State and local governments are not alone in their fiscal stress, which can have a reciprocal cause-and-effect relationship with consumer or household finances. With that in mind, it comes as little surprise that Nevada, a state that has been particularly plagued by high foreclosure and unemployment rates over the past several years, ranked the most financially distressed state in the nation, according to a recent study by CredAbility, a national non-profit credit counseling and education agency.
Its annual Consumer Distress Index is based on factors such as employment, housing, credit, household budgeting, and net worth.
A high employment rate and the ability to manage credit and household budgets helped Washington, D.C. score the highest of any metro areas.
On the upside, the report cites overall improvement in fiscal distress. “The addition of 635,000 new jobs, fewer mortgage delinquencies, and an ever-improving credit picture helped bolster the financial health of the average U.S. household in 2012’s first quarter,” says a company press release.
For the first time, this quarter’s study included 25 of the nation’s largest metro areas. Its findings: the most fiscally healthy metro areas are Washington, D.C., Boston, Minneapolis–St. Paul, Honolulu, and Dallas Fort-Worth. High employment and the ability to manage credit and household budgets helped Washington, D.C. score the highest of any metro areas.
On the other end of the spectrum, the metro areas measuring the greatest levels of fiscal distress in the first quarter of 2012 were Tampa-St. Petersburg, Detroit, Miami–Fort Lauderdale–West Palm Beach; Atlanta; and Los Angeles. These metro areas lag their peers in employment and housing, according to the report.
Are residents’ wallets tied to state or local government coffers?
Michael Ross, CFA, Senior Desk Analyst at Raymond James Morgan Keegan, says that the financial well-being of its residents can have a significant impact on a state or local government’s fiscal capacity, which encompasses its ability to generate revenue against its need for expenditures.
In a May 2007 report specific to states in its region, the New England Public Policy Center at the Federal Reserve Bank of Boston states that “fiscal capacity gauges a state’s ability to pay for needed public services.” Further, “states with high revenue capacities or low expenditure needs tend to have high fiscal capacity, while states with low revenue capacities or high expenditure needs tend to have low fiscal capacity.”
“Fiscal capacity is nice to have, whether you use it or not …”
The same holds true for local governments. As Michael Ross explains, “if a municipality’s residents are fiscally stressed, it affects their ability to pay their bills, including mortgages and local property taxes, leading to delinquencies and foreclosures in extreme cases. Not only does this lead to a lower property tax base, it also leaves the local government with its hands somewhat tied in terms of raising taxes. And when that happens, it can jeopardize its ability to provide certain public services,” he says.
Fiscal capacity is nice to have, whether you use it or not, he points out. Fortunately, fiscal capacity could be on the rise, as the CredAbility index points to overall improving financial health of the average U.S. consumer.