S&P Global Ratings downgraded Kentucky's issuer credit rating to A from A+ on Friday, due in part to "increased budgetary strain from rising costs associated with pension obligations," the ratings agency said in a news release.
"In our opinion the state is more vulnerable to fiscal stress due to years of uneven budgetary management that has relied on expenditure cuts and weakened reserve levels during a period of economic expansion," said Timothy Little, S&P credit analyst, in the release. "The commonwealth's high level of fixed costs for its pension obligations and Medicaid are likely to remain such, further pressuring future budgets."
The outlook is stable, which "reflects the state's enacted pension reform, adopted biennium budget that fully funds its required actuarial determined employer contribution to all pension plans, and transferring of funds to its budget reserve trust fund," Mr. Little added.
In October, the office of Kentucky Gov. Matt Bevin pegged total unfunded liabilities at $64 billion for the $17.4 billion Kentucky Retirement System, $18.1 billion Kentucky Teachers' Retirement System and the $327 million Kentucky Judicial Form Retirement System, all based in Frankfort.
On April 10, Mr. Bevin signed into law a pension reform bill that included placing future teachers in a new cash balance plan, a reset of the 30-year amortization period to pay off KRS' unfunded liabilities and a change to the way unfunded liabilities are paid off.
Whether the law will survive a legal challenge by Kentucky Attorney General Andy Beshear remains to be seen. A day after the law was signed, Mr. Beshear's office filed a lawsuit against Mr. Bevin and legislative leaders, arguing that the measure violated an "inviolable contract" by reducing workers' rights and benefits. Mr. Beshear's lawsuit also condemned lawmakers for passing a bill that lacked an actuarial analysis at the time and was not subject to public comment or testimony, and for not allowing sufficient time to fully digest the changes before the bill went to a vote. Mr. Beshear is also seeking a temporary injunction against the pension reform law. A hearing on the lawsuit will be held in June.