Fed opens the door wider to more counties, states for participation in municipal funding facility

More counties and cities will be eligible to participate in a facility meant to buy up municipal debt – and for a longer time, the Federal Reserve said Monday.

In a release, the Fed said U.S. counties with a population of at least 500,000 residents, and U.S. cities with a population of at least 250,000 residents, would be able to participate in its Municipal Liquidity Facility (MLF), set up April 9. Notes issued by the municipalities must mature no later than 36 months from the date of issuance. Before the Fed’s announcement Monday, notes could have no more than a 24-month maximum term.

In addition, the central bank said the termination date for the facility has been extended to Dec. 31 “in order to provide eligible issuers more time and flexibility.”

The Fed said it is purchasing up to $500 billion of short-term notes issued by states, counties, and cities under the expanded program.

However, counties and cities (as well as states) participating in the program must have had an investment grade rating as of April 8, 2020, from at least two major nationally recognized statistical rating organizations, the Fed said.

“The new population thresholds allow substantially more entities to borrow directly from the MLF than the initial plan announced on April 9,” the Fed said in the release. “The facility continues to provide for states, cities, and counties to use the proceeds of notes purchased by the MLF to purchase similar notes issued by, or otherwise to assist, other political subdivisions and governmental entities.

“The expansion announced today also allows participation in the facility by certain multistate entities,” the Fed said.

Still more expansion of the MLF program is under consideration, the Fed indicated. The agency said it is looking at expanding the MLF to allow a limited number of governmental entities that issue bonds backed by their own revenue to participate directly in the MLF as eligible issuers. “Any decision to include any such additional eligible issuers would be publicly announced at a future date,” the Fed said.

The MLF was established by the Fed earlier this month, it said, to help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities during the coronavirus crisis.

Federal Reserve Board announces an expansion of the scope and duration of the Municipal Liquidity Facility