Puerto Rico consistently ranks last in ‘State of the States’ analysis
The island struggles in key economic and infrastructure indicators.
Puerto Rico has been ranked last among all U.S. states and territories in fiscal health according to Morgan Stanley Investment Management’s (MSIM) 12th annual State of the States Report.
The analysis, which was conducted in collaboration with investment management firm Eaton Vance’s Municipal Research Team, highlights slowing revenue growth after two years of expedited growth tied to pandemic-era government stimulus.
The report highlights Puerto Rico’s “exceptionally high” debt-to-gross domestic product ratio, significant unfunded pension liabilities and economic stagnation as key factors in its precarious financial position. The island ranked in 51st, last behind Illinois, in the report’s overall state ranking.
The report identifies Puerto Rico’s 59% liabilities-to-GDP ratio as the highest in the nation, nearly double that of any state, with significant outstanding debt, unfunded pension obligations and other post-employment benefit liabilities.
“While we believe most states are on solid footing, there are several critical factors looming that will have long-term implications for states’ creditworthiness and ability to respond to shifting market dynamics,” said Craig Brandon, co-head of Municipal Investing for MSIM.
The island’s debt burden, adjusted pension liability and other financial obligations continue to weigh heavily on its economic prospects, leaving little room for investment in infrastructure, social services or economic growth initiatives, the report shows.
Puerto Rico’s general fund balance as a percentage of state governmental revenues ranks among the lowest, limiting its ability to withstand economic shocks or invest in long-term recovery. In this ranking, Puerto Rico was also last, following Illinois, which took the 50th spot.
Another critical issue is Puerto Rico’s unemployment rate, which stands at 5.7%, the highest among U.S. states and territories, surpassing Nevada. This figure underscores the ongoing economic struggles, particularly as outmigration continues to shrink the local labor force.
With fewer residents contributing to the tax base, the government faces increased difficulty meeting its financial obligations and funding essential public services.
The island also ranks last in median household income at $24,492, significantly below the national average. When adjusted for cost of living, the island remains at a disadvantage, limiting consumer spending power and reducing overall economic activity. The low-income levels also affect the government’s ability to generate tax revenue, further straining fiscal stability. In this category, Puerto Rico also placed last, behind Mississippi.
Puerto Rico’s pension system remains among the most underfunded, with a 0% funded ratio, leaving it without assets to cover future obligations. This financial burden diverts funds that could be used for development or essential services toward covering pension shortfalls.
Liquidity is another critical issue, as Puerto Rico ranks last in cash reserves, following New Jersey. Unlike many U.S. states that have bolstered their rainy-day funds, Puerto Rico’s lack of financial cushion leaves it vulnerable to unexpected economic downturns or natural disasters.
“Unfunded pension liabilities and increasing Medicaid costs continue to challenge state budgets, while natural disasters continue to have an outsized impact not only on budgets but also future planning,” said Brandon. “Additionally, outmigration and demographic shifts are two issues that warrant close examination.”
The report also highlights that state debt remains generally low, as many states curtailed borrowing after the Great Recession and experienced increasing GDP.
Rainy-day fund balances, an indicator of preparedness for economic downturns, are at all-time highs, with the median state at 13% of expenditures in 2024 and projections suggesting an increase to 15% in 2025. However, five states have less in reserves now than they did in 2007.
“Understanding how states rank from a credit standpoint influences portfolio decisions,” said Brandon. “With a new presidential administration and uncertainty related to the potential extension of the Tax Cuts and Jobs Act, this analysis pinpoints areas of strength and deficiencies, and helps us identify which states are positioned to address policy changes, demographic shifts and unforeseen events that tap into state agencies and budgets and leverage infrastructure resources.”
