As Kentucky lawmakers prepare to meet in this year’s regular session, rating agencies are warning of headwinds if it doesn't tackle its underfunded pensions.
The legislative session begins Tuesday.
No major pension reform bills have been filed, but one measure could ease funding problems.
Rep. Dennis Keene, D-Campbell, has prepared a draft bill that would provide money for certain retirement obligations.
After setting aside $2 million of the proceeds from wagering receipts annually to fund the state’s problem gambler program, the remaining proceeds would be split between the Kentucky Employees Retirement System nonhazardous retirement fund and the Kentucky Teachers' Retirement System’s pension fund in amounts proportional to the number of participants, according to the proposed bill.
Moody's Investors Service said a December court ruling that invalidated 2018’s pension reform bill is credit negative for the Bluegrass State, “delaying reforms to its severely underfunded pension plans that were set to provide modest savings over the long term.”
Kentucky’s adjusted net pension liability of nearly $39 billion at the end of fiscal 2017 was 332% of revenues, the third highest among states, according to Moody.
“Kentucky's track record of weak annual contributions has also pushed its plan for non-public-safety employees, the Employees Retirement System's non-hazardous plan, to the brink of asset depletion,” Moody’s said.
After the state Supreme Court struck down the 2018 reform bill because of the procedures used to pass it, lawmakers held a one-day special session to consider House Bill 1, a replacement measure. The session ended Dec. 18, a day after it began, with legislators saying they didn’t have enough time to digest the bill.
Gov. Matt Bevin, a Republican, blasted the GOP-led Legislature in a Dec. 30 newspaper op-ed.
“The bill did not fail due to a lack of planning but, rather, due to a lack of legislative will,” Bevin said. “The weak excuse that there was not enough understanding among legislators about the contents of HB 1, reflects poorly on the legislative leadership’s ability to communicate with their own members.”
Bevin said the single greatest threat facing Kentucky’s financial future is its public employee pension crisis. In less than five years, he said, the non-hazardous public employee plan is projected to run out of money.
“This will affect the financial stability and credit rating of Kentucky and will leave us unable to deliver on the promises we made to all our hardworking police officers, teachers, firefighters and other state employees regardless of which pension plan they happen to be in,” Bevin said.
Analysts stopped short of downgrading the state in December, but they have previously taken action because of fiscal pressures mostly due to chronic pension underfunding.
In May, S&P Global Ratings lowered Kentucky’s issuer credit rating to A from A-plus. In July 2017 Moody’s downgraded its issuer rating to Aa3 from Aa2. Both assign stable outlooks.
S&P said the court ruling and special session in which lawmakers couldn’t agree on a replacement bill “highlight the ongoing pension funding challenges facing Kentucky's credit quality.”
Current pension pressures are likely to persist despite reform efforts, S&P analyst Timothy Little said Dec. 21. The likelihood of the 2018 reforms being overturned as well as increasing pension costs were factored into the May rating downgrade, he said.
Even if reforms are enacted, Little said the state’s fixed costs for its pension obligations are expected to remain high, pressuring future budgets. Any future pension reform adopted by the Legislature will likely face legal challenges, he added.
