Conning: State credit quality stabilizing

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Conning’s latest State of the States bi-annual report shows the credit climate for states is stabilizing and improving, reversing a downward trend seen last May.

The report from the investment management firm also shows that state tax revenue conditions are benefiting from economic growth across the U.S. while states are exhibiting expenditure and budget discipline.

“Overall, this is the most optimistic report I’ve written in a while,” said Paul Mansour, managing director and head of municipal credit research at Conning. “I expect that the current credit climate will continue for a while.”

Conning’s report ranks all of the 50 states by credit quality based on key economic indicators, general fund operations and state business competitiveness.
“Since our May report, increased general fund revenues combined with spending moderation has resulted in improved credit metrics,” Conning said in the report released on Oct. 30. “State revenue growth is now trending above both the growth in state expenditures and national GDP growth in current dollars. Many states have strengthened their rainy-day funds from these revenue surges — notably California and Connecticut. Public pension funding levels have also moderately improved due to strong equity markets with further improvement expected when FY 2018 results are released.”

The five top-ranked states are Colorado, Idaho, Utah, Texas and Nevada, while the five lowest-ranked states are New Jersey, New Mexico, Kentucky, Louisiana and Mississippi.

Conning said that it had been feared that the Tax Cuts and Jobs Act of 2017 would have a negative impact on municipal credit quality in 2018. Many worried that caps on the home mortgage interest deduction would lead to lower home prices and an accelerated population exodus from the high-tax states.

While the full impact of taxpayers haven’t yet been felt by those paying 2018 taxes, and a greater impact could be still coming, Conning said that so far there hasn’t been evidence of a negative impact on housing prices from tax reform.

“Despite apprehensions among high-income taxpayers in states with higher tax rates, we have not seen evidence of declining home values,” said Mansour, who was lead author of the report. “In fact, according to the Federal Housing Finance Agency House Price Index, all 50 states saw increases in home prices during the past 12 months."

For state pensions, Conning said the 2017 median state funded ratio rose to 73.7% from 70.5% in the previous year.

“More improvement in funding ratios is expected as recent strong investment results for FY 2018, which ended in June, become available,” the report said. “In particular, pension funds are benefiting from strong growth in the equities markets. That being said, there is risk that funded ratios would be negatively affected if equities prove to be more volatile going into 2019.”

Conning is a management firm with about $134 billion in global assets under management as of Sept. 30. Founded in 1912, it has investment centers in Asia, Europe and North America.

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