Despite Pandemic, State Credit Quality Outlook Updated to Stable: Conning’s 2021 Municipal Credit Report

May 18, 2021

  • Conning changed its outlook to stable from declining on state credit quality
  • Impact of COVID-19 on state finances was less significant than expected and recovery is well on track
  • Financial markets rebounded quickly, benefitting states’ investment income tax and pension funding levels
  • Work-from-home dynamics impacted population changes and fueled regional housing price growth

    HARTFORD, CT – May 18, 2021 –Leading global investment management firm Conning today released its latest State of the States municipal credit research report. The firm changed its outlook to stable from declining on state credit quality. Conning found that states are in a good position as they emerge from the pandemic and in the report cited a few important factors that helped support state credit quality.


    Top Five Ranked States Bottom Five Ranked States
     1. Utah 46. Illinois
     2. Nebraska 47. New York
     3. Idaho 48. West Virginia
     4. South Dakota 49. Louisiana
     5. Montana  50. Hawaii


    “Overall, it was surprising to see that the pandemic had minimal effect on states’ credit quality. This was due to unprecedented federal aid and quickly improving economic conditions, which stabilized state credit quality and allowed many to save their reserves, placing states in a relatively healthy position moving into FY 2022,” said Karel Citroen, Head of Municipal Credit Research at Conning and lead author of Conning’s State of the States report. “Highlighting the importance of tax regimes, most states are expected to report positive income and sales tax collections as unemployment decreases and the economy reopens. Population changes will also continue to be an increasingly significant factor in state credit quality, impacting tax revenue, employment, the housing market, and states’ personal income growth.”


    The report analyzed 13 metrics indicative of state credit health to calculate and assign state rankings, with #1 being the highest and #50 being the lowest. The methodology for the 2021 edition continued to place more emphasis on population changes and taxes, a change made in last year’s report, reflecting how the two influence each other. The report also examined unemployment rates, reserves, and gross domestic product growth by state, among other factors.


    Socio-economic Conditions

    Due to the pandemic, population change remains a considerable factor since a state’s financial resources typically grow with its tax base. Continuing a pattern that has persisted for several years, people are generally moving to the western and southern regions of the U.S. with Idaho, Arizona, Nevada, Utah and South Carolina experiencing the most significant positive population changes.


    Illinois, Hawaii, New York, West Virginia, and California had the worst year-over-year changes in population – in California and New York, the primary reason for moving was because of a job. A declining state population may lead to declining revenues, a concern for states with a relatively high percentage of fixed costs, like Illinois and Connecticut.


    Economic Activity

    GDP is the most comprehensive measure of a state’s economic health. In general, states with less diverse economies experienced sharper declines in economic output.


    The lowest performing states in annual GDP growth were Hawaii, West Virginia, Alaska, Oklahoma, and Wyoming, all of which share a reliance on industries negatively affected by the pandemic, like oil and hospitality. Construction, real estate, manufacturing, and government sectors were not impacted as much. Overall, unemployment and layoffs mostly occurred among lower-paying jobs, which meant the income tax hit for states was minimal.


    Hawaii, New York, Nevada, California, and New Mexico were the worst performing states for employment growth. Interestingly, five of the 10 worst performing states for employment growth were in the Northeast, which, along with California and Hawaii, were also some of the hardest hit states population-wise. Illinois, which ranked at the bottom for population growth and #39 for employment growth, is of particular concern because a declining population and job losses make it difficult for the state to organically recover from its distressed financial situation.


    The pandemic caused a reduction in leisure and hospitality employment in every state between February 2020 and February 2021, with declines ranging from 3% in Idaho to 40.3% in Hawaii. Some experts predict it may take up to four years before tourism and business travel fully recover.


    Financial Metrics

    States entered 2020 with greater reserves than they had prior to other downturns, providing a buffer to revenue losses during times of stress, like the pandemic. Stronger-than-expected revenue collections may keep states from dipping into their reserves, helping raise FY 2021 reserve totals. States also benefited from federal relief funds throughout the year, including the most recent American Rescue Plan. Given the one-time nature of the surplus funds, many states plan to allocate the funds toward infrastructure or other non-recurring expenses;  Illinois plans to put some of its federal aid toward unpaid bills and short-term debt.


    Heavily burdened states like Connecticut, Illinois and New Jersey have more difficult decisions to make when revenues come in below expectation – high fixed costs, such as debt-service payments, pension, and other post-employment benefit contributions, could impact other state programs like education or force states to use reserves.


    Conning further analyzed a state’s burden by measuring its total debt per capita. These rankings were unchanged year over year, both for the top five and bottom five positions.

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    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).


    Conning (www.conning.comis a leading investment management firm with almost $200 billion in global assets under management as of March 31, 2021.* With a long history of serving the insurance industry, Conning supports institutional investors, including insurers and pension plans, with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America.


    *As of March 31, 2021, represents the combined global assets under management for the affiliated firms under Conning Holdings Limited and Cathay Securities Investment Trust Co., Ltd. (“SITE”). SITE reports internally into Conning Asia Pacific Limited, but is a separate legal entity under Cathay Financial Holding Co., Ltd. which is the ultimate controlling parent of all Conning Holdings Limited controlled entities.


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