Rankings Show Iowa/Illinois on Divergent Fiscal Paths
Each year, investment management firm Conning releases its State of the States credit quality report. Conning ranks each of the 50 states on 13 factors such as employment growth, economic growth, income levels, population growth, housing activity and various credit-specific metrics. The purpose is to assign a ranking that reflects each state’s ability to repay its debt and the general health of its economy.
Conning’s latest report shows that over the past 12 months there has been a gradual decline in state credit quality across the nation. It downgraded its credit outlook from “stable” to “declining.” On the positive side, Conning notes that many states have improved balance sheets, lower debt levels and higher cash reserves. However, this improved economic condition was driven not by some sudden burst of fiscal restraint but through massive pandemic-related federal aid delivered to states.
But much of that generous federal aid is starting to wane. Conning also warns that a projected weaker economy could drastically reduce revenues from sales taxes, corporate taxes and personal income taxes in the upcoming year. Lower tax revenues to state coffers are expected to place added strains on state budgets and spending initiatives. In many cases, states will be forced to tap into cash reserves or to take on added debt to remedy their budget shortfalls.
The rankings help identify the states best equipped to weather the expected economic slowdown and, likewise, those that may struggle. On a state-by-state basis, credit quality ranges from the good, the bad to the downright ugly. For 2023, the Top 5 ranked states are Texas at No. 1, followed by Florida, South Dakota, Tennessee and Idaho. The lowest-rated states are No. 46 Ohio, followed by West Virginia, Rhode Island, Louisiana and lastly, Mississippi.
But what about Illinois and Iowa? Where do they fall within this 50-state comparative analysis?
Iowa is ranked No. 20, up seven spots from last year’s ranking of No. 27. Over the past five years, its average rank is a very solid 18.6. Among its strengths, Iowa has the sixth lowest state debt and the sixth highest tax revenue growth rate. Its No. 20 ranking is further bolstered by the tenth lowest average unemployment rate and the sixteenth largest growth rate in personal income.
But Iowa has some noted weaknesses. It ranks No. 48 in annual economic growth and No. 43 in employment growth.
Unfortunately, for Illinois citizens, their state’s fiscal condition is not as vibrant as its Iowa neighbor. Out of the 50 states, Illinois ranks a fairly dismal No. 44, down one from last year’s No. 43 ranking. Over the past five years, Illinois’ average rank is 44.2.
For its relative strengths, Illinois is ranked No. 11 in economic growth per capita. This is the total dollar-value of all goods and services produced divided by the state’s population, which helps measure economic production and productivity. Illinois also ranks No. 12 in personal income per capita.
But then Illinois’ ranking quickly falls off the track. Illinois’ blistering high average unemployment rate ranks No. 49 in the land. Illinois’ minimal cash reserves rank No. 48, its ballooning state debt ranks as the forty-eighth highest while its stagnant growth in personal income ranks No. 38.
Perhaps most troubling is Illinois’ No. 49 ranking in population growth. According to the U.S. Census Bureau, Illinois has had nine consecutive years of declining population. In 2022, Illinois’ population fell by a record-high 104,437 residents. In fact, 91 of Illinois’ 102 counties experienced a population loss. The decline was led by Chicago’s Cook County, which lost 68,314 residents last year. This was the second largest decline by a county in the nation, behind only Los Angelas County.
The main cause for the population decline is the continued exodus of Illinois residents to other states. Last year, 141,656 Illinois residents packed up and moved to another state. This translates to a rate of 11.2 departures for every 1,000 residents. Only two states lost more residents to other states last year – California (-343,230) and New York (-299,557).
Looking ahead to 2024, the biggest factor for state budgets and their fiscal health will be the national economy. However, next year, the economy is expected to significantly weaken. That weakness means states will likely face slower economic growth, higher unemployment and reduced tax revenues. And as Conning’s latest report indicates, some states will be in a much better position to handle these challenges than others.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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