The recent news that the state’s bond rating had taken a dip was not the kind of news that rises to the level of grave concern. But it is worth consideration.
Last week, Vermont State Treasurer Beth Pearce and Gov. Phil Scott released a joint statement after Fitch Ratings Inc. said it had downgraded the state’s credit rating from AAA to AA+, its second-highest rating.
Credit ratings for the state can be compared to ratings for individuals. The lower the score, the fewer the opportunities, and potentially, the higher the borrowing rates.
In 2018, Moody’s Investors Service had been revised downward from AAA to AA1 with a stable outlook. Prior to that, for several years Vermont had maintained a superior bond rating. At the time of the Moody’s downgrade, Pearce said it will cost the state about $1 million for every $150 million borrowed.
The third rating agency, Standard & Poor’s, gave Vermont its second-highest rating, AA+, in recent years.
The state’s aging population and relatively high pension liabilities were mentioned as two contributing factors in the downgrade. Unfortunately, neither of those factors seems to be moving in a direction to position the state positively.
“This outcome is not unexpected, and while it is not the outcome we’d aimed for, Fitch’s report also noted many positives,” said Pearce and Scott in their joint statement. The positives include: “continued strong financial management, sound reserves, the leveling of Medicaid spending, and modest steps taken towards reducing our pension liabilities, including a path to prefunding for our state employee and teacher post-employment benefits.”
Like Moody’s, Fitch’s advice was clear: “Material and sustained improvement in the state’s demographic profile, such as through consistent population and labor-force gains, could support revenue growth prospects and a more robust revenue framework assessment.”
The Republican governor lamented, “(Our) demographic challenges continue to overshadow all of our other efforts. We need to continue to work together, as we have with the pension liabilities, to further advance policy initiatives that bring more people to Vermont and more people into our workforce.”
Scott has doubled down on efforts to attract more people to Vermont, including implementing initiatives like a remote-worker incentive.
But more has to be done. Scott has stated, from his first campaign to present, “it is clear we have more to do to make Vermont more affordable for families and businesses and to revitalize our economic centers throughout the state.”
But the pension crisis is another ball of wax altogether.
Vermont’s unfunded pension liabilities top out at $4.5 billion.
Conservatives argue that the pension requires more attention. But it is a political third rail: It is Vermonters’ retirement.
In addition, it would be expensive to fix, which would outrage taxpayers and the public-employee unions, who don’t want the system (or their benefits) changed.
The structure of the debate shares an impossible framework to another controversial issue: climate change.
Everyone (well, almost everyone) acknowledges the state faces a serious fiscal challenge that, if left unchecked, will be catastrophic to the long-term viability of the state. But the problem is so large, so intimidating, it is almost too daunting to stop or reverse course.
When the Moody’s downgrade occurred last year, some watchers were hoping that it would provide the shock necessary to lead to reform. The state’s unions shouted down any and all implications of such a move.
In 2008 Vermont’s pension payment was 2.25% of revenues; in 2012, it was 6.4% of revenues; in 2017 it was 9.4%; and in 2019 it was projected to increase to 11.5%, according to the state budgets.
That does not feel sustainable.
In their statement, the governor has called for the support of the Legislature, state government and his administration to focus on affordability and economic growth.
No idea — even Vermont’s sacred cows — should be left off the table. We are seeing the consequences of avoidance. And it has the potential of getting much worse, exponentially.