The coming months of the COVID-19 crisis will continue to bring an unprecedented amount of strain on municipal budgets. Here, we review the US Federal Reserve’s groundbreaking recent action that may provide a way to inject much-needed financial capital into cities.
On April 9, the US Federal Reserve announced that it would open a new Municipal Liquidity Facility (MLF) for states and their subdivisions, to help state and local governments manage cash flow pressures to continue serving their communities. The Federal Reserve will directly purchase bonds from state and local governments. In the second, updated term sheet released April 27th, the Fed clarified that this will be available to states, counties with populations of 500,000 or more, and cities with populations of 250,000 or more.
Robert Hockett, an economist, Cornell professor, and former employee at the Federal Reserve Bank of New York and IMF, shared that there may be actions cities can take even if they – like the majority of cities across the country – do not meet the defined population thresholds. Professor Hockett explained that this new MLF essentially “deputizes” municipalities to respond to the pandemic as if they were federal agencies. This action is unprecedented and a significant shift from past practice – and brings critical new opportunities for cities. Professor Hockett has written a three-phase “game plan” for states and cities that encourages governing bodies to convene immediately to discuss how to engage with the MLF; you can read more about his plan here.
So what do cities need to know and do right now to position themselves to take advantage of this new program?
Things to know
Engage with your regional Federal Reserve
The regional federal reserve branches will act as liaisons between municipalities and the Federal Reserve. Because of this, all cities should immediately engage with the Public Affairs Office of their regional branch to express their interest in this program. This signals to the regional branches that they need to stay engaged in this process and communicate effectively with local governments as the process moves forward. Cities can request that information be shared through public engagement processes, such as virtual town halls, for regional offices to share information, and for cities to provide feedback on the program.
Beyond these immediate next steps, the regional agencies will be a key resource for cities moving ahead with this program. The rules and implementation of this are still in development. Cities forming strong connections with regional Fed branches is thus even more important. There is a tremendous opportunity for local governments to weigh in on how the program rolls out.
Consider what could be treated as anticipated revenue
Cities should begin to think creatively about what might be treated as anticipated revenue. This new program uses a very broad definition of revenue that allows for creativity on the part of municipalities. Cities could create projects and mitigation efforts to meet their greatest needs without depending on traditional revenue sources like property and sales taxes. To generate ideas, city leaders should engage their department heads and community partners who serve traditionally marginalized or vulnerable populations.
Partner with other municipalities
While the population thresholds for cities and counties were lowered from the first to the second term sheet, they are still quite high for the majority of US cities. However, according to Professor Hockett, there could be great opportunities for cities under 250,000 to partner with other municipalities. This could be within one county, to be able to meet the 500,000 population per county threshold; or this could be through collaboration with other municipalities in your state or region to participate as a combined entity.
What to do immediately
- If your city has a population of 250,000 or more: begin engaging with your regional branch of the Federal Reserve now, with the asks above.
- If your city has a population of less than 250,000: explore your options for local or regional partnership, and begin connecting with other municipalities.
The Mayors Innovation Project will continue to monitor this rapidly evolving program and bring you the latest updates on how you can use it in your city.
Federal Reserve Board announces an expansion of the scope and duration of the Municipal Liquidity Facility
New York Times: Fed Gearing Up to Help Smaller Local Governments
Forbes: Welcome To Community QE – Now Let Us Put It To Use