Fiscal Health of States Shows Growing Divergence

November 20, 2012

While the financial health of U.S. states continues to improve, there is a growing disparity in economic growth between strong and weak states. A report from asset manager Conning looked at several indicators of economic health to determine the fiscal health of strengths, including: economic competitiveness, tax revenue growth, unemployment rate and changes in home value, says the Wall Street Journal.

For many weaker states, growing unfunded pension liabilities and higher costs of programs like Medicaid are slowing down economic growth. Stronger states benefit from improving business conditions and growth in employment numbers.

  • Ten states are expected to finish fiscal 2012 with surpluses of 10 percent or more.
  • But states like California, which Conning ranks 44th, will likely end the fiscal year with a deficit.
  • Connecticut is now ranked 50 after being ranked 37 in April due to its 4.7 percent year-over-year decline in home prices and loss of 14,700 jobs.

Economic debt is another metric to highlight the disparity between strong and weak states. Conning measures economic debt by looking at factors such as unfunded pension liabilities, net tax-supported debt, unfunded health and retirement benefits, and state borrowing for unemployment programs. Hawaii, for example, has economic debt as 48 percent of personal income whereas that percentage is only 1.8 percent for South Dakota.

The growing disparity has caused the asset manager for the insurance industry to become selective on purchasing state general obligation bonds. These bonds are backed by states' tax revenues and their ability to further tax. Instead, Conning prefers purchasing revenue bonds, which are typically sold by utility, transportation and health care companies because they have smaller unfunded retirement costs and less political risk. Moreover, the potential of the fiscal cliff and budget cuts to states keep Conning cautious on states.

Source: Kelly Nolan, "Fiscal Health of States Shows Growing Divergence," Wall Street Journal, November 13, 2012.

 

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