So far, federal help to state and local governments has been limited and complex. The first stimulus program (CARES Act; P.L. 116-136), signed March 27, 2020, allocated $150 billion to states, counties with more than 500,000 and cities with more than 250,000 people. The Corona Relief Fund (CRF) details can be found in section 5001 of the Act. Funding was also allocated to tribal communities, U.S. territories and the District of Columbia. Funds are to be used specifically to cover corona virus-related expenses not previously budgeted but not for revenue losses. There’s virtually no guidance (and no requirement) to down-stream the funds to smaller jurisdictions. An updated FAQ was issued on May 28. The FAQ and other information about the program can be found here.
Funds must be spent by December 31st, 2020, which is causing at least one recipient county some headaches. Hidalgo County, Texas is in conversation with its 22 cities about just how to distribute the funding. You can read their story here.
In addition, smaller communities in Texas are receiving less than they expected (see the Bond Buyer article here). While the federal government has paid the full $171 per capita to the state, larger counties and cities, the state has held back funds for smaller jurisdictions. Smaller jurisdictions will receive 20% of an initial disbursement once the jurisdiction has certified it will follow the federal rules. The remaining amount will be made as a reimbursement at some later date — implying that the state may not strictly stick to the per capita amounts. More information on Texas’ distribution of relief funds can be found here.
The CARES Act also created the Municipal Liquidity Facility (MLF), which, as most readers know by now, is a program for the Federal Reserve to purchase short term notes of state and local entities (to be paid back in three years). There are similar population limits for direct note purchases as the CRF (although multi-state entities are eligible for MLF). The purchases must be concluded before December 31, 2020 and are assigned a penalty rate of interest based on rating agency ratings.
The larger eligible entities could, in turn, create their own facilities to purchase notes from their smaller jurisdictions. The most recent FAQ can be found here. The catch? Aside from the time it might take each state or county to set up a home-grown facility, eligible state and local governments bear 100% of the default risk of their smaller cousins. Meanwhile Congress appropriated $35 billion to Treasury, effectively a first loss position, to support the $500 billion facility.
The Federal Reserve seems to be open to comments and has revised criteria several times already. While it is welcome that the Federal Reserve is, for the first time, considering state and local government market conditions, there appears to be limited interest in the program from most eligible issuers, given the penalty rates and the fact that many large, high-grade issuers can enter the market on their own.
The state of Illinois, however, has included $4 billion expected borrowing from MLF in its 2021 budget and recently signed an agreement to initially sell $1.2 billion to the facility. A quick look at where the recent Illinois bond issue is trading and the MLF penalty rates and it doesn’t look like such a bad deal. The state would, of course, have to repay within three years or roll over the debt, perhaps at even higher rates if they are still struggling financially at that time. The Port Authority of New York and New Jersey also announced that it too, will use the facility. Other states are considering the facility as well.
Smaller community El Cerrito, California, recently voted 5-0 to borrow up to $8.9 million short-term notes from capital markets. See the Mercury News (June 3). The city has typically sold notes on an annual basis, but the size of note borrowing has grown with the community’s financial stress. El Cerrito is a community of about 25,000 population, tucked in between Berkeley and Richmond, north of San Francisco. The city has several malls and until the COVID-19 shutdown, sales taxes supported the budget. Now the city, according to the article, expects to end the fiscal year (June 30) with a cash balance of $362,386. Given an audited 2019 General Fund budget of about $40 million, that’s not very many days cash. The state auditor counts El Cerrito in its highly stressed category but other small communities are in a similar boat given revenue losses and mounting retirement costs.
The HEROES Act, (H.R. 6800) which passed the House of Representatives on May 15, 2020, would open up the Municipal Liquidity Facility to political subdivisions with more than 50,000 population. It also eliminates the penalty rates and the requirement that the borrower prove it cannot access credit elsewhere. Most believe the Act is “dead on arrival” at the Senate, but the Senate’s alternative proposals have not yet been made transparent.
Back to small communities. How many people in the U.S. live in communities below 50,000? You might be surprised that the total is nearly 40% of the population. This is actually an undercount, since there are populated unincorporated areas in counties, but we found it difficult to exactly match up census data by population groups. We show population below, as well as the number of governments by type, including special districts and school districts, many of which fall below 50,000.
