FRANKFORT — A national financial magazine has ranked Kentucky 47th in overall fiscal health, thanks to its rising pension obligations and relatively high debt levels.
South Dakota enjoys the strongest financial position among the 50 states, while Connecticut ranks last, according to the Aug. 27 issue of Barron's.
Kentucky's poor showing in the analysis was largely due to its ballooning unfunded liability in the state's pension plan. Kentucky's unfunded pension obligation equaled 10.3 percent of the state's gross domestic product, an overall measure of economic activity, according to Barron's. Only New Mexico and Connecticut scored worse on that measure.
The state's general debt obligation equaled 5.4 percent of gross domestic product, which is a higher debt ratio than all but four other states, the magazine reported.
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Mary Lassiter, budget director and cabinet secretary for Gov. Steve Beshear, said Kentucky's debt level is actually lower than the rankings show.
"A significant amount of state-level debt has been incurred for local projects such as court houses, water and sewer systems and K-12 schools," Lassiter said. "Many other states handle this debt at a more local level, so that difference in practice may influence Kentucky's perceived debt level."
Lassiter said Beshear has tried to lower the state's debt in recent years. Beshear's proposed budget for 2012-2014 had the least amount of borrowing in it since the 1996-1998 budget, Lassiter said.
Senate President David Williams, R-Burkesville, said Kentucky's low ranking is reflective of the state's economy, which has not performed as well as other states in the last four years.
"Our gross domestic product is not growing," Williams said. "The per capita income in our state is a lot lower than surrounding states."
Williams also laid blame for Kentucky's rising debt on Beshear and the Democratic-led House. Beshear restructured much of the state's debt in recent years, which means debt payments were pushed into future years in order to get cash during the state's leanest times, he said.
Beshear's administration countered that the restructuring had little to do with the magazine's ranking.
"The debt restructuring that has occurred (most of which was enacted by the General Assembly) does not change the amount of debt owed," Lassiter said. "Second, in this difficult economy, tough choices have had to be made in order to protect spending for education and other priority areas."
Williams said the state's debt would have been higher if Senate Republicans had not stopped efforts by the Democrats to borrow more in recent budgets. House Democrats have countered that Williams, too, tried to add to the state's debt by attempting to borrow millions for new road projects.
Meanwhile, Kentucky's pension troubles have only increased in recent years. According to numbers released in November 2011, the total unfunded liability — the expected future payout for retirees for which no money is available — is more than $30 billion for pension plans the cover teachers and state and local government workers. In comparison, the state's General Fund brings in about $9 billion a year.
A legislative task force is looking at the issue and will issue recommendations on how to fix the pension system by the end of the year.
Many states that performed higher in Barron's rankings have cut costs in their pension systems and kept employer contributions current, according to the magazine.
Williams said Senate Republicans have warned since 2006 that more needs to be done to shore up Kentucky's pension system.
The Kentucky legislature approved reforms in 2008 that were designed to increase contributions into the system and decrease some benefits, but a Pew Center on the States report released last week said those reforms did not go far enough.
The bulk of the current shortfall was created because state and local governments have not put their required contributions into the system.
"As this has all played out, I think it shows that Senate Republicans have been right about the fiscal situation of this state," Williams said.
Lassiter defended Beshear's record on pensions, saying the state honored the stepped up contributions required under the 2008 pension reform bill.
"During a time when most state agency budgets were cut, increased contributions for pensions and retiree health insurance was one of the few areas of government that received substantial increases in funding," Lassiter said.
David Adams, a Tea Party activist, lays blame at the feet of both parties.
"Instead of making the required contributions to the pensions, they have been spending it on vote-buying activities," Adams said, referring to building projects in legislators' home districts.