Conning State of the States Municipal Credit Quality Report: “Stable” Outlook for 2025, Alert to Federal Policy Challenges Ahead

Conning, a leading global investment management firm, today 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.

Additional 2025 State of the States Metrics to Note:

• Migration Patterns – Population growth, a reliable indicator of future state credit quality due to its link to tax revenue, is often linked to lower tax rates that encourage inflows. The report notes that state population growth has rebounded from pandemic-era lows, with weather and cost of living considerations likely driving growth in the Northeast as remote work declines. Interestingly, Conning indicates that population shifts often create “feedback loops” related to cost of living, as large growth necessitates higher tax rates and housing costs.
  
  
• Reserves – Overall, states exhibited strong reserve positions as the median rainy-day fund balance reached 13.5% of general fund expenditures, up from 12.7% the year prior. About half of all states reported increased reserves, with 15 states reaching record-high levels. While rainy-day funds varied significantly across states, 22 states held total balances above Conning’s recommended 15% minimum threshold.
  
  
• Employment Growth – Defined as a state’s ability to support population expansion through new jobs, employment growth declined overall to 0.9% from 1.3% last year. Idaho, Utah, and South Carolina experienced strong growth in the category while Indiana, West Virginia, Massachusetts, Arizona, and Iowa saw declines.
  
  
• GDP – The professional services and healthcare industries drove growth in states’ real GDPs nationwide, while mining, utilities, and manufacturing underperformed. Variations by sector led to large disparities by region, with the Far West, Southwest, and Southeast leading while the Great Lakes, Mideast, and Plains fell below the national average.
  
  

“In the time of transition ahead, it is imperative that states bolster their reserves by making tax policy decisions to support increased expenses,” Citroen added.

Conning’s 2025 State of the States interactive data platform is now available, offering access to dynamic charts, metric-by-metric analysis, historical rankings and link to the full 2025. Explore the platform here.

About Conning’s Municipal Credit Research and State of the States Report

Conning’s State of the States Report helps the firm’s investment professionals make better-informed credit decisions and improve relative value for client portfolios. State of the States indicators include measures of economic activity, such as income levels, housing prices, population changes, tax revenue growth, state gross domestic product growth, unemployment rates and employment growth, as well as a state’s finances and overall business environment. To enhance the predictive nature of the rankings, 2025 findings reflect new Catastrophe Losses Per Capita and Cost of Living Index metrics (weighted 4% each) that replaced Debt Per Capita and Gross Domestic Product Per Capita (formerly weighted 8% each). The remaining 8% of unassigned weighting was distributed evenly across Economic Debt as a percentage of Personal Income, Reserves, Tax Revenue Growth and Population Growth indicators, which now each carry a 10% weighting.

ABOUT CONNING

Conning is a leading investment management firm and with affiliates has more than $173 billion in global assets under management as of March 31, 2025.* With a long history of serving insurance companies and other institutional investors, Conning supports clients with investment solutions, risk modeling software, and industry research. Founded in 1912, Conning has investment centers in Asia, Europe and North America. Conning is part of the Generali Investments platform.

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