Capital spending may increase due to rising needs: Analyst

State and local governments' capital spending is likely to increase in coming years, supported by expanded borrowing, a Moody's Ratings analyst said Thursday.

This sort of capital spending was flat during the COVID-19 period of 2020 to 2022 but has since increased, Moody's Ratings Vice President of Public Finance Dan Seymour said. While some analysts call the increase a blip that will soon die, others see the start of a prolonged increase. Seymour is in the latter camp.

Big issuers are telling Moody's they are planning to increase their capital spending, Seymour said Thursday during The Bond Buyer's National Outlook Conference's seminar, "Planning for Resilient Infrastructure in a Higher-Cost Environment."

Statistics show the need is there, he said. The average age of state and local fixed assets steadily increased to 26.2 years in 2024 from 21.3 years in 2004, according to the Bureau of Economic Analysis.

The American Society of Civil Engineers gave U.S. infrastructure a grade of C in May.

The capital asset depreciation ratio for U.S. cities increased to 50% by 2024 from about 46% in 2019, according to Moody's.

Yet spending on capital needs has remained at historically moderate levels compared either with gross domestic product or accumulated depreciation, Seymour said.

State and local governments have the economic capacity to borrow to improve their infrastructure, Seymour said. The ratio of state and local government debt to GDP has gone down substantially since 2005, according to the Federal Reserve.

Because governments need the capital work and have capacity for more debt, increasing their borrowing would not hurt their credit, Seymour said.

Two other panelists talked about their experiences borrowing to improve infrastructure in the face of increased natural disaster risks from climate change.

Battery Park City Authority Chief Financial Officer Pamela Frederick said she was working on several projects to protect the downtown Manhattan Battery Park neighborhood from storm surge and sea level rise. When they are completed she expects the neighborhood will be removed from Army Corps of Engineers flood plain maps, and residents will see lower insurance costs.

The Battery Park projects are part of seven resiliency projects on coastal lower Manhattan, all coordinated by the Lower Manhattan Coastal Resiliency Commission.

William Fazioli, executive director of the Rhode Island Infrastructure Bank, said for every dollar the federal and state government has provided to its Clean Water Revolving Fund, the fund has been able to loan out nearly $4 dollars.

Fazioli said his organization has been talking about getting insurance companies to share the cost of improving infrastructure. Spending money now on resilience will be much cheaper than spending later for repairs, he said.

For years, analysts assumed the U.S. Federal Emergency Management Agency was in the background, ready to help out if there were natural disasters, said Kristin Stephens, managing director and head of the Northeast Region for Public Finance at Oppenheimer & Co. This is now shifting, she said.