BRADENTON, Fla. – The Kentucky Turnpike Authority's bonds were downgraded Friday due to what Standard & Poor's described as the state's poorly funded pension obligations.
The downgrade to AA-minus from AA affects about $1.4 billion of debt issued by KTA. The outlook is stable.
S&P also assigned the AA-minus rating to $215.7 million of revenue refunding bonds expected to be issued around March 22.
"The downgrade reflects our view of escalating financial pressures tied to the state's long-term pension liability profile," said analyst Carol Spain. "In our view, rising pension costs could pressure the state's overall budget."
Kentucky's combined pension plans' funding ratio declined to 37% in 2015, and remains among the lowest in the nation, Spain said.
While KTA's bonds are an obligation of the road fund and a lease is in place, S&P said there is no direct lien on road fund revenues, which differentiates it from traditional gas tax-backed bonds.
"We believe the state's general financial pressures weaken this security structure and could add some exposure and potential pressure on net available revenues in the road fund, especially given overall pressures at the state level regarding its long-term liabilities," Spain said.
Although road fund revenues are constitutionally dedicated to road fund expenditures, S&P said some states have redefined the revenues or eligible expenditures in ways that benefit their general funds.
"In Kentucky's case, we view the sustained lack of progress on its pension funding as exerting pressure on all of the state's appropriation-backed debt, and therefore we have lowered our rating on the road fund bonds to better align it with the state," S&P said.
In September, S&P cut Kentucky's issuer credit rating to A-plus from AA-minus, citing the lack of meaningful progress in reducing pension liabilities, especially those of the Kentucky Teachers' Retirement System.
S&P also lowered most of the state's appropriation-backed debt ratings to A from A-plus.
Bond proceeds from the upcoming issuance will be used to advance refund certain maturities of 2008A and 2009A bonds for savings with no extension of maturities.
Fitch Ratings assigned A-plus ratings with a stable outlook to the bonds.
