While thousands of tourists sip Mai Tais on its beaches, Hawaii‘s government may not be feeling so relaxed. The tropical state fell 11 spots to last place in an annual credit quality ranking by Conning, the $120 billion asset manager, in its annual State of the States report.
Overall, the credit quality of all 50 states has improved over the past few years. They are generally in better shape now than before the Covid-19 pandemic and Conning upgraded his outlook for them from “declining” to “stable” in his 2023-2024 analysis and report released on Tuesday. The municipal bond market was on a rollercoaster in 2023, and Citigroup, a major insurer and trader, exited the $4 trillion market earlier this year, and municipal defaults may occur (see: Detroit or Puerto Rico), but they are extremely rare. Still, asset managers and investors are always evaluating and comparing which municipal debt issuers to bet on.
“Although growth rates are expected to return to pre-pandemic levels, state credit quality should remain stable with potential for regional improvements. While the highest-ranking states tended to be west of the Mississippi before the pandemic, this year we saw the most positive changes occur in the Northeast, Great Plains, and Great Lakes regions,” Conning’s report says.
Florida (which ranked third in the 2024 report), Georgia (No. 24), Idaho (No. 12), Maine (No. 22), North Carolina (No. 8), and Tennessee ( #14) have been steadily rising in the rankings for the past 10 years. Some states, like Utah and Colorado, have always been in the top quartile, while others like Mississippi and Illinois have consistently ranked near the bottom.
For various reasons, a small group has been falling in the rankings, including Hawaii. The state now ranks last, in part after last year’s deadly fires.
GDP per capita adjusted for state size gives an idea of a state’s efficient utilization of its population. States with large populations but lower relative productivity highlight untapped potential. However, Hawaii is in a unique setting. Its below-average real GDP growth of 2 percent did not prevent its rise in its GDP per capita rank (it rose 26 places in this year’s Conning analysis) primarily due to a population decline.
“The wildfires on Maui during 2023 impacted Hawaii’s economic growth in the second half of the year due to business disruptions and a decline in tourism. Additionally, the displacement of people and possible reluctance to migrate to Hawaii after the disaster could have significantly influenced its relatively small population,” the report explains.
Population changes can have profound effects on municipalities. If your tax base shrinks, it may affect your issuance of debt or your ability to pay interest on existing bonds. Additionally, Hawaii witnessed minimal job growth, resulting in a significant drop of 45 places in its job growth ranking, to 49th. Job losses in the financial activities and trade, transportation and utilities sectors, the latter of which is among the largest employment sectors. in Hawaii, were the culprits. Without job growth, a state’s ability to adapt to further demographic expansion by creating new jobs and industries is hampered.
Those challenges are also evident in other data. The Federal Housing Finance Agency’s Home Price Index (HPI) is a barometer of a state’s economic health, so if the local economy is strong and residents perceive job stability, it is likely that prices have an upward trend. Hawaii was the only state with an annual decline (states such as Montana, Utah, Colorado and Idaho also disappointed despite strong population growth).
Hawaii was also one of 10 states (Hawaii, West Virginia, Mississippi, Wisconsin, Louisiana, Ohio, New Mexico, Kansas, Kentucky and Alabama) with below-average personal income levels – three more states than in the previous report. .
“The increase suggests a broader divergence between a state’s debt levels and personal income metrics across the country. This situation is concerning because economically disadvantaged states may have difficulty managing a relatively high debt burden compared to wealthier states,” Conning said.
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