State Revenue Growth Slows, but Most States Classified as ‘Stable’
Morgan Stanley Investment Management releases annual State of the States Report
Commenting on the report’s finding, Craig Brandon, co-head of Municipal Investing for MSIM, said: “While we believe most states are on solid footing, there are several critical factors looming that will have long-term implications for states’ creditworthiness and ability to respond to shifting market dynamics. Unfunded pension liabilities and increasing Medicaid costs continue to challenge state budgets, while natural disasters continue to have an outsized impact not only on budgets but also future planning. Additionally, out-migration and demographic shifts are two issues that warrant close examination.”
The States of the States Report reveals that state debt generally remains low as many states curtailed borrowing after the Great Recession and experienced increasing state gross domestic product (GDP). Rainy day fund balances, a strong indicator of how prepared each state is for recessions and economic downturns, are at all-time highs with the median state at
“Understanding how states rank from a credit standpoint influences portfolio decisions,” said Brandon. “With a new Presidential Administration and uncertainty related to the potential extension of the Tax Cuts and Jobs Act, this analysis pinpoints areas of strength and deficiencies, and helps us identify which states are positioned to address policy changes, demographic shifts and unforeseen events that tap into state agencies and budgets and leverage infrastructure resources.”
Key findings:
- Debt and unfunded pension burdens largely declined due to GDP growth, investment returns and pension reforms. However, overall pension liabilities remain large despite many states over-contributing to their plans in recent years.
- Most state budgets are well-positioned to address debt, pension and Other Post-Employment Benefits (OPEB) expenses, however these expenses could crowd out other spending initiatives if paid in full.
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Puerto Rico remains a significant outlier; its59% liabilities-to-GDP ratio is nearly double that of any other state. -
Medicaid costs play a significant role in state budgets and dwarf other fixed-cost spending; this is particularly acute for
Colorado ,Missouri ,Arizona ,Pennsylvania ,Connecticut andKentucky . - Only one quarter of states have better funded pensions now than they did in 2018, which means less well-funded pensions states have less flexibility for other necessary spending.
Developed by the municipal research team, this comprehensive report details what the team sees as the biggest issues facing the 50 states and
Read the full State of the States Report.
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Colleen McElhinney
617.672.8995
Colleen.McElhinney@morganstanley.com
Source: Morgan Stanley Investment Management