Federal Reserve’s Municipal Liquidity Facility
$500B Loan Program Must Offer Better Terms as Part of
Federal Help for States and Local Governments, Including MTA
As of September 23, 2020, federal emergency funds for state and local governments, as well as transit systems across the country like New York’s Metropolitan Transportation Authority (MTA), have not yet been delivered, leaving large deficits in their budgets and the prospect of debilitating cuts to services. The MTA faces a $10B deficit through 2021, and a $16B deficit through 2024.
As part of the federal government’s March actions on COVID-19 relief, including the CARES Act which delivered $3.9B to the MTA (note these funds were fully spent down in July), the Federal Reserve created the Municipal Liquidity Facility (MLF) program. The MLF is a $500B loan program for state and local governments that offers three-year loans as a “lender of last resort” for struggling governments. This program does not deliver federal emergency grants, but rather loans that would need to be repaid. (See our explainers about the program and the Fed’s updates from April, June and August.)
Reinvent Albany has repeatedly urged the Federal Reserve to make the program truly useful to COVID-shocked local governments by reducing borrowing costs with lower or even zero interest rates, and offering loans for longer than three years. Even before COVID destroyed their revenue, many local governments, and the MTA, already had high debt loads. (The MTA’s debt payments will be almost 26% of its expected revenues in 2021.) A substantially improved MLF program and more than $10B in federal emergency aid are essential to prevent devastating MTA service cuts, which would severely cripple the region’s ability to recover from the COVID-19 crisis.
At the September 23, 2020 MTA Board meeting, Finance Committee Chair Larry Schwartz proposed that the MTA borrow $2.9B from the MLF, which would currently be at 1.8% interest for a three-year period, pledging Payroll Mobility Tax (PMT) funds as backing. It is logical for the MTA to look for less expensive sources of credit, especially since MTA’s fare-backed Transportation Revenue Bonds were downgraded by Moody’s just last week. Schwartz claims that MLF loans could be repaid with no interest paid in the event that federal emergency funds are delivered soon. If the MTA seeks to access the MLF, it should work with federal partners, including Senator Schumer, to access even lower interest rates.
To date, only the State of Illinois and the MTA have used the program. The State of Illinois has the worst credit rating of any state and it has borrowed $1.2B from the MLF. The MTA borrowed $450M from the program in August, after the Feds lowered the program’s interest rates by .5%, giving the MTA a 1.92% interest rate. This was considerably lower than bids received from 10 banks, saving the MTA $12M in interest payments, according to MTA CFO Bob Foran. However, $450M is less than a nickel on the dollar of what the MTA is asking for in emergency aid through 2021 ($12B). It is also only a small fraction of their yearly debt service payments, which total $2.8B for 2020.