This week, the Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing on the Senate version of legislation we introduced in the House of Representatives, H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act, that will save a long-standing source of low-cost capital for public infrastructure investment. The bipartisan and bicameral legislation permits money market funds that invest in the short-term debt of commercial entities and state and local governments to continue to use amortized cost accounting for valuing fund assets. We introduced the legislation because it would preserve money market funds as a source of liquidity and capital for the public infrastructure needs of our citizens.
State and local governments rely on access to robust capital markets to finance the construction and maintenance of schools, roads, public transportation systems, affordable housing, airports and other important infrastructure projects. Money market funds facilitate access by investing in short-term municipal debt and holding it to maturity. That access has been put at risk by a Securities and Exchange Commission (SEC) rule that requires certain money market funds offered to institutional investors change their method of calculating their net asset value (NAV) from fixed to floating.
Money market funds are among the largest investors in short-term municipal bonds. As of the end of 2015, money market funds held over $245 billion in municipal debt issuances from all 50 states and the District of Columbia. In Wisconsin and Ohio, these funds held $3.4 billion and $4.3 billion respectively in tax-exempt debt. Beneficiaries of projects currently financed by investors in money market funds include Children's Hospital of Wisconsin and the Columbus City School District.
Unfortunately, the SEC rule, which was adopted in July 2014 and that will take effect beginning on October 14, 2016, will make money market funds far less attractive to investors who desire a stable NAV cash management vehicle. Instead, their options will be limited to money market funds that invest exclusively in government securities, bank deposits, or non-SEC registered investment funds.
As investors begin to leave funds that invest in municipal bonds, which has already started to happen, there will be less demand for municipal securities. According to a recent study by Treasury Strategies, a financial industry consulting firm, more than 40 percent of tax-exempt money market fund assets are directly at risk due to the floating NAV rule, and the indirect impacts are significantly higher because of the complexity of the rule's definition of non-natural persons. As demand decreases, the logical consequences will be higher borrowing costs for state and local governments in Wisconsin, Ohio, and across the nation.
In fact, according to a March 31, 2016 money market fund report by the SEC, there was a significant jump on tax-exempt fund yields, which translates into higher debt issuance costs for state and local governments across the country, with the possibility of the delay or cancellation of many important infrastructure projects. This comes at precisely the same time that global banking regulations, known as Basel III, are being put in place, making banks less capable of filling the gap. For state and local governments and their taxpayers, it's the worst of both worlds.
Today, the typical coupon rate for a highly rated municipal borrower on a short term instrument is as low as five basis points. A sample bank credit facility rate for the same borrower is 100 to 105 basis points. For a less highly rated issuer who needs credit enhancement to issue short-term debt, the cost of converting to long-term debt could be 250-350 basis points. Therefore, the extra cost of a $40 million bond issued by a public university or hospital, for example, could range between $400,000 and $1.4 million a year. Enactment of H.R. 4216 would ensure that municipalities continue to have options that would allow them to borrow at the lowest possible rate.
Over time, state and local taxpayers could be even more impacted from not having those options because current market conditions are favorable. Interest rates are low, but we know that higher rates are coming. We need to act now to protect the financing options of municipal entities so that, when the markets become less liquid and interest rates increase, they have the options they need to finance infrastructure investments with short-term borrowing.
Our legislation simply provides institutional non-government money market funds with the option to offer and redeem their shares on a stable NAV basis, which would be consistent how money market funds operated in the past. It forbids any federal assistance from being provided directly to any money market fund, being it a stable or floating NAV. Equally important, it does not alter any aspect of the Dodd-Frank Wall Street Reform and Consumer Protect Act, nor does it alter any of the safety and soundness regulations adopted by the SEC in 2010 and 2014, which we strongly support. Those rules effectively addressed and enhanced money market fund liquidity, credit quality, transparency, and regulatory monitoring, and made money market funds more resilient to future market turmoil.
While it is true that money market funds are not FDIC insured or hold regulatory capital like banks, money market mutual funds are far more liquid than banks, with a 10 percent of fund assets required to be convertible to cash overnight and 30 percent convertible in a week. Banks remain the cornerstone of U.S. financial markets, but money market funds are a safe and vital option for cash management, especially for amounts above FDIC insurance rates. Academics and studies have highlighted that, in the 40-year history of money market funds, only two have ever failed to pay investors the dollar par share value (known as "breaking the buck"); whereas, over the same 40 years, thousands of FDIC insured banks have failed.
The Senate subcommittee will soon hear important testimony that state and local governments need Congress to act on H.R. 4216 (S. 1802 in the Senate) so they can continue to have access to the indispensable financing options provided by money market funds. We urge our colleagues to heed this call and work with us to enact this legislation, which preserves those options while protecting the stability of the financial system.
Rep. Gwen Moore (D-Wis.) Rep. Steve Stivers (R-Ohio) serve on the House Committee on Financial Services.
