Last week, Vermont was downgraded a notch by Moody's Investors Service, which cited pension debt and slow economic growth as the culprits. Connecticut knows a thing or two about that; it has struggled for years with downgrades due to lackluster growth.
But there's something else affecting these states' ratings: older populations. And the two are far from alone.
Declining working-age populations has already been a trend in 10 states over the past decade. But what's happening in Connecticut and Vermont may be foreshadowing what’s in store for about one-third of the country. By 2026, a total of 17 states will move into the “super aged” category, meaning that at least 20 percent of their populations will be 65 or older, according to a recent report by Fitch Ratings.
That factor is expected to weigh down their economies and finances for years to come. “When you’re at that 20 percent or above point," says the report’s lead author, analyst Olu Sonola, "you really start to see the structure of society change."
In particular, working-age populations in Maine, Vermont and West Virginia are projected to decline by at least a half-percent annually by 2026. “This trend will strain economic growth in these states,” the report says, “with knock-on implications for revenue growth prospects and ratings.”
The majority of super-aged states are located in the Northeast and Midwest. On the other end of the spectrum, states with younger populations and, by consequence, stronger projected GDP growth are located in the South and West.
There are still a lot of unknowns that could change the current fiscal outlook for these super-aged states.
For one, if rising health-care costs are ultimately brought under control, that could help ease Medicaid costs for states. Medicare, the health insurance program for senior citizens, is funded by the federal government. But costs for Medicaid, the health insurance program for the poor, are shared by states and the feds. Places like West Virginia that have a large population of elderly disabled or elderly poor who qualify for both Medicare and Medicaid stand to benefit even more from improvements in health-care delivery.
On the other hand, federal proposals to raise the qualifying age for Medicare would harm states by boosting their own retiree health-care liabilities.
Immigration is also a “wild card,” says Sonola. Last year, nearly 80 percent of the foreign-born population in the U.S. was working age, compared with about 60 percent of the U.S.-born population. If the current pace of international migration stays the same, it could slow the pace of aging.
Research has shown that while first-generation immigrants are costlier to state and local governments than native-born adults, those effects eventually reverse. That’s largely due to the higher birth rate among immigrant populations than native-born populations. The children of these immigrants grow up and contribute more on average to federal, state and local coffers.
However, if the current political climate and push to tighten international immigration continues, that could hurt states like Hawaii, New Jersey and New York, where international migration is expected to help offset domestic out-migration over the next 10 years.
“You have to think about how [more restive immigration policy] affects population changes for these states,” Sonola says, adding that it would likely accelerate working-age population declines for the Northeast in particular.
In other public finance news this week:
Income Tax Revenue is Booming
Higher income tax revenues are driving strong state revenue growth this year, according to a new report from the Urban Institute.
During the first nine months of this year, state tax revenues have increased by an estimated 7.1 percent. But much of that strength “should be viewed with caution,” writes Lucy Dadayan, a senior research associate at the institute, “as it is likely attributable to [federal tax reform] that created strong incentives for some high-income taxpayers to shift income and deductions between tax years.”
During the first quarter, of 2018, for which there is more complete data, income tax revenues grew by a whopping 12.8 percent after adjusting for inflation. Overall, says Dadayan, individual income tax collections increased in 38 states during that quarter with 23 of them reporting double-digit growth. Connecticut, Illinois and Kansas saw particularly strong growth and collections increased by 51.4 percent, 43.2 percent and 66.6 percent, respectively.
Kansas’ and Illinois’ growth is mostly attributable to increases in income tax rates while Connecticut benefited from the provision in federal tax reform that encouraged companies to bring their foreign earnings back to the United States. Connecticut is home to a large number of hedge fund managers who scrambled to bring overseas profits back into the states by the end of 2017.
A Credit Ratings Echo Chamber?
In the years following the Great Recession, the municipal market saw a rise in what’s called a split rating where two credit agencies issue a different rating for the same municipal credit. Now, reports Municipal Market Advisors, that trend is on the decline: Spilt ratings account for about 41 percent of outstanding bond debt, down from 46 percent in 2015.
But it’s not necessarily because rating agencies are agreeing more. Rather, it’s more likely due to the issuer trend of obtaining fewer ratings on new issues. Previous research from Municipal Market Advisors has found that through the first five months of this year, 25 percent of bond sales have involved just one credit rating. That’s far higher than the 13 percent rate a decade ago.
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*CORRECTION: A previous version of this misspelled "West Virginia" and left out the word "annually" in this sentence: "In particular, working-age populations in Maine, Vermont and West Virginia are projected to decline by at least a half-percent annually by 2026."