FRANKFORT – Kentucky’s economic outlook took another hit this past week as Moody’s downgraded the state’s bond ratings to Aa2 from Aa3 following the announcement the state failed to make its revenue estimates for the fiscal year and in light of its growing public pension problems.

The Governor’s Budget Director’s Office announced in early July that receipts fell $138.5 million short of budget estimates. Budget Director John Chilton also warned government agencies and offices not to expect a quick recovery, advising them to plan for lower expenditures in Fiscal Year 2018 which began July 1.

Meanwhile, adjusted investment projections have increased – at least on paper – the unfunded liability of pension funds. Various estimates place that liability at anywhere between $37 billion and, in a worst-case scenario, as much as $80 billion.

That will mean higher contribution requirements from state agencies for their employees and from the General Fund.

Moody’s cites both the shortfall and the pension problems for its most recent downgrade.

“The downgrade reflects revenue underperformance that will challenge the commonwealth’s ability to increase its very low pension funding levels,” the ratings agency’s website explained. “The commonwealth has one of the heaviest unfunded pension burden of all states. The commonwealth(‘s) fixed costs will also restrict fiscal flexibility.”

A significant increase in funding for the pension systems, a reduction in fixed costs or economic growth exceeding the national growth rate might lead to an upgrade in ratings, Moody’s said.

Factors which could lead to a further downgrade, according the ratings agency, would be continued worsening of pension funding levels, continued underperformance of revenues which could deplete reserves or slower economic performance relative to the rest of the country.

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