Finance & Tax

Pelosi, Warren press Fed to ride to rescue of cities slammed by pandemic

Congress has given the Federal Reserve a $454 billion pot of money and broad authority to back up the municipal bond market with direct purchases.

Nancy Pelosi

House Speaker Nancy Pelosi and Sen. Elizabeth Warren are among top Democrats pressing the Federal government to do more to help salvage municipal finances as the coronavirus wallops state and local budgets.

"We need to do more by way of our appropriations, by way of our tax code, and by way of policy," Pelosi said Tuesday on MSNBC. "And also by way of the Fed doing more to help the state and local governments with the challenges that they face, which are massive."

Congress has given the Federal Reserve a $454 billion pot of money and broad authority to back up the municipal bond market with direct purchases. But the fund is also available to corporations and will be administered at the discretion of Treasury Secretary Steven Mnuchin and Fed officials, and the rescue package does not specify how much help local government-backed debt will get.

The Fed is aware of the problem, moving earlier this month to free up pressure in the short-term municipal bond market by expanding one of its emergency lending facilities to cover highly rated local government debt.

It also hired Kent Hiteshew, a longtime municipal expert who used to head the Treasury’s office of State and Local Finance.

But the action on short-term debt, while welcome, only affected a fraction of a market that is seeing historic outflows.

Mutual funds and other investors have sold off massive quantities of municipal bonds in recent weeks, opting to park money in more stable assets such as Treasury securities. According to data from financial services company Lipper, net outflows from municipal bond funds in the U.S. totaled more than $13 billion for the week ended March 25.

That has forced local officials to look increasingly to the federal government for help. Late Monday night, the Treasury Department released guidelines on how airlines, cargo carriers, and national security-related contractors could apply for grants and loans. But no such guidance exists yet for local governments.

It was one of many procedures that Treasury is expected to roll out setting terms for the emergency support from the Fed as part of the $2 trillion coronavirus aid legislation that President Donald Trump signed into law on March 27.

Warren, a Massachusetts Democrat, on Monday raised alarm in a letter to Mnuchin and Fed Chair Jerome Powell that the agencies might pay more attention to large companies than to local government agencies.

"Before you begin the process of bailing out big corporations, I urge you to establish programs to provide aid to hard-hit states and municipalities so that they can begin providing additional assistance to Americans who need it,” Warren wrote.

State officials are crossing their fingers, and see the Fed's action on March 23 on short-term lending as an important demonstration of support.

“The crucial thing is that the Fed and Treasury use the authority that I believe they have under that to step in to normalize the muni market, which is somewhere between gravely dysfunctional to utterly stopped,” said Pennsylvania State Treasurer Joe Torsella in an interview.

Torsella and other state treasurers had called for the Fed's help in numerous letters, but he said the central bank's move will affect only about 3 percent of a market valued at nearly $4 trillion. The Fed can take drastic action with the billions provided by Congress, he said.

“My urging would be that those actors hopefully see with some real urgency the need for swift and decisive use of that provision which enables them to step in, in a broad way,” Torsella said.

Local governments are plugging holes in their budgets as revenue has dried up because of residents staying indoors - a significant portion of them now without jobs. The impact is severe for a range of government income sources, from sales taxes, to farebox revenue for transit systems, to hotel and airport fees.

The Trump administration's decision to delay the due date for filing federal taxes is also expected to cut into collections for state and local revenue, Torsella said.

Moody’s Investors Service zeroed in on the problem in a report Friday that said shifting the federal tax deadline — a move that led many states to follow suit with local taxes — means a large portion of revenue will arrive three months later than usual and could create unexpected holes in short-term budgets.

While the Fed may yet step in to do more, the central bank has been reluctant to get too involved in the municipal markets.

Powell said the Fed has “limited authority” to buy short-term municipal debt and historically hasn't waded very deeply into state and local government finance, in an exchange with Rep. Rashida Tlaib (D-Mich.) during an oversight hearing in February.

"Why shouldn’t the Federal Reserve ensure that state and local government have access to funding in times of stress?” asked Tlaib.

Powell said Fed chairs and policymakers “in all kinds of different political environments have thought of that as something that’s not appropriate really for us, in the sense that it’s government finance, that’s to be dealt with by fiscal authorities, rather than by the monetary authority."

Tlaib then asked Powell “do you not believe that the governments of Detroit and Puerto Rico also play a vital role that should be preserved even if a financial crisis makes it hard for them to borrow money?

“What I believe is that, that's not a job for the Fed,” Powell said.

Powell isn't the only Fed leader who has offered such a blunt assessment. Nine years ago, then-Chairman Ben Bernanke told the Senate Budget Committee that “we have no expectation or intention to get involved in state and local finance," as local budgets were flailing during the Great Recession.

Congress has now created an expectation for the exact opposite.

Michael Decker, senior vice president for federal policy for Bond Dealers of America, said Fed action to intervene on short-term municipal issues provided a message of support: “The Fed has demonstrated that if conditions in the market really do become untenable, that they're prepared to act and they're prepared to provide some support.”

“So I am not too worried that we’ll have to compete with other users of the same resource,” he said.

Decker said because the Fed can leverage the stabilization fund — $454 billion of which is dedicated to corporations along with state and local governments — “for a $500 billion dollar Treasury contribution, we could end up with $5 trillion in Fed activity.”

“So it’s a lot, a lot of resources, a lot of liquidity potentially to go around,” Decker said.

Skanda Amarnath, director of research and analysis for Employ America, said remarks from Pelosi as well as House Financial Services Chairwoman Maxine Waters about the Fed backing up local finance have demonstrated strong support from Congress.

“It's something that I think it does have a lot of resonance in Washington, that this should have some priority, but ultimately it's up to the discretion of Secretary Mnuchin and Chair Powell,” said Amarnath, whose a labor-focused advocacy group has been calling for broader Fed involvement in the municipal bond market.

“They’re going to have to decide what’s most important, and it’s not clear how it’s going to shake out," he said. "Some are probably going to come out a little more ahead than others."