No state is needier than West Virginia when it comes to fixing crumbling highways, airports and water works, with annual repair needs of $1,035 per resident that’s three times the national average.
Yet even with borrowing costs hovering close to four-decade lows, lawmakers rejected a January proposal to sell $1 billion of bonds to repair roads that run through the Appalachian Mountains. Budget cuts were a more immediate concern, they said.
Across the U.S., localities are refraining from raising new funds in the $3.7 trillion municipal-bond market after the worst financial crisis since the Great Depression left them with unprecedented deficits. Rather than take advantage of Federal Reserve policy that’s held benchmark interest rates at historic lows since December 2008, they’re repaying obligations by the most on record.
“When you’re trying to be frugal, it’s probably not the time to eat caviar,” said Margaret Staggers, head of West Virginia’s House transportation committee, who said she was unable to persuade Democratic colleagues to support the bond plan.
The legacy of the 18-month recession that ended in June 2009 still looms large for America’s states and cities. While revenue has revived, governments are under pressure to increase funding for education and other services after years of cuts. They’re balancing those needs against required payments toward entitlements such as pensions, having set aside $1.4 trillion less than they’ve promised to retirees, according to Fed data.
“There’s a psychological hangover,” said Uri Monson, chief financial officer of Montgomery County, Pennsylvania, outside Philadelphia. “We’re not going to go out and borrow unless we absolutely have to.”
Issuance this year has tumbled to $123 billion nationwide through June 13, down 20 percent from the 2013 pace, according to data compiled by Bloomberg. It’s also 30 percent below levels seen in 2010, the final year of the federally subsidized Build America Bonds program, which was designed to spur infrastructure investment.
Since 2010, states and localities have lowered their bond load by $111 billion, the most since the Fed began keeping records in 1945. They’ve paid down the liabilities even as yields on 20-year general obligations have averaged 4.25 percent in the five years since the recession, the lowest since 1969, according to Bond Buyer data.
In contrast, Apple Inc. and Verizon Communications Inc. have led investment-grade companies selling $648 billion of dollar-denominated debt this year, a record pace, Bloomberg data show. The 3.05 percent yield on the Bank of America Merrill Lynch U.S. Corporate Index is within 0.4 percentage point of an all-time low reached in May 2013.
States’ and localities’ spending on construction has fallen every year since its 2009 peak, declining $39 billion, or 13 percent, over the period, U.S. Commerce Department figures show. Their investments in roads, schools and office buildings account for the smallest share of the economy since at least 1947.
“Infrastructure is one of the only ways that states and local governments directly affect commerce in the United States -- the trucks have to use the roads and bridges, the boats have to use the ports,” said Daniel White, an economist with Moody’s Analytics in West Chester, Pennsylvania.
“If we continue to let them deteriorate, it could have disastrous consequences,” he said.
State and local spending on roads, railways and other infrastructure crested as a share of the economy during the post-war population boom. In the first quarter, the expenditures accounted for 1.4 percent of the economy, less than a third of the 1967 level, according to data compiled by Moody’s Analytics.
America’s governments would need to spend about $3.6 trillion through 2020 to put everything from roads and water to sewers and electricity networks into adequate shape, according to the American Society of Civil Engineers, based in Reston, Virginia. That’s about $1.6 trillion more than governments are expected to dispense.
“We are not investing adequately in maintaining our infrastructure,” said Joshua Schank, president of the Eno Center for Transportation in Washington. “We are missing an opportunity to borrow at lower rates in order to do it.”
Governments aren’t avoiding the market altogether. Municipalities routinely borrow billions of dollars each week for public works, and as tax bases rebuild officials may be more willing to take on debt.
In northern Virginia, the Metropolitan Washington Airports Authority is building a $5.7 billion, 23-mile (37-kilometer) extension to connect the capital’s subways to Dulles International Airport. In Texas, home to seven of the 15-fastest growing U.S. cities, debt sales have risen 14 percent this year to $15.6 billion, Bloomberg data show.
Citigroup Inc. predicts that infrastructure needs will become so glaring that municipal sales will swell to $330 billion in 2015 from a projected $280 billion this year.
Investors have lauded the shift toward paying down debt, viewing it as a move toward getting a handle on financial pressures that led banking analyst Meredith Whitney in 2010 to forecast widespread defaults that didn’t materialize.
As issuance has dwindled, munis have delivered some of the best returns in fixed income, earning 6.1 percent this year through June 19, compared with 2.6 percent for Treasuries and 5.1 percent for investment-grade corporates, Bank of America data show.
“There’s actually some sanity at senior levels of government,” said Thomas Metzold, co-director of municipal bond investments for Eaton Vance Management in Boston, which oversees $24 billion in state and local debt. “People are saying just because times are good again, we still have to think about what’s going to happen five years from now.”
In West Virginia, known for coal mines and pockets of poverty, officials have lightened their bond load as budget cuts loom. From June 2011 through June 2013, the state reduced its debt by $254 million, to about $1.74 billion, according to the treasurer’s office.
At the same time, the state needs cash for infrastructure.
In 2012, Governor Earl Ray Tomblin, a Democrat, appointed a commission that’s still working on financing for roads. All told, the state needs an extra $1.9 billion a year to fix and maintain roads, drinking-water systems and airports, according to data compiled by Bloomberg from federal agencies and a March report by Smart Growth America and Taxpayers for Common Sense. That per-capita bill of $1,035 compares with $298 nationally.
Michele Bennett, a resident of Danese, 70 miles southeast of the state capital Charleston, says she’s paying the price.
In 2011, state officials closed the Thomas Buford Pugh Memorial Bridge to large trucks after discovering broken supports. Bennett said she’s stopped using it too, opting for a 40-mile detour to Wal-Mart or her doctor.
“That bridge has just continued to deteriorate,” she said. “I don’t cross it at all.”
In January, Staggers, her delegate in the state legislature, proposed asking voters to pass the $1 billion bond sale in November, which would be the first for roads to go before voters since 1996.
Staggers said the idea stalled because lawmakers in the Democratic-controlled legislature were focused on the need to cut spending to balance the budget.
“When we’re discussing that we’re in a severe financial crunch and we’re cutting so much money from each agency, it probably isn’t prudent to ask the voters approve more debt,” Staggers said.
The aversion to higher spending is evident nationwide. Even as economic gains are filling state coffers, governors have proposed holding spending increases to the least since 2010, according to the National Association of State Budget Officers in Washington.
Outside Philadelphia, Monson said his perspective has evolved after he worked from 2008 to 2012 as executive director of the Pennsylvania Intergovernmental Cooperation Authority. The group monitored Philadelphia’s finances as officials considered shutting libraries and pools to cut costs.
When Montgomery County issued bonds last year for bridges, roads and buildings, it borrowed $55 million. It could have sold almost twice as much, given its list of projects.
“When you have to make very sudden, very significant decisions which can have real impacts on people and are unpopular, it makes you want to have as much flexibility as possible,” he said. “Once you issue debt, that flexibility is gone.”
The austerity push has been bipartisan. In 2010, New Jersey Governor Chris Christie, a Republican, canceled the construction of a new rail tunnel into Manhattan, estimated to cost $12.4 billion. In California, Democratic Governor Jerry Brown has made trimming what he called a “wall of debt” a priority. Florida Governor Rick Scott, a Republican, is highlighting how his administration paid down debt by $3.6 billion.
In West Virginia, Brent Boggs, head of the house finance committee, said he’s waiting on the governor’s recommendations for roads, and wouldn’t rule out borrowing more.
“If you talk to most folks here in the state and in the legislature, there’s certainly a prevailing feeling that no one wants to borrow when you don’t have to,” he said. “The time will come that we will need to look at that -- and I think it’s in the not-too-distant future.”