The nation’s two largest credit ratings agencies, both of which downgraded Kentucky this year because of its large public pension debt, have handed in mixed reviews of Republican Gov. Matt Bevin’s proposal to reshape the state’s retirement systems.
Moody’s, which put the state’s pension debt at $37.42 billion, praised Kentucky for taking “significant steps toward structurally adjusting its budget to accommodate long-deferred pension costs.” Next year’s pension payments could total around $2 billion, or 16 percent of the state’s General Fund, Moody’s projected.
However, Standard & Poor’s predicted that Bevin’s proposal “will likely face legal challenges” over the “inviolable contract” rights of school teachers and state employees to not have their retirement benefits reduced.
“As seen in other states, legal challenges to pension reform can take years to resolve and courts may invalidate the largest cost-saving measures,” S&P wrote in its review. “If enacted reforms are ultimately invalidated, this may have negative credit implications as the state would need to make up those costs.”
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Bevin and top GOP lawmakers last week unveiled a proposal that would shift most public employees and school teachers hired after next July 1 into defined-contribution retirement plans, like private sector 401(k) accounts, rather than traditional pensions. The 154,000 current retirees would get to keep their pensions. But pension benefits would be capped for most current public employees and teachers after 27 years of service.
Also, public employees and teachers would be required to contribute 3 percent of their salaries every year into their retiree health care funds, effectively cutting their pay at a time when raises have been scarce.
And cost-of-living adjustments for retired teachers would be frozen for five years, while newly retired teachers would not be eligible for a cost-of-living adjustment until five years after retirement. State government retirees already have not seen a cost-of-living adjustment since 2011. By law, those annual raises won’t resume until the state pension plan is fully funded — it’s presently 14 percent funded — or the legislature provides the money for such a raise in advance.
Teachers are protesting Bevin’s proposal, saying it would cut the incomes of retired educators and discourage young people from entering the profession in the future. “There will be nobody left to educate our children if this proposal comes to fruition as presented,” Kentucky Education Association President Stephanie Winkler said Monday.
But in a five-page report, Moody’s praised the Bevin administration for taking the pension shortfall seriously after Kentucky neglected it for more than a decade.
Through a combination of ongoing budget cuts across state government, including reductions to education and Medicaid; increased contributions to Kentucky Retirement Systems and the Teachers’ Retirement System of Kentucky to make up for many years of inadequate payments by the state; and now, plans to largely eliminate cost-of-living adjustments for pensioners and reduce the size of future pensions, Kentucky is showing fiscal discipline, Moody’s said.
Still, Moody’s added, “Kentucky’s large pension liabilities will loom over its finances for the foreseeable future.” The state’s public pension debt is the equivalent of 19 percent of its gross domestic product of $197 billion, which is not a healthy economic indicator, Moody’s said.
Bevin spokesman Woody Maglinger said in a prepared statement that the agencies’ reviews are a good start toward improving the state’s credit ratings.
“We are encouraged by Moody’s and S&P’s comments about the framework for ‘Keeping the Promise’ that was announced last week and are confident the plan will withstand any legal challenge,” Maglinger said. “We fully believe that after the changes are adopted by the legislature there will be a positive impact on Kentucky’s credit ratings, which in turn has direct repercussions on the commonwealth’s economic viability.”
Bevin has said he expects to call a special legislative session this fall to address pensions, but he was not ready on Tuesday, when he spoke to a Louisville business group, to give a specific date. So far, neither he nor GOP legislative leaders have publicly shown a pension bill. The public has seen lists of bullet points explaining their proposal in general terms.