States issued 10.3% more debt in 2009 — $460 billion — than the $417 billion issued in 2008, and debt likely will rise again this year, Moody’s Investors Service said in a report.
In 2008, debt issuance rose 4.7%. Moody’s said several factors contributed to the rise: pent-up demand after states cut back on issuance in the fall of 2008; the introduction of Build America Bonds and qualified school construction bonds through provisions of the American Recovery and Reinvestment Act, which created unprecedented incentives for municipal issuers; the need for budget relief as a result of the national recession; and a low interest rate environment.
“State debt issuance in 2010 (which will be the basis of our 2011 debt medians analysis) will likely increase as states continue to generate economic activity while taking advantage of low interest rates and the lower overall net cost of funds provided by the issuance of BABs and QSCBs,” according to the Moody’s report.
“States will continue to look to long-term financing to alleviate budget pressure, particularly with the exhaustion of ARRA funding in fiscal 2011,” it said.
If state governments decide to back debt for lower levels of government in lieu of bond insurance, it “may or may not have a direct impact on a state’s debt burden, depending on how the support is structured,” Moody’s said.