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Rating Agency Calls Ky. Pension Bill Ruling 'Credit Negative'

Jefferson County Court 4
Photo by J. Tyler Franklin
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A top credit rating agency says the Kentucky Supreme Court’s ruling that struck down the controversial pension bill last week was “credit negative,” though it did not officially downgrade the state’s credit rating.

Moody’s on Thursday said that the pension bill would have provided “modest savings over the long term,” and that the ruling was a setback.

“While currently uncertain, the ruling may only be a setback in the state’s quest to at least partially address its heavy unfunded liabilities through benefit changes,” Moody’s wrote in a report.

The court ruled last week that the pension bill was unconstitutional because lawmakers rushed the bill to passage without following proper procedures. It didn’t weigh in on whether or not the contents of the bill — which changed pension benefits for most state workers and some current ones — were illegal.

Kentucky has an estimated $38 billion in unfunded pension liabilities. When compared to the amount of tax revenue the state brings in, Kentucky’s pension obligation is one of the most underfunded in the nation.

After the state Supreme Court's ruling, Gov. Matt Bevin called a special legislative session to try and get lawmakers to pass a new version of the bill. The effort quickly failed and the session ended after lawmakers realized they couldn't reach a consensus on the legislation before the end of the year.

The pension bill that passed out of the legislature earlier this year would have moved future teachers out of the conventional pension system that guarantees payments every month after retirement, and instead give them “hybrid” 401(k)-style plans.

The bill also would have changed how state employees use sick leave to qualify for retirement, and tinkered with benefits received by recently-hired workers.

The Moody’s report said that even if new pension changes are enacted in the upcoming legislative session, Kentucky’s credit outlook is uncertain because “it is likely that Kentucky’s attorney general will challenge the laws on substantive grounds.”

“The court did not address substantive questions about the permissibility of benefit changes, such as whether the legislation violates contractual protections under the state constitution,” the report stated.

Attorney General Beshear, a Democrat who initiated the legal challenge against the now-defunct pension law, maintained that the substance of the legislation would have violated state workers’ contract rights, though that claim is still untested by the courts.

Both Beshear and Bevin have said they will run for governor in the 2019 election.

Bevin and Republican leaders of the legislature have said they will take up a pension reform bill again in the 2019 legislative session, which begins on Jan 8.

Ryland Barton is the Managing Editor for Collaboratives. Email Ryland at rbarton@lpm.org.