BRADENTON, Fla. — Kentucky on Thursday will price $153.5 million of taxable notes to finance obligations that the state owes to the Teachers’ Retirement System for health care benefits in fiscal 2013 and 2014.

The Kentucky Asset/Liability Commission is selling the notes.

The state sold $269.8 million of taxable notes in 2011 to finance similar obligations for fiscal 2011 and 2012.

In 2010, Kentucky issued $467.5 million to refinance loans carrying 7.5% interest rates the state took from the teacher’s pension fund starting in 2005 to pay its share of teachers’ medical benefits. That deal resulted in an overall interest rate of 3.304% and saved the state $87.7 million over the life of the 10-year final maturity.

This week’s transaction comes to market on the heels of a negative outlook on the state’s AA-minus issuer credit rating by Standard & Poor’s, which cited the state’s burgeoning pension and other post-employment liabilities.

S&P assigned an A-plus with a negative outlook to Thursday’s offering, while Fitch Ratings assigned an A-plus and stable outlook.

Moody’s Investors Service rated the deal Aa3 and continued a negative outlook related to ongoing budget pressures and low pension funding.

The negative rating outlooks are not expected to affect Thursday’s pricing, according to Ryan Barrow, who became executive director of the Office of Financial Management following Tom Howard’s retirement on Dec. 31.

“Our office has a long history of communicating our pension funding to the market so we believe that has already been considered in our previous transactions,” Barrow said. “We expect strong demand due to favorable market technicals with strong inflows into municipal bond funds and a very moderate supply calendar this week. Given that this is similar to the previous transactions for this purpose, I believe it will be well-received, especially since it is a taxable with 10-year final maturity.”

The $153.5 million deal is structured to provide level debt service with serial maturities between 2014 and 2023.

Rating analysts have cited pressures on the Bluegrass state’s budget because of the weak economy, the use of reserves, debt restructuring, and transfers to cure deficits.

Revenues are showing signs of stabilizing.

Analysts have also commented on low pension-funding levels due, in part, because the state has not fully funded the annual required contributions.

As of a June 2012 valuation, the Kentucky Employees Retirement System was 30.2% funded, with an unfunded liability of $8.9 billion. The state paid $251 million toward the $482 million required contribution, according to bond documents.

The Teachers’ Retirement System was 54.5% funded, and had an unfunded liability of $12.3 billion. The state paid $557 million toward the $758 million required contribution in 2012.

Pension reform bills are expected to be filed during this year’s legislative session to address funding, automatic cost-of-living adjustments, and adopting a new hybrid retirement plan for future employees.

Lawmakers are in session through March 26.

Morgan Stanley is book-runner for this week’s offering. Others in the syndicate are Goldman, Sachs & Co., JPMorgan, J.J.B. Hilliard, W.L. Lyons LLC, PNC Capital Markets LLC, Raymond James | Morgan Keegan, Stifel, Nicolaus & Co., Edward D. Jones & Co., First Kentucky Securities Corp., Stern, Agee & Leach Inc., and Ross, Sinclaire & Associates.

Kutak Rock LLP is bond counsel. Peck, Shaffer & Williams LLP is underwriters’ counsel.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.