February 11, 2016

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State finance outlook dims; business leaders call for action

Published 9:16 pm Saturday, February 2, 2013

Standard & Poors Rating Services has downgraded Kentuckys financial outlook from stable to negative amid concerns over unfunded liabilities in the states pension systems.

While S&P noted the state is experiencing a healthy recovery in its economic base and has moderate debt burden, the ratings service said structural imbalances in the budget and sizable pension debts drove its outlook down.

Uncertainty over pension reforms also played a role in S&Ps decision. The agency said it would continue to monitor Kentuckys progress on the matter.

There is no clear timeline on when the state legislature will consider these (the Task Force on Kentucky Public Pensions) recommendations, S&P said in a news release.

And even if the legislature adopts some of the recommendations, its unclear when the changes would take effect, especially if these reform efforts face legal challenges.

S&P affirmed the states AA-minus credit rating. Kentuckys outlook could return to stable if the state takes credible action on pension reform that improves funding ratios and eases budgetary pressures related to post-retirement liabilities, the agency said.

State Budget Director Mary Lassiter said S&Ps revised outlook accounts for not only the states pension obligations, but also its structural budget balance, economic trends, debt, rainy day fund levels and several other factors.

The commonwealth clearly needs to continue to address these substantive issues, and we are confident that we will work together with all parties to keep Kentucky on sound financial footing, Lassiter said in a statement.

Leaders from business groups pointed to S&Ps negative outlook as reason to support Senate Bill 2, a wide-ranging reform package that would fully pay actuarially required pension fund contributions, move state employees into a hybrid cash balance retirement program and remove language guaranteeing cost-of-living raises for retirees.

More than 50 business groups, calling themselves the Kentucky Business Coalition for Pension Reform, signed a letter to legislators urging immediate action on the issue.

During a news conference Friday, Kentucky Chamber of Commerce President Dave Adkisson said failure to act on pension reform could lead to higher taxes on workers and employers.

If the 2013 session concludes without the passage of meaningful pension reform, I dont see how the business community would have any choice but to call the 2013 session a failure, Adkisson said.

SB 2, which mirrors the recommendations proposed by the pension task force co-chaired by Senate Majority Leader Damon Thayer, R-Georgetown, and retired Democratic Rep. Mike Cherry of Princeton, must be passed in its entirety, Adkisson said.

Removing key aspects such as the hybrid cash balance plan and striking COLA language would water down the bill, he said. The funding matter should be resolved in the 2014 session, when the next biennial budget is written, and not linked to tax reform efforts, he added.

Senate President Robert Stivers, who attended the news conference with other Republican senators, said reforming the public pension system and improving the cash flow to Kentucky Retirement Systems, as will be recommended in SB 2 when its filed Tuesday, will improve the agencys assessment on state finances.

When we take those two steps, I think the bond rating companies will say we have our fiscal house in order, and you will see our bond rating go back up, said Stivers, R-Manchester.

While prior projections showed the state could owe some $330 million more to fund ARC payments starting in fiscal year 2015, Stivers said ARC payments from the General Fund would cost $122 million more based on KRS assumptions. A combination of state transportation, federal and other funds would fund about $100 million in remaining contributions, he said.

SB 2 could be voted on soon after its heard in committee next week, Thayer said Friday. He called S&Ps outlook downgrade a stark reminder of the need for pension reform.