Fed is considering a second municipal lending facility

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The Federal Reserve is considering a bipartisan request by four senators to create a second municipal lending facility to help municipalities in the medium and long term, Chairman Jerome Powell told the Senate Banking Committee Tuesday.

The Fed also is considering allowing additional governmental bodies to borrow through the current Municipal Liquidity Facility in states that do not have any municipalities that qualify, Powell said.

Every state is eligible to apply under the liquidity facility, but it counties require a population of at least 500,000 and cities must have at least 250,000 residents. A number of rural states don’t have any municipalities that qualify. The MLF program has been set up so that state governments can serve as conduits on behalf of municipalities in their state, Powell told Banking Committee Chairman Mike Crapo, R-Idaho.

Federal Reserve Chairman Jerome Powell told the Senate Banking Committee the Fed may relax rules for the Municipal Liquidity Facility in states where no municipalities have sufficient populations to qualify.

The request for a second municipal lending facility was made in a bipartisan letter sent to the Fed last week by Democrat Sens. Robert Menendez of New Jersey and Sherrod Brown of Ohio along with Republican Sens. Lisa Murkowski of Alaska and Thom Tillis of North Carolina.

Menendez, who initiated the letter, said at Tuesday’s hearing that state and local governments “are facing unprecedented budget challenges.”

“We're looking at an enormous wave of budget shortfalls about to crest, which will lead to a devil's cocktail of devastating layoffs, dangerous cuts to public safety and essential services and massive local tax increases,” Menendez said.

Those actions threaten to make the economic crisis worse, he said, noting that one million state and local government workers were laid off in April.

Powell agreed with Menendez’s prediction that additional layoffs of firefighters, police officers teachers and emergency health personnel will make economic conditions worse.

“Essentially, yes senator,” Powell said. “We have the evidence of the global financial crisis and the years afterward where, where state local government, layoffs and lack of hiring did weigh on economic growth.”

Menendez said that situation was the impetus for the letter asking the Fed to purchase state and local municipal bonds directly from issuers and also on the secondary market.

Asked if the Fed would consider it, Powell responded, “Yes, we'll take a look at that, senator.”

“What we're trying to do is address liquidity needs, and those are really longer-term funding needs, but not notwithstanding that we are taking a look,” Powell added.

The current Municipal Liquidity Facility launched Monday when the New York Fed released application materials for issuers interested in the program as well as legal documents.

The Fed announced last week it was accepting notices of interest — a form issuers must fill out to express interest in selling notes under the MLF.

Powell said, "We're probably 10 days away, two weeks away from actually being operational. Not quite yet.”

Senators also pressed Powell on his recent comments that additional fiscal action will be needed to address the economic crisis stemming from the coronavirus pandemic.

The Fed chairman avoided endorsing any specific policy action by Congress but observed under questioning from Sen. Jack Reed, D-R.I., that “a lot of the critical services that people rely on day-to-day are provided at the state and local level.”

Treasury Secretary Steve Mnuchin was criticized by some senators for limiting the use of $150 billion already approved by Congress for a Coronavirus Relief Fund to COVID-19 expenses.

Under questioning from Sen. Chris Van Hollen, D-Md., Mnuchin said he recently offered guidance to allow the federal grants to be used to prevent layoffs of police and firefighters.

Van Hollen wants to also protect teachers and other public sector workers.

Sen. John Kennedy, R-La., noted 49 states have a balanced budget requirement and most states are prohibited from borrowing to operate government.

Earlier this month, Kennedy proposed legislation that would allow states and localities to use the federal grants to close revenue shortfalls. His Coronavirus Relief Fund Flexibility for State and Local Government Act would allow states and local governments to use CARES Act funding for operating expenses unrelated to the coronavirus, but not for shoring up pension funds.

Kennedy pressed Mnuchin on whether the Trump administration would support his bill.

Mnuchin said the administration would consider it if it can gain broad bipartisan support.

Kennedy highlighted the importance of his bill by predicting the Senate would not act on the HEROES Act passed by the House last week.

“I think there’s less than a 50% chance of passing another bill,” Kennedy said.

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State and local finance Coronavirus Federal Reserve Washington DC Federal Reserve Jerome Powell Steven Mnuchin