Economist, lawmaker urge extending maturities eligible under Fed's Municipal Liquidity Facility

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Lawmakers and economists are pushing for a longer maximum maturity period under the Federal Reserve’s Municipal Liquidity Facility, saying fiscal pressures on states and local governments will likely last for several years.

During a Senate Banking, Housing and Urban Affairs committee hearing Wednesday, one of the first hearings since lawmakers came back from August recess this week, Sen. Bob Menendez, D-N.J., said many are disappointed by the “ineffectiveness” of the Fed’s Municipal Liquidity Facility and said it would be a “massive policy failure” if Congress fails to get money into the hands of states and local governments.

Sen. Bob Menendez, D-N.J. expects fiscal pressure on states and local governments to last years due to the pandemic.

Currently, the maximum maturity period for bonds under the MLF is 36 months, up from 24 months when the program was first created in April.

“Wouldn’t you agree that just like in the Great Recession, the fiscal pressures on states and localities are probably still going to be there several years beyond that?” Menendez asked William Spriggs, professor of economics at Howard University, a witness at the hearing.

“Yes, the maturity on those loans has to be greater to really provide the smoothing of income that the state and local governments need,” said Spriggs, who is also a chief economist to the American Federation of Labor and Congress of Industrial Organizations.

The MLF is authorized to purchase up to $500 billion of short-term notes and is open to counties with populations of 500,000 or more and cities of 250,000 or more. In June, the central bank allowed U.S. states to be able to have at least two cities or counties eligible to directly issue notes regardless of population. Governors of each state are also now able to designate two issuers whose revenues are derived from activities such as public transit and tolls.

Spriggs recommended lowering the fees of the MLF. The Fed initially charged issuers a premium for using the program at a baseline of 150 basis points for triple-A to 590 basis points for below investment-grade-rated issuers. As of August, the Fed reduced those prices by 50 basis points in each credit category.

Market participants expect the Fed will approve more price reductions, saying many issuers were still unlikely to use it. The New York Metropolitan Transportation Authority did tap into the program shortly after the reduction in interest rates was announced.

The interest payment is too high for state and local governments, Spriggs said.

Menendez also raised the issue of state and local governments laying off employees, citing a Bureau of Labor Statistics job report that said state and local governments have laid off nearly one and a half million public workers.

“If Congress doesn’t act soon to help state and local governments, they’re going to have to cut life-saving services, lay off or furlough more teachers, public safety, emergency health personnel or raise taxes,” Menendez said.

Spriggs warned continued layoffs would create a substantial drag in a future economic recovery.

“These jobs aren’t going to come back quickly,” Spriggs said. “They’re not going to bounce back unless Congress steps in to help state and local governments. The lesson learned from the Great Recession, unfortunately at the state and local level, is that austerity is the wisest policy because Congress refuses to bail you out.”

Government officials will cut expenditures and will be slow to reinvest without federal help, Spriggs said.

“We can’t afford that,” Spriggs said. “We need them to continue investment in K-12 education and higher education and as we see in our public health system. We need them as active partners. Slowing them down threatens our economy tremendously.”

This comes as Senate Republicans proposed a smaller coronavirus relief package on Tuesday, which does not include direct aid or state and local governments. The Senate is expected to vote Thursday on the proposed bill.

Aid to state and local governments is a sticking point between House Democrats and Senate Republicans. Senate Republicans introduced a $1 trillion emergency relief package in late July. House Democrats supported the much larger House-passed $3.5 trillion HEROES Act that includes $915 billion in direct aid for state and local governments. They since have been willing to bring that $3 trillion number closer to $2 trillion.

The “skinny” bill is less than the $1 trillion Senate bill introduced in July and would strike $204 billion out of $500 billion appropriated to the Federal Reserve and Treasury Department for loans to businesses and states and municipalities.

It would include more money for a small business loan program and would not give another round of direct payments to households, according to multiple news reports.

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