The Week in Public Finance: Ranking the States, Vallejo's Recovery and Financial Armageddon

A roundup of money (and other) news governments can use.
by | April 10, 2015

For past editions of The Week in Public Finance column, click here.

North Dakota’s still got it

Despite the slump in oil prices, North Dakota is still topping the charts in most measures of economic strength, a new analysis this week says. The quarterly report, the Federal Funds Information for States’ Index of State Economic Momentum, measures three key measures of economic vitality: personal income growth, employment growth and population growth. FFIS averages measures of the three components and sets the the national average at zero. The report expresses wach state’s score as a percentage above or below the national average.

A total of 16 states exceeded the national average economic performance while 34 and the District of Columbia lagged it. Aside from North Dakota, which was the highest-performing state at 1.89 percent above the national average, the Plains region has seen slippage in its rankings. Notably, no northeastern state exceeded the national economic performance average. Most states high the list are located in the West and South. Nebraska, Maine and Mississippi rounded out the bottom of the list, falling 1.2 percent to 1.47 percent below the national average. Population strongly correlates with overall performance, the report said. “For many years, Wyoming experienced rapid economic growth, which led to ranking #2 in 2012 population growth. As its economy has cooled, so too has in-migration; Wyoming ranked #12 in population growth in 2013 and fell to #41 in 2014.” Additionally, five of the 10 most populous states are among those that exceeded the national economic average.

A recent Standard & Poor’s report perhaps explains North Dakota’s continued resilience even in the face of declining oil prices. Oil-industry activity in North Dakota fuels direct and indirect taxes, such as sales, income, and property taxes. So, while “a decline in industry activity could contribute to a decline in state taxes, but likely the impact would be greater for local governments whose economies are concentrated in the oil industry,” the report released earlier this month said.

Taxing recovery

Four years out of bankruptcy, the Northern California city of Vallejo appears to be trudging toward financial recovery, a new Moody’s Investors Service analysis said. Moody’s cited the city’s voter-approved sales tax as a key reason for its stability. The city’s five-year financial projections show modest growth in total general fund reserves in fiscal 2015 and over the next five years and total reserves are expected to increase to $11.3 million in 2020 from $9.9 million in 2014. Without the sales tax revenues the city would have had "budget gaps until 2020,” Moody’s said.

Vallejo’s property values have also begun to stabilize, though its recovery is “less robust than in other parts of the country,” Moody’s said. Still, the report went on, the city’s decision to not make cuts to its pensions will challenge its long-term fiscal stability.

Dreaming up financial disaster scenarios

The question of when the Federal Reserve will raise interest rates looms large on the minds of many financial observers. Fitch Ratings addressed the issue this week. The analysis noted that the Fed is likely to start raising interest rates in the middle of the year and will do so gradually, with inflation peaking at 1.6 percent next year. Still, that didn’t stop Fitch from contemplating what would happen if things went south. It created an “interest rate shock scenario” to gauge how faster rate increases combined with a decline in the economy and unemployment rising steadily to 7 percent would impact state, local and transportation infrastructure issuers. If inflation next year peaked at 4.5 percent, for example, Fitch thinks that factor combined with the “lack of growth and rise in unemployment would trigger declines in income and consumer spending, which would reduce sales tax revenues.” Fitch also said a spike in interest rates would cause a decline in the stock markets, which would reduce capital gains tax collections states that rely on them more (ahem, California), and would reduce state and local employee pension plan assets. Transportation projects would also suffer from declining transportation volumes.

As for local governments, such a scenario would hurt their bread and butter: property tax collections. “Many local governments are still recovering from the funding declines during (and after) the Great Recession,” Fitch said. “An interest rate shock in 2016 would lead to rating pressures on local governments with fund balances that are still recovering.”

So, I guess we can all be grateful that the Fed does not seem inclined to raise interest rates quickly. And, when it does raise rates, keep in mind it could always be worse.