Municipal Bond Credit Perspectives -- State of the States

from Conning.com, May, 2024 (Hawaii-related excerpts)

Overall, we believe states are generally in better financial shape than before the pandemic. Despite growth rates that are expected to revert to pre-pandemic levels, state credit quality should remain stable with the potential for regional improvements….

There were significant shifts in ranking: …Delaware and Hawaii plummeted 21 and 11 spots, respectively, into the bottom five, alongside perennially low-ranking states Illinois, Louisiana, and Mississippi. …

Measuring GDP per capita adjusts for state size differences, providing insight into a state’s efficient utilization of its population. States with large populations but lower relative productivity highlight untapped potential. The top six states from our 2023 report maintained their positions in 2024, primarily concentrated on the East and West Coasts, reflecting the stability of this metric which requires significant shifts in population or economic activity to change substantially. Nebraska ascended five positions to seventh place, propelled by robust (+5.2%) real GDP growth, while Hawaii made even greater strides, climbing six spots to 25

Hawaii presents a unique scenario where its below-average real GDP growth of 2% didn’t hinder the rise in its GDP-per-capita rank, primarily due to a decrease in population. The wildfires in Maui during 2023 affected Hawaii’s economic growth in the latter half of the year due to business disruptions and a downturn in tourism. Additionally, the displacement of people and potential reluctance to migrate to Hawaii post-disaster could have significantly influenced its relatively small population….

(TRANSLATION: Young families are leaving Hawaii.  Rich retirees are moving in.  The result is a sharp increase in per capita GDP.)

GDP per capita is fairly sticky and requires a large change in population or economic activity to move the needle. Hawaii bounced back six spots after standing out as a laggard in 2022 while Texas did the opposite, dropping seven spots. …

Hawaii witnessed minimal employment growth, resulting in a significant drop of 45 places in its job-growth ranking to 49. …

Hawaii fell 45 spots due to job losses in the financial activities and trade, transportation, and utilities sectors, the last of which is among the largest employment sectors in the state….

FHFA’s Housing Price Index rose 6.5% in 2023, less than the 8.1% gain in 2022, but still marking 12 consecutive years of growth. Growth continued to be strong amid a rising mortgage rate environment which approached 8% for the first time since the financial crisis. 

…Hawaii was the only state with an annual decline, but states like Montana, Utah, Colorado, and Idaho also disappointed despite strong population growth.…

Personal Income Per Capita

We track personal income per capita because, in theory, a wealthier population can incur a higher tax burden needed to support higher debt levels. If wealthier residents move out, they leave behind a debt burden for a smaller and potentially less affluent population.

Typically, states with higher per capita debt levels exhibit above-average wealth metrics. However, this trend shifted slightly in our 2024 report: we found 10 states (Hawaii, West Virginia, Mississippi, Wisconsin, Louisiana, Ohio, New Mexico, Kansas, Kentucky, and Alabama) with below-average personal income levels; in our 2023 report, there were only seven. The increase suggests a broader divergence between a state’s debt levels and personal income metrics across the nation. This situation is worrying because less economically advantaged states may struggle to manage a relatively high debt burden compared to more affluent states.

Our 2024 report notes robust personal income growth across all 50 states, driven by increases in earnings, property income, and transfer receipts. This growth, particularly in earnings across various industries, along with population expansion bodes well for future credit quality. States like Florida (top-ranked for personal income growth), Utah (2), and Wyoming (3) experienced significant increases in personal income, with a diverse range of contributing sectors. Even states traditionally ranking lower in personal income growth such as Louisiana (ranked 50 in our 2023 report) and Hawaii (49) displayed strong improvements, moving up 10 and 28 spots, respectively, indicating widespread economic momentum.…

read … FULL REPORT

II: Why Hawaii Plummeted to Last in Conning’s State Credit Rankings