by Timothy McQuiston Vermont Business Magazine State Treasurer Beth Pearce is taking a bottom-line view of the Legislature’s special session, which began Wednesday and will resume May 30. While Governor Phil Scott and legislative leaders wrangle over property taxes, Pearce is urging the administration and Legislature to not let state government shut down, which would happen if the budget and tax bills do not become law by July 1. She said in a May 18 letter to them that even discussion of a government shutdown could damage the state’s sparkling AAA credit rating. A downgrade to an AA rating would cost the state $7 million over the life of a typical $150 million bond, she projected, and nearly $26 million if the credit rating fell to single A. Separately affected would be other state agencies’ borrowings and local bonds and other financings which rely on the state’s “moral obligation.”
Since Republican Governor Richard Snelling and Democratic Speaker Ralph Wright hammered out a spending and tax plan in 1991 to get rid of a budget deficit, the two sides have worked together to maintain a balanced budget. The state’s credit rating also has rebounded.
Last August, Moody’s, for example, gave Vermont an Aaa rating. In doing so it said:
“Moody's Investors Service has assigned Aaa ratings to the State of Vermont's $33 million General Obligation Bonds 2017 Series A and $67 million General Obligation Bonds 2017 Series B. The outlook is stable. Moody's maintains an Aaa rating on Vermont's outstanding GO bonds. The Aaa rating recognizes Vermont's strong fiscal management, a track record of running surpluses most years even when revenues do badly, modest debt, and a small but productive economy. Vermont's primary credit challenge is its above-average net pension liability paired with an increasingly unfavorable demographic profile. We expect the state to maintain its commitment to balanced budgets even as this challenge poses some budget pressures in the next few decades.”
“Credit Strengths » Strong fiscal management leading to surpluses most years » Good progress on funding pension liabilities » Modest debt burden
“Credit Challenges » Above-average net pension liability » Aging population and work force » Slow economic and revenue growth
Rating Outlook The stable outlook reflects the state's proven ability to balance its budget in a variety of operating environments. Having grown fund balance and liquidity substantially in the past few years, Vermont is financially well-positioned for the future.
Factors that Could Lead to an Upgrade » Not applicable
Factors that Could Lead to a Downgrade » Reversal of recent progress toward better funding of pension liabilities » Reversal of historical track record of running budget surpluses even in bad years » Protracted population loss, aging of population, and/or shrinkage of workforce leading to poor revenue trends and difficulty servicing liabilities.”
Beth Pearce letter to Governor Scott and legislative leaders, May 18, 2018.
In part, Pearce wrote the leaders: “Last spring, I wrote a letter, urging a renewed positive and collaborative dialogue among Administration and Legislative leaders to resolve the FY18 budget impasse. As I explained then, Vermont has a well-deserved reputation as a leader in responsible governmental financial management. That reputation has been earned over many years by the hard work and compromise of Administration and Legislative leaders from both sides of the aisle. And it has resulted in Vermont having the highest credit rating in the Northeast, an achievement we can all be proud of, as it produces concrete savings of millions of dollars each and every year benefiting all Vermonters. In short, Vermont is able to do more with less because we work together to maintain our high credit rating.
Vermont Treasurer Beth Pearce
“One year later, it is with regret that I once again write to urge you to work together to resolve yet another budget impasse. I write with an even greater sense of urgency this year, as I am particularly alarmed by Governor Scott’s statement at the May 16th press conference, when he declined to assure Vermonters that there will be no shutdown of State government. This is deeply troubling, and it is very much in contrast to the leadership demonstrated last year, when the Governor promised that there would be no shutdown and stated, “I know that’s not great negotiating skills to tell people you’re willing to put aside your own preference for the benefit of the state, but that’s just the way I am as a leader.”
“I cannot emphasize enough how important it is to avoid a government shutdown. Not only would a shutdown prevent State agencies from providing the critical public services that Vermonters rely on every day, it would result in real and permanent costs, such as foregone and irrecoverable revenues and the additional costs of agency disruption. Even the threat of a shutdown can have adverse consequences, such as reducing the public’s faith in government, imposing additional costs to fund a special Legislative session, and jeopardizing the State’s high credit rating. Simply stated, no one wins when the government shuts down.”
“I would urge both the Administration and the leadership in the Legislature to carefully consider the fiscal impacts of a credit downgrade as you work to resolve the current impasse. It is no secret that the State faces challenges, both in demographics and in slower than expected economic growth. Our margin for error has narrowed. Because of these challenges, it is perhaps more important than ever that we focus on our historical discipline, consensus forecasting, and collaborative budgeting. Any rating downgrade will increase costs to the State, bond-issuing agencies and authorities of the State, and Local Governments in material amounts.
Impacts of a Credit Downgrade
The fiscal impacts of a credit downgrade are best summarized in four parts:
1) An increase in the bond interest cost paid directly by the State;
2) A corresponding increase in bond interest cost for the many State authorities and most Vermont local governments on borrowings that rely on Vermont's bond rating through the extension of a State moral obligation pledge and State aid-intercept provisions, which are directly tied to Vermont’s general obligation (GO) bond rating;
3) Potential reduction in access to the markets in recessionary environments; and
4) Overall reputational risk.
She included with her statement a memo on the state'scredit rating from a 2011 discussion on the topic:
“During our testimony to the Committees on October 24 (2011), Representative Lorber requested that the Treasurer’s Office provide an analysis of the impact of a credit rating downgrade on Vermont’s cost of borrowing. This memorandum reviews the results of that analysis.
“To summarize, assuming indicative municipal bond interest rates as of the close of business October 24, if the State sold $150 million of bonds (approximately the current 2-year authorization for fiscal years 2012 and 2013) that were repaid in level principal amounts of $7.5 million per year over a 20-year period, then we estimate a downgrade from the State’s current triple-A rating to a double-A rating would increase the State’s cost of borrowing by over $4.1 million over the life of the bond issue. We estimate that a downgrade from triple-A to single-A would cost over $15 million.
“We also observed during our testimony that today’s interest rates, which range from 0.25% (in one year) to 3.5% (in 20 years) for a triple-A rating, are near record lows. We stated our belief that if interest rates increased to historically more normal levels, then borrowing costs associated with lower ratings would increase correspondingly. Specifically, 20-year historical average interest rates range from 2.5% (one year) to 5% (20 years) for a triple-A rating. If the current ratios between triple-A, double-A and single-A rate levels remained somewhat consistent at higher rate levels, then we estimate that the corresponding increased interest costs could be almost $7 million for a double-A rating, and over $25 million for a single-A rating.
“Finally, it should be noted that the State issues bonds an ongoing basis, and total increased borrowing costs across multiple bond issues will be substantially larger than the above dollar amounts.”
Source: Treasurer. 3.18.2018