US cities, states back off bonds amid growing budget concerns

JEFFERSON CITY, Missouri (AP) – Uncertainty about where their next dollar is coming from has chilled the municipal bond market, meaning cities and states will be breaking ground on fewer public works projects, canceling or delaying projects worth tens of billions of dollars and providing yet another blow to economic-recovery efforts.

Through mid-August, the total value of municipal bonds issued nationwide was down about 40 percent over the same period a year ago, the largest decline in about two decades. This means fewer bonds issued for water and sewer systems, education, transportation, health care, electric utilities and general government purposes.

That leaves Kansas City, for example, without the money to prevent water from bubbling to the surface of streets and lawns because of aging water pipes that are bursting under pressure. The city can only afford to fix a fraction of the plumbing on its repair list, a problem that may only marginally improve if it is able to issue more bonds later this year.

Market analysts attribute the municipal bond drop-off to a variety of factors, including a natural slowdown after last year’s rush to issue bonds before a federal stimulus act program expired. But another reason, say local government officials, is the fact that their budgets are stretched so thin, they’re not willing – or able – to siphon scarce tax dollars toward debt repayment.

“There’s no question that this year some of the decline is simply budget problems that people have,” said John White, chief executive officer of the Public Financial Management Group, a Philadelphia-based investment advisory firm. “There is an atmosphere now where taxpayers are asking more questions about anything that’s debt-related than they have in the past.”

Unlike the federal government, which borrows to finance its daily operations, most local governments issue bonds to pay for specific public works projects. Without additional bond revenue, many of those infrastructure projects simply don’t get done. That means roads may remain bumpy, classrooms may remain crowded and – as Kansas City has demonstrated – old water mains may burst before they can be replaced.

“Just about everybody every day either rides on a street or a subway car, or gets on an airplane, or sends their kids to school, or turns on the water faucet or flushes the toilet, or engages in some kind of activity that involves a bond-financed piece of infrastructure,” said Michael Decker, the managing director and co-head of municipal securities division for the Securities Industry and Financial Markets Association.

And it may be a while before annual bond issuances crack the $400 billion mark as they did in each of the past two years. That bubble was aided partly by Build America Bonds, a stimulus act creation that expired at the end of 2010. The special bonds paid taxable interest to investors – unlike the tax-free bonds municipalities usually use – but were popular with local governments because the US Treasury Department subsidized their borrowing costs.