Conning's Bi-Annual State of the States Report Finds Credit Quality Stabilizing

October 30, 2018

Conning’s Bi-Annual State of the States Report

Finds Credit Quality Stabilizing


  • Report Shows Improvements in State Credit Quality
  • State Tax Revenue Conditions Benefitting from US Economic Growth
  • States are Exhibiting Expenditure and Budget Discipline

    HARTFORD, CT – October 30, 2018 – Leading global investment management firm Conning today released the October 2018 edition of the company’s State of the States municipal credit research report, which revealed a stabilizing state credit climate, reversing a downward trend found in the previous report issued in May.

    Since our May report, increased General Fund revenues combined with spending moderation has resulted in improved credit metrics. State revenue growth is now trending above both the growth in state expenditures and national GDP growth in current dollars. Many states have strengthened their rainy-day funds from these revenue surges – notably California and Connecticut. Public pension funding levels have also moderately improved due to strong equity markets with further improvement expected when FY 2018 results are released.

    Conning’s State of the States report ranks all of the 50 states by credit quality based on a number of key economic indicators, General Fund operations and state business competitiveness. The five top-ranked states (from #1 to #5) are Colorado, Idaho, Utah, Texas and Nevada, while the five lowest-ranked states (from #46 to #50) are New Jersey, New Mexico, Kentucky, Louisiana and Mississippi. The West Coast and the Southeast states have benefited from state credit quality improvement and economic expansion. Meanwhile, California’s municipal credit conditions continue to show impressive improvement, although the state’s rate of economic growth has been slowing in recent months.

    “Overall, this is the most optimistic report I’ve written in a while,” said Paul Mansour, a Managing Director and Head of Municipal Credit Research at Conning and lead author of Conning’s State of the States report. “I expect that the current credit climate will continue for a while.”

    Tax Reform Exerting Little Negative Impact on Home Prices So Far

    It was widely feared that the Tax Cuts and Jobs Act of 2017 (TCJA) would have a negative impact on municipal credit quality, as caps on the home mortgage interest deduction were expected to lead to lower home prices and an accelerated population exodus from high tax states. While taxpayers (by and large) haven’t yet begun to pay 2018 taxes and a greater impact could be still coming, so far there isn’t evidence of a negative impact on housing prices from tax reform.

    “Despite apprehensions among high-income taxpayers in states with higher tax rates, we have not seen evidence of declining home values,” explained Mansour. “In fact, according to the Federal Housing Finance Agency House Price Index, all 50 states saw increases in home prices during the past 12 months."

    Rainy-Day Fund Outlook 

    While the Conning report found that some states have used their growing revenues to strengthen their reserves, apprehensions do exist regarding low rainy-day fund balances for several states, some of which have stubbornly high economic debt and unrelenting cost pressures. These low reserves are of increasing worry for these states, given the length of the current economic expansion, and the fact that not all states are as well-prepared as they should be for a potential reversal in the economic recovery. In light of a growing federal budget deficit and given the current polarized political climate in Washington, it is uncertain whether the level of federal assistance states received during the last recession would be repeated.

    State Pension Funds Showing Improvement

    The 2017 median state funded ratio is 73.7%, up from 70.5% the year prior. More improvement in funding ratios is expected as recent strong investment results for FY 2018, which ended in June, become available. In particular, pension funds are benefiting from strong growth in the equities markets. That being said, there is risk that funded ratios would be negatively affected if equities prove to be more volatile going into 2019.

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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 ( is a leading investment management firm with approximately $134 billion in global assets under management as of September 30, 2018.* 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 investment centers in Asia, Europe and North America.

    *As of September 30, 2018, represents the combined global assets under management for the affiliated firms under Conning Holdings Limited, Cathay Securities Investment Trust Co., Ltd. (“SITE”) and Global Evolution Fondsmæglerselskab A/S and its group of companies (the “Global Evolution Companies”).  The Global Evolution Companies are affiliates of Conning.  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 controlled entities. C: 7663984

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