State and local governments spent less in the first quarter of 2010 on infrastructure projects and new equipment despite a windfall of federal aid, figures released by the Bureau of Economic Analysis on Friday showed.

The BEA clocked state and local “gross investment” at a seasonally adjusted annual rate of $338 billion in the first quarter.

That is the slowest pace of investment since the third quarter of 2007. It represents a decline of 3.7% from the $350.9 billion investment rate in the fourth quarter and a 6.4% decline from the peak of municipal infrastructure investments in mid-2009, just after the federal stimulus was enacted.

Gross investment measures spending on equipment, software, and structures used to provide goods and services to the public.

The figures show that while states and localities are spending less overall, the cutbacks arise from spending less on projects — not day-to-day provision of services.

The BEA’s gross domestic product figures showed state and local governments spent at an annual rate of $1.789 trillion in the first quarter, a slight decline from the fourth quarter.

State and local governments have cut spending in five of the last six quarters.

Day-to-day spending on providing goods and services to the public fell sharply in late 2008 and early 2009, but lately have been rising again.

State and local governments laid out $1.45 trillion on “consumption expenditures” in the first quarter, an increase of 0.9%.

The decline in spending stemmed entirely from investing less.

Gross investment in the first quarter commanded its smallest share of overall state and local government spending since the second quarter of 2005.

Since 1947, states and localities have devoted an average of 20% of their spending to infrastructure and equipment. In the first quarter, they devoted 15%.

The drop in investments comes even as the federal government is showering municipalities with stimulus money intended to spur infrastructure spending.

Federal grants to state and local governments have surged from an annual rate of $382.5 billion at the beginning of 2008 to an annual rate of $503 billion in the latest quarter, according to the BEA.

Richard Ciccarone, head of municipal research at McDonnell Investment Management, said he was skeptical from the beginning that the stimulus would actually stimulate new investing.

With revenues tumbling, it appears municipalities are essentially replacing lost locally generated revenue with federal aid, he said.

“These federal dollars that were meant for capital outlays were used as a substitute for pay-as-you-go programs,” Ciccarone said.

He acknowledged that investments probably would have fallen even more without the stimulus.

While the Census Bureau does not release comprehensive municipal-tax data until later this quarter, the GDP figures offer encouraging signs for government revenue.

Among the tax categories that have been reported — everything except corporate taxes — tax receipts increased 0.4% in the first quarter.

Sales and property taxes increased, while income taxes decreased.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.