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Report Reviews State Credit Quality Since the End of the Great
Recession in 2009 - Conning Maintains Stable Outlook for 2019
- Analysis Reveals Inconsistencies in States’ Recession Preparedness
HARTFORD, Conn.–(BUSINESS WIRE)–Leading global investment management firm Conning today released its
latest edition of the company’s State
of the States municipal credit research report, which maintains a
stable state credit outlook for 2019. The report uses 13 credit
indicators to compare state credit quality and assign a ranking, with #1
being the highest and #50 being the lowest.
The report’s stable outlook for state credit quality reiterates
Conning’s position from October 2018. Overall, state credit quality is
improving but remains regionally patchy, and the highest-ranked states
are all west of the Mississippi. Driven by factors including expanding
economies and population growth, the report found Utah to be the
top-ranked state, followed by Nevada and Idaho. Meanwhile, slow
population growth, lagging economies, and underfunded pension and
reserve funds dogged the lowest-ranked states, with Kentucky coming in
at 50, followed by Louisiana and Mississippi.
Retrospective: Insights on the Decade Since the Financial Crisis
June 2019 marks the 10-year anniversary of the official end of the
U.S.’s Great Recession. This edition of the State of the States report
reviews the evolution of state credit quality during the past 10 years,
in addition to the firm’s annual study of current state credit quality.
“The tenth anniversary of the end of the U.S. financial crisis provided
a unique opportunity to study longer-term trends in state credit
quality,” said Karel Citroen, Head of Municipal Credit Research at
Conning and lead author of Conning’s State of the States report. “The
long-term perspective shows us to what degree even small changes in
employment, GDP, housing prices, budgetary spending, and reserves factor
into a state’s credit quality and fiscal health.”
The past decade has revealed considerable shifts among the states. New
Hampshire, for example, saw the most improvement, moving from #37 in
2009 to #7 in this latest edition. Other states with outsized gains over
the last 10 years include Nevada, which rose from #29 in 2009 to #2 in
2019, and Utah, which climbed from #22 to #1.
Recession Preparedness
Other key areas of focus in the report include research on recession
preparedness. A 10-year GDP growth cycle has some economists thinking
the U.S. is due for a financial downturn, and the report finds that
states overall are better prepared for a recession now than in 2009.
However, three main challenges – liquidity, expenditures exceeding
inflation, and a lack of General Fund reserves – remain a significant
hurdle for several states, according to the report.
General Fund reserve balances now average 13% of General Fund
expenditures versus 9% a decade ago, just below the Conning-recommended
10% minimum. Fixed costs are the other side of the preparedness
question, and the report found that several states are facing
significant infrastructure spending and pension obligations that may
challenge their fiscal stability should a downturn arrive.
Growing Public Pension Liabilities
The report finds that the public pension funding gap has risen for
several reasons in the past 10 years despite the equity bull market. A
decade of historically low interest rates has resulted in lower discount
rates, requiring sponsors to dedicate greater amounts of money to meet
obligations for future retirees. Simultaneously, lower interest rates
have generated weaker-than-expected returns for fixed-income
investments, hurting plans’ asset growth. The report revealed a number
of instances where greater strains on budgets have caused a number of
states to skip scheduled plan contributions.
The report’s retrospective demonstrates the impact of high levels of
fixed costs on a state’s ability to overcome unforeseen economic
challenges. As pension payments increase in heavily burdened states
like Kentucky, these fixed costs, which the report defines as annual
pension payments, annual OPEB payments, and debt service, crowd out
other state programs like education and infrastructure, and hamstring
low-reserve states’ budgetary ability to respond to the next recession.
The Impact of Oil Prices
The report also revealed the importance of oil prices in states
dependent on energy industry revenues. Several oil-patch states suffered
when oil prices fell drastically in 2014 and remained low for the
following two years. However, these states have benefited from the
recent recovery in oil prices, with oil-producers Alaska (#27), North
Dakota (#5) and New Mexico (#39) representing three out of the top four
states for tax revenue growth in 2018.
Conning’s study found that states such as Alaska with significant
oil-tax revenues tend to have reserves that could cover expenditures for
up to a year, but other states rely on reserves to protect against
revenue volatility caused by recessions. Conning suggests that states
relying on economically sensitive revenues should carry higher balances.
“One of the most satisfying revelations we gained from reviewing state
credit quality over a ten-year span is that there is more common ground
than divisions developing between states,” added Citroen. “Despite
differing sources of revenue, attitudes towards spending, and shifts in
population, the spread in credit quality between the top-ranked state
and the lowest is smaller today than it was in 2009.”
* * *
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).
ABOUT CONNING
Conning (www.conning.com)
is a leading investment management firm with approximately $141 billion
in global assets under management as of March 31, 2019.* With a long
history of serving the insurance industry, Conning supports
institutional investors, including pension plans, with investment
solutions and asset management offerings, risk modeling software, and
industry research. Founded in 1912, Conning has investment centers in
Asia, Europe and North America.
*As of March 31, 2019, 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.
Contacts
Media
Marty McDonough
Conning
+1
860-299-2391 (direct)
[email protected]
Ann Pinkerton
Stanton
+1 646-502-3534 (direct)
[email protected]
