Vermont has not yet recovered its coveted AAA ratings from the country’s major credit rating agencies. But for the first time in years, those same agencies are sending signals that the state is moving in the right direction.
In a report issued Friday, S&P Global Ratings revised the state’s rating outlook from negative to stable, crediting recent retirement system reforms and pandemic-era in-migration to Vermont.
S&P also affirmed the state’s general obligation bond ratings of AA+, the second-highest rating available. The news follows an announcement in May that Moody’s Investors Service, another influential credit rating agency, had released an “issuer comment” finding that a recent pension overhaul was a credit positive to the state.
“We are beginning to see the fruits of investments and critical retirement reforms achieved by Act 114,” Vermont Treasurer Beth Pearce said in a statement Friday, referring to the recent legislative session’s pension deal. “The ratings affirmation also emphasizes the importance of not only continuing to adhere to our record of sound financial management and budget practices, but also addressing our workforce and demographic trends.”
An aging and declining population and the state’s growing pension system liabilities have long been the source of much hand-wringing in Montpelier and a drag on the state’s credit ratings.
In 2018, Moody’s dropped the state’s longstanding triple-A rating (the highest available) down to its lower AA1 rating, citing slower-than-average economic growth, demographics and pension obligations. In 2019, Fitch followed suit, and in 2020, S&P affirmed the state’s AA+ rating but revised the state’s outlook from stable to negative.
“Our goal is to maintain a strong AA rating and eventually achieve a AAA. Today’s rating from S&P is a welcome step, but we must continue to work together on solutions to Vermont’s challenges and upholding the processes of our credit strengths,” said Pearce, who plans to retire when her term expires in January.
Lawmakers enacted significant changes this year to the retirement systems that benefit state employees and public educators, which legislative analysts estimate will eventually take $2 billion in unfunded liabilities off Vermont’s bottom line. As part of the package, both workers and the state will pay more into the system.
“Although we recognize that some of these reforms will increase demand on Vermont's budgetary resources initially, we believe their long-term impact will be to decrease pressure on the state's budget as the unfunded liability is reduced,” the report states.
In its report, S&P analysts also wrote that while Vermont’s aging population is expected to continue to limit economic growth, they also believe that the state has benefited, at least in the short-term, from an uptick in migration during the Covid-19 pandemic.
“According to the latest data from the U.S. Census Bureau, Vermont's population growth outpaced the nation in 2021,” the report states. “This is a stark reversal in trend since it represents the only year within the past decade that Vermont's population has grown at a faster rate than that of the nation.”
S&P added that it’s unclear if remote workers who relocated recently will stick around. But they credited state policymakers for also pursuing other initiatives aimed at its demographic problems, including investments totalling $150 million in housing, $140 million in economic development and $40 million in child care.
Gov. Phil Scott asked lawmakers to take the lead on a pension overhaul but vetoed the package that lawmakers brokered with unions, arguing it did not go far enough. The Republican was unanimously overridden in the House and Senate, a first in state history, and the bill became law anyway. But Scott supported recent injections of funding into housing, economic development, and child care — investments largely made possible by an unprecedented influx of federal funds.
“This is good news, and a sign that our work to strengthen our fiscal fundamentals is moving us in the right direction,” Scott said in a statement provided by Pearce’s office. “I want to thank Treasurer Pearce for her stewardship in this area, as well as for her partnership over the years to address some significant financial challenges.”
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