Kentucky’s new pension law, which provides financial incentives for regional universities, county health departments and dozens of other quasi-governmental agencies to exit the state pension system, is a “negative” for the state’s credit rating, the credit rating agency Moody’s said Monday.
Moody’s declared the new law “credit negative” because “it pushes pension costs into the future and raises the likelihood Kentucky will take responsibility for a greater share of the Kentucky Employees Retirement System’s unfunded liabilities,” said David Jacobson, vice president of communications for Moody’s, in a news release.
Still, the “credit negative” declaration does not imply a rating outlook change for Kentucky’s credit rating, Jacobson said.
The Kentucky General Assembly last month in a special session called by Republican Gov. Matt Bevin approved a measure to let public employers at regional universities, community and technical colleges and quasi agencies to decide next year whether to stay in the state retirement system and face a near-doubling of their pension contribution rates or agree to leave.
The law, backed by Bevin, offers several incentives to the public employers if they agree to freeze their employees’ pensions and transfer them into a defined-contribution retirement account, such as a 401(k) plan. An estimated 7,000 public employees would be affected, many of them middle-aged and well into their careers.
Kentucky Retirement Systems faces unfunded pension liabilities of $23.5 billion, and contribution rates have soared. State government is paying the equivalent of 84 percent of its payroll into KRS for pensions. Under the new law, the rate for the regional universities and other quasi-governmental entities is capped at 49 percent until next summer.
Bevin said in Louisville Monday that he was not surprised by the Moody’s statement.
“This Kentucky pension system is essentially bankrupt,” he told the Associated Press. “It is a mess, and that’s what I’ve been saying for four years straight. And so that doesn’t surprise me at all. We have so much more work to do.”
House Democratic Leader Rocky Adkins of Sandy Hook, said House Democrats warned about the same concerns expressed by Moody’s before the governor’s pension bill was passed into law.
“Less than two weeks after the bill was signed into law, our predictions are coming true,” he said. “We offered a more fiscally responsible alternative that would have provided financial stability and security to the system and would have upheld our promise to career public service employees. It is time for the governor to put people over politics and work on issues in a true bipartisan manner.”
Jim Carroll, president of Kentucky Government Retirees, said the Moody’s assessment is predictable.
“The entire premise of House Bill 1 was to solve an employer contribution problem without providing more funding,” he said. “It shifts risks to the commonwealth while at the same time assaulting the contract rights of employees. It is a bad bill that at best will have dire consequences.”
Republican supporters of the bill said public employers need to be able to leave a pension system they no longer can afford to support, paying off their existing pension liabilities in one lump sum or over 30 years.
Opponents raised several concerns. One was whether freezing pensions and offering a less attractive retirement benefit would violate the “inviolable contract” rights of public employees, generating legal challenges. Republican supporters of the bill say they don’t believe employees of the quasi-governmental agencies are covered by the inviolable contract, but they acknowledge that lawsuits are likely.
Another concern is the financial security of the employees themselves, who could lose hundreds of thousands of dollars in retirement benefits if they are moved into less generous 401(k) plans with no guarantee of an employer match, some lawmakers said.
Moody’s said Monday it calculates Kentucky’s adjusted net pension liability, which includes the state Teachers’ Retirement System, as of fiscal year 2017 at $48 billion, which equated to 332 percent of state revenue.
“This is the third highest pension liability among all 50 states and has been largely driven by years of very weak contributions,” said the credit rating agency.
The new law will increase liabilities in coming years, Moody’s said.
Moody’s uses a sliding scale to publicly evaluate the creditworthiness of entities that issue debt through bonds: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2 and Baa3
Kentucky’ is rated at Aa3, indicating it’s fairly stable. If the bond rating is lowered, it would cost the state more to borrow money.