“We need to put partisan politics aside and work together to get Kentucky's financial house in order,” Gov. Matt Bevin said in a tweet in response to Moody’s report.

BRADENTON, Fla. - A Kentucky Supreme Court ruling is a credit negative for the state, according to Moody's Investors Service.

The ruling says Kentucky's governor lacks unilateral authority to withhold appropriated funds to universities.

The ability of a governor to use executive authority to reduce spending is viewed as a positive governance attribute, Moody's Investors Service said in the report Thursday.

"Kentucky's governor will find it harder to manage difficult budget scenarios without legislative cooperation," said analyst Dan Seymour.

In a 65-page ruling, the Kentucky Supreme Court said in a 3-2 ruling Sept. 22 that Gov. Matt Bevin does not have authority to revise appropriated allotments to the state's eight public universities and one community and technical college.

Bevin, a Republican, had ordered budget reductions at the institutions earlier this year totaling $18 million in order to contribute more cash toward Kentucky's underfunded pension plans.

"We need to put partisan politics aside and work together to get Kentucky's financial house in order," Bevin said in a tweet in response to Moody's report.

Since the court ruling, state Attorney General Andy Beshear, a Democrat, has called on Bevin in daily tweets to release funds "wrongfully withheld" from the universities.

Beshear has filed several lawsuits, including the one leading up to the Sept. 22 ruling, challenging a number of unilateral actions that Bevin has ordered since taking office in December.

From a credit perspective, Moody's said the $18 million withheld from Kentucky's universities is "trivial," given that the state's annual revenues exceed $10 billion.

The $18 million also would not "make a dent" in the state's pension plans, which are underfunded by $31 billion on an actuarial basis and by $41.3 billion on a Moody's-adjusted basis.

"What is not trivial is a potential limit on gubernatorial powers to reduce spending without legislative collaboration, which our U.S. states methodology expressly considers a governance weakness," Seymour said. "Without such a power, states are less capable of quickly adjusting to revenue shortfalls or unexpected spending increases.

"Conversely, states whose executives can unilaterally cut spending mid-year can swiftly modify their spending to better align with revenue or other trends," he said.

Kentucky and 16 states do not grant their governor's authority to withhold appropriations, Moody's said, citing data from the National Association of State Budget Officers.

Some 33 states give their governors the power to withhold appropriations from executive branch departments, data showed. Nine states confer the power to withhold appropriations from all three government branches.

"Some governors can reduce expenditures whenever they want, while others can only reduce appropriations under certain circumstances, such as a revenue shortfall," Seymour said.

While Kentucky's governor can cut appropriations if there is a budget shortfall of 5%, state revenues outperformed in 2016 and the state ran a surplus.

"To be clear, the authority to cut spending in the event of a 5% budget shortfall is still a very helpful feature of Kentucky's governance profile," Seymour said.

The Kentucky Supreme Court concluded that the governor's authority with respect to the boards of universities "differs fundamentally from his authority with respect to those state entities and employees that answer to him, such as the program cabinets and secretaries who head those cabinets.

"In this sense, the universities are much more like private entities," the justices said. "And their authority over spending their money is largely independent of the executive branch."

 

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