Kentucky's bad blue-state habits: Credit rating "upgrade" is a tiny step forward.

There’s been quite a bit of attention to the slight upgrade Fitch Ratings gave Kentucky this week.

Gov. Andy Beshear and House Speaker David Osborne jostled for credit (no pun intended) for the improvement. Nothing wrong with that. It’s what politicians do.

Here’s what Fitch said that is leading the coverage:

The Outlook revision to Stable from Negative reflects Kentucky's solid economic recovery to date from the pandemic trough, and the commonwealth's ability to navigate the ongoing budgetary implications without materially weakening its fiscal resilience.

No question Kentucky is participating in the national economic recovery as life slowly returns to normal. The state’s budget is in solid shape, propped up by a massive infusion of federal COVID-relief funds.

Neither the media or state leaders focused on the state’s long-term financial challenges. Digging further into the report reveals:

Kentucky's ratio of net pension liabilities and debt to personal income, at 19.9% (per Fitch's "2020 State Liability Report") versus the U.S. states median of 5%.

Translation: Kentucky’s total debt is four times higher than the median state.

We have made progress on this front, however, by remaining committed to fully funding pensions:

Until recently, the Commonwealth had historically fallen short of full actuarial contributions for its two primary pension systems, Kentucky Employees Retirement Systems covering non-hazardous employees (KERS non-hazardous) and the Teachers' Retirement System of the State of Kentucky (TRS); Kentucky carries virtually the entire obligation for local school teachers. Over the past several biennia, the Commonwealth has made material progress in addressing the contribution shortfalls and began making full actuarial contributions for all systems as of fiscal 2019.

But here’s the fact that isn’t being discussed: Even with this “upgrade” Kentucky has one of the poorest credit ratings in the nation. Whereas Fitch assigns Tennessee, Indiana and North Carolina AAA ratings, Kentucky is an AA-, keeping company with the “blue” states best known for their fiscal mismanagement:

Kentucky AA-

Pennsylvania AA-

Connecticut A+

New Jersey A-

Illinois BBB-

(Note: Louisiana is also rated AA-)

Bottom line: Kentucky has taken a tiny step forward in repairing its poor financial condition. While we don’t want to completely dismiss the progress, much more work is needed before the Commonwealth joins the list of states that have responsibly managed their finances.

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Credit: “Kentucky’s bad blue-state habits” was the headline of our recent op-ed published in the National Review. It’s a great way to frame theses issues so we’ll use it but want to give proper credit to NR staff for their headline.