Morgan Stanley Investment Management (MSIM) has released its 12th annual State of the States Report, highlighting a slowdown in revenue growth following two years of pandemic-related government stimulus. Despite this deceleration, most states maintain a stable credit outlook, with many planning for budget cuts around 6% in the upcoming fiscal year.
Craig Brandon, co-head of Municipal Investing for MSIM, commented on the report: “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 report notes that state debt levels remain low due to reduced borrowing post-Great Recession and increased state GDP. Rainy day fund balances have reached record highs with projections suggesting further increases. However, five states currently hold less in reserves than they did in 2007.
Brandon emphasized the importance of understanding state rankings from a credit perspective: “Understanding how states rank from a credit standpoint influences portfolio decisions,” he said. “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 include declines in debt and unfunded pension burdens due to GDP growth and pension reforms; however, overall pension liabilities remain significant despite recent over-contributions by many states. Medicaid costs significantly impact state budgets more than other fixed-cost spending in certain states such as Colorado, Missouri, Arizona, Pennsylvania, Connecticut, and Kentucky.
The report was developed by MSIM's municipal research team using a proprietary ratings methodology based on quantitative factors like financial performance as well as qualitative analysis including projected budget shortfalls or surpluses.
For more information about Morgan Stanley Investment Management or Morgan Stanley’s services globally across investment banking securities wealth management visit their website at www.morganstanley.com/im.