| April 12
April 12 Kentucky's recent overhaul of its
long-crippled public pension system is winning over the rating
agencies that had expressed deep concerns about the state's low
The Kentucky legislature passed a reform of the public
pension system on March 26, and Governor Steve Beshear signed it
into law on April 4.
The changes "should allow the state to better manage its
underfunded pension liability and have come sooner than many
expected," Fitch Ratings said in a note on Friday.
"But, in our view, the overall challenges to the state
remain, and the plan exerts additional budgetary pressure," the
rating agency added about the state's financial condition, which
it said suffers from temporary budget-balancing maneuvers and
Consistently, Kentucky has put in roughly half the amount of
money that actuaries suggest will make the system whole. Returns
on investments typically provide the lion's share of public
pension revenues and make up 68 percent of the Kentucky
retirement system's funding. Funds from the state -- essentially
the taxpayer dollars -- constitute 20 percent of the Kentucky
system's revenues and are known as the Actuarially Required
Contribution, or ARC.
Under the new law, Kentucky will be required to fully fund
its ARC by fiscal 2015, at a cost of about $100 million a year
that is to be covered by changes to the state's personal income
tax. Kentucky will also put new hires into retirement plans
similar to those provided in the private sector and essentially
eliminate cost-of-living adjustments for retirees.
"We believe acceleration to the full ARC will have a
positive impact on the long-term trajectory of the state's
pension liability," Fitch said. "However, the impact of the
acceleration will be muted due to the significant underfunding
Last week another rating agency, Moody's Investors Service,
noted Kentucky has one of the worst funded pension systems in
the country, with the sixth highest unfunded pension liability
of any state. The Kentucky Employees Retirement System only has
enough assets to cover 30.2 percent of its liabilities.
"Kentucky's pension funding problems reflect decades of
chronic underfunding, extensive early retirement incentives and
lackluster investment returns exacerbated by poorly structured
reforms enacted in 2008," Moody's said.
The "landmark pension reforms" are credit positive for the
state, it added.
SOME PENSIONS CRISES PERSIST
Altogether, the Pew Center on the States estimates states
are short $757 billion for their pension systems. For years,
many had not made their full ARCs. Then during the 2007-09
recession the stock market stopped providing sufficient returns
just as states' revenues fell and forced them to pull back
further on funding.
Of late, public retirement systems have been doing better.
According to the U.S. Census, pensions had assets of $2.84
trillion in the fourth quarter of 2012, the highest since a peak
of $2.93 trillion in the fourth quarter of 2007.
Nonetheless, pension crises persist in many places, most
notably Illinois, which currently has a shortfall of $98.6
Kentucky is one of 14 states that have only made partial
pension payments over the past seven years, according to Chris
Tobe, who served as a trustee of the system from 2008 through
2012. In fiscal 2011, it had investment returns of nearly 19
percent, but assets "grew by only 1 percent due to the negative
cash flows from underfunding," he said in a white paper last
Almost every state has enacted pension reforms in the last
five years, and political fights are erupting over the country
over whether the reforms go far enough or if they are even
legal. Many states only made changes to benefits for new hires,
which proved too slow to solve the most pressing problems.