A Use-Case of How Sub-Nationals Can Improve Credit Rating

How Sub-nationals can Improve Credit Rating

In the ever-changing landscape of finance and economics, credit ratings play a pivotal role in determining a state or sub-national’s financial health. Recently, the “Bluegrass State” of Kentucky, officially known as the “Commonwealth of Kentucky,” made headlines with its impressive credit rating upgrade from two international rating agencies. This achievement is a shining example of how sub-national entities can drive economic growth and enhance their creditworthiness through strategic efforts.

Kentucky’s credit rating upgrade was a result of years of dedicated legislative work aimed at strengthening the state’s economy. By improving governance practices and implementing recent pension reforms for the Teachers’ Retirement System, Kentucky demonstrated a strong commitment to reducing expenditures and achieving budget balance. These significant strides were recognised and appreciated by credit rating agencies, leading to the state’s improved creditworthiness.

Ranked 27th in the United States for its economic outlook and 26th in economic performance, Kentucky showcased its potential for growth and prosperity. With a focus on prudent fiscal management, the state witnessed substantial improvements in fiscal reserves since 2020. A post-pandemic surge in tax collections, coupled with disciplined budgeting practices, enabled Kentucky to utilise surplus revenues to bolster state fiscal reserves, increasing overall financial resilience.

In addition to fiscal reserves, the credit rating upgrade also considered better funding practices related to long-term liabilities, particularly public pension plans. Kentucky’s proactive approach of making full actuarially-determined annual pension contributions boosted budgetary flexibility and secured sustainable improvements.

Central to Kentucky’s credit rating upgrade were a series of laws and reforms championed by the state’s legislature. From cutting individual income tax and reforming the juvenile justice system to revitalising rural communities and ensuring mental health services, these initiatives showcased a forward-thinking approach to address pressing issues. The legislature also prioritised disaster response and tackled chronic misbehavior in students, reinforcing its commitment to a thriving state.

Kentucky’s success story serves as a testament to how sub-national governments can elevate their credit ratings through persistent legislative efforts. By aligning their strategies with economic growth, implementing prudent spending practices, modernising tax systems, and building state savings, other states can learn valuable lessons from Kentucky’s journey.


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