Moody's: State Borrowing Slowed in 2011, Will Remain Subdued This Year

WASHINGTON — States slowed their borrowing dramatically, with a growth of only 2.5% in 2011, despite low interest rates, according to a new Moody’s Investors Service report.

This comes after much higher growth of 10% and 8% in outstanding net tax-supported debt in 2009 and 2010, respectively. The combined 2011 net tax-supported debt for all 50 states increased to $510 billion from $497 billion in 2010, Moody’s said. Net tax-supported debt is defined as debt secured by state taxes or other operating resources that could otherwise be used for state operations.

Moody’s expects borrowing growth will remain subdued in 2012 due to “anti-debt political sentiment and continued revenue and debt limit constraints.” In addition, some high-debt states will move toward more of a pay-as-you-go capital funding system, which is likely to keep borrowing growth subdued.

The slowdown in growth in 2011 partially reflects states’ reduced capital funding needs after a borrowing surge in late 2010 when many states took advantage of low borrowing costs through the Build America Bonds program.

The BAB program were created as part of the Recovery and Reinvestment Act of 2009 and expired in 2010. Issuers sold more than $181 billion of the bonds and received subsidy payments from the federal government equal to 35% of their interest costs.

“New money issuance was constrained both by legal debt limitations and anti-debt sentiment that arose during the recession” as well as the U.S. debt ceiling debate, said Baye Larsen, Moody’s vice president-senior analyst and author of the report.

States also refunded existing debt to achieve interest rate savings due to the low rates.

The savings achieved through the refunding transactions in 2011 were used to balance budget gaps, the report said.

Illinois issued deficit bonds for the second consecutive year to relieve budget pressures and used $3.7 billion of general obligation bonds to help fund it’s annual pension contributions.

California, Illinois and Massachusetts were the largest contributors of borrowing growth in 2011, adding $1.7 billion, $2.2 billion and $1.6 billion, respectively.

New Jersey, New York and Virginia increased overall state borrowing by about $1 billion each.

Ten states, including Nevada, Rhode Island and Texas saw borrowing declines.

Even though borrowing was lower in 2011, state debt service costs increased by 8.6% due to the continued phased-in debt service on bonds issued in the previous two years, according to the report.

For reprint and licensing requests for this article, click here.
Buy side Washington
MORE FROM BOND BUYER