Majority of States Exceed Revenue Targets, Classified as ‘Stable’

Morgan Stanley Investment Management (MSIM) today released the 13th annual State of the States report, which indicates a stable credit outlook for most states and includes analysis of new factors tied to the global economy and the shifting balance between federal funding and state-driven support for national programs. The State of the States report examines the financial health of the 50 states and Puerto Rico and leverages MSIM’s proprietary ratings methodology.

Report Highlights:

• 34 states exceeded revenue estimates in fiscal year 2025 and another nine met expectations; seven states (and Puerto Rico) reported revenue below estimates.
• The State of the States report indicates stronger gross domestic product (GDP) growth, favorable investment returns and pension reforms may have prompted the median debt-to-GDP and unfunded pension-to-GDP ratios to significantly decline to 3.9% in 2024 from 8.3% in 2011.
• Rainy day funds, also known as budget stabilization funds, are believed to be a strong indicator of how prepared a state is for recessions and economic downturns; on average, these funds were approximately 13% of expenditures, which is consistent with 2024 levels and approaching the record high of approximately 15%. However, five states have less in rainy day funds now than they did in 2007.
• Interstate population migration affects state tax bases with Florida seeing the highest increase in adjusted gross income and New York seeing the largest decrease.

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Craig Brandon, co-head of Municipals at Morgan Stanley Investment Management, emphasized the importance of deep research and analysis of a range of factors that influence states’ creditworthiness and overall financial health. “We believe the municipal market is healthy, but there may be challenges ahead as states adjust to shifting tariff policy, broader economic trends population migration and the downstream effect of changing federal aid programs like federal emergency management, supplemental nutrition assistance and low-income health care coverage.”

Brandon elaborated, stating that the team included new tariff and import / export data in the annual report. “We believe that tariffs affect the state-level economies too; for instance, imports can play a key role for a state with a manufacturing focus, but a state with a larger export footprint may feel the impact of tariffs first.” Brandon continued, “Similarly, people moving between states has an impact on state income potential. However, the volume of people isn’t what affects state income but rather the degree of wealth entering or leaving a state.”

Additional Key findings:

• Most states maintained manageable debt burdens in 2025. The state median liability-to-GDP ratio declined from approximately 11.5% in 2011 to 4.8% in 2024.
• Puerto Rico remains a significant outlier; its approximately 54% liabilities-to-debt ratio was nearly double that of any of the 50 states.
• Alaska, Wyoming and Tennessee have the lowest tax burden as a percentage of personal income, which may indicate they have more flexibility to raise taxes and, in turn, state revenue, as needed; however, 12 other states reported approximately 12% personal income tax burden, which may limit this option.
• As in past years, Medicaid spending continues to dwarf other fixed-cost spending with total Medicaid spending averaging 28% of state budgets.

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“We believe that a strong credit outlook for the states bodes well for the overall municipals market, but there are additional complexities for municipal investors to consider,” said Brandon. “In our view, fundamental, active credit research powers the municipal investment market because we often see examples of strong issuers based in struggling regions and vice versa. It is imperative to evaluate each investment opportunity individually before putting money to work.”

Developed by the investment management municipal research team, this comprehensive report details what the team sees as the biggest issues facing the 50 states and Puerto Rico and seeks to rank them based on their creditworthiness and overall financial health. The State of the States report leverages the team’s proprietary ratings methodology that is based on both quantitative factors, including overall state economy and wealth, financial performance, outstanding debt and unfunded retirement obligations, as well as qualitative factors, including projected budget shortfalls or surpluses, states’ historical record of meeting projections, pension or other post-employment benefit (OPEB) reform initiatives and the success of proposals to increase revenues and decrease expenditures.

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