The Associated Press

FRANKFORT - Moody's Investors Service, a major bond-rating agency, has put Kentucky on a watch list because the General Assembly has not passed a budget.

The agency cited uncertainty about the state's legal authority to pay ongoing expenses if the new fiscal year begins July 1 with no budget.

But state Budget Director Brad Cowgill said there is no immediate impact from Moody's putting Kentucky on the watch list for possible downgrade because the state won't be issuing any bonds until a budget is passed.

Cowgill said the Moody's action would not have any immediate or direct effect. That would come if the state's bond rating is downgraded, indicating higher risk, which would mean the interest rate the state must pay on future bonds would increase.

If no budget is passed by July 1, Gov. Ernie Fletcher has said he will impose a spending plan. Fletcher and Cowgill agree that the governor cannot issue bonds in the absence of a budget.

"So the main reason for being on the watch list will be eliminated before we issue bonds because we won't issue bonds until we get a budget," Cowgill said.

Still, Cowgill said the action by Moody's "is of some symbolic significance. Over the long haul, ratings agencies want to see compliance with the law and conservative fiscal practice. Having no budget is something that concerns them."

Moody's and other ratings agencies took the same action two years ago when the General Assembly also failed to pass a budget. Kentucky issued no new bonds under a spending plan imposed by then-Gov. Paul Patton but made timely payments on all previously issued bonds.

Raymond Murphy, a vice president and senior credit officer with Moody's, said the immediate effect of any downgrading of a state's bond rating is that the trading value of state bonds is decreased.

Murphy agreed that passage of a state budget would eliminate the major concern Moody's has about Kentucky. But he said the agency may not immediately take the state off its watch list when a budget passes. "This is the second time this has happened in as many budgets. That's disconcerting and something we have to consider," he said.

Moody's rates Kentucky's bonds Aa2. Murphy said that is one level lower than most states, whose bonds are rated Aa3.