Will “universal healthcare” effect Vermont’s Triple-A bond rating?

by Angela Chagnon

Last week, Governor Shumlin took a trip to Wall Street to discuss the state’s bond rating with financial experts.

Secretary of Administration Jeb Spaulding accompanied the Governor on the March 18 excursion, along with State Treasurer Elizabeth Pearce, Deputy State Treasurer Steve Wisloski, and David Coates.

“We went down to tell them that we remain committed to conservative, fiscal debt management and to answer any questions they might have,” said Spaulding. He said the delegation spent about an hour and a half discussing the Governor’s priorities, the pension fund liability, and other fiscal matters.

Spaulding said that the bond rating agencies “were not concerned about [the Governor’s proposed healthcare plan] from a rating perspective.” Spaulding noted that “a very large portion of the population” is on Medicaid, VHAP, Catamount or other state-funded healthcare plans. He pointed out that Vermont is the only New England state with a triple-A rating by bond-rating agencies Moody and Fitch.

When asked if the large unfunded liability in Vermont’s pension fund had been discussed, Spaulding said, “It is important to distinguish between pension plans and health insurance, we have unfunded liability in both. We have made significant changes that are now in effect.”

Spaulding said that the bond ratings were determined by “chances of defaulting on debt service” and financial relativity to other states.

How does the bond rating system work? John Boland, founding partner of Maple Capital Management and former director of the Vermont CFA (Certified Financial Analyst) Society offered a short, simple explanation, “Credit ratings agencies look at tax income as a percentage of revenue,” Boland said, “and then they look at tax capacity and compare that against projected spending in an economy.”

While Vermont’s credit rating by Moody’s is currently at triple-A, as Spaulding pointed out, Boland said that Vermont was at a “crossover point.”

“A significant jump in government spending could prompt us to experience a downgrade,” he said. When asked if the Governor’s proposed healthcare plan may negatively affect the state’s bond rating, Boland said that the proposed tax revenue in H.202, such as hospital and provider taxes, would have to offset the added costs of the system.

“If it’s truly a revenue neutral situation, the bond rating shouldn’t be impacted that much,” remarked Boland. “But there are going to be added costs just to administer the plan. If spending goes up, VT’s bond rating would go down.”

Boland cited Illinois’ decreased bond rating due to the fact that their spending projections have risen while revenue has not. Another example of this is Burlington Airport’s recent bond rating downgrade.

Legislators have also been made aware of the proposed healthcare system’s impact on the economy. In Rep. Cynthia Browning’s (D-Arlington) explanation to her amendments, which was discussed on the House floor, she wrote:

“How can we even contemplate this when we are having difficulty meeting our current obligations? Would even the planning for this massive new obligation be seen negatively by the bond rating agencies that track our budgetary behavior, resulting in a downgrading of our bond rating?”

Browning clarified her remarks in an e-mail to True North Reports:

“First of all, the bond rating agencies evaluate Vermont’s budget in terms of whether we are balancing it (which we do) and whether we have a good match between planned expenditures and expected revenues going forward. So I think that they would not look kindly on the possible creation of a promised large new entitlement program that has no specified source of support. They would be worried that at some point we might start borrowing to fund the project or that at some point we might be less able to pay the interest on our debt.”

Browning goes on to say that the state’s good bond rating is due to the fact that Vermont keeps about 5% of the previous year’s expenditures in a reserve fund. Based on this practice, Browning says that we would need a reserve fund for the healthcare plan, called “Green Mountain Care” (GMC), as well. She continues:

“If GMC costs $2 billion a year, which it easily could, we would have to have a $100 million reserve fund. If it costs $4 billion, the reserve fund would have to be $200 million. Where would we get that money? If we chose not to have a reserve fund because we could not accumulate that cash, how would the bond rating agencies regard that?”

Rep. George Till (D-Jericho) states on his website that one of the changes made to H.202 in exchange for his vote is language that requires a fiscal analysis by the Joint Fiscal Office by April 21. This analysis will reportedly include the anticipated costs and savings of the system proposed by the bill. Although this is a good idea, whether legislators will pay any attention to the analysis remains to be seen.

Concerning the reserve fund and bond ratings, Browning concluded: “I think that these questions should have been answered before we were expected to vote on H. 202 as presented, and that is one of the reasons that I introduced my amendment to strike GMC from the bill.”

If Governor Shumlin expected his trip to Wall Street to give him an understanding of his healthcare plan’s impact on Vermont’s bond ratings, he was mistaken. Boland remarked, “Such a trip would be useless unless the legislation was in hand.

“I’m sure ratings agencies are starting to do their homework, but they would never comment ahead of time to prevent being accused of interfering with legislation,” said Boland. “They would have to keep their mouths shut until legislation passed.”