Conning’s annual State of the States Report is our ranking of the 50 U.S. states by credit quality based on our examination of economic conditions, socio-economic trends, and the states’ balance sheets. This year’s report is presented in a more interactive format offering viewers greater flexibility in reviewing the data upon which Conning bases our conclusions.

Key Findings

• Conning maintains a stable outlook on state credit quality as the economic recovery continued in 2021.
• States further reopened their economies and benefitted from strong tax collections combined with unprecedented federal stimulus.
• Population patterns that emerged during the pandemic continued with people moving out of city centers, often into rural and suburban areas.
• Migration from Northeast and Midwest to the West and South is leading to strong housing markets in the destination regions.
• While Western and Mountain states have increasingly led recent overall rankings, Florida, New Hampshire and Texas earned top-five spots this year.

Executive Summary: Conning Maintains Stable Outlook

Since the depths of the pandemic, state credit quality recovered quickly, driven by the economic rebound and unprecedented federal stimulus. 

The economic recovery in 2021 drove strong tax revenue collections, which increased 22% from 2020. Alaska was the best-performing state in this category, in part because of the recovery in oil prices. Across all states, we saw the positive impact of unprecedented fiscal stimulus and witnessed economies normalizing with consumer spending focused on services. States that rely on leisure, travel and energy for tax revenues as well as employment did especially well. For example, Nevada and California improved the most when it came to employment growth while Texas came in fifth.

Notwithstanding their dominant position and intrinsic credit strength, states faced daunting challenges in 2020 as the COVID-19 pandemic wreaked havoc on the U.S. economy. The nation’s unemployment rate jumped from a historic low of 3.5% in February 2020 to a post-war record high of 14.7% in April 2020, eclipsing the 10% rate reached in October 2009 during the Great Recession.¹ From April 2021 to March 2022, Nebraska had the lowest 12-month average unemployment rate, but Indiana had the greatest positive change in rank, rising 19 spots in the metric year over year. States with no personal income tax, such as Florida, Texas, and Washington, are seeing increases in their labor force and employment numbers. However, California, which has one of the highest personal income tax rates, also did well when it came to employment growth during the period, most likely because of the state’s strong economic recovery. 

Tennessee and New Hampshire posted the strongest growth percentage in GDP year over year while Massachusetts and New York maintained their top positions in terms of GDP per capita. Idaho ranked first in both population growth and personal income, with South Dakota and Florida rounding out the top three for personal income growth.

Population growth patterns that emerged during the COVID-19 pandemic continued for a second year with people moving out of city centers, often into rural and suburban areas.² Connecticut and Vermont moved up the most in terms of population growth compared to the prior year.

There was concern that high-tax and often-blue states would see outmigration as a result of 2017’s Tax Cut and Jobs Act and the cap on state and local tax (SALT) deductions. Illinois has experienced outmigration since; however, it had also experienced outflows in years prior. As we have detailed in prior reports, there is little data to suggest that tax-law changes cause this pattern; a more likely driver of population change is job opportunities and, more recently, cost and quality of living. In a post-pandemic world, with the ability to work remotely, the cost of living (and consequently, state taxes) became an increasingly important factor in decisions to relocate. In terms of tax climate, New York and New Jersey rank as the lowest two states. 

Housing markets were especially strong in Arizona and Utah. The outmigration from the Northeast and Midwest into the West and South is leading to strong housing markets in those destination regions.

The combination of unprecedented fiscal and monetary support allowed financial markets to recover quickly in 2020 and expand in 2021, allowing New Jersey to reduce its net pension liabilities. However, the state remains one of our lower-ranked states when it comes to economic debt, although it can offset that with a high personal income per capita ratio. 

Reserves allow states to withstand periodic deficits without endangering their financial health; however, running longer periods of imbalances can create an unsustainable fiscal situation, pushing off to future taxpayers some past costs for government operations and services. States like Illinois, New Jersey and Rhode Island have very thin reserves compared to their budget, while resource-rich states tend to acquire large surpluses in boom years that can help cushion shortfalls when revenues decline. As such, we see Wyoming, North Dakota, New Mexico and West Virginia at the top of our reserves ranking. 

1. Bureau of Labor Statistics, U.S. Department of Labor (2022), “Civilian Unemployment Rate, seasonally adjusted,” https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
2. Census Bureau, U.S. Department of Commerce (2022), “Over Two-Thirds of the Nation’s Counties Had Natural Decrease in 2021,” March 24, 2022 press release, www.census.gov/newsroom/pressreleases/2022/population-estimates-counties-decrease.html​