Fitch Rates Kentucky Pension As Worst-Funded Major Plan

May 15, 2014

A Kentucky pension plan continues to be one of the worst-funded major plans in the country, according to an annual report from Fitch.

The credit rating agency's report tracks how well states are making the necessary contributions. Kentucky’s Employee Retirement System for non-hazardous workers reported a funding rate of only 23.2 percent – the lowest on the list.

"They have set aside assets enough to cover about a quarter of the obligation that the state believes it owes to retirees," says Douglas Offerman, Senior Director in Fitch's U.S. Public Finance group.

While 37 of the 91 state plans in the survey received at least 100 percent of the required annual contribution, he says Kentucky was among the states that have sometimes viewed pensions as "somewhat of a flexible expense that can be reduced if the state budget is tight."

Kentucky lawmakers enacted pension reform in 2013, closing the original plan to new hires, instituting a hybrid cash balance plan, and requiring the state to fully fund what's called the Actuarially Required Contribution, or ARC.

But those reforms alone may not be enough to boost the 23.2 percent figure in the short term. Fitch analyst Eric Kim says a number of factors play a role in determining the funding ratio - including the investment return on assets that are currently set aside for pension obligations.

"If they fall below [expectations], as they did during the recession for example when you had some big stock market declines in 2008 and 2009, that's going to hurt the funded ratio because it relies on a certain level of investment rate of return," he cautions.

Kentucky's latest round of pension reforms won't go into effect until fiscal year 2015.