Making the Municipal Liquidity Facility a permanent emergency lending program would be “valuable and forward thinking” for the Federal Reserve to implement, the president-elect of the National Association of State Treasurers told a congressional panel Thursday.
“Set parameters that consider the variety of states’ needs and circumstances,” said Connecticut Treasurer Shawn Wooden, who will succeed Indiana’s Kelly Mitchell as NAST president on Jan. 1.
Wooden, who spoke before the House subcommittee on national security, international development and monetary policy, has been Connecticut’s treasurer since 2019.
The Federal Reserve established the $500 billion short-term lending program in March 2020 as the COVID-19 pandemic began to spiral. It was part of the CARES Act, the first of three rounds of federal rescue aid packages. Market volatility at the time resulted in base municipal bond index yields to rise by more than 225 basis points in nine trading days.
Connecticut Office of the Treasurer
It also spurred wider credit spreads to benchmark indices as mutual fund investors pulled more than $41 billion of assets out of the municipal market in less than three weeks.
Only Illinois, the lowest-rated state, and the New York Metropolitan Transportation Authority, tapped the MLF before the facility stopped purchasing eligible notes last Dec. 31.
Illinois, which borrowed $3.2 billion through the program in two installments, paid pay a base rate plus a spread of 330 basis points for its December borrowing, based on its ratings.
The state-run MTA, whose subway and bus ridership in New York plummeted by up to 90% early in the pandemic before stabilizing, borrowed roughly $3.5 billion through the program, also in two installments. In its $2.9 billion December issuance, the MTA sold bond-anticipation notes, using its payroll mobility tax credit, with a 1.33% coupon for those maturing in 2023.
High penalties deterred many municipal issuers from using it.
Wooden proposed several improvements to the MLF structure to make it “shelf ready” for the next crisis. They included lowering the borrowing rates to more competitive taxable market rates that move with the market.
“Due to current restrictions on tax-exempt, cash-flow borrowing, most issuers would expect any borrowing from MLF to be taxable,” he said. “The MLF would be more attractive to borrowers if the rates were set more at competitive taxable market levels and were indexed to track changes in the market.”
Wooden also called for removing a certification requirement that borrowers cannot secure adequate credit accommodations from other banking institutions; flexible forms of state guarantees and pooled borrowings, not just one-off guaranteed borrowings for particular municipalities; and longer credit terms with the creation of a special-purpose vehicle.
In addition, he proposed the creation of special bank-managed program that would enable all local governments to borrow directly from the MLF with state supervision and approval, rather than requiring most to borrow through their state.
“That would be much more efficient to execute,” Wooden said.
Connecticut, which received across-the-board bond rating upgrades this year due to its bolstering of reserves, drew on “talent, preparation and prudent action,” Wooden said.
While the Fed in June allowed states to designate two municipalities or counties as additional direct borrowers, Connecticut pursued no legislative changes to establish eligibility for the MLF “as the impact on our municipalities was less than expected,” Wooden said.
Rep, Andy Barr, R-Kentucky, ranking Republican on the committee, warned that programs such as the MLF should be for emergency use only.
“As the crisis abates and economic conditions improve, the Fed must put those tools back in the box,” he said.