A surge in borrowing costs could result in local projects in Clearfield and elsewhere being left unfinished, said Shepherd, who is also chair of a National League of Cities committee on federal advocacy.

Around the country, local governments are on edge about volatility in the bond market, and some are preparing for spending cuts as time runs short for Congress to strike a deal to raise the federal borrowing limit by June 1. The uncertainty is rippling through bond markets as lawmakers negotiate to avoid a default on Treasurys, which have long been considered the world’s safest investment and are widely used as a benchmark for borrowing costs. 

The standoff between Democrats and Republicans in Washington is just one of the factors putting a damper on the municipal bonds that help finance city infrastructure, along with rising interest rates, said Matt Fabian, a partner at the research firm Municipal Market Analytics. So far this year, municipal governments have issued $112 billion in tax-exempt debt through Thursday, a 14% drop from a similar period a year ago, according to Refinitiv.

“You have issuers not issuing and investors not investing ahead of this debt-ceiling crisis,” Fabian said.

Yields on 10-year triple-A muni bonds have climbed over the past two weeks, rising to 2.72% on Thursday, according to Refinitiv MMD. 

Municipal bonds are popular investments and seen as ultrasafe because they are generally backed by state and local-government revenue and hardly ever default. Their prices tend to be fairly steady, but any upheaval in Washington is considered a red flag for cities, counties and other local governments that draw federal funding.

State and local governments faced a similar situation in 2011, when S&P lowered the country’s credit rating as Congress narrowly averted a default during a partisan standoff. Delays in raising the debt limit increased the Treasury’s borrowing costs by about $1.3 billion that year, according to the Government Accountability Office. On Wednesday, Fitch Ratings said it placed its credit rating for the U.S. on watch for a possible downgrade.

The stalemate in Washington is already being felt outside the capital. A federal decision that took effect earlier this month suspended the sale of state and local government series securities, one small way of limiting the growth of the nation’s debt load. The securities are used by state and local governments to facilitate debt refinancings.

The debt-ceiling standoff could lead to cuts in federal funding for local governments, either as part of a temporary fix to avoid default or as part of a more lasting compromise. Federal funding helps pay for a range of programs at the local level, such as food assistance, medical care for the poor and elderly and grants for community housing and other urban-development projects. 

Among the issues on the table are tougher work requirements for food and cash assistance, and rescinding unspent pandemic aid.

“The programs that I worry about are those that affect our seniors and low-income families,” said

Brandon Jones,
a member of the Lewisville, Texas, City Council who serves as the city’s mayor pro tem as well as vice chair of a National League of Cities federal advocacy committee.

Rhode Island Gov.

Daniel McKee
recently asked his budget office to make contingency plans should the country default on its debt.

Despite the worries, many public officials and business leaders expect Republicans and Democrats to reach a deal before early June, when Treasury Secretary

Janet Yellen
has said the government could default.

“I’m confident they understand how important it is to not default on the U.S. government’s debt,” said Ben Watkins, director of Florida’s Division of Bond Finance.

Write to Brenda León at [email protected] and Heather Gillers at [email protected]