THIS CAN'T BE GOOD NEWS

The Governor is blaming the Legislature for Moody and Fitch's gloomy forecast for state bonding. Will he call them back in session to - what? - pass more bonds?  really consider casino gaming and a cigarette tax?

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Commonwealth of Kentucky
Office of the Governor

Lack of Legislative Action on Pension Reform, Revenue Growth Drives Moody’s, Fitch to Revise Kentucky’s Rating Outlook

FRANKFORT, KY (May 12, 2008) – According to recently released reports from two national financial ratings services, Kentucky could be facing long-term negative implications for the state’s debt service. Both Moody’s Investor Service and Fitch revised downward from “stable” to “negative” the outlook for state supported bonds.

 In January 2008, Gov. Steve Beshear met with the rating agencies while formulating his budget recommendation.  At that time, no change in the rating outlook was expected.  Upon review of the General Assembly’s final enacted budget, Moody’s and Fitch expressed concern because of the current economic situation, the structural imbalance in the final budget, the draining of the state’s Rainy Day fund, the failure to pass meaningful pension reform and the continued use of one-time measures, including $100 million of debt restructuring for FY09-10 fiscal relief, to “balance” the budget for the next two years.

Although both services revised the outlook downward, Kentucky’s bond ratings with Moody’s Investors Service remain unchanged at Aa3 and AA- with Fitch Ratings

 “This sends a clear signal that continued inaction in addressing pension reform and new revenue sources will only bring more bad financial news for the people of Kentucky,” said Gov. Beshear. “Because of the revised outlook, my administration will have to take a cautious view when determining how and when to issue bonds to fund projects authorized by the General Assembly.”

A negative outlook indicates the respective rating agencies’ views that the likely direction of the commonwealth’s rating over the intermediate term is down and moving toward the ‘A’ rating category, if circumstances remain unchanged. Standard and Poor’s already rates Kentucky’s General Fund supported obligations in the A category.

While these actions do not change the state’s actual credit rating, they do indicate that if the state’s financial condition continues on this trend, the Commonwealth could be put on Watch List or Credit Watch, which indicates that a rating change is likely

“Just like any household, our credit quality or score is directly related to our ability to borrow funds and the rate at which we can borrow,” said Gov. Beshear. “A one-notch rating downgrade would have a significant impact on the state’s cost of borrowing money to fund state projects, and would place Kentucky in the lowest rating category among states. It could further impede other spending priorities such as education, human services, and future state construction projects.”  

The Commonwealth’s credit ratings are in the lower end among states because Kentucky is a comparatively poor state with relatively high debt. A downgrade could increase interest costs as much as .33 percent in the current market, which could result in an increase of approximately $58 million in debt service over the life of the bonds for the newly authorized debt from the 2008 legislative session alone. This does not include the increased cost for future authorizations that will follow.  

“In light of the bleak economic environment the Governor and I will work to prudently manage our debt program within available resources,” Finance and Administration Cabinet Secretary Jonathan Miller said. “We will issue the authorized debt on a measured basis to assure that we move forward on critical projects in the most cost-efficient manner possible. These actions are critical to preserve the state’s affordable access to the capital markets for needed investments.”

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