Issuer groups push for expansion of MLF as stimulus talks deteriorate
A coalition of issuer groups is frustrated with what it says is a muted response from the federal government on expanded aid and say without it, state and local governments will be forced to take actions that will offset past fiscal support.
In a letter sent to Secretary Treasury Steven Mnuchin, Federal Reserve Chair Jerome Powell and Congress, issuer groups asked for an expansion of the Fed’s Municipal Liquidity Facility, though they say direct aid is still important.
“Without timely and strong federal government efforts to support the municipal bond market and compensate for delayed revenues, our state and local governments will be forced to take actions that will exacerbate economic contraction and offset the vital stimulus that Congress, the Federal Reserve, and the Administration have worked to provide,” the groups said.
The Government Finance Officers Association led the letter and the International City/County Management Association, the National Association of Counties, the National Association of State Auditors, Comptrollers and Treasurers, the National Association of State Treasurers, the National League of Cities and The United States Conference of Mayors signed onto it.
The Fed launched the MLF as part of the CARES Act, a coronavirus relief package that was enacted in March. The MLF began operating in May. The Fed has said the MLF pricing was meant to be used as a backstop for borrowers.
The MLF 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 able to designate two issuers whose revenues are derived from activities such as public transit and tolls.
Last week, the Fed changed the MLF’s Frequently Asked Questions to require eligible governments to submit a notice of interest to participate in the program 30 days before the day the program ends on Dec. 31, 2020. Issuers say that note speeds up the timeline for eligible governments to use the program.
GFOA’s Director of the Federal Liaison Center Emily Brock said the decision to send wrote letter now was made because the hopes of a future federal stimulus bill seem slim. The White House, Senate and House have struggled to come up with a price for the next bill.
Issuer groups want to see the MLF extended past that Dec. 31, 2020 deadline and say the recession effects caused by the pandemic will have a lagging effect long into 2021.
“An extension of the MLF’s origination period into 2021 would very likely mean more access for issuers who need it most,” they said.
The groups are asking the Fed to expand the MLF to more issuers as well, specifically revenue bond issuers, Brock said.
Relief to smaller, less frequent issuers is also needed, the issuer groups said, such as passing the Municipal Bond Support Act of 2019. That bill, introduced by Reps. Terri Sewell, D-Ala., and Tom Reed, D-N.Y. would increase to $30 million from the current $10 million the amount of tax-exempt bonds that individual local governments or nonprofits can issue and still qualify to sell debt to banks under favorable terms as bank-qualified.
“Even if the smaller, less frequent issuers don’t see the MLF as an alternative, the Federal Reserve has the capacity to look at the capital charges being charged towards the smaller community banks,” Brock said.
The MLF allows short-term notes with a maturity no longer than 36-months. It needs to be lengthened, ideally up to 10 years, the groups said, to help state and local governments make long-term investments.
One of the major sticking points in the MLF for issuers is the pricing in the MLF. Democratic lawmakers called for the MLF’s interest rates in their updated stimulus HEROES Act to be brought down to the Federal Funds Rate, which is currently at 0.25%.
The issuer groups encouraged the Fed to lower pricing so that it would not penalize issuers. Some argue that many issuers are able to go through traditional channels thus far to access capital, though Michael Gleeson, legislative manager at the National League of Cities said some issuers will still need to go to the Fed if they can’t go to the market.
“It’s important that we have a better alternative to make sure cities can access capital at a cheaper rate,” Gleeson said.
Traditional measures suggest that the muni market is functioning well. While the volatility earlier this year did lock out issuers from the market, it has since stabilized and rates are at near record lows.
This holiday-shortened week has the largest new-issue slate of 2020 at more than $14 billion. Detroit, New York issuers, airport credits, hospitals and higher education issuers have been able to access the municipal market via the exempt and taxable markets at favorable rates.
Brock acknowledged the market is functioning well but said the MLF needs to be made more muscular in case the volatility of eariler this year returns.
“That recommendation is in preparation for any potential challenges that may happen again as we witnessed from March 18-23," Brock said. "We understand that the market is pricing relatively well, but I think that we still remain at high alert that credit assessments and challenges posed by the pandemic to governments across the country have the potential to affect our market and we would love for the Federal Reserve to be prepared for that in the event that that does happen.”
Groups also want to see the Fed create a facility to provide relief of municipal securities in the secondary market, similar to the Secondary Market Corporate Credit Facility.
The SMCCF was created in March to purchase corporate bonds by investment-grade companies in the secondary market.
Though the market has recently improved, with Wednesday seeing a slate of new issues and inflows into muni bond funds, the groups say it is largely tied to uncertainty and could lead to a repeat of a market crisis as seen in mid-March.
“At a minimum, having such a facility developed in advance and at the ready to begin purchasing in the event of a second market selloff would rapidly provide much needed stability to our fragile markets,” the groups said.