May 12, 2015

Conning Releases Latest Semi-Annual State of the States Municipal Credit Report and Rankings (Q2, 2015)

• Research shows economic growth and cautious spending contributing to improving outlook on state credit quality

• However, legacy costs, a key credit determinant of state credit quality, vary dramatically by state

• Western states are benefitting from strong employment, as well as home price appreciation and personal income growth

HARTFORD, CT – May 12, 2015 – According to its most recent semi-annual State of the States Municipal Credit Research report (Q2, 2015), insurance asset manager Conning continues to see improvement in aggregate state credit quality due to steady economic recovery combined with responsible state budget actions. Though many states have made strides in tightening budgets and building up reserves, Conning has seen an uneven economic recovery across the United States, with the most notable economic recovery and improvement in credit quality centered in the Western states.  With the exception of Florida, many Eastern states continue to struggle with slower employment growth and have yet to build back reserves to safe levels despite continued expansion over the past six years.

The semi-annual State of the States Municipal Credit Research report ranks the credit quality of all 50 states and serves to guide the asset management firm’s municipal bond investment decisions.  As a key differentiator, Conning’s State of the States Municipal Credit Research report places added emphasis on economic debt, not just stated debt.

“States are achieving balanced budgets through a combination of employment growth, GDP growth and improved housing prices. Conning has moved to an overweight position for municipal bonds, reflecting the overall improving credit quality of the asset class,” said Paul Mansour, Managing Director, head of Conning’s municipal credit research group and lead author of the report. “Additionally, while most states have been able to keep the rate of expenditure growth below the rate of state tax revenue growth, some states continue to be weighed down by high legacy costs, including high debt and unfunded retirement costs,” he added.  Among the larger states, Illinois is noteworthy for the magnitude of its fiscal problems. 

Positive indicators -- Home appreciation and employment growth

Several key economic metrics contributed to the Conning ranking and benefitted improving states, including personal income, home prices, GDP and employment.  The Western states have benefitted from personal income growth more than the rest of the country.  Home prices in the Western states also appreciated in excess of the national average of 4.9% in the fourth quarter.  Employment growth has been concentrated in California, Texas and Florida.  There are some bright spots in the Eastern states as well.  In particular, Delaware and Massachusetts have had impressive job growth over the past 12 months.  The only three states that have lost jobs over the past 12 months are West Virginia, Maine and Vermont.  “While overall job growth and its impact on personal income and housing prices have resulted in a 4.7% increase in state revenues, General Fund spending increased an estimated 4.8%,” added Mansour. 

Lingering legacy costs – Pensions and economic debt

In aggregate, there has been limited success to date in reducing the burden of growing pension costs on municipal governments.  With the exception of Rhode Island, most jurisdictions have found it politically difficult to reduce pension benefits.  During the recession, many states borrowed from the federal government to make unemployment claims payments.  Most states have repaid these borrowings in recent years, with nine states having outstanding balances.  Maine, Alaska and Hawaii lead the states with the highest economic debt levels per personal income.  The lower ranked states led by Illinois are all located in the eastern half of the country.  While they are experiencing growth, it is not as robust as in many of the Western states.  Thus, many of these states have not been able to build their fund balances back to a safe level following the 2008 financial crisis. “This makes their credit quality vulnerable to the next recession,” indicated Mansour.

About State of the States Report -- A More Forward Thinking Analysis 

The goal of Conning’s State of the States report is to be an accurate predictor of future state credit quality.  It is used by Conning to help 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).  Economic debt includes direct debt, unfunded pension liabilities, unfunded Other Post-Retirement Benefits, and federal borrowings for state unemployment benefit obligations. 

About Conning

Conning (www.conning.com) is a leading investment management company for the global insurance industry, with almost $95 billion in assets under management as of March 31, 2015, through Conning, Inc., Conning Asset Management Limited, Cathay Conning Asset Management Limited (CCAM) Limited, Goodwin Capital Advisers, Inc., and Conning Investment Products, Inc. The company's unique combination of asset management, risk and capital management solutions and insurance research helps clients achieve their financial goals through customized business and investment strategies. Founded in 1912, Conning provides clients with innovative solutions, leveraging its global capabilities, investment experience, proprietary research and risk management technology. Headquartered in Hartford, Connecticut, Conning also delivers its services globally through its offices in New York, London, and Cologne, and in Hong Kong through CCAM, a joint venture between Conning and Cathay.