Kentucky’s Fiscal Crisis

Kentucky is facing a fiscal crisis. Kentucky’s government is deep in debt and it is facing billions in unfunded pension liabilities. Kentucky’s debt and pension problems are exacerbated by the fact that Kentucky’s economy has been a laggard in economic growth.

Left unchecked, Kentucky’s fiscal freefall will only serve to impoverish Kentuckians for generations to come.

State Debt

In June 2010, Fitch lowered the Commonwealth’s bond rating while stating, “Commonwealth debt levels are at the higher end of the moderate range and are rising due to significant recent debt authorizations and issuance.” This warning shot regarding Kentucky’s debt did not come out of thin air. Kentucky has been steadily piling up debt over the last decade.

According to Moody’s Investor Service, Kentucky has the 8th highest state debt/ personal income ratio of any state in the country for 2010. Furthermore, of the top ten most indebted states below, only California has seen a larger increase in its debt burden than Kentucky in the last decade. Kentucky is already to the point where they are issuing new bonds to make interest payments on past debt.

Rank State 2010 2000
1 Hawaii 9.9% 11.6%
2 Massachusetts          9.2% 8.0%
3 Connecticut 8.7% 8.1%
4 New Jersey 7.2% 5.3%
5 New York 6.5% 6.4%
6 Delaware 6.2% 5.2%
7 California 5.6% 2.4%
8 Kentucky 5.4% 3.5%
9 Washington 5.3% 4.6%
10 Rhode Island 5.2% 6.2%

Source: Moody’s

Unfunded Pension Liabilities

To make matters worse, Kentucky ranks 7th worst among states in terms of unfunded pension liabilities. Kentucky is the only state to rank in the 8th worst debt/income and unfunded liability/income categories. The Commonwealth’s unfunded pension liabilities now exceed $48 billion. The Pew Center for the States stated, “ Kentucky’s management of its long term pension liability is cause for serious concern…”

2008 Unfunded Pension Liability

State Per Capita Unfunded Unfunded Liability/

Pension Liability Gross State Product

1 Rhode Island $20,271 58.7%

2 Ohio $19,110 57.9%

3 Mississippi $12,523 53.3%

4 Wisconsin $16,418 47.1%

5 Alaska $18,797 43.9%

6 Illinois $17,230 43.5%

7 Kentucky $12,555 42.8%

8 Alabama $12,205 41.9%

9 Hawaii $15,525 40.8%

10 Oklahoma $11,806 39.1%

Source Forbes Magazine 1/20/2010

Kentucky’s pension problems are a recent phenomenon. In 1999, Kentucky’s pensions were 104.64% funded. By 2008, their level of funding had fallen to 63.84%. The pension problem for Kentucky has only declined further since 2008. According to the Center for State and Local Government Excellence, Kentucky’s pension plans are currently funded at the following levels:

KERS 40% (Projected to be 16% by 2017 and 0% by 2020)

State Police 55%

CERS 72%

CERS haz 68%

KTRS 67%

Slow Economic Growth

In 1999, Kentucky was the ninth poorest US state. By 2008, it had become the fourth poorest, according to the US Census Bureau, Kentucky’s per capita income is only higher than Utah, West Virginia, and Mississippi. Kentucky’s fall down the income ranking has been a result of poor economic growth. Between 1997 and 2008, Kentucky had the third lowest growth rate in the country only ahead of Ohio and Michigan. Such a slow growth rate will make debt and pension payments an even larger obstacle to future economic growth.

Kentucky’s economy is in trouble and in need of serious reform. Rising state debt, combined with massive unfunded liabilities threatens to imperil Kentucky’s future economic growth – an area that Kentucky can ill afford to fall further behind on. Left unchecked, current fiscal policies could bankrupt the Commonwealth.

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