June 24, 2020 Update: Feds’ Municipal Liquidity Facility Is a $500B Fund Providing Three-Year “Loans” That Nobody Is Using
As of today, we see no changes in the terms of the Federal Reserve Board’s Municipal Liquidity Facility since June 3, 2020. However, we note that as of June 15, 2020, this emergency financing program has only provided one loan — in this case to the State of Illinois for $1.2B. This is not the infusion of cash that state and local governments struggling from a COVID caused revenue collapse need. Indeed, it suggests the program is not properly designed and the fed should clarify what the goal of the program is. We suggest the fed provides no or very low interest financing for five years, and does not penalize localities with poor credit by charging higher interest rates.
On June 3, 2020, the Federal Reserve Board again changed the terms of its Municipal Liquidity Facility to allow states and somewhat smaller cities and counties to receive three-year loans of up to 20% of their pre-COVID general revenue. Technically, the “loans” consist of the local government entity — like MTA or NYS — selling bonds directly to the Liquidity Facility. Most local government debt is in the form of 30 year bonds, and is used to pay for capital projects.
Some press accounts have mischaracterized how the Fed’s $500B Municipal Liquidity Facility program could affect New York State and NYC finances. The Fed is allowing states and localities to borrow from a $500B fund. It is NOT providing a “bailout” or emergency grants for COVID-stricken state and local governments or public authorities like the MTA.
The Fed’s package includes a $500B Municipal Liquidity Facility that can make three-year loans to cities of at least 250k, counties of 500k, and all states. (Technically, the Fed will buy Bond Anticipation Notes, known as “BANs”, and Tax and Revenue Notes, known as “TANs” or “TRANs.”)
June 3, 2020 Municipal Liquidity Facility Terms
- Borrowers can borrow from the fed by selling bonds directly to the Feds “Special Purpose Vehicle. (Bonds include tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), revenue anticipation notes (RANs.)
- Eligible borrower: cities of 250K plus, counties of 500K plus, states and plus “designated” revenue bond issuers, in case of NYS, this means public authorities like MTA.
- “Only one issuer per State, City, County, Multi-State Entity, or Designated RBI is eligible.”
- Loan of up to 20% of “general revenue from own sources” from FY 2017 for states, counties, and cities and FY 2019 for public authorities.
- Cost of loan: 0.1% of loan amount plus interest based on borrowers/bond sellers credit rating. (See Schedule B of Fed doc.)
- No loans/bonds available from Fed after Dec 31, 2020. (May be continued by Federal Reserve Board.)
Bottom Line for New York State, New York City, MTA
The Municipal Liquidity Facility is a short-term loan from the Fed of up to 20% of “general revenue” that NY State, NY City, counties of 250K plus people and public authorities like the MTA can sell bonds to, which is a form of borrowing. We do not know if “general revenue” includes MTA appropriated dedicated taxes.
Reinvent Albany and transit advocacy groups asked Senator Schumer, Governor Cuomo and the MTA to ask the Fed to allow the MTA to borrow directly from the Municipal Liquidity Facility as an emergency financing measure to cover the huge losses caused by COVID-19, and support the MTA having access to long-term bonds and refinancing from the Fed. Additionally, we believe the Municipal Liquidity Facility could benefit the MTA by reducing the short-term incentive for the State government to divert or “raid” MTA dedicated taxes and funds like MMTOA.