SLGS window closure deals a blow to issuer flexibility

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WASHINGTON – Treasury’s Bureau of the Fiscal Service announced Friday afternoon the suspension of the purchase of state and local government securities effective noon on March 1 to conserve cash when the current debt limit suspension expires at midnight that evening.

The closing of the SLGS window could last for weeks or even months as one of the extraordinary measures Treasury is expected to take before Congress decides to act on the debt limit.

“They don’t usually deal with the debt limit this early, even though some of us would consider it late in the sense that being up against the debt limit is something we know costs the federal government lots of money,” Shai Akabas, director of economic policy at the Bipartisan Policy Center, said in an interview. “They have more pressing issues in their view such as the Trump emergency declaration on the border wall.”

SLGS are typically used by state and local governments and other entities that issue tax-exempt municipal bonds because of yield restrictions and arbitrage rebate requirements under the Internal Revenue Code.

“Anytime that window is closed SLGS become inaccessible,” said Emily Brock, director of the federal liaison center for the Government Finance Officers Association. “Access to SLGS is critical when we talk about escrows established for local government borrowing purposes and when the window is closed it decreases the flexibility for issuers.”

The use of SLGS has been on the decline since their biggest use – for an advance refunding – was terminated by Congress on Jan. 1, 2018 as part of the Tax Cuts and Jobs Act.

Since that change in the tax law, the amount of SLGS outstanding has declined about 32%. There were 15,254 SLGS bonds and notes with a combined value of $61.4 billion as of Jan. 31 of this year compared to 21,015 SLGS bonds and notes valued at $94.4 billion at the end of 2017, according to the Treasury.

House Ways and Means Committee Chairman Richard Neal, D-Mass., wrote to Treasury Secretary Steve Mnuchin last month asking how long the extraordinary measures can last.

“The length of time that extraordinary measures can last is subject to considerable uncertainty,” Jonathan Blum, deputy assistant Treasury secretary in the office of legislative affairs, wrote in response.

“Cash flows for the federal government can be volatile and vary significantly over periods of day, let alone months into the future, and are subject to inherent forecasting uncertainty,” Blum wrote. “This uncertainty is amplified by the tax refund season and the major individual and corporate tax dues dates in April and June. As a result, it is not possible at this time to accurately predict a certain date regarding the exhaustion of extraordinary measures.”

Treasury “respectfully urges Congress to act as soon as possible to suspend or increase the statutory debt limit,” the letter said.

Akabas, the Bipartisan Policy Center’s economic director, estimates Treasury’s extraordinary actions can delay a crisis until at least midsummer.
House Democrats, who took control of the chamber in January, enacted a new standing rule that reinstates a link between the annual budget resolution and the debt limit.

“Instead of a separate vote, the rule stipulates that the vote on the budget resolution is to be considered as the vote on the debt legislation,” the nonpartisan Congressional Research Service said.

Unlike the former rule which also required Senate passage of a concurrent budget resolution, “the debt limit legislation is passed and sent to the Senate when the House adopts the budget resolution,” CRS said. The vote also suspends the debt limit for a year rather than setting a new dollar amount.

Congress also has a self-impose deadline of April 15 for adopting a budget resolution, although it’s rarely met.

Akabas said he thinks the debt limit will be intertwined with House-Senate negotiations on setting new spending caps for the 2020 fiscal year that begins Oct. 1.

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