State of the States - May 2017

May 02, 2017

Conning’s Latest State of the States Report

Highlights Persistent Decline in Credit Quality


  • Low oil prices, high legacy costs, and underfunded pensions weigh on fiscal health
  • Political uncertainty and federal-funding questions generate challenges for states
  • Despite declining prospects overall, there are notable improvements for several states


HARTFORD, CT – May 2, 2017 – Leading global investment management firm Conning today released its semi-annual State of the States municipal credit research report, which shows steady declines in overall state credit quality. In general, states have not made much progress in solving their biggest fiscal issues from 2016, which include slow economic growth, high legacy costs, and expense growth that is outpacing tax-revenue growth. Low oil prices also continue to have a negative effect on states that rely on income from their natural resources. To add to all of these issues, many states are failing to make their full annual contribution to their pension funds, which have suffered from years of underfunding and poor investment performance.

“Measures of state credit strength have worsened since Conning’s last report in October of 2016,” said Paul Mansour, a Managing Director, Head of Municipal Research at Conning, and lead author of Conning’s State of the States report. “State revenue growth is falling short of the expenditure growth, and as a result, state budgets are under pressure,” he said, adding that Conning is also keeping a close eye on policies promised by the new administration. “The Trump administration is adding new challenges for the states.”

Conning’s State of the States report uses key economic factors to rank states in order of credit health. Conning’s proprietary model found that Utah, Florida, Washington, Nevada, and Idaho were among highest in credit quality, and that New York and Rhode Island have experienced significant improvement over the last six months. Common factors among top-ranked states include strong employment and personal income growth, as well as rising GDP, population, and home prices. States with lower rankings tended to face issues with unemployment, high debt levels, persistent legacy costs, and steep declines in tax revenue. The research concluded that many of the states continue to face several common challenges including:

Uncertain Federal Legislative Policies

Unclear federal policies complicate the outlook for state budgets and creditworthiness. While the president seems keen on facilitating infrastructure investment, there are many funding details yet to be determined. Pending legislative topics, such as whether existing Medicaid structures will be replaced with block grants to individual states and possible revisions to the tax code, could affect states’ financial positions.

Stalled Revenue Growth

Typically, 80% of states’ General Fund revenues come from personal income, sales, and corporate income taxes. Tax revenue is of utmost importance to states and their budgets. In 2016, on average, state tax revenues increased only .4%. This was caused by depressed oil prices, lower corporate profits, and taxpayer delay in taking capital gains in anticipation of possible lower future tax rates. This past year saw the lowest growth in state revenues since the end of the Great Recession in the late 2000’s.

Excessive Pension Liabilities

While pension underfunding has been an issue for years, states are not doing enough to fix the problem. The aggregate funded ratio of 75% is virtually unchanged since last year. States such as New Jersey and Illinois continue to fall behind, having failed to fund or choosing to delay essential contributions. Such decisions make liabilities even greater, and negatively affect states’ financial health.

Disappointing Oil Outlook

While oil prices have recovered somewhat over the past year, they remain at depressed levels. Oil-patch states such as Alaska, North Dakota and Louisiana can no longer depend on revenue from production fees, and have been forced to draw capital from their general reserve funds to compensate. Additionally, advancements in drilling technology have reduced employment needs in this industry.

Though Conning’s outlook is negative as a whole, there are some positive improvements in some individual states noted in the report. Idaho, Utah and Nevada are the percentage leaders in employment growth over the past year. “Home prices have increased by more than 10% in 2016 in Oregon, Colorado, Florida and Washington. A common thread for all of top-ranked states is a favorable business climate as measured by regulations, state tax policies and state leadership,” said Mansour. “We expect that strong economic indicators will lead to future credit upgrades for many of the states in these regions.”

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 global investment management firm with almost $113 billion in global assets under management as of March 31, 2017.* 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 Boston, Cologne, Hartford, Hong Kong, London, New York, and Tokyo.

*As of March 31, 2017, 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 entities. (Ctech: 5699532)

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