UPDATE 2-Muni bond issuance falls 9 pct in 2008

(Recasts lead; adds details, comments)

CHICAGO Jan 2 (Reuters) - A turbulent municipal bond market forced some state, city and other tax-exempt bond issuers to forgo plans to sell new debt in 2008, pushing issuance down 9 percent from 2007, Thomson Reuters reported on Friday.

New long-term municipal bond issuance fell to $386.5 billion in 2008 versus a record high $424.5 billion in 2007, Thomson Reuters said.

"Most issuers were shell-shocked by the rise in interest rates," said Richard Ciccarone, a managing director at McDonnell Investment Management in Oak Brook, Illinois.

Yields on even triple-A-rated tax-free munis leaped over those of taxable U.S. Treasuries as a host of factors shook up the market, including the loss of top ratings by most bond insurers, a lack of confidence in underlying muni ratings and the departure of major muni market liquidity providers like Bear, Stearns & Co. and UBS Securities (UBSN.VX).

Citigroup (C.N) retained the top spot as senior underwriter with $56.2 billion in sales, followed by Merrill Lynch & Co MER.N and J.P. Morgan Securities (JPM.N), according to the Thomson Reuters report.

California was the top issuer of municipal bonds, selling nearly $8.18 billion of debt last year amid worsening budget problems. The New York Dormitory Authority ranked second with $6.8 billion, followed by New York City with $6.14 billion.

While fixed-rate issuance totaled $261 billion, variable-rate debt issuance jumped by 94 percent in 2008 to $121 billion from $62.3 billion in 2007, the report said.

Ciccarone said the jump in variable-rate debt grew out of a mass exodus of issuers from the auction-rate market, which froze up a year ago, trapping both issuers and investors. Some issuers that escaped refunded their auction rates with variable-rate debt, he added.

Muni refundings were up 15.3 percent at $178.7 billion in 2008 versus $155 billion in 2007, Thomson Reuters reported. Ciccarone said that, too, reflected issuers having to refund troubled auction rate and variable rate debt.

Sidelined issuance from 2008 along with revenue pressures could point to bigger issuance in 2009.

"You're going to have to see bigger issuance," a New York-based trader said. "Where are they going to get the money from? It's going to be difficult for some of these people to issue debt, but they're going to have to. Where else are they going to get the funding from?" (Reporting by Karen Pierog, additional reporting by Lisa Lambert in Washington; Editing by Leslie Adler)