State of the states: How do they rank?

1. State of the states: How do they rank? Unless otherwise indicated, all information is as of 9/30/2019 Eaton Vance Municipal Research Team Prepared by:

2. Important information and disclosure This presentation is for informational and illustrative purposes only. This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any particular securities or to adopt any investment strategy. This information has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and Eaton Vance has not sought to independently verify information taken from public and third-party sources. Any investment views and market opinions/analyses expressed constitute judgments as of the date of this presentation and are subject to change at any time without notice based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. Different views may be expressed based on different investment styles, objectives, views or philosophies. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance product. This presentation may contain statements that are not historical facts, referred to as "forward looking statements.” Actual future results may differ significantly from those stated in any forward-looking statement, depending on factors such as changes in securities or financial markets or general economic conditions.

3. Table of Contents • Overview • Ranking Methodology • Ranking Results • Key Findings • Appendix

4. I. Overview

5. Summary CREDIT OUTLOOK: STABLEfor most states • Many states are structurally balanced and building reserves. • At year end 2018, state revenues were 12.6% ahead of the pre-recession peak on an inflation adjusted basis. • Median Rainy Day fund balances have increased from 1.8% of general fund expenditures in FY 2011 to 6.4% in FY 2018 • Sources: State revenue growth from Rockefeller Institute, State rainy day fund balances from NASBO The operating environment is becoming more challenging: • Some states face a structural imbalance due to: • Unfunded pension obligations • Rising OPEB liabilities • Escalating Medicaid costs • Thin reserves • Budget pressure

6. Why are some states challenged? • Unfunded pension and other post employment benefit (OPEB) liabilities are over 3X larger than debt burdens • Source: Debt is net tax supported debt from Moody’s June 2019. Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) and Eaton Vance assumptions. States’ pension plan discount rates from most recently available State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. OPEB liabilities from State CAFRs. Net Debt$523 billion Unfunded Pension & OPEB $1.64 trillion For more on the challenges of unfunded pensions and OPEB, please see the Appendix

7. There’s more to the credit story • Debt and unfunded liabilities represent only one aspect of municipal credit quality. • An evaluation of a municipal issuer’s credit quality should also include quantitative and qualitative factors: • Financial performance • Economy and wealth • Budgetary outlook and flexibility

8. II. Ranking Methodology

9. How we rank the states and Puerto Rico • This report presents state and Puerto Rico rankings based on Eaton Vance’s proprietary ratings methodology:

10. Quantitative factors in our methodology

11. Quantitative factors in our methodology (contd.)

12. Important notes about our rankings • Rankings are on a 1-51 scale, with 1 as most positive and 51 as most negative. • Although we don’t provide Eaton Vance’s proprietary ratings score for each state, many states score closely together. • We use eight color codes to group states, as large differences in ranking may not necessarily reflect differences in credit quality. • States in the same color-coded group should be considered similar in credit quality. HIGHEST RATED LOWEST RATED

13. III. Ranking Results

14. 37 35 33 10 Summary rankings 27 24 2 28 21 11 19 20 1 3 45 30 47 46 49 4 8 31 14 7 12 50 9 42 36 6 29 48 23 26 32 44 13 5 25 22 18 16 39 34 38 40 51 41 17 43 15

15. Detailed rankings

16. Detailed rankings

17. Key findings

18. A guide to reviewing the state of the states • The following charts help compare states based on the credit quality factors that are incorporated in Eaton Vance’s ratings methodology. • How are states managing their debt load? • How heavy are debt and unfunded pension burdens? • Which states are most pressured by debt, pension and OPEB liabilities? • How do debt, pension and OPEB loads compare to annual revenues? • Which state budgets can handle debt, pension and OPEB expenses? • Which states are fully funding their pension contributions? • Which state pensions are the most underfunded? • How much cushion do states have to mitigate financial risks? • How much liquiditydoes each state have? • Which states have been building reserves? • Which states are battling high unemployment? • Which states have the wealthiest households? • Which states fall short in terms of economic growth? • How much flexibility do states have to raise taxes? • Which states have the highest population growth?

19. How are states managing their debt load? • Many states curtailed borrowing after the Great Recession. Combined with increasing state GDP, this has resulted in state debt remaining low. • Source: Debt is net tax supported debt from Moody’s State Debt Medians Report, June 2019. GDP from the Bureau of Economic Analysis Q3 2018. Connecticut has the highest debt/GDP ratio at 8.8%, although that appears to be very manageable.

20. How heavy are debt and unfunded pension burdens? • Due to GDP growth, robust investment returns, and pension reforms the median declined from 8.3% in 2011 to 5.1% in 2018. • Source: Debt is net tax supported debt from Moody’s June 2019. Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) and Eaton Vance assumptions. States’ pension plan discount rates from most recently available State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the new sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. OPEB liabilities from State CAFRs. GDP from the Bureau of Economic Analysis Q3 2018. Notably, Connecticut, Illinois, and New Jersey have debt and pension-to-GDP ratios above 20%. 5.1%

21. Which states are most pressured by debt, pension and OPEB liabilities? • Most states maintain manageable burdens, and the state median declined from 11.5% in 2011 to 6.9% in 2018. • Source: Debt is net tax supported debt from Moody’s June 2019. Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) and Eaton Vance assumptions. States’ pension plan discount rates from most recently available State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the new sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. OPEB liabilities from State CAFRs. GDP from the Bureau of Economic Analysis Q3 2018. When including OPEB, five states have liability-to-GDP ratios over 20%. State Median 6.9%

22. No surprise: Puerto Rico remains a significant outlier • Source: Debt is net tax supported debt from Moody’s April 2018. Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Moderate Adjusted Net Pension Liability Growth in 2016 Precedes Spike in 2017 “ (September 2017) and Eaton Vance assumptions. States’ pension plan discount rates from most recently available State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the new sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. OPEB liabilities from State CAFRs. Importantly, the states’ unfunded OPEB liability has not been adjusted for the states share of the total state and local OPEB liability, which could result in the states’ OPEB liability being overstated. GDP from the Bureau of Economic Analysis Q3 2017. Puerto Rico values from 2015 CAFR as 2016 CAFR have not been released as of this report. At 90%, Puerto Rico’s liabilities-to-GDP ratio is more than double any of the 50 states. State Median 6.9%

23. How do debt, pension and OPEB loads compare to annual revenues? • Much like a home mortgage, this ratio measures the states’ outstanding debt in comparison to annual income. • Source: Debt is net tax supported debt from Moody’s June 2019. Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) and Eaton Vance assumptions. States’ pension plan discount rates from most recently available State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the new sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. OPEB liabilities from State CAFRs. GDP from the Bureau of Economic Analysis Q3 2018. Puerto Rico values from 2014 CAFR, prior to default. Notably, three states and Puerto Rico have ratios above 300%. State Median 71.6%

24. Which state budgets can handle debt, pension and OPEB expenses? • Most states are in good shape, but for some states these expenses, if paid in full, could crowd out other spending initiatives. • Source: Governmental Revenues, debt service and OPEB ARCs are from State CAFRs and Puerto Rico 2014 CAFR. States’ share of pension tread water payment from Eaton Vance calculations on data reported in State pension CAFRs and Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018). Puerto Rico tread water payment calculated from data in 2014 Puerto Rico pension CAFRs. OPEB liabilities from State CAFRs. These liabilities consume more than 20% of the budget for five states and Puerto Rico. State Median 6.5%

25. Medicaid changes the picture • Medicaid spending, especially the portion funded through Federal grant money, dwarfs other fixed-cost spending. Changes to the Federal program would have an enormous impact on state budgets. • Source: Governmental Revenues, debt service and OPEB ARCs are from State CAFRs and Puerto Rico 2014 CAFR. States’ share of pension tread water payment from Eaton Vance calculations on data reported in State pension CAFRs and Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) Puerto Rico tread water payment calculated from data in 2014 Puerto Rico pension CAFRs. OPEB liabilities from State CAFRs. Medicaid spending data from Medicaid and CHIP Payment and Access Commission, FY 2017 data. State Median 39.2%

26. Which states are fully funding their pension contributions? • If a state does not fund, at a minimum, its required tread water contribution (service costs plus net interest costs), pension funded ratios will worsen over time. • Source: Tread water contributed percentage from Eaton Vance calculations on data reported in State pension CAFRs. Puerto Rico tread water payment calculated from data in 2014 Puerto Rico pension CAFRs. For 2018, fewer than half of the 50 states contributed enough to their pensions to make progress towards a fully-funded level State Median 93%

27. Which state pensions are the most underfunded? • States needing to invest more money into their pension plans to meet these eventual obligations have less flexibility for other spending. • Source: Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) and Eaton Vance assumptions. States’ pension plan discount rates from State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the new sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. 10 states and Puerto Rico have pensions that are less than 50% funded. State Median 60%

28. Which states are making progress on their pension funding? • Some states have made progress towards better funded ratios over the past four years, while other have failed to improve their pensions • Source: Unfunded pension liabilities from State pension CAFRs. States’ share of estimated pension liabilities are based upon the states’ share of the total state and local liabilities as per Moody’s “Medians – Adjusted net pension liabilities spike in advance of moderate declines“ (August 2018) and Eaton Vance assumptions. States’ pension plan discount rates from State pension CAFRs. Eaton Vance then uses the current plan discount rates along with the new sensitivity analysis provided as part of GASB 67/68 to adjust all plans to a 5.5% discount rate. 15 states have worse funded pensions now than they did in 2015 State Median 2%

29. How much cushion do states have to mitigate financial risks? • A high general fund balance signifies that a state has adequate financial resources to mitigate current and future financial risks. • Source: General Fund Balances and Revenues from State CAFRs. Wyoming, North Dakota and Alaska are over 100%. State Median 15.1% Notably, three states have negative general fund balances, and Illinois’ negative balance exceeds 10%.

30. How much liquidity does each state have? • High levels of liquidity ensure that a state can make payments on time without the need for short-term borrowing. • Source: Governmental Funds liquidity from State CAFRs. Days cash on hand is calculated as cash available in the governmental funds divided by annual governmental fund expenditures, and then multiplied by 365. North Dakota, Wyoming and Alaska have over 500 days cash on hand. Five states and Puerto Rico have less than 30 days (one month) cash on hand. State Median 70days cash

31. Which states have been building reserves? • Comparing current rainy day fund balances (in days of operations) to balances in 2007 before the last recession measures how prepared states are for the next downturn • Source: Rainy day fund balances from Pew Research “Fiscal 50 – State Trends and Analysis” as of FY 2018. Balances in terms of days of operating expenses in reserve. Twenty states have less in reserve now than in 2007 State Median 2.5 Days

32. Which states are battling high unemployment? • The 12-month moving average unemployment rate is a general measure of the health of a state’s economy and labor force. • Source: Unemployment rates for the past 12 months from BLS, as of April 2019. Ten states have a 12-month moving average unemployment rate below 3%. State Median 3.8%

33. Which states have the wealthiest households? • Median household income adjusted for cost of living is one measure of the strength of a state’s tax base. • Source: Median Household Incomes from Census Bureau 2017 one-year estimates. Cost-of-living adjustment from the Missouri Economic Research and Information Center, annual 2018 data. To adjust for cost of living, we divide the median household by the cost-of-living index value, which is given as a % of the U.S. average. Puerto Rico cost-of-living adjustment from numbeo.com cost-of-living index. 15 states have adjusted median incomes above $60,000. State Median $56,481

34. Which states fall short in terms of economic growth? • Real state GDP growth provides a measure of the health of the economy in each state. • Source: Real GDP growth from 2013 - 2018(annualized) from the Bureau of Economic Analysis 2018 GDP Estimates. Puerto Rico GDP from the World Bank. Notably, 2 states and Puerto Rico have had negative real annual GDP growth over the past five years. State Median 1.7%

35. How much flexibility do states have to raise taxes? • State and local tax burden as a percentage of personal income can help measure a state’s flexibility to increase taxes to generate additional revenue. • Source: Tax burdens as a percent of personal income from taxfoundation.org published January 2016, data as of FY 2012. Tax burden information was unavailable for Puerto Rico. 17 states have a state and local tax burden as a % of personal income above 10%. State Median 9.4%

36. Which states have the highest population growth? • State population growth provides a measure of how desirable a state is to live in, which may impact revenue trends, but also may influence infrastructure spending. • Source: Population growth from Census Bureau 2018 population estimates and 2014 population estimates. Six states and Puerto Rico had negative population growth from 2013 to 2018. State Median 1.5%

37. How has population migration affected state tax bases? • People may move between states for a variety of reasons: taxes, weather, retirement, schools, etc. Regardless of the reason, population migration affects the income tax base of the states. Some have fared much better than others over the past five years. • Source: Migration and Adjusted Gross Income data from IRS Statistics of Income Division.

38. Conclusion • While we have focused on state data in this presentation, there are over 40,000 different local general obligation (GO) and essential service credits. • In some highly ranked states, there are certain local issuers that may pose a credit risk. • Conversely, in some low-ranking states, certain local issuers may exhibit strong credit characteristics. • Independent, professional credit research is more important than ever in navigating the vast, disparate municipal bond market.

39. V. Appendix

40. Appendix • Examining the lowest ranked states: • Illinois • New Jersey • Kentucky • Connecticut

41. The bottom 4: Why do these states rank so low? Illinois (#50) Illinois is struggling from intertwined problems of budget deficits, growing pension liabilities and legislative inaction. New Jersey (#49) Structurally unbalanced budgets and rapidly growing pension and debt costs hinder New Jersey. Kentucky (#48) Poorly funded pensions, pressured financial position, and below average economy drive Kentucky’s low ranking. Connecticut (#47) Connecticut is burdened by a struggling economyand very high debt levels compared to other states, but has improved financially in recent years with sizeable operating surpluses and increased reserves.

42. Eaton Vance Municipal Credit Research Team • Credit Research Team with Extensive Experience • Eaton Vance, as of 6/30/19 Municipal Credit Research Team

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