Senate fixes authorization for Fed to purchase munis

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Senate Majority Leader Mitch McConnell, R-Ky., indicated Tuesday morning that the time for Senate Democrats to negotiate further changes was ending.

The Senate put the final touches to a COVID-19 economic stimulus package Tuesday that will authorize the Federal Reserve to stabilize the municipal bond market and provide additional financial aid to state and local governments.

A separate bill offered by House Democrats would not only authorize but also require the Federal Reserve to purchase a sufficient quantity of munis so that the issuing cost of bonds would be held to a minimum level equivalent to the federal funds rate.

However, the Senate bill would supersede the House Democratic bill if the House chooses to simply approve the Senate bill.

Senate Majority Whip John Thune, R-S.D., said Monday the bill included $10 billion for block grants the states: $12 billion for K through 12 education; $6 billion for higher education; $5 billion for the FEMA disaster relief fund; $10 billion for airports and $20 billion for public transportation emergency relief.

The House bill could become the framework for a fourth emergency bill to address the COVID-19 pandemic, according to Emily Brock, director of the public finance liaison center for the Government Finance Officers Association.

“I do think it absolutely has the potential to become stimulus four, in particular because they’ve written it and they’re dedicated to it,” said Brock “I do think there’s a deference to whatever the Senate is able to pull together.”

Senate Majority Leader Mitch McConnell, R-Ky., indicated Tuesday morning that the time for Senate Democrats to negotiate further changes was closing.

“The buzzer is sounding,” said McConnell. “The hour for bargaining as if this were business as usual has expired. The American people need our Democratic friends to say yes for an answer.”

Senate Minority Leader Chuck Schumer, D-N.Y., also expressed optimism about Senate passage.

"I pray that we can come together very quickly and pass in large numbers a bipartisan bill that will help the American people who so badly, badly need our help,’’ Schumer said.

Public finance advocates said the bill as originally presented to the Senate by McConnell on Sunday has been changed significantly for the better from the original provision covering only Fed purchases of bond issues by states and localities.

That initially caused concern that the language could be interpreted as not covering debt issued by the various state and municipal authorities and agencies which make up an enormous chunk of the muni market.

“I’m getting more and more confident as the minutes go on,” Brock said. “What we are working on right now is to ensure that the definitions are accurate. We are trying to ensure that all bonds that are on the secondary market that are being held by broker dealers right now are included in any initiative for the Federal Reserve to purchase.”

Brock said the Senate version has no mandate or requirement for the Fed to make purchases but her multiple conversations with officials at the Federal Reserve have made her confident there is a desire by them “to normalize our space.”

The revised Senate bill has no limitation on the maturity of the bonds that the Fed would be authorized to purchase unlike the original bill that had a 20-year limit.

Much of the focus on talks between muni market advocates and Senate staffers over the last 48 hours was on providing a financial backstop for hospitals.

“We are just asking the Federal Reserve to come in as another investor,” said Brock. “We are not asking them to buy primary issues here. Primary issues are not the problem we are trying to address. We are asking that the municipal market becomes functional again so that primary issues can go to the market and not to the Fed.”

Chuck Samuels of Mintz Levin, who represents the National Association of Health and Educational Facilities Finance Authorities, said, “It’s just a question that with more time -- they basically had another 48 hours -- they improved the language.”

“Hopefully what we see coming out of the Senate covers our sector as well as other sectors more broadly and I think the House bill clearly does,” said Samuels.

“We just need to be sure that whatever legislation we get covers appropriately the waterfront of municipal bonds, including hospitals and other nonprofits. And the airports are saying the same thing and mass transit is saying the same thing and the counties for sure who felt they were left out of what was on the Senate floor on Sunday.”

Michael Decker, senior vice president for federal policy at the Bond Dealers of America, also confirmed that what he terms as “the sloppy language” in the original Senate bill is being fixed.

“We think the market is in need of Fed support,” Decker said. “We agree with Congress moving in the direction of providing the Fed with additional authority to support the market.”

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