The Washington Weekly: Bankruptcy or Direct Support?

Legislative Recap:

Political furor has struck the US Senate as state and local governments begin to feel the negative effects of the COVID-19 shutdown.  In the past week, Senate Majority Leader Mitch McConnell (R-KY) has indicted that further stimulus may not be needed, and that states should rely on bankruptcy instead of federal bailout.
His comments drew bi-partisan ire, but favor from President Trump.

House to Feature Bond Provisions in Next Stimulus Effort

House Democratic leaders continue to demand up to $1 trillion in funding for state and local governments, however, they will continue to do so from afar as  this week House Speaker Nancy Pelosi (D-CA) announced that the House will remain in recess indefinitely.

This week, Ways and Means Chairman Richard Neal (D-MA) announced his intentions to use bond provisions to help state and local governments. While pressing for direct stimulus to states and locals, the Chairman touted the expansion of PABs and the creation of a new Build America Bonds program that would be untethered from sequestration.

BDA continue to press the Chairman and House leaders to include other BDAprovisions such as the reinstatement of advance refundings, and raising the limit on BQdebt, provisions included in the Ways and Means January infrastructure plan.

Senate Sours on Additional Spending

While the Senate is expected to return to Washington Monday, the legislative calender remains unknown. Senate Banking is slated to debate a Treasury nomination, and while the Senate Finance calender remains bare, state and local governments remain a focus for the Committee due to the recent introduction of the SMART Fund package.

While bi-partisian support remains, Senate Majority Leader McConnell continues to pump the breaks on any additional stimulus, including nixing the idea infrastructure spending in response to the economic downturn.  On a Senate Republican Caucus call this week, Leader McConnell stated, ” We need to keep the White House in the box. The Democrats and the White House both need to get the message” when discussing reigning in Congressional infrastructure spending.

These statements follow his recent musings on allowing state governments to declare bankruptcy, not only alarming Members of Congress, but creating substantial disruptions in the municipal market

Final Thought

The BDA expects “stimulus 4” to be a tough task for the month of May. While economic pressures may start to influence President Trump, this week he seems opposed to direct stimulus to state and local governments by stating the need for immigration concessions for funding.

The BDA remains hopeful the House package will follow the initial steps outlined by Chairman Neal, and this may help to move the conversation forward as the month progresses, forcing the Senate and White House to take the measures seriously.

Federal Reserve Recap:

The Fed continues to move forward taking steps to build out the Municipal Liquidity Facility, while also raising alarm on state and local finances and the long term outlook of the U.S. economy. This week, the Fed announced the expansion of the scope and duration of the MLF, while also laying guidelines for access to the available credit.

The most recent actions follow recommendations from the BDA as well from GFOA and others in the issuer community, who called for lowering the population threshold for access of the facility. The Fed lowered the threshold to U.S. counties with a population of at least 500,000 residents, and U.S. cities with a population of at least 250,000 residents.  A major concession.

The Fed also added detail to the Facility FAQ’s, including allowing longer duration notes, and the requirement for issuers to certify they are unable to secure adequate credit accommodations from other banking institutions before accessing the facility.

The BDA continues to press the Fed for pricing details and to ensure issuers they will not be liable for “downstream” credit risk.

Regulation Recap:

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