By David Nichols
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LOUISVILLE, Ky. (WAVE) – The credit rating agency Moody’s has released its thoughts on a new law crafted by Kentucky Gov. Matt Bevin and passed by the General Assembly in a special session last month.
A Sector Comment published by Moody’s on Aug. 1 said that what was ultimately passed could have “credit negative” impacts on the state’s credit rating. The report did not note any rating changes were occurring.
“The new law is credit negative for the Commonwealth of Kentucky (Aa3 stable) because it pushes costs into the future and raises the likelihood that the state will take responsibility for a greater share of KERS’ unfunded liability,” the report stated.
During the session, Damon Thayer, R-Senate Majority Floor Leader, said that Senate Republicans wanted to pass the Bevin-backed, quasi-government pension relief to show credit rating agencies the state was not “kicking the can down the road” when it came to its financial issues.
The published Moody’s comment was titled “Pension relief and buyout options for certain governmental entities are credit negative for the state.”
House Bill 1 was signed into law by Bevin last week. The bill freezes the employer-contribution rate at 49 percent for a year, instead of the 84-percent rate that temporarily went into effect July 1.
During that time, agencies would have to decide to stay in the pension system and face higher future contribution rates, which could cripple some employers, or pay their way out of the system up front or in differing installment plans, and enter a 401(k)-style-defined contribution plan instead.
The brief Moody’s report stated that pension funding issues largely stem from years of weak contributions, something Republicans have pointed out, referring to past Democratic administrations.
“Kentucky’s adjusted net pension liability (ANPL) relative to state revenues was the third highest among the 50 U.S. states, largely driven by years of very weak contributions,” the sector comment stated.
The report also noted on the commonwealth’s ability to pay out benefits, stating, without contributions or investment income, some systems would have a limited lifespan.
“The “non-hazardous” portion of the Kentucky Employees Retirement System (KERS-NH) is just one of the state’s pension systems, but it has assets sufficient to cover just two years of benefit payments, assuming no future contributions or investment income, and a reported funding ratio of 13% (11% under our discount rate adjustments),” the report stated.
Authors also wrote that if quasi-government agencies went bankrupt, the Commonwealth’s financial issues would be even worse than they’ll end up under current law, an argument posed by some supporting House Bill 1.
“Securing even discounted payments from other entities would be a more beneficial outcome for the state compared to the possibility of pension-driven bankruptcies of quasi-governmental entities,” the report stated. “For example, Seven Counties Services, Inc., a quasi-governmental mental health provider, filed Chapter 11 bankruptcy in order to discharge its KERS-NH unfunded liabilities in 2013.
The bankruptcy of Seven Counties was also a major talking point for Republican lawmakers during the special session. Moody’s stated the legal battle over the organization’s bankruptcy is now before the state Supreme Court.
“For now, without a definitive ruling from the state’s highest court, the Seven Counties bankruptcy has set a precedent that quasi-governmental entities struggling to afford KERS-NH contribution requirements can use Chapter 11 bankruptcy to effectively shift their entire KERS-NH unfunded liability to the state and other entities remaining in the system — assuming they can convince a court they are not a governmental unit and are otherwise eligible.” (Governments must file Chapter 9 bankruptcy, in which case the state would have more power to prevent a filing.) The state’s new buyout offer can be viewed as providing a lower stakes alternative, whereby the state provides quasi-governmental entities with permanent relief from the coming KERS-NH contribution spikes and accepts a greater share of unfunded liabilities, but secures at least some recurring contribution assistance from these entities.”
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