Plans to restructure Kentucky’s underfunded pension plans during this year’s legislative session are not expected to affect how one rating agency views the state’s credit.
Fitch Ratings said that the state’s attempt to reform several retirement system plans will probably be similar to a bill approved in 2018 but was struck down by the Supreme Court.
“Even if the legislature and governor enact replacement legislation, Fitch anticipates further litigation,” said analyst Eric Kim. “Given the modest savings anticipated, the proposed pension benefit changes and any related litigation would not affect the state's rating.”
Fitch assigns Kentucky its AA-minus issuer default rating and rates the state's lease obligations A-plus. Both have stable outlooks.
Gov. Matt Bevin had warned lawmakers to prepare for downgrades if the state didn’t enact changes to deal with its pension liability in a special session.
“Pension benefit changes could be helpful in easing fiscal pressure over a very long time frame, but are likely to have only a modest effect on the commonwealth's pension burden in the near term,” Kim said.
Kim’s comment is in response to a series of recent events starting with a Kentucky Supreme Court ruling on Dec. 13, which struck down Senate Bill 151, which passed during the 2018 session and would have made a number of changes to several state retirement plans in an effort to stem soaring costs.
The justices said SB 151 was defective on procedural grounds and unconstitutional, although the ruling didn’t “assess the legality of the benefit changes,” Kim said.
Bevin called a five-day special session shortly after the ruling and asked lawmakers to pass what he said was similar substitute legislation or the state would face “impending credit downgrades based on the Supreme Court’s decision.”
House Speaker Rep. David Osborne, R-Prospect, adjourned the session after one day saying that the substitute measure was substantively different from SB 151 and that lawmakers would continue working on legislation during this year’s session, which started Jan. 8.
Fitch said its primary rating sensitivity for Kentucky is its ability to maintain structural spending commitments, most notably for pensions, while continuing to reduce reliance on non-recurring budget measures.
Kentucky's elevated long-term liability burden, including net pension liabilities, is among the highest for U.S. states, Fitch said, adding that its combined adjusted net pension liability is about $40 billion.
“Fitch considers the burden moderate and anticipates it will remain there for the foreseeable future,” Kim said.
Lawmakers estimated that SB 151 would generate $300 million in savings over 30 years, an amount that is less than 1% of the adjusted pension liability, Fitch said.
“Assuming the Legislature pursues similar provisions in a new bill, Fitch anticipates any beneficial effects to emerge slowly, as new hires with lower benefits gradually replace existing employees with higher benefits,” Kim said. “These changes are unlikely to materially affect Fitch's view of Kentucky's long-term liability burden.”
In addition to the benefit changes proposed in SB 151, Fitch said the bill established an ongoing statutory commitment by the state to make full pension system actuarial contributions calculated using a more conservative level-dollar amortization method.
“A replacement bill would likely include similar provisions,” Kim said. “Fitch views an ongoing statutory funding provision as a positive step, but not determinative in assessing Kentucky's commitment to meeting pension budgetary obligations.”
Future legislatures and governors generally have discretion to revise statutory multi-year budgetary commitments to pensions, as has happened in other states, said Kim.
The only pension bill that's been filed so far is one that would allocate state tax revenue from sports betting to the Kentucky Employees Retirement System nonhazardous retirement fund and the Kentucky Teachers' Retirement System.
Last week, the Legislature created the
The 14 senators and representatives have been asked to make recommendations on changes by Feb. 15, although their work can be extended through the end of this year if more time is necessary.
