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, socioeconomic trends, and the states’ balance sheets. We present the report in an interactive format offering viewers greater flexibility in reviewing the data upon which we base our conclusions.

Key Findings

• Conning has revised its outlook on state credit quality to “Stable” from “Declining,” anticipating a return to prepandemic fiscal conditions. 
• State rainy-day funds have remained at near-record levels, offering a cushion against potential revenue declines. 
• The surge in federal funds, economic growth, and stock market gains bolstered states’ financial stability, but inflation and increased costs are now impacting budgets. 
• States are encouraged to engage in realistic discussions about prioritizing needs over wants to successfully navigate the changing fiscal landscape.
  
  

Executive Summary: Conning Changes Outlook to "Stable"

Conning has revised its outlook on state credit quality to “Stable” from “Declining,” anticipating a return to prepandemic fiscal conditions. The “Declining” outlook in our 2023 report reflected an anticipated slowdown from a period of robust economic growth and substantial federal aid post-pandemic, confirmed by last year’s decrease in state tax collections mainly due to reduced personal income tax revenues following recent tax cuts. While the surge in federal funds, economic growth, and stock market gains bolstered states’ financial stability, inflation and increased costs are now impacting budgets. Conning encourages states to engage in realistic discussions about prioritizing needs over wants to successfully navigate the changing fiscal landscape. Despite these challenges, state rainy-day funds have remained at near-record levels, offering a cushion against potential revenue declines. 

The 2024 State of the States Report reveals notable shifts at the top of its overall rankings, with Nebraska and Wyoming claiming the top two spots, pushing Florida down to third. Texas saw a decline, dropping five spots to 6 due to subpar tax revenue growth, Rhode Island made significant advancements, moving up 21 spots. 

Real U.S. GDP improved for every state last year except Delaware. Top-performing states such as North Dakota, Texas, Wyoming, Alaska, Oklahoma, and Nebraska relied heavily on natural resources like oil, natural gas, coal, and agriculture for real GDP growth. On the other hand, the financial services industry saw a small negative contribution in 2023 after a positive contribution in the year prior, which impacted states like Delaware and New York, which had subpar real GDP growth. 

Population growth trends varied in 2023, with South Carolina, Florida, and Texas boasting the greatest increases. Population shifts can have profound effects on labor markets, where job growth accelerates with an expanded workforce (South Carolina is a case in point). However, when a state fails to provide sufficient employment opportunities, it can result in high unemployment rates even with strong population growth (e.g., Nevada). 

Employment plays a pivotal role in shaping state finances, driving individual income tax revenue through paychecks and stimulating consumer spending which in turn generates sales and corporate tax income. Decreasing employment conditions can signal rising costs for states, such as increased demand for safety-net assistance.

These population and employment changes also impact activity in the housing sector and drive up state and local government spending. Several states in the Northeast performed well last year, suggesting that affordability issues may have become a concern for states that previously experienced the most significant home price appreciation such as Utah and Idaho, which were highly ranked in our 2023 report but saw significant drops this year.

In recent years, strong financial performance has limited the need for new debt issuance, and some states like Connecticut, Illinois, Kentucky, and New Jersey¹ have utilized financial windfalls to bolster funding for pension and other post-employment benefit plans. 

Overall, we believe states are generally in better financial shape than before the pandemic. Despite growth rates that are expected to revert to pre-pandemic levels, state credit quality should remain stable with the potential for regional improvements. While the highest-ranked states were typically west of the Mississippi before the pandemic, this year we observed most positive changes occurring in the Northeast, Great Plains, and Great Lakes regions.

Footnote:
¹©2024 The Pew Charitable Trusts, “State Pension Contributions Hit Important Benchmark”, https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/10/state-pension-contributions-hit-important-benchmark

About Conning
Conning is a leading investment management firm with a long history of serving the insurance industry. Conning supports institutional investors, including insurers and pension plans, with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America.

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