Major pension legislation was cited as Vermont’s rating outlook was raised to stable from negative by S&P Global Ratings.

In a report that also affirmed the state’s AA-plus general obligation bond rating, the rating agency said Vermont currently ranked sixth highest in the nation for unfunded retiree health care benefits and eighth highest for unfunded pension liabilities in 2021.

“The newly passed retirement reforms offer a structural path toward easing budgetary pressures from mounting retirement liabilities,” S&P said.

According to analyst Geoffrey Buswick, the “scope of the bill” was key in S&P’s decision.

“They’re not nibbling on this,” he said. “They’re taking meaningful approaches to all their liabilities, and so they’re not just focusing on one stream of future obligations.”

The bill became law in May after representatives in both houses voted to overturn a veto from Gov. Phil Scott, who said in a statement the efforts fell short of what was needed “to solve the enormous unfunded liability problems the State faces.”

In its current iteration, the 80-page law touches on the entirety of Vermont’s state-backed pension and health system, said Buswick.

The state of 624,000 had some $2.5 billion of unfunded pension liabilities for a 63.7% funding ratio in 2019, according to a 2021 Pew Charitable Trusts report.

Fundamental changes to the funding structure were needed to help get those high numbers down over the years to come, according to Buswick.

“In a nutshell, the state’s going to pay a little more, the employees will pay a little more, and there’s a benefit,” he said. “It seemed to be substantial to us.”

According to the law, state employees will see 4% to 5% of their pay deducted for pension contributions going forward, the exact amount dependent on their length and terms of employment, while the state will be required to boost payments to the pension system’s employer contribution fund, guaranteeing an annual deposit of $15 million from 2026 until the date the liabilities are 90% covered, according to the law.

Those changes are a net positive for Vermont and will allow for cost of living adjustments, ensuring future pensioners “can maintain that same purchasing power with the amount of money that they’ve been given,” said Buswick.

The law also allocated $150 million from the state’s fiscal year 2021 reserves to the system for immediate dispersal.

According to S&P’s report, Vermont’s “improved demographic metrics” also influenced the long-term outlook on the state.

Vermont’s population is the third oldest in the nation on average, presenting “challenges in GDP growth” that aren’t “necessarily aligned with the demands of the economy,” said Buswick.

As recently as 2020, the population was shrinking. The pandemic changed that however, as city dwellers seeking out less congested accommodations helped grow Vermont’s population.

“During the pandemic that was anecdotal”, he said. “Then the anecdotal came true.”

Demographics were cited in 2020 when S&P lowered its outlook to negative. Earlier, demographics were cited as the state lost its triple-A ratings.

According to Buswick, the 2021 state census showed the state’s population had grown for the first time in nearly a decade.

“The question is, will they stay there?” he said. “If the pandemic and the fear of COVID wane, will there be some sort of population exodus?”