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Rating Action:

Moody's revises Kansas' outlook to negative; affirms Aa2

Global Credit Research - 03 May 2016

New York, May 03, 2016 -- Summary Rating Rationale

Moody's has affirmed the State of Kansas' issuer rating at Aa2 and revised the outlook to negative. The state's Aa2 rating recognizes its stable tax base and fundamental economic capacity to balance its budget and fund its pension liabilities. The rating also incorporates the state's financial shortfalls caused in part by large tax cuts, as well as a long history of underfunding its pension plans.

We have affirmed the Aa3 rating on $2.3 billion of the state's subject-to-appropriation bonds issued by the Kansas Development Finance Authority. That rating is one notch lower than the state's issuer rating to reflect appropriation risk.

We have additionally taken actions on three of Kansas' tax-backed securities, discussed in a separate report published simultaneously with this one.

Moody's is currently evaluating comments we received on our proposed, methodological revisions to rating state and local government lease-backed, annual appropriation, and moral obligations. Our comment period closed on December 2, 2015, and the publication of the final, revised methodology could affect the State of Kansas' appropriation ratings.

Rating Outlook

The revision of the state's outlook to negative from stable reflects the ongoing difficulties it is having restoring structural balance to its budget and getting on a path to sounder funding of its pension liabilities. By continuing to balance its budget with unsustainable, nonrecurring resources, including pension underfunding, it is accumulating large and expensive long-term liabilities that it will be paying off for a long time.

Factors that Could Lead to an Upgrade (Removal of Negative Outlook)

Sustained revenue growth or expenditure cuts leading to structural balance in state finances

Improvement in reserve levels

Demonstrated path to sounder funding of pension plans

Factors that Could Lead to a Downgrade

Continued underfunding of pension plans and growth in unfunded pension liabilities

Failure to adopt measures to increase revenues or decrease expenditures sufficient to restore structural balance

Legal Security

The state's Issuer Rating is the equivalent of its full faith and credit pledge, which does not apply to any outstanding bonds.

Because the state constitution allows the issuance of direct debt only in certain limited instances, Kansas has not issued GO bonds since 1919. All of its rated bonds are secured by something other than the state's full faith and credit pledge.

The state's KDFA-issued appropriation bonds are payable by annual legislative appropriations. There is no requirement for the legislature to appropriate funds to pay debt service, and bondholders have no recourse if the legislature fails to do so.

See our separate report for details on three of the state's tax-supported securities.

Use of Proceeds

Not applicable.

Obligor Profile

The State of Kansas is the 34th-biggest state, with a population of 2.9 million people and a gross state product of $150 billion.

Methodology

The principal methodology used in the general obligation rating was the US States Rating Methodology published in April 2013. The principal methodology used in the lease backed rating was the The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dan Seymour
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nicholas Samuels
Additional Contact
State Ratings
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's revises Kansas' outlook to negative; affirms Aa2
No Related Data.
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