[V]ermont lost its longstanding triple A bond rating with Moody’s Investors Service on Tuesday as the influential credit rating agency factored in the state’s slower-than-average economic growth, aging population and high pension obligations as a reason.
The ratings drop will cost Vermont, although it’s not clear how much, said David Coates, a retired managing partner at KPMG-Vermont who worked on a 2010 state commission that was formed to address public retiree health benefit plans.
“With the treasurer, we calculated that having the triple A rating saved the state about $10 million a year, minimum, just in lower borrowing costs,” Coates said Tuesday. He added that the ratings for several Vermont agencies are pegged to the Moody’s rating, including the Vermont Bond Bank, Vermont Student Assistance Corp., Vermont Economic Development Agency, and Vermont Housing Finance Agency.
“They kind of tag along with the rating we get for the state of Vermont,” he said. “They get their own rating, but their own is rated higher because of the state’s ability to have such a good rating. So this is very disturbing.”
In dropping Vermont to an Aa1 rating – Moody’s second-highest rating, according to the state treasurer’s office -- Moody’s also rated Vermont as “stable,” saying the rating also takes into account Vermont’s history of strong fiscal management and the underlying health of the economy.
State lawmakers and advocates have been working on the issues of pension funding and attracting workers for several years, so the news was not a surprise.
“I’ve been saying for some time we’d be downgraded if we didn’t do something about shoring up our pension and OPEB (retiree health care) liabilities,” Coates said. He added that the state must make structural changes to the plan, but lawmakers lack the will to bring them about.
“The longer we wait, the more difficult it will be to make up for this gigantic liability that the state has incurred for both the teachers and the state workers,” he said.
The governor’s office also evinced no surprise at the drop.
“While Vermont continues to have the highest overall bond ratings in New England, our transportation bond rating is stable and we’re getting stronger every day, it’s no surprise that Moody’s Investor Services today highlighted Vermont’s aging demographics and the unfunded retirement liabilities that have accrued over the last several decades,” said Vermont Gov. Phil Scott in a prepared statement. “These are our most significant economic and budgetary challenges.”
Vermont is far from the only state struggling with unsustainable pension liabilities. A Pew Charitable Trusts report found that state pension funds in the U.S. collectively have a $1.4 trillion deficit.
Pew said preliminary information for 2017 shows that strong financial markets might lower states’ unfunded liabilities.
“However, that same market volatility could have an adverse impact in the long term, especially if lawmakers also fail to make adequate annual contributions to state plans,” the research organization said in an overview of the report.
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