Credit rating agency Standard & Poor’s downgraded Kentucky’s debt and credit rating on Thursday, citing the enormous and growing unfunded liabilities of its public pensions plans, as well as the lack of commitment by the state’s elected officials to do anything about it.
Kentucky’s credit rating was lowered from AA- to A+, which now places it tied for fourth-worst in the country, only besting California, Illinois and New Jersey. Kentucky’s rating on its overall appropriation debt was also lowered, from A+ to A.
“The downgrade reflects our view of Kentucky’s substantially underfunded pension liabilities that are the result of chronic underfunding and that we view as placing long-term pressures on the state’s finances,” wrote Standard & Poor’s credit analyst John Sugden. “Despite pension reform efforts that began in 2008, Kentucky lawmakers have yet to make meaningful progress in reducing its long-term pension liability, especially as it relates to Kentucky Teachers’ Retirement System (KTRS). Although pension reform was discussed in the 2015 legislative session, the session ended without a resolution on how to address KTRS’ large unfunded liability.”
S&P maintained a stable outlook for Kentucky for the time being, though noted that deterioration could be possible “given the state’s demonstrated lack of commitment when it comes to funding its annual contributions” to pension plans. S&P added: “Until the state implements and demonstrates a track record of addressing its long-term pension liabilities, we are unlikely to raise the rating, even if revenues and the economy outpace current forecasts.”
Such bad ratings are likely to affect the interest rates on bonds for the state, as there is less faith in Kentucky’s ability to pay off debts.
While there is talk among Kentucky’s state legislature of infusing more money into the troubled KTRS and state workers’ Kentucky Employees Retirement System through large bonds or finding dedicated revenue streams, such methods will continue to face an uphill fight in Frankfort — as the state has other budget priorities and proposals to raise revenue through tax reform aren’t popular in either party. Gov. Steve Beshear appointed a task force this summer to recommend a way to shore up the funding of KTRS, but considering the fact that S&P singled out this plan, the ratings agency is saving its optimism.