A 39% plunge in the median net worth of U.S. families is a credit negative for state and local governments and higher education institutions, according to Moody’s Investors Service.
The Board of Governors of the Federal Reserve reported the 39% decline from 2007 to 2010 in a bulletin published June 11. The percent decline for net worth is inflation-adjusted. The decline in net worth was primarily due to declines in house and stock prices, according to the Fed.
The Fed study only went to 2010. On Tuesday, Moody’s noted that while the stock market has improved, home prices and family income remain depressed.
“We expect that higher education, states that rely on personal income tax, and local governments will continue to feel the pinch from these negative macroeconomic factors in 2012 and 2013,” Moody’s stated.
Since the housing market is expected to remain in the doldrums, sales tax revenue growth should remain moderate, according to associate analyst Faiza Mawjee, vice president Emily Raimes and analyst Vito Gallucio.
“When people buy houses they usually buy furniture, do renovations, buy new appliances, etc.,” Moody’s spokesman David Jacobson wrote, explaining the connection between housing prices and sales tax revenues. “These home-related goods make up a fairly large portion of sales tax revenues. Also, when the housing market was strong, people were taking equity out of their homes (second mortgages, etc.) and using it for things like buying cars, appliances, etc., and therefore paying more sales taxes.”
Declines in stock prices and income strongly affect states that depend heavily on personal income taxes, the analysts noted. Raising stock prices lead to capital gains taxes for the states.
“The current anti-tax political environment has led many states to turn to spending restraint as the dominant fiscal strategy,” they wrote. “We expect this trend to continue over the next one to two years.”
With regards to local governments, falling home prices reduce property tax revenues “unless governments raise tax rates enough to sustain revenues,” Moody’s analysts note. “High unemployment and stagnant incomes hamper the political ability to do so. In addition, the drop in overall net wealth makes it difficult for residents to maintain their previous consumption patterns, impacting economically sensitive revenues, such as sales taxes, food and beverage taxes, mortgage fees and permits.”
Higher education finance is also being negatively affected by macroeconomic trends, the analysts wrote. Inflation-adjusted pre-tax family income went down from 2001 to 2010. In addition, net worth declined substantially in the same period. Taken together these explain “the heightened sensitivity of families to affordability and quality in higher education.”
Families are increasingly sensitive to tuition levels, the analysts wrote. The portions of Moody’s rated colleges and universities with annual revenue growth falling below 2% were substantially higher from 2009 to 2011 than in the years 2005 to 2008. “Lower net tuition revenue growth has been a primary contributor to slow revenue growth at rated colleges and universities,” the report said.