The credit quality of states continued to rebound last year from the COVID-19 pandemic, but a potential economic downturn this year could pose problems, according to a report released Thursday by investment management firm Conning.
The 2022 State of the States report, which maintained last year’s stable outlook for credit quality, analyzed 13 metrics indicative of credit health to calculate and assign state rankings, placing Florida at the top and Louisiana at the bottom.
Those metrics include population change, tax climate, tax revenue, housing prices, GDP, employment, budget reserves, and debt per capita.
“There’s a lot of positive news in the report, but we do see some headwinds for this year,” said Karel Citroen, director and head of municipal research at Conning, which has approximately $203 billion in global assets under management.
High inflation will impact states’ infrastructure and labor costs, he said, while rising interest rates will make borrowing more expensive and sinking financial markets could negatively affect public pension funding ratios.
Citroen said Florida, which moved up from the 2021 report rank of 19th, stood out in a lot of the metrics and was boosted by the work-from-home trend that led to a migration of younger workers into the state, which traditionally attracts retirees.
Louisiana moved down a notch to 50th place based on its low rankings for housing price change, GDP and population growth, and reserves.
Rounding out the top five states were Utah, New Hampshire, Montana, and Texas. Other bottom five states were Maryland, West Virginia, Mississippi, and Kentucky.
Migration from the Northeast and Midwest to the West and South led to strong housing markets in those regions, with particularly strong markets in Arizona and Utah, the report said.
Tax collections in calendar year 2021 increased 22% from 2020, with Alaska experiencing the best revenue growth as it benefitted from the recovery in oil prices, Conning reported. All of the states got a boost from unprecedented federal fiscal stimulus and a return of consumer spending on services, while states that rely on leisure, travel, and the energy sector for tax revenue did especially well, it added.
But the report warned “the extraordinary state financial windfalls of (fiscal 2021) are not expected to last.”
“For example, Illinois is projected to use up most of its FY21 reserves in FY22 to balance its budget,” Conning said. “New Jersey and Rhode Island also have very thin reserves compared to their budget. Structural imbalances will likely lead to lower reserves and less recession preparedness.”
