BRADENTON, Fla. - Atlanta-based Asset Preservation Advisors is recommending that investors remain "highly selective" when purchasing Kentucky's bonds.

Investors should consider Kentucky's high pension liability and other economic factors, APA, a registered investment advisor specializing in managing municipal bond portfolios, said in a June white paper called "Kentucky: The Next Illinois?"

"In similar fashion to Illinois, Kentucky's pension funding ratio has been on the decline," the company's paper said. "The state has enacted reform efforts dating back to 2008, which have done little to mitigate the problem."

The Bluegrass state's pension funding ratio has steadily dropped over the past decade to 44.94% from 82.2%, resulting in the second-lowest pension funding ratio of any state behind Illinois, according to APA.

Kentucky's actuarial accrued pension liability is up from $25.7 billion in 2005 to $43.6 billion through fiscal 2014.

"Long term, the state faces significant financial pressures until the underfunded pension liabilities are managed," APA said in the Kentucky review.

APA also said another hurdle facing Kentucky is the state's relatively slow growth for a period of economic expansion, including an individual poverty rate that has increased annually since 2005. The state is also home to just five Fortune 500 companies compared to Illinois, which has 33.

"Like Illinois, Kentucky faces challenged financial operations," APA said, adding that Kentucky ended fiscal 2014 with revenue growth of just 1.2%, resulting in a $91 million shortfall.

The state closed the shortfall with one-time fixes, including a $21 million reduction of the budget reserve trust fund and $50 million in excess unappropriated restricted fund balance, the company said.

"We will continue to monitor the state's efforts to address the underfunded liabilities," APA said. "Absent meaningful pension reform, we believe Kentucky could face further downgrades by the ratings agencies in the near term, and thus recommend investors remain highly selective when purchasing bonds issued in the state."

Kentucky does not issue general obligation bonds, and most of the state's debt is backed by lease rental payments and subject to annual appropriation.

Fitch Ratings assigns the state an implied GO rating of AA-minus with a stable outlook. Moody's Investors Service assigns its Aa2 issuer credit rating with a stable outlook. Standard & Poor's assigns its AA-minus issuer credit rating and a negative outlook.

Analysts from all three agencies have mentioned the state's large pension liability in reports this year.

During Kentucky's regular legislative session, a bill failed to pass that would have authorized $3.3 billion of pension obligation bonds to address a portion of the $14 billion in unfunded liabilities of the Kentucky Teachers' Retirement System.

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