[V]ermont’s bond rating drop will cost the state at least $1 million for each $150 million general obligation bond, according to the governor’s office. On top of that, Vermont entities whose interest rates are linked to the state’s overall rating from the influential Moody’s Investors Service will also see a jump in their rates.
Moody’s on Tuesday lowered Vermont from the highest Aaa rating to Aa1, citing the state’s pension liabilities, its slower-than-average economic growth, and its aging population as reasons. The two other influential credit rating agencies, Fitch Ratings and Standard & Poor’s, haven’t issued ratings this year for Vermont.
State Treasurer Beth Pearce, whose office administers Vermont’s state retirement systems and pension funds, emphasized Thursday that Moody’s based its rating on not only pension liabilities but on slow economic growth and demographics. Vermont has the nation’s second-fastest aging population after Maine.
“They saw some items in our aging population and our economy that put more pressure on all state liabilities including pensions,” Pearce said. “But we have ample cash reserves in our operating funds, and we have a plan in place to pay down that liability.”
Vermont is on the hook to pay a share of retirement and health care benefits for 32,000 teachers and state workers. Some state officials and business groups have pressed lawmakers and other policymakers to lower Vermont’s future liabilities, saying that the pension assets have been invested using assumptions about long-term returns that probably won’t hold true.
Vermont has long had the highest rating from Moody’s in northern New England, so the drop was an unsettling signal to those who are watching the economy.
And it will also cost Vermont money. In the immediate future, the additional cost to borrow $150 million will be about $1 million, according to the Scott administration. The governor’s office plans to issue debt of only $61 million per year in 2020 and 2021, so the overall cost will be lower than that, said Rebecca Kelley, Gov. Phil Scott’s communications director. Kelley said there will also be an impact to several other entities, such as the Vermont Economic Development Authority.
Meanwhile, rising health care costs, longer life expectancies, and other factors are also putting unforeseen pressures on the state’s retirement funds. Some advocates for action foresee huge increases in the liabilities themselves over coming years.
“There are storm clouds on the horizon that are threatening Vermont’s public pension and health care plans,” said John Pelletier, director of the Center for Financial Literacy at Champlain College, in a speech at a Vermont Business Roundtable conference last year that focused on state retirement and health care plans.
“At some point in the future, we will have another recession and that will result in a drop in Vermont’s tax revenue. Vermont’s population and its labor force are shrinking. This puts severe limits on Vermont’s economic growth potential,” Pelletier said. “Vermont should expect subpar economic growth in the future compared to other states.”
Pearce and the teachers union have said that the plan in place now will guarantee that the pension obligations are paid off by 2038.
“I think there’s a complete misunderstanding of this,” said Pearce. “We have $4.5 billion of pension assets to pay plans. This is a liability that exists for all employees out to their date of retirement, and we have a funding plan in place to pay down that liability by 2038.”
Jeff Fannon, executive director of the state’s teachers union, the Vermont NEA, said problems of underfunding were addressed in 2010 when the state Legislature approved an increase in contributions by teachers.
“Moody’s downgrade, while unfortunate, doesn’t change the fact that we’re on a trajectory to solve the problem,” he said.
Pearce said she didn’t expect the matter to come up in next year’s legislative session. But there are those who hope it does. Mark Crow, a member of the Vermont Business Roundtable, suggested in a column that the state honor existing obligations but stop admitting new employees to the retirement plan.
“That will at least limit the future liability under these plans to the existing participants,” Crow said. He also called for establishing a defined contribution plan, such as a 401(k), for new teachers and state employees. The state’s contribution would be fixed.
“This would allow us to take real and meaningful steps to solve a clearly unsustainable situation,” he said.
As for getting lawmakers to take up the matter in the coming session, Crow said he has found most aren’t fully aware of the complex topic of health and retirement liability.
“If we’re trying to make Vermont more affordable, this is a big, looming problem,” he said.
