Kentucky’s fiscal problems led S&P Global Ratings on Friday to downgrade the state one notch as it prepares to issue $281 million of revenue bonds.
S&P lowered Kentucky’s issuer credit rating to A from A-plus and cut the ratings on the state’s appropriation-backed obligations to A-minus from A, affecting lease debt issued by the State Property and Buildings Commission and other state agencies.
S&P also lowered to A-minus from A the ratings on Kentucky’s state aid intercept programs for schools and universities, and downgraded to BBB-plus from A-minus the ratings on lease debt backed by appropriations from the Administration Office of the Courts.
The outlook is stable.
“In our opinion the state is more vulnerable to fiscal stress due to years of uneven budgetary management that has relied on expenditure cuts and weakened reserve levels during a period of economic expansion,” said S&P analyst Timothy Little.
The commonwealth's fixed costs for its pension obligations and Medicaid are likely to remain high, further pressuring future budgets, Little said.
Complicating the state's long-term fiscal health are income levels well below the national average and economic growth that has consistently lagged the nation, according to S&P.
“The stable outlook reflects the state's enacted pension reform, adopted biennium budget that fully funds its required actuarial determined employer contribution to all pension plans, and transferring of funds to its budget reserve trust fund,” Little said.
Despite these developments, a history of missed revenue estimates, underestimating necessary government expenditures, and weak economic indicators could indicate further downward rating pressures, he said, adding, "We do not expect to raise our rating within the two year-outlook period.”
The State Property and Buildings Commission plans to price $271.8 million of revenue bonds and $9.6 million of refunding bonds on June 5 with Citi as the book-runner of the negotiated deal.
S&P assigned an A-minus rating to the bonds, and a stable outlook.
Moody's Investors Service assigned its A1 rating to the bonds Friday, and said the outlook is stable. Moody's assigns its Aa3 issuer rating to Kentucky.