DALLAS – A vicious cycle of aging populations, urban migration, job losses and falling revenues darkens the credit outlook for hundreds of rural counties that have generally failed to recover from the Great Recession, according to recent research.

A report last week from Moody’s Investors Service cited “troubling economic and demographic trends impacting the rural parts of America that emerged during the recession and have not only failed to recover, but appear to be worsening.”

“Aging and declining populations, along with underperforming labor markets, will continue to weigh on the finances of many rural local governments,” said Moody’s analyst Frank Mamo, author of the report. “The impact will vary, largely based on how a locality’s revenues are structured and the kinds of services it provides.”

Moody’s defines rural government as any municipality not within a federally designated metropolitan statistical area. Moody's rates more than 1,400 rural cities, counties, school districts and municipal utilities.

“With the exception of some counties with successful energy and tourism industries, the problem is nationwide and in almost every state,” Mamo said.

Total employment in rural counties through 2017 was 4.3% below the 2007 pre-recession level, according to the report, with urban counties 7.5% above.

While prairie states have faced depopulation for decades, the total number of people living in rural America fell in 2010 for the first time in at least 30 years, the report said. Between 2010 and 2017, the country's rural population fell by 0.5%, while the urban population grew by more than 6%. Urban migration and falling birth rates drove the rural decline.

Some counties in the Southwest illustrate the cycle, the report said.

In Colfax County, New Mexico, the population fell 10% in seven years as its median age rose to 48 years, about 10 years above the national median.

At the same time, the share of prime working-age residents in the county population fell to 32%. Moody’s said that is low even compared to all rural counties’ median of 36%. Since 2010, employment is down 10%, analysts said.

“The weakening demographic trends have led to sharp enrollment declines at the Raton school district, with the number of students falling by almost 25% since 2010,” the report said. “Raton's enrollment declines, coupled with state cuts in education appropriations, caused the district's state aid to fall 14% between 2010 and 2017, a driver of five annual operating deficits. In an attempt to regain balanced operations, the district closed two of its five schools and reduced expenditures in line with enrollment, but has yet to gain structural balance.”

Roughly one half of school districts, one third of schools, and one fifth of students in the United States are in rural areas, according to the Center for Public Education’s January report entitled “Out of the Loop.”

About 64% of rural counties have high rates of child poverty compared to 47% of urban counties, the report noted. Rural children are also more likely to experience “deep” poverty, a situation in which a child’s family income falls below half of the poverty line.

In 2014, more than 60% of rural students qualified for free and reduced-price lunches, a marker for family poverty, in Arizona, New Mexico and Oklahoma. In Texas and Utah, more than 50% qualified. In Colorado and Kansas, 40% to 50% qualified, according to the study.

In Oklahoma, the consolidation of schools has reduced the number of districts from 1,000 to 513 since statehood in 1907. Kansas, which is also facing a trend of rural depopulation, has sought to consolidate schools amid tight funding.

While consolidating rural districts creates efficiencies in administration, the savings may vanish due to the rising cost of transportation, according to the CPE.

To remain viable, rural school districts rely on voters to supply bond money to improve facilities, but winning elections can be difficult. In May, 23 rural school districts in Texas asked voters for bond money, with nearly half of the proposals going down to defeat.

Losing schools and hospitals are historic milestones on the way to becoming a ghost town.

In Texas, 15 rural hospitals have closed since 2013, with others operating on the verge of bankruptcy. As the nation’s second-largest state in area, Texas led the nation in rural hospital closures in recent years. Twenty-seven of Texas’ 254 counties lack a single physician, and another 27 counties have only one, according to the Texas Department of State Health Services.

In East Texas, the Nacogdoches County Hospital District saw its ratings fall deeper into junk categories from Moody’s and Fitch Ratings last week as officials prepared for a bankruptcy filing that would affect $42 million of outstanding bonds.

While the district has not defaulted on any bonds so far, Fitch said that based on its analysis, a default on sales-tax-backed bonds is probable in the reorganization process.

“Since NCHD's pledged revenues are a general sales tax available for operations as well as debt service, Fitch had no basis to consider the bonds to be secured by pledged special revenues,” Fitch analyst Thomas McCormick said.

A quiet street in Raton, New Mexico
Demographic changes are creating financial stress for rural communities like Raton, New Mexico, according to a Moody's Investors Service report. Raton

Among the rural governments Moody's rates, the median rating is one notch lower than the national median.

More bad news may be coming as the U.S. launches a global trade war, the report said.

“Tariffs imposed by the Trump administration will likely reduce rural manufacturing employment and hurt the agricultural sector, which would negatively affect local government tax revenue,” the report said. “Additionally, recently enacted tax cuts are unlikely to stimulate widespread economic growth in rural America because rural areas are still at a disadvantage in competing for new investment, given their shrinking working-age population and an unreliable pipeline of future employees.”

Retaliatory tariffs on U.S. agricultural products are also likely to damage rural economies and could impact the value of farmland subject to property tax, the report said.

“Trade tension that lowers U.S. crop prices would adversely impact the tax base of agriculture-dependent municipalities,” Moody’s said.

Steel and aluminum tariffs recently imposed by the U.S. on imports from Canada, Mexico and the European Union will likely hurt rural America more than help, Moody’s said.

“While the tariffs will provide a near-term boost for domestic steel and aluminum producers, they will hurt manufacturing and construction firms that will end up paying more for these materials,” analysts said.

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