One of the big three credit rating agencies has upgraded Kentucky’s financial outlook from “negative” to “stable,” easing worries from last year that the coronavirus pandemic would devastate the state’s official pocketbook.
Kentucky officials are celebrating thechange from Fitch Ratings as a sign that policies implemented during the pandemic and the years before helped the state weather the financial storm.
But the agency says Kentucky will likely still have challenges going forward, including slow economic growth and massive pension obligations crowding out state spending.
Democratic Gov. Andy Beshear said the report shows the state is ready to sprint out of the pandemic.
“There are good days ahead of us. But remember, it’s how we dealt with this adversity that sets us up for success. So I need everybody out there who hasn’t been, to get vaccinated,” Beshear said.
House Speaker David Osborne took credit on behalf of the legislature, which has been controlled by Republicans since 2017.
“We didn’t get here by spending millions on services that are not effective or by using one-time monies to make long-term commitments,” Osborne said in a statement. “We listened to the people of Kentucky and adopted a spending plan that positions our state to navigate the current economic uncertainty.”
Before the pandemic hit, Kentucky’s cofferswere already facing lackluster growth from tax revenues. Once it did, the state’s official economic forecasters predicteda massive financial hit, leading to shortfalls and the possibility of extraordinary budget cuts.
But in the end,tax revenue wasn’t dinged as badly as predicted, partly because the state and taxpayers got infusions of cash through coronavirus relief legislation passed by Congress.
According to Fitch’s analysts,“this significant influx of federal funding played a key role in supporting a rebound in commonwealth tax collections and economic activity, which is moving slightly ahead of national trends.”
In addition to stimulus checks, expanded unemployment benefits and other programs directly affecting citizens, Kentucky’sstate government got about $2.4 billion from the most recent relief package.
State lawmakers explicitly banned Beshear from spending any of the money without their approval, though Republican leaders of the legislature and the governoragreed on how to spend around half of it — on initiatives like rural broadband, water and wastewater and money to pay down the state’s unemployment insurance debt.
The agency praised lawmakers for increasing contributions to the state’s ailing pension systems and setting aside more money for the Rainy Day Fund, which now sits at $465.7 million, about 4% of annual revenue.
But it also pointed out that the legislature’s infusions into the pension system have been made possible by cutting other programs like higher education, social services — tactics that can only go so far.
“The Commonwealth may be challenged to pursue additional broad-based expenditure cuts given the scope and frequency of pre-pandemic reductions,” the report stated.
Fitch Ratings also noted that the state has below-average population growth and education levels “indicating more limited long-term growth prospects.”
