Borrowing is way down. As of April this year, state and local government issuers brought only about $62 billion of new debt to the municipal market. That’s less than half of the $132 billion of new debt brought to the muni market over the same period last year.

Lending is also down. Individual and institutional investors have not only stopped turning to the municipal bond market as their source of safe, secure investments, but they’re taking their money out. Investors have withdrawn about $47 billion from U.S. municipal-bond mutual funds since Nov. 10, pulling money out for 24 weeks straight.

Why is the muni market so depressed? The easy answer would be Meredith Whitney's now infamous forecast on 60 Minutes that there could be 50 to 100 sizable municipal bond defaults. But the truth is, the muni market’s current problems run deeper.

Let’s start with the borrower side. The Great Recession is still taking its toll on state and local revenue. Even when that revenue recovers, few economists expect it to bounce back to those heady, pre-2008 days, when growth averaged 6 percent a year. The Rockefeller Institute’s Lucy Dadayan and Donald J. Boyd report that states collected $715 billion in total tax revenues in 2010, a gain of 4.3 percent from 2009. However, that 2010 figure was still 7.8 percent below the levels reported in 2008. Their April 2011 revenue report notes that “despite four consecutive quarters of growth, state tax revenues were still slightly lower in the fourth quarter of 2010 than in the same quarter three years earlier.”

When it comes to revenue recovery in the states, there is a long way to go -- and that has implications for the robustness of the muni market.

At a recent briefing on the Bond Dealers of America’s economic survey, Mark Vitner, committee chair and senior economist at Wells Fargo Securities, pointed out that pre-2008, states could count on healthy revenue growth and felt confident enough to borrow money to build stadiums, airports and city halls. Those projects, of course, fed the municipal bond market, pointing it toward dizzying heights -- as high as $475 billion in issuances in 2007.

There’s a different mindset today. As Vitner noted, states have been adjusting to poor revenue collections by making deep cuts in their budgets. They also are rethinking how much debt they can carry, given not only their present budgetary constraints but also the future outlook for revenue growth. The bottom line: States will be building less and borrowing less. Some market forecasters predict 2011 issuance could fall as low as $210 billion, though $240 billion is more of a consensus figure.

What about lenders? They are conspicuous for their absence. One reason is that the muni market looks increasingly unstable -- not necessarily because of headline risk or fear of defaults. There are bigger questions about whether the tax deductibility that makes muni bonds so desirable will continue. Senators Ron Wyden of Oregon and Dan Coates of Indiana have introduced legislation that would eliminate tax-exempt interest for new state and local debt in favor of tax-credit bonds. Wyden has argued that the tax exemption on muni bonds is inefficient and that replacing it with tax-credit bonds would benefit a broader set of taxpayers, not just high-net-worth individuals. Some of the pros and cons of taxable debt were discussed in a recent column by my colleague Girard Miller. The bill is awaiting further action with the Senate Finance Committee.

Meanwhile, the exemption of earnings on municipal bonds from federal income taxes has become part of the larger debate over ridding the federal tax code of tax expenditures. President Obama’s deficit-reduction commission proposed to end the exemption -- as well as a host of others. Congress is also considering a bill -- the Public Employee Pension Transparency Act -- that would prevent state and local governments from issuing tax-exempt bonds if they failed to file annual reports with the Treasury Department disclosing how they calculate their unfunded pension liabilities. The bill would require governments to use a so-called riskless rate of return pegged to a Treasury rate of 4 to 5 percent, instead of the more widely used 7 to 8 percent.

Muni market problems don’t end there. The Securities and Exchange Commission (SEC) is also taking an interest in state and local pension funding and how this reflects on the stability of their bonds. Last year, the SEC sued New Jersey for failing to disclose to muni bond investors that it was underfunding its two largest pension plans. Now the SEC is scrutinizing Rhode Island's bonds vis a vis pension disclosures. The probe is part of a broader push to explore whether state and municipal borrowers have provided accurate financial information to municipal bond investors.

The lack of timely disclosure of all kinds is an ongoing complaint about the muni market. Investors have long chafed about the lack of it, and the grumbling has only increased during the tight fiscal times states now face. It also may be one reason some investors are shying away from the market. At a May meeting of the National Federation of Municipal Analysts, SEC commissioner Elisse Walter suggested that, in order to enhance investor protection in the muni market, Congress should give the SEC the authority to set baseline standards for issuer disclosure for primary and secondary municipal securities. Several key members of Congress have indicated an interest in the reform, and in more timely and consistent financial disclosures by issuers.

Over at the Municipal Securities Rulemaking Board (MSRB), tools are available to help out on this front. The MSRB’s EMMA (Electronic Municipal Market Access System) -- a free source for official statements, continuing disclosure documents, advance refunding documents and real-time trade price information on municipal securities -- is now accepting preliminary statements, which issuers can use to communicate directly and often with investors.