Bond Rating Downgrade Echoes Failure in Accountability

Gardner B. Bell, KLJ Senior Staff Editor[1]

Kentucky faces an ever-growing financial dilemma: its under-funded pension system threatens to severely handicap the state’s ability to finance new projects, or even pay for basic necessities.[2]  Despite lawmakers’ efforts to stabilize this predicament, S&P downgraded Kentucky’s bond rating on September 3, 2015.[3]  In its news release, S&P attributed the downgrade to their assessment of “Kentucky’s substantially underfunded pension liabilities that are the result of chronic underfunding and that we view as placing long-term pressures on the state’s finances.”[4]  Financing projects will now be more expensive for Kentucky; and thus, the fiscal dilemma worsens.

Legislators placed Kentucky in this position by making generous promises for state employees’ retirement benefits and then failing to fund those promises.  It makes sense if you are a legislator: reap the reward of a generous promise today, and then pass the buck on to a subsequent legislature to deal with it.  Such governing is not only irresponsible, it violates Kentucky’s Constitution.  Section 171 requires a balanced budget, and the purpose is to place a check on present legislators’ burdening of future generations with their bills.[5]

Arguably, underfunding Kentucky’s pension system was also a breach of the contract between the Commonwealth and its employees.  The statute that set out Kentucky’s retirement system expressly describes the entire system as an “inviolable contract.”[6]  Incorporated within that “inviolable contract” is the statute that requires the state to fund the system in accordance with the state actuary’s recommendations.[7]  Since 2000, however, the General Assembly has followed the habit of instead “temporarily suspending”[8] this statute.[9]  In Jones v. Board of Trustees of Kentucky Retirement Systems, the Supreme Court of Kentucky opened the door for this possibility by pronouncing it lawful maneuver.[10]  However, many other state courts came to the opposite conclusion by pronouncing that underfunding itself is a breach of contract.[11]  Prior to Jones, an opinion by the Attorney General of Kentucky likewise stated that it would be a breach of contract to underfund Kentucky’s pension system.[12]

In 2013 – in response to another downgrade in Kentucky’s bond rating – Kentucky policymakers claimed to strengthen the promise to fund the system adequately by signing into law Senate Bill 2.[13]  Yet the statute does nothing to address whether future General Assemblies can simply “temporarily suspend” the statute and continue to underfund the system.  In fact, the statute arguably weakens the promise to employees more than strengthens it: it removes the “invaluable contract” language for all employees hired after January 1, 2014.[14]  Apparently, Kentucky policymakers can no longer even promise that they are in a secure contract at all.  Those who were disappointed in the strength of an “inviolable contract” cannot have much confidence in an even weaker promise.

Ultimately, this issue boils down to holding our elected officials accountable.  Despite constitutional and contractual requirements that we pay for our promises, legislators have been able to usurp these fiscal checks.  In doing so, they have placed Kentucky in a financial quandary that will take decades to repair—and one that will hamper Kentucky’s competitive advantage immeasurably.  Unlike the federal government, which can simply borrow a seemingly endless amount, Kentucky’s government can only raise taxes.  Yet raising taxes discourages economic growth.  Companies and citizens can simply move to neighboring states with lower tax burdens and greater public benefits.[15]  When they do leave, tax revenue ultimately falls and thereby undermines the purpose of the tax increase.  For state budgets, this is known as the “death spiral” of fiscal irresponsibility.[16]

Kentucky citizens must view this dilemma with eyes wide open.  They must demand greater responsibility from their elected officials.  They should be less short-sighted in asking for benefits without a willingness to pay for them.  And despite this hardship, they should strengthen their resolve to honor the rule of law by enforcing contracts and abiding by Kentucky’s Constitution.

[1] J.D. expected May 2016.
[2] See, e.g., Frank Goad, Kentucky pension shortfall a potential bankruptcy bomb, The Lane Report (Feb. 6, 2013), http://www.lanereport.com/18327/2013/02/kentucky-pension-shortfall-potential-bankruptcy-bomb/ [hereinafter Lane Report].
[3] See Tom Loftus, Pension debt lowers Kentucky credit rating, The Courier-Journal (Sep. 4, 2015), http://www.courier-journal.com/story/news/politics/2015/09/03/kentucky-credit-rating-downgraded/71668062/#.
[4] Id.
[5] Ky. Const. § 171.
[6] Ky. Rev. Stat. Ann. § 61.692 (West 2014).
[7] Ky. Rev. Stat. Ann. § 61.565 (West 2014).
[8] See Com. ex rel. Armstrong v. Collins, 709 S.W.2d 437 (Ky. 1986) (permitting temporary suspensions of statutes in a budget bill).
[9] Lane Report, supra note 1.
[10] 910 S.W.2d 710 (Ky. 1995).
[11] See, e.g., Stone v. State, 664 S.E.2d 32, 41 (N.C. App. 2008); Municipality of Anchorage v. Gallion, 944 P.2d 436 (Alaska 1997); Dadisman v. Moore, 384 S.E. 2d 816 (W. Va. 1989); Valdes v. Cory, 139 Cal. App. 3d 773 (Cal. Ct. App. 1983); Sgaglione v. Levitt, 337 N.E. 2d 592 (N.Y. 1975); Weaver v. Evans, 495 P.2d 639 (Wash. 1972); Dombrowski v. City of Philadelphia, 245 A.2d 238 (Pa. 1968); State Teachers’ Retirement Board v. Giessel, 106 N.W.2d 301 (Wis. 1960); see also Darryl B. Sinko, “Of Public Pensions, State Constitutional Contract Protection, and Fiscal Constraint” 69 Temp. L. Rev. 1059 (1996).
[12] Ky. Op. Atty. Gen. 90-6 (1990).
[13] See Kentucky’s Successful Public Pension Reform, The Pew Charitable Trusts, (Sep. 27, 2013), http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2013/09/27/kentuckys-successful-public-pension-reform.
[14] Ky. Rev. Stat. Ann. § 61.692 (West 2014) (“prior to January 1, 2014” language added in 2013).
[15] See Lane Report, supra note 1.
[16] See Tobe, Chris & Tobe, Ken, Kentucky Fried Pensions: Expanded Worse that Detroit Edition! (2015).