June 14, 2023

Conning’s annual State of the States Report is our ranking of the 50 U.S. states by credit quality based on our examination of economic conditions, socio-economic trends, and the states’ balance sheets. This year’s report is presented in a more interactive format offering viewers greater flexibility in reviewing the data upon which Conning bases our conclusions.


Key Findings

  • Conning changes its outlook on state credit quality to “declining” from “stable.” We believe states are well positioned to weather an economic slowdown but in our view, anticipated results for the current fiscal year (FY23) are weaker and states will likely lower their tax revenue forecasts for FY24.
  • Positives: Balance sheets and debt levels have improved, reserves are at all-time highs, pension and OPEB contributions have risen (although still a long-term challenge) and the resource-dependent states that lagged the postpandemic recovery caught up in 2022.
  • Negatives: Tax revenue growth will likely slow or turn negative, the positive impact of inflation should wane and negatively impact states most reliant on sales taxes and, should the economy slow, personal income taxes will probably decline.
  • States that lowered taxes could see even greater declines in tax revenue.

Executive Summary: Conning Changes Outlook to "Declining"


Conning has had a “stable” outlook assigned to state credit quality since our 2021 State of the States Report. The interim was marked by relatively benign economic and credit conditions, with state credit quality riding the wave of the economy recovering from the impact of the Covid-19 pandemic. State coffers benefitted from a strong labor market and nominal growth in consumer spending. With the economy in 2022 continuing its pandemic recovery and with people returning to work, income taxes performed very well. (While the pandemic led to people changing where they live and work, our data does not support either “red” or “blue” states outperforming the other.) Sales tax collections also performed well, again due to federal stimulus-supported consumer spending and a reopening economy. However, signs are mounting that the unprecedented tax-revenue growth of the past few years will soon moderate.


Our 2023 report shows how higher than expected tax revenue growth in 2022, combined with abundant federal aid, led to record financial reserves and much-improved state financial metrics. This will allow many states to navigate several challenges we identify, such as a weakening economy, tighter monetary policy, historically high inflation, and a tapering of federal Covid-19 aid. Yet despite the strength of 2022, we expect a significant decrease in annual state tax-revenue growth and as such are assigning a “declining” outlook.


Looking ahead at fiscal year (FY) 2024 (most states have June 30 year-ends) we expect credit conditions to soften. For example, revenue projections will look weak compared to prior years, especially when considering inflation has boosted sales tax collections for those states most reliant on them, and inflation will push expenditures higher. This will squeeze budgets, and in some cases force states to use reserve monies to remedy shortfalls. Fixed costs are the other side of the preparedness question, and several states are facing significant infrastructure spending and pension obligations that may challenge their fiscal stability should an economic downturn come soon.


Talk of a recession will become more prevalent as well and we expect mid-year budget forecasts in many states to be revised downward. In some cases, the impact of weaker stock and labor markets on income tax collections is already visible. And lastly, states that used surplus revenues as a reason to lower taxes or expand services could experience additional financial pressure.


Our State of the States rankings allow us to identify states we believe are best equipped to weather an economic slowdown. We examine how negative factors such as lower tax revenues (from weakening labor markets), lower corporate profits, fewer retail sales, a softening housing market, or a pullback in the financial markets can affect tax collections. We are also studying reserves that could cushion such a decline, or economic debt that will have to be serviced. Lastly, our focus on population growth and, to a lesser extent, a state’s tax climate, helps us identify states that we believe will outperform.