Research:
State Review: Kansas
Publication Date: 14-Nov-2000
Analyst: James Wiemken, Chicago (1) 312-669-9170; Malachy Fallon, Dallas (1) 214-871-1402

 
Table 1   Rating
   
Issuer credit rating AA+
Outlook Stable

Rationale

Kansas' issuer credit rating reflects the state's general creditworthiness. Credit factors include:  
Continued economic diversification and growth despite softness in manufacturing and agriculture,
A very low debt burden,
Conservative fiscal management that has maintained financial stability through a short-term revenue crunch, and
Good liquidity ensured by statutorily mandated cash reserves.

Kansas' economic growth has slowed in 1999-2000 from its rapid levels in the mid-to-late 1990s. Employment growth has slowed from 3.5% to just over 1%, driven by manufacturing employment declines. Although many of the cutbacks at Boeing have been absorbed by growth in other aircraft manufacturers, further manufacturing declines are predicted. However, strong growth in services, particularly in high-technology industries related to telecommunications and biotechnology, are expected to more than compensate for the manufacturing losses, yielding continued modest growth going forward. Although real personal income growth has also slowed from about 4% to 2%, continued labor shortages and modest economic growth are expected to lead to further growth in wages.  

The state has successfully managed its short-term revenue crisis without harming its current financial situation, partly due to continued economic growth, budget cuts, and a better understanding of tax cuts passed in previous years. Delayed expenditures and ongoing issues such as school funding and the stability of rural agricultural communities, however, will likely put pressure on future budgets.  

Although Kansas' constitution allows for the issuance of GO debt under certain circumstances, the state has not exercised this ability since 1919. Instead, debt issuance consists of highway bonds issued by the Kansas Department of Transportation (KDOT) and lease revenue bonds and certificates of participation issued through the Kansas Development Finance Authority (KDFA). Along with the strength of legal provisions and high project essentiality, the state's creditworthiness is an important factor in assessing its appropriation-backed debt. Debt service as a percent of budget remains low at about 1%, and the state has one of the lowest per capita debt ratios in the nation. The state's highway revenue bonds, representing the majority of outstanding debt, currently enjoy 7 times coverage of maximum annual debt service by pledged taxes and fees.  


Outlook

Kansas' stable outlook reflects the expectation that ongoing strong financial management and capital planning should enable it to maintain good reserve levels while addressing expenditure pressures.  

 
Table 2   Kansas Economic Data
  1999 1998 1997 1996 1995
Personal income (bil $) 69.1 65.9 62.4 58.7 55.3
Nontax, nonwage personal income (bil $) 13.8 13.4 13.0 12.6 12.5
Avg annual wage—total nonagricultural ($000s) 29.2 28.1 27.0 26.0 25.1
Avg annual wage—total manufacturing ($000s) 35.6 35.3 34.4 33.0 31.2
Avg annual wage—nonmanufacturing ($000s) 28.0 26.7 25.6 24.7 23.9
Disposable personal income (bil $) 58.8 56.2 53.5 50.7 48.1
Employment total nonagricultural (000s) 1,327.0 1,312.2 1,268.1 1,226.5 1,198.1
Civilian labor force (000s) 1,446.3 1,410.6 1,368.4 1,348.6 1,340.9
Unemployment rate (%) 3.2 3.8 3.8 4.5 4.4
Employment total manufacturing (000s) 213.2 214.1 206.6 196.7 191.4
Employment total nonmanufacturing (000s) 1,113.8 1,098.1 1,061.6 1,029.8 1,006.7
Resident population (mil) 2.7 2.6 2.6 2.6 2.6
Private housing starts (000s, annual rates) 15.4 13.9 13.1 15.9 11.5
Real retail sales, total (bil of chained 1992 $) 25.4 23.4 21.9 21.2 20.4
Real retail sales, durables (bil of chained 1992 $) 9.7 8.5 7.4 7.0 6.1
Real retail sales, nondurables (bil of chained 1992 $) 15.7 15.0 14.5 14.2 14.2
Source: Standard & Poor's DRI.


Economy

Kansas, with a population of 2.6 million, is the 14th-largest state in terms of size, encompassing more than 82,000 square miles, and is the geographic center of the 48 contiguous states. Although much of the state is rural, the ongoing development of its highway transportation network has led to significant commercial and industrial investment, decreasing dependence on farming and agribusiness. Kansas' major economic regions are centered in the northeastern and southcentral portions of the state. Much of the recent development has occurred in northeastern Kansas, specifically in the Kansas City MSA.  

Growth in total nonfarm employment fell from 3.5% in 1998 to 1.1% in 1999, and is projected to be around 51.5% for 2000. Declines in manufacturing employment of 0.4% and 0.9% in 1999 and 2000, respectively, account for most of the slowdown. Moreover, Standard & Poor's DRI predicts further and more-severe manufacturing declines through 2005, as the aircraft manufacturing industry endures a shakeout.  

Several factors, however, make future total employment declines unlikely. While manufacturing has declined, services and construction employment continue to boom. Overall housing construction remains strong, and work connected with the state's new comprehensive transportation plan has commenced. With the failure of the Sprint-MCI merger, the continued centralization of Sprint services into its new Johnson County headquarters appears more likely, although speculation about other possible mergers abounds. Efforts to bring more high-technology money into the Kansas City MSA also seem to be paying off, which the local business community hopes will lead to a vibrant biotechnology industry. After the pharmaceutical company Hoechst Marion Roussel announced plans last fall to relocate its headquarters to New Jersey, North Carolina-based Quintiles Transnational Corp. announced its intention to occupy Hoechst's vacated office space, ultimately saving 1,000 jobs. The Stowers Institute for Medical Research will open in November 2000, with plans to bring $100 million in research money annually, doubling the amount currently attracted to the city. In addition, the Mid-America Heart Institute is planning to raise $40 million during the next five years to expand its operations.  

Although the potentially volatile transportation equipment industry accounts for about 28% of the state's manufacturing jobs, the state's diversity of firms catering to different segments of the aerospace industry has buffered it, and Wichita specifically, from past volatility. By serving the commercial airline, defense, private-commercial, and private-recreational markets, the state's aerospace employment levels have enjoyed relative stability, as workers move from one niche market to another. For significant future declines, then, several segments of the aerospace market would need to decline simultaneously, which is somewhat contrary to past performance.  

Weakness in agricultural prices continues to make the state's farmers more dependent on federal subsidies, thus influencing farmers' decisions about what crops to plant. Kansas accounts for about 20% of the nation's wheat production, but relatively lower subsidies for wheat have resulted in increased corn production during the past year. While the state plays a large role in the U.S. agricultural sector, agriculture has now declined to a small part of the state's overall economy. Many rural communities, however, remain closely tied to agriculture, and further declines without federal assistance could put pressure on the state to provide further assistance, as well.  

 
Table 3   Kansas Financial Data
               
 
—Fiscal year-ending June 30—
(Mil $) 1999 1998 1997 1996 1995 1994 1993
Gen Fund              
Gen fund rev 4,005 4,090 3,692 3,463 3,217 3,185 2,931
Gen fund expend 3,945 3,579 3,327 3,218 3,109 2,928 2,338
Net transfers and other adjustments (261) (286) (217) (223) (240) (195) (348)
Net operating surplus (deficit) (200) 225 147 22 (133) 63 245
Total gen fund bal 599 784 559 412 390 479 415
Unreserved gen fund bal 478 675 487 322 299 432 366
Combined unreserved gen fund + reserve fund 478 675 487 322 299 432 366
bal/gen fund expend (%) 12.1 18.9 14.6 10.0 9.6 14.7 15.7
Net operating surplus (deficit)/gen fund expend (%) (5.1) 6.3 4.4 0.7 (4.3) 2.2 10.5
Cons Operating Funds (Gen, Special Rev, Debt Service)              
Cons rev 7,401 7,265 6,784 6,578 6,271 6,249 5,986
Cons expend 7,593 6,993 6,732 6,570 6,276 6,057 5,308
Cons total fund bal 1,522 1,754 1,499 1,521 1,663 1,825 1,639
Cons unreserved fund bal 479 711 487 322 297 504 366
Cons unreserved fund bal/cons rev (%) 6.5 9.8 7.2 4.9 4.7 8.1 6.1
Debt              
GO debt 0 0 0 0 0 0 0
Tax-supp rev debt 1,399 1,099 928 914 913 862 737
Appropriation debt 102 106 109 116 118 133 141
Other contingent debt 0 0 0 0 0 0 0
Total tax-supp debt 1,501 1,432 1,145 1,113 1,118 1,100 973
Per capita GO debt ($) 0 0 0 0 0 0 0
Per capita total tax-supp debt ($) 577 544 439 430 437 431 383
Total tax-supp debt/personal income (%) 2.1 2.2 1.8 1.9 2.0 2.1 1.9
Total tax-supp debt/cons rev (%) 20.3 19.7 16.9 16.9 17.8 17.6 16.3
GO and appropriation debt service/cons expend (%) 1.0 1.0 1.0 1.0 1.0 0.8 0.6
Basis of Accounting: Modified cash.


Finances

The state's finances remain in good shape thanks to continued economic growth and budget cuts designed to help the state meet its statutory requirement of maintaining reserves equal to 7.5% of expenditures. After cutting taxes and simultaneously increasing spending without harming fund balances during the mid-to-late 1990s, fiscal 1999 revenues failed to meet budget estimates. This led to a $200 million general fund deficit at the end of the year, cutting the general fund balance by 23% to $599 million, or 15% of actual expenditures. Facing further revenue shortfalls in fiscal 2000, Governor Bill Graves ordered agencies to begin reducing their current-year budgets by 1% in September 1999. Two months later, Gov. Graves' fears were confirmed when the consensus revenue estimators revised their fiscal 2000 revenue projections downward by $37.2 million, leading to a lower initial 2001 revenue estimate. In response, Gov. Graves proposed a $65 million, or 1.5%, reduction to the fiscal 2000 budget in January. The legislature adopted the proposal with minor revisions, and the final measure's cuts affected all agencies, with the exception of primary and secondary education, services for the aging, and juvenile justice. Unaudited estimates indicate that the state suffered another $165 million deficit in fiscal 2000, leaving the fund balance at 8.7% of expenditures, but $43 million above projections. In May 2000, the legislature adopted a fiscal 2001 budget allowing for expenditure growth of just 0.4% in order to maintain the mandated ending fund balance equal to 7.5% of expenditures. Given better-than-expected results during fiscal 2000, the fiscal 2001 fund balance is currently not expected to fall below 8.5%.  

Going forward, the state's budget pressures will likely continue despite recent brighter revenue forecasts. In order to achieve the spending reductions in fiscal 2000 and 2001, the state cut expenditures such as pension fund contributions and demand transfers. While these cuts did not endanger any existing programs due to sufficient liquidity without the general fund contribution, this funding will need to be restored in the near future. Moreover, issues such as education funding, support for the elderly, implementation of the state's comprehensive transportation plan, and continued agricultural softness could present additional pressures.  

Debt

Kansas has no debt outstanding. Historically, the state financed most general capital projects through ad valorem taxes and other dedicated revenues attributable to educational, institutional, and correctional facilities' building funds. The KDFA was created in 1987 as a state agency to provide access to long-term capital financing resources. The KDFA currently has about $131 million outstanding that is payable out of the general fund from lease rental payments and state agencies subject to annual appropriation by the Kansas Legislature. Projects financed under the auspices of KDFA include correctional facilities, office buildings, and energy conservation improvements. In fiscal 2000, the scope of financed projects will expand somewhat to include the state capitol, Kansas National Guard Armories, and public broadcasting facilities.  

The largest area of capital spending has been, and will likely remain, highway transportation. Following the success of KDOT's 11-year, $5.8 billion comprehensive highway program enacted in 1989, the 1999 Kansas Legislature overwhelmingly approved a new 10-year, $12.9 billion comprehensive transportation plan, including provisions for another $980 million of highway revenue bonds ('AA+'/Stable). The new program addresses statewide transportation needs and continues funding for:  
Substantial maintenance ($2.00 billion),
Major modification and priority bridges ($3.30 billion), and
System enhancements ($1.05 billion).

In addition, the new program provides:  
$30 million for aviation,
$60 million for public transit, and
$24 million for short-line railroads.

The next largest area of capital spending has been for the Kansas Board of Regents, or the education building fund, which has about $234 million of revenue bonds outstanding to build, renovate, or replace buildings on the campuses of the state's universities. The education building fund has been supported by a statewide property tax mill levy since 1984. Funds are appropriated by the state legislature and pledged for repayment of the bonds.  

Overall, debt levels remain very low, with total tax-supported debt at $577 per capita and 2.1% of total personal income. Tax-supported debt service remains at 1% of operating expenditures. Strong legal covenants regarding additional debt and a history of prudent issuance suggest that levels will remain manageable for the foreseeable future.  

 
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