(Reuters) — The U.S. Supreme Court on Monday declined to take up a dispute that has roiled the $3.8 trillion U.S. municipal bond market over payments on special revenue bonds that grew out of Puerto Rico's ongoing bankruptcy.

The justices left in place lower court rulings dismissing lawsuits by bond insurance companies Assured Guaranty Corp. and Ambac Assurance Corp. that sued the federally created financial oversight board that is trying to restructure about $120 billion of Puerto Rico's debt. The companies had asked the justices to reverse the lower court rulings.

The high court's action leaves a dark cloud over special revenue bonds, which could increase borrowing costs for local governments seeking to finance infrastructure projects.

In two cases involving Puerto Rico Highways and Transportation Authority debt, the Boston-based 1st U.S. Circuit Court of Appeals determined last year that payments on bonds secured by special revenues are not required — but optional — while the issuer's bankruptcy is ongoing.

The financial oversight board commenced a form of municipal bankruptcy for the U.S. Caribbean island territory to restructure about $120 billion of debt and pension obligations.

The two companies sued the board contending that payments on the bonds from pledged toll and other revenue should not be halted during the bankruptcy. The 1st Circuit upheld the litigation's dismissal by a federal judge hearing Puerto Rico's bankruptcy, issuing rulings that surprised the municipal bond market used by states, cities, schools and other issuers to sell debt.

The bond insurers argued that the lower court's decision conflicted with the "settled understanding" of the municipal bankruptcy code and protections for special revenue bonds and would impede the ability of municipalities to finance critical infrastructure such as sewers and roads.

They also pointed to actions by credit rating agencies to place several special revenue bond ratings under review that in some cases has led to downgrades, including to water and sewer bonds from Cleveland and Dallas.

In briefs to the Supreme Court, the Securities Industry and Financial Markets Association said that if left in place the rulings would increase borrowing costs for financially troubled municipalities and could lead to higher fees and taxes.

The board argued that requiring bond payments would undermine its "exclusive right" to propose a restructuring plan that would lead to Puerto Rico's bankruptcy exit.

Revenue bonds accounted for 61% of the $406.5 billion of debt sold in the municipal market last year, according to Refinitiv data. Only certain revenue bonds qualify as being backed by special revenues under the bankruptcy code.