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State Bond Ratings Remain Unchanged, Demographic and Pension Challenges Ahead

April 20, 2021

MONTPELIER, Vt. — Vermont State Treasurer Beth Pearce announced Tuesday that the three major rating agencies have affirmed their ratings of the State’s General Obligation Bonds:  

  • Fitch Ratings                               AA+, stable outlook; 
  • Moody’s Investors Service              Aa1, stable outlook; and 
  • S&P Global Ratings                      AA+, negative outlook.  

These ratings are unchanged from the ratings assigned in 2020, which reflected a downgrade by Moody’s and Fitch from triple A status in 2018 and 2019, respectively, and the assignment of a “negative outlook” by S&P in 2020. The Treasurer’s Office, the Governor, and the General Assembly have stated their commitment to restoring the triple-A ratings.   

“There are a great number of positives in the credit reports,” said Treasurer Pearce. “The rating agency reports generally cite the State’s strong financial management and fiscal discipline, consensus revenue forecasts, good liquidity, and efforts to reduce bonded debt. These rating strengths support the overall credit ratings.” Notwithstanding these strengths, the ratings also reflect continued challenges with Vermont’s demographics and workforce issues, as well as long-term liabilities related to pension and other post-employment benefit (OPEB).

"I’m pleased that the State's credit ratings remain unchanged, but the rating agency reports are a sobering reminder that our demographics and unfunded retirement liabilities are still big challenges,” said Governor Scott. “We must remain focused on our economic recovery from the pandemic and take full advantage of the $1 billion in state recovery funds from the American Rescue Plan. These investments should be in tangible infrastructure, such as housing, climate change solutions, economic recovery projects, sewer, water and broadband that will provide the greatest economic benefits and will truly transform our economy - especially in the parts of the state that need it most." 

The rating agency reports are clear about the challenges ahead.

S&P Global Ratings retains a negative outlook in its report, stating that “the negative outlook reflects that there is at least a one-in-three chance we could lower our rating on Vermont.” Vermont’s “slow workforce expansion could continue to stifle future economic growth prospects,” which would put financial pressure on the State as it faces challenges with pension and other post retirement liabilities. S&P notes that unfunded liabilities are rising, and employer contributions are expected to significantly increase. The S&P report acknowledges that the General Assembly is considering a proposal to create a task force to study the issue. However, S&P states that “[w]hile we believe the state is actively pursuing reform efforts, it is currently unclear what might be passed and when."

While the Fitch report notes that the 44% increase in pension contributions is “not a material concern in the context of the state’s fiscal governmental funds,” it also states that pension liabilities are high and have increased by 25% this past year. Fitch notes that Vermont’s current rating would be at risk of lowering if there becomes an “inability to prudently manage the long-term liability burden, in the context of modest growth expectations for the economic base available to support repayment.” Fitch further states that “earlier this year, the legislature considered a bill to revise pension benefits and increase both employer and employee contributions in an effort to reduce the projected growth in liabilities and that “instead of enacting legislation, the legislature elected to create a task force to study the issue and propose new legislation for the next session in 2022."

These reports include a recognition of the steps already taken, such as fully funding the employer contributions and increases in employee contributions. They also express a concern for the future trajectory of these liabilities. 

“Vermont has a long history of proactively addressing its challenges,” said Treasurer Pearce. “Our recent efforts, such as the State’s clean water initiatives, are a testament to what can be done and reflect a collaborative effort by the Administration, the Treasurer’s Office, the General Assembly, employee groups and all Vermonters. Our strengths are apparent. We must not shy away from difficult decisions. It is time to apply our strengths and our joint efforts to address our demographic and workforce issues and take decisive action to reduce our unfunded pension and health care liabilities. This needs to be accomplished in a fair and equitable manner, with all parties at the table, so that we can provide retirement security for public employees, this generation, the next, and each new generation after that.”