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By Kenneth Hunter, Line Item Editor

On April 27th, the Federal Reserve announced changes to the structure of their recently-created Municipal Liquidity Facility, established earlier in April as part of their unprecedented response to the fiscal challenges created by the COVID-19 Pandemic.

The liquidity facility is able to purchase up to $500 Billion in short-term notes issued by states, counties, and municipalities. The changes announced April 27, 2020, include the following:

  • Lowering the municipal population minimum from 500,000 to 250,000;
  • Lowering the county population minimum from 1 million to 500,000;
  • Extending the maximum maturity period from 24 months to 36 months;
  • Establishing a requirement borrows have an investment grade rating from at least 2 “major nationally recognized statistical rating organizations” as of April 8, 2020;
  • Allow for participation of “certain multistate entities”; and
  • Extending the termination date of the program to December 31, 2020.

“The Federal Reserve will continue to closely monitor conditions in primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments,” the Fed stated in a press release.

These changes significantly-expand the eligibility for liquidity with respect to the number of local governments able to participate. According to Wells Fargo Economics Group, the eligible pool of localities (87 cities, 140 counties) is now nearly 9 times as large and represents more than 162 million Americans, three times prior eligibility.

“The expanded MLF represents the Fed’s commitment to provide liquidity wherever it can, without taking significant credit risk,” stated Wells Fargo Senior Economist Mark Vitner. “The Fed is walking a fine line by primarily taking liquidity risk—which it can easily do as it does not mark-to-market—but minimal credit risk.”

Vitner also offered the following commentary:

“As such, the Fed’s latest moves will primarily help higher-rated municipalities. A better functioning municipal market, however, will help a wider set of borrowers. Still, while it can inject liquidity, the Fed is limited in its ability to address solvency, or plug the gaping budget holes of states, cities and counties. Such a fix will require help from the federal government and a remarkable degree of fiscal discipline from state & local governments once the economy is on the mend. Direct state & local assistance is at the center of ongoing negotiations for the next round of fiscal relief. The stakes are high—state & local governments comprised 8.5% of GDP in 2019, and austerity at the local level was a major weight on the recovery from the Great Recession—real state & local government spending did not recover its prerecession level until Q3-2017. Even with federal assistance, states are going to have to find efficiencies in order to deal with the loss of revenues from COVID-19 shutdowns.”