U.S. Local-Government Debt Declines for First Time Since 1996, Fed Reports

U.S. state and local governments reduced their debts last year for the first time since 1996 as political aversion to borrowing cut supply of municipal bonds and fueled a market rally.

Such debt dropped by almost 2 percent last year, the Federal Reserve said today in a quarterly report. The decline helped shrink the market for U.S. municipal securities to $3.74 trillion at the end of December from $3.8 trillion a year earlier, the figures show.

States, cities and counties borrowed less as they struggled with budget deficits left from the recession that ended in 2009 and faced political reluctance to racking up debt. Sales of long-term, fixed-rate municipal bonds totaled $258 billion in 2011, the least since at least 2003, when Bloomberg data begin.

“It has created a scarcity,” said Matt Fabian, an analyst with Municipal Market Advisors, based in Concord, Massachusetts. “It’s helped push up prices.”

The municipal market includes bonds sold by state and local governments as well as hospitals and other non-profit borrowers that are allowed to issue tax-exempt securities. The debt of state and local governments dropped to $2.99 trillion in 2011 from $3.05 trillion in 2010, the Fed said. Securities from non- profit issuers totaled $254 billion, while a category including industrial revenue bonds came to $497 billion.

2011 Return

Municipal bonds returned 11.2 percent last year, the best performance since 2009, according to Bank of America Merrill Lynch indexes.

The drop in issuance was spurred in part by political pressure, Moody’s Investors Service said this month, as states including California, New Jersey and Florida moved to limit borrowing. Republicans, who typically argue for less government spending, won a majority of U.S. governorships in the November 2010 elections, which also gave the party control of the U.S. House of Representatives.

U.S. state and local spending cuts have slowed the economy’s recovery. Such outlays dropped at a 2.5 percent annual pace during the fourth quarter, according to the U.S. Commerce Department.

The slowdown shows the lack of investment being funneled into public works, said Fabian, who said he expects the trend to continue this year. While bond sales in January and February increased from the same period a year earlier, that was a result of refinancing debt, he said.

“You have an aversion to higher taxes and an aversion to borrowing,” Fabian said. “Politically, debt, borrowing and Wall Street are dirty words.”

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net