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1 1 (August 14, 2020)

handle is hein.crs/govdbjy0001 and id is 1 raw text is: August 14, 2020 COVID-19: The FederalReserve's MunicipalLiquidity Facility State and local (municipal) governments is sue debt (often called bonds) for a variety of purposes, including infrastructure construction. In April2020, the Federal Reserve (Fed) announced thecreation of the Municipal Liquidity Facility (MLF) to ease pressures in municipal debt markets causedby Coronavirus Disease 2019 (COVID-19). Pressures eased around the time the MLF was announced. One municipality has used the MLF to date. R et-, - t A c-ti,, ta 0.',, 01k, State and local governments faced two financing problems early in the pandemic. First, they faced budgetary pressures causedby COVID-19's effects on revenues and spending. Second, they faced a disruption in lmunicipalbond markets at the onset of the COVID-19 crisis, which hindered their ability to is sue debt. This disruption was triggered by a decline in investor demand causedby uncertainty about COVID-19's effects on municipalbond markets and the economy more generally. Beginning in April, municipal debt market activity has rebounded as investor fears have subsided. Table 1 shows the volume of new municipal is suances in 2020 in nominal terms and as a reflection of 2019 activity. Following a 31% year-over-year decline in March 2020 issuance volume, new is suances returnedto roughly 2019 levels in April and May, before increasing in June and July. The year to date 2020 issuance volume through July is 19% larger than 2019 levels over the s ame period. Table I. New Municipal Issuance Volume, 2020 New Issuance Volume (in Change from Month billions) 2019 January 2020 32.9 +16% February 2020 41.7 +55% March 2020 19.5 -31% April 2020 28.7 -4% May 2020 30.0 -1% June 2020 60.6 +34% July 2020 52.9 +54% Year to Date 2020 266.3 +19% Source: Municipal Securities Rulemaking Board. Some of the recent rebound in activity may be a reflection of broader improvement in market conditions. General interest rates, which were already low by historical standards before the crisis, declined further in the past few months. The Bond Buyer reported an average yield on 25- year municipalrevenuebonds of 2.51% for the weekof July 30, down from3.10% in the first weekof 2020. Lower yields reduce the interest costs to lmunicipalgovernments when issuing debt. Over the sant period, 30-year (federal) Treasury yields declined from2.32% to 1.20%. Despite relatively normal conditions for new debt issuances, there are stillconcerns about municipalities' abilities to make existing debt payments in the coming months. State and local governments are statutorily required to balance their operating budgets, and COVJD-19 has both decreased s tate and local revenues and increased spending demands onhealth, education, and other services. Such a s ituation increases the risk that municipal governments may default on existing obligations if those budgetary gaps are not addressed elsewhere. Late or miss ed payments would then likely lead to a drop in municipal credit ratings, which could hamper future municipal borrowing efforts. M.uii.,ip,a, Uq, it Radi. The Fed acts as a lender of las t resort, traditionally to banks, to provide liquidity directly to ensure continued access to needed funding. The Fed has set up a series of emergency facilities, including the MLF, in response to COVJD-19, expanding its lender of last resort role to other sectors of the economy. This marked the first time the Fed has purchased municipal debt since the 1930s. The MLF was announced as a $500 billion program It purchases newly is sued debt fromeligible is suers, which is backed by anticipated taxes, bonds, or revenues and matures within three years. All states and the District of Columbia are eligible to use the facility,but a limited number of cities and counties are eligible. To be eligible, a city must have at least250,000 residents, and a county must have at least 500,000 residents. For states that donothave a combination of at least two cities or counties meeting that size threshold, the state may designate two of its largest cities or counties to participate. Figure 1 shows the eligible issuers. Issuers also had to have an investment grade credit rating before April 8 to be eligible. The interestrate on the debt is based on the is suer's credit rating, with lowerrated is suers paying a higher interest rate. There is also a limit on how much debt any is suer may sell to the Fed. The Fed created the MLF under its emergency authority, found in Section 13(3) of the Federal Reserve Act (12 U.S.C. 343). (The Fed's ability to purchase municipal debt under its normal authority is far more limited.) Under this authority, actions mus tbe temporary and approved by the Treasury Secretary. The interestrate must be higher than normal market rates. Actions also mu s t provide s ecurity (e.g., collateral) that is sufficient to protect the taxpayer and be based on sound risk management practices. To absorb A A '2 k yg

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