Treasurer's office and Bond Bank warn program could raise long-term costs, urge appropriation language and Bond Bank role

Members of the House Ways & Means Committee heard an overview April 17 of the school construction section folded into House bill H.454 and were warned that a state debt-service subsidy could create rising, multi-decade budget obligations and risk the state's credit rating unless the law is carefully structured.

Ashlyn Duan, director of policy in the Vermont State Treasurer's Office, told the panel the proposal in H.454 largely tracks recommendations from the school construction task force and uses a debt-service subsidy model similar to Rhode Island's program. Duan said the bill contemplates a 20% base subsidy with bonus points that could raise the subsidy to as much as 40% for projects meeting certain criteria.

The stakes, Duan said, are financial as well as programmatic: "We are hoping to add in bold, that the annual amounts are subject to annual appropriation and do not constitute a pledge of faith and credit or taxing power of the state," language her office recommends to reduce the risk that rating agencies count the program as net tax-supported debt.

Why it matters: If the subsidy were treated as a state debt obligation, Duan said, rating agencies could consider the liabilities "net tax supported debt," pushing up borrowing costs not only for the state but also for entities that rely on Vermont's rating such as the Vermont Bond Bank, VHFA and other instrumentalities.

Duan summarized modeling done for the task force showing how the state's annual subsidy commitment would rise as new projects are added year over year. The treasurer's office ran scenarios for annual project volumes of $100 million, $250 million and $500 million and said even a steady $100 million per year pipeline would produce a long, rising subscription of subsidy payments before any long-term leveling as bonds mature. Duan also cautioned that the models predate recent large swings in interest rates and do not fully capture future inflation in construction costs.

Michael Gaughan, executive director of the Vermont Bond Bank, described how the bond bank facilitates school borrowing across the state and the credit-enhancement tools the bank uses. The bond bank currently has roughly $220,000,000 of outstanding school debt on its books as of Dec. 31, 2024, Gaughan said, and the bank's access to capital markets and the state's credit support help lower interest costs for borrowers.

Explaining the bond bank's credit tools, Gaughan said the state's statutory "intercept" mechanism lets the treasurer's office redirect certain state payments to cover missed debt service: "If somebody doesn't pay us, then we, under statute... ask the treasurer's office to redirect payments to us so that we can backfill any debt service due." He also described the bank's moral-obligation structure and recent changes intended to reduce dependence on that feature.

Both witnesses recommended two technical changes to the draft law. Duan said adding clear appropriation language would help keep the program off the state's net tax-supported debt roll. She and Gaughan both said the Vermont Bond Bank should be named as the fiscal agent for reimbursement of district debt service, which Gaughan said would improve efficiency, enable timely reimbursement to districts and preserve the credit enhancements that lower borrowing costs.

Committee members repeatedly raised the question of existing or "legacy" district debt and how liabilities will travel to newly formed, larger districts under the education-reform governance changes. Gaughan and Duan said legal and practical options exist but that defeasing or transferring obligations can be complex and costly; Duan recommended additional study and said the treasurer's office and bond bank would help the Legislature analyze those legacy liabilities.

Witnesses flagged other program design issues: whether the state should provide up-front cash (Rhode Island has used a $500 million package for planning and pre-construction costs), whether bond structures should permit level debt service rather than level principal to ease first-year budget pressure, and whether alternative delivery or public-private partnership approaches could harness scale to lower construction and delivery risk.

Next steps: Duan said her office has discussed the bill with bond counsel and the state's financial advisors and will consult rating agencies after the legislation is less fluid. The treasurer's office plans to offer two specific edits on the Senate side: the appropriation/pledge wording and language naming the Vermont Bond Bank as fiscal agent for reimbursement. Both offices said they expect ongoing analysis and may return with additional recommendations.

Ending: Committee members signaled interest in further work this summer to sort out legacy liabilities, the implications of the new foundation funding model and the program's interaction with municipal bond markets and state credit. No formal committee vote on amendments was recorded during the hearing.