, which is approved by the courts,” S&P’s report said.

Alan Rupe, an attorney representing school districts suing the state, has said the plan’s additional funding falls short of meeting a state constitutional requirement for adequacy.

Additional pressure on the state’s budget has built up from years of pension underfunding that contributed to above-average net liabilities and a below-average funded ratio of 67 percent, according to S&P.

The threat of a trade war, sparked by new U.S. tariffs on steel and aluminum imports, could impact Kansas, where trade accounted for 19 percent of jobs in 2017.

“The vulnerability the state faces from federal policy decisions highlights the need for continued strong budget management, in our opinion,” S&P said. (Reporting by Karen Pierog in Chicago Editing by Matthew Lewis)

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