New York Transit Authority appeals to Federal Reserve borrowing program
This article was updated on October 12 to correctly reflect the total value of bonds sold by the Metropolitan Transit Authority in August to the Federal Reserve’s Municipal Liquidity Facility.
New York’s Metropolitan Transportation Authority (MTA) sold $ 451 million in three-year bonds to the Federal Reserve’s Municipal Liquidity Facility (MLF) in August, becoming the second municipal issuer to participate in the new loan program from the Fed. Now, as the authority continues to tackle historic revenue deficits caused by the pandemic, plans to borrow an additional $ 2.9 billion to help cover an estimated budget deficit of $ 12 billion over two years.
The actions of the MTA, along with the state of Illinois’ sale of $ 1.2 billion of one-year securities to the MLF in June, show how the program can provide affordable financing to governments and public entities less well rated, helping them to solve cash flow problems. and lost income resulting from the COVID-19 pandemic. Fed money can be used to preserve basic government services and vulnerable budget lines – including contributions to public pension plans, which must continue to provide benefits to retirees despite precipitous cuts in government revenues.
The MTA, which operates public transportation in and around New York City, closed the deal at a rate of 1.93%, including interest and charges, based on a pricing schedule set by the Fed. This price compared favorably to what the MTA could then access in the private market. On the same day, the authority attempted to sell the bonds in a public auction but opted for a deal with the MLF after receiving bids with an average rate of 2.79%. This was more than 80 basis points higher than the cost of borrowing under the Fed’s program launched in May.
The MTA became eligible to participate in the MLF in early June, when the Fed for the second time broadened the eligibility criteria to include smaller cities and counties and other public entities, including “fiscal bond issuers.” Like the transport company. The deal came just a week after the Fed announced a decision to lower program rates by 50 basis points for all issuers – the fourth change in MLF terms since the inception of the program.
The August transaction only used up a small part of the reported MLF loan limit of $ 3.4 billion. The MTA now says it plans to use the remaining funds to help balance its budget as it struggles to maintain operations amid shrinking ridership and overall revenues. Lawrence Schwartz, Chairman of the MTA Finance Committee, mentionned the money is the “cheapest … the MTA will ever get in the form of a loan.”
It is not known whether a second MTA loan would affect the use of the Fed’s program. Most states and localities can still access lower prices in primary markets, even with the rate cut agreed to in August. This is because the MLF is intended to function as a market safety net, with higher “penalty” rates than those generally available in the private market. Only lower-rated issuers – like Illinois, with a BBB rating – and the MTA, with a rating as low as BBB + – found the rates attractive. This trend is expected to continue unless program conditions change or market conditions deteriorate.
Yet for Illinois and the MTA, the MLF provided timely and comparatively cheaper funding. The loan gave officials time to develop more comprehensive tax solutions and await the outcome of Congressional deliberations, which could include significantly more aid for states and communities.
Calls for the Fed to ease MLF terms – making the program more attractive to municipal borrowers of all credit qualities – have increased recently. In August, more than 50 Democratic members of Congress wrote to Fed Chairman Jerome H. Powell, calling for fundamental changes to the program, including calls to eliminate the penalty rate structure and extend the maximum term of eligible loans from three to at least five years. Other lawmakers, however, resisted these changes, claiming that the program has achieved its goal of appeasing the market and should remain in the role of last resort.
Regardless of the MLF funding terms, federal support alone is unlikely to be enough to address the challenges facing state and local governments. Any federal assistance will usually need to be accompanied by withdrawal of reserve funds, budget cuts, or new revenue – strategies that most jurisdictions have already begun to address.
Yet, if direct assistance from the federal government is not expanded, income anticipation financing could become an important tool given the nature of the COVID-19 recession. The current economic shock, while unprecedented in terms of brutality and impact, is expected to ease relatively quickly compared to past recessions. It could also allow states and local revenues to recover more quickly, giving governments the flexibility to use deficit financing to “smooth” the revenue stream through recession and recovery.
Whether the MLF will ever be a very attractive one depends on factors such as the outcome of Congressional deliberations on additional relief spending; the impact of the virus on financial markets and the economy; and, finally, how the Fed is reacting to these developments. Given the uncertainties, national and local authorities would be advised to review the current conditions of the MLF and understand the scenarios in which their governments could benefit from the use of this program.
Greg Mennis is a director and Ben Henken is a partner in the Pew Charitable Trust Public Sector Pension Systems Project.