Austerity Chills the Ardor for Muni Debt

By MICHAEL CORKERY And JEANNETTE NEUMANN

For many cities and states, the love affair with debt has cooled, as governments cut back on spending and as borrowing comes under political attack.

In Marquette, a small city on Michigan's Upper Peninsula, officials last month voted to nearly halve the amount of debt the city plans to issue in fiscal 2012 from the year ending June 30.

"You get to a saturation point where too much debt is too much debt," said Marquette City Commissioner David Saint-Onge.

The wariness to take on more debt extends to the municipal-bond market's largest borrowers, such as California, which this year plans to issue a little more than half of the approximately $10 billion in long-term bonds it sold in 2010. "It has a lot less to do with the market, and more to do with trying to get back on firm fiscal ground," said Tom Dresslar, spokesman for the California Treasurer's Office.

The change in attitude raises the prospect that the drought in municipal-bond issuance—the first quarter was the slowest quarter in 11 years—isn't a temporary blip but a longer-lasting shift in municipal borrowing habits. State and local governments sold $47 billion of debt in the first quarter, down from $104 billion a year earlier, according to Thomson Reuters.

"The decline in issuance is a reflection of states managing through a crisis in a very prudent way," said Thomas Doe, chief executive of research firm Municipal Market Advisors.

The austerity adopted by some governments could change if the economic recovery accelerates, potentially encouraging a return to more borrowing for stalled or abandoned projects, he says. State tax collections, for instance, continued to rise in January and February, in part from tax increases, but remain below the precrisis peak.

While the national debate over the federal-debt limit generally reflects a partisan divide, borrowing decisions at the local and state levels seem more rooted in practical budgetary concerns. Both Democrats and Republicans in local governments are paring back debt in the face of fiscal squeezes.

A cutback in debt would be a change from the trend of the past decade, when states gradually increased their debt. The median state debt as a percentage of personal income rose to 2.5% in 2010 from 2.2% in 2000, a 14% increase, according to Moody's Investors Service.

Lately, when state and local governments have borrowed, they have borrowed less.

The median municipal-bond deal in the first quarter was $5 million, the lowest since 1999, according to figures analyzed by market data provider Ipreo for The Wall Street Journal. In 10 of the past 11 years, the median first-quarter deal was $6 million to $8 million, the data show.

The more-austere stance could lead to fewer construction and other projects that employ both public and private workers, and could hurt business for the municipal-bond industry.

In Illinois, Gov. Pat Quinn's proposal to borrow $8.7 billion in fiscal 2011 has met resistance, largely from Republicans, who gained several seats in the legislature in the November election, giving them more clout to thwart his plans. Gov. Quinn wants to at least borrow about $2 billion to make Medicaid and other health-care payments. Kelly Kraft, a spokeswoman for the governor's office, said that if the state can't complete the Medicaid borrowing by the end of June it may miss out on receiving about $200 million of matching federal funds.

Fiscal restraint isn't the only factor behind the slowdown in sales. Borrowers may be taking a breather after last year, when they sold a record amount of debt to take advantage of U.S. subsidies for municipal issuers.

Higher interest rates in the market also are spurring borrowers to pare deal sizes. At the same time, the lack of issuance is helping to stabilize prices in the municipal-bond market.

At Dormitory Authority of New York State, one of the nation's largest municipal issuers, borrowing is down 23% from a year ago and the pipeline of deals it expects to bring to market is thinner, says the authority's president, Paul Williams.

The biggest drop off in the pipeline is from private universities and health-care facilities that use the authority as a conduit to access the municipal-bond market, the authority says.Marquette plans to sell $5 million in long-term debt in fiscal 2012, down from $8.7 million in fiscal 2011 and about $28 million in the strong economy of 2007. City manager Bill Vajda said uncertainty about cutbacks in state and federal funding is making the city more cautious.

To be sure, some borrowers aren't cutting issuance. Maryland sold $485 million of debt in early March and plans to tap the market again in late summer to fund infrastructure projects approved by the legislature, says state Treasurer Nancy Kopp.

Market conditions haven't deterred Cedar Hill, Texas, a city of 46,000 residents on the outskirts of Dallas, from borrowing. But it is being selective. It plans to refinance $12.5 million in debt in coming weeks in anticipation that rates will rise this year. But it is putting off plans to borrow $4.6 million to expand the local library.

"The project is not considered important enough or necessary enough to increase the tax rate," says Hardy Browder, Cedar Hill finance director.

Write to Michael Corkery at michael.corkery@wsj.com and Jeannette Neumann at jeannette.neumann@wsj.com.