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COMMENTS

Tourism-Dependent U.S. States Could Face Credit Pressure From COVID-19's Outsized Effects On The Industry


Tourism-Dependent U.S. States Could Face Credit Pressure From COVID-19's Outsized Effects On The Industry

The abrupt halt of the U.S. economy due to the COVID-19-induced recession is uniquely configured to stress the tourism sector (including leisure, hospitality, and travel-related activities), more so than in past recessions. The measures states have implemented to contain the pandemic (including social distancing, closing of nonessential businesses, limiting gatherings, and restricting hotel use), while prudent, have shut down the tourism sector in the U.S. for now. It is not just in the U.S; the international response to the pandemic has also curtailed travel and tourism globally, reducing it to historically low levels. For states with significant portions of the economy dependent on tourism, S&P Global Ratings expects COVID-19 and containment measures to translate into pressure on their creditworthiness.

Nevada And Hawaii Are Expected To Be Most Affected Based On Their Significant Tourism Concentration

Nevada (AA+/Negative) and Hawaii (AA+/Negative) are the states most severely affected by the tourism sector shutdown. Both states have the highest concentration in employment related to tourism and GDP in sectors associated with tourism.

Nevada's employment base reflects the highest concentration in leisure and hospitality across all states, accounting for 25% of total employment, which is more than twice the national average. Gaming revenue, accounting for about 18% of the state's general fund revenue, has also experienced heightened exposure in the current recession with the casinos on the Las Vegas Strip closed. Furthermore, we believe the travel and tourism-centered structure of Nevada's economy ties its growth prospects to those of the nation, characterized by stronger growth during expansions and more severe contractions in a downturn. The state's commitment to financial management has positioned the state more favorably than in past recessions with historically high reserves, but it is our opinion that it could face budgetary pressures. Nevada started the current year with a combined balance of $498 million (including $236 million in the stabilization reserve), equivalent to about 15% of budgeted expenditures.

As an island-economy state, Hawaii is inherently vulnerable to the negative effects of certain types of exogenous shock events. The Bureau of Labor Statistics reports that leisure and hospitality accounts for a significant 19% of the state's 2019 employment. Hawaii's financial management, however, has reflected an alignment with its economic realities with a commitment to growing its balances and reducing its long-term liabilities to prepare for an economic slowdown. However, the state's ability to navigate potential budgetary pressures in the next year will weigh heavily on its rating. Hawaii started the current fiscal year with combined operating reserves of $1.1 billion or, 14.3% of budgetary general fund expenditures.

Other States With Tourism Sectors Are Also Facing Pressure

The role of tourism in Florida (AAA/Stable), while significant at 14% of total state employment, has benefited from broad and diverse economic development in recent years, supported by strong population growth. Employment sectors such as trade, education, and health services could moderate losses somewhat from tourism statewide within the short term, in our view. The state and its local communities nevertheless rely on the tourism sector to help support economic activity.

For Montana (AA/Stable), leisure and hospitality employment represents 13.8% of total jobs and reflects its wealth of outdoor recreation and national and state parks. However, tourism-related activities only represents 5% of state GDP.

Table 1

What Is At Risk For The States
State Rating Outlook State employment from leisure and hospitality (2019) (%) GDP from tourism (2018) (%)
Nevada AA+ Negative 25.1 16.5
Hawaii AA+ Negative 19.3 10.2
Florida AAA Stable 14.0 6.1
Montana AA Stable 13.8 5.1

Wyoming

AA+ Stable 12.6 4.5

South Carolina

AA+ Stable 12.4 4.8

Colorado

AA Stable 12.4 5.1

Louisiana

AA- Stable 12.0 4.6

Rhode Island

AA Stable 11.9 4.9

Vermont

AA+ Stable 11.8 6.5

Mississippi

AA Stable 11.8 4.6

California

AA- Stable 11.7 4.3

New Mexico

AA Stable 11.5 4.1

Delaware

AAA Stable 11.4 2.8

North Carolina

AAA Stable 11.3 3.8

Arizona

AA Stable 11.3 4.8

Tennessee

AAA Stable 11.2 5.7

Oregon

AA+ Stable 11.0 4.4

Alaska

AA- Negative 11.0 3.5

Idaho

AA+ Stable 10.9 4.1

Texas

AAA Stable 10.9 3.6

Maine

AA Stable 10.9 5.5

Georgia

AAA Stable 10.9 3.3

South Dakota

AAA Stable 10.7 3.8

New Hampshire

AA Stable 10.7 5.2

Missouri

AAA Stable 10.6 4.1

West Virginia

AA- Stable 10.4 3.8

Kentucky

A Stable 10.4 3.8

Oklahoma

AA Stable 10.3 3.5

Massachusetts

AA Stable 10.2 4.1

Ohio

AA+ Stable 10.2 3.7

Maryland

AAA Stable 10.2 3.9

Illinois

BBB- Negative 10.2 4.2

Virginia

AAA Stable 10.1 3.4

Alabama

AA Stable 10.1 3.3

Washington

AA+ Stable 10.0 3.8

Indiana

AAA Stable 9.9 3.7

Utah

AAA Stable 9.9 3.4

New York

AA+ Stable 9.8 4.4

Michigan

AA Stable 9.8 3.6

Wisconsin

AA Stable 9.5 3.2

Pennsylvania

A+ Stable 9.5 3.5

New Jersey

A- Stable 9.4 3.5

Arkansas

AA Stable 9.4 3.3

Connecticut

A Stable 9.3 3.4

Minnesota

AAA Stable 9.3 3.5

North Dakota

AA+ Stable 9.2 2.6

Kansas

AA- Stable 9.2 3.0

Nebraska

AAA Stable 9.2 2.8

Iowa

AAA Stable 9.1 2.9
Sources: Bureau of Labor Statistics, Bureau of Economic Analysis.

The Already Projected Significant Economic Contraction In The U.S. Is Magnified In The Tourism Sector

Restricted economic activities resulting from the COVID-19 pandemic, including those related to tourism, will translate directly into contracted economic output and general revenue declines for all states. S&P Global Economics forecasts (See "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020, on RatingsDirect) expects the current recession has likely reduced economic activity by 11.8% peak to trough, which is roughly 3x the decline seen during the Great Recession in one-third of the time. The baseline scenario for annual change in U.S. GDP for 2020 is now projected to contract by 5.2%, with some recovery beginning in 2021. Specifically, we believe national consumer spending, which is a key factor in state revenue, will contract by 33.5% in the second quarter of 2020.

Our macroeconomic assumptions, however, do not specifically address acute sector-specific pressures related to tourism. We believe that tourism will be particularly affected as will, by extension, state economies disproportionately reliant on the sector. Shelter-in-place and quarantine measures have led to wholesale cancellations of domestic and international flights and year-to-date enplanement numbers are down significantly. While some states are likely to relax containment restrictions and start opening economies and businesses soon, we expect that an extended aversion to leisure activities, non-essential gatherings, and traveling while the risk of COVID-19 infection lingers is likely to result in a much slower recovery for tourism than for the rest of the economy.

The Effects On State Ratings Will Depend On Concentration And Financial Management In Tough Times

In our view, states dependent on the tourism sector could face significant headwinds well after a national recovery and the next few years will represent a test for some of them. Effects on a state could include liquidity and budgetary pressures from temporary or permanent loss of tax revenue, increases in unemployment, and shifts in real estate demand. To the extent that a state is significantly dependent on tourism, its ability to navigate a dampened revenue environment for the next few years while using sustainable budget measures will be key to maintaining the credit rating.

Most states receive revenue information such as sales tax collection data on a lagged basis, which currently clouds the magnitude of loss in March and April. However, we expect the effects to be evident, particularly in the second quarter of 2020, and affect budget management for many years. As tourism-related revenue begins to decline, a state's relative revenue decline and responsiveness to maintain structural balance could be an indicator of future credit direction.

Sector Size Matters, But Proportion Relative To The State Matters More

We expect that states with significant tourism activities will see more subdued effects if tourism constitutes a smaller proportion of the overall economy. However, given the recession and the expected severity of economic contraction in the short term, even slight declines from tourism could add up to create a "perfect storm" for otherwise resilient economies. Since tourism is also a labor-intensive sector, there would potentially be a decline in employment levels, even in states with relatively low tourism-related job concentration.

While California (AA-/Stable) has the highest tourism GDP of all states, that fact mainly reflects its large size. Its economy is diversified with hospitality and leisure employment accounting for only 11.6% of total state employment, similar to the 11.0% share for the nation as a whole.

Table 2

Tourism GDP By State
State 2018 tourism GDP* (Mil. $) Share of national tourism GDP (%)
California 130,031 15.2
New York 73,922 8.7
Texas 64,834 7.6
Florida 63,729 7.5
Illinois 35,984 4.2
Nevada 27,863 3.3
Pennsylvania 27,228 3.2
Ohio 24,825 2.9
Massachusetts 23,388 2.7
New Jersey 21,564 2.5
Washington 21,324 2.5
North Carolina 21,259 2.5
Tennessee 20,686 2.4
Georgia 19,578 2.3
Colorado 19,090 2.2
Michigan 19,087 2.2
Virginia 17,989 2.1
Arizona 16,629 1.9
Maryland 16,084 1.9
Indiana 13,539 1.6
Missouri 13,037 1.5
Minnesota 12,835 1.5
Louisiana 11,761 1.4
South Carolina 11,155 1.3
Wisconsin 10,723 1.3
Oregon 10,587 1.2
Hawaii 9,603 1.1
Connecticut 9,387 1.1
Kentucky 7,855 0.9
Alabama 7,232 0.8
Oklahoma 6,999 0.8
Utah 6,031 0.7
Iowa 5,560 0.7
Mississippi 5,240 0.6
Kansas 5,129 0.6
New Hampshire 4,364 0.5
Arkansas 4,211 0.5
New Mexico 4,085 0.5
Maine 3,589 0.4
Nebraska 3,440 0.4
Idaho 3,140 0.4
Rhode Island 2,998 0.4
West Virginia 2,923 0.3
Montana 2,569 0.3
Vermont 2,159 0.3
Delaware 2,067 0.2
South Dakota 1,998 0.2
Alaska 1,889 0.2
Wyoming 1,745 0.2
North Dakota 1,437 0.2
*Gross output from arts, entertainment, recreation, accommodation, and food services. Source: Bureau of Economic Analysis.

This report does not constitute a rating action.

Primary Credit Analyst:Ladunni M Okolo, New York (1) 212-438-1208;
ladunni.okolo@spglobal.com
Secondary Contacts:Geoffrey E Buswick, Boston (1) 617-530-8311;
geoffrey.buswick@spglobal.com
Sussan S Corson, New York (1) 212-438-2014;
sussan.corson@spglobal.com
David G Hitchcock, New York (1) 212-438-2022;
david.hitchcock@spglobal.com
Oscar Padilla, Farmers Branch (1) 214-871-1405;
oscar.padilla@spglobal.com

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