Published: May 16, 2008 03:44 pm            

A warning — 05/19/08

Lower bond rating would cost state much more to borrow

In a move that could delay some state-funded projects, two credit rating companies have lowered their outlook on Kentucky bonds. In the long run, that could result in it costing the state millions of dollars more to borrow the same amount of money.

Although Fitch Ratings and Moody’s Investor’s Service have not actually lowered Kentucky’s bond rating, Gov. Steve Beshear said both have expressed concern because of the “current economic situation, the structural imbalance of 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 to ‘balance’ the budget.”

Because of the warnings by the two credit-rating services, the governor said he will have to move more cautiously in authorizing the issuance of bonds authorized by the 2008 General Assembly. And, the governor warned, “continued inaction in addressing pension reform and new revenue sources will bring only more bad financial news for the people of Kentucky.”

Moody’s continues to rate Kentucky at Aa3 and Fitch at AA-. Both are “very good” ratings, according to Tom Howard, executive director of Kentucky’s Office of Financial Management. Standard & Poor’s, the nation’s third leading rating agency, already rates Kentucky more harshly than the other two agencies, giving the state a single-A rating.

The concern expressed by Fitch’s and Moody’s is a warning to state officials that their bond rating could be lowered if the General Assembly continues to make what the two services consider unsound financial decisions. Even a minor downgrade in the state’s rating can cost Kentucky taxpayers millions of dollars more in interest over the life of a bond. That means fewer projects for the same amount of money. And the threatened downgrade in the state’s rating comes at a time when rising costs for transportation and building materials is driving up the cost of construction projects.

Rep. Robin Webb, D-Grayson, vice chairman of the House budget committee, said the actions taken by the ratings agencies is “a reflection of the national economy, and Kentucky’s experience is not so extraordinary. And I’m hoping we will begin to fix the outlook by taking steps on pension reform at a special session in the next few months.”

There is not much the state can do about rising construction costs, but it can control what it costs to borrow money by being responsible with its resources. The state has been warned. Those companies that help determine what it costs to borrow money are unhappy with some of the decisions being made in Frankfort. It is time to aggressively address the state’s financial picture.

        

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