BRADENTON, Fla. – Under pressure to fund Kentucky’s ailing pensions, Gov. Matt Bevin recommended cutting 70 state programs as part of his biennial budget.

Calling it a “difficult but honest” two-year spending plan, Bevin composed it by cutting most state agency budgets 6.25% and bulking up reserves borrowing from a special fund designed to address unfunded pension liabilities.

Kentucky Gov. Matt Bevin
Kentucky Gov. Matt Bevin said the state faces "harsh realities” while cutting 70 state programs to support his budget. Bloomberg News

“Kentucky has just completed a truly transformative year of achievement, where many important seeds of progress were sown,” said Bevin, referring to new economic development projects. “However, the truth remains that after decades of poor financial management, the Commonwealth faces some harsh realities.

“These realities, coupled with modest projected revenue growth, mean that Kentucky must make tough and unpopular decisions.”

Bevin is a Republican. His predecessor was Democrat Steve Beshear, who was in office from 2007 to 2015.

State economists project revenue growth of 2.7% in fiscal 2019 and 2.6% in 2020.

Bevin recommended a $34.5 billion total budget for 2019, which is only 1.2% or $412.2 million more than the current budget. He set aside $35.1 billion for 2020.

The $10.8 billion general fund recommendation for fiscal 2019 is $7.6 million less than the current budget, and includes spending cuts that Bevin said the state could avoid by implementing pension and tax code reforms. He proposed a $11.2 billion general fund budget for 2020.

The two-year budget dedicates 14.5% of general fund revenues or $3.31 billion to “fully fund state employee and teacher pension plans for the first time in nearly two decades,” the governor said.

Kentucky has some of the worst funded pension plans in the country. The unfunded liabilities for the state and county employee retirement plans recently rose to $27 billion from $5 billion due to changes in underlying assumptions for inflation, interest rates and payroll growth, according to the Kentucky Retirement Systems 2017 comprehensive annual financial report.

The Teachers’ Retirement System had $14.3 billion in unfunded liabilities and was 56.4% funded as of June 30, 2017.

The proposed budget includes $755.5 million of general-fund supported bonds for roads and other capital spending over the next two years, and $60 million in agency bonds to leverage federal drinking and wastewater financing programs.

The bonding program includes another $100 million of debt to continue work on the state’s novel workforce development program, which leverages local funding to create training centers that match the needs of employers.

Bevin suspended requirements in the law aimed at providing long-term funding for pension liabilities to support reserves, dipping into the fund for $62 million in 2019 and $184 million in 2020 to bring the reserve balance to $254 million by the end of fiscal 2020.

According to the Kentucky Center for Economic Policy, a research think tank, Bevin relied on “significant” transfers of $472 million over the biennium, the largest of which is $202 million from the Kentucky Employees’ Health Plan.

“This fund has been raided repeatedly over the past several years to help balance the budget,” KCEP said.

The second-largest proposed transfer is $150 million from the Permanent Pension Fund, while others are $26 million from the School Facilities Construction Commission Emergency and Targeted Investment Fund and $23 million from the Petroleum Underground Storage Tank Fund.

Although revenues are tight and the governor did not say how much in savings there would be from cutting 70 programs, Bevin said his spending plan calls for several landmark investments.

Those include $34 million from tobacco settlement funds to support programs that fight the opioid epidemic and substance abuse; $24 million to add positions and increase salaries for social workers; $10.8 million in new funding for adoption and foster children programs; and additional funds to hire 75 new state and county attorneys and 51 new public advocates to support the criminal justice system.

Kentucky’s bond ratings have taken hits because of the state’s outsized pension liabilities. In July 2017, Moody's Investors Service cut Kentucky’s issuer rating to Aa3 from Aa2, driven mainly by pension costs.

S&P Global Ratings has a negative outlook on its A-plus issuer credit rating and other Kentucky debt citing the pension problem.

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