The Municipal Liquidity Facility (MLF) was a Federal Reserve (Fed) to buy up to $500 billion in debt from state and local governments that have suffered reduced revenues as a result of the COVID-19 pandemic. Under this program, the Fed purchased short-term securities municipal notes states and the District of Columbia, certain city and county governments, and multi-state entities.
In addition, the Fed monitored liquidity and credit conditions in the primary and secondary markets to municipal titles decide whether to take further action.
Due to coronavirus-related shutdowns, state and local tax revenues have plummeted. Sales taxes went down because people bought fewer goods. Income taxes have fallen amid rising unemployment. To help fill the shortfall, the Fed program purchased municipal notes, allowing states and local governments to continue operating during the crisis.
On November 19, 2020, then-Treasury Secretary Steven Mnuchin said he would not allow the MLF to be extended again after December 31, 2020. The program stopped buying tickets on December 31, 2020. 2020.
Key points to remember
- The COVID-19 pandemic has caused a sharp drop in state and local tax revenues.
- The Municipal Liquidity Facility (MLF) was an initiative of the Federal Reserve (Fed) to provide emergency funding to these governments.
- The Fed bought up to $500 billion in municipal notes.
- The program ended on December 31, 2020.
Municipal Cash Facility Details
The Municipal Liquidity Facility (MLF) made direct purchases of short-term notes issued by all 50 states and the District of Columbia. The Federal Reserve (Fed) also purchased the notes of county governments with populations over 500,000 and municipal governments with populations over 250,000. The Fed originally set population requirements at 1 million for cities and 2 million for counties, but lowered those thresholds on April 27, 2020. It also added multi-entity ratings. States (pacts between States) on the program.
On June 5, 2020, the Fed changed the terms again to give cities and counties in less populated states a chance to qualify. Governors of some states could nominate their most populous city or county (or both, if they qualify) to participate in the program. In addition, the Fed has expanded the program so that each state can designate two “tax bond issuers,” such as a utility or an airport, to be eligible.
The MLF was a special purpose vehicle (VPS). The U.S. Treasury Department provided $35 billion in initial capital from the Exchange Stabilization Fund (ESF), as allocated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The rest of the funding came from the 12 regions Federal Reserve Banks.
The municipal debt instruments eligible for purchase included tax anticipation notice (TAN), income anticipation notes (RAN), bond anticipation notes (BAN) and other similar notes. Eligible debt securities had to have terms until maturity no more than 36 months from the date of issue.
A given state, county or city may have had multiple entities, authorities or instrumentalities who issued the debt in his name. The MLF was limited to buying tickets issued by a single issuer per state, county or city.
The MLF has also limited ticket purchases from any given state, county, or city to an amount equal to 20% of its general fiscal year 2017 revenue. However, states could seek exceptions by under which the MLF would purchase tickets above these limits. The same 20% cap applied to multistate entities and revenue bond issuers, based on their gross revenues in fiscal year 2019.
Eligible issuers had to pay a assembly costs 10 basis points on the principal amount of tickets purchased by MLF. Such commission may be deducted from the proceeds of the issue of Notes. Notes purchased by MLF could be redeemed by the issuer at par at any time prior to maturity. On August 11, 2020, the Fed lowered the interest rate spread on tax-exempt notes by 50 basis points. The rate difference between taxable and tax-exempt tickets has also been reduced.
The MLF stopped buying notes after December 31, 2020. The Fed continued to fund the MLF until its assets matured or were sold.