May 03, 2016
Conning Releases Q1 2016 State of the States Report
- Overall Outlook For U.S. State Credit Lowered from Improving To Stable
- Lower Oil Prices And A Flat Equity Market Slowed Revenue Growth As Expenses Picked Up
- Top-Rated States With Most Diverse Economies Are Utah, Idaho, North Carolina and Oregon
HARTFORD, CT – May 3, 2016 – Conning’s latest State of the States Report, shows that while state revenues have been on a steady climb since the 2008 recession, they are now showing signs of strain. State expenditure growth has been picking up recently, contrasting the restrained state spending that over much of the past 7 years helped rebuild fund balances for most states. Persistently lower oil prices and flat equity markets have impacted both individual income and state tax revenue growth, especially across the “oil patch” states. Lower revenue, paired with rising Medicaid costs and legacy expenditures are stalling further credit improvement. As a result, Conning has lowered its municipal credit outlook from improving to stable.
“Since our last report (Q4 2015), many of the lower-rated states have shown no improvement in credit quality despite the steady (albeit slow) recovery,” said Paul Mansour, Head of Municipal Credit Research at Conning and lead author of the firm’s bi-annual State of the States Report. “These states are seeing sluggish job gains, resulting in little to no tax revenue growth with slim cash reserves. And while measures such as tax increases, compensation reduction and other expenditure decreases could help to balance budgets, political disagreements are precluding necessary remedial steps. Investor caution for these credits is warranted.”
Conning’s State of the States municipal credit report uses select economic indicators to produce an overall state ranking. Conning uses these rankings to make informed investment decisions. That said, fiscal health varies sharply among the states which translates directly into trading value not only for its credit, but also for the credit of its underlying political subdivisions. Conning believes having a solid grasp on state credit quality is a prerequisite to effective municipal bond asset management.
Ongoing economic growth, although tepid, continues to provide a solid foundation for state credit quality. This includes a rise in U.S. employment and personal income per capita, a rise in housing prices (and state tax revenues from housing sales) and an overall recovery in most states’ general fund balances and rainy day funds.
Major Differences Among the States
According to Mansour, top-rated states -- Oregon, North Carolina, Utah and Idaho -- share several common factors, including diverse economies, good business conditions, strong employment, and home price growth, resulting in migration to these states. Population growth yields increased state tax revenues and a reduction in legacy costs. Most importantly, these states are not dependent on oil or mining revenues.
In contrast, Illinois, Pennsylvania, New Jersey, Kentucky, Maryland and Connecticut head a list of states whose rankings have been negatively impacted by chronic problems such as ongoing legacy costs, inability to reduce compensation-related state expenditures, and lower credit ratings.
Mining and Oil Dependent States Lag
States that are heavily dependent on energy and mining income have been impacted by stubbornly low oil and mineral prices. These include New Mexico, Oklahoma, Kansas, Texas, West Virginia, Wyoming, North Dakota and Alaska. In these states, weak business conditions combined with high legacy costs have adversely affected state finances.
Outlook for Municipal Credit
“By Conning’s measurement, and despite an expected slowdown in state revenue growth, the credit outlook remains sound for most states,” stated Mansour. “Any uptick in the economy could produce a more upbeat assessment later in 2016.”
About Conning’s Municipal Credit Research
Conning’s State of the States Report helps the firm’s investment professionals make better-informed credit decisions and improve relative value for client portfolios. State of the States indicators include measures of economic activity, such as income levels, housing prices, foreclosure rates, as well as a state’s overall business environment (i.e., ability to attract new business). In this update, State economic indicators account for 48% of the quantitative measures used to determine a state's rank in the annual State of the States Report. A state's economic competitiveness accounts for 12% of the total score, with state specific general obligation credit indicators accounting for 40% of the score.
Conning (www.conning.com) is a leading global investment management firm with approximately $103 billion in assets under management as of March 31, 2016.* With a long history of serving the insurance industry, Conning supports institutional investors, including pension plans, with investment solutions and asset management offerings, award-winning risk modeling software, and industry research. Founded in 1912, Conning has offices in Hartford, New York, Boston, London, Cologne, Hong Kong and Tokyo.