A national credit rating agency said Thursday that proposed changes to Kentucky’s troubled pension systems are unlikely to affect the state’s credit rating, contradicting claims made by Gov. Matt Bevin as he pushed lawmakers to pass a pension bill during a December special session.
Fitch, a credit rating agency based in New York City, said the state’s ability to maintain full funding for pensions and eliminating its reliance on one-time money to fund ongoing programs are the most crucial factors in its credit-rating of the state, not the proposed changes to the pension systems.
“Even if the legislature and governor enact replacement legislation, Fitch anticipates further litigation,” the agency wrote, referencing the recent Kentucky Supreme Court ruling that struck down a pension overhaul bill lawmakers passed last spring. “Given the modest savings anticipated, the proposed pension benefit changes, and any related litigation, would not affect the state’s rating.”
The report contradicts the urgency Bevin claimed when he unexpectedly called the legislature into special session last month the week before Christmas.
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“For the sake of all current and future Kentuckians, the legislature must act immediately before the Commonwealth incurs further credit downgrades that will cost tens of millions of dollars for taxpayers and further limit the Commonwealth’s ability to pay for essential services, including education and healthcare,” Bevin said after calling the special session. “I am confident that the General Assembly can, and will, do exactly that.”
Fitch, though, noted that the bill was expected to save the state about $300 million over 20 or more years, a figure that pales in comparison to the state’s pension liability, which Fitch estimates at $40 billion.
Kentucky has one of the worst-funded pension systems in the country. Last year, Republican lawmakers rushed through a controversial pension bill that would have eliminated defined-benefit retirement plans for future teachers and scaled back benefit enhancements for current teachers.
The bill was challenged by Attorney General Andy Beshear and eventually struck down by the Kentucky Supreme Court on procedural grounds.
Moody’s, a competing credit rating agency, has previously warned that the court’s pension ruling was a “credit negative” for Kentucky, saying it “delayed reforms to the state’s severely underfunded pension plans that were set to provide modest savings over the long term.” The agency, though, did not lower the state’s credit rating.
“Moody’s has already said that Kentucky’s failure to make significant pension reforms is viewed as ‘credit negative,’ said Elizabeth Kuhn, Bevin’s communications director.
Fitch acknowledged that Kentucky has the largest long-term pension liability in the country, but said it considers the burden “moderate” and projects it will stay the same for the “foreseeable future.”
“Assuming the legislature pursues similar provisions in a new bill, Fitch anticipates any beneficial effects to emerge slowly, as new hires with lower benefits gradually replace existing employees with higher benefits,” Fitch said. “These changes are unlikely to materially affect Fitch’s view of Kentucky’s long-term liability burden.”
Senate President Robert Stivers, R-Manchester, said there is still a need for pension legislation in order to reduce future pension costs.
“If we don’t get a plan, it’s just going to be like a black hole,” Stivers said. “We have to put more and more money into it.”
The agency praised a provision of the old bill that required future legislatures to fully fund the pension system through level-dollar funding, a formula that would set a flat-rate for pension funding each year.
“Fitch views an ongoing statutory funding provision as a positive step, but not determinative in assessing Kentucky’s commitment to meeting pension budgetary obligations,” the agency said. “As demonstrated most explicitly in New Jersey several years ago, future legislatures and governors generally have discretion to revise statutory multi-year budgetary commitments to pensions.”
The agency said they will focus on Kentucky’s budgets rather than the proposed pension reforms in order to determine the state’s credit rating. It noted that tax changes lawmakers approved last year resulted in “a sizable net-revenue increase,” but expressed concern that $500 million of the budget came from one-time fund transfers.
“Kentucky’s ability to manage rising spending demands while reducing reliance on one-time items will continue to drive Fitch’s assessment of the commonwealth’s financial resilience as the next, inevitable, recession draws closer,” the agency said.