February 01, 2013 04:17 PM UTC

S&P: Kentucky Credit Outlook Downgraded Due to Pension Underfunding.

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• by: PolDancer

LEGAL CHALLENGE POSSIBLE OVER STATE PENSION COLA-THEFT.  S&P: PUBLIC PENSION “UNDERFUNDING” HAS CAUSED A “NEGATIVE” VIEW OF STATE CREDIT.

Yesterday, Standard and Poor’s lowered its outlook on Kentucky’s credit from “stable” to “negative.”

State underfunding of public pension obligations, similar to Colorado’s $4.5 billion in underfunding of Colorado PERA in the last decade, continues to draw the attention of U.S. credit rating agencies.  (A few weeks ago, the State of Illinois received a credit rating agency “comeuppance” over its historic underfunding of public pension obligations . . . now the state of Kentucky has been targeted.)

From Kentucky.com:

“There also is a possibility that Kentucky pension reform will be challenged in court, S&P said. Groups representing state workers and retirees are protesting several of the proposed reforms, including the elimination of cost-of-living adjustments in pensions and a shift for future state workers away from defined-benefits pensions and into hybrid cash-balance plans that are more like private sector 401(k) accounts.”

Link to story at Kentucky.com:

http://www.kentucky.com/2013/02/01/2499515/kentuckys-financial-outlook-downgraded.html

From Reuters:

“‘The outlook revision reflects our concern over pension funded levels, which have declined and are likely to continue declining due to lower-than-actuarially required funding of pension liabilities, and budgetary pressures associated with funding post-retirement benefits,’ S&P credit analyst John Sugden said in a statement.”

Full article at Reuters:

http://www.reuters.com/article/2013/01/31/kentucky-outlook-idUSL1N0B0LK020130131

From Governing.com:

“The report added that ‘there is no clear timeline on when the state legislature will consider’ recommendations from the Kentucky Pension Task Force on how to improve the state's pension funding status. ‘And even if the legislature adopts some of the recommendations, it's unclear when the changes would take effect, especially if these reform efforts face legal challenges,’ the report added.”

“At Governing’s Outlook in the States and Localities conference held earlier this week in Washington, D.C., Sugden predicted that pensions and unfunded liabilities would have more of an impact on states’ and localities’ ratings this year.”

“‘Underfunding … or where there isn’t sufficient action on pension reform, it has affected our view of the credit negatively,’ he said.”

Link to Governing article:

http://www.governing.com/topics/finance/gov-kentuckys-outlook-downgraded.html

In 2010, the Colorado General Assembly attempted an unconstitutional taking of fully-vested Colorado PERA retiree pension benefits in the bill, SB10-001.  Colorado PERA retirees immediately sued the State of Colorado and its pension administration arm, Colorado PERA, over the contract breach.  Last year, the Colorado Court of Appeals held that Colorado PERA retiree pension COLA benefits taken by the Colorado Legislature are indeed contractual obligations of the state.  Appeals to the Colorado Supreme Court are pending.

The “COLA-theft” bill enacted by the Colorado General Assembly in 2010 proposes to take contracted Colorado PERA pension COLA benefits until the “funded ratio” of the pension, Colorado PERA, reaches a level of 100 percent.

The Colorado Legislature placed this 100 percent funding threshold into the bill, SB10-001, in spite of the fact that a 100 percent funded ratio is unnecessary for public pension systems.  Such a funded ratio is unnecessary since public pension systems exist in perpetuity, and never have to fully “payoff” their pension obligations.  These pension obligations will come due three or more decades into the future . . . they are never due “tomorrow.”  Indeed, the Colorado PERA pension system has been funded at a 100 percent level just twice in its 81-year history.  Public pensions are analogous to home mortgages.  If your home mortgage is 80 percent paid off, you congratulate yourself.  You do not run in the streets screaming about your “crisis.”

One of the big three U.S. credit rating agencies, Fitch Ratings, deems public pension systems to be “well-funded” at an 80 percent funded ratio, and “adequately funded” at a 70 percent funded ratio.

“Fitch generally considers pensions with funded ratios 80% and above to be well-funded.”

In a 2011 Fitch Ratings report, Fitch notes that a 70% actuarial funded ratio for public defined benefit pensions is considered an “adequate” actuarial funded ratio.

Link to the report:

http://www.ncpers.org/Files/2011_enhancing_the_analysis_of_state_local_government_pension_obligations.pdf

So, it was odd that the Colorado General Assembly felt the need for the clear overreach of a 100 percent funding level threshold in SB10-001.  Even Colorado PERA’s actuaries note in Colorado PERA’s most recent financial statements that a 100 percent pension funded ratio far exceeds federal pension regulatory (GASB) standards.

On page 112, of the 2011 Colorado PERA Comprehensive Annual Financial Report, Colorado PERA’s Independent Actuary, Cavanaugh MacDonald Consulting, LLC, reports:

“It should be noted that the changes made to the PERA structure as a result of SB10-001 have as a goal 100% funding of the accrued liability within 30 years for all divisions.  The results of the December 31, 2011, valuations combined with financial projections of all divisions, indicate that this goal, WHICH IS A MUCH STRONGER POSITION THAN REQUIRED TO MEET CURRENT GASB STANDARDS, is still achievable with the exception of the Judicial Division.”

Why did Colorado PERA’s actuaries not inform Colorado PERA in 2010 that the proposed 100 percent funded ratio requirement in SB10-001 was a ridiculous overreach?  Perhaps, it wasn’t their place to do so.

The Colorado General Assembly’s underfunding of the Colorado PERA pension (for the last five years) is presented on page 30 of the 2011 PERA CAFR.  The CAFR reports underfunding of the Colorado PERA pension of $122.6 million for the 2011 calendar year, following a $451 million underfunding of the Colorado PERA pension in 2010.

Link:

http://www.leg.state.co.us/OSA/coauditor1.nsf/All/641A0AB5B97D073C87257A3A0072FEA3/$FILE/2067-12%20CAFR_6-26-12.pdf

The Center for Retirement Research at Boston College, in its “Public Plans Database,” presents the Colorado Legislature’s underfunding of the PERA pension beginning in 2001 in percentage terms.

Link:

http://crr.bc.edu/data/public-plans-database/

The Colorado Legislature has underfunded its Colorado PERA public pension obligations in the last decade, particularly in regard to its “annual required contributions” for the PERA State and School Divisions where typically only 50 to 70 percent of annual obligations have been met.  I believe that it is rather disingenuous for governments that have ignored their pension obligations to claim a need to breach public worker contracts.  Why do public worker contracts appear to have a lower priority than the state’s corporate contracts?

The Colorado Legislature, having racked up its public pension debt through this habitual underfunding, decided in 2010 to attempt to extricate itself from its self-inflicted mess by shifting 90 percent of the cost of its 2010 “pension reform bill” onto the backs of Colorado PERA retirees . . . in breach of these retirees' pension contracts.

Reasonable?

The Public Plans Database reveals the percent of the Colorado General Assembly’s pension bills that have actually been paid since 2001:

2001 Colorado School – 100% ARC Paid
2002 Colorado School – 100% ARC Paid
2003 Colorado School – 69% ARC Paid
2004 Colorado School – 51% ARC Paid
2005 Colorado School – 48% ARC Paid
2006 Colorado School – 62% ARC Paid
2007 Colorado School – 60% ARC Paid
2008 Colorado School – 68% ARC Paid
2009 Colorado School – 65% ARC Paid
2010 Colorado School – 70% ARC Paid
2011 Colorado School –
2001 Colorado State – 100% ARC Paid
2002 Colorado State – 100% ARC Paid
2003 Colorado State – 69% ARC Paid
2004 Colorado State – 51% ARC Paid
2005 Colorado State – 48% ARC Paid
2006 Colorado State – 58% ARC Paid
2007 Colorado State – 56% ARC Paid
2008 Colorado State – 63% ARC Paid
2009 Colorado State – 61% ARC Paid
2010 Colorado State – 62% ARC Paid
2011 Colorado State –
2001 Colorado Municipal – 100% ARC Paid
2002 Colorado Municipal – 100% ARC Paid
2003 Colorado Municipal – 69% ARC Paid
2004 Colorado Municipal – 62% ARC Paid
2005 Colorado Municipal – 64% ARC Paid
2006 Colorado Municipal – 85% ARC Paid
2007 Colorado Municipal – 84% ARC Paid
2008 Colorado Municipal – 98% ARC Paid
2009 Colorado Municipal – 96% ARC Paid
2010 Colorado Municipal – 101% ARC Paid
2011 Colorado Municipal –

A number of states, having underfunded their public pension obligations, are attempting to break their public pension contracts.  An astute observer has noted that politicians take this approach (public pension contract breach) to deflect the responsibility of pension underfunding away from themselves, and onto their state court systems . . . making the courts appear to be “the bad guys” when illegal pension reforms are struck down.  Such state attempts at pension contract breach force the courts, rather than the politicians, to uphold the rule of law and the sanctity of contracts.

According to this “observer,” states have nothing to lose in attempting to break their public pension contracts.  If the courts strike down state unconstitutional “pension reform” legislation, the state has the same public pension debt it started with, and the courts, the “bad guys,” can be blamed.  Sick, isn’t it?

Support public pension contractual rights and the rule of law in the United States.   Friend Save Pera Cola on Facebook!  Contribute to the defense of public pension rights at saveperacola.com.  (Their website explains how to do this.)