MNI EXCLUSIVE: Fed Muni Aid Dogged By States Who Can't Accept

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve's USD500 billion for state and

municipal lending is being rejected by a majority of officials who spoke to MNI,

saying it conflicts with balanced-budget laws and cuts off too many cities.

     The unprecedented program targets the USD3.9 trillion municipal debt market

and aims to lend for as long as two years. The loans for now are open to 76

borrowers including states, the District of Columbia, counties of at least 2

million residents and cities of at least 1 million. Senate Minority Leader Chuck

Schumer Monday said Fed Chair Jerome Powell assured him the program will be

expanded to more cities and counties.

     "We also have no cities or municipalities that met the program's population

threshold," Maine's Treasurer Henry Beck told MNI, adding there doesn't seem a

need to tap the facility. "Anything we borrow must be paid back in the same

fiscal year," he said of local financing rules. "That could pose a challenge."

     Officials from Colorado and Connecticut also said they don't have a clear

plan to use the Fed program, and Pennsylvania hasn't decided. California,

Florida and New York didn't respond to requests for comment. While many state

and local governments are squeezed by claims for jobless benefits and business

closures that curb tax receipts, on top of longstanding troubles with pension

costs, there is a deeper problem borrowing short-term for a health crisis that

may create lasting damage. 

     "If we can't rely on a return to normal for ongoing revenues, sales,

etcetera, then making use of the facility might be diverting a cashflow

problem," Beck said. Congress or the Fed could improve aid for states by making

repayment more flexible, he said. 

     --TAXPAYER RIGHTS

     Other states are limited by constitutional provisions making it difficult

to run up debt or require quick repayment, said Dee Wisor, former president of

the National Association of Bond Lawyers. Some legislatures or voters must also

approve debt issued under the current Fed program before it lapses at the end of

September, Wisor said. 

     Treasurer Shawn Wooden of Connecticut has said the state has a

"historically high" USD2.5 billion reserve fund and doesn't anticipate using the

program. The state "may very well" utilize the Fed's program for downstream

municipalities although changes to state law may be necessary, Wooden said.

     Colorado faces a barrier from its taxpayer bill of rights, a

difficult-to-change law limiting taxes and spending. Voters must approve the

"creation of any multiple-fiscal year direct or indirect" debt incurred by the

state. 

     Treasurer Dave Young said that because only his state government qualifies,

he is "considering how to best include cities and counties." Colorado's unique

tax system "limits any short term borrowing," Young said.

     Pennsylvania is awaiting Fed guidance and may need legislation to

participate, according to a spokeswoman. No decision has been made. 

     --CITIES

     The cities of San Jose, Philadelphia, and Chicago are awaiting more

information and evaluating short-term borrowing needs, officials told MNI.

     Phoenix hasn't determined whether it will use the program but details to go

over include "interest rate comparability and affordability, payback terms and

provisions and permissible spending limitations," spokesperson Matthew Heil

said. 

     Houston's Harris County doesn't plan on using the program according to

Treasurer Dylan Osborne. Many local finance leaders aren't even aware of the

program, he said. "The Fed created this, and nobody knows about it."

     Some states may be more well-suited to borrowing Fed cash to lend to cities

and counties. New York has its Dormitory Authority which can lend to any

government and non-government entity in the state.

     "Any technical fixes would have to be on the state-end, state-by-state,

because a number of states have those same requirements for payback of temporary

loans within the fiscal year. There is a mismatch," said Beck, the Maine

treasurer.

     Matt Fabian, partner at Municipal Market Analytics, said: "What the Fed did

was really a patch. There is still injury underneath, but this should hold

things together for a while."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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