Growth in outstanding state debt slowed for the third consecutive year to 1.3% in 2012 and is

the slowest increase in debt in over 20 years, primarily due to concerns about the economy and federal fiscal policy, Moody’s Investors Service said in a report issued Thursday.

Legal debt limitations, state-level austerity spending and anti-debt sentiment have curbed states’ appetites for new money borrowing, the 15-page report said. Last year’s increase in debt is well below the 7% average annual growth over the past 10 years. It peaked at 10% in 2009.

“Debt appetite has also declined in some previously high-growth states that saw population growth stall during the recession,” the report said.

The outstanding net tax-supported debt (NTSD) in 2012 for all 50 states increased to just $516 billion from $510 billion in 2011 and is expected to remain low as states wait to understand the full economic impact of sequestration, Moody’s said. In March, $85 billion of across-the-board budget cuts were implemented.

“Uncertainty regarding U.S. federal fiscal policy and the impact on the national economy are contributing to a generally debt averse attitude,” Moody’s said. “States will continue to defer debt plans until the impact of federal budget balancing efforts are better understood. Despite recent revenue growth, states are experiencing a protracted recovery from several consecutive years of large budget gaps and austerity spending.”

The median NTSD per capita decreased by 3% to $1,074, despite slow population growth, and as a percentage of personal income it was flat at 2.8%. The NTSD as a percentage of gross state product was almost flat, increasing 2.5% from 2.4%, Moody’s said.

Since the recession, states have typically moved toward a more conservative approach to accumulating more debt. Specifically, budget gaps and expanding fixed cost obligations such as pension systems, have forced many states to raise revenues or severely cut services.

The largest contributors to debt growth were California, Massachusetts, Virginia and Washington, with each adding between $1.2 billion and $1.7 billion. Virginia saw the highest 14% increase in NTSD growth, marking the commonwealth’s fourth consecutive year of double-digit debt growth. The majority of new debt went to financing transportation and higher education capital projects.

The rating agency expects states 2013 new money borrowing to be constrained by debt policies and greater fiscal conservatism. State debt service costs increased by 3% in 2012, significantly lower than the 8.6% growth from 2011. The declining growth in debt service costs is directly related to the lower debt issuance over the past few years and the near zero interest rates. Low interest rates have not only lowered ongoing debt service costs but also triggered a higher level of refunding in states, the report said.

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