Step 6: Category 4: External, Economic/Technical Causes of Financial Distress

This category includes:

  • Economic Stagnation
  • Shifting Demographics 


Economic Stagnation

Not all localities are treated the same by economic recessions. Some recover faster than others. Local governments must think about their prospects for economic recovery in the context of local conditions.  

For example, fiscal distress occurs when the traditional basis of a local economy declines or goes away, or changes in such a way that it provides less support to the community than it once did.  

Distress also takes place when the traditional economy changes in such a way that it provides less support to the community. This happens when local production stays strong but, because of improved technology and productivity, it no longer provides the employment it once did.


  • Industries vulnerable to stagnation. Are the industries that are large employers in the community particularly vulnerable to the recession? For example, tourism has been traditionally vulnerable to recessions and has been particularly hard hit by the COVID 19 pandemic.
  • Lack of diversity in economic base. Are the government’s revenues dependent on a narrow range of economic activities?
  • Revenues vulnerable to recession. Do the government’s important revenues sources perform especially badly under adverse economic circumstances? For example, a sales tax base that is highly dependent on construction spending will probably not do well.
  • Other signs of stagnation. Are any of the following evident in your community: declining population; the best education and most ambitious moving out; the poor and under-skilled moving in; commercial and residential property occupancy and prices fall; high paying jobs disappearing?


Shifting Demographics

Contributed by Douglas C. Robinson and Charles L. Sizemore 

Independent of the larger economy, changes in demographics can cause fiscal distress by increasing the relative size of population segments that consume more in public services than they contribute in taxes. 

Shifting demographics can also lead to distress if the demands of new constituents are not consistent with existing capacities. For example, areas with slow-growing and aging populations may find themselves with excess capacity in their schools.

Perhaps most importantly, demographics play an important role in the level and composition of retail spending. Men and women in their late 40s tend to make the biggest overall impact on consumer spending. An area with a larger percentage of its population approaching that age should benefit from strong spending, a healthier job market, and greater sales tax revenue.


  • Aging population. Is your population reaching a tipping point in which a significant number will be entering retirement and reducing spending? 
  • Coming youth cohort. Today’s newborn is a kindergartener five years from now, making an increase in birthrates a precursor of increasing costs. Do local birthrates to foreshadow a coming youth cohort?
  • Changing residential mix. What age and income groups are moving into the area? What kinds are leaving? What are the rough numerical estimates of each? Talk to local real estate agents as they are likely to see trends in these areas.