Fed expands muni-debt program to cover smaller cities, counties

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The Federal Reserve expanded the scope and duration of the Municipal Liquidity Facility, a $500 billion emergency lending program aimed at providing short-term credit to state and local governments as they endure the economic fallout from the coronavirus pandemic.

The U.S. central bank lowered the population thresholds under which counties and cities would be eligible to sell short-term debt to the facility. The new levels are at least 500,000 for counties and 250,000 for cities, down from 2 million and 1 million.

“The new population thresholds allow substantially more entities to borrow directly from the MLF than the initial plan announced on April 9,” the Fed said in a statement Monday.

The facility, which is yet to be operational, is among nine programs announced by the Fed to limit the economic harm from the virus as businesses shutter to limit contagion. Its entry has helped municipal bonds recover from a record sell-off in March.

The rout caused borrowing costs for state and local governments to soar and billions of dollars in bond deals to be scuttled, raising concerns that municipalities wouldn’t be able to raise money right as they’re dealing with costs from the pandemic.

The Fed encountered criticism when it became clear that many large U.S. cities wouldn’t qualify for the program, disproportionately affecting cities with large minority populations.

“This expands the number of cities,” said Aaron Klein, fellow at the Brookings Institution, who was among critics of the original guidelines. “It covers many of the nation’s large cities that previously were ineligible for direct assistance like Atlanta, Miami, Baltimore, Boston, New Orleans. It also drastically increases the number of counties that quality.”

Lobbying groups like Government Finance Officers Association had asked the Fed to expand the scope of its short-term lending facility and offer access to a wider range of issuers, saying that some states may be reluctant to take on debt on behalf of smaller cities.

The program was expanded to include certain multi-state entities. A new term sheet for the program also adds a so-called fallen angel provision, allowing some issuers whose credit ratings were downgraded after April 8 to qualify, provided they had been rated investment grade by two agencies as of that date.

The Fed said it was also considering expanding the MLF to allow a limited number of governmental entities that issue bonds backed by their own revenue to participate directly in the facility.

The termination date for the program was also extended, to Dec. 31 from Sept. 30.

The statement offered no new information on how the Fed intended to price the securities it purchases under the program, repeating this would be based on the issuer’s rating at the time of purchase “with details to be provided later.”

Bloomberg News