On April 9, 2020, The Federal Reserve launched the Municipal Liquidity Facility (“MLF”), a credit facility that will purchase up to $500 billion of Eligible Notes (defined below) issued by eligible states, local governments, and instrumentalities (“Eligible Issuers”). This post provides a comprehensive review of the term sheet published by the Federal Reserve for the MLF, as well as advisories on the eligible uses of proceeds from the sale of bonds to the MLF and the role of States in delivering MLF liquidity to small cities and counties.
Summary of Facility Terms
Eligible Issuers: The MLF may purchase Eligible Notes from any of the following Eligible Issuers:
- the States and the District of Columbia (together, “States”);
- municipalities with a population exceeding one million residents (“Large Cities”), including Dallas, Houston, and San Antonio;
- counties with a population exceeding two million residents (“Large Counties”), including Harris County, Dallas County, Bexar County, and Tarrant County; or
- any instrumentality of a State, Large City, or Large County that issues on its sponsor’s behalf for the purpose of managing the sponsor’s cash flows.
Only one issuer per State, Large City, or Large County is eligible.
Eligible Notes: The MLF will purchase are tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), and other similar short-term notes issued by Eligible Issuers (collectively, “Eligible Notes”). Eligible Notes must mature no later than 24 months after the date of issuance.
Notwithstanding, each note’s eligibility is subject to review and approval by the designated Federal Reserve Bank and relevant legal opinions and disclosures may be required.
Maximum Purchase Limit Per State, Large City, and Large County: The maximum aggregate amount of Eligible Notes issued by or on behalf of a State, Large City, or Large County, that the MLF may purchase (“Maximum Per-Issuer Limit”) is 20% of the general and utility revenue of the applicable State, Large City, or Large County for FY 2017.
Notwithstanding, States may request that the MLF purchase Eligible Notes in excess of their Maximum Per-Issuer Limit in order to assist political subdivisions and instrumentalities that are not eligible for the MLF.
Pricing: Pricing is not yet published, but will be based on the Eligible Issuer’s rating at the time of purchase. The Federal Reserve indicated that additional details will be provided at a later date.
Origination Fee: Each Eligible Issuer that participates in the MLF will pay an origination fee equal to 0.1% of the principal amount of the Eligible Issuer’s notes purchased by the MLF. The origination fee may be paid from the proceeds of the issuance.
Call Right: Eligible Notes purchase by the MLF are callable by the issuer at any time at par, meaning the issuer may pay off a Eligible Note before it reaches it stated maturity date.
Eligible Use of Proceeds: The proceeds of Eligible Notes purchased by the MLF may be used to help manage the cash flow impacts caused by the following (“Qualifying Causes”):
- Potential Increases in expenses related to or resulting from the COVID-19 pandemic;
- Potential reductions of tax and other revenues related or resulting from the COVID-19 pandemic;
- Requirements for the payment of principal and interest on obligations of the applicable State, Large City, or Large County; or
- Income tax deferrals resulting from an extension of an income tax filing deadline.
Additionally, an Eligible Issuer may use the proceeds of Eligible Notes purchased by the MLF to either (a) purchase similar notes from, or (b) otherwise to assist, political subdivisions or instrumentalities of the Eligible Issuer for the purposes detailed above.
Termination Date: The MLF will cease purchasing Eligible Notes on September 30, 2020 (unless extended). The designated Federal Reserve Bank will continue to fund the MLF until its underlying assets mature or are sold.
Scope of Eligible Uses of Proceeds Is Broad: The expenditures that may be financed by the proceeds of Eligible Notes purchase by the MLF appear to include those made either in connection with or as an effect or consequence of the COVID-19 pandemic. Therefore, in the absence of further regulatory restrictions from the Federal Reserve or any State (as applied to its political subdivisions and instrumentalities), eligible expenditures are likely to include the costs of:
- public health equipment, personnel, services, and activities used to prevent, prepare for, and respond to the COVID-19 pandemic (including current and future waves thereof);
- economic relief, technical assistance, and health services to individuals and businesses impacted by the COVID-19 pandemic directly;
- economic relief, technical assistance, and other services to individuals and businesses impacted by the COVID-19 pandemic indirectly, for example, individuals and businesses impacted by the public health measures and activities implemented to prevent, prepare for, and respond to the COVID-19 pandemic; and
- economic relief, technical assistance, and other services to help vulnerable populations (such as people who are homeless, immunocompromised, elderly, imprisoned, or disabled) and their service providers (homeless shelters, Section 854 housing providers, nursing and senior homes, jails, and Section 811 housing providers) prevent, prepare for, and respond to the COVID-19 pandemic.
Small-to-Midsize Municipalities and Counties Should Coordinate with State Issuers: the State of Texas may expend the proceeds of Eligible Notes purchased by the MLF to either (a) purchase notes similar to the Eligible Notes from, or (b) otherwise assist, municipalities, counties, and other political subdivisions or instrumentalities that are not Eligible Issuers, provided such subdivisions and instrumentalities use the proceeds of State assistance toward eligible expenditures (described above). To ensure State implementation achieves local priorities, Texas local governments should communicate with, and monitor developments at, the Texas Legislature, the Texas Bond Review Board, the Texas Attorney General’s Public Finance Division, and Texas Comptroller’s office in connection with the programs established and regulations adopted by the State in its delivery of MLF liquidity to small and mid-size local governments.