Bonds and Financing

Fed gives communities in low population states access to Municipal Liquidity Facility

The Federal Reserve on June 3 said that it is again expanding the scope of the Municipal Liquidity Facility (MLF) created as part of the CARES Act Economic Stabilization Fund.

Previously, the Fed had limited participation in the MLF to: (1) U.S. states (including the District of Columbia); (2) U.S. counties with a population of at least 500,000 residents; and (3) U.S. cities with a population of at least 250,000 residents.

The Fed on June 3 announced steps to give access to the MLF to communities in low population states. Specifically, the governors of 14 states will be allowed to designate two of their highest population cities or counties (that do not otherwise meet the MLF’s population threshold) to have access to the MLF.

Another six states will be allowed to designate one of their highest population cities or counties to have access to the MLF. The remaining 30 states will not be allowed to designate additional communities.

Also, each governor may designate up to two “Revenue Bond Issuers” (RBI) in their state for participation in the MLF. This could include a public power utility.

The Fed said that a “Revenue Bond Issuer” is a state or political subdivision thereof, or a public authority, agency, or instrumentality of a State or political subdivision thereof, that issues bonds that are secured by revenue from a specified source that is owned by a governmental entity.

The MLF is not intended solely as a lender of last resort, but to serve as a purchaser of short-term debt when a qualified issuer is “unable to secure adequate credit accommodations.”

In certifying whether an issuer is unable to secure adequate credit accommodations from other banking institutions, issuers “may consider economic or market conditions in the market intended to be addressed by the MLF as compared to normal conditions, including the availability and price of credit.”

The Fed also pointed out that a “lack of adequate credit” does not mean that no credit is available. Rather, it may mean that lending is available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.

Additionally, issuers may use proceeds of notes purchased by the MLF to, in turn, purchase notes of one of its political subdivisions or other governmental entity.

However, the Fed has emphasized that the issuer would retain the credit risk associated with any notes it purchased from its political subdivision or other governmental entity.

Additional information about MLF can be found on the Fed’s MLF web page.

In late March, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. For additional details about the CARES Act and the CARES Act Economic Stabilization Fund, read this Public Power Daily article.