Moody’s has downgraded Kentucky’s credit rating because of the low funding level of the state’s pension systems and lackluster revenue gleaned from taxes.
The news comes after the state missed its own revenue prediction by $135 million at the end of the last fiscal year, which finished on June 30.
“The downgrade reflects revenue underperformance that will challenge the commonwealth’s ability to increase its very low pension funding levels,” Moody’s wrote in a news release. “The commonwealth has one of the heaviest unfunded pension burdens of all states. The commonwealth’s high fixed costs will also restrict fiscal flexibility.”
Moody’s downgraded Kentucky one notch — from level Aa2 to Aa3 — partly for high “fixed costs,” which includes pension payments to current and future state retirees.
The credit rating agency estimates Kentucky has a more than $70 billion public pension shortfall–a higher amount than the state’s official estimate of $37 billion, which relies on more optimistic predictions.
In addition to dreary revenue performance last year, the state didn’t predict some expenses and didn’t retire as much of its debt as anticipated, bringing Kentucky’s total budget shortfall to $152 million.
Gov. Matt Bevin enacted a combination of spending cuts and financial maneuvers to fill the shortfall, and used the development to make another pitch for the state to reform its tax code and alter its pension programs.
“This year’s budget shortfall validates the need for conservative spending plans, and it dramatically underscores the critical need for fixing Kentucky’s broken pension systems and modernizing the state’s tax code,” Bevin said in a news release.
Bevin has promised to call state lawmakers back to Frankfort later this year for a special legislative session to deal with tax and pension changes.
So far, leaders of the Republican-led legislature have been wary about Bevin’s call for tax reform if it includes raising taxes or getting rid of certain popular tax breaks.
Moody’s still rated Kentucky’s outlook as “stable” and said the state could improve its rating by increasing the level of pension funding or reducing fixed costs.
Bevin’s budget director, John Chilton, says the state needs to have another $700 million per year to tackle the pension crisis — a significant chunk of the state’s $10.6 billion budget.
According to the Pew Charitable Trusts, Kentucky generated 98.9 percent of the money it needed to cover current budget expenses between 2002 and 2015. The state had budget deficits in 8 out of the 14 years.
This story has been updated to note that Moody’s estimates Kentucky’s pension debt is higher than the state prediction.