BRADENTON, Fla. Two days after the downgrade of a Kentucky agency’s bonds partly because of unfunded pensions, Gov. Steve Beshear ordered a new study into the solvency of the Kentucky Teachers’ Retirement System.
Beshear appointed a 23-member work group Tuesday to recommend how to resolve a funding shortfall and stabilize the system for 75,000 active members and 45,000 retirees.
KTRS has a $14 billion unfunded liability and a 53.6% funded status, according to a 2014 actuarial valuation. The state also operates the Kentucky Retirement Systems, for which the state has adopted reform and funding measures in recent years.
The General Assembly earlier this year rejected plans to provide additional funds for KTRS’ annual contribution and to issue $3.3 billion in pension obligation bonds to chip away at the liability.
Beshear, whose final term ends this year, said that recent warnings by credit rating agencies regarding the KTRS “are further evidence that this fiscal crisis has financial implications beyond this administration.”
Beshear also acknowledged that past study groups have examined KTRS. He said that those studies can be utilized going forward. He also said improvements have been made to the retirement system, though he provided no details.
“It is critical that we explore the options and develop recommendations to aid the 2016 General Assembly as action needs to be taken next spring to address this crisis,” he said.
The newfound urgency in dealing with KTRS came after Standard & Poor's downgraded the Kentucky Turnpike Authority to AA from AA-plus reflecting, in part, the lack of “meaningful progress” state lawmakers have made in addressing the long-term pension liability.
The downgrade was accompanied by a change in outlook to negative from stable; it also reflected lower revenues from declining oil prices and changes to the state’s motor vehicle tax, S&P said in a June 14 report.
The turnpike bond rating intersects with the pension obligation because there is no direct lien on road fund revenues securing the turnpike bonds, according to analyst John Sugden.
Turnpike bond payments are also subject to annual appropriation by the General Assembly.
While road fund revenues are constitutionally dedicated to road expenditures, Sugden said some states have “redefined, rather than redirected, the revenues or eligible expenditures in ways that benefit their general funds,” particularly when state general fund budgets are under pressure.
“In Kentucky's case, we view the sustained lack of progress on its pension funding as potentially exerting pressure on all of the state's appropriation-backed debt,” Sugden said. “We believe this weakens the security structure and could add some exposure and potential pressure on net available revenues in the road fund, especially given overall pressures at the state level regarding it long-term liabilities."
The Turnpike authority priced the $190.8 million bond issue Wednesday.
It carried ratings of A-plus from Fitch Ratings and Aa2 from Moody's Investors Service. Both have stable outlooks.
Fitch said Kentucky’s operating flexibility is constrained compared to most states with weak, depleted reserves and a continuing reliance on nonrecurring revenue sources.
The Bluegrass state also has combined debt plus unfunded pension system liabilities that “are amongst the highest for U.S. states,” according to Fitch.
Earlier this month, Atlanta-based Asset Preservation Advisors recommended that investors remain “highly selective” when deciding whether to purchase Kentucky’s bonds.
The overall funded status of the state’s pension funds has steadily dropped over the past decade to 44.94% from 82.2%, resulting in the second-lowest pension funding ratio of any state behind Illinois, according to APA.
Kentucky’s actuarial accrued pension liability is up from $25.7 billion in 2005 to $43.6 billion through fiscal 2014, the muni fund manager said, adding that the state also has weak economic indicators.
“We will continue to monitor the state’s efforts to address the underfunded liabilities,” APA said. “Absent meaningful pension reform, we believe Kentucky could face further downgrades by the ratings agencies in the near term, and thus recommend investors remain highly selective when purchasing bonds issued in the state.”
