Finance and Administration Cabinet
Kentucky’s Bond Rating Outlook Improves

(FRANKFORT, Ky.)— Standard and Poor’s (S&P) and Moody’s, two of three prominent bond rating services, have both announced improved outlooks for the commonwealth’s credit picture, Governor Ernie Fletcher announced today. 

Both agencies noted that the improved outlook is the result of favorable trends in Kentucky’s economy, corresponding revenue performance and strong budget balancing measures, which have resulted in a projected $401 million dollar surplus for the current biennial budget period; and the replenishment of reserves, including a recommended deposit of nearly $152 million into the Budget Reserve Trust Fund, which would bring the state’s Rainy Day Fund from a balance of $5 million in 2003 to $383 million, the highest level of reserves since the fund was formally establishment in 1995.

"When I took office, the commonwealth carried a negative outlook from Moody’s and had recently been downgraded by S&P. Kentucky now has a stable outlook from Moody’s and a positive outlook from S&P,” said Gov. Fletcher. “This is a significant achievement for my administration, avoiding millions of dollars in additional interest cost that can be used in a better way for our future. This represents quantifiable progress in the effort to restore our credit ratings and financial balance,” Gov. Fletcher added.

Moody’s revised its outlook for the state’s bond ratings from “negative” to “stable” on February 6, 2007, which is a level last seen on June 10, 2002. Since June 2002, the commonwealth has been on and off Moody’s watch list for a possible downgrade.

In its most recent report Moody’s states that the commonwealth’s…”credit strengths are: ongoing trend of strong financial control; improved finances, including strengthened revenues that have outperformed estimates; and economic strengthening, reflected in recently increasing non-farm payroll employment growth following prior year declines.”

On January 18, 2007, S&P revised its outlook for the commonwealth’s bond ratings from “stable” to “positive.” This marks the first rating action by S&P since Kentucky was downgraded on October 9, 2002, citing the General Assembly’s inability to pass a timely budget and the state’s deteriorating financial position.

S&P noted in its January 2007 Issuer Credit Rating report that “responsive actions during Governor Fletcher’s administration have been taking effect and fiscal years 2005 and 2006 showed significant improvements in total general fund equity.”

"I know vetoing capital projects was a very tough decision, and frankly I had some questions about it at the time, but this news shows that it was best for the long-term financial outlook of the commonwealth," said Sen. Gary Tapp.

While Kentucky’s financial picture has improved, S&P and Moody’s also noted the challenges that lie ahead, particularly in the areas of Medicaid as well as unfunded pension liabilities and post employment benefits for state employees and retirees.

On February 5, 2007, Gov. Fletcher announced his recommendation to the General Assembly that $50 million of the surplus be dedicated to the Kentucky Employees Retirement Systems and the Kentucky Teachers’ Retirement System. Recent actuarial reports have projected a significant increase in the unfunded actuarial accrued liability of the two pension and health insurance plans.

Governor Ernie Fletcher announced in May 2006 that Kentucky was approved by the federal government to implement comprehensive Medicaid reform through the Deficit Reduction Act passed by the 2005 Congress, making Kentucky the first state in the nation to offer a comprehensive reform package under the Medicaid state plan.

Under this reform plan, KyHealth Choices, low-income, disabled and elderly beneficiaries in Kentucky have access to benefits designed to meet their specific health care needs while ensuring the future solvency of the Medicaid program.

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