Ratings agency Standard & Poor’s downgraded Kentucky’s debt and credit rating last week, blaming the growing multibillion dollar unfunded liability of its public pension plans and state government’s “demonstrated lack of commitment when it comes to funding its annual contributions.”
What this downgrade is expected to translate into for Kentucky is higher interest rates on government bonds, essentially making it costlier for the state — and even local governments — to borrow money for projects. While Kentucky has a balanced budget amendment, large infrastructure and construction projects unable to be funded due to budget constraints are often made possible by such bonding.
Jason Bailey, executive director of the progressive Kentucky Center for Economic Policy, says the increased costs of borrowing will drain dwindling available money in the budget away from other neglected priorities, such as the pension plans that led to the downgrade itself. Altogether, Bailey says this is another reason to implement tax reform that adds new revenue to the budget and circumvents a worsening pension crisis, which was created by a decade of Frankfort not paying its full actuarially required contributions (ARC) to its pension plans.
“To get out of this hole, we need a plan to pay down pension liabilities while also keeping our obligations to adequately fund schools, health and other important state services,” said Bailey. “Ultimately, there’s no way to get there without a plan that includes new revenue to make the full pension payments we’ve been avoiding in the past. We’re beginning to hear more leaders suggest we should start that conversation in this state, and that’s a hopeful sign of where we need to head.”
State Rep. Rick Rand — the Democratic chair of the House budget committee — appeared to make such a call for increased revenue after news of the downgrade, telling The Courier-Journal’s Tom Loftus that “we probably need to look at some sort of tax reform next session so that we have the dollars to make absolute commitments to these major problems.”
However, calls for tax reform that increases revenue have been kept at arm’s length by both parties in Frankfort, as the specter of being labeled a proponent of tax increases in the next election usually kills such efforts in their infancy. Additionally, an effort to issue a $3.3 billion bond for the troubled Kentucky Teachers’ Retirement System while interest rates were low passed the House in this year’s session but stalled in the Senate amidst fears that such a large bond was too risky.
Asked if new tax revenue or large bonding was necessary to address the chronic underfunding of Kentucky’s public pension system that brought about the downgrade, Dave Adkisson, president of the Kentucky Chamber of Commerce, told IL that this may not be as necessary as displaying “increased discipline and increased fortitude” to the ratings agencies.
“New revenue does not necessarily have to be involved, or specifically designated new revenue,” said Adkisson. “I think the key is for S&P to see that there are solutions that have been developed and the legislature has the willpower to make the ARC.”
Adkisson cited the KTRS task force currently meeting at the request of Gov. Steve Beshear, saying their recommendations later this year might create consensus and momentum for a funding mechanism to be passed by the state legislature next year and turn around one of the worst-funded teachers’ pension plans in the country.
Despite the dire state of Kentucky’s pension system and its consequences, the issue has mostly been an afterthought in the race to determine Kentucky’s next governor. Matt Bevin’s campaign sent a statement from the Republican candidate for governor saying that he is the type of outsider who can solve the pension crisis and put the state’s finances in order.
“This downgrade is just another example of why it is time for a leadership change in Frankfort,” said Bevin. “After having been named one of the most corrupt state governments, it is clear why we can’t get our financial house in order. What we are doing now is not working. It is time for a Frankfort outsider to grow Kentucky’s economy, resolve the pension crisis, and get our state back on track; I am the only candidate in this race with the experience and knowledge to do that.”
Bevin has called for freezing pensions for new state workers and moving them into a defined contribution 401k plan, as well proposing to move existing state workers into a private plan. Critics have said the latter proposal is impossible legally, as such workers have an inviolable contract that cannot be broken. Additionally, the National Institute on Retirement Security has warned that pension freezes actually will increase costs for states to fund the closed plan, while moving from defined benefit to private defined contribution plans could leave retirees vulnerable to volatility in financial markets.
Independent gubernatorial candidate Drew Curtis has an unorthodox plan for the state to obtain a large line of credit instead of one lump sum bond to pay pension obligations and stabilize their finances. He says Kentucky likely will be forced to raise taxes if the state continues to fall short of paying the full ARC for pensions, and says Bevin’s strategy would only exacerbate the crisis.
“(Bevin) wants to put new hires into a 401k, which will bankrupt the pension system quicker, and he has proposed putting existing retirees into a 410k, which we physically cannot do,” said Curtis. “Basically, either he doesn’t have a plan, or he’s got one that’s going to blow it up faster. I’m the only candidate that’s put out a plan that isn’t just wishful thinking.”
Democratic candidate Jack Conway has called for a dedicated source of revenue for the state to pay the full ARC, though he has not yet specified the amount needed or where this money would come from. He also has spoken out against the $3.3 billion bond plan for KTRS and said the Kentucky Employees Retirement System — the plan for state workers that is the most underfunded public pension plan in the country — will work itself out if the state makes full ARC payments and makes smart investments. However, Kentucky Retirement System actuaries have said that even if the full ARC is met, KERS cannot invest its way out of the crisis and its funding ratio will continue to decline to dangerous levels over the next decade.
Conway’s campaign declined to respond to IL’s multiple inquires over the S&P downgrade.