A compromise coronavirus relief bill expected to become law effectively kills the Municipal Liquidity Facility, though it allows the Federal Reserve to reinvent its efforts to help states and local governments without congressional approval.
Congress is set to pass a major $900 billion relief bill on Monday, the second-largest relief bill in U.S. history after getting over a significant hurdle from Senate Republicans seeking to restrict the Federal Reserve’s powers next year.
Sen. Pat Toomey, a Pennsylvania Republican, led an effort last week to disallow the Fed from restarting or duplicating certain programs like the MLF without congressional consent. The MLF expires on Dec. 31, 2020.
Sources say lawmakers were able to reach a compromise that still ends the MLF, but does not otherwise restrict the Fed.
“While that’s still a limitation that’s being placed on the Fed’s 13(3) authorities, it’s far less restrictive from what we were seeing initially being proposed,” said Brian Egan, policy director at the National Association of State Treasurers. “It still leaves the Federal Reserve with a broad array of tools to intervene if needed in the new year.”
Section 13(3) of the Federal Reserve Act allows the Federal Reserve Board to engage in emergency lending, limited to programs and facilities with “broad-based eligibility.”
“The Fed regardless is going to continue doing what it said it was going to do,” Egan said. “It’s going to continue to monitor market conditions and take the appropriate steps it needs to."
Democrats said Toomey’s proposal took away the Fed’s ability to act during a Biden administration. After discussions, it was decided that the MLF could not be reestablished and could not be used again in 2021, said Emily Brock, director of the Government Finance Officers Association’s federal liaison center.
“But he’s not tying the hands of the Federal Reserve to effectively respond to market conditions and for them to be able to help provide emergency lending facilities that would help to stabilize the market,” Brock said. “It’s just they cannot be exactly the same thing as the MLF next time around.”
The MLF was designed for market liquidity, Brock said, and issuers want the Fed to focus on smaller issuers.
The MLF was open to counties with populations of 500,000 or more and cities of 250,000 or more. In June, the central bank allowed U.S. states to be able to have at least two cities or counties eligible to directly issue notes regardless of population.
“The way the package is designed right now is not really well suited to small rural cities because the money goes to big transportation airports and big cities,” Brock said.
In 2021, the Fed could incentivize small rural banks to participate in lending, even leaning on bank-qualified bonds as a tool, Brock said. Bank-qualified debt, also known as BQ debt and bank eligible, allows banks to deduct most of the carrying cost of that debt as a business cost. But it can only be sold by an issuer that issues no more than $10 million of tax-exempt bonds during the calendar year.
“There is a fair amount of things that we haven’t even scratched the surface of that maybe we can start conversations fresh with the Federal Reserve going forward,” Brock said.
If Toomey does become chair of the Senate Banking Committee, which is expected if runoff races in Georgia go red, Toomey won’t forget about his initial proposal, Brock said.
“This is something that he is going to focus on,” Brock said. “Toomey is really well known for sticking to his guns on stuff.”
Toomey will have a tight relationship with the Treasury and Fed, Brock said.
The Fed now has experience with the MLF, so future programs may be different and more useful, said Chuck Samuels, general counsel to the National Association of Health and Education Facilities Finance Authorities.
Only two issuers have used the MLF — the New York Metropolitan Transportation Authority and Illinois. Just last week Illinois
“Based on new needs and the economic situations that will exist in 2021 and the experience of the Fed and Treasury, I’m sure they would be revised programs in any case,” Samuels said.
Janet Yellen will have a hand in future programs if approved by the Senate to become the next U.S. Treasury secretary, but she has taken a strong stance against Fed loan programs as Fed chair in the past.
“Of course now she has a different job as Treasury Secretary and may have a different position,” Samuels said. ‘You’d think she’d be more liberal and less restrictive, but someone like Janet Yellen will apply strict scrutiny to any program.”
