Conning Releases State of the States Report - Disparity Between State Credit Quality Widens
HARTFORD, CT, June 19, 2012 – Conning, Inc., a leading global provider of asset management services, risk and capital management solutions, and research to the insurance industry, today announced the release of its 2012 State of the States Municipal Credit Research Report (available here). Prepared twice a year, the report ranks all 50 states in terms of their credit quality based on extensive analyses of 13 key indicators including revenue growth, year-over-year employment gains, and foreclosure rates.
Overall, changes in the rankings compared to the November 2011 report were largely minimal, although there was improvement by some select states in the south as well as in Washington. At the top of the list were a line of states – led by North Dakota and stretching down to Texas – characterized by low debt, moderate social-service costs, and strong agriculture and energy sectors. Declining states included Hawaii, Massachusetts and Arizona, all of which had relatively slow employment and tax revenue growth.
“While states such as South Carolina and Arkansas jumped significantly in the rankings the real winner was Florida, which moved up 16 spots,” commented Paul Mansour, Managing Director of Conning’s municipal credit research group and lead author of the report. “Key drivers behind the improvements in Florida were a combination of good fiscal discipline, increased tax revenues, an improved general-fund balance, and an unemployment rate that dropped by more than 1 percentage point. Despite the real estate crisis, people are still moving to Florida and employment is increasing.”
An important observation from the report is the widening disparity between state credit qualities as measured by Conning’s metric. To that end, while some states have taken steps to rein in costs or have inherent credit advantages, others, for a variety of reasons, have neither materially addressed structural issues nor rebuilt their reserves.
“What concerns us is that if the approaching ‘fiscal cliff’ creates an economic slowdown or if another recession hits in a year or two, the states that haven’t been able to rebuild their fund balances, lower their structural deficits or control the growth in their debt could face extremely grim choices,” said Mansour. “It is dangerous to assume in this current political and fiscal climate that the federal government would provide sufficient assistance to selected states in this scenario. For local governments, especially those located in these states, extra caution needs to be exercised.” He also cautioned that while it is important to understand a state’s credit outlook there is no substitute for detailed, fundamental security credit analysis.
A Better Evaluation Tool
The goal of Conning’s State of the States Report is to be more forward looking on both ratings and outlooks than the rating agencies, which tend to be reactive in their analyses. While the rating agencies consider macro-economic factors, Conning’s ranking system gives them more weight. Additionally, State of the States’ indicators include measures of economic activity including income levels, housing prices and foreclosure rates, which ultimately drive rating agency actions.
Conning’s report also places added emphasis on economic debt, not just stated debt. Economic debt includes debt-like obligations such as pensions, retiree health (Medicaid), federal borrowings for unemployment, and tax burdens. The report is also differentiated by the fact that it measures a state's business environment (i.e. attracting new business).
The goal of the report is to be an accurate predictor of future state credit quality, and it is used by Conning to help make better informed credit decisions and improve relative value for client portfolios.
Conning (www.conning.com) is a leading asset manager for the insurance industry, with almost $88 billion in assets under management as of March 31, 2012 through its global investment centers and Goodwin Capital Advisers subsidiary. For more than 25 years, Conning has built its asset management business to meet the investment and financial needs of insurers. The Company’s unique combination of asset management, risk and capital management solutions and insurance research helps clients achieve their financial goals through customized business and investment strategies. Founded in 1912, Conning is headquartered in Hartford, Connecticut, with additional offices in New York, London, Dublin, Cologne and Hong Kong.