WASHINGTON - State debt issuance has been below average and is likely to remain restrained in the near term despite the fact that infrastructure needs are large, Standard and Poor's said in a report released Monday.
"In our view, state officials are likely to find it difficult to balance infrastructure funding against other spending priorities in an overall environment of fiscal restraint," the rating agency said in the report. "However, U.S. states may increasingly turn to [public-private partnerships] to fund large infrastructure projects."
State tax-supported debt increased by 0.5% in fiscal 2013, significantly less than the 2.8% growth from the previous fiscal year, the rating agency said. Most states' fiscal years run from July to June.
State debt burdens were generally moderate, S&P said. The median tax-supported debt service as a percent of general government spending was 4.1% in fiscal 2013.
Hawaii, which issues debt for K-12 education and other typically local purposes, had the highest debt burden as a percent of spending at 12.5% in fiscal 2013. It was followed by California at 9.8% and Connecticut at 9.7%. The three states with the lowest percentage of debt service to government spending were Nebraska and Wyoming at 0.1% and North Dakota at 0.8%, the rating agency said.
Municipal bond issuance in calendar year 2013 for all levels of U.S. government was 12% lower than it was in the previous year and also 12% less than the 10-year average, according to Securities Industry and Financial Markets Association data cited in the report.
Meanwhile, U.S. government infrastructure spending has declined to less than 2% of GDP, even though the American Society of Civil Engineers gave U.S. infrastructure a grade of D+ in 2013. S&P believes that the governments in the United States and other developed nations have reduced infrastructure spending largely because of budgetary concerns.
States are responding to their infrastructure needs in several ways. Some states have recently announced or undertaken increased debt issuance plans or infrastructure spending programs. A few states, such as Arkansas and Virginia, increased certain taxes in recent years to generate additional revenue that can be used for infrastructure. Other states, including Wisconsin and California, have authorized capital spending increases that will be funded with existing revenues, S&P said.
Additionally, P3s are becoming a more popular financing tool. S&P expects an increase in U.S. P3s over the next year, but it also believes that the financing option is relatively underutilized.
The rating agency thinks that in fiscal 2015, states will likely continue to limit debt issuance.
"While we expect the U.S. economy and state revenues will continue to improve -- strengthening states' abilities to potentially support additional debt -- we believe that the revenue picture may remain uncertain and states will also face increased pressure for restoring services and providing tax cuts, in addition to meeting increased pension and Medicaid costs," S&P said. "These pressures, in our view, along the continued political environment emphasizing fiscal restraint, will likely crowd potential debt service increases out of state budgets, at least for in the near term."
Also, federal proposals could impact debt issuance if they are enacted. President Obama's fiscal 2015 budget proposes capping the value of the tax exemption for municipal bonds at 28%, and draft legislation released earlier this year by House Ways and Means Committee Chairman Dave Camp, R-Mich., similarly would cap the value of the exemption at 25%. These types of proposals could lead to higher borrowing costs for issuers, S&P said.
The rating agency also noted that there have also been proposals to revive Build America Bonds, though at lower subsidy rates than the 35% established under the original program. And bills have been introduced in Congress to create a national infrastructure bank that could provide loans and loan guarantees.
