Groups representing states and localities are urging the Federal Reserve and Treasury to create new programs to buy a wider range of securities and help municipalities grappling with revenue delays due to the coronavirus.
In a letter sent to the Fed and Treasury this week, the National Association of State Treasurers, Government Finance Officers Association and the National Association of State Auditors, Comptrollers and Treasurers pushed for the Fed to buy munis on secondary market and create a financing program to help municipalities struggling with late revenues.
“As you know, an historic cash panic, prolonged paralysis in the primary municipal bond market, and impending budget shocks stemming from the pandemic have all culminated at once, forcing many businesses and nearly every state and local government into an unprecedented state of damage control,” the groups wrote in the letter. “Absent support for the municipal debt market, state and local government budgets will be further stressed at the most inopportune time, particularly as revenues decline as a result of business closures and rising unemployment.”
Last week, Congress passed a $2 trillion COVID-19 emergency relief bill — the Coronavirus Aid, Relief and Economic Security Act — encouraging the Fed to start voluntary purchases of longer-maturity municipal securities through a new $454 billion Economic Stabilization Fund. That fund will provide direct lending, loans, loan guarantees among other investments to support the Fed’s lending facilities.
The groups recommended to the Fed that it create a temporary Municipal Securities Purchasing Facility, which asks the Fed to buy municipal securities in the secondary market.
Over the last few weeks, the primary market has fumbled and essentially been at a standstill, though it has slowly been making a comeback after the CARES Act was passed.
“The primary market freeze that is denying many municipal issuers the credit they need stems directly from pressures in the secondary market, which drives bond valuations in our market,” the letter said. “We believe the most effective way to normalize the volume of primary issues is for the Fed to begin purchasing a large and diverse array of municipal securities in the secondary market.”
However, groups are worried that if the new facility under the CARES Act comes up short of expectations, the market will take a turn for the worse.
“A lot of this confidence coming in has been a result of expectations,” said Brian Egan, NAST policy director. “There is a valid concern that if expectations aren’t met, for all markets, we can risk some of those gains.”
The groups want their new recommended facility to support securities from all types of issuers with a diverse array of credit ratings and terms.
“We appreciate the Federal Reserve’s actions to date, which have provided targeted relief on the short end of the municipal markets, but municipal market benchmarks are largely driven by longer-term maturities,” the letter said. “Therefore, the Federal Reserve must also include longer-term municipal securities (with maturities up to 30- years) in its purchasing programs.”
The groups also want to create a temporary Bridge Lending Facility to give loans to state and local governments that will be experiencing financing gaps due to delayed revenues. Those lines of credit could come directly from the Fed or through conduit banks, the letter said.
The Internal Revenue Service postponed the filing date for 2020 income taxes from April 15 to July 15, which triggers postponements for state and local filings too. Many state and local governments have fiscal years that end on June 30, so postponing those revenues will negatively affect their budgets.
“When you look at a state like Ohio or Pennsylvania where school districts are reliant on a collection of income taxes, that delay could be substantial,” said Emily Brock, director of GFOA’s federal liaison center.
NAST, GFOA and NASACT want the Fed to create a financing program with low or no-interest loans that would be backed by anticipated revenues delayed by COVID-19 response efforts. They asked that the loans be flexible in terms of maturities and open to all types of state and local governments such as conduit authorities.
A private market solution already exists, but the groups say the volume of delayed revenues resulting from COVID-19 are beyond what it could handle.
“Flooding the private market with tax and revenue anticipation notes (TRANs) of the volume needed could risk offsetting the positive impacts of other Federal Reserve actions to stabilize the market,” the groups wrote.
The groups also asked for local government investment pools — money market-like funds established by a group of governments or state treasuries — to have the same guarantees as money market mutual funds.
“Under the guarantee plan, different treatment of LGIPs from MMMFs could result in local government investors forcing LGIPs to sell the very same assets that federal regulators and the administration are looking to backstop, thus accentuating market liquidity stresses,” the letter said.
The American Securities Association sent in its own separate letter to the Fed on Wednesday asking for a broader inclusion of dealers into the Fed’s Primary Dealer Credit Facility.
PDF was launched in late March and allows primary dealers to “support smooth market functioning and facilitate the availability of credit to businesses and households.” The program is currently open to only 24 primary dealers that act as market makers for the New York Fed’s implementation of monetary policy, buying securities directly from the federal government.
ASA wants the Fed to authorize a non-primary dealer credit facility or affirm that non-dealer primary dealer have access to one of the Fed’s credit facilities.
“While credit facilities are necessary to stabilize markets, currently only the largest and most financially interconnected firms (i.e. primary dealers of the New York Fed) are eligible to access the PCDF,” ASA Chief Executive Chris Iacovella wrote in the letter. “This makes little sense given that the current downturn is distinct from past crises, in that it is not yet a financial panic primarily impacting Wall Street. Rather, it is a nationwide economic collapse that is impacting every facet and industry of our economy.
Some of the primary dealers do have muni businesses, but most of them have large retail banking or other focuses.
