Former Federal Reserve chairs say more aid needed for state, local governments

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Former Federal Reserve Chairs Ben Bernanke and Janet Yellen testified Friday afternoon in front of the Select Subcommittee on the Coronavirus Crisis.

In the next round of federal aid, Congress needs to provide “substantial support” to states and local governments, former Federal Reserve Chair Janet Yellen said.

Yellen referenced a study from the Center on Budget and Policy that suggests the shortfall for just states was $555 billion through 2022. There will also be shortfalls at the local level, she added.

To the Select Subcommittee on the Coronavirus Crisis, part of a House Oversight and Government Reform Committee hearing, Yellen said the coronavirus pandemic has put municipalities' budgets in the red.

During her opening statement, Yellen said Congress should focus first on investing in public health, then extending unemployment insurance and third should focus on providing support to municipalities.

“Congress should provide substantial support to state and local governments,” Yellen said. “The enormous loss of revenue from the recession together with the new responsibilities imposed by the response to the pandemic has put their budgets deeply in the red.”

Yellen and former Federal Reserve Chair Ben Bernanke both testified Friday. They both steered the Fed at different times during the last recession.

Rep. James Clyburn, D-S.C., chair of the coronavirus subcommittee, asked Bernanke what the implications would be if Congress does not pass another stimulus bill.

States and local governments are first-line providers of financial health services, health and education, Bernanke said.

Senate Republicans are expected to release their stimulus bill next week. The House passed its stimulus bill in May.

“One thing we learned after the financial crisis was that because of balanced-budget requirements at the state and local level, as states and localities saw big declines in their revenues, they also had to do serious cuts in their employment and capital investment, leading to a slower, economic recovery,” Bernanke said.

Contraction at the state and local level slowed the U.S. economy’s growth, Bernanke added. So if no action is taken to help out municipalities, it will have a negative effect on the overall economic recovery and critical services localities provide to their residents.

Bernanke was appointed by former President George W. Bush in 2006. Yellen, appointed by former President Barack Obama, succeeded Bernanke in 2014 following her position as vice-chair from 2010 to 2014.

The Coronavirus Aid, Relief, Economic and Security Act established $150 billion to be dispersed to state and local governments. The CARES Act was signed into law on March 27.

House Democrats approved $915 billion in state and local aid under the HEROES Act in May for the next stimulus package. The Senate’s proposal will resemble the CARES Act, but is not likely to include a new round of direct aid to state and local governments, according to Bloomberg Tax.

Rep. Steve Scalise, R-La., asked Yellen how much money would be needed to help states.

“Are you talking about a $500 billion number or a trillion-dollar number?” Scalise asked. “Can you quantify what you mean for this package that would bail out states?”

Yellen referenced a study from tThe Center on Budget and Policy that suggests that the shortfall for just states was $555 billion through 2022. There will also be shortfalls at the local level, she added.

States had budget shortfalls before COVID-19, Scalise said, and he said they should have been fixing those problems before the virus.

Also on Friday, the Securities Industry and Financial Markets Association along with other muni bond groups sent a letter to Senate Majority Leader Mitch McConnell, R-Ky., and Senate Minority Leader Chuck Schumer, D-N.Y. asking them to include two Senate municipal bond provision bills in the next stimulus package. Those two bills are the Lifting Our Communities through the Advance Liquidity for Infrastructure Act and the American Infrastructure Bonds Act.

The American Bankers Association, Financial Services Forum, the Bond Dealers of America, the U.S. Chamber of Commerce, the National Association of Bond Lawyers and the American Securities Association also penned the letter.

LOCAL will reinstate tax-exempt advance refunding. The American Infrastructure Bonds Act will authorize a 35% direct pay subsidy.

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Coronavirus Federal Reserve Janet Yellen State and local finance