@Conning.
Conning has revised its outlook on state credit quality to “Stable” from “Declining,” anticipating a return to pre-pandemic fiscal conditions. While the surge in federal funds, economic growth, and stock market gains bolstered states’ financial stability, inflation and increased costs are now impacting budgets. Conning encourages states to engage in realistic discussions about prioritising needs over wants to successfully navigate the changing fiscal landscape.
The 2024 State of the States Report reveals notable shifts at the top of its overall rankings, with Nebraska and Wyoming claiming the top two spots, pushing Florida down to third. Texas saw a decline, dropping five spots to sixth due to subpar tax revenue growth. Rhode Island made significant advancements, moving up 21 spots. Real US GDP improved for every state last year except Delaware. Top-performing states such as North Dakota, Texas, Wyoming, Alaska, Oklahoma, and Nebraska relied heavily on natural resources like oil, natural gas, coal, and agriculture, for real GDP growth.
Population growth trends varied in 2023, with South Carolina, Florida, and Texas boasting the greatest increases. Population shifts can have profound effects on labour markets, where job growth accelerates with an expanded workforce (South Carolina is a case in point). However, when a state fails to provide sufficient employment opportunities, it can result in high unemployment rates even with strong population growth (e.g., Nevada).
Employment plays a pivotal role in shaping state finances, driving individual income tax revenue through paycheques and stimulating consumer spending which in turn generates sales and corporate tax income.
These population and employment changes also impact activity in the housing sector and drive up state and local government spending. Several states in the Northeast performed well last year, suggesting that affordability issues may have become a concern for states that previously experienced the most significant home price appreciation
In recent years, strong financial performance has limited the need for new debt issuance, and some states have utilised financial windfalls to bolster funding for pension and other post-employment benefit plans.
Overall, we believe states are generally in better financial shape than before the pandemic. Despite growth rates that are expected to revert to pre-pandemic levels, state credit quality should remain stable with the potential for regional improvements.
