Summary:

Pike County, Kentucky; General

Obligation
Primary Credit Analyst:
Caroline E West, Chicago (1) 312-233-7047; caroline.west@spglobal.com

Secondary Contact:
Daniel E Hughes, Chicago + (303) 721-4272; daniel.hughes@spglobal.com

Table Of Contents

Rationale

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Summary:
Pike County, Kentucky; General Obligation
Credit Profile
Pike Cnty GO rfdg bnds
Long Term Rating BB/Watch Neg Downgraded
Pike Cnty GO (AGM)
Unenhanced Rating BB(SPUR)/Watch Neg Downgraded
Many issues are enhanced by bond insurance.

Rationale
S&P Global Ratings lowered its long-term and underlying ratings on Pike County, Ky.'s general obligation (GO) bonds
to 'BB' from 'A+.' The ratings remain on CreditWatch with negative implications.

The downgrade reflects the county's general fund cash reserves weakening to near zero in the most recent audit (June
30, 2016) following very weak operating budgetary performance, which we believe is a function of the county's very
weak economy, very weak management, and very weak debt and liability profile. The Kentucky Auditor publicly
released the county's fiscal 2016 (year-end June 30) audit on March 29, 2018, or 21 months after the close of the fiscal
year; no financial statement is yet available for fiscal 2017. Our rating also incorporates our view of the delayed
disclosure of the county's financial statements and lack of additional supporting information from county management.
We view the county's management as very weak and lacking relevant skills under our Financial Management
Assessment (FMA) methodology. In our view, the county faces major ongoing uncertainties, and exposure to adverse
business, financial, or economic conditions could lead to inadequate capacity to meet its financial commitments.

The CreditWatch reflects our view there is at least a one-in-two chance we could withdraw the rating within 90 days if
the county does not produce a financial statement for fiscal 2017 that we view as reliable, sufficient, and timely per our
information quality standards. (See "How Quality and Timelines of Information Are Incorporated Into U.S. Public
Finance’s Rating Process," published Oct. 25, 2016.)

The county's unlimited-tax full faith and credit GO pledge secures the outstanding bonds.

The 'BB' rating reflects our opinion of Pike County's:

• Very weak economy, with significant population decline;

• Very weak management, with "vulnerable" financial policies and practices under our FMA methodology and a
management team that we believe lacks relevant skills;

• Very weak budgetary performance, with operating deficits in the general fund and at the total governmental fund
level in fiscal 2016;

• Very weak budgetary flexibility, with an available cash reserve in fiscal 2016 of 0.5% of operating expenditures that
is also low on a nominal basis at $57,000, as well as a limited capacity to cut expenditures;

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 Summary: Pike County, Kentucky; General Obligation

• Weak liquidity, with total government available cash at 1.9% of total governmental fund expenditures and 15.2% of
governmental debt service, but access to external liquidity we consider strong;

• Very weak debt and contingent liability position, with debt service carrying charges at 12.3% of expenditures and
net direct debt that is 105.0% of total governmental fund revenue, and a large pension and other postemployment
benefit (OPEB) obligation and the lack of a plan to sufficiently address it, but rapid amortization, with 71.0% of debt
scheduled to be retired in 10 years; and

• Strong institutional framework score.

Very weak economy

We consider Pike County's economy very weak. The county is in eastern Kentucky, about 140 miles east of Lexington,
and has an estimated population of 61,983. It has a projected per capita effective buying income of 73.2% of the
national level and per capita market value of $47,669. Weakening Pike County's economy is its demographic profile,
which includes a significant population decline of 8%. The county unemployment rate was 10.8% in 2016, which we
consider high and a negative credit factor.

Pike County has historically been a leading coal and natural gas producer in Kentucky, but as the coal industry has
waned in the U.S., the economy has weakened. Unemployment levels improved to 7.2% in 2017 based on preliminary
data from the Bureau of Labor Statistics; however, this rate is still above both national and state levels during the same
period. Unemployment and a weak coal industry have been causing ongoing population loss, in our view; the county's
population declined by 9% over the last decade, and we believe it is likely to continue to decline over the next ten
years.

A battery manufacturer recently announced plans to open a facility in Pikeville, the county seat, which would bring
nearly 900 new jobs to the area; while this development is positive for local residents, we believe the overall economic
indicators are likely to remain very weak.

Very weak management

We believe the county's finances have suffered from a result of insufficient personnel with relevant management skills.
The county relies heavily on a single person, the county treasurer, with responsibility for a wide range of duties,
including what we understand is financial reporting, reconciliation of accounts, and timely payment of invoices and
other financial obligations. Evidence suggests that the treasurer may not be fully completing those job duties. The
auditor found that the county did not perform bank reconciliations each month and did not submit an accurate
financial report to the state, among other findings, for example. In our view, this "key man" risk is a limiting credit
factor, and calls into question not only the reliability of unaudited financial statements, but also the county's ability to
assess its own financial condition and timely fulfill its financial obligations.

In addition, we view the county's management as very weak, with "vulnerable" financial policies and practices under
our FMA methodology, indicating the government lacks policies in many of the areas we believe are most critical to
supporting credit quality.

When developing the budget, the county uses only one year of historical data in addition to collaborating with the state
Department of Local Government. In our view, budgets over the last several years have included optimistic

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 Summary: Pike County, Kentucky; General Obligation

assumptions or overlooked likely shortfalls. Officials indicate that the fiscal court members receive monthly
budget-to-actual results, but we have not reviewed a copy of that document, so we cannot verify if this reporting
occurs. The county does not produce a long-term plan either for capital or operations. It has an investment policy but
does not provide any investment reporting to the fiscal court. There is no debt policy, and no type of reserve policy or
goal.

The county will be changing forms of government in January 2019, shifting to three commissioners and one county
judge, from the current six magistrates and one county judge. Officials believe the change will save the county roughly
$200,000 in annual administrative costs.

Very weak budgetary performance

Pike County's budgetary performance is very weak, in our opinion. The county had operating deficits of negative 16%
of expenditures in the general fund and negative 7.2% across all governmental funds in fiscal 2016. Weakening our
view of Pike County's budgetary performance is the county's deferral of significant expenditures, which we think
inflates the budgetary result ratios.

The county's most recent was audit was delayed considerably; the fiscal 2016 (year-end June 30) audit was released by
the state in March 2018. If a sufficient and reliable financial statement for 2017 is not available in a timely manner, per
our information quality standards, we could withdraw the rating due to lack of sufficient information.

In fiscal 2016, the general fund generated a $1.8 million deficit, equivalent to 16% of adjusted expenditures, leaving an
ending general fund cash balance of only $57,000. Due to underperformance in other funds such as the jail and solid
waste funds, and an unusually large transfer out to the road fund, the general fund transferred out $4.7 million; we
count these transfers as expenditures in our calculations, and we also exclude the county's cash-flow borrowing from
the operating results.

While transfers were higher than prior years in 2016, revenue was also higher due to a county-approved increase in the
occupational tax, which partially took effect in fiscal 2016 and resulted in increased revenue of about $2.6 million.
Despite the increased revenue, the general and jail funds still ended the year with sizable operating deficits. In addition,
the 2016 audit recorded only $2,000 worth of capital outlay expenses across all governmental funds; management has
not confirmed to us that the county deferred capital, but the drop-off in capital expenses compared to prior years
appears to indicate delaying typical maintenance and capital investments.

For fiscal 2017, although there is no audit available, management indicates positive general fund operating results due
to receiving a full year of occupational tax revenue (about $3.4 million) in addition to reducing 30 staff positions and
eliminating family health insurance. The county estimates an increase in cash in the general fund to $713,000, or about
6% of adjusted 2016 expenditures. However, we do not have any documentation confirming this result.

So far in fiscal 2018, management projects that operating results are likely to be break-even, in part due to a significant
property tax rate increase approved by the county to maintain level property tax revenue because of reductions in tax
rates on dormant coal mines. With less property tax revenue coming from those coal-related properties, the county
raised rates on all other properties to maintain flat property tax revenue.

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 Summary: Pike County, Kentucky; General Obligation

In fiscal 2019, the county's pension costs are set to increase 12%, or about $168,000. (The increase was supposed to
have been larger until the state legislature passed a bill in April 2018 capping the increase.) Before the recent statute
passed, officials indicated to us an intention to spend down any existing cash balance in 2019 to cover the increased
pension costs. Otherwise, management has not communicated to us any identified budget adjustments. We
understand that the fiscal court has no appetite for raising revenue, given local politics and the recent property tax rate
and occupational tax hikes, and we believe the county would be challenged to identify additional budget cuts, given
near-zero capital outlay in 2016. While the legislature's desire to suppress the growth in payments to the pension plan
somewhat eases near-term budget pain, it only forestalls inevitable large increases in pension expenditures.

While management has taken action in recent years to increase the occupational tax and the property tax rate and cut
expenditures, the county generated large operating deficits in the most recently audited fiscal years. Prior to 2016, it
used $2.4 million received from an opioid-related legal settlement to cover operational expenses. Management reports
improved operations in fiscal years 2017 and 2018, but given the ongoing budgetary pressures facing the county
through underperforming funds, political resistance to further raising taxes, sizable upcoming increases to pension
costs, and already low cash levels, we believe that budgetary performance is likely to remain very weak.

Very weak budgetary flexibility

Pike County's budgetary flexibility is very weak, in our view, with an available cash reserve in fiscal 2016 of 0.5% of
operating expenditures. In addition, reserves are low on a nominal basis at $57,000, which we view as vulnerably low
and a negative credit factor. Weakening budgetary flexibility, in our view, is use of cash accounting, which reduces
clarity about the amount of funds that are truly available.

In the most recently audited year (June 30, 2016), the county spent down nearly all available cash in the general fund.
Officials estimate that cash levels improved somewhat in fiscal 2017, with a general fund ending cash balance of
$714,000, or roughly 6% of expenditures, which we would consider an adequate level. Management estimates cash will
remain flat in 2018. However, we do not have sufficient documentation from the county to conclude that the cash
balance did in fact increase in 2017.

Given the budgetary pressures that face the county in the upcoming fiscal year, and our view that the county has
limited capacity to cut spending given considerable expenditure reductions in fiscal 2016 and minimal capital outlay,
we believe budgetary flexibility is likely to remain very weak.

Weak liquidity
In our opinion, Pike County's liquidity is weak, with total government available cash at 1.9% of total governmental
fund expenditures and 15.2% of governmental debt service in 2016. In our view, the county has strong access to
external liquidity if necessary.

Following weak operating results across all funds in fiscal 2016, the county's liquidity reached what we consider low
levels, with only $609,000 in unrestricted cash across all funds.

Because of low cash levels in fiscal 2016, the county issued a short-term note of $1.5 million for general fund cash-flow
purposes. Due in part to poor property tax collections, the county had to extend the note maturity from its original due
date on Dec. 25, 2015, ultimately paying off the note on Feb. 24, 2016. The audit shows that the road and solid waste

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 Summary: Pike County, Kentucky; General Obligation

funds also had cash-flow notes in 2016, but the county has not provided us information about whether those notes
were paid on the original maturity date.

For fiscal 2017, the county issued a cash-flow note for $2.5 million in August 2016, and we understand from officials
that once again, it could not meet the original maturity date of December 2016, and the principal and interest were
actually paid in January 2017.

In the current fiscal year (2018), management tells us the county has not needed to issue a cash-flow note due to
strategically paying one large bill late and incurring small fees, which it indicates is more cost-effective than issuing a
cash-flow note.

While the county reports that cash levels increased somewhat in fiscal 2017, based on our expectation that expenses
will rise in the next few years with little willingness from the fiscal court to raise revenue, we believe the county will
not be able to replenish its liquidity in the near term and that liquidity will remain weak or very weak.

Management reports that the county has no direct-purchase or private-placement liabilities.

Because the county has accessed the capital markets in the last 20 years, and has issued cash flow notes recently, we
believe the county retains market access. However, if the county attempts to access the market for any purpose and is
unable to do so, we would consider the county's market access as limited, and our view of liquidity, already at weak
levels, would worsen.

Very weak debt and contingent liability profile

In our view, Pike County's debt and contingent liability profile is very weak. Total governmental fund debt service is
12.3% of total governmental fund expenditures, and net direct debt is 105.0% of total governmental fund revenue.
Negatively affecting our view of the county's debt profile is its overall net debt burden we consider high because
sufficiently current overlapping debt figures are not available. Approximately 71.0% of the direct debt is scheduled to
be repaid within 10 years, which is, in our view, a positive credit factor.

The county has no plans to issue additional debt.

In our opinion, a credit weakness is Pike County's large pension obligation, without a plan in place that we think will
sufficiently address it. The county made its full annual required pension contribution in 2016. The funded ratio of its
single pension plan, the County Employees Retirement System (CERS), is 53.3%, which we view as low.

In 2016, the county contributed $1.4 million to CERS, equivalent to 4.3% of total governmental fund expenditures.
Given the plan's low funded ratio, the state is increasing pension costs effective in fiscal 2019. For Pike County, initial
estimates by the state budget director indicated costs would increase by $685,000, or about 50%, in fiscal 2019. This
amount is equivalent to 6% of the county's adjusted 2016 general fund expenditures. However, the Kentucky
legislature passed House Bill 362 in April 2018 that limits annual increases in contributions to CERS to 12% annually
through fiscal 2028. This statue reduces what would have otherwise been a substantial increase to the county's annual
costs starting in fiscal 2019. While this statute provides relief to the county's short-term budget and liquidity
challenges, it pushes out the long-term pension liabilities and delays inevitable future increases.

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 Summary: Pike County, Kentucky; General Obligation

The fiscal court has not communicated to us any plan for how it will address the rising costs outside of spending
existing cash on hand, which is limited given weak liquidity levels; we believe these rising pension costs will create
additional pressure on the county's budget and remain a negative credit factor until management implements
significant budgetary adjustments.

Our understanding is that the county has no contingent liabilities for OPEBs.

Strong institutional framework

The institutional framework score for Kentucky counties is strong.

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria.
Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is
available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found
on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left
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