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The Boston Globe

Business

Rising rates pinch state and local governments

Major projects costing more

Repaving roads, repairing bridges, and building new schools is getting more expensive as interest rates increase from historic lows and the price of borrowing money climbs for state and local governments.

Rates for municipal bonds, which state and local governments sell to investors to finance major projects, have climbed more than a full percentage point since early May, according to Municipal Market Data, which tracks these bonds.

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In Massachusetts, where the state plans to borrow $3 billion, that increase would add $300 million in interest costs over the 30-year life of the bonds, according to the state treasurer’s office.

And many analysts expect rates will only climb higher.

To cover those additional costs, other government-funded projects may have to be cut or taxes raised, officials say.

The higher interest rates are forcing municipalities to cut back on plans to refinance debt — as well as to build in additional costs for big projects.

Waltham, for example, had to put off some of its refinancing plans in recent weeks because of higher rates.

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In Newton, which is launching several capital projects, including new schools, city officials had been expecting interest rates to rise and factored higher borrowing costs into the estimated price of the projects, said Maureen Lemieux, the city’s chief financial officer.

When the city’s voters approved an $11.4 million annual tax increase last spring to help pay for the projects’ principal and debt, interest rate increases were built in, Lemieux said.

The city plans to begin borrowing for those projects next April. As long as the rates don’t skyrocket beyond projections, the city won’t have to ask taxpayers for additional money, she said.

“We are only beginning to see what every one of us has known is coming,” Lemieux said

Lemieux said she expects the interest rate to reach about 4 percent by 2015.

The city has been borrowing money at rates under 2.5 percent in recent years.

For Newton, a percentage point increase in interest rates on a $10 million bond could add up to about $100,000 more a year in costs, she said.

Like homeowners, state and municipal agencies — and by extension, taxpayers — have benefited from rock-bottom interest rates in recent years.

The state, for example, accelerated major bridge repairs in 2008 to take advantage of record-low borrowing costs.

And the College Building Authority borrowed at such favorable rates to build a dormitory at the Massachusetts College of Art and Design that the school was able to shave $500 off annual room fees for students.

“We had a fabulous run,” said Edward Adelman, the state authority’s executive director.

The rising interest costs for state and local governments are part of a broader increase in long-term rates as the economy improves.

In recent years, when the economy was uncertain and stock markets volatile, many investors crowded into the municipal bond market, lured by bonds’ relative safety, stable returns, and tax-exempt status.

But as investors have gained confidence in the economic recovery, many are moving money into riskier assets, such as stocks, that yield higher returns.

As a result, state and local governments have had to offer higher rates to attract investors.

In addition, rates have jumped in anticipation that the strengthening recovery will lead the Federal Reserve to pull back on the bond-buying program it undertook to stimulate the economy by pushing long-term rates lower.

Interest paid on the 10-year Treasury, to which many long-term loans are tied, has risen nearly a percentage point since the beginning of May.

The rising rates have thrown a wrench into refinancing plans for state and local governments across the country.

Georgia, for example, indefinitely postponed the refinancing of $157.3 million in debt last month.

The City of Philadelphia moved its $400 million bond sale from late June to a yet-to-be-determined date.

Massachusetts could refinance only a portion of its debt in May to avoid higher interest rates on all of it. As a result, the state did not save as much as it had originally anticipated with the refinancing.

“It’s been a rough month for bonds,” said Colin MacNaught, the state’s assistant treasurer for debt management. “Every additional cost of borrowing crowds out other costs in the state budget.”

Despite the rising costs, state and local officials say, borrowing rates remain low by historical standards.

The 20-year average rate for long-term municipal bonds is 4.83 percent, three-quarters of a point higher than current rates, MacNaught said.

And governments like the Commonwealth of Massachusetts, which has top credit ratings and a clear ability to pay back its investors, will be able to lock in the lowest rates, MacNaught noted.

“We’re no longer at the lows of the lows of the market,” he said — but the interest rates are “still very attractive.”

Deirdre Fernandes
can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.

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