Credit Highlights
• S&P Global Ratings affirmed its 'AA+' long-term rating on the State of Vermont's general obligation (GO) bonds
outstanding.
• At the same time, S&P Global Ratings affirmed its 'AA' long-term rating on the Vermont Bond Bank's Vermont State
College System bonds, which are supported by a state aid intercept mechanism.
• The outlook is stable.
Security
Vermont's full faith and credit secures the GO bonds. The 'AA' rating reflects our view of the risk of appropriation.
Credit overview
At the beginning of fiscal 2025, Vermont finds itself in a strong financial position as it continues to emerge from the pandemic, with coffers that have been bolstered by various rounds of federal fiscal stimulus and some of the largest budget surpluses in the state's history. At the same time, the state saw an uptick in domestic in-migration of high-income earners in 2020 and 2021, as the wider acceptance of remote work alongside Vermont's largely rural location, with access to ample outdoor recreation, continues to draw out-of-staters.
Whether the state can capitalize on this momentum to promote stronger long-term demographic and economic growth remains to be seen, in our view. It has historically underperformed in both of these areas relative to the U.S. But Vermont is devoting significant policy attention and investment to these legacy issues--for example, through housing policy reform and the use of federal stimulus dollars to target areas such as housing, broadband, and workforce development. As we have stated in the past, Vermont's economic performance relative to that of higher-rated peers is a key upside rating constraint, and we expect it will remain so until the state can establish a clear trend of stronger growth.
The July 2023 floods caused more than $1 billion in damages to the state's economy, infrastructure, and private property, with state-owned infrastructure sustaining about half of the damage costs. As with similar natural disasters, including the flooding wrought in Vermont by Tropical Storm Irene in 2011, we expected that the availability of Federal Emergency Management Agency disaster relief funds and private insurance would aid in recovery, and it did, with approximately $611 million in damages and an expected federal share of $550 million representing 90% of eligible costs, and another $48 million in insurance payments. While the state capital and state offices were flooded, Vermont officials report that the damage to other public infrastructure was less severe than in 2011 largely because of measures taken after Tropical Storm Irene to fortify infrastructure and enhance flood resiliency.
The fiscal 2025 budget anticipates weaker revenue performance than in 2024, as the broader macroeconomic slower growth trend is forecast to push unemployment up and weigh on personal income and corporate earnings through the next fiscal year. The state has generally forecast revenue conservatively and structures its base budget around conservative revenue estimates, providing some inherent cushion should revenue decline more than expected. Vermont also regularly updates its revenue forecast during the year and typically makes midyear adjustments to accommodate changes in the forecast. We therefore expect that operations will remain balanced through the next year even as economic growth slows, which S&P Global Economics is also forecasting in its latest outlook. (See "Economic Outlook U.S. Q4 2024: Growth and Rates Start Shifting To Neutral," published Sept. 24, 2024, on RatingsDirect.)
The 'AA+' rating reflects our view of Vermont's:
• Economy, which is experiencing a slower jobs recovery than the rest of the nation, although with historically low unemployment and some signs that the state could be in the early stages of a path toward stronger demographic and economic performance, albeit with significant uncertainty around the sustainability of pandemic-era trends;
• Strong budgetary performance, with the past four fiscal years ending with some of the largest budget surpluses in the state's history, most as a result of higher-than-forecast corporate income tax receipts and investment income in fiscal 2024;
• Historically high cash balances that have ballooned to approximately $1.7 billion compared with a typical pre-pandemic average of $200 million to $500 million, with reserve balances that continue to be fully funded at the statutory maximums;
• Robust financial management and governance framework because the state has substantial autonomy to raise revenue without limits, regularly monitors and adjusts its budget during the year, and uses a consensus revenue forecast that is updated twice annually to track revenue performance;
• Well-defined debt affordability and capital planning processes that we believe have limited leverage and contribute to a modest tax-supported debt burden with rapid principal amortization; and
• Significant pension and OPEB liabilities that remain sizable relative to those of state peers, although retirement reforms passed in 2022 will moderate these liabilities over time.
Environmental, social, and governance
Vermont is susceptible to flooding, so events comparable to the July floods in 2023 and 2024 could become more frequent as warmer temperatures contribute to more regular extreme precipitation events. Following Hurricane Irene in 2011, the state implemented a range of measures designed to fortify infrastructure and enhance flood resiliency. Consequently, based on the state's preliminary assessment, infrastructure damage each of the past two years was considerably less than in 2011. Physical climate risks remain neutral within our analysis because Vermont has not seen significant long-term economic or revenue disruption related to flooding, and we expect that it will continue to take active measures to reduce risk as it recovers from the recent flood and updates its hazard mitigation plan later this year.
Our view of the state's risk management for pension governance has improved following the passage of pension reform legislation in 2022 that we believe places Vermont's pension and OPEB on a more sustainable long-term cost trajectory. Social capital risks are elevated relative to those of state peers because despite the significant policy attention and funding that the state is directing toward long-term demographic challenges, we have yet to see an unequivocal, sustained trend in favor of stronger population growth and economic output than were typical in the decade preceding the pandemic.
Outlook
The stable outlook reflects our expectation that Vermont will continue to realize structurally balanced operations with fully funded reserves and robust cash balances in the coming few years, despite the likelihood of a near-term economic slowdown. Recent pension reform, the state's historically high cash and large structural budget surplus, and the availability of substantial federal funds that Vermont plans to deploy strategically to target legacy economic and demographic vulnerabilities have created positive momentum that we believe will limit downside credit pressure through the two-year rating outlook horizon.
Downside scenario
Rating pressure would most likely emerge outside the two-year outlook period if, despite the state's efforts, Vermont's economy and demographics significantly underperform relative to those of similarly rated peers, particularly if slow revenue growth or elevated fixed costs were to strain the state's ability to sustain structural balance in out-year budgets.
Upside scenario
We could raise the rating with clear evidence that the state's economic and demographic trajectory is on a path of accelerating long-term growth that aligns with what we typically see among 'AAA' rated peers, and if the state also makes inroads in paying down its still-sizable retirement liabilities.
Credit Opinion
Institutional framework
Although Vermont is the only state without a constitutional or statutory balanced budget requirement, this has not had a significant effect historically, as in practice the state has demonstrated a commitment to structurally balanced budgets regardless. Vermont has significant revenue autonomy and can generally levy taxes and alter taxing structures (including modifying tax rates and bases) without constitutional constraint or having to meet an extraordinary legislative threshold. The state has significant legal authority to alter disbursements and assistance to local governments but could face practical limits in exercising this ability given a comparatively high level of essential service provision and support for local governments. Vermont is not a voter-initiative state. Despite a lack of express statutory provisions giving priority to bondholders over other claimants to state resources, Vermont has no limits on its ability to impose taxes to pay debt service on GO debt and can pay debt service without a budget.
Management
Vermont uses a consensus revenue forecast that is based on recommendations from the state's two economists (representing the legislature and the administration) and that is required to be approved each January and July by the state's Emergency Board (the E-Board), which includes the governor and chairpersons from each of the legislature's finance-related committees. The state monitors and reports revenue and spending monthly, while the E-Board meets at least twice a year to adopt the updated consensus forecast and make budgetary adjustments. The E-Board can hold interim meetings to evaluate the budget and has done so in the past during periods of heightened economic uncertainty, such as during the Great Recession and the pandemic.
The Capital Debt Affordability Advisory Committee oversees the state's long-term capital planning and debt. It publishes an annual report each September with recommendations on future bond issuance limits to enable the administration to complete its annual capital budgeting proposal as part of its long-term capital planning process. Although the committee's recommendation is nonbinding, the state has never authorized GO debt in excess of its recommendations. The state treasurer's office oversees Vermont's state investment portfolio in accordance with statutory limits on allowable investments, and publishes monthly reports detailing investment holdings and unrestricted cash balances.
The three major operating funds--general, transportation, and education--have budget stabilization reserve accounts that have been funded at the statutory maximums each year since the Great Recession. The general and transportation stabilization reserve maximums are calculated as 5% of prior-year appropriations, and the education fund reserve is equal to 5% of prior-year appropriations net of the state's property taxes collected by towns that are not remitted to the state. The state created a second general fund reserve in 2013 called the general fund balance reserve, and has various other reserve accounts that are restricted for specific purposes.
Vermont has a strong and largely formalized budget management framework with a history of effective budget tracking and adjustment to maintain structural balance. In addition to the monitoring and reporting mechanisms mentioned, the state can and does adjust its budget in response to variances through a variety of mechanisms that include administrative action at the departmental level, through the E-Board, or through the legislature by way of a budget adjustment act.
Economy
Vermont is trailing the U.S. in jobs recovery, with year-over-year job growth of 0.2% by the second quarter of 2025, ranking 32nd among states, according to S&P Global Market Intelligence. As with other New England states, Vermont's comparatively weak labor force growth will weigh on long-term economic growth, underscoring the state's need to attract and retain qualified workers to achieve stronger economic performance. The good news is that unemployment is also quite low. The April 2024 release from the Bureau of Labor Statistics has Vermont tied for the lowest unemployment rate in the country at only 2.1%. S&P Global Market Intelligence forecasts Vermont's underperforming the U.S. over the next year, with gross state product (GSP) estimated to grow by 0.7% compared with 1.6% for the nation, and with the baseline forecast showing the state unemployment rate rising to 2.5% by the middle of next year. The state's employment diversity by sector is generally in line with that of the U.S. with no material concentration and/or unusual cyclicality. Per capita personal income improved relative to the U.S. level to 97% in 2023 from 95% in 2021.
We continue to expect that long-term lackluster demographic trends will remain a key constraint on economic growth, although, as noted, Vermont is positioning itself to capitalize on the now-widespread acceptance of remote work to attract new residents and leverage private sector investment for in-state job creation. The state's 10-year annual population growth rate through 2023 was less than half the U.S. rate (0.23% compared with 0.56%) and its median age of 43.2 is considerably higher than the U.S. median of 39.0. Net in-migration in 2020 and 2021 accelerated, in particular among prime working-aged individuals (25-54) with adjusted gross incomes of greater than $100,000. However, this was followed by growth of just 92 residents in 2022 (0.01%) and 400 in 2023 (0.06%), and S&P Global Market Intelligence forecasts a return to flat growth trends through 2027.
The state's economy is driven by tourism, higher education, electronics, consumer goods manufacturing, and agriculture (including dairy farming). Economic growth has historically been slower than that of the U.S. but has basically aligned with that of the U.S. since 2020. Real GSP has grown by less than half the national growth rate over the past 10 years, and fell below the U.S. GDP growth rate in every year from 2011 to 2020. Growth in 2020 and 2021 was comparable to that of the U.S., and Vermont's 2022 real GSP exceeded national growth at 2.8% compared with 2.1% GDP for the U.S., but slowed to 1.3% in 2023 compared with 2.5% for the U.S. In addition, GSP per capita still lags the national level considerably at 82% of GDP.
Financial performance, reserves, and liquidity
Vermont received record-setting corporate income tax revenue in 2023 partly as a result of a shift to market-based taxation that expanded the base of taxable activity following legislation passed in 2019, alongside the high inflation environment of the past fiscal year, which conferred stronger pricing power to businesses. The state's interest income has far outpaced historical averages because Vermont's cash balances have swelled since 2021 as a result of high interest rates and the influx of federal funds that the state has deposited to interest-bearing accounts. All told, fiscal 2024 ended with a large unallocated general fund surplus of $44.2 million (2.2% of base appropriations), with surplus results likewise reported in the transportation and education funds and budget stabilization reserve accounts funded at statutory maximum levels.
For fiscal 2025, general revenue is forecast to increase by 1.1% to $2.30 billion, and base appropriations--including for the Act 76 child care bill passed in the 2023 legislative session--will increase by 2.6% to $2.35 billion. The state's economic forecast anticipates a slow growth trend (between 1.5% to 2.1% per year), though not a recession, through 2025. Vermont also plans to use $74 million of its 2024 carryforward balance on one-time appropriations in 2025, as it has done in the past few fiscal years, and expects to fully fund its reserve accounts. In general, we expect the state will continue to realize structurally balanced operations, as the economic assumptions underlying its revenue forecast more or less align with those in S&P Global Market Intelligence's macroeconomic forecast, and we note the state's record of making regular midyear budget updates through budget adjustment acts to sustain structural budgetary balance, which we expect will continue.
The operating budget (which we define as the combined general and education funds) has a diverse revenue mix, with the largest sources including personal income taxes (32% of combined revenue), a statewide education tax (a property tax, 30%), and sales and use taxes (14%). In addition, the state legislature and governor are considering various proposals to potentially reform education funding by reducing the education tax for taxpayer relief, deferring education payments to schools, or raising new sources of revenue for education expenses.
Our forward-looking analysis will focus on the state's ability to continue funding its education budget, and any proposal that would result in expenditures' outpacing revenue could worsen our view of budgetary performance. The state has fully funded its budget stabilization reserve accounts in the general, education, and transportation funds since the Great Recession, providing some flexibility to offset fund deficits should they emerge.
Vermont pools its cash across major funds and has seen its cash increase considerably since 2021, to an average monthly balance of about $2.3 billion in 2023 and $2.1 billion in 2024 to date compared with a typical balance of several hundred million in the years leading up to the pandemic. Given that much of the increase has come from federal stimulus dollars that will be spent over the next several years, we expect that cash balances will normalize eventually but likely remain exceptionally strong in the interim.
In fiscal 2023, a joint initiative of the treasurer and governor led to the creation of a new fund designated for pay-as-you-go capital financing (the cash fund), with the express goal of reducing future reliance on issued debt. The cash fund was seeded with $25.0 million and received additional transfers totaling $45.8 million at the close of fiscal 2023 and $17.7 million in fiscal 2024. The cash fund will be supported through an ongoing funding mechanism based on general fund transfers calculated as up to 4% of prior-year appropriations, less debt service. With this new source of capital financing in place, we expect that the tax-supported debt burden will likely lessen over time.
Debt and liabilities
Vermont's tax-supported debt liabilities are modest relative to those of state peers and are projected to decline over the next decade, particularly as the state created and seeded a designated pay-as-you-go capital fund in 2023 to reduce reliance on bonded debt. Its pension and OPEB liabilities remain elevated compared with those of peers, even after the passage of pension reform two years ago. We believe that the changes introduced in the pension reform legislation--which included reduced benefits, higher contributions, and prefunding OPEB--place the state's retirement liabilities on more stable long-term footing, but that it will take some time before the liabilities are paid down to levels that better align with those of most other states.
We calculate direct debt at $1,190 per capita, 1.8% of personal income, and 1.7% of GSP, when including the new-money portion of the 2024 issuance. The debt service carrying charge was 2.1% of general government spending in fiscal 2023 and, we expect, will be around 2.0% on a forward-looking basis as debt amortizes. The state's debt portfolio consists entirely of fixed-rate GO debt. It has no variable-rate debt, interest rate swaps, or direct placement debt.
Pension and OPEB liabilities
The 2022 pension reform legislation included several measures to shore up the state's retirement accounts and place pension and OPEB costs on a more sustainable trajectory. These measures included raising state contributions above actuarially determined levels and creating a long-term funding mechanism for higher contributions, raising employee contributions, and lowering cost-of-living adjustments, as well as changing employee eligibility, prefunding OPEB, and providing a one-time state contribution of $200 million to the pension funds. With the changes, we believe that retirement liabilities are less of a source of credit pressure but are still sizable relative to those of state peers. The state provides pension benefits through two defined benefit pension plans: the Vermont State Employees' Retirement System and the Vermont State Teachers' Retirement System. As of June 30, 2023, the latter was 57% funded, with a net pension liability of $1.9 billion, and the former was 68% funded, with a $1.1 billion liability. The three-year average pension funded ratio is 63%, with net pension liabilities totaling $4,659 per capita and 7% of personal income, placing Vermont in the bottom fifth of all states in terms of the size of its pension liabilities.
The $200 million one-time contribution in fiscal 2022 allowed total plan contributions to exceed our minimum funding progress calculation, but we expect contributions will continue to fall short of minimum funding progress in a typical year for some time. In particular, the level percentage of payroll amortization method used for both plans results in lower upfront employer contributions that rise progressively along with assumed payroll growth, and the plans' 7% rate-of-return assumption results in lower employer contributions in favor of investment returns than would an assumption that more closely aligns with our 6% guideline. State contributions have exceeded the actuarially determined contribution for the past decade, and the ongoing payment of the actuarially determined contribution plus additional contributions pursuant to the reforms will result in gradual funding improvement over time. However, as noted, the plans rely on a funding structure that, while improved, still results in meaningful cost deferrals that increase outyear risk.
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