WASHINGTON - Federal Reserve officials said Monday that currently there are no plans for their Commercial Paper Funding Facility to accept tax-exempt commercial paper, but that the Fed may reconsider this issue before the program starts Oct. 27.
The remarks came as state and local government officials said they plan to continue pushing the Fed to include tax-exempt commercial paper in its program.
William Dudley, executive vice president of the markets group for the Federal Reserve Bank of New York, told market participants during a conference call yesterday that tax-exempt commercial paper would not be accepted by the CPFF, but that the matter was under consideration, according to Frank Hoadley, Wisconsin's capital finance director, who asked Dudley about the issue during the call.
Andrew Williams, a Fed spokesman, later told The Bond Buyer the same thing.
State and local government officials said that they will continue to push Fed officials to change their minds and include them in the program. Tax-exempt issuers and money market funds successfully gained access in September to the Treasury's insurance program for money-market funds after the funds initially were not included.
"There is no reason to not provide governmental entities access to this facility," said Tom Dresslar, spokesman for California's treasurer, Bill Lockyer. Dresslar said money market funds are demanding "almost a daily rollover" at higher rates for commercial paper.
"If we had access to this three-month facility that would inject some needed stability into our [commercial paper] program," he said. "Governmental entities are hurting just as much as financial institutions."
The commercial paper program is one of a series of efforts rolled out by the Fed and the Treasury Department to ease credit strains for banks and corporate lending. But none of the efforts have addressed the borrowing concerns of state and local issuers.
The New York Federal Reserve yesterday
The language does not specifically rule out municipal issuers, but states that issue extendable maturity commercial paper will not be accepted by the CPFF. Some states, including Wisconsin, have extendable maturity provisions associated with their commercial paper.
Extendable maturity has no liquidity support. When an issuer is unable to roll over its commercial paper because it cannot find new buyers to pay for the maturing debt, it can extend the maturity of the paper in return for paying a premium interest rate to investors
California has no extendable maturity commercial paper, Dresslar said.
Dean Martin, Arizona's state treasurer, said he hopes issuers will get access to the program because this will provide a sense of confidence for the tax-exempt market. He said he contacted the Treasury Department repeatedly to allow tax-exempt money-market funds to be included in the insurance program for money-market funds and will do so again regarding the CPFF.
"It looks like we will not be able to directly participate," Martin said. Arizona has "no immediate need" for the commercial paper program, but Arizona could face difficulty issuing tax-anticipation notes in the near future and state law caps interest payments at six percent, he said.
"It's extremely frustrating for us to deal with and I think that underscores the reason why some much uncertainty in the market place right now," Martin said.
Among the proposals announced by the Fed and the Treasury yesterday, the Federal Deposit Insurance Corp. will guarantee new, unsecured debt issued by any bank, thrift, or holding company to help banks fund their operations. The guarantees allow banks and their holding companies to roll maturing senior debt into new issues fully backed by the FDIC.
