RegulationAugust 8, 2019

Moody’s: Kentucky Pension Reform Is a Negative for State’s Credit Rating

Credit agency says the reform only pushes costs into the future. Gov. Bevin says he’s ‘not surprised.’

Reported by Elijah Owens

Approximately two weeks ago, the Kentucky legislature approved a landmark pension reform that paved a course for certain quasi-governmental state agencies to escape the dire financial situation they’re expected to face as a consequence of being part of the underfunded Kentucky Retirement System.

Moody’s reviewed the legislation and decided it’s ultimately a negative for the state’s credit rating, which currently has an Aa3 stable rating, “because it pushes costs into the future and raises the likelihood that the state will take responsibility for a greater share of KERS’ unfunded liability.”

“Kentucky’s adjusted net pension liability relative to state revenues was the third-highest among the 50 US states, largely driven by years of very weak contributions,” Moody’s said in the report. The agency added that the “credit negative” assessment of the legislation doesn’t signal a rating outlook for the commonwealth’s credit rating.

Gov. Matt Bevin, who wrote the bill, said he wasn’t surprised by Moody’s announcement, and added that its statement only reinforces his previous assertions on how much work there’s left to do with the retirement system, one of the most underfunded in the nation.

The legislation aimed to provide significant aid to state universities and quasi-governmental agencies, who were looking at mandated increases to their contribution rates into the system that could effectively jeopardize their operations. The bill froze their contribution rate for the remainder of the fiscal year, and provided avenues for them to buy their way out of the system through lump-sum or incremental payments and transfer their employees into 401 (k) plans.

“We estimate that non-state entities have a long-term savings opportunity if they elect to leave KERS under the new legislation, particularly if their employees prospectively cease participation in KERS. To the extent savings materialize for entities that leave the system, the state has signaled its intent to fund the long-term difference,” the Moody’s report said.

Moody’s said that the state, as of fiscal year 2018, was already responsible for more than 70% of the system’s liabilities.

Supporters of the bill are saying it’s generally a step in the right direction, with few other alternatives to explore. Critics argue it bars workers from receiving benefits, lets the agencies mistreat them, and freezes the accrued benefits of some members.

The critics’ proposed legislation, which was shot down in previous legislative sessions, proposed a long-term freeze of retirement benefits paid out by the quasi-governmental agencies, in addition to diverting millions in retiree health insurance payments to pension liabilities for five years.