August Update on Fed’s $500B Municipal Liquidity Facility

Feds’ Municipal Liquidity Facility is a $500B Fund Providing Three-Year “Loans” that Has Only Been Used Once

The Federal Reserve announced on August 11, 2020 that it is making revisions to its Municipal Liquidity Facility Program. This follows under-use of the program by eligible state and local governments and designated agencies. The emergency financing program has only provided one loan to the State of Illinois for $1.2B. The August 11th change reduces borrowing costs by half a percentage point, with the range now between 1 and 5.4%, depending on the entity’s bond ratings. However, current costs of the program remain substantially higher than market rates.

The program has not been the infusion of cash that state and local governments struggling from a COVID-caused revenue collapse need. It remains to be seen if the revisions will result in greater use. We continue to suggest that the Fed provide no- or very low-interest financing for five or more years, and not penalize localities with poor credit by charging higher interest rates.

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 program allows states and local governments and designated agencies to receive three-year loans of up to 20% of their pre-COVID general revenue. Technically, the “loans” consist of the 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.

August 11, 2020 Municipal Liquidity Facility Terms

• Eligible borrowers include cities of 250K plus, counties of 500K plus, states, and “designated” revenue bond issuers (RBI). In the case of NYS, this means public authorities like the MTA.
• Only one issuer per state, city, county, multi-state entity, or designated RBI is eligible; however, the Fed may approve more to “facilitate provision of assistance” to political subdivisions.
• Borrowers can borrow from the Fed by selling bonds directly to the Fed’s “Special Purpose Vehicle. (Bonds include tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), revenue anticipation notes (RANs).)
• Loans are 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: 1% of loan amount plus interest based on borrowers/bond sellers credit rating, up to 5.4%. (See Schedule B of the Fed terms document.)
• No loans/bonds available from Fed after Dec 31, 2020. (May be continued by the Federal Reserve Board.)

The terms were previously updated in June to allow entities like the MTA to be eligible for financing.

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.

History

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 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.

Press Links

August 4, 2020 – Burton, Paul. Bond Buyer. “New York MTA May Tap Fed Program, Moody’s says.”
July 16, 2020 – Ho, Justin. Marketplace. “Could the Fed help bail out New York’s MTA?”
June 4, 2020 – Burton, Paul. Bond Buyer. “New York MTA Eligible for Fed Liquidity Program.”
April 7, 2020 – Burton, Paul. Bond Buyer. “Watchdog Group Wants Federal Reserve to Buy Bonds to Prop Up New York MTA.”