This comes as no surprise:
There was nothing ambiguous or complicated about Standard & Poor’s (S&P) reasoning behind downgrading Kentucky.
“The outlook revision reflects our concern over pension funded levels, which have declined and are likely to continue declining due to lower-than-actuarially required funding of pension liabilities, and budgetary pressures associated with funding post-retirement benefits,” wrote S&P Credit Analyst John Sugden in the revised rating note.
The state (or “Commonwealth of Kentucky” in official ratings’ parlance) issued $153.5 million in bonds on February 1 to fund the healthcare benefit contributions to the teachers’ pension system. All three ratings major ratings agencies downgraded the state on this latest issuance. According to Moody’s, this rating carries more weight than just an assessment for specific bonds; it “represents the state’s implicit general obligation rating.”
Falling in Moody’s books from Aa3 to Aa2, as Kentucky has, will make the cash-strapped state’s borrowing more expensive.
Unfortunately for the pension fund and state’s credit rating, things will likely get worse before they get better: “While improved market conditions and the increased funding in the KERS and SPRS [State Police Retirement Systems] plans have slowed the growth of the unfunded liabilities of the various systems, KRS uses a five-year smoothing method and the full effects of the market losses in 2008 and 2009 will not be realized for another two years.”
Moody’s specified in its adjustment note that “failure to address declining pension system funded levels” could make the state’s credit rating drop even further.
It’s only going to get worse.
Meanwhile, we continue to receive threats from Kentucky Retirement Systems officials over our coverage. Because they obviously have nothing better to do.