State governments are issuing debt at a slower rate than at any time in the past two decades and stockpiling cash surpluses in rainy-day funds, according to a new report, reflecting a wariness to new debt in the wake of a recession that forced states to borrow billions.
The combined tax-supported debt of all 50 states grew by just $2 billion in 2013, to $518 billion total, an increase of just 0.4 percent, while per capita debt issued by states declined 2 percent from the previous year.
That’s far below the 6.5 percent average growth of the last decade, and a fraction of recession-era peaks in 2004 and 2010.
About half the states saw their amount of net tax-supported debt decline from the previous year in 2013. Budget surpluses in most states allowed them to pay off debt without issuing new bonds, the report from Moody’s Investors Service found. Even states with some of the biggest debts in the nation, like California, cut their obligations by significant margins.
The slowdown in debt issuance comes as a new conservative attitude toward debt takes hold. States that borrowed heavily during the recession want to put their fiscal house in order before the next economic downturn hits.
At the same time, states are saving more money in rainy day funds depleted by the recession. The Pew Charitable Trust’s program on state fiscal health found rainy day fund balances growing to an average of $702 million, below the fiscal 2007 peak of $984 million but well above recession-era levels of 2008, 2009 and 2010.
The amount of debt states carry as a percentage of personal income fell for the first time in five years, Moody’s found, from 2.8 percent in 2012 to 2.6 percent last year. Sixteen states carry debts of less than 2 percent of personal income.
Hawaii, Connecticut and Massachusetts lag behind their peers. Hawaii carries $6.6 billion in tax-supported debt, equal to about 10.6 percent of the state’s personal income. Connecticut and Massachusetts carry debt worth more than 9 percent of personal income.
California remains the nation’s largest debtor, at $94 billion. Gov. Jerry Brown (D) has made paying down that debt a central priority in his 2014 budget proposal, which legislators are debating in Sacramento. New York carries nearly $63 billion in total debbt, while New Jersey, Massachusetts and Illinois all carry more than $33 billion in debt.
Puerto Rico remains in startlingly bad shape, carrying more than $54 billion in tax-supported debt. Moody’s rates Puerto Rico’s debt at Ba2, a level far below any of the 50 states.
The lower levels of debt means the costs of maintaining those debts are rising. State debt service costs rose by 8 percent in 2013, up from 3 percent the year before. The Federal Reserve has kept interest rates close to zero for years, which meant states were able to refinance those debts at lower rates; that window appears to have closed.
Moody’s said it expects new debt issuance to remain low this year. Tax revenues have grown every quarter in the past four years, but that growth has slowed, according to data from the Rockefeller Institute, which tracks state fiscal health.