Financial management credited for Kentucky’s positive rating outlook

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Improving Kentucky’s financial risk management practices was key to S&P Global Ratings’ decision to upgrade the state’s rating outlook to positive.

The rating agency revised Bluegrass’ outlook to stable on January 28 and affirmed its issuer credit rating of A.

At the same time, S&P affirmed the A-minus rating on state-linked credit-backed bonds issued by the State Property and Buildings Commission and other state agencies.

“Our continued effort to attract new investment to the Commonwealth while continuing to be fiscally responsible is having a positive impact,” Kentucky Governor Andy Beshear said.

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The agency also affirmed a BBB-plus rating on Kentucky lease debt backed by Office of Courts Administrative credits, issued for county courthouse projects.

“The positive outlook reflects our view of Kentucky’s improved risk management practices that we capture as part of our environmental, social and governance (ESG) factors, including less reliance on one-time items to balance the budget. and a larger rainy day fund, the Reserve Trust Fund budget, which increased to $1.9 billion, or 16% of general fund expenditures, from $303 million in fiscal year 2020,” said Anne Cosgrove, credit analyst at S&P.

S&P noted improved governance as Kentucky made changes to the state’s teacher retirement system with a transition this year to a hybrid structure for teachers hired after Jan. 1.

“We believe these changes enhance legal flexibility to meet our view of minimum funding progress, as well as modifying a number of plan assumptions,” S&P said. “This is in addition to Kentucky continuing its commitment to fully fund actuarially determined contributions (ADC) pension plans since fiscal year 2017, which we view as a positive.”

S&P said its A rating reflects Kentucky’s ability to maintain a balanced budget and reduce reliance on one-time measures to balance the budget.

He noted that the significant federal relief funding in fiscal year 2021 helped improve overall financial flexibility during a time of significant uncertainty due to the pandemic.

Under the American Rescue Plan Act 2021, the state will receive more than $3.77 billion, including $868 million for counties and $931 million for cities. The state had received about $1.7 billion in federal assistance under the Coronavirus Aid, Relief, and Economic Security Act of 2020.

“Our continued effort to attract new investment to the Commonwealth while continuing to be fiscally responsible is having a positive impact on expert opinion in Kentucky,” Governor Andy Beshear said. “S&P cited a reduced reliance on one-time items to balance the budget and a higher balance in the state’s Rainy Day Fund as key factors influencing the change.”

He noted the main drivers of the outlook revision.

“Their outlook on the state of our economy is not stable, but positive,” he said. “Our continued economic recovery – including significant investments like the decision by Ford Motor Company and SK Innovations to build what we believe will be the largest battery production plant in the United States – has also been cited by S&P as the key to the decision to revise Kentucky’s outlook to positive.”

S&P said some major auto industry investments are expected to generate many new jobs. He also described as positive the improvement in governance in recent years, including the recent reform of teachers’ pensions and a clear desire to cut spending to balance the budget.

Still, S&P said the state’s assets are offset by high fixed costs such as pension liabilities, which it says will weigh on future budgets. Additionally, S&P noted that future budgets may be strained by having to deal with a large percentage of Medicaid costs as well as weaker demographics and low labor force participation rates.

“We could raise the rating if Kentucky continues to show its commitment to structurally balanced operations and better funding for pensions, even after factoring the potential increase in pension costs into the proposed budget,” S&P said.

However, the agency noted that it could revise the outlook to stability if the state misses its revenue collection forecast, leading to weaker-than-expected fiscal performance; if the costs of pensions and other post-employment benefits increase more rapidly than expected; or if there is a lack of structural balance or a reduction in the balance of the Fiscal Reserve Trust Fund.

Over the past few years, Kentucky leaders have said companies-supportive policies have helped it achieve record growth and investment. And it continues to anticipate increased economic activity.

The governor announced that in the last week of January, more than 1,200 new jobs will be created with nearly $292 million in investments by businesses across the state.

“Companies across the country and around the world have recognized what we’ve always known — that Kentucky is the place to be,” Beshear said. “We have already broken all records in the books for economic development.”

Last year, the Beshear administration saidKentucky has seen a record $11.2 billion in private sector investment for new location and expansion projects and commitments to create more than 18,000 full-time jobs over the next few years.

Kentucky is rated Aa3 by Moody’s Investors Service and AA-minus by Fitch Ratings and Kroll Bond Rating Agency. All three have stable credit outlooks.

In 2021, state issuers sold more than $3 billion in debt, with the top issuer being the Northern Kentucky University Foundation with $210.5 million.

“With all the negative we’ve had to deal with, the positive feels pretty good,” Beshear said.

Kentucky is grappling with both the fallout from the COVID-19 pandemic and the recent aftermath of death and destruction left in the wake of last December’s tornadoes.

Since the start of the pandemic in 2020, the state has recorded 1.2 million coronavirus cases with more than 13,000 deaths.

In early December, 70 tornadoes crossed the state and also hit Arkansas, Illinois, Mississippi, Missouri and Tennessee. It resulted in at least 77 deaths in Kentucky, making it the deadliest weather disaster on record in the state. It also caused mass destruction of property and damaged infrastructure in towns in the southwestern part of the state.

Kroll said supportive cash will help Kentucky manage its tornado recovery efforts.

“In KBRA’s view, the Commonwealth of Kentucky’s enhanced reserve position, coupled with federal assistance, provides important support to address additional costs that may result from stimulus efforts,” Kroll said in a note. of December.

President Joe Biden traveled to Kentucky on December 15 to visit some of the most devastated areas.

“There are no red tornadoes or blue tornadoes,” Biden said during a briefing with state leaders. Beshear is a Democrat while both houses of the state legislature have Republican majorities.

Biden issued a major disaster declaration, which activated the Federal Emergency Management Agency to respond and dispatch 700 people to affected areas.

“With federal assistance and state resources, Kentucky is well positioned to handle the financial implications of the substantial damage caused by recent tornadoes,” Kroll said.

A resident sits in front of a damaged home after a tornado in Dawson Springs, Kentucky, on December 13.

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In early January, Beshear sent its 2022-2024 tax report executive budget to the state legislature, noting that fiscal year 2021 saw an unprecedented revenue surplus and that the years ahead look promising.

“Revenue estimates for the 2022-2024 biennium are bright, with $1.9 billion more than expected in General Fund revenue for the current year, and a growth rate of 7.5% which follows last year’s 10.9% growth rate,” he said in his budget message to the State House and Senate.

General Fund revenue grew more than 15% in the first half of the current fiscal year, he said, adding that the Consensus Revenue Forecasting Group forecast growth rates for fiscal years 2023 and 2024 of 2.1% and 4.2%, respectively.

The governor’s budget would add nearly $2 billion to state education spending, with $915 million more in fiscal year 2023 and $983 million more in fiscal year 2024. The budget also remained below the debt service-to-government revenue policy ceiling of 6%, with a ratio of 3.68. %.

However, later last month, the House passed its version of the $65 billion budget for the fiscal year 2022-2024, which has now passed to the Senate where it will be amended and undergo some changes before the two bodies meet. to negotiate a final version which will be sent to the governor for his signature.

It was the first vote on a House budget bill in many years and lawmakers said preparations for last year’s interim session allowed them to pick up the pace of budgeting this year. .

The House version was more conservative than the Governor’s proposal in that it withheld about $1 billion in unallocated funds whose purpose will be decided later.

Some have speculated that the GOP Legislature may want to revise the state’s tax code in the current session and offer sweeping tax cuts. Democrats have urged that spending on education programs and infrastructure be prioritized.

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