by Timothy McQuiston, Vermont Business Magazine Moody’s Investors Service announced today that the state’s Aaa bond rating was revised downward to Aa1 with a stable outlook. Downgrading a bond rating leads to higher financing costs. For several years Vermont has maintained a superior bond rating. The state's aging population and relatively high pension liabilities were mentioned as two contributing factors in the downgrade. See full report below.
Governor Phil Scott today issued the following statement on the Moody Investor Services reports:
“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. These are our most significant economic and budgetary challenges. In fact, they foreshadowed this in last year’s report.
“As I’ve noted for the last several years, we have to do more to retain and recruit working age families by focusing on affordability, reducing barriers to organic wage growth and job creation, and strengthening state government’s fiscal foundation. This has been a primary focus of my Administration and we have a comprehensive plan to achieve these goals.
“While we’ve made much progress in the last 22 months -- and Moody’s has acknowledged our ‘strong management and governance’ -- there is clearly much more work to do to grow the economy and make Vermont more affordable. Vermont didn’t get into this situation overnight and getting out is going to take more work. And it is essential that we do this work together on a bipartisan basis, and with the understanding, and sense of urgency, that it is essential to changing the economic trajectory of our state.
“I’m hopeful this report will help every elected official, every appointee in my Administration, and every state employee focus on the fundamentals of affordability and economic growth, and increase the pace at which we work together to get measurable results. It is necessary to ensure we can afford to preserve essential services and make new investments in our future.
“It is important to note that the report clearly says addressing our demographics and economic growth is the path back to the best possible fiscal health – and we are on that path. But this is about so much more than the ratings of a Wall Street agency – it’s about having a healthier, more vibrant and prosperous state for families and job creators.
“We can, and we will, change the economic and demographic trajectory of our state – if we share those goals and are all pulling in the same direction.
“I look forward to prioritizing this critically important work with the Legislature.”
Vermont State Treasurer Beth Pearce said it will cost the state about $1 million for every $150 million borrowed. Sheissued this statement: “The Treasurer’s Office was notified today that Moody’s Investors Service has downgraded the general obligation credit rating of the State of Vermont from Aaa to Aa1, their second highest rating. No change has been made by Fitch Ratings, for which Vermont has the highest possible AAA rating, nor Standard & Poor’s, for which Vermont has the second highest AA+ rating.
“In their report, Moody’s identified several areas of concern. We need to work collaboratively to address issues such as Vermont’s aging population, slow economic growth, and above average long-term pension and post retirement liabilities relative to GDP. These challenges are real, but they are accompanied by many positive strengths that have been identified by all three rating agencies.
“Moody’s decision follows April 2018 changes to the criteria they use to assess state financial health. While Moody’s updated methodology made maintaining a Aaa rating more challenging for small states, such as Vermont, this is not the time to resign ourselves to that outcome. Vermont is still the highest rated state in New England.
“I am confident that the Governor, General Assembly, and my office will partner with other state and local officials to address our shared challenges. We must focus on regaining our Aaa rating and achieving a triple-A rating from all three rating agencies as we work together to improve the economic prosperity of all Vermonters.”
Moody's Investors Service has downgraded the State of Vermont's general obligation (GO) bond rating to Aa1 from Aaa. Concurrently, Moody's has downgraded to Aa3 from Aa2 the rating on debt issued by the Vermont Student Assistance Corporation that is supported by the state's moral obligation pledge and to A1 from Aa3 the rating on debt issued by the Vermont Economic Development Authority and Vermont Educational and Health Buildings Financing Agency that is supported by annual appropriations of the state. Lastly, Moody's has downgraded to Aa2 from Aa1 the rating on the Vermont State Aid Intercept Program. The outlook for the state is stable. The outlook for the intercept program is also stable.
The downgrade of the ratings incorporates an economic base that faces low growth prospects from an aging population. At the same time, the state's leverage, measured by debt and unfunded post-employment obligations relative to GDP, is high among states and especially so among the highest rated states. With slower than average growth, Vermont's long-term liabilities will weigh more heavily on its economic base and may manifest in growing cost pressures.
The Aa1 GO rating balances these challenges against the underlying health of Vermont's economy, a stable and solid financial position, and strong management and governance of state fiscal matters.
The Aa3 rating on the Education Loan Revenue Bonds issued by the Vermont Student Assistance Corporation reflects a two notch distinction from the state's GO rating to incorporate the moral obligation's strong legal framework and more essential nature of the financing. Payment of the bonds is supported by the state's moral obligation pledge to appropriate funds to maintain a debt service reserve fund for the benefit of bondholders. The bonds financed student loans under the corporation's fixed rate loan program.
The A1 rating on Mental Health Services Bonds issued by the Vermont Economic Development Authority and Vermont Educational and Health Buildings Financing Agency reflects a three notch distinction from the state's GO rating to incorporate the weak legal framework associated with the bonds and the more essential nature of the developmental disability services provided at the financed facilities. The state annually appropriates funds to providers of the developmental disability services, a portion of which the state transfers directly to the bond trustees for bond payment, under direction of the providers.
The Aa2 rating on the Vermont State Aid Intercept Program reflects a statutory requirement that the state treasurer withhold funds payable to a governmental unit that has defaulted on a loan payment to the Vermont Municipal Bond Bank and use those funds to cure as much as possible that unit's default.
The stable outlook reflects the expectation that Vermont's strengths in governance and financial management will mitigate the impacts of current economic and demographic trends.
FACTORS THAT COULD LEAD TO AN UPGRADE
-Improved demographic and economic trends that more closely track those of the nation and other highly rated states
-Moderated leverage, especially unfunded pensions and retiree health care liabilities, relative to state GDP
FACTORS THAT COULD LEAD TO A DOWNGRADE
-Sustained growth in debt or unfunded post-employment liabilities that outpaces economic expansion
-A slowdown in economic development or revenue growth
-A departure from strong fiscal management practices
Vermont's general obligation bonds are a full faith and credit obligation of the state backed by the state's authority to levy taxes without limitation as to rate or amount.
The Mental Health Services Bonds issued by the Vermont Economic Development Authority and Vermont Educational and Health Buildings Finance Agency are secured by payments appropriated by the state to providers of developmental disability services.
The Education Loan Revenue Bonds issued by the Vermont Student Assistance Corporation are secured by payments made by student loan borrowers and a debt service reserve fund that the state pledges to replenish, subject to appropriation, should a draw on the reserve be made to pay debt service.
The legal security for the state aid intercept program is a state law, Act 77, that requires the treasurer to intercept funds payable to an issuer that has defaulted on a loan payment to the Vermont Municipal Bond Bank.
USE OF PROCEEDS
The State of Vermont is located in the northeast United States. Its estimated 2017 population of just under 624,000 makes it the second smallest state in the country. Its 2017 nominal GDP of $32.2 billion is the smallest of the 50 states.
The principal methodology used in the general obligation ratings was US States and Territories published in April 2018. The principal methodology used in the appropriation and moral obligation ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. The principal methodology used in the enhanced provider rating was State Aid Intercept Programs and Financings published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Source: Governor. Treasurer. 10.23.2018. New York, October 23, 2018 -- Moody's