The Municipal Liquidity Facility (MLF) is an initiative by the Federal Reserve to provide up to $500 billion of credit to state and local governments that have seen their revenues collapse during the COVID-19 coronavirus crisis. Under this program, the Fed will buy short term municipal notes directly from the states, the District of Columbia, eligible local governments, and Multi-State Entities. It will also monitor conditions in the primary and secondary markets for municipal securities to decide if the Fed should take additional action.

Because of COVID-19-related shutdowns, state and local tax revenue has plummeted. Sales taxes are down because people are purchasing fewer goods, and income taxes are down as rising unemployment lowers household incomes. To help make up this shortfall, the Fed's program will purchase municipal notes, allowing state and local governments to continue functioning through the crisis.

Key Takeaways

  • The coronavirus crisis is causing a sharp drop in state and local government revenues.
  • The Municipal Liquidity Facility is a Federal Reserve initiative to extend emergency funding to these governments.
  • The Fed will purchase up to $500 billion of municipal notes.

Details on the Municipal Liquidity Facility

The Municipal Liquidity Facility will make direct purchases of short-term notes issued by the 50 U.S. states and the District of Columbia, the governments of counties with populations of at least 500,000 people, and the governments of cities with populations of at least 250,000. Initially the population requirements for cities and counties were much higher, but they were lowered on April 27, 2020. Bonds issued by "Multi-State Entities," compacts made between states, were added on April 27, 2020. On June 5, 2020, smaller states were given the option to designate the largest city and/or county (depending on the state's size) to be eligible for the program, even if they do not otherwise meet the population requirement. In addition, each state may also designate two "Revenue Bond Issuers" such as utilities or airports, that can also sell bonds to the facility. These population thresholds were lowered to States that receive assistance under the program may use the proceeds to support any counties and cities within their borders. The facility is authorized to make total purchases of up to $500 billion.

The Municipal Liquidity Facility is a special purpose vehicle (SPV). The U.S. Department of the Treasury will provide $35 billion in initial equity to the program from its Exchange Stabalization Fund (ESF), as appropriated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The remaining funding, up to $465 billion, will come from the 12 regional Federal Reserve Banks.

The municipal debt instruments eligible for purchase by the facility include tax anticipation notes (TANs), revenue anticipation notes (RANs), and bond anticipation notes (BANs), as well as other similar notes. Additionally, eligible debt securities must have terms to maturity of no more than 36 months from their dates of issuance.

A given state, county, or city may have multiple entities, authorities, or instrumentalities that issue debt on its behalf. The facility will limit itself to purchasing notes issued by only one issuer per state, county, or city.

The facility also will limit its purchases of notes from a given state, county, or city to an amount equal to 20% of its general revenues during its 2017 fiscal year. However, states may apply for exceptions under which the facility will buy notes in excess of these limits. The facility is limited to 20% of a Multi-State Entity or Revenue Bond Issuer's gross revenue for fiscal year 2019.

Eligible issuers must pay an origination fee of 10 basis points on the principal amount of notes purchased by the facility. This fee may be deducted from the proceeds of the note issue. Notes purchased by the facility may be called by the issuer at par any time before maturity.

Unless extended by the Fed and the U.S. Treasury, the facility will cease buying notes after Dec. 31, 2020. The Fed will continue to fund the facility until its assets mature or are sold.