A credit ratings agency fired a warning shot this week over Kentucky’s $32.6 billion public pension debt.
Standard and Poor’s Global Ratings revised its outlook on Kentucky on Wednesday, from stable to negative, ahead of an upcoming state bond sale. The lowered outlook reflects at least a one-in-three likelihood that S&P will lower the state’s credit ratings during the next two years, making it more expensive for the state to borrow money, the agency said in a statement.
“The outlook revision reflects our view that funding levels of the commonwealth’s pension plans could significantly weaken and associated fixed costs could continue to rise to a level that might significantly pressure budgetary performance and flexibility,” S&P analyst Timothy Little said.
Despite previous attempts at pension reform, Kentucky Retirement Systems ended fiscal 2016 with 31 percent of the amount of money it’s expected to need for future benefits — the funding level for the largest KRS fund for state workers was even worse, at 16 percent — and Kentucky Teachers’ Retirement System ended the year with 35 percent of what it needs, S&P said.
“While one year of negative returns does not weaken current credit quality to a level that warrants a lower rating, we think that given the level of liquidity pressures among its poorly funded systems, the commonwealth is more vulnerable than other states to litigation, weak investment returns and likely changes to key actuarial assumptions, such as payroll growth and mortality rates,” the agency warned.
“If actuarially required pension contributions rise or liquidity issues worsen, necessitating meaningful increases in pension contributions, in our view, Kentucky has limited means to afford them,” it said.
Gov. Matt Bevin has made the state’s pension debt a top priority, ordering cuts around state government in order to increase the state’s contributions to the retirement systems. Additional changes to the pension plans are possible later this year in a special session of the legislature, after consultants whom Bevin has hired finish their review of the plans’ financial health.
“This highlights the importance and severity of the pension crisis here in Kentucky, and is the reason why the Bevin administration has hired consultants to help the commonwealth address this critical issue,” state budget director John Chilton said in a prepared statement Friday.