Major credit rating agencies say that state government shutdowns in isolation don’t usually lead to bond rating downgrades, complicating a narrative that’s been coming from Vermont’s state treasurer and Democratic lawmakers for weeks.
As an impasse over property taxes now encroaches upon the July 1 deadline for a new spending package, alarm is growing over the shutdown and the ramifications it could have on state agencies, employees and Vermonters who rely on public services.
The state’s sterling credit rating has also been a central point of concern on both sides of the political divide. State Treasurer Beth Pearce, a Democrat, has said the rating will be in serious jeopardy if the state reaches July 1 without a budget in place.
A lower credit rating would make it more expensive for Vermont to borrow money, exacerbating the economic pressures at the heart of the current political dispute.
Representatives from credit rating agencies said Monday that government shutdowns on their own typically don’t lead to downgrades in ratings.
David Jacobson, a spokesperson with Moody’s, one of the agencies that issues Vermont’s ratings, said that in the six or seven years he’s worked there, he can’t recall any state seeing its bond rating lowered exclusively over a shutdown.
“The bottom line is these shutdowns, very often these things come down to the last minute, that’s not unusual,” Jacobson said. “Every year somebody has a shutdown and they rarely last very long.”
Eric Kim, Fitch Ratings’ lead analyst for Vermont, said his agency also won’t categorically downgrade ratings for states that see shutdowns, although it may downgrade ratings based on the underlying issues that lead to protracted budget impasses.
“It wasn’t the fact that a state enters a year without a budget, that’s not going to be a rating driver for us,” he said. “We look at why is that happening. Is there an underlying issue that would affect our view of the credit quality of the state?”
Illinois saw a recent downgrade after a shutdown from Fitch, for example, because it failed to produce budgets on time for years running.
Kim said that the policy debate at the heart of Vermont’s impasse — a dispute over setting property tax rates and how to spend a large pot of one-time money — isn’t setting off any alarm bells to suggest that a rating downgrade is in the offing.
“It sounds like a policy dispute between the Legislature and the governor and we see this all the time across the country,” Kim said. “Nothing that we have seen so far would indicate that the disputes in this particular scenario would trigger a rating concern for us.”
Kim stressed that things aren’t set in stone and that Vermont’s credit rating will also hinge on the quality of the budget it puts forward.
A budget that’s structurally imbalanced, relies on one-time money to fund ongoing expenses or contains provisions that call into question Vermont’s ability to “address its fiscal challenges in a productive and collaborative way,” could lead to such a downgrade, he said.
In an interview Monday night, Pearce said Kim contacted her Monday afternoon to schedule a discussion after the Legislature votes on whether to override Scott’s veto of the latest budget proposal — an indication, she said, that Fitch is keeping close tabs on the process.
Pearce maintained that failing to pass a budget on time would pose a long-term threat to Vermont’s bond ratings.
At a time when Vermont faces several financial hurdles, including an aging demographic and sluggish revenue growth, she said the state has little margin for error and needs to “take care of the things that are under our control.”
This includes passing a structurally balanced budget on time and addressing long-term financial liabilities, she said.
“Both the treasurer’s office and its independent financial adviser have articulated that those have an impact on our long-term financial health and they pose a risk to our credit rating,” she said. “It’s not today you have this, tomorrow you have that, it’s a much more nuanced process.”
Pearce pointed to written analysis on the possibility of a shutdown from her office’s financial adviser, Tom Huestis, which echoes these arguments.
“For these reasons we believe that that moving away from the State’s conservative financial management approach and having a government shutdown presents the State with long-term risk to its ratings,” he wrote.
Pearce added that unlike other states, Vermont does not have policies and procedures in place to address a shutdown.
The Scott administration has failed to produce a contingency plan to address the possibility of a shutdown, or clarify how public services and agencies would be impacted, despite pressure from Pearce, Democratic lawmakers and the state employees union.
While a government shutdown may not lead to a ratings downgrade on its own, it could have a dramatic impact on state services, according to attorneys with the Office of Legislative Council.
They said in a memo last week that without a spending bill “most, if not all, state programs would ultimately lack funding to operate.”
Scott has said there is no need to prepare for a shutdown because he is confident there will be a budget deal before the deadline, although his administration has painted a similarly grim picture if funding does run out.