BRADENTON, Fla. - Citing Kentucky's unfunded pension liabilities, Standard & Poor's cut the Bluegrass state's issuer credit rating to A-plus from AA-minus Thursday.

Despite pension reform efforts that began in 2008, Kentucky lawmakers have yet to make meaningful progress in reducing its long-term pension liability, especially as it relates to Kentucky Teachers' Retirement System, S&P said.

Although pension reform was discussed in the 2015 legislative session, no resolution was reached on how to address the large unfunded liability in the teacher's pension plan, which stands at $14 billion.

"The downgrade reflects our view of Kentucky's substantially underfunded pension liabilities that are the result of chronic underfunding and that we view as placing long-term pressures on the state's finances," said analyst John Sugden.

Sugden said the current rating accommodates some additional deterioration in the state's pension funded levels, which is likely "given the state's demonstrated lack of commitment when it comes to funding its annual contributions.

"Although we don't currently expect it, the rating could come under renewed pressure over the next two years if there is still no action from elected leaders to address long-term liabilities or if the funded level of Kentucky's retiree liabilities erodes more significantly due to updated assumptions or reduced employer participation in its plans," he said.

In addition to lowering the state's issuer credit rating, S&P also cut the state's appropriation-backed debt ratings to A from A-plus. Most of Kentucky's debt is dependent on annual appropriations.

S&P also lowered the ratings on the state-aid intercept programs for schools and universities to A from A-plus, and the ratings on lease debt issued by various Kentucky county public property corporations, backed by the appropriations from the Administration Office of the Courts, were lowered to A-minus from A.

The outlook is stable.

The rating action came as the Kentucky State Property & Building Commission's Judicial Branch Agency Fund prepared to make its first entrance into the market. S&P assigned an A rating to the upcoming sale of $20.14 million of bonds.

State officials could not immediately be reached for comment.

S&P's downgrade leaves Kentucky with split ratings.

Moody's Investors Service assigns Kentucky its Aa2 issuer credit rating and its Aa3 rating to much of the state's appropriation-backed debt.

Fitch Ratings assigns Kentucky its AA-minus implied general obligation rating, and its A-plus rating to the $6 billion in appropriation-backed debt.

Both affirmed their ratings ahead of the upcoming State Property & Building Commission deal.

The General Assembly ended its annual session in March after rejecting plans to provide additional funds for the annual contribution to the Kentucky Teachers' Retirement System and to issue $3.3 billion in pension obligation bonds to chip away at the liability.

In June, Gov. Steve Beshear ordered a new study into the solvency of KTRS, appointing a 23-member work group to make recommendations for resolving the funding shortfall.

The group's report is due in time for next year's legislative session.

The new study panel was assembled just days after S&P downgraded the Kentucky Turnpike Authority to AA from AA-plus saying that it reflected, in part, the lack of "meaningful progress" state lawmakers had made in addressing the pension liability.

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.