Fed Expands Municipal-Lending Facility to More Localities -- 2nd Update
04 June 2020 - 5:47AM
Dow Jones News
By Heather Gillers and Nick Timiraos
The Federal Reserve said it would again broaden the number of
local governments eligible for a new lending program as Illinois
announced it would be the first borrower to access the
facility.
The central bank said Wednesday it would allow all 50 states to
designate two cities or counties to sell debts directly to the
central bank's program, creating an option for states with less
populous municipalities to participate. Many state and local
governments are facing cash crises as the coronavirus pandemic has
crushed both their tax intake and driven an increase in their
spending.
The central bank also said state governors will be able to
designate an additional two issuers whose revenues are derived from
operating activities, such as airports, toll facilities, utilities
or public transit, to be eligible to use the facility on their
own.
The changes could allow more than 380 issuers, up from around
260 before the latest changes, to access the emergency-lending
program, which was first announced in April.
So far, however, few have shown interest in borrowing through
the Fed, which has positioned itself as a high-interest lender of
last resort.
Illinois becomes the first to tap the program. It is the
country's most indebted state.
Illinois said it would issue $1.2 billion in one-year notes
Friday to tide it over until income taxes arrive late in July. The
state, which is rated just above junk status, is planning to borrow
through the Fed at an interest rate of 3.82%. The rate is more than
10 times what one-year A-rated bonds were going for Wednesday,
according to Refinitiv.
"When you can't get anybody else to lend you money, you've got
to go to Papa," said Ben Watkins, director of Florida's Division of
Bond Finance.
Municipalities can issue up to three-year debt under the program
originating in federal coronavirus aid legislation. Congress gave
$454 billion for the Treasury to use to backstop losses in Fed
lending programs, and the Treasury has committed $35 billion of
that money for a central bank effort to backstop municipal
debt.
The Fed previously made the program available to all 50 states,
the District of Columbia, and one borrower for each county of at
least 500,000 people and city of at least 250,000. Those thresholds
had already been revised once, down from earlier cutoffs of 2
million and 1 million.
The changes will extend participation in the facility to one
extra municipality in six states, including Alabama and Hawaii,
that currently have just one eligible municipal issuer, and they
will allow two municipal issuers in 15 states, including Idaho and
Vermont, that had none eligible before.
The announcement of a muni-buying program from the Fed injected
confidence into a faltering market. The interest rate on an A-rated
30-year general obligation bond was 2.14% Wednesday, compared with
2.51% on April 8, the day before the Fed formally announced the
muni-lending program.
But the facility itself could be useless to many state and local
governments whose ability to borrow for operating costs is limited
by local law or state constitution. Illinois lawmakers tweaked that
state's law this spring to facilitate borrowing from the Fed
facility.
"Balanced budget requirements, legal restrictions on the length
for which notes can be outstanding, and prohibitions on counting
long-term debt proceeds as current revenue could limit the utility
of the Fed's efforts," said Clayton Gillette, a professor at New
York University School of Law.
Also making state and local governments wary is the high level
of uncertainty about how much revenue to expect. Fitch Ratings
cautioned in a report Wednesday that governments borrowing in
anticipation of delayed revenues could be disappointed if those
revenues are lower than expected when they finally do come in.
Wisconsin capital finance director David Erdman said the state
doesn't plan to issue debt for operations, but if it did, he
expects it could borrow more cheaply in the market than through the
Fed facility.
"But as we've learned from everything that's happened so far in
2020, you really don't know what tomorrow brings," he said.
Write to Heather Gillers at heather.gillers@wsj.com and Nick
Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
June 03, 2020 15:32 ET (19:32 GMT)
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