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What is the Federal Reserve Municipal Liquidity Facility?

BY , Travis Gibbs

Due to measures taken to combat the spread of coronavirus (COVID-19), including stay-at-home orders and the closing of non-essential businesses, state and many local governments will experience significant budgetary challenges due to the loss, or severe reduction of revenue sources, including property taxes, sales taxes, and other fees and charges. One tool that eligible cities, counties, and states have to manage the impacts of the economic slowdown is the Federal Reserve Bank's recently authorized Municipal Liquidity Facility.

In a term sheet dated April 9, 2020, the Federal Reserve released initial details surrounding the Municipal Liquidity Facility, pursuant to which it will lend up to $500 billion to a special purpose vehicle (SPV), which will, in turn, purchase "eligible notes" of "eligible issuers." The Department of the Treasury, under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), will provide $35 billion as an initial equity investment in the SPV.

The SPV will be authorized to purchase short-term notes such as tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes, and other similar short-term notes (collectively, the "eligible notes"), directly from (i) states, including the District of Columbia, (ii) counties with more than two million residents and (iii) cities with more than one million residents (collectively, the "eligible issuers").

Eligible issuers may use the proceeds from eligible notes for a variety of purposes, including, but not limited to, managing the cash flow impact of delayed income taxes due to the extension of the income tax filing deadline, payment of principal and interest on existing obligations, or to purchase similar notes of political subdivisions ineligible to borrow under the Facility.

The Municipal Liquidity Facility currently imposes a deadline of September 30, 2020, for the SPV to purchase eligible notes; however, this deadline may be extended by the board of governors of the Federal Reserve and the Department of the Treasury.

Additional details of the Municipal Liquidity Facility are pending further guidance from the Federal Reserve—developments which the Nixon Peabody Public Finance team will continue to monitor.

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David J. Song


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Travis Gibbs


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