PrintKentucky will land in market with appropriation-backed debt
BY SourceMedia | MUNICIPAL | 08:00 AM EDTKentucky's State Property and Buildings Commission plans to bring $885.5 million in appropriation-backed revenue bonds to market next week.
Kentucky is one of three states with issuer ratings that diverge by two notches from best to worst. Alaska and Pennsylvania are the other two. The rating agencies give all other states equivalent ratings or ratings one notch apart.
The state carries issuer ratings of Aa2 from Moody's Ratings, A-plus from S&P Global Ratings, AA from Fitch Ratings and AA-minus from KBRA, all with stable outlooks. The state hasn't issued general obligation bonds in over 50 years and the rating agencies rate the Kentucky's appropriation bonds, like the ones coming to market in this deal, one notch below their issuer ratings.
This particular deal is rated Aa3 by Moody's and AA-minus by Fitch, with stable outlooks.
The bonds are coming in the form of $750 million in new money revenue bonds, Project No. 135 Series A and $135.5 million in revenue refunding bonds, Project No. 135 Series B.
BofA Securities is the lead underwriter for the deal, expected to price Wednesday after a retail order period Tuesday, according to an online investor presentation.
Morgan Stanley
The Series A bonds have serial maturities from March 2027 to March 2046. The Series B bonds mature in March 2027, March 2028 and March 2029.
Kentucky is one of the most trade-dependent states in the nation, according to the Commonwealth Policy Center think tank, with imports comprising 32.3% of its GDP and exports at 16.3%,
Muni Credit News Publisher Joseph Krist and Kentucky Office of Financial Management Executive Director Robert Miller were asked if the U.S. trade tariffs on imports and the reciprocal foreign tariffs on U.S. trade pose a significant threat in the coming years to Kentucky's economy.
"Tariffs are a problem in ways still emerging, especially regarding the supply chain," Krist said. "Much focus has been on a couple of large manufacturing projects but smaller manufacturers are really hurting. And they create the marginal job growth."
Miller said his state had "pushed through the headwinds" of tariffs and the first quarter of this year was the best quarter in the state's history for economic investment. Gov. Andy Beshear has joined a lawsuit to roll back the tariffs and if that is achieved, the state expects even more investment, Miller said.
Largely due to underfunded pensions, the state has the sixth highest ratio of liabilities to state revenues in the country. While the ratio has improved in the last few years, Krist was asked how concerned bondholders should be about this.
"Pensions have long been underfunded in Kentucky and plans to maintain or increase underfunding are not a shock," Krist said. "It's not responsible governance or financial management. It would also be back to the future for the commonwealth."
Miller said, "The commonwealth has taken numerous actions to both pay down its pension liabilities and to limit the growth of future pension liabilities."
House Bill 8 of 2022 sets out conditions under which the Kentucky legislature may take action to lower income tax rates. It also shifts reliance on tax revenues away from individual income taxes to sales taxes.
On Feb. 6, 2025, Beshear, a Democrat facing an overwhelmingly Republican legislature, signed a bill lowering the state's individual income tax rate to 4% from 3.5% effective Jan. 1 of this year.
"Despite the recent decreases in the individual income tax rate, Kentucky's General Fund revenues have continued to grow," Miller said.
"The effort to shift the tax burden to sales is just in keeping with regional competitor states," Krist said. "It's as much ideological as anything. Away from issues of regressivity, sales taxes create more immediate volatility due to economic changes than do income taxes."
A relatively high proportion of Kentucky's population, 17%, is below the poverty line. President Trump and fellow Republicans in Congress approved phased cuts to Medicaid, with many of the cuts being rolled out from January of this year to October of 2028. According to USAfacts.org, 78% of all spending for Medicaid in Kentucky came from the federal government in fiscal 2024, with the balance from the state government.
Krist said he doesn't think the existing and planned cuts to Medicaid would substantially impact the state's finances. "My expectation is that people who lose Medicaid will just forgo a lot of healthcare. It will return many to a point in time not all that long ago as Kentucky was a late adopter of Medicaid expansion."
Miller said the federal cuts to Medicaid reduce the number of individuals on Medicaid and shrink provider reimbursements. They don't challenge state finances but do create barriers to state residents seeking health care, he said.
Proceeds from the Series A bonds will be used for over 20 building projects. The three most expensive are Capitol Annex renovations, an enterprise human resources information system and a new Capitol parking structure.
The State Capitol is in the midst of a three-year, $291 million renovation project.
The bonds are not secured by a lien on any of the properties being built with or refunded with the bond proceeds. Principal and interest are solely payable from the bond, rebate and escrow funds, established under the bond resolution and from revenues the state government appropriates each year for rent of the built facilities under leases and subleases.
The 2026 Series B bonds will be used to refund Project 112, Series 2016B bonds.
All four ratings agencies highlight the high levels of pension underfunding as credit concerns about the state government. S&P gives the state's appropriation bonds the lowest rating of the four, A, though it wasn't hired to rate these particular appropriation bonds.
In its October 2025 report on the state, S&P said the pension systems' "contributions fall short of not only our minimum funding progress, but also static funding, which indicates funding deterioration last year, as contributions did not cover service and unfunded interest costs."
Moody's emphasis is a bit different. "Debt has been declining over the past five years, along with the adjusted net pension liability and adjusted net [Other Post-Employment Benefits] liability. However, the cost of funding the state's retirement benefits will continue to present a budget pressure," Moody's said on May 19.
"Pension contributions continue at or above required levels," Moody's said.
Kentucky's adjusted net pension liability was 164% of own-source annual revenue as of June 30, 2025, Moody's said.
For credit positives, Moody's said the state's strengthened fiscal governance has produced sustained structural balance, sizable reserves that are expected to remain healthy through the state's 2026-2028 biennium, and improved liquidity. The state has had consistent adherence to "high annual pension funding to pay down" its pension liability. The state has a large, diverse economy supported by a strong business environment, Moody's said.
However, economic and nonfarm employment growth lagged national rates in 2024 and 2025, Moody's noted. The state's residents' income, educational attainment and labor productivity are generally below average.
The economy is also concentrated in manufacturing and logistics, which are exposed to global demand and trade policy developments, Moody's said.
Fitch sees the state government's credit conditions as strong across the board. It awards "aa" ratings to three key rating drivers ? revenue framework, expenditure framework, long-term liability burden ? and "aaa" rating to operating performance.
Regarding operating performance, Fitch said, "Kentucky retains robust gap-closing capacity, given its general budgetary flexibility and now-sizable dedicated reserves, and its lower revenue volatility at times of cyclical economic decline compared to most states?. The commonwealth achieved a structurally balanced budget in both the previous and current biennium with no reliance on nonrecurring measures."
Fitch said that while the state's long-term liability burden is "moderately elevated for a U.S. state," there will likely be slow continued progress in reducing the burden.
KBRA said in September the state is making progress in dealing with its pension underfunding but that it is still a problem. The state has had strong revenue performance. However, a credit challenge is the "increasing need to manage revenue uncertainty resulting from the initiative to eliminate personal income taxes."
Kutak Rock is the bond counsel for the deal.
