No action on pensions in 2016 will likely lead to bond rating downgrades, experts say

Without action on the state’s persistent pension problems during the 2016 session, experts explained Monday that the state will likely see lower bond ratings as rating agencies closely monitor Kentucky’s pension debt.

In a meeting of the Kentucky Teachers’ Retirement System Task Force Monday, experts from Morgan Stanley spent time explaining to the group the options when it comes to bonding to shore up the pension systems. In their presentation, the experts stressed that rating agencies will be watching Kentucky to make sure something is done to address the state’s severely underfunded pension systems.

If nothing is done, they explained, the state is likely to see bond rating downgrades which makes it harder for the state to complete other projects in areas like infrastructure and others.

Also included in their presentation, the Morgan Stanley representatives discussed different models of taking out a pension obligation bond, which continues to be debated in these sessions.

If the state were to go through with a pension obligation bond, the experts explained that a smaller bond with more flexibility would be better than asking for a massive amount all at once. As an example, they said a $1 billion bond would be preferable at first—a number lower than the $3.3 billion bond proposed in the 2015 session.

The group also heard from William B. “Flick” Fornia, a pension expert consulting with the group, who again discussed many potential funding models to try to shore up KTRS.

With all plans presented, Flick said the key to all is hitting the assumed rate of return set by the system at 7.5 percent.

Many of the potential plans discussed in the meeting Monday had changes to the system for current and future teachers. Some options for current teachers include changes to how excess sick leave is calculated and moving from a three to five year average salary on which benefits are calculated. When asked what kinds of cuts that would mean for future teachers, Flick said that benefits being provided under any of the plans being discussed would still be a “much better deal” than social security.

Flick again expressed his opinion that it would not be economically sound to add teachers to the social security system, which they are currently not eligible for. He said current teachers’ benefits outweigh what they would get from social security and the cost to the state would be substantial.

Monday’s meeting was the second to last meeting of the task force. The group will meet again on Tuesday, Dec. 1 to decide on recommendations to submit to the governor and legislature.

The full meeting will be available on KET’s website in the days after the meeting.