KRS_LOGO_CCiting Kentucky’s woefully underfunded public pension system, an Atlanta-based investment firm cautioned investors on Wednesday to “remain highly selective when purchasing bonds issued in the state,” saying the state could be the next Illinois.

Asset Preservation Advisors’ white paper noted that the funding ratio of Kentucky’s public pension plans is the second-lowest in the country, just eclipsing Illinois. The massive unfunded liability of Illinois’ pension system is partly responsible for the continual downgrades of its credit rating over the past five years; it now ranks as the worst in the country. Kentucky’s credit rating currently ranks near the bottom.

APA adds that while state legislators recently approved pension reform to address the crisis, such efforts “have done little to mitigate the problem.” The Kentucky Employees Retirement System now ranks as the most underfunded public pension plan in the country, at 21 percent with a $9 billion shortfall, which is only expected to grow worse over the next decade. Likewise, the Kentucky Teachers’ Retirement System is among the worst-funded teachers’ pension plans in the country, with a $21.6 billion unfunded liability and 45.6 percent funding ratio.

After a decade of Frankfort not pitching in the full actuarially required contribution to state pension plans, Kentucky’s combined funding ratio has dropped from 82 percent to 45 percent, and the total unfunded liability has risen from $25.7 billion to $43.6 billion.

The funding ratio of Kentucky's public pension plans has gone from great to terrible over the last 10 years

The funding ratio of Kentucky’s public pension plans has gone from great to terrible over the last 10 years.

APA also notes that Kentucky is prevented from improving its credit profile due its high poverty rate and lack of strong revenue growth, which resulted in a $91 million budget shortfall last year that was only fixed with funds from one-time sources. Due to that bleak picture — which resembles Illinois before that state’s credit freefall — APA writes that bond buyers should beware when it comes to the Bluegrass.

“We will continue to monitor the state’s efforts to address the underfunded liabilities,” APA writes in the white paper. “Absent meaningful pension reform, we believe Kentucky could face further downgrades by the ratings agencies in the near term, and thus recommend investors remain highly selective when purchasing bonds issued in the state.”

KTRS lobbied the legislature to allow the teachers’ pension plan to issue a $3.3 billion pension obligation bond to shore up its finances in this year’s session of the General Assembly, but Senate Republicans killed the bill, saying it was too risky to undertake without further study. An actuary for the Kentucky Retirement Systems — under which KERS is housed — recently completed an analysis showing a hypothetical $5 billion bond would stabilize KERS amid its current descent, but the actuary has not yet lobbied for such an effort in Frankfort.

While many have called for thorough auditing of both pension plans and reforms to make their investment decisions more transparent, recent studies have found that no matter the investment strategy taken, there is no way for Kentucky to invest its way out of the dilemma without more dedicated funding from state coffers. Republicans continue to call for reforms that would cut back benefit payments for retirees and shift new state employees towards private or hybrid plans. State House Speaker Greg Stumbo supported the bond measure for KTRS, but the party has failed to coalesce around a single proposal.