Last year was strong for states raising money by issuing bonds, partly because of federal subsidy programs that expired at year's end, according to a new report by Moody's Investors Service.
That means bond issuance by states likely will decline significantly this year, the report issued Wednesday says.
The report cited an 8.5 percent increase in state debt issuance in 2010, to $499 billion from $460 billion in 2009. That followed a record 10.3 percent increase in 2009. States' debt sales accelerated last year ahead of the Dec. 31 expiration of the Build America Bonds program, funded by the Obama administration's economic stimulus bill, and the Qualified School Construction Bond program.
State and local governments used the stimulus bonds, which pay taxable interest to investors, instead of the tax-free bonds they normally issue to fund projects like schools, hospitals and transportation. Investors demanded higher interest rates on the stimulus bonds because of the taxes, but the U.S. Treasury Department covered 35 percent of the local governments' interest payments. That lowered their net borrowing costs to below what they would pay on tax-exempt bonds.
Moody's said in the report that state debt issuance this year is expected to decline because many states are avoiding deficit financing or not issuing bonds to restructure their debts, moving instead to raise taxes and fees and cut spending as a way to balance their budgets.
The recession that began in late 2007 set in motion a budget crisis for states and local governments. Many of them are cutting spending on services and laying off public employees to close gaping budget holes.
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