Tracking the Recession: Credit Crunch Eases Slightly

By: - February 17, 2009 12:00 am

It’s still hard for states to borrow money, but Georgia shows it’s not impossible.

Georgia’s recent $614 million bond sale is a hopeful sign that even financially struggling states are now finding it easier to borrow, five months after the credit markets tightened in the aftermath of the Wall Street collapse.

The state sold the general obligation bonds Feb. 4 to pay for dozens of transportation and education projects. The interest rate of 1.61 percent on the five-year bonds was the lowest such rate in 20 years, delighting officials in a state with a budget shortfall that has swelled to $2.2 billion.

“We were very pleased with the result of the sale, especially the rates,” said Susan Hart Ridley, director of the Georgia Financing and Investment Division. “We were confident we could sell the full amount. The size was unique.”

It was the largest general obligation bond deal nationally since September in which new money was raised for the sale – compared to a refinancing of a previous bond issue, according to the Bond Buyer .

Analysts said Georgia’s sale showed how at least one type of borrowing is having success: high grade, AAA-rated municipal bonds sold by a state government. Delaware ( million) and Minnesota ( million) also recently completed similar sales.

But financial specialists stressed that it is still difficult for many states to obtain credit. California, for instance, has the lowest bond rating of any state and has been virtually closed off from the bond market.

Access to credit “is improving, but states still have a long way to go before we’re back to the levels of even a year ago,” said Sujit CanagaRetna, senior fiscal analyst for the Southern Legislative Conference of the Council of State Governments .

The potential to revive lending was a reason behind the urgency of the $789 billion economic stimulus legislation approved by Congress on Feb. 13. As money is poured into the economy, banks will be willing to lend again. States may not need to borrow as much money, however, if they use the federal funds to pay for capital improvements such as building and road projects that they otherwise would be financing through bond sales, said Bartley Hildreth , a professor of public policy at Wichita State University.

State and local governments sell municipal bonds to raise money for capital projects and other operations and pay them back over time with interest. After the credit markets tightened last fall, many state and local governments backed off from planned bond sales.

While borrowing still is difficult for states, high-grade general obligation bonds are appealing to small investors because they yield more interest than Treasury bonds. Nine in 10 of the buyers in the Georgia sale were state residents. “The bond offering gave Georgians the opportunity to invest in the state while strengthening their own portfolio,” said Gov. Sonny Perdue (R).

Perdue has proposed an additional $1.2 billion in bond projects, which he is framing as an economic stimulus package for the state that he says would create about 20,000 jobs. The Legislature is considering that proposal in its current session.

How is it that states with budget troubles are able to borrow hundreds of millions of dollars? “States have broad taxing powers, enormous revenue-raising potential” to repay bonds, Hildreth said.

In Georgia’s case, Fitch Ratings , one of the companies that assign states their credit ratings, said the state’s triple-A rating “is the result of its conservative debt management, consistent maintenance of sound finances and a diversified economy.”

States’ growing reliance on borrowing alarms some people. In some, such as Minnesota, debt service – the money states set aside to pay for the interest and principal on debts – is one of the fastest-growing parts of the state budget.

Georgia officials said they had no other option than borrowing because of the sums required to finance repairs, renovation and new construction throughout the state. The $614 million will finance such things as a $650,000 microscope at the Medical College of Goergia that provides a 3-D image of individual stem cells for use in a lab. It also will pay for a new $7.3 million horse barn and practice ring at the Georgia National Fairgrounds.

But the bond package also illustrates the inherent contradictions of government spending during a period of cutbacks. Included is an item to spend $1.7 million to replace the 25-year-old burn building at the Georgia Fire Academy in Forsyth, where the state trains firefighters.

David Wall, director of the academy, said construction is scheduled to be completed in 18 months. But the Legislature and Perdue are weighing cutting five people from Wall’s 23-person staff as part of the drastic reductions needed to balance the state budget. Firefighters would have a new training building, Wall said, but not enough people to train them.

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.