WASHINGTON - Municipal issuers are pushing to be included in the Federal Reserve's program to buy commercial paper, which the Fed has hinted will not include municipalities under its current terms. The resolution may ultimately boil down to the definition of a municipality, market participants contend.
Since the Fed announced its Commercial Paper Funding Facility program on Monday, municipal issuers have been pushing to be included in it. They argue that the Fed's desire to provide liquidity to the short-term market through commercial paper should extend to their tax-exempt commercial paper and even to municipal tax and revenue anticipation notes. They also claim it may be possible for municipalities to be legally considered corporations.
California Treasurer Bill Lockyer talked with representatives from the New York Federal Reserve Bank on Tuesday and was told that the new commercial paper program, as it is currently structured, does not extend to municipal issuers, according to Lockyer spokesman Tom Dresslar.
"Our point that we're making to the federal government is that it should extend to municipal issuers," Dresslar said. "Governments are feeling the effects of the meltdown in credit markets just as much as the private sector."
"We're not talking about protecting the interests of some bureaucrats. It's about educating students, putting cops on the streets, putting out fires, creating the infrastructure that creates jobs. There's no good policy reason not to extend it to governments," he said.
The Fed held a conference call Tuesday with corporate officials and others involved in commercial paper programs, but municipalities were not discussed during the call.
But Fed spokesmen said yesterday that they could say for certain whether tax-exempt commercial paper will be excluded from the Fed's funding facility.
Andrew Williams, a spokesman for the New York Federal Reserve Bank, said a decision on tax-exempt commercial paper is not likely to come before next week.
"We are discussing our options with market participants and we expect more details soon," he said.
Roger Anderson, executive director of the New Jersey Educational Facilities Authority, said that if the government is buying commercial paper to inject liquidity into corporations, "governments need liquidity just as much as corporations do."
Anderson argues that the Fed program should include not only tax-exempt commercial paper, but also state and local issuers' tax and revenue anticipation notes.
Governments use tax anticipation and revenue anticipation notes to fund their cash flow needs the way corporations use commercial paper to fund their daily operations, he said. These notes are secured by tax receipts or government aid receipts. They are often secured, similar to corporate commercial paper, with letters of credit from banks.
"I would like to suggest to the Fed that they expand their program to buy Tans and Rans of governments because that will give us liquidity just as much as buying commercial paper from corporations will give them liquidity," Anderson said.
He said he has asked to meet with Fed officials to discuss this, but has not received a response.
Some state and local groups were working yesterday to find a definition that would provide a form of corporate status to municipal issuers.
The Fed has structured its commercial paper buying program under Section 13-3 of the Federal Reserve Act, which allows the central bank to buy assets from "any individual, partnership or corporation" that is secured by other banking institutions, according to a lawyer and former Treasury official. The language in that section does not include state and local governments or municipalities.
Some muni market participants argue that hospitals, private universities, and even cities, may meet the definition of a corporation, depending on how they are structured within the state.
However, that argument may not extend to states, which are sovereign entities, and counties, which are subdivisions of states, according to Ben Watkins, Florida's director of bond finance.
"All of them are going to be different and that just ends up being a mess," Watkins said. The Fed needs to change its policy so that all municipal issuers are clearly included in the Fed's program, he said.
"We do real bricks-and-sticks stuff," Watkins said. "We're not talking about toxic securities. State and local governments are [the Fed's] blind spot and we shouldn't just get lost in the noise."
"It seems like there's a lot of debate about that now," Robin Prunty, a credit analyst with Standard & Poor's, said in regard to federal purchasing of state commercial paper. "I don't really know the answer to that. It seems like there are a lot of questions, whether it's applicable or not to state and local governments. But what government wouldn't want to borrow at a lower cost? I think that goes without saying, any state or local government is going to look for the lowest cost financing that they can access."
Some market participants worry that muni issuers' participation in the Fed program might jeopardize the tax-exempt status of their commercial paper or other short-term securities. Most tax-exempt securities cannot receive federal guarantees and retain their tax-exempt status.
But tax attorneys said yesterday that the tax-exempt status of these securities would only be threatened if the Fed provided a letter of credit to an issuer - essentially putting the municipal debt on a par with Treasury securities.
Wisconsin capital finance director Frank Hoadley, whose office manages a $960 million commercial paper portfolio, said he has not considered pushing for inclusion in the federal government program though he might participate if it could guarantee that it could provide lower rates. The state's program continues to function, albeit at higher rates, he said.
Richard Saskal, Yvette Shields, and Lynne Funk contributed to this story.