WASHINGTON — A bill that issuers of municipal bonds say would both lower their borrowing costs and give them more investing flexibility is back on the table after failing to become law in the previous Congress.
Earlier this week, Sen. Pat Toomey, R-Pa. introduced S. 733, the Consumer Financial Choice and Capital Markets Protection Act, which is identical to a bill introduced in 2017. The bill would allow institutional money market funds to return to a fixed net asset value after a 2014 SEC rule change, which required those MMMFs to use a floating NAV.
The SEC rule, which took effect in 2016, allows funds investing in federal government securities, as well as “retail” funds that have policies and procedures in place designed to limit investors to “natural persons,” to use a stable NAV. Natural persons means human beings, rather than business entities. Other MMMFs were required to “float” their NAVs, meaning that the value of a share can fluctuate rather than remain at a fixed $1. The change was designed to prevent investors from causing a “run” on MMMFs by pulling out of them in a scenario similar to one that occurred during the financial crisis in 2008.
“S. 733 would restore the ability of state and local governments to use prime and municipal stable NAV funds for their essential and critical investment needs,” Emily Brock, director of GFOA’s federal liaison center, wrote in a GFOA letter in support of the bill.
GFOA’s members rely on the stable NAV feature since many governments have in place state or local statutes and policies that require them to invest in financial products with a stable NAV. Funds with a stable NAV are the most commonly used investment by state and local governments, Brock wrote.
“Forcing governments to find alternative investments to prime and municipal MMMFs creates additional risk for public funds by driving them to lower yielding government funds or potentially less suitable products,” Brock wrote. “Such options may not meet liquidity standards required by their governments to meet cash management policies and statutes.”
The SEC rule curbed MMMF’s appetite for short-term municipal securities, decreasing demand and increasing costs to state and local governments, according to the letter. MMMF's are the largest purchasers of short-term municipal securities, Brock wrote.
As a result of the implementation of the floating NAV rule in 2016, MMMFs assets fell by over 40%, shrinking the funding pool available to municipal borrowers by as much as $400 billion in today’s interest rate environment, Brock wrote.
Brock plans to distribute the letter to the Senate Finance Committee.
Chuck Samuels, general counsel to the National Association of Health and Educational Facilities Finance Authorities,
Samuels said he would presumably support the new bill, though he had not seen the reintroduced version. NAHEFFA members are supportive of keeping the market open and viable for mutual funds, Samuels added.
“The mutual funds have always been a significant purchaser and you want to have as many purchasers available as possible so you can get the best economic deal for the borrowing nonprofits,” Samuels said. “The previous regulatory actions really closed down that market, so if this legislation will open it up, then we’ll support it. We’re for market opening legislation.”
The 2017 bill did not go past the Senate, and Samuels said it could have been caused by a difference of agreements in the mutual fund market industry but couldn’t specify where the hangup might be. The bill is bipartisan, boasting two Democrats among the four Senators (including Toomey) who have signed on as sponsors so far.
“Just from the point of view of people who are trying to provide low-cost financing opportunities for nonprofit health and education, it would be good to get this particular purchasing market back on its feet,” Samuels said.
