Fed Again Expands State and Municipal Lending Program

A couple, wearing protective masks due to COVID-19, walk through social distanced cones for patrons as they pass a seaside pizza shop, Monday, June 1, 2020, in Salisbury, Mass.

A couple, wearing protective masks due to COVID-19, walk through social distanced cones for patrons as they pass a seaside pizza shop, Monday, June 1, 2020, in Salisbury, Mass. AP Photo/Charles Krupa

 

Connecting state and local government leaders

The latest move will ensure that at least two local governments in each state have access to the program, which is designed to help states and localities weather the coronavirus crisis.

The Federal Reserve will expand a $500 billion lending program intended to help state and local governments deal with coronavirus-related financial difficulties so that at least two cities or counties will be eligible to participate directly in the initiative in each state.

Up to this point, the Municipal Liquidity Facility was open to states, as well as counties with at least 500,000 residents and cities with at least 250,000. But some states didn’t have any local governments that reached those population thresholds. 

Governors in 20 states will gain the ability to designate at least one additional city or county to participate in the program under the updated rules, according to guidelines issued Wednesday.

Fed chairman Jerome Powell hinted during congressional testimony in May that the central bank was considering expanding the program so it covered more local governments in states that don’t have heavily populated cities and counties.

Under the revised rules, governors in each state will also be able to tap two entities that generally depend on “operating government activities” for revenue to participate in the program. These entities might include transit agencies, airports, toll roads, or public utilities.

States previously could—and still can—borrow through the program and then transfer the money down to the local level, acting as intermediaries for local governments. But the new rules would grant more government entities direct access to the liquidity facility.

The facility was launched in order to help ensure that states and local governments can borrow at reasonable interest rates to meet their near-term liquidity and cash flow needs at a time when the coronavirus outbreak has upended the economy and undermined a range of tax revenues.

Governments will have to pay off notes issued through the program within three years at most. The program isn’t designed to support the issuance of longer-term debt that states and local governments would typically use to build infrastructure projects.

Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.

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