BRADENTON, Fla. – Kentucky's credit rating could slip if state officials fail to address the massive pension liabilities accruing in the teachers' pension fund, a rating agency said.
The state's expanding economy and solid 2015 fiscal results are positive credit factors, yet large pension liabilities and rising debt levels remain headwinds, Moody's Investors Service said in a report Monday.
"A continued lack of meaningful progress on reform in the legislative session starting January 2016 will weigh negatively on the state's credit quality," said analyst Anne Cosgrove.
Moody's currently assigns an Aa2 rating and stable outlook to Kentucky's issuer credit rating.
Kentucky's rating has already taken a hit because of the problematic pension funding.
In September, Standard & Poor's cut the Bluegrass state's issuer credit rating to A-plus from AA-minus due to "the state's demonstrated lack of commitment when it comes to funding its annual contributions" and the pressure that places on the state's finances.
While Fitch Ratings affirmed the commonwealth's implied AA-minus general obligation rating in September, the agency also cited concern over the combined state pension plan liabilities.
The report by Moody's comes as the Kentucky Teachers' Retirement System Funding Work Group appointed by outgoing Gov. Steve Beshear prepares to meet Monday to draft recommendations for funding the pension shortfall and stabilizing the system that serves 75,000 active and over 45,000 retired members.
The Funding Work Group also plans to meet Dec. 1 to complete its report.
The Kentucky Teachers' Retirement System's most recent unfunded liability was pegged at $14 billion, according to a July 17 analysis by KTRS.
The unfunded liability estimate increases to $21.6 billion under valuation standards adopted in Statement No. 67 by the Government Accounting Standards Board, the analysis found.
Moody's assessment comes as Gov.-elect Matt Bevin, a Republican, prepares to take office Dec. 8. Term limits prevented Beshear from seeking another term.
In an interview with WYMT-TV on Wednesday, Bevin said that retirement plans for current and retired state workers should not change, but that future state government workers should be placed in defined contribution plans.
"We have a legal obligation...we have a moral obligation to our teachers and others to give them what was promised to them," Bevin told the station. "That's going to cost the taxpayers of Kentucky. I'm committed to finding a way to pay that cost."
Moody's review of Kentucky was largely positive, with the exception of the pension underfunding as well as impacts the coal-dependent state can anticipate from the recently finalized Environmental Protection Agency rule known as the Clean Power Plan.
"The rules place a limit on carbon emissions from power plants in the U.S., a credit negative for Kentucky," Moody's said, adding that coal fueled 92% of the state's net electricity generation in 2014.
Kentucky also has the nation's second-highest coal mining employment level.
"The EPA rules are likely to speed up the decline in coal consumption and states with a heavy reliance on coal production will face declines in employment and income," Moody's said.
