Just as the state of Kentucky prepares to borrow $281 million on the bond market, Standard & Poor's has dropped its credit rating, which is likely to mean a higher interest rate for taxpayers.
S&P, one of the nation's three major ratings agencies, cut Kentucky's credit rating to A from A+ on Friday, citing the state government's poor fiscal management and the relative poverty of its citizens.
Last year, Moody's downgraded Kentucky by one level, to an Aa3 rating, warning bond investors at the time that the state does not collect enough revenue to resolve its growing public pension debt.
Other state entities, including the Property and Buildings Commission and the state's aid programs for schools and universities, had their ratings lowered by S&P on Friday to A- from A. The rating for Kentucky's lease debt on a statewide package of local courthouse projects dropped to BBB from A-.
Kentucky's fiscal problems go beyond tens of billions of dollars of public pension debt, S&P warned. Year after year, Kentucky's state government is forced to cut its spending because it continually fails to understand how much it needs to pay for services, and it does not set aside enough money for adequate reserves, S&P said.
"In our opinion, the state is more vulnerable to fiscal stress due to years of uneven budgetary management that has relied on expenditure cuts and weakened reserve levels during a period of economic expansion," S&P Global Ratings credit analyst Timothy Little said in a news release.
Aggravating the state's fiscal situation, Kentuckians lag behind most other Americans on income, and the state's economic growth continues to be outpaced by the nation's as a whole, S&P said.
Gov. Matt Bevin's office released a statement Monday acknowledging that Kentucky has work to do.
"As Governor Bevin has said since day one, building a strong financial foundation for the commonwealth is our top priority," Bevin spokesman Woody Maglinger said.
"We have worked with the General Assembly to take historic steps in this direction," Maglinger said. "However, continued bold action is still necessary on many fronts. We will forge ahead in our endeavor to make pension funding sustainable, to build the state’s emergency fund to an appropriate level and to reform Kentucky’s tax code to drive economic growth and create more jobs for Kentuckians."
The Kentucky Finance and Administration Cabinet is planning to sell about $281 million in bonds on June 5 on behalf of the State Property and Buildings Commission. That is the largest bond sale on the state's schedule at least through early summer.
S&P and the other two ratings agencies, Moody's and Fitch, have closely watched Kentucky to see how it would address its public pension shortfall.
In its news release Friday, S&P credits the state for passing pension reform legislation during the 2018 General Assembly and fully funding the state's actuarial required contributions to the state employees' and teachers' pension systems. However, it also says it does not plan to raise its ratings for Kentucky within the next two years.