Kentucky pension funds in trouble following spring debt downgrade

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August 27, 2011

By David Godow

Kentucky

FRANKFORT, Kentucky:

While Washington pundits the country over continue to kvetch over the S&P downgrade of the federal government's debt, Kentucky politicians have spent months wrestling with the same issue much closer to home. On March 30, credit agency Moody's downgraded the state's debt from AAA, the highest rating, to AA2. That followed a similar downgrade by the third ratings agency, Fitch, back in February.[1] While both agencies continue to rate Kentucky highly -- and the state's debt remains in better position than some of its neighbors -- the downgrades have been seen as a sign of the state government's weakening financial position, especially where its pension obligations are concerned.

In its downgrade report, Moody's pointed to Kentucky's mounting debt load and its underfunded pension funds as primary factors in its decision. Indeed, since Moody's made it announcement in spring, the situation has gotten even worse; the Bowling Green Daily News reported last week that "in addition to Kentucky’s current $31 billion worth of unfunded pension liabilities for government retirees, the commonwealth’s pension-fund stocks are taking a beating on Wall Street, losing $500 million since July 1."[2] This could add some extra urgency to an issue that has been known to policymakers for some time.

Indeed, commentators have been cautioning states for some time about the billions they don't have but are legally obligated shell out in the not-too-distant future. Kentucky, of course, is no exception. A 2010 study by Joshua D. Rauh of Northwestern University's Kellogg School of Management estimated that Kentucky's pension found will run out in 2022. After the fund is exhausted, according to Rauch's calculations, the state will need to spend at least 36% of its annual income just to cover state retiree benefits.[3] Another 2010 study by the conservative think tank Heartland Institute gave Kentucky a letter grade of "C" for its pension fund management, putting it roughly in the middle of the pack for pension management, but still worse than average.[4]

State politicians, while grudgingly acknowledging the gravity of the problem, have mostly resorted to general calls to fully fund the pension system. State Rep. Michael Cherry (D-Princeton) was has been quoted proposing a withholding of cost-of-living increases for retirees, but, as the BG Daily News points out, this is hardly likely to solve the problem.[2]

It will be interesting to see if the pension or downgrade issue heats up this year's state executive elections. If the media pushes candidates on the issue, both Republicans and Democrats wary of alienating the state's public employee unions may struggle to offer a credible solution.

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