Kentucky is moving far too slowly to fix its state pension system, Standard & Poor's Ratings Services said this week as it lowered the state's financial outlook to "negative," down from "stable."
Although the General Assembly is considering pension reforms suggested last November by a task force, "there is no clear timeline" for when the underfunded Kentucky Retirement Systems would get more money, S&P said.
Senate Republicans say they're preparing a pension bill to be filed next week, but they won't identify a way to fund the proposal until 2014. If the suggested reforms are approved, lawmakers would need to provide an extra $327 million for the pension system in fiscal year 2015 and continue ramping up that amount until it hits $1 billion by 2020.
Delaying a decision on how to fund the proposed legislation would mean at least one more year of inadequate funding for the $11 billion Kentucky Retirement Systems, or KRS, which is responsible for providing lifetime pensions and health coverage for 334,177 state and local government employees. The pension fund for most state workers is down to a 27 percent funding level, among the worst in the country. Overall, KRS has 44 percent of the money it's expected to need in coming years.
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"At this point, all we have are the recommendations of a task force," said John Sugden, an S&P analyst in New York. "Our concern is that the pension funding levels continue to decline, and they (the legislators) are not meeting their obligations on that front."
S&P studies each state government's financial management and the state's economy. It then issues an outlook — positive, stable or negative — to indicate whether the state's ability to pay its debts is likely to get better or worse.
Overall, S&P has awarded Kentucky a "AA negative" credit rating, which is five levels down from the best, "AAA." The lower the credit rating, the more it costs Kentucky to borrow money.
There also is a possibility that Kentucky pension reform will be challenged in court, S&P said. Groups representing state workers and retirees are protesting several of the proposed reforms, including the elimination of cost-of-living adjustments in pensions and a shift for future state workers away from defined-benefits pensions and into hybrid cash-balance plans that are more like private sector 401(k) accounts.
A key House Democrat said Friday that he agrees with S&P's criticism about the immediate need for funding. House Democrats believe the legislature should identify sources for additional pension revenue this year and possibly shift the necessary money around in the budget, said House State Government Chairman Brent Yonts, D-Greenville. The 2013 legislative session resumes Tuesday.
"This rating may give us the impetus we need to reopen the (two-year) budget this session, though that was not something we originally had expected to do," Yonts said.
"We have got to put money into this system this year, or at the very least set up a specific procedure to do it, set up a funding formula that we're committed to," Yonts said. "There is no reason why we can't do it this year."
In a prepared statement, Senate Majority Leader Damon Thayer, R-Georgetown, said Senate Republicans are sticking to their plan of filing a pension reform bill next week but not addressing "the funding portion" until the legislature's 2014 session, when lawmakers will prepare the state's next two-year budget.
Passing a bill without money attached solves nothing, said a spokesman for a state retiree group.
"So-called pension reform legislation expected to be introduced next week will simply state the intention of the legislature to accelerate payments," said Jim Carroll, founder of the Facebook community Kentucky Government Retirees. "It is therefore as meaningless as the existing state law that already mandates these payments and has been disregarded by the legislature for years."
Also Friday, the Kentucky Chamber of Commerce and other business groups held a Frankfort news conference to urge the General Assembly to pass "comprehensive pension reform" in the 2013 legislative session. Without reform, the pension system will continue to drain money from all other state priorities, including education and infrastructure, the groups warned.
The Chamber would be satisfied to see a pension reform plan locked into place during 2013 if it reflected last year's task force recommendations, even if no additional money flows to KRS until next year, said Chamber president Dave Adkisson.
"I don't quarrel with the logic of S&P," Adkisson said. "I will say that if the Legislature adopts a substantive road map in this session, the 2013 session, that will mean a lot more than just having recommendations from a task force. That will show the intent of the legislature."
"We've said all along that Hurdle No. 1 is to adopt a plan, and Hurdle No. 2 is to pay for it," he said.
Can Kentucky pay its debts? What analysts say
Standard and Poor's on Jan. 31
"The negative outlook reflects our view of Kentucky's weakened pension-funded levels, failure to adequately fund post-retirement benefits in this biennium and pension-reform efforts that still require legislative consensus and action. ... Should Kentucky take credible action to enact comprehensive pension reform plan that improves funded levels and take measures to address budgetary pressures related to post-retirement liabilities, we could revise the outlook back to stable."
Moody's on Jan. 31
"Kentucky's credit outlook is negative. While revenue growth has improved, the commonwealth's sizable budget deficits over the past few years led to a depletion of reserve balances and borrowing for budget relief. ... The commonwealth's pension liability is large and is expected to grow in the near to medium term absent material pension reform."
Fitch Ratings on Jan. 29
"The commonwealth has relied on one-time solutions to balance its budget, including depletion of reserves, debt restructuring and borrowing for operations. ... The funded status of the pension system is likely to decline significantly before it begins to improve, and future pension payment requirements will place a greater demand on budgetary resources than would have otherwise been the case."