Lackluster infrastructure investment leads to slow debt growth

Register now

WASHINGTON — Slow growth in state revenues, pension costs, and other factors resulted in a fifth consecutive year of sluggish growth in net tax-supported debt, a trend that analysts said could go on for some time.

Total net tax-supported debt grew 1.2% for 2018, Moody’s Investors Service revealed in a report out this week, marking a half-decade in which the number has grown by less than 2% annually. The NTSD numbers are based on 2017 issuance and debt service data. Analysts weren't surprised by the slow growth, and said that subdued infrastructure spending and other policy decisions would also keep that growth rate slow for the foreseeable future.

Total NTSD grew to $522 billion from $516 billion last year, Moody’s said, increasing in 24 states. Illinois was a key driver, having largest increase in debt at $5.2 billion. That 16.3% year-over-year increase was largely due to issuing long-term debt to finance payment of its bill backlog, Moody’s said. Debt ratios declined for the third consecutive year, as median NTSD per capita fell by 4.3% to $987. Median NTSD as a percentage of GDP fell to 2.1%, its lowest level since 2006.

California leads the way with $86.5 billion in NTSD, followed by New York at $61.2 billion and Massachusetts at $41.7 billion. Wyoming carries the smallest NTSD burden at $21.8 million.

General obligation debt represented the largest share of NTSD, at just over 52%. Appropriation and lease debt is the second largest share of state debt outstanding at 19.7%, according to Moody’s.

Lackluster infrastructure spending is a key factor that has been contributing and will continue to contribute to slow debt growth, analysts said.

“Debt is likely to maintain slow growth in the next 12 to 24 months, as infrastructure spending will remain subdued,” Moody’s said. “The federal infrastructure plan is unlikely to generate significant new expenditures.”

George Friedlander, a managing partner at Court Street Group Research, said that a large list of factors, particularly pensions, resulted in this slow growth in NTSD.

“Pensions,” Friedlander said. “This is such a big concern I will state it twice. It is and will limit tax-supported debt capacity all over the country.”

Friedlander said minimal long-term infrastructure investment and political factors contributed to the sluggish debt increase, and added that some states are still catching up budget-wise from the great recession.

“Let’s face it, at a very large number of states, budgets have been kept incredibly tight through limits on taxes, and this doesn’t leave much room for supporting debt,” he said.

“With tight budgets at the federal level and little focus on supporting state/local activities, state and local governments are being forced to choose between capital spending and maintenance of services, and as the school/teacher battles suggest, it isn’t an easy choice,” Friedlander said. “Yes, we desperately need to pay teachers more, in my opinion, but where do we then get funding for infrastructure?”

The Moody’s report was written by Joshua Grundleger, Emily Raimes, Nicholas Samuels and Timothy Blake.

For reprint and licensing requests for this article, click here.
Infrastructure State taxes Public pensions Primary bond market Moody's Washington DC