MNI EXCLUSIVE: Munis Eye Federal Cash, Fed Loans A Last Resort

--Republicans May Bend On House Bill With USD1 Trillion Of Grants

By Evan Ryser

     WASHINGTON(MNI) - U.S. state and local leaders want federal grants to help

fix huge budget holes as part of a Congressional fiscal package expected later

this month, with some saying that otherwise they might be forced to access the

Fed's municipal liquidity facility despite high rates.

     "The federal government rapidly responded to the economic downturn and took

a number of actions to keep the economy relatively stable," Massachusetts State

Treasurer Deborah Goldberg told MNI. "States and local governments, who have

truly led in the pandemic response, are continuing to face unprecedented revenue

shortfalls."

     The longer the virus shakes consumer confidence, the more municipalities

will need direct aid, sources told MNI. There may be even more political

friction if there is regional divergence in fiscal strength amid a resurgence in

Covid-19 cases in the south and west. Those economies opened earlier after being

encouraged to do so by President Donald Trump and Congressional Republicans in

an election year.

     "Exactly when they have to ratchet up services -- unemployment, housing,

food -- is exactly when they have revenues shrinking," Don Beyer, the top

Democrat on the Congressional Joint Economic Committee, told MNI.

Balanced-budget laws in many states are also "de-stabilizers" that hurt the

economic recovery, he said.

     --JOB CUTS

     State and local government employment fell by 1 million in April and by an

additional 600,000 in May, to levels not seen since 2001, Beyer said. Their

revenues dropped USD140 billion in fiscal year 2020 and could decline by as much

as USD350 billion in 2021, according to a Cleveland Fed study.

     Democrats want to provide USD1 trillion in grants following a bill the

House passed in May. Senate Republicans say they won't support that bill, and

remain divided as to what to propose in its place, with some preferring capping

aid while some favor loans.

     "I would expect more grants than loans," said Brian Riedl, an outside

economic adviser to Senate Republicans now a senior fellow at the Manhattan

Institute.

     The Fed's USD500 billion Municipal Liquidity Facility has been tapped only

once since it opened in April. The state of Illinois tapped into USD1.2 billion

at a rate of 3.82%, but other other states have been forced to reconsider with

their budgets further strained.

     --FED PENALTY RATES

     Hawaii Governor David Ige said his state may draw about USD750 million from

the Fed's facility, a spokesperson told MNI. New Jersey announced last week it

would borrow up to USD9.9 billion from various sources, which could come

significantly from the Fed.

     The Fed facility "includes penalty rates and we can't afford that,"

Wisconsin State Treasurer Sarah Godlewski said. "It is a significant cost and

makes states think that they don't want to use it," over cheaper private

borrowing, she said.

     "The mayors in my district tell me they are excited about what could come

to Alexandria, Arlington, to Fairfax in the next Congressional deal," said

Beyer, the Virginia Congressman.

     "But if that doesn't happen or even if it is toned down a lot then you will

see them go to the Fed's muni facility. Because they have to get through. They

would rather not do it with more debt, but they have to get through," Beyer

said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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