12/19/2018

Kentucky attempts to address pension reform in special session

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Kentucky Governor Matt Bevin called a special legislative session on December 17, 2018 for the review of state pension reform legislation, after the Kentucky Supreme Court overturned pension reform law passed in spring, 2018. The Governor, in describing the need for a special session, cited recent questions from bond rating agencies, and said that Kentucky’s public retirement plans require immediate attention.  During the special session, Kentucky legislators were to have considered House Bills 1 and 2. In announcing the special legislative session, Governor Bevin said “the only chance we have for those working toward retirement is to change the system going forward”.

In comments regarding the special session, Sen. Morgan McGarvey, a Louisville Democrat just elected minority floor leader, said “we all know the unfunded pension liability is a problem”. In a letter sent by M. Stephen Pitt, general counsel for Bevin, to members of the General Assembly on Tuesday, Mr. Pitt stated that the credit markets need certainty now, and “HB 1 was drafted and proposed to provide such certainty”.

On the evening of December 18, 2018, the special session was adjourned, with the explanation that there was insufficient time to consider the proposed bills.  Any further legislative action on pension reform will be taken up once the regular legislative session begins on January 8, 2019 when, it is hoped, the political will can be found to address the pension funding issues.

Earlier this year, S&P lowered Kentucky’s rating to A from A-plus while Moody’s reduced the rating to Aa3 from Aa2, with both agencies citing the rising cost of pension obligations and revenue constraints. As of December 19, 2018, the agencies had not released revised opinions on their ratings.

Meanwhile, positive economic results for Kentucky were reported in the Urban Institute’s State Tax and Economic Review for Q2 2018, published December 18, 2018.  Year-over-year (Q2 2018 vs. Q2 2017), personal income tax receipts increased by 3.7%, sales tax receipts increased by 3.4% and total State tax revenues increased by 2.9%.

We maintain our objective of managing interest rate risk and credit risk while keeping over 90% of the portfolio rated A or higher. We believe that one of the benefits of owning shares in Aquila Churchill Tax-Free Fund of Kentucky is having the resources of local portfolio management and credit analysis. We will be monitoring the progress of pension reform in the state, along with the local economic and political environment.

For specific information about Fund characteristics and performance please see the Fund Fact Sheet and Fund Holdings located on our website at www.aquilafunds.com.