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Agency warns pension ruling a ‘credit negative’ for Kentucky

December 20, 2018

FRANKFORT, Ky. (AP) — One of the country’s largest credit ratings agencies has warned Kentucky about its recent failure to enact changes to its troubled pension systems.

Moody’s on Thursday declared a state Supreme Court ruling striking down a new pension law as 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 declaration does not change Kentucky’s credit rating, but it indicates the uncertainty of the state’s ability to pay off its massive pension debt. Kentucky is nearly $39 billion short of what it needs to pay retirement benefits over the next three decades. Moody’s says that debt is 332 percent of the state’s revenue, the third highest pension debt level by percentage in the country behind Illinois and Connecticut.

State Budget Director John Chilton called the declaration “extremely concerning.”

“While Moody’s and other credit agencies will consider many factors when issuing a credit rating in connection to our next bond offering, they consistently cite the pension crisis as their greatest concern,” Chilton said. “A credit downgrade will increase borrowing costs, putting even more pressure on our already cramped budget.”

Earlier this year, Republican Gov. Matt Bevin signed a pension law that would have put all new teacher hires into a hybrid pension system. It would have also made changes to how teachers use sick days to calculate their retirement benefits and would have changed how the state pays off its pension debt.

Last week, the state Supreme Court struck the law down, saying the Republican-controlled legislature did not use the right procedure to pass it.

Bevin called the legislature back to Frankfort on Monday for a special session to pass the pension law again. But lawmakers adjourned Tuesday without passing a bill. Acting Republican House Speaker David Osborne said lawmakers preferred to wait until they return in January for the regular session.

The prospect of a credit downgrade was the primary reason Bevin gave for calling the legislature back in session. But in an “Issuer Comment” released Thursday, Moody’s said the court’s ruling “may only be a setback.” It noted Kentucky has significantly bumped up its annual contributions to the pension system, saying its ability to maintain those increased payments is “a key credit consideration.”

“Provided that the legislature passes a new round of pension benefit changes, Kentucky’s reforms stand to reduce its pension contribution requirements, or at the very least enable its current contribution levels to go further toward reducing its unfunded liabilities,” the agency said.

Moody’s noted even if the legislature passes a new pension law in 2019, it is “likely Kentucky’s attorney general will challenge the laws on substantive grounds.” Beshear, a Democrat, is running for governor in 2019.

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