Conning Report Looks at US State Credit & Budgets

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 Conning, a leading global investment management firm, has released its annual State of the States Report analyzing municipal credit quality across all 50 U.S. states. Conning’s “Stable” outlook overall aligns with the five-year recovery trend following the COVID-19 pandemic. However, the report notes new uncertainties linked to federal policy shifts that will increase state responsibility and financial accountability for the remainder of 2025 and into 2026.

“States have amassed robust rainy-day funds and healthy budgets, but they may be challenged by declining tax revenues, increasing costs, and high-impact weather events in the year ahead,” said Karel Citroen, Head of Municipal Credit Research at Conning and author of the report. “This year’s methodology incorporates Cost of Living and Catastrophe Losses metrics to better reflect today’s challenges and deliver deeper predictive insights amid ongoing macroeconomic uncertainty.”

The report ranks each state based on 13 key metrics which indicate relative municipal credit quality.  They include economic factors such as GDP and employment growth; socioeconomic trends such as population shifts, income levels and tax policy; and state balance sheets. Conning notes that disparities between balance-sheet strength and other metrics will likely determine which states can best navigate headwinds and maintain credit quality in FY 2026.

Challenges and Uncertainty Ahead

States face increased financial responsibility in the next fiscal year, particularly around infrastructure, education and healthcare, where federal funding is anticipated to decrease as pandemic-era support declines. Additionally, challenges related to immigration, catastrophic weather events, housing affordability, and insurance market stability, among other factors, will require prudent budget management in the year ahead.

Some states are already experiencing shortfalls amid rising costs and shrinking tax revenues. Ten states have reduced income tax rates or implemented automatic tax cuts in recent years, hampering their ability to respond to new and ongoing economic challenges.

Nonetheless, the report finds that states have largely demonstrated sufficient fiscal resilience in recent years to navigate this combination of known and unpredictable challenges. Those in particularly strong positions have set aside funds to counter federal funding cuts, created special committees to monitor and respond to federal actions affecting state finances, or implemented governance mechanisms to trigger special legislative sessions if federal actions significantly impact their budgets.

Significant Ranking Movement

The 2025 report illustrates significant state movement across rankings. For example, Idaho climbed 11 spots to rank #1 this year, reflecting strong growth in state GDP, employment, and personal income as well as limited exposure to natural catastrophes. Other states gaining in position include Arkansas (+16) and Alabama (+14), which saw relatively low cost of living indices. Northeastern states rose the most in rank as Connecticut (+30) and New York (+23) benefited from low catastrophe losses per capita. Some states fell drastically with Kansas experiencing the steepest decline, down 29 spots to #45.