State debt issuance has remained below average levels even though governments have large infrastructure needs and less ability to pay for projects through pay-as-you-go financing, Standard & Poor's said in a report.

"Despite an improved revenue environment, the significant demands on governments to reinstate services, reduce taxes and fund rising pension and health care costs leave limited appetite for additional debt," the rating agency said in the report.

Municipal bond issuance in calendar year 2012 for all levels of government was 28% higher than it was in 2011, but slightly below the 10-year average, according to the report. Issuance was lower than average in 2011 after surging in 2010, with states taking advantage of the American Recovery and Reinvestment Act, which authorized new bond programs and ease some bond restrictions in 2009 and 2010.

State-level debt issuance was 17% lower in the first half of this year than in the same period last year. Nearly 62% of last year's issuance was for refundings and new money issuance totaled only $141.2 billion, the lowest since at least 2004.

"We feel that states are not laboring under debt burdens," said Henry Henderson, the lead author of the report.

Standard & Poor's questioned whether state debt levels are too low, given the backlog in infrastructure projects. The report cited an assessment released this year by the American Society of Civil Engineers that gave the nation's infrastructure a D+ due to huge capital needs. To eliminate the backlog of bridge repairs and replacements by 2028, federal, state and local spending would have to increase by $8 billion annually, the report found.

The authors of the Standard & Poor's report predict that during the 2014 fiscal year, state debt issuance will likely continue to be constrained. Henderson said it will continue to be a challenge for states to find a balance between funding infrastructure projects and taking care of other priorities.

Revenue and spending pressures, potential changes in the tax exemption for municipal bonds and states' use of public-private partnerships to finance infrastructure projects may all influence debt issuance, the report said.
Total state tax-supported debt increased 2.8% from the 2011 to 2012 fiscal years. The fiscal 2012 debt growth rate was slightly higher than in the previous fiscal year but significantly lower than the growth rates in 2009 and 2010, according to the report.

The rating agency report found state debt as moderate when compared to the states' gross domestic product, expenditures and personal income. In fiscal 2012, the median ratio of tax-supported debt to states' GDP was 2.3%. The median ratios of debt to personal income was 2.6% and of debt burden to general government outlays was 3.7%.

Hawaii had the highest debt ratio in fiscal 2012. The report noted that the state issues debt for public schools and other functions that are funded at the local level in many other states.

Nebraska had the lowest ratios of debt to state GDP, personal income and government expenditures, in part because it cannot issue general obligation bonds in excess of $100,000 and has no outstanding debt from revenue bonds for highway, water conservation and management structures, according to the report.

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