April 4 (Bloomberg) — Pennsylvania school districts are selling the least municipal debt in seven years as localities nationwide respond to calls for austerity even with yields close to generational lows.

From urban cores such as Philadelphia to rural communities in Lancaster County, Pennsylvania school officials are holding off on construction projects as budgets are buffeted by rising costs and dwindling aid, while local tax receipts struggle to recover almost five years after the recession.

The issuance drop in the Keystone State reflects an ebbing reliance on debt by U.S. localities amid voter antipathy to new projects, said John Donaldson, who helps manage $750 million in munis at Haverford Trust Co. At the same time, states facing their own fiscal strains are giving cities and towns less support, said Todd Sisson, senior analyst for tax-exempt fixed income at Wells Capital Management in Charlotte, North Carolina.

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"The states are pushing the problem down to the local level," said Sisson, whose company oversees $31 billion in munis. "They're not rescuing local towns, and school districts fall into that bucket."

As the U.S. municipal market shrank in 2013 for the third straight year, Pennsylvania schools sold $2.8 billion of bonds, the lowest amount since at least 2006, data compiled by Bloomberg show. Nationally, schools offered about $54 billion, down almost 12 percent from the previous year.

Scarcity Boost

The scarcity may be helping the debt. Securities from school districts and universities have earned almost 4 percent this year, beating the 3.7 percent return for the entire $3.7 trillion municipal market, according to Bank of America Merrill Lynch indexes.

The borrowing dropoff may harm Pennsylvania's economy, said Dan Burton, manager of the mid-Atlantic region for RBC Capital Markets.

"It has not only an effect on the local economy, but it has an effect on the quality of education," said Burton, who has offices in Lancaster and Philadelphia. Without investment, "it makes it much harder to perform at a high level."

Crisis Mode

In Philadelphia, the nation's fifth-most populous city, schools are in crisis mode. The district of 130,000 students last borrowed money in 2012 — to keep schools open, not to invest in them. Officials warn of a drop of about 26 percent in federal and state grants in the year that begins in July from fiscal 2013, documents show.

Fernando Gallard, a district spokesman, didn't respond to requests for comment on bond plans and capital investment.

Officials elsewhere in the state say debt plans are on hold in part because Pennsylvania has stopped allowing new capital projects into a program that reimburses for part of the expenditures.

Governor Tom Corbett, a Republican, has proposed that the moratorium, in effect since October 2012, should extend to June 2015, said Tim Eller, spokesman for the state Education Department. In the meantime, Pennsylvania has allocated $300 million this year for reimbursements, while 207 districts are due a combined $1.7 billion, according to Eller.

The state is dealing with its own fiscal stress. Standard & Poor's grades it AA, the third-highest level, though with a negative outlook, partly because of growing pension costs.

Savings Redirected

Jay Pagni, a Corbett spokesman, said the governor wants the legislature to pass changes that would deal with escalating retirement contributions for the state and school districts as well as Pennsylvania's unfunded pension liability.

Savings "from pension reform could be used in other areas such as capital projects and classroom investment," Pagni said.

Schools face climbing pension payments as they are restricted from raising property taxes above state-mandated caps. The districts' required pension contributions are set to rise to $1.3 billion for the year beginning in July, from $980 million this year, according to Pagni.

Districts have cut programs and personnel to cope, said Jay Himes, executive director of the Harrisburg-based Pennsylvania Association of School Business Officials. Elementary and secondary schools employed 256,664 people as of 2012, down about 23,000 from 2010, according to the most recent data from the Bureau of Labor Statistics.

Voters' Choice

"Districts aren't spending any discretionary dollars because of the significant issues we have around state funding and our exploding pension payments," Himes said. "It's not a good time to be talking about building new schools when you're laying off teachers."

Nor are voters eager to take on such projects. Of 16 ballot questions since 2006 on raising school taxes above state caps to pay for uses such as new bonds, only one has passed, according to the schools association.

In May, voters in Clearfield and Clinton counties, northeast of Pittsburgh, defeated a referendum that would have raised revenue for the West Branch Area School District. The board wants to renovate its elementary school, built in 1974 when open educational spaces were popular, to put doors on classrooms, said Michelle Dutrow, the superintendent.

"In this day and age, it presents a very significant safety issue should we have any sort of intruder event," she said.

'Budget Pressures'

Officials in Solanco School District west of Philadelphia have been planning a project since 2008 to combine two middle schools in one campus and free up space for more elementary students, said business manager Tim Shrom.

The combination of higher expenses, the state moratorium on the building program and the weak economic recovery has stymied the plan, he said. Income-tax receipts this year, while better than in 2010, may still be less than in 2008, and pension costs next year are slated to rise 26 percent from this year, he said.

"There's just way too much uncertainty to move forward," Shrom said. "We have a lot of budget pressures that we're sitting on."

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