[Joint House and Senate Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                                                          S. Hrg. 116-1

                 EXAMINATION OF THE MUNICIPAL LIQUIDITY
                  FACILITY ESTABLISHED BY THE FEDERAL
                   RESERVE PURSUANT TO THE CARES ACT

=======================================================================

                                HEARING

                               BEFORE THE

                   CONGRESSIONAL OVERSIGHT COMMISSION

                     ONE HUNDRED SIXTEENTH CONGRESS

                             SECOND SESSION

                                   ON

   EXAMINING THE MUNICIPAL LIQUIDITY FACILITY CREATED BY THE FEDERAL 
                   RESERVE, PURSUANT TO THE CARES ACT

                               __________

                           SEPTEMBER 17, 2020

                               __________

                            Serial No. 116-1
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                            


     Printed for the use of the Congressional Oversight Commission
                 Available at: https://www.govinfo.gov/
                 
                              __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
41-489                    WASHINGTON : 2022                     
          
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                   CONGRESSIONAL OVERSIGHT COMMISSION

FRENCH HILL, Representative          DONNA E. SHALALA, Representative
BHARAT RAMAMURTI, Commissioner       PATRICK J. TOOMEY, Senator

                       Amber Venzon, Chief Clerk
                           
                           
                           C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMISSION MEMBERS

                                                                   Page

Hill, Hon. J. French, a Representative in Congress from the State 
  of Arkansas....................................................     4
Ramamurti, Bharat, an American attorney and political advisor....     4
Shalala, Hon. Donna E., a Representative in Congress from the 
  State of Florida...............................................     1
Toomey, Patrick J., a U.S. Senator from the State of Pennsylvania     3

                               WITNESSES

Edwards, Chris, Director, Tax Policy Studies, Cato Institute.....    44
Gee, Marion, President, Government Finance Officers Association, 
  and Finance Director, Metropolitan St. Louis Sewer District, 
  Missouri.......................................................    35
Hiteshew, Kent, Deputy Associate Director, Division of Financial 
  Stability, Board of Governors of the Federal Reserve System....     5
McCoy, Patrick, Director of Finance, Metropolitan Transportation 
  Authority......................................................    28
Zandi, Mark, Ph.D., Chief Economist, Moody's Analytics...........    55

                         QUESTIONS AND ANSWERS

Questions for the Record submitted to U.S. Treasury from the 
  Congressional Oversight Commission.............................    81
Questions for the Record submitted to U.S. Treasury from 
  Commissioner Bharat Ramamurti and Congresswoman Donna E. 
  Shalala........................................................    81
Questions for the Record submitted to U.S. Treasury from 
  Commissioner Bharat Ramamurti..................................    83
Question for the Record submitted to U.S. Treasury from Senator 
  Pat Toomey.....................................................    83
Department of the Treasury responses to questions from the 
  Congressional Oversight Commission regarding the Municipal 
  Liquidity Facility.............................................    85
Department of the Treasury responses to questions from 
  Commissioner Bharat Ramamurti and Congresswoman Donna E. 
  Shalala........................................................    85
Department of the Treasury responses to questions from 
  Commissioner Bharat Ramamurti..................................    88
Department of the Treasury response to question from Senator Pat 
  Toomey.........................................................    89

                       SUBMISSIONS FOR THE RECORD

Henry C. Levy, Treasurer-Tax Collector, Alameda County Office of 
  the Treasurer and Tax Collector, Oakland, California, Letter...    26
Hill, Hon. J. French, a Representative in Congress from the State 
  of Arkansas, graphic...........................................    69
National Association of Counties (NACo), Washington, D.C., 
  statement......................................................    90
Valerie Ramey, University of California, San Diego (UCSD), 
  Department of Economics, letter................................    76

 
                 EXAMINATION OF THE MUNICIPAL LIQUIDITY
                 FACILITY ESTABLISHED BY THE FEDERAL.
                   RESERVE PURSUANT TO THE CARES ACT

                              ----------                              


                      THURSDAY, SEPTEMBER 17, 2020

                        Congressional Oversight Commission,
                                                   Washington, D.C.

    The Commission met, pursuant to notice, at 10:02 a.m., in 
Room SD-215, Dirksen Senate Office Building, and via Webex, 
Hon. Donna Shalala, Acting Chairman, presiding.

    Present: Representative Shalala, Mr. Ramamurti, 
Representative Hill, and Senator Toomey.

                OPENING STATEMENT OF MS. SHALALA

    Ms. Shalala. This hearing will come to order. This is a 
hybrid hearing, meaning that our Commissioners are appearing in 
person and witnesses will testify remotely.
    Before I begin introducing our witnesses, let me first 
offer a few videoconferencing reminders. Once you start 
speaking, there will be a slight delay before you are displayed 
on the screen. To minimize background noise, please click the 
``Mute'' button until it is your turn to speak or ask 
questions. If there is a technology issue, we will move to the 
next speaker until it is resolved.
    You should all have one box on your screens labeled 
``Clock'' that will show how much time is remaining. All 
Members and witnesses need to be especially mindful of the 5-
minute clock. At 30 seconds remaining, I will gently tap the 
gavel to remind Members that their time has almost expired.
    With that, today we welcome you to this hearing convened by 
the Congressional Oversight Commission. The Commission's role 
is to conduct oversight of the implementation of Division A, 
Title IV, Subtitle A of the CARES Act by the Department of the 
Treasury and the Board of Governors of the Federal Reserve 
System. Subtitle A provides $500 billion to the Treasury 
Department for lending and other investments to, I quote, 
``provide liquidity to eligible businesses, States, and 
municipalities related to losses incurred as a result of the 
coronavirus.''
    As part of our oversight work, the Commission has decided 
to hold this hearing today, which will examine the Municipal 
Liquidity Facility. The Federal Reserve established the 
Municipal Liquidity Facility to provide up to $500 billion in 
lending to State and local governments and other municipal 
issuing authorities.
    Today's hearing will have two panels.
    Mr. Kent Hiteshew, Deputy Associate Director of the 
Division of Financial Stability of the Federal Reserve Bank of 
New York, will testify during the first panel. Mr. Hiteshew 
also previously served as the first Director of the Office of 
State and Local Finance at the U.S. Department of the Treasury. 
Prior to his time at Treasury, Mr. Hiteshew was a public 
finance banker with JPMorgan and its predecessor firm Bear 
Stearns. Mr. Hiteshew is a graduate of Rutgers and earned his 
Master's in City Planning from the University of North 
Carolina, Chapel Hill.
    In the second panel, we will hear testimony from Mr. 
Patrick McCoy, who is Director of Finance at the Metropolitan 
Transportation Authority in New York. Mr. McCoy has also 
previously served as the Executive Director of the New York 
City Municipal Water Finance Authority, the Executive Director 
of New York Water, and the Deputy Director of Finance for the 
MTA. Mr. McCoy earned his Master's degree in Urban Policy 
Analysis and Management from the New School in New York and has 
a B.A. from St. Ambrose University.
    Mr. Marion Gee is President of the Government Finance 
Officers Association. In addition, Mr. Gee has served as the 
Finance Director of the Metropolitan St. Louis Sewer District 
since September of 2015. Previously, Mr. Gee was the Assistant 
Finance Director for the city of San Antonio for 4 years. Prior 
to joining the city of San Antonio, he was employed as Finance 
Director of the Louisville Metropolitan Sewer District for 11 
years. Mr. Gee is a certified public accountant, earned his 
Master's in Business Administration and his Bachelor's of 
Science in Business Administration from the University of 
Louisville.
    Mr. Chris Edwards is the Director of Tax Policy Studies at 
the Cato Institute. Before joining Cato, Mr. Edwards served as 
a Senior Economist on Congress' Joint Economic Committee. Prior 
to his time at the JEC, Mr. Edwards was a manager with 
PricewaterhouseCoopers and an economist with the Tax 
Foundation. He has authored ``Downsizing the Federal 
Government'' and is co-author of ``Global Tax Revolution.'' Mr. 
Edwards is a graduate of the University of Waterloo and holds a 
Master's in Economics from George Mason University.
    Dr. Mark Zandi is the Chief Economist at Moody's Analytics. 
Dr. Zandi is on the board of directors of the Mortgage Guaranty 
Insurance Corporation and serves as the lead director of the 
Reinvestment Fund, which makes investments in underserved 
communities. Dr. Zandi is the co-founder of Economy.com, which 
provides economic analysis data and forecasting, credit risk 
services, and research on countries, industries, and economies. 
Dr. Zandi is also the author of ``Paying the Price: Ending the 
Great Recession and Beginning a New American Century'' and 
``Financial Shock.'' Dr. Zandi is a graduate of the Wharton 
School of the University of Pennsylvania and earned his Ph.D. 
at the University of Pennsylvania.
    We are fortunate to have these five witnesses appearing 
today and appreciate their time. The Commission would like to 
note for the record that it also invited the Treasury 
Department to participate in the hearing, but the Treasury 
Department declined.
    In the absence of a Chair, the Commissioners have agreed to 
each have 1 minute of opening remarks. I will now recognize 
myself for an opening statement.
    It is no secret that State and local governments are 
struggling to deal with the economic fallout of COVID-19. They 
have already cut 1.1 million jobs. The city of Miami in my 
district, Florida's 27th, has an estimated budget shortfall of 
nearly $25 million, and the pandemic is not even over yet.
    Miamians did not cause this problem. We were actually very 
prudent. We saved and we went into the pandemic with a $20 
million surplus. COVID-19 wiped that out, and now we face a 
huge deficit.
    South Florida's economy relies on tourist dollars, but the 
tourism industry has been decimated. And while our revenues are 
down, our expenses are up. We need to pay for PPE to protect 
our first responders and update school programs to keep our 
children safe. This problem is not unique to Miami. It is 
happening all across the country.
    The Municipal Liquidity Facility can support $500 billion 
in lending, but to date only $1.65 billion, less than 1 
percent, is being used. I hope we come up with solutions today 
to get State and local governments the support they need and 
their residents desperately need.
    I yield back. I yield to Senator Toomey.

              OPENING STATEMENT OF SENATOR TOOMEY

    Senator Toomey. Thank you, Madam Chair. Let me just say, 
some who criticize the Municipal Liquidity Facility may be 
ignoring its original intended purpose. The CARES Act was meant 
to resolve the immediate liquidity crunch and economic shock 
experienced in March of 2020.
    The Municipal Liquidity Facility was not meant to replace 
private capital markets, be a mechanism to bail out State and 
local governments, nor to be a substitute for fiscal policy. As 
the name implies and consistent with Section 13(3) of the 
Federal Reserve Act on which the CARES Act was built, the 
Municipal Liquidity Facility was meant to be a lender of last 
resort, to stabilize the municipal bond market, and to provide 
liquidity.
    These were unprecedented actions, and the economy today is 
in a very, very different place now than it was 6 months ago. 
State and local revenue shortfalls are far less than what was 
originally projected. The municipal bond markets have 
recovered. Municipal bond issuance is higher, up 21 percent 
year over year through August, as opposed to the down 30 
percent of March. And, importantly, municipal interest rates 
and spreads have returned to their pre-COVID-19 levels.
    Economic data is coming in with greater strength than many 
had forecast, and using this program to do anything more than 
what it was intended to do, which was to provide temporary 
liquidity, would, in my view, be inconsistent with 
congressional intent when it passed the CARES Act. Liquidity in 
the municipal bond market has been restored, and as such, the 
MLF, in my view, should wind down.
    Ms. Shalala. Thank you, Senator Toomey.
    I now recognize Mr. Ramamurti for 1 minute.

               OPENING STATEMENT OF MR. RAMAMURTI

    Mr. Ramamurti. Thank you, Madam Chairwoman.
    In the 6 months since Congress authorized the Treasury and 
the Fed to offer loans to State and local governments, they 
have provided two loans for a total of $1.65 billion. That is 
0.3 percent of the $500 billion lending capacity of the 
program.
    State and local governments are desperate for help, but the 
loans offered by this Administration are so punitive that even 
governments in deep trouble cannot justify using them. Yet, at 
the same time, the Treasury and the Fed are offering much more 
generous no-strings-attached support to many of America's 
biggest and most profitable corporations. It is a shameful 
disparity that reflects this Administration's priorities, 
taking care of big-time executives and wealthy shareholders 
while abandoning emergency responders, teachers, firefighters, 
nurses, and all the people who count on their help; and it will 
further widen the racial income and wealth gaps in this 
country.
    Congress needs to provide direct aid to State and local 
governments immediately, but if Republicans continue to 
stonewall direct aid, the Fed and the Treasury should offer 
much more generous loans so that State and local governments 
can help families, protect jobs, and support our economy.
    Thank you, Madam Chair.
    Ms. Shalala. Thank you.
    Commissioner Hill.

                 OPENING STATEMENT OF MR. HILL

    Mr. Hill. Thank you, Madam Chair, and thank you to our 
witnesses for providing your expertise today.
    Today we are discussing the Municipal Liquidity Facility. 
This continues to be a heated topic on Capitol Hill as State 
and local municipalities determine how best to balance their 
budgets and fight COVID-19.
    Last week, in the House Financial Services Committee we 
held a hearing precisely on this issue. This challenge varies 
widely across the Nation. During the hearing last week, I 
highlighted that the number of COVID cases per State does not 
correlate with how an individual State's economy is actually 
faring.
    For example, Arkansas and New York are ranked very 
similarly in the number of COVID-19 cases per capita, but sales 
tax revenue in my home State of Arkansas is up substantially 
while down in New York. I will discuss this in more detail.
    Ultimately, we need to ensure that our communities can 
reopen in a safe and secure manner and rebuild our great 
economy that we experienced at the beginning of this fateful 
year.
    Thank you, Madam Chair, and I yield back.
    Ms. Shalala. Thank you, Congressman Hill.
    All Members' statements will be added to the hearing 
record. Each of the witnesses' full written testimony will also 
be made part of the official hearing record.
    To allow the Members enough time for questions with each 
witness, we have organized today's hearing into two panels. Mr. 
Hiteshew of the Federal Reserve will testify in the first 
panel, and Mr. McCoy, Mr. Gee, Mr. Edwards, and Dr. Zandi will 
testify in the second panel.
    We will now proceed with the first panel and hear Mr. 
Hiteshew's testimony. At the end of his testimony we will move 
to two rounds of 5-minute questioning.
    Mr. Hiteshew, welcome. You are now recognized for 5 
minutes.

STATEMENT OF KENT HITESHEW, DEPUTY ASSOCIATE DIRECTOR, DIVISION 
   OF FINANCIAL STABILITY, BOARD OF GOVERNORS OF THE FEDERAL 
                         RESERVE SYSTEM

    Mr. Hiteshew. Good morning, Madam Chair, Representative 
Hill, Commissioner Ramamurti, and Senator Toomey. Thank you for 
the opportunity to speak with you about the Federal Reserve's 
Municipal Liquidity Facility. I am very pleased to provide 
information that I hope will be useful to your important 
oversight work.
    At the outset of the COVID pandemic in mid-March, the $3.9 
trillion municipal bond market experienced historic levels of 
turmoil. Market conditions unprecedented--far worse than during 
the onset of the financial crisis in late 2008 or even in the 
days after 9/11, when the municipal market was briefly closed. 
Interest rates soared more than 225 basis points in just 9 
trading days, mutual fund investors pulled over $41 billion of 
assets out of the market in less than 3 weeks, and market 
functioning deteriorated to the point that buyers and sellers 
had difficulty even determining prices. Ultimately, this meant 
that State and local governments were effectively unable to 
borrow, with new issues canceled for lack of investor demand.
    Recognizing the severity of this market dislocation, the 
Federal Reserve quickly moved to use its authorities to 
directly support the municipal markets for the first time in 
its 100-year history.
    First, the inclusion of municipal variable rate demand 
notes as eligible collateral in the Money Market Liquidity Fund 
on March 23 had an immediate and dramatic downward impact on 
short-term municipal rates, providing both significant interest 
cost relief to State and local budgets and increased liquidity 
to the larger fixed-rate municipal market.
    Next, on April 9, the Fed, with the approval of the 
Treasury, announced the MLF would help State and local 
governments better manage the extraordinary cash flow pressures 
associated with the pandemic--caused by both higher expenses of 
fighting COVID on the front lines and sharply delayed and lower 
tax revenues from the resulting economic recession. The 
facility backstops private market capacity to address these 
liquidity needs by standing ready to purchase the short-term 
notes often used by State and local governments to manage their 
cash flows. By addressing the cash management needs of eligible 
issuers, the MLF was also intended to encourage private 
investors to reengage in the municipal securities market, thus 
supporting overall municipal market functioning. With nearly 20 
million employees--that is 13 percent of all employees in the 
Nation--and the responsibility for delivering essential 
services to their constituents, the fiscal stability of State 
and local governments is a crucial component of the Nation's 
overall economic health and its recovery. As of August 31, the 
facility had purchased two issues for a total outstanding 
amount of $1.65 billion.
    Consistent with the Fed's Section 13(3) authority, our 
mandate is to serve as a backstop lender to accomplish these 
objectives--not as a first stop that replaces private capital. 
Accordingly, we have established MLF pricing based on a rate 
that is a premium to normal market conditions as measured over 
an extended period prior to the pandemic, but at a discount to 
stress conditions in March.
    We are also required to protect the taxpayer against loss. 
We cannot make grants or forgivable loans, and we cannot lend 
to insolvent or highly distressed entities. Therefore, we 
measure the success of the MLF based not on its volume of 
lending but, rather, on the condition of the municipal 
securities market and State and local government access to 
capital.
    By these measures, the MLF has contributed to a strong and 
rapid recovery in the municipal securities markets. State and 
local governments and other municipal bond issuers of a wide 
spectrum of types, sizes, and credit ratings have been able to 
issue securities, including long maturity bonds, with interest 
rates that are at or near historic lows.
    Many State and local governments have taken advantage of 
these low rates to refinance their outstanding debt for 
substantial debt service savings, with a resulting record 
issuance of $225 billion of bonds since April 1. And those 
municipal issuers that do not have direct access to the MLF 
have still benefited substantially from this better-functioning 
municipal market.
    Of course, the Federal Reserve continues to closely monitor 
the municipal markets and State and local government borrowing 
conditions and their access to capital, and we remain vigilant 
to any dislocated conditions. We look forward to answering your 
questions today, and I thank you very much for this 
opportunity.
    [The prepared statement of Mr. Hiteshew follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Shalala. Thank you very much.
    As I mentioned in my opening remarks, the Municipal 
Liquidity Facility can support up to $500 billion in lending. 
However, thus far, only two issuers have borrowed a combined 
total of $1.65 billion, which represents less than 1 percent of 
the facility's total capacity. Does the facility's non-use 
indicate a design flaw of the program?
    Mr. Hiteshew. Thank you for that question, Madam Chair. We 
do not think so. This is the first time that the Fed has 
intervened in the municipal market. It is a complex market made 
up of 50,000 unique issuers of various sizes, types, purposes, 
and credit ratings, as I mentioned.
    We had to undertake very quickly to enter into the market, 
and our four principles that were guiding us in terms of our 
design were: speed to announcement and execution, do not let 
the perfect be the enemy of the good; ensure that State and 
local governments had access to liquidity for operating cash--
this is what we heard overwhelmingly from individual issuers 
and associations like GFOA; restore market confidence and 
stability given the unprecedented liquidity crisis in the 
market; and, finally, to your point, to design a uniformly 
applicable, transparent, and easy-to-administer facility.
    We started out on April 9 with the core program 
announcement. We made several changes along the way. As the 
Chair cites, we are learning as we go here, and we have made 
these adjustments. But in the meantime, we have experienced--
and we think this is due to the totality of the Fed's various 
facilities--there has been a sharp recovery in the municipal 
market, and access to the markets has been opened, and 
notwithstanding the two loans that were made in the MLF, there 
is broad access to the market, as I mentioned in my opening 
comments, at historically low interest rates.
    So we think the program has been successful. The mere size 
of the announcement of the program, the $500 billion, had an 
immediate positive impact. How did that happen? Because long-
term investors were comforted that the Fed was standing by to 
meet the liquidity needs of State and local governments to make 
sure that they did not run out of cash and they did not default 
for liquidity purposes as opposed to for credit concerns.
    Ms. Shalala. Thank you. I do have another question.
    Mr. Hiteshew. Sure.
    Ms. Shalala. Many potential borrowers and commentators, 
including three of our four witnesses today in our second 
panel, believe that the terms of the Municipal Liquidity 
Facility are too restrictive. The interest rate is too high; 
the 36-month term is too short; and the use of loan proceeds 
are overly constraining. We understand that the Federal Reserve 
lends at a penalty rate and views itself as the lender of last 
resort. But it also has the discretion to determine what an 
appropriate penalty should be.
    Given the needs expressed by State and local governments 
experiencing economic crisis, why did the Fed establish 
stringent terms that render the program unapproachable for most 
borrowers?
    Mr. Hiteshew. We do not believe that the program is rigidly 
designed. We believe that it is carefully calibrated to meet 
the purpose of the program. Our pricing is based on the 
methodology that is grounded in Federal statute, regulation, 
and our longstanding principles, as adopted by Regulation A in 
2015 by the Federal Reserve after a 2-year rulemaking process 
that included broad public support across the ideological 
spectrum for the imposition of a premium rate in 13(3) loan 
facilities.
    We have adjusted that rate once over the summer as we saw 
the municipal market rally, and we wanted to make sure that the 
backstop continued to provide its intended purpose and to make 
sure, if there should be a sell-off in the future, that we were 
tighter to current market rates. So we have been flexible in 
terms of pricing.
    In terms of the maturity, Madam Chair, the purpose of the 
program is to provide liquidity. Most State and local 
governments are required, as you know, to have balanced budgets 
and have very limited capacity to borrow across fiscal years. 
We wanted to design a program that was applicable to all but 
that, of course, has to recognize that Federal law cannot 
supersede local statutes and Constitutions. And so to the 
extent that issuers have the ability to borrow beyond a year 
for operating and liquidity purposes, we are available to 
provide for that. But I think the key is not to look at what 
the program requirements are but what the results have been in 
the municipal market. We have State and local governments that 
are rushing to market to take advantage of interest rates, low 
interest rates, to achieve significant debt service savings. I 
believe O'Hare Airport announced a refunding for next week in 
which the target is 20 percent savings on their bond.
    Ms. Shalala. Thank you.
    I yield back and turn to Senator Toomey for 5 minutes of 
questioning.
    Senator Toomey. Thank you, Madam Chairman.
    Mr. Hiteshew, I think, if I heard you right, when you were 
discussing how the program--how the pricing works, you said 
that the pricing by design is meant to be at a premium in terms 
of the cost to the prior, what I would consider ordinary 
conditions, but a discount to stressed levels. So, by design, 
is it fair to say that if the market were to return to 
something like the prior ordinary conditions, then a typical 
borrower would be able to go back to the market and access 
credit at more attractive terms than the MLF offers, and that 
that is, in fact, exactly what we have seen?
    First of all, was that the idea? And, secondly, could you 
characterize a little bit more the municipal bond market today, 
the volume, the types of issuers that are able to access it? 
What is pricing like for these issuers? And as a general 
matter, what is the availability of credit for municipalities?
    Mr. Hiteshew. Thank you, Senator. In fact, you may know 
that your home State, the Commonwealth of Pennsylvania, 
borrowed over $400 million yesterday in the marketplace for 20 
years at an average interest rate of 1.93. So that is one 
indication of where rates are.
    By design, based on the Fed's monopoly, muni rates are near 
zero after having approached nearly double digits. The MTA and 
other issuers in March had variable rate debt that was pricing, 
as I said, in the high single digits. Today those are at zero. 
Three-year rates are generally less than 75 basis points. The 
triple A curve is about 20 basis points at that point. Thirty-
year rates with the triple A curve are at 160, generally with a 
spread for a double layer or single layer issue you are going 
to come in at under two and a half.
    Senator Toomey. And can I just interrupt briefly for a 
quick clarification? So those sound like extremely attractive 
rates, certainly by historical standards. Are they generally 
available to issuers?
    Mr. Hiteshew. They are. As I mentioned, we have experienced 
record issuance since the recovery began in April, and, again, 
with interest rates so low, issuers are even issuing 
significant amounts of taxable debt in order to refinance tax-
exempt that the tax rules do not allow them to otherwise do.
    Senator Toomey. Because interest rates are so low.
    Mr. Hiteshew. That is correct.
    Senator Toomey. Yeah. Quickly, because I am going to run 
out of time here, the program by design is available to 
municipalities above a certain size. What does the program 
offer to municipalities that are too small to meet that 
threshold?
    Mr. Hiteshew. The program was designed, again, balancing 
the need to rush to market, to have a perfect program that came 
too late would not have been of help to the municipal market. 
So we had to make decisions, as I said, with 50,000 issuers. So 
we focused on the large ones at first. We slowly increased the 
number. But the benefit to all the issuers is that the market 
has recovered, and the vast majority of issuers have access at 
extraordinarily low rates.
    We also developed a feature that allows downstreaming so 
that States and larger cities and counties have the ability to 
borrow on behalf of their sub-entities if necessary.
    Senator Toomey. So States can be a conduit for the smaller 
municipalities within their borders.
    Mr. Hiteshew. Correct.
    Senator Toomey. Some have suggested that--you know, we have 
two facilities for corporate debt. We have the primary 
facility, and we have a secondary market facility. But yet we 
only have one that is explicitly meant for the municipal debt 
and that there is an inherent unfairness to that. But wouldn't 
it be fair to say that the Money Market Mutual Fund Liquidity 
Facility effectively serves as a tool to provide liquidity in 
the secondary market for municipal debt?
    Mr. Hiteshew. Certainly a certain type of municipal debt, 
commercial paper programs, supports commercial paper, tax-
exempt commercial paper. And the MMLF, the Money Market Fund, 
supports the RDBs. And as I have noted, in particular, that 
second program had an enormously positive impact.
    In terms of the secondary market, we are very cognizant of 
the differences in the markets, and munis are very different 
than corporates, as I think everybody here understands, with 
the number of issuers and the diversity and the idiosyncratic 
nature of the marketplace and the relative illiquidity in the 
marketplace compared to corporates and other markets.
    So our thought was--and we were driven by what we were 
hearing from State and local issuers--get liquidity available 
to us as soon as possible, and we wanted to do that and also 
restore market confidence. We thought that designing a 
secondary market program for munis would have taken longer. 
Munis, as you may know, have very little ETFs in it, and the 
secondary market for corporates is largely being executed 
through the purchases of ETFs.
    So while a secondary market facility could have been 
developed for the muni market, we believe that the MLF was 
better suited and easier and quicker to get into the 
marketplace. If we had needed a secondary market facility, we 
have that capability. But we believe at this point that is not 
necessary, and we hear from market participants regularly. 
Every day we are talking to market participants, and we have 
not heard that they believe one as well. That is the opposite. 
They do not believe a secondary market facility in munis at 
this time is necessary.
    Ms. Shalala. Thank you.
    Mr. Hiteshew. But, of course, we remain vigilant in terms 
of changes to markets.
    Ms. Shalala. Thank you.
    Commissioner Ramamurti.
    Mr. Ramamurti. Thank you, Madam Chair.
    State and local governments have been hit hard by the 
COVID-19 crisis, and they are desperately looking for help. 
Despite that, we have seen report after report of State and 
local governments taking a look at the loans offered through 
the Fed's lending program and deciding that they cannot justify 
taking on such harsh terms. Instead, they are moving forward 
with sharp budget cuts, cuts to our kids' schools, to housing, 
to nutrition programs, and more.
    Mr. Hiteshew, you are leading the Fed's efforts on this 
lending program, so I want to understand why you have chosen to 
make the loans as punitive and unappealing as you have, 
particularly in comparison to what the Fed is offering 
corporate America. So let me give you an example. Through its 
Corporate Credit Program, the Fed has purchased a bond issued 
by Philip Morris that pays about 0.075 percent interest over a 
term of more than 4\1/2\ years. But the Fed is requiring the 
State government, like Kentucky, which has the exact same 
credit rating as Philip Morris, to pay an interest rate of more 
than 2 percent over 3 years--in other words, a rate more than 
double what Philip Morris is paying, despite a shorter loan 
term.
    So, Mr. Hiteshew, why is the Fed demanding such a high rate 
from our own State governments when it is willing to accept 
such a low rate from a company like Philip Morris?
    Mr. Hiteshew. Well, Commissioner, you and I both agree that 
the serious condition of State and local government balance 
sheets needs to be addressed, and we believe that monetary 
policy has limited capacity to do that and, as the Chair has 
said on numerous occasions, believe that we will need more 
fiscal policy to get through this situation.
    With regard to your specific example, I think there may be 
a little bit of apples and oranges there, and I believe that 
you are citing the Secondary Market Corporate Credit Facility. 
The analog to the muni market is the Primary Corporate Credit 
Facility for which there have been zero loans made to this 
point.
    Mr. Ramamurti. Well, respectfully, Mr. Hiteshew--and, 
again, sorry to cut you off, but my time is limited. Look, the 
Secondary Market Corporate Credit Facility is set up under 
Section 13(3). It is subject to the exact same rules and 
regulations as the Municipal Liquidity Facility, and yet there 
seems to be no penalty rate for corporations, but there is a 
significant penalty rate for State and local governments, and 
that is having a serious impact on the functioning of that 
facility. And, look, there are dozens and dozens of these 
examples.
    Just to give you one more, currently the Fed is using 
public money to purchase a bond from Chevron at a rate of about 
0.09 percent over more than 4\1/2\ years while a State like 
Wisconsin with the exact same credit rating as Chevron has to 
pay 1.28 percent over 3 years--again, a substantially higher 
rate despite a shorter term.
    So, look, there are two main variables here that affect how 
punitive these loans are: the interest rate and the length of 
the repayment term. And I want to understand if there is 
anything stopping you from making each of these variables less 
punitive for State and local governments.
    So on the rates, as you noted, the Fed has already dropped 
the interest rates offered to State and local governments by 
half a percentage point, which means that you were not offering 
the lowest possible rates before. Is there anything legally 
that prevents you from reducing the rates further so that they 
are comparable to what corporations are getting from the Fed?
    Mr. Hiteshew. Again, Commissioner, corporations are the 
Secondary Market Program that you are citing. The Primary 
Market and the Main Street Facilities both have premiums that 
are established----
    Mr. Ramamurti. Mr. Hiteshew, can you answer very simply? Is 
the Secondary Market Corporate Credit Facility subject to the 
same 13(3) authority as the Municipal Liquidity Facility?
    Mr. Hiteshew. It is. I am not----
    Mr. Ramamurti. So why is there a difference on the penalty 
rate?
    Mr. Hiteshew. I would like to answer by saying that I am 
not an expert on the Secondary Market Facilities. We would be 
glad to put together a call for you with our General Counsel, 
but they are subject to Reg A. They are in compliance with Reg 
A in a different manner than open market lending.
    Mr. Ramamurti. Okay. And I am sorry to cut you off, just 
because I want to keep moving with my time, and I will take you 
up on that offer. It sounds like potentially there is an 
opening here given what you have said.
    Here is another example: the repayment term. The lending 
facilities for mid-sized companies--and, again, these are 
primary market loans--have a term of 4 or 5 years while the 
State and local lending program only allows 3-year repayment 
terms. Is there any explicit legal restriction that stops you 
from extending the repayment term to 5 years like the corporate 
facilities offer?
    Mr. Hiteshew. There is no legal limitation. We have 
programs that are designed for different markets to reflect the 
differences in those markets.
    Mr. Ramamurti. How about 10 years? Is there anything that 
restricts it from going to 10 years?
    Mr. Hiteshew. The program is designed to restore market 
conditions through making liquidity available to State and 
local governments. In general, State and local governments have 
limited authority to borrow for liquidity----
    Mr. Ramamurti. Sure, but they could obviously change those 
laws if the Fed is offering something that is appealing to 
them.
    Look, my time is up. Thank you, Mr. Hiteshew. It sounds 
like there is no legal restriction that is stopping you from 
making these terms much more generous. I do not think the 
Treasury and the Fed should be treating State and local 
governments worse than big corporations. There is no 
justification for it legally. There is no justification for it 
economically. And I hope that the Fed and the Treasury will 
move quickly to fix these problems.
    Thank you, Madam Chair.
    Ms. Shalala. The gentleman yields back. Thank you.
    Congressman Hill is recognized for 5 minutes.
    Mr. Hill. Thank you, Madam Chair.
    Mr. Hiteshew, you mentioned in your testimony the market 
has largely stabilized from the levels that we saw in April, 
and that was largely due to the announcement of the MLF. Is 
that correct?
    Mr. Hiteshew. Yes. I would just correct that a little bit 
by saying I think you have to look at the totality of the 
Federal Reserve interventions in all the markets. But, 
certainly, the MLF together with the MMLF and the CP program 
all had positive impacts on the muni market.
    Mr. Hill. And to date, the Metropolitan Transportation 
Authority of New York, who we will hear from in a few minutes, 
and the State of Illinois have participated in the program. Are 
there others that you know of that plan on taking advantage of 
the MLF?
    Mr. Hiteshew. Congressman, as a matter of policy, we do not 
disclose applicants until the loans are purchased. But there is 
plenty of----
    Mr. Hill. What is your pipeline right now, would you say, 
in terms of either numbers or dollars?
    Mr. Hiteshew. Again, we have ongoing daily conversations 
with issuers across the country, so we are aware of issuers 
that are interested in the program. We have one specific issuer 
that has come into the pipeline and may be doing a financing in 
the next couple of weeks where----
    Mr. Hill. Thank you.
    Mr. Hiteshew [continuing]. --The notes may or may not be 
purchased, depending on, again, market management.
    Mr. Hill. I understand.
    Mr. Hiteshew. Beyond that, there are a number of other 
major issuers that are contemplating the program.
    Mr. Hill. Thank you. Do you believe the 12/31 deadline for 
the expiration of this facility should be extended?
    Mr. Hiteshew. That is a call for the Board and the 
Secretary of the Treasury to make as we get closer to the end 
of the year. As you know, the Municipal Facility was the first 
facility to be extended from September 30 to December 31. And 
while we are not by any means projecting that we will see any 
kind of market turbulence like we saw in March, there are 
warning signs in the muni market that we should all be aware 
of. The coming cuts and potential downgrades of State and local 
governments could affect market conditions, and so we remain 
vigilant, and we believe that through the end of the year, at a 
minimum, this is an important facility to, again, backstop the 
market, provide confidence to the market so that all issuers, 
whether they are directly eligible or not, have access to 
affordable capital.
    But as we get closer to the end of the year, that will be a 
determination that the Board and the Secretary will make based 
on what market conditions look like at that point.
    Mr. Hill. Thank you very much.
    Mr. Hiteshew. As they will with all the facilities.
    Mr. Hill. Chairman Powell has been vocal over the months 
working with us that the Fed is learning as they go when it 
comes to designing and implementing these 13(3) facilities. And 
as noted, on August 11, the Fed lowered the interest rate by 50 
bps on the Municipal Liquidity Facility, at which point the 
Metropolitan Transportation Authority in New York, who we will 
hear from in a few minutes, took advantage of the program, 
getting a better rate than it could from the street. And this 
is to Senator Toomey's point. Since this is a backstop program, 
as you have testified--and this seems to be in direct 
contradiction to my friend Commissioner Ramamurti in the sense 
that the MTA rejected 20 private sector bids for $1.6 billion 
in offers on their bond anticipation notes and took the Fed up 
on their offer and placed, if my memory is right, about $450 
billion at 1.92 percent at the Fed, even though the street's 
bids were at 2.79. What is your comment on that?
    Mr. Hiteshew. Congressman, the MLF does not set pricing for 
individual loan purchases but, rather, we use a uniform pricing 
grid based on average credit ratings----
    Mr. Hill. I understand that. I have seen the grid, and I 
understand it. But, obviously, it was to the advantage of the 
MTA to come directly to the MLF, which seems to contradict my 
friend. And I am just curious. If the market rate is 2.79, how 
does that reflect you being a backstop lender as opposed to 
someone competing with the private sector?
    Mr. Hiteshew. Again, the facility is uniformly applicable 
and broadly available to eligible issuers, and so on that 
particular day, that was the result of the competitive bidding 
process that the MTA undertook. And we are an open lending 
window, and that was the rate that the MTA qualified for, and 
that was their decision. Again, yes, we act as a backstop, but, 
again, with the number of issuers in the marketplace, there 
will be different prices on different days for different 
issuers.
    Mr. Hill. Thank you, Madam Chair. I yield back.
    Ms. Shalala. Thank you. We will now start the second round 
of questioning by the Commissioners.
    In June, the Federal Reserve lent $1.2 billion to the State 
of Illinois through the Municipal Liquidity Facility. An 
economist on our second panel, Mr. Edwards with the Cato 
Institute, testified it is not appropriate for the Nation's 
central bank to finance the States because, in his judgment, 
the States have a large independent fiscal power to tax, save, 
borrow, and adjust spending. His testimony goes on to say that 
the MLF is an unneeded central bank expansion into State budget 
policy.
    Do you agree with these statements? Why or why not?
    Mr. Hiteshew. The Municipal Liquidity Facility is designed 
to not only provide liquidity to State and local governments in 
an emergency situation, but it is also designed to restore 
market confidence. I think that 6 months since the events, 
those folks who are not as active in the municipal market 
cannot appreciate the stress that that market was under in 
March. You have two issuers on your next panel that can testify 
to their day-to-day heightened concerns about maintaining their 
market access during that period of time. And so the MLF has 
had an enormously important contribution to make to stabilizing 
the markets for all issuers, and I would not want to comment on 
his point about the appropriateness of the lending to locals on 
an individual basis. This is a broad program that is applicable 
on a uniform basis. We do not pick individual issuers. If you 
are eligible and you meet the eligibility criteria, you have 
access to this facility. By design, that is what makes it such 
a powerful facility.
    Ms. Shalala. Actually, it is not so powerful if only 250 
entities are eligible to directly access a facility, and the 
vast majority of nearly 80,000 public issuers are left out, 
with the exception that Governors can designate a couple of 
local governments, which actually pits them against one another 
when they should be instead working toward common goals.
    Why is the Federal Reserve imposing such restrictive 
limitations to access when over 99 percent of the facility 
remains unused? Why is the MLF restricted to just a handful of 
municipalities?
    Mr. Hiteshew. Great question, Madam Chair, and I think it 
goes back to my point about speed to announcement and execution 
and the complexity of trying to set up a Federal lending window 
for 50,000--you said 80,000--unique issuers with a wide 
spectrum of sizes, types, purposes, and credits. So our goal 
was to identify some of the largest issuers, a signal to the 
marketplace that those issuers would have full access to 
liquidity from the Fed window, and in doing so make sure that 
the market works for everybody.
    So if we believed today that we needed to expand the 
aperture of issuers that were eligible, that is something that 
we could certainly do, and we would be glad to work with you 
and your staff and other Members of the Commission to identify 
underserved issuers that we might be able to expand the program 
to serve. But, again, the focus is on the number of issuers 
that are eligible as opposed to what we believe the importance 
of the program has been to make all issuers have access to 
capital at historically low rates.
    Ms. Shalala. Dr. Zandi, the Chief Economist at Moody's, 
testifying in our second panel, is going to testify that State 
and local governments have already cut more than a million jobs 
as a result of the crisis. How does the Federal Reserve 
reconcile its mandate to maximize employment with the very 
restrictive terms it established for the MLF, terms that 
severely limit its use by struggling State and local borrowers? 
That is just a followup question.
    Mr. Hiteshew. Madam Chair--excuse me?
    Ms. Shalala. Go ahead.
    Mr. Hiteshew. I am sorry. Madam Chair, I would like to pass 
on that question and have that be addressed to our policymakers 
and the Chair. I am not here to talk about monetary policy. 
That is not my expertise. I joined the Fed in March with a 
strong background in the municipal markets and public policy 
relating to State and local government finance. So I would say 
that the Chair has advocated for more fiscal policy to deal 
with this crisis and that monetary policy tools are limited in 
their capacity to solve the problem.
    I think all of us would agree that while State and local 
governments cannot cut their way out of this recession, neither 
can they borrow their way out of it. And if the legacy is 
operating deficit financing on State and local government 
balance sheets after this crisis is over, that will limit their 
ability to finance infrastructure, to educate our students, and 
to care for our elderly.
    Ms. Shalala. Thank you. I yield back.
    Senator Toomey.
    Senator Toomey. Thank you very much, Madam Chairman. I just 
want to follow up on a point that Commissioner Ramamurti was 
making earlier, and I want to underscore the MLF is a primary 
market facility. In other words, its purpose is to purchase 
debt directly that is issued directly to the SPV that is set up 
under 13(3) for that purpose.
    The corollary program for corporate lenders is the Primary 
Market Corporate Credit Facility, and that charges a penalty 
rate of 100 basis points above whatever the previously 
prevailing market rate was. And my understanding is there has 
been a grand total of zero issuance into the Primary Market 
Corporate Credit Facility.
    Mr. Hiteshew, is it your understanding that there have been 
no direct issues into this corollary program, the Primary 
Market Corporate Credit Facility?
    Mr. Hiteshew. You are correct, Senator.
    Senator Toomey. So there has been no corporate subsidies 
going on here. I think there is an important point we need to 
keep in mind here. This program was never intended to be the 
mechanism by which we provide subsidized debt to 
municipalities. It is a fiscal question that that poses. Should 
the Federal Government be subsidizing any cost of a State or 
local government? It is a fair question. We can have that 
debate. But it is a fiscal debate, and that was not the purpose 
of these programs. But it was the purpose to ensure that 
municipal and State borrowers would have access to credit.
    And so, Mr. Hiteshew, let me ask you this: Much has been 
made of the fact that there have been only two borrowers under 
this program. Are you aware of a significant number or any 
number--tell us what you know about States and municipalities 
that need access to credit and they cannot get it, they have no 
access to credit?
    Mr. Hiteshew. Senator, I have a long history in the muni 
market. For better or for worse, a lot of people in the muni 
market know me, and they know how to get a hold of me. So I 
have had ongoing discussions with issuers and market 
participants since the first day on the job.
    I can tell you that those first weeks, those first couple 
months, the phones were ringing off the hook to all Members of 
the Fed.
    Senator Toomey. Sure.
    Mr. Hiteshew. There were extreme, extreme concerns out 
there, and that is why we rushed our facility to market so 
quickly.
    Those calls have significantly cut back as issuers have had 
access to the market without the MLF, without needing to go to 
the MLF. They go directly to the market.
    So I would not pretend to be the person who knows about 
every State and local government, the 50,000 issuers out there. 
But of those that are not directly eligible for the program, we 
are not aware of any, as I said in my testimony. But I am sure 
there are some. There are some that have serious credit 
problems, especially if they are secured by, for example, a 
hotel tax, if they are a real estate transaction. There are 
credit problems out there. But we believe that the liquidity 
problems have been addressed.
    Senator Toomey. So I think I heard you say you are not 
aware--you assume that they are out there somewhere, but you 
are not aware of a specific borrower or municipality or State 
that wants access to credit and simply cannot get it.
    Mr. Hiteshew. Not from the MLF.
    Senator Toomey. Okay. Some have suggested that the terms 
should extend much longer than the zero to 3 years. Let me ask 
you this: Is there distress, is there a lack of liquidity, is 
there a nonfunctioning market at the longer end of the maturity 
spectrum in the municipal market today?
    Mr. Hiteshew. Well, there very much was in March and April 
and extending into May, and so that was a tradeoff that we had 
to make, as I said earlier. Do we rush to market something we 
knew we could make work and that would be large? The $500 
billion was not necessarily designed to think that it will all 
be used, but it was meant to make a statement about the 
importance of the municipal market and that the Fed was 
entering that market for the first time in its history. And so 
by rushing to market a large program, open window, 3 years, 
which reflects generally what the maximum that State and local 
governments can borrow for liquidity purposes, we very much 
hoped and we have been pleased so far that it has translated 
into confidence at the long end of the market.
    Senator Toomey. I understand that. But the short question 
is simply: Is there liquidity at the long end of the market 
today?
    Mr. Hiteshew. There is.
    Senator Toomey. Thank you.
    Ms. Shalala. The gentleman yields back.
    Commissioner Ramamurti.
    Mr. Ramamurti. Thank you, Madam Chair.
    Just quickly on Senator Toomey's point, first of all, the 
Secondary Market Corporate Credit Facility is subject to 
Section 13(3), just like this program, and is subject to the 
same penalty rate requirement, so I fail to see why accepting 
such a low rate on the secondary market program is okay for 
companies but we must demand a much higher rate when it comes 
to municipal borrowers. And, second of all, there is a primary 
market program for companies, the Main Street Facility, that 
has done quite a few loans. To date, it offers a 5-year 
repayment term, so it seems to me like without question that is 
an analog to the situation and a clear indication that the Fed 
could certainly extend the repayment term up to 5 years for 
municipal borrowers as well.
    Turning to my next round of questions, the Fed recently 
issued a new statement on monetary policy. One of the main 
takeaways was that the Fed's legal goal of full employment is a 
``broad-based and inclusive goal.'' Fed Chair Powell also 
recently released a statement on racial injustice in which he 
said, ``The Federal Reserve serves the entire Nation. Everyone 
deserves the opportunity to participate fully in our society 
and in our economy, and these principles guide us in all we do, 
including monetary policy.''
    Mr. Hiteshew, I assume you agree with those goals?
    Mr. Hiteshew. Broadly. But, again, I am not here to address 
monetary policy. That is not my expertise, and so I would defer 
to your comments that the Chair made and would not have any 
further comment.
    Mr. Ramamurti. Well, you do in a sense because the Fed 
lending programs, including the State and local government 
lending program that you run, are part of the Fed's exercise of 
its monetary policy power. It has been quite clear about that. 
So don't you think that the goals that I just described should 
guide how you design and implement the State and local 
government lending program?
    Mr. Hiteshew. We are very concerned about the fiscal 
condition of State and local governments. As I said in my 
statement, 20 million workers, 13 percent of the workforce in 
the country, and there is--the recovery of the State and local 
market, State and local fiscal condition is critical to the 
overall recovery of the economy.
    Mr. Ramamurti. Yeah, I appreciate that, and thank you for 
bringing up that point about the people who work for State and 
local governments, because if you look at that data, in my 
opinion, it is pretty clear that the Fed is failing to achieve 
the goals that Chair Powell and others have laid out.
    The Fed's corporate credit facilities and other 
interventions have boosted the stock market, but black families 
do not share equally in that financial success. They make up 
more than 13 percent of the U.S. population but own only 1.5 
percent of stocks.
    Meanwhile, the Fed's failure to provide meaningful help to 
State and local governments is crushing black workers in 
particular. State and local governments have already cut more 
than a million jobs and are projected to cut 2 million more 
without Federal help, and they employ a disproportionate number 
of black workers. In fact, a worker who is laid off in the 
public sector is 20 percent more likely to be black than a 
worker who loses his or her job in the private sector. And I 
think that is part of the reason why the black unemployment 
rate currently is 5.7 percentage points higher than the white 
unemployment rate.
    So when the Fed is stingy with State and local governments 
and generous with corporations and with Wall Street, it further 
widens the divide between black and white families in this 
country.
    So, Mr. Hiteshew, if the Fed wants its recent statements to 
be more than just window dressing, don't you think it needs to 
do a lot more to account for these huge disparities in its 
COVID response so far?
    Mr. Hiteshew. Commissioner, I think that we restored market 
access for the vast majority of State and local governments, 
and that translates directly into benefits in their community 
and preventing more cuts than have already happened. As I said 
in one of my comments earlier, we agree with you that State and 
local governments cannot cut their way out of the steep decline 
in revenues and the rapid decline in revenues that we have 
seen, but neither can they likely borrow their way out of it. 
So----
    Mr. Ramamurti. I appreciate that, Mr. Hiteshew, and, again, 
I am sorry. My time is short. Look, I think you have to be 
realistic about the fact that if no further Federal aid is 
coming from the Federal Government directly, the tool that you 
have in front of you can offer significant relief to State and 
local governments if you make the terms more generous while 
staying within the law.
    And, look, I raised two issues in the first round of 
questions, which were lowering the interest rate and 
lengthening the loan term. It sounded like both of those were 
potentially consistent with the legal restrictions the Fed is 
operating under.
    The other thing I am hoping that you can take a look at is 
something that the Chair mentioned, which is changing the 
eligibility requirements for the lending program. So, for 
example, Guam and Puerto Rico and Indian tribes are shut out 
categorically from this lending program. Other criteria like 
the credit ratings and also the fact that you have to be rated 
by a national statistical ratings organization are also 
exclusionary.
    So will you just commit to me to take a fresh look at each 
of these eligibility restrictions through the lens of whether 
they serve what Chair Powell called ``the Fed's guiding 
principles'' of inclusion?
    Mr. Hiteshew. Commissioner, we would be glad to do that.
    Mr. Ramamurti. Thank you, Mr. Hiteshew.
    I see my time is up, and I yield back. Thank you, Madam 
Chair.
    Ms. Shalala. The gentleman yields back.
    Mr. Hiteshew, let me thank you for your long service and 
for your time and testimony today.
    We will now proceed to the second panel's testimony, and 
after all the witnesses have given their testimony----
    Mr. Hill. Madam Chair?
    Ms. Shalala. Oh, I am sorry. I am so sorry. My good friend 
Commissioner Hill, please.
    Mr. Hill. Thank you, Madam Chair.
    I want to follow up on this secondary market discussion 
that you had with Senator Toomey, and I wondered if you had 
evaluated the use of closed-in funds as a way to participate in 
the municipal secondary market. You noted that exchange-traded 
funds are fairly limited in municipals, but over the decades, 
closed-in funds, while not large cap, have been. Did you 
evaluate that as a potential way to support the secondary 
market?
    Mr. Hiteshew. Thank you, Congressman. We have a team within 
the Fed that works with me on the municipal market and 
potential responses. I would not want to go into too much 
detail in terms of the types of interventions we have been 
evaluating, but suffice it to say that the secondary market 
intervention in the muni market would be complex. And, again, 
for the first time there are a number of considerations that we 
would have to be making. And so, again, we are evaluating the 
markets, and we are prepared to act if necessary. Closed-in 
funds and other ways of accessing or intervening into the 
secondary market have been evaluated, but I would not want to 
go further than that.
    Mr. Hill. Okay, thank you. Let us talk about smaller States 
like Arkansas who received $1.25 billion of CARES Act money. 
They also in one of your modifications allowed Governors to 
designate the largest county or city to be an issuer, potential 
issuer to the MLF. Have you found that Governors taking you up 
on that offer have a majority of the States who were ``small'' 
and did not have a rated large municipality? Are they taking 
you up and designating counties?
    Mr. Hiteshew. We have not received any indication of that. 
You would know better than me, Congressman, but we have not 
heard from the Arkansas Governor about Little Rock, for 
example.
    Mr. Hill. I understand. I fully understand the situation in 
Arkansas. I just was curious more broadly because it 
illustrates, I think, Senator Toomey's point that we do not 
have a lot of Governors actually designating their larger 
cities or counties that were not previously designated as a 
large rated issuer.
    I do want to talk about another challenge to smaller 
States, and that is the use of entities to issue debt, to 
participate in the MLF, and then support lower subdivisions in 
their State. In my home State, we have the Arkansas Development 
Finance Authority, ADFA, and it is the exclusive issuer of 
bonds for State agencies. And, therefore, they have typically 
acted as a conduit.
    Is it the Fed's intention to let these sorts of conduit 
issuers have access to the program?
    Mr. Hiteshew. Congressman, I am familiar with ADFA. I used 
to work with them a little bit when I was an investment banker. 
The program was designed initially to deal with State and local 
governments and their instrumentalities, generally essential 
service public providers. We broadened the definition, as you 
noted, to allow Governors to select up to two revenue bond 
issuers. The only limitation on the revenue bond issuer is that 
it has to be financing governmentally owned assets, so it is 
consistent with the State and local government--consistent with 
the MLF objectives. For example, ADFA probably issues a lot of 
private activity bonds. Those would not be eligible.
    But to the extent that ADFA issues bonds for governmentally 
owned entities and they have a creditworthy revenue stream, 
they may be eligible for the program. We would be glad to talk 
to you about the specifics that you have in mind to determine 
whether, in fact, that entity would have direct access. I think 
it depends on what that entity is financing----
    Mr. Hill. I understand. Well, I think that is a point of 
education in our States where you have a facility such as an 
arena that does not have business now due to the tourism impact 
and in some States government shutdowns. And, therefore, they 
are a public facility, sometimes operated by a county, 
sometimes operated by a facilities board, but they are not 
typically a bond issuer, and that is why I raise it. Is that 
something that you think might work under a conduit like an 
ADFA bond issuer?
    Mr. Hiteshew. It may be able to. And, also, of course, the 
State, or Little Rock, for example, could borrow on behalf of 
one of these arenas or entities pursuant to the downstreaming 
provisions of the original MLF design.
    Mr. Hill. Right. Thank you for your testimony today. I 
appreciate your participation with our Commission, and I yield 
back, Madam Chair.
    Ms. Shalala. Thank you very much, and I apologize, 
Commissioner. Let me thank Mr. Hiteshew for your time, for your 
service, and for your testimony today.
    We will now proceed to the second panel's testimony. Let me 
submit for the record a letter from the Treasurer-Tax Collector 
of Alameda County, Henry Levy. Without objection, for the 
record.
    [The letter follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Shalala. We will now hear from Mr. Patrick McCoy, 
Director of Finance of the Metropolitan Transportation 
Authority.
    Mr. McCoy, you are recognized for 5 minutes.

 STATEMENT OF PATRICK MCCOY, DIRECTOR OF FINANCE, METROPOLITAN 
                    TRANSPORTATION AUTHORITY

    Mr. McCoy. Thank you. Senator Toomey, Representative Hill, 
Representative Shalala, Commissioner Ramamurti, thank you for 
holding today's hearing examining the Municipal Liquidity 
Facility. My name is Pat McCoy, and I serve as the finance 
director of the Metropolitan Transportation Authority in New 
York. The MTA provides critical public transportation services 
to a population of 15 million people, including broad and 
diverse communities that have been most severely impacted by 
the COVID-19 pandemic. This region contributes nearly 10 
percent of national GDP, and it is only possible because of the 
MTA.
    Much like public service providers across the country, MTA 
is experiencing unprecedented financial hardship due to the 
pandemic. Prior to its initiation, the MTA was experiencing an 
$81 million surplus forecasted for our current year and 6 
consecutive months of on-time performance. As a direct result 
of this pandemic, we have projected a $12 billion loss of 
revenue across 2020 and 2021.
    Our core credit, the Transportation Revenue Bond, with 
nearly $30 billion outstanding, has been downgraded five times 
since March, and our long-term credit spreads have increased by 
over 200 basis points.
    The impact continues to be felt, and we are desperately 
seeking $12 billion in Federal funding just to get us through 
2021. Federal funding and financing opportunities through the 
MLF have been critical to the MTA thus far. However, financing 
tools are not a substitute for direct funding assistance and 
cannot solve the unprecedented fiscal crisis that we are 
facing.
    As a frequent issuer with over $46 billion in bonds 
outstanding, market stability is crucial to the MTA. Between 
March 18th and 23rd, all U.S. markets experienced a precipitous 
decline in investor activity due to the pandemic. The $4 
trillion municipal market seized up, resulting in short-end 
yields climbing to nearly 10 percent. With passage of the CARES 
Act and the MLF, credit markets, including the municipal 
market, were provided a critical boost in confidence that had a 
tangible positive impact on the free flow of capital.
    To be clear, the MTA, as well as issuers across the 
country, would prefer funding to financing, especially when it 
comes to MTA's revenue shortfalls and other operating 
challenges brought on by the pandemic. The Federal Reserve 
should maintain this credit program until this crisis plays 
out. Many municipalities are likely to seek working capital 
solutions in the capital markets, which could place a 
significant strain on the municipal market in the near future.
    The MTA was able to utilize the MLF in August with an 
issuance of $450 million of transportation revenue bond 
anticipation notes. Issuing the notes to the MLF provided a 
critical bridge to a long-term solution to address the 
repayment of this debt. Our competitive bid, as noted earlier, 
resulted in 20 bids from ten banks totaling $1.6 billion at 
varying rates. The average true interest cost of the bids 
necessary to clear the issue was 2.79 percent in comparison to 
the MLF cost at 1.93 percent. As a point of comparison, earlier 
in the year we issued $1.5 billion in bonds in early January 
with a true interest cost of 1.32 percent.
    I would like to offer a few suggestions for the MLF that 
have the potential to help governments most in need and to 
provide issuers across the country the additional support to 
manage through the pandemic.
    My first suggestion is regarding timing. Forecasts from 
economists broadly agree that the recession effects of 
necessary shutdowns due to the pandemic will have a lagging 
effect that will last well into 2021. An extension of the MLF's 
origination period into 2021 would very likely mean more access 
for issuers who will need it most.
    The 36-month maximum term of the note is too restrictive. 
Few governments across the country utilize short-term borrowing 
due 
to constitutional or local policy-imposed restrictions. The MLF 
is really only relevant to a few large local governments across 
the country. If the facility was open to underwriting longer-
term securities, a broader set of issuers could use the 
facility to finance infrastructure and finance COVID-related 
revenue losses.
    Second, the Federal Reserve should reconsider the impact of 
penalty pricing to participate in the MLF. Provided the policy 
objective intended by Congress, we would encourage the Fed to 
refine its pricing structures in a way that would not unduly 
penalize an issuer.
    Finally, access. This pandemic has different revenue and 
expenditure effects on different types of issuers, and it will 
continue to have a profound impact on the financial condition 
of governmental units that will continue to serve on the front 
lines of this national crisis. Expanding the facility to 
include an expansive network of essential public service 
providers will help to underpin the infrastructure we use to 
keep the country running.
    I appreciate your consideration of this testimony. The 
MTA's consistent and overarching request from our Federal 
legislators is for direct, unencumbered funding to ensure 
stability in this environment where revenues are falling 
drastically short due to suppressed ridership. But our request 
also extends to support the municipal bond market. We look 
forward to working with you to improve the Municipal Liquidity 
Facility.
    Thank you.
    [The prepared statement of Mr. McCoy follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Shalala. Thank you, Mr. McCoy.
    We will next turn to Mr. Marion Gee, the President of the 
Government Finance Officers Association and the Finance 
Director of the Metropolitan St. Louis Sewer District.
    Mr. Gee, you are recognized for 5 minutes.

STATEMENT OF MARION GEE, PRESIDENT, GOVERNMENT FINANCE OFFICERS 
ASSOCIATION, AND FINANCE DIRECTOR, METROPOLITAN ST. LOUIS SEWER 
                       DISTRICT, MISSOURI

    Mr. Gee. Thank you. Senator Toomey, Representative Shalala, 
Representative Hill, and Commissioner Ramamurti, thank you for 
holding today's hearing on the Municipal Liquidity Facility 
created under the CARES Act. I am Marion Gee, and I am honored 
to be here in my capacity as President of the Government 
Finance Officers Association. But I will also share some 
insight with respect to the Metropolitan St. Louis Sewer 
District where I serve as Finance Director.
    The CARES Act was an important start to provide some relief 
to State and local governments as we attempted to navigate the 
response to the COVID-19 pandemic. The response continues and 
further assistance is needed. The first best option is to 
provide direct Federal funding as it can be rapidly deployed; 
whereas, borrowing is inherently most costly and time-
consuming. Since additional funding is not a guarantee, the 
Federal Government must explore other ways to help State and 
local governments as we navigate these challenging times.
    Today I will focus on the MLF, specifically why local 
governments and State governments are not using that, and 
recommendations to enhance its effectiveness to public sector 
entities.
    Not all public entities providing vital services are the 
same, and each face unique challenges that require practical 
solutions to help us face those challenges. As currently 
designed, the MLF is too costly of a solution for us, nor is 
access widely granted. We all need clean, safe water to take 
the important step of washing hands and for other hygienic 
purposes to protect the public health.
    The National Association of Clean Water Agencies projects 
the total impact to clean water utilities nationwide from lost 
commercial and industrial revenues at $12.5 billion over the 
year and $3.8 billion of revenue losses from increased 
household bill delinquencies due to the COVID-19-related job 
losses.
    Commercial water usage on which my agency bases a portion 
of its bills is projected to decrease by roughly 17 percent 
over the current fiscal year. We will face additional 
challenges as water usage relating to residential customers is 
increasing. The revenue losses and substantial costs for 
maintaining services pose a significant challenge for public 
entities like mine.
    Next, my State and local government colleagues face similar 
revenue struggles and will continue to do so into 2021. Since 
more direct funding is uncertain, we need additional options 
from our Federal partners at a low cost and recognize the 
uncertainty regarding how long this public health crisis will 
last.
    Income, property, and sales taxes are among the main 
sources of revenue for State and local governments. Since 
revenues generally lag behind economic changes, the full 
picture of the pandemic's impact on these will be unknown for 
some time.
    This leads me to the MLF. As currently designed, it is not 
a practical solution for many public entities. Direct access to 
the MLF is too restrictive for most public entities. Only 250 
entities are eligible to directly access the facility, leaving 
out the vast majority of nearly 80,000 public issuers. My 
agency is not an eligible entity to directly access the MLF 
unless it is designated as an eligible revenue bond issuer by 
the Governor.
    Access should be expanded to a larger, more diverse pool of 
issuers. The MLF's 36-month term should be lengthened, and 
borrowers should have greater flexibility with regard to the 
use of the proceeds. The vast majority of public entities issue 
debt for capital needs more than they do for operational needs. 
Issuing 36-month debt is rare. Increasing flexibility so 
borrowers can use proceeds for investments like capital 
projects means job creation and boosting the economy.
    The Fed should extend the underwriting deadline of the MLF 
beyond December 31, 2020. The facility is currently set to 
expire at the end of the year, even though we will not know the 
extent of revenue challenges State and local governments will 
face until well into 2021.
    The MLF pricing is unduly punitive. The penalty pricing 
structure of the MLF term sheets does not make it a viable 
solution for municipal issuers like my agency. Pricing should 
be competitive with the market or lower; issuers in dire 
circumstances should not be penalized. The Fed should create a 
facility to provide relief by purchasing municipal securities 
in the secondary market, similar to the secondary purchasing 
program in the Secondary Market Corporate Credit Facility. 
Given the uncertainty regarding the duration of the COVID-19 
pandemic, we could see a replay of this year's cash crunch and 
selloff in the muni market.
    Thank you for the opportunity to address the Commission 
today. I am happy to address any questions.
    [The prepared statement of Mr. Gee follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Shalala. Thank you, Mr. Gee.
    We will next turn to Mr. Chris Edwards, Director of Tax 
Policy Studies at the Cato Institute.
    Mr. Edwards, you are recognized for 5 minutes.

                  STATEMENT OF CHRIS EDWARDS, 
          DIRECTOR, TAX POLICY STUDIES, CATO INSTITUTE

    Mr. Edwards. Thank you very much for inviting me to testify 
today. I will discuss the Municipal Liquidity Facility and 
State budget challenges. I have two general points.
    First, with the economy rebounding, State revenues likely 
will not fall as much as originally projected. Further aid from 
the Fed or Congress is not needed, in my view.
    Second, the MLF undermines market discipline on State 
borrowing and risks politicizing the Fed.
    Regarding the State budget situation, Bureau of Economic 
Analysis data for the second quarter of 2020 show that total 
State and local tax revenues dipped just 3 percent from the 
first quarter. Sales and income tax revenues fell, but property 
tax revenues increased slightly. Home prices in July were up 5 
percent over last year, and if they stay up, that will help 
boost city and county budgets in the months ahead.
    During the recession a decade ago, local tax revenues did 
not fall, and that is because property tax revenues remained 
stable.
    Looking at the BEA data from the first to the second 
quarters, total State and local tax revenues fell $13 billion, 
but total Federal aid to the States soared $193 billion. That 
suggests to me that the States generally are not short of cash, 
although some places like New York City do face big challenges.
    A recent NCSL survey of 37 States found that tax revenues 
are expected to be down 10 percent on average in 2021 compared 
to original projections. That translates into just a 4 percent 
tax revenue drop from the 2019 peak. Most States can handle a 
downturn with the rainy day funds and spending restraint going 
ahead. It is true that the States differ. New Jersey and 
Illinois saved zero in their rainy day funds, even after 11 
years of economic expansion. That was totally irresponsible, in 
my view. If Illinois had saved in its rainy day fund, it would 
not have needed the MLF loan. And, again, if Illinois had been 
more responsible and saved in its rainy day fund, it would not 
have needed the Federal Reserve loan.
    Here are some concerns about the MLF. Finance expert Robert 
Pozen warned in an op-ed that expanding the MLF could 
politicize the Fed. I mean, imagine if the Fed began making 
regular loans to the States. All those swarms of lobbyists that 
currently surround Capitol Hill today would open offices 
surrounding the Fed's headquarters on Constitution Avenue in 
Washington. That really would not be a good outcome.
    In general, State and local governments are far more 
fiscally responsible than the Federal Government, and not just 
because they have balanced budget requirements but also because 
of the discipline of credit markets. State and local 
governments have strong incentives to act with fiscal prudence 
to boost their credit ratings and lower their borrowing costs.
    Federal Reserve intervention into State and local finance 
undercuts incentives for fiscal responsibility. It makes no 
sense for the central bank to undermine market interest rates, 
which properly reflect market risks and credit risks, in order 
to reward fiscally unsound jurisdictions.
    The first MLF loan went to Illinois, which has probably the 
worst-run finances in the Nation. Did the MLF loans stave off a 
liquidity crisis in Illinois? Not at all. The MLF loan allowed 
Illinois to increase its 2021 general fund budget by 5.9 
percent, including $250 million in salary increases for State 
workers. So the MLF loan discouraged needed restraint in 
Illinois, in my view.
    In the long run, congressional and Fed subsidies undermine 
incentives for State and local policymakers to build rainy day 
funds, to reduce their debt loads, and to pursue restraint.
    So, in closing, what about the economy in general? Some 
analysts support more Federal aid and Fed loans to the States, 
believing it creates a large multiplier boost to the economy. I 
cite evidence in my written testimony that those multipliers 
may not be large. While government spending may boost GDP in 
the short run, a negative side effect is crowding out or 
shrinking the private sector, which undermines long-term 
growth. In the long run, growth comes from innovation in the 
private sector, and if you crowd out the private sector, you 
are going to reduce innovation and growth in the long run.
    More deficit spending also means higher taxes down the 
road, and with the economy now recovering, it is not prudent or 
fair, in my view, to burden younger Americans with even more 
government debt.
    In sum, the MLF undermines the healthy discipline of the 
municipal bond market and the discipline it creates for State 
and local governments. Going forward, the States should build 
larger rainy day funds so when the next recession hits, they 
will be much better prepared.
    Thank you very much.
    [The prepared statement of Mr. Edwards follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Shalala. Thank you, Mr. Edwards.
    We will next turn to Dr. Mark Zandi, Chief Economist at 
Moody's Analytics.
    Dr. Zandi, you are recognized for 5 minutes.
    Dr. Zandi, are you on mute?
    Mr. Zandi. Sorry about that. I apologize.
    Ms. Shalala. We do it all the time.
    Mr. Zandi. I do as well. I apologize.

                STATEMENT OF MARK ZANDI, PH.D., 
               CHIEF ECONOMIST, MOODY'S ANALYTICS

    Mr. Zandi. To start over, I just want to thank the 
Commission for the opportunity to speak and participate today. 
And I also would like to say that my comments are my own and do 
not represent those of the Moody's Corporation.
    I do have a few charts I would like to show. We will see if 
we can do that along the way. I will reference them as we go. I 
will make three points.
    First, the finances of State and local governments have 
been hit hard by the crisis. At Moody's Analytics we estimate 
that State and local governments in their totality will suffer 
budget shortfalls of somewhere between $450 billion and $650 
billion through fiscal year 2022 depending on the ongoing 
pandemic. This is a shortfall relative to a flat budget 
baseline that just assumes that States have enough funding to 
keep the lights on and avoid layoffs. They do not include any 
real discretionary budget increases or address any long-term 
structural problems such as pension or post-employment 
benefits, and they assume that all of the rainy day funds that 
the States have are used.
    States suffering the biggest expected budget shortfalls are 
shown in red and orange in the first chart, so if you can see 
that. States dependent on their oil and natural gas industries, 
including Alaska, Louisiana, North Dakota, and West Virginia, 
will suffer among the most serious budget shortfalls since 
energy prices have collapsed in the crisis. And States hit hard 
by the virus, such as Connecticut, New York, New Jersey, and 
those with large tourist industries, such as Florida and 
Hawaii, will also suffer outsize budget shortfalls.
    Some suggest that State and local governments were 
profligate spenders prior to the pandemic and should not be 
supported. There is no evidence of that. As you can see in this 
second chart, as a share of GDP, State and local government 
spending pre-pandemic was consistent with their spending during 
the past 30 years. Most have done an admirable job of raising 
rainy day funds prior to the pandemic. If you add it all up, it 
was close to 10 percent of total State government revenue. Only 
a handful of States--Illinois, Kansas, and Pennsylvania--did 
not sock something away.
    The second point I would like to make is that, without 
additional fiscal support from the Federal Government, State 
and local governments will have no choice but to cut back on 
payrolls, essential government services, and critical programs, 
and this will severely impact Americans in nearly every 
community and exacerbate the Nation's serious economic 
problems. We estimate at Moody's Analytics that failure by 
lawmakers to provide any additional direct aid to State and 
local governments will threaten the recovery. The odds of 
recession, return to recession is high. It will cut as much as 
3 percentage points from real GDP and erase almost 3 million 
jobs over the next 2 years. This is on top of the little over 1 
million jobs State and local governments have cut in the past 6 
months in response to the crisis. That is equal to 6 percent of 
all jobs. And you can see that in the third chart that I would 
like to show.
    These jobs include obviously very critical jobs, police 
officers, firefighters, health care workers, emergency 
responders, social service providers, teachers. These are folks 
that are critical at any point in time, but particularly in a 
pandemic.
    Finally, my third point is that since it is increasingly 
unlikely that Congress and the Administration will come to 
terms on more aid to State and local government, at least 
anytime soon, the Federal Reserve's 13(3) Municipal Liquidity 
Facility should be made more generous to facilitate its use by 
hard-pressed State and local governments. To this end, I would 
make a few recommendations, some of which you have already 
heard. I would extend the facility's expiration date beyond the 
end of this year. I would lower borrowing costs to make them 
less punitive. I would lengthen terms to make this more 
operational. I would allow for a deferred payment structure 
such as that provided in the Main Street Lending Facility for 
mid-sized companies. And, finally, I would permit MLF funds to 
be used more broadly than they are currently.
    Policymakers deserve a lot of credit for responding 
aggressively to the pandemic. They have used the Federal 
Government's resources to help bridge American households and 
businesses to the other side of the pandemic. The Federal 
Government's financial support has run out, but the pandemic 
rages on. The bridge is unfinished. Unless lawmakers act 
quickly to extend it, many lower-income households and small 
businesses in particular face financial devastation. Congress 
and the Administration should agree to another significant 
fiscal rescue package that includes substantial direct aid to 
State and local governments, and the Federal Reserve should 
become more expansive in its implementation of the Municipal 
Liquidity Facility.
    Thank you.
    [The prepared statement of Mr. Zandi follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. Shalala. Thank you. Thank you, Dr. Zandi, and the other 
witnesses as well for their testimonies.
    As with the first panel, we will move to two rounds of 5-
minute questioning of these witnesses. I will recognize myself 
for 5 minutes of questions.
    Dr. Zandi, let me start with you. Mr. Edwards, a fellow 
economist, testified that the States are facing budget 
challenges, but they can restrain spending and tap rainy day 
funds to balance their budgets without further aid from 
Washington. He also said that millions of American businesses 
have tightened their belts in recent months, so why can't 
governments?
    In your expert opinion, can State and local governments 
simply tighten their belts in lieu of additional Federal 
assistance? What would be the economic and social consequences 
of such a proposal?
    Mr. Zandi. I think the fiscal pressures here are incredibly 
intense, and I mentioned $450 billion to $650 billion through 
fiscal year 2022, so over the next 2 years, and that assumes 
that they use all of the rainy day funds that were quite ample 
coming into this. And if there is no additional support, then 
State and local governments will be put into a position of 
significantly cutting back. That means payrolls, more job loss, 
as I mentioned, 2 to 3 million more in job loss, and that is 
going to happen relatively soon, relatively quickly, if they do 
not get the aid. That means cutbacks in essential government 
services. You know, the key programs, many of those programs 
are critical to supporting the most hard-pressed in our 
communities--lower-income households, smaller businesses. And 
this would be devastating to the economy, very procyclical, 
exacerbating the end downturn.
    I should point out, you know, providing aid to State and 
local government in recessions is tried and true. We do this 
every single time we face this because we know that if the 
Federal Government does not provide help to State and local 
governments, they will have to make those cuts. That will 
exacerbate the recession and make things worse for everyone and 
for the broader fiscal situation. So this is something that we 
have done in each recession. We did it in the financial crisis. 
There is lots of good academic research that shows that. And 
not doing it here would be a significant error.
    Ms. Shalala. Thank you.
    Mr. McCoy, Mr. Edwards testified that the two MLF loans 
have saved the issuing entities interest costs, but that is not 
a goal worth undermining federalism for and pushing aside the 
market interest rates. You represent one of the issuers that 
borrowed under the MLF. How do you respond to that testimony? 
What would be the impact to the MTA and your city's residents 
if the Federal Reserve provided no aid either through the MLF 
or otherwise?
    Mr. McCoy. Thank you for the question. You know, I believe 
that without the MLF, we would incur higher costs. We know 
that, and I included that in my testimony. The facility has 
both practical applicability as well as psychological 
applicability to the entire market, and that has clearly had a 
very calming influence on the market, and the availability of 
this facility for State and local issuers cannot be underscored 
enough. To not have it, I think we would see a very different 
environment in the municipal market today, much more 
challenging conditions for issuers to get in and borrow money 
at rates that, you know, would have been common pre-COVID.
    I hope that answers your question.
    Ms. Shalala. Thank you.
    Mr. Edwards, your fellow panelists all warn of devastating 
job cuts, service cuts, and slow economic rebound across the 
country if additional Federal aid is not provided. My city, 
Miami, had a surplus and a rainy day fund, yet we are also 
facing devastating cuts. Despite overwhelming testimony to the 
contrary, you state that there is no national crisis in local 
government finances. Could you please explain why you believe 
that to be the case?
    Mr. Edwards. Thanks for the question. I agree with Dr. 
Zandi that, you know, some States and some jurisdictions are in 
trouble. Some energy-producing States, like Wyoming and 
Oklahoma, have seen a drop in revenues. In some cities, like 
New York City, they are in trouble. Hawaii is in trouble 
because, you know, they depend on tourism, of course.
    But, generally, if you look back at the recession 10 years 
ago, local governments actually did not lose revenues overall, 
and that is because property tax revenues are very stable. And 
it looks again like during this recession--if things do not get 
worse; they seem to be getting better--that for local 
governments in general that is what we find, because property 
tax revenues will stay strong.
    I would also say that, you know, there is continuing to be 
some money in the pipeline from aid that Congress has already 
passed. I noticed in a news story a couple days ago the 
legislature of North Carolina just now appropriated $1 billion 
from the CARES Act, which was passed 6 months ago. North 
Carolina is just getting around to actually appropriating the 
money now, the $1 billion.
    I also noticed in another news story a couple weeks ago 
that Idaho used $200 million from the CARES Act to cut property 
taxes in the State.
    So, you know, yes, some jurisdictions are in trouble, but 
there are plenty of other jurisdictions, and I think most 
jurisdictions, that are going to do fine, frankly, without 
further aid.
    Ms. Shalala. Thank you. I could not disagree more. I think 
much of that money was obligated.
    Let me yield and turn to Senator Toomey for 5 or 6 minutes 
of questioning. We seem to be going on.
    Senator Toomey. Thank you.
    Ms. Shalala. Whatever you need.
    Senator Toomey. Thank you, Madam Chair.
    Let me follow up on this. According to multiple published 
news reports, last month the Governor of New Jersey proposed a 
$40 billion budget that is $1.3 billion more than the budget 
from last year. This summer, the State of Connecticut gave its 
unionized State workers a 5.5 percent raise. In July, Illinois 
gave hundreds of millions of dollars worth of pay raises to its 
workers. Some States, like New York, have delayed a scheduled 
pay increase, but they have not canceled it because they are 
expecting a Federal bailout.
    Mr. Edwards, does that kind of behavior suggest to you dire 
circumstances that can only be met with additional Federal 
money?
    Mr. Edwards. I agree with your point there. There are a lot 
of States here that are--you know, they are not doing what they 
can to restrain spending in this recession. As I pointed out, 
Illinois just passed a budget where the general fund was 
increased over 5 percent. If Illinois had built up a rainy day 
fund, say, of 10 percent of their spending, that would have 
been around $4 or $5 billion. That would have easily covered 
their short-term cash flow problem. And I actually do not think 
there was a cash flow problem in Illinois. It is just that they 
were able to borrow at a lower Federal rate.
    I think that, you know, during a recession, I think State 
and local governments are learning valuable lessons here. They 
have to plan ahead. They should lower their debt load in 
anticipation that we will have another recession down the road, 
and they should build a bigger rainy day fund.
    So, you know, State and local governments are not 
subdivisions of the Federal Government. They have enormous 
fiscal powers by themselves. And I do not think they ought to 
be running to Washington whenever they get into fiscal trouble. 
I think they can solve their own problems.
    Senator Toomey. So let me look at it from another 
perspective. Mr. Zandi in his testimony, written and oral, 
tells us that the total projected shortfalls through fiscal 
year 2022 are between $450 billion and $650 billion if there is 
a serious second wave of the virus. Now, we had a little bit of 
a second wave in some States over the summer. That clearly has 
abated. And economic numbers are coming in much stronger than 
were projected by just about anyone in recent months.
    So according to Mr. Zandi, the budget shortfall estimate 
through 2022 is $450 billion, maybe higher. But how much money 
have we already sent to State and local governments?
    I would like to submit for the record a page from the 
Committee for a Responsible Federal Budget, Moody's Analytics, 
September 16, 2020, coronavirus funding for State and local 
governments, and it gives a breakdown that adds up to $456 
billion. That is how much we have already sent to State and 
local governments, and the projected shortfall by Mr. Zandi and 
Moody's Analytics is for a shortfall of $450 billion or up to 
$650 billion if there is a serious second wave.
    So, Mr. Edwards, first of all, I do not know if you have 
drilled down into these numbers, but as you point out, there 
are many municipalities where property taxes are coming in at 
or above last year. Do you agree with this range of likely 
shortfalls? And is there a reasonable likelihood that we have 
already sent as much money to the State and local governments 
as their entire shortfall is likely to be?
    Mr. Edwards. Well, first, you know, with respect to Dr. 
Zandi's projections, no one knows the future. Perhaps he is 
right about the size of those shortfalls; perhaps they are 
lower, as I think. I would say there is a measurement issue 
here. Again, if you look at the National Conference of State 
Legislatures' survey of 37 States from a couple weeks ago, they 
show that tax revenues will be down 10 percent next year from 
projected increases. But projected increases were around 6 
percent, so that really translates into about a 4 percent 
revenue loss from the 2019 peak. I do not think that is a 
crisis level of reductions. I think State and local governments 
ought to be able to handle those sorts of revenue shortfalls.
    So, again, I think, you know, local governments could come 
through this pretty well because it does look like property tax 
revenues will stay up. It is true that in some central business 
districts the office commercial real estate will fall, but 
industrial property prices are staying high as well. So, you 
know, I think local property tax revenues will be fine, and I 
think States are going to be able to handle the modest State 
tax reductions.
    A last point on that, actually. You know, the new CBO 
Federal projections came out a couple weeks ago, and they have 
Federal revenue falling--total overall Federal tax revenues 
falling 5 percent in 2020, 1 percent in 2021; then they are 
going to start booming again and rise 15 percent in 2022. So 
the CBO does not think that Federal revenues are really going 
to fall all that far now, and usually State and local tax 
revenues do not fall as far as Federal revenues because the 
Federal tax system is more progressive. So I think State and 
local governments will be fine. I am hoping they will be fine. 
But, you know, I could be wrong. We do not know the future.
    Senator Toomey. Thank you.
    Thank you, Madam Chairman.
    Ms. Shalala. Thank you.
    Commissioner Ramamurti.
    Mr. Ramamurti. Thank you, Madam Chair.
    Just quickly on the point about a second wave, and, look, 
we have plateaued in a situation where 1,000 Americans are 
dying every day, and we are about to enter winter flu season, 
and we have seen in other countries already a resurgence of the 
virus. So I think the idea that we have put a possibility of a 
second wave behind us is not correct.
    But, look, even though we are 6 months into this crisis and 
State and local governments are in rough shape, as we have 
heard from the issuers today, the Fed's lending program has 
made only two loans to date. So, Mr. Gee, you represent State 
and local government financing officers across the country. Do 
you think the Fed's State and local lending program has had so 
little uptake because State and local governments already have 
all the resources that they need?
    Mr. Gee. No, sir, I do not. I believe that the reason that 
you do not see usage centers around the way that the program is 
structured. As I mentioned earlier during my remarks, the 3-
year term is restrictive, as is how the proceeds can be used. 
State and local governments are basically penalized if they use 
that liquidity facility, which is why I think you will not see 
issuers take advantage of it.
    Mr. Ramamurti. Thanks. And, look, we have talked about it 
in the abstract, but I just want--you are on the ground, so I 
want to get your sense of what are the concrete impacts of this 
budget crunch. If State and local governments do not get 
additional help, either directly through the Federal Government 
or through this lending program, what are the consequences of 
that? And who is bearing the brunt of those changes?
    Mr. Gee. Citizens are bearing the brunt if no action is 
taken. What we are seeing is crucial services being cut, things 
like homeless prevention services, public health-related 
services. So we are not out of the woods yet. I think that some 
may have too rosy of a viewpoint that things are turning 
around. Quite frankly, that is not what I am seeing or hearing 
from my colleagues throughout the country.
    Mr. Ramamurti. Thank you. And, look, there has been plenty 
of data talking about this idea of a K-shaped recession where 
people who were already well off coming into the crisis are 
doing okay, but people with lower incomes are really suffering. 
And, of course, the cuts to State and local government that you 
are talking about also tend to fall disproportionately on those 
folks who are already suffering.
    So let us talk about how to make this program more useful 
within the legal restrictions that Congress has created. Mr. 
Gee, your testimony asks for the Fed to set their rates as low 
as possible within the law. Mark Zandi, who just testified, 
said that the rate could go as low as just slightly above the 
Federal funds rate, which, in other words, is pretty close to 
zero. How low of a rate would you support?
    Mr. Gee. I would support anything that is at a market level 
or more than a market level. You are not going to get 
participation in the program if the rates are punitive.
    Mr. Ramamurti. Thank you.
    Mr. Gee. And they currently are.
    Mr. Ramamurti. Thanks. And, Mr. McCoy, I want to bring you 
in here because your testimony noted that even though you ended 
up using the Fed's lending program, the MTA paid an interest 
rate of 1.9 percent, which was actually quite a bit higher than 
the 1.3 percent that you paid just before the pandemic hit for 
a similar type of note. So, by contrast, the Fed's 
interventions have already allowed big corporations to actually 
pay less to borrow now than what they were typically paying 
pre-pandemic.
    So let us say that the Fed did the same thing for you that 
it has done for big corporations. Say that they provided a rate 
of about 1.3 percent instead of 1.9 percent. How much would 
that end up saving the MTA over the life of the loan?
    Mr. McCoy. Sure. Thank you for the question, Commissioner. 
So the rate that we received through our MLF issuance saved the 
MTA $8.235 million over the 3-year maturity. Just to give you 
more granular detail, a one-basis-point change in the rate is 
equivalent to $135,000 on that $450 million loan. So it clearly 
saved us money, and that was a good thing. But, again, you 
know, I come back to the other part of my testimony where we 
talked about the revenue loss that we are experiencing. One of 
the other witnesses talked about, you know, property taxes not 
being impacted so severely by COVID. Well, here at the MTA we 
do not receive property taxes. We are not a taxing entity. We 
rely on fare box revenues, and we have the highest fare box 
recovery ratio of any public transportation provider in the 
country. That means when our ridership dropped down by 95 
percent due to COVID, our revenue hit was immediate and severe. 
And we are continuing to forecast severe impacts from reduced 
ridership well into 2023. So----
    Mr. Ramamurti. Thanks, Mr. McCoy. I hear the Chair hitting 
the gavel. Just to do the math quickly on that point, if you 
had gotten a rate similar to what you had gotten pre-pandemic 
of 1.3 percent, doing the math, that looks like that is about a 
$4 million savings, which I imagine would allow you to keep 
some people on payroll. It would allow you to potentially offer 
more transit services or lower-cost services. That money makes 
a real difference.
    And so, look, I keep coming back----
    Mr. McCoy. Correct.
    Mr. Ramamurti [continuing]. --To this point. If we are 
able--if the Fed is able to offer State and local governments 
just the same type of deal that it is offering corporations 
right now, it can make an enormous difference in people's 
lives. It can make a difference in the lives of children and 
people with disabilities and seniors and others who are often 
more dependent on services that the State and local governments 
provide. That is really what is at stake here.
    Thank you, Madam Chair.
    Ms. Shalala. Thank you.
    Congressman Hill, I owe you as much time as you would like.
    Mr. Hill. Thank you, Madam Chair. You owe me nothing, just 
your friendship.
    I thank our panelists again for being here. Very 
interesting testimony. Very informative.
    I want to begin my questions in this round to talk about 
this difference that both Mark Zandi referenced and Mr. Edwards 
on the uneven nature of the economy reopening and the uneven 
burden around the States, and recognize our States have lots of 
authorities to control their own destiny, which we have heard 
about.
    I have a slide, if I could put that up for our viewing 
audience and my fellow Commissioners. I looked at tax revenues 
for different States, and in this instance I decided to look at 
it based on the impact of the virus. So you can see Arkansas, 
Texas, New York, and California. These are States that are not 
normally compared to one another, but I am using approximately 
2,000 cases per 100,000 infection rates. But in the case of 
Arkansas and Texas, those Governors basically kept their States 
open in fighting the coronavirus, trying to minimize the impact 
on dislocation of their economies. And you can see that tax 
revenues in July year over year are up 14.9 percent in 
Arkansas, 4.3 percent in Texas. And our friends in New York who 
bore a huge brunt at the beginning of this terrible pandemic, 
tax revenues year over year in July are down almost 9 percent 
and in California down 45 percent.
    I would like to insert that in the record, Madam Chair. 
Thank you.
    [The slide follows:]
    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Hill. Also, Mr. Zandi I think made a very important 
point about economic concentrations so that if you are heavily 
in tourism, like Hawaii or my friend from Florida, or in the 
oil and gas business as noted in his statistics on North Dakota 
or Oklahoma, you have also additional burdens, not necessarily 
per se connected to the pandemic, but we have a major 
dislocation in the oil and gas market partially as a result of 
the economic shutdown around the world and supply conditions.
    When you look at June 30, of the 46 States that end their 
fiscal year in June, 8 States actually had overall tax growth 
when including personal income, corporate income, and sales tax 
income. And I also want to highlight that, in addition to the 
Municipal Liquidity Facility, as Senator Toomey has noted, we 
have distributed billions of dollars out to our States directly 
and indirectly. And when you look at both direct and indirect, 
it is about $700 billion distributed to the States.
    To that end, Mr. Edwards, let us talk again about your way 
States can cover their budget shortfalls. I think in your 
testimony you said that people--or States had built up their 
rainy day funds to about 13 percent of a typical annual revenue 
budget. Is that right?
    Mr. Edwards. It is a bit less. I think it is about 9 
percent going into this, although there is a measure called 
``total balances'' which are essentially all the extra cash 
that States have kicking around. That is higher, maybe up 
around 12 percent.
    Mr. Hill. And you also noted that you felt many of the 
States could access the market quite successfully. I was 
looking at all of our States' bond ratings before this hearing, 
and 90 percent of our States are rated double A or better. 
Wouldn't they have regular access to the capital markets?
    Mr. Edwards. That is absolutely right, and, in fact, all 
States would have better access at lower interest costs if they 
reduced their debt burdens during economic growth years. So, 
you know, the MTA, for example--I sympathize with the plight of 
the MTA in New York. It is in terrible trouble. But they would 
be in a lot better position if New York area policymakers had 
not let the MTA get so deeply in debt. It is deeply in debt. 
The interest costs as a share of its cash flow have risen 
pretty dramatically.
    States can avoid getting into that position. Some States 
finance a lot of their capital investment pay as you go. Most 
roads and highways in the United States are financed mainly pay 
as you go, meaning gas tax revenues. So if you look at some 
States, like Nebraska, they have very low debt loads. That 
really bodes well for those sorts of States. When you go into a 
recession, they are in a much better financial position, it 
seems to me.
    Mr. Hill. Thank you. I will also note for the record, Madam 
Chair, that Illinois, of course, as we have talked about here, 
has accessed the market successfully and participated in the 
Municipal Liquidity Facility. It has the lowest rating of the 
States I reviewed at BBB. New Jersey, which was just reported 
to us this morning, is entering the market and has an expanded 
budget, is single A minus; Kentucky and Connecticut at single 
A; and Senator Toomey's home State of Pennsylvania at A-plus. 
So essentially all of our States, the 90 percent of States that 
are double A or better or these States that even have slightly 
lower rating--modestly slightly, I might add--have all accessed 
the market quite successfully.
    Thank you, Madam Chair. I yield back.
    Ms. Shalala. Thank you, Congressman Hill.
    We will repeat our order of questioning, and each 
Commissioner will now have a second round of questions for 
these witnesses. I will start by recognizing myself for 5 
minutes.
    Dr. Zandi, according to Mr. Edwards' testimony, economic 
conditions in the municipal bond market are normalizing. I 
represent Miami. He clearly missed my community. And he also 
said it is not fair or prudent to increase government borrowing 
and spending further. Among other things, he cites projected 
versus actual State and local revenues.
    Do you agree with his assessment of the economic outlook 
and his statement that additional Federal assistance is not 
fair or prudent? And could you repeat your recommendations with 
regard to the Municipal Liquidity Facility and additional 
Federal assistance or otherwise?
    Mr. Zandi. Sure. Well, thank you. No, I think the budget 
situation is very serious, and it is a script being written, 
that there is a lag. We are already seeing a lot of the 
revenues get pummeled here, but there is a very significant lag 
between what is going on in the economy and when it shows up in 
tax revenue, you know, particularly like income tax revenue. A 
lot of what we are observing now is based on final settlement 
payments in 2019 income when the unemployment was 3.5 percent 
and wage growth was strong. It does not reflect what is 
happening in 2020.
    So I think as we get more numbers toward the end of this 
year going into next year, we are going to see significant 
declines in income tax revenue in more and more States across 
the country. This is an ecumenical problem regionally. It is 
not just, you know, a few States. It is going to be--much of 
the country is going to be involved in this.
    The same is true for property tax revenue. That is a long 
lag. You know, the problem this go-around is that house prices 
as much--that was the problem in the financial crisis. This go-
around it is going to be commercial real estate values, and it 
is going to take a while for that to flow through and it is 
going to have a big impact on revenues for lots of local 
governments across the country.
    And I think it is clearly evident--I mean, we can pick 
anecdotes across the country, but for me, the thing that 
encapsulates the stress most vividly and clearly is that State 
and local governments in the last 6 months have reduced 
payrolls by 1.1 million jobs, 6 percent of their workforce. And 
I think in the last couple, 3 months they have delayed those 
cuts because they hoped and they believed--because most 
everyone believed--that they would get some additional Federal 
Government aid to help support them. And now as it becomes 
increasingly clear that that aid is not coming through, they 
are not going to get that aid, I think these cuts are going to 
become quite significant.
    So we are going to see how things go here pretty quickly, I 
think, over the next few months, certainly by the end of the 
year, how serious this is and how much economic damage it is 
going to cause to communities across the country.
    Finally, I would say that $450 billion low-end estimate of 
the budget shortfall through fiscal year 2022 is on top of the 
Federal Government support that has already been provided. So 
in those calculations, that is history; that is in the data. It 
is $450 billion on top of that, assuming no significant 
increase in infections going forward, so it is very 
significant.
    So in that context, what I just described to you, that 
outlook, I think it is critical that we look for other tools to 
try to support State and local government in the Municipal 
Liquidity Facility. Here is what I would do. The first thing I 
would do is extend it, because, you know, this is a script 
being written. The pandemic is not going to be over on December 
31, 2020. We have to extend it.
    Secondly, we have to lower the rate. The Fed is willing to 
do this. They lowered it once. I think they need to lower it 
again, make this less punitive so it opens up access.
    Third, extend the term. You have already heard from the 
other folks that are on the ground here that 36 months is just 
not practical. That means it is not particularly useful.
    Fourth, I would really think about expanding out what the 
money can be used for.
    And, fifth, you know, think about how you can defer some of 
these payments to make it a little bit more attractive.
    Here is the thing: I could be wrong. Actually, I hope I am 
wrong. You know, hopefully the world, our economy, the fiscal 
situation turns out a lot better than I am anticipating. But, 
look, I fear that I am right; and if I am right and we are not 
prepared for it--if we do not prepare for it--you know, 
Policymaking Economic 101. When you have a lot of uncertainty, 
you press on the accelerator. You do more than you think is 
necessary because you do not know. And I assure you we do not 
know. This pandemic is still ongoing.
    Ms. Shalala. Thank you.
    Senator Toomey.
    Senator Toomey. Thanks, Madam Chair.
    Mr. Gee, we took a look at where the St. Louis Sewer 
District debt is trading in the secondary markets, and 
according to our sources here, it looks like they are trading 
at the lowest yields in at least 5 years. Paper with 3 years' 
remaining life is trading at 21 basis points. And you suggested 
that the MLF should be offering rates below what the market is 
offering. But, obviously, this whole program is ultimately 
backstopped by U.S. taxpayers.
    How much lower than 21 basis points should taxpayers be 
lending money to the St. Louis Sewer District when it can 
borrow money for 21 basis points in the capital markets?
    Mr. Gee. Well, sir, I am not suggesting that taxpayers lend 
money specifically to my agency. I was speaking in terms of 
State and local governments, which may not be in as good 
financial shape as our agency. We are a triple A-rated utility, 
so the conditions that we are currently facing may not be as 
dire for us as they are for some of my colleagues at the State 
and local governments. But I think what we are asking for is to 
simply make the MLF competitive. And as it exists right now, it 
is not competitive. So if you are actually looking for entities 
to utilize this facility, then I believe that the rate 
structure needs to be at market rates or lower.
    Senator Toomey. I cannot disagree with the notion that if 
the goal is to get people to borrow, you have to give them a 
better deal than what they can get in the capital markets 
generally. That is just not my goal. My goal was always to 
ensure that we would have a liquid functioning market, and we 
have that.
    Mr. Edwards, two questions. The first is we have never had 
an MLF before, but we have had recessions before. We have had 
all kinds of disasters before. How have States and 
municipalities managed through difficult times in the past? 
That is one question.
    Then the second is we have a very wide range among our 
States and certainly among municipalities in terms of expenses 
per capita, in terms of tax regimes and tax revenue per capita. 
And the people of the various States get to decide through the 
elections they hold what kind of regime they want.
    If the Federal Government is going to be a sort of 
permanent backstop, bailout mechanism, how does that change the 
mechanism of accountability in State government?
    Mr. Edwards. That is a great question, and one of the 
things I am really concerned about here is the incentives for 
State and local governments going forward. The more the Federal 
Government gets involved in this sort of emergency loan to 
State and local governments, the less incentive they have to be 
prepared for the future. As Dr. Zandi noted, most States did 
build up substantial rainy day funds after the last recession. 
California, for example, was really hard hit during the 
recession a decade ago, and to their great credit, they built 
up a very large rainy day fund. So that is great. So you have 
to think about forward-looking incentives here.
    To go back to some of the previous discussion, people have 
compared the Federal Reserve's mechanisms for businesses and 
governments. But there is a basic difference here in that 
governments can always raise tax revenue. They have fiscal 
power. They can always issue debt, and they can always trim 
spending. Businesses during recessions, especially when State 
and local governments are mandating closures of millions of 
small businesses, they often do not have a choice. They get 
into terrible fiscal and financial trouble because the revenues 
just disappear in front of their eyes. Governments are really 
never in that situation because they can always rely on 
taxation. And for local entities like the MTA, I think the 
first backstop ought to be State-level governments and not the 
Federal Government. I think State-level governments have 
enormous fiscal power, and if their local governments get into 
trouble, I think that should be mainly their responsibility.
    Senator Toomey. Thank you.
    Madam Chair, I yield back my time.
    Ms. Shalala. Thank you.
    Commissioner Ramamurti.
    Mr. Ramamurti. Thank you, Madam Chair.
    Mr. Edwards, you have testified today that the Federal 
Government should not help State and local governments in part 
because ``debt-financed spending by the Federal Government 
pushes costs forward onto younger generations of Americans.'' 
You actually made the same argument in 2008 when you opposed 
Federal aid for State and local governments in the midst of 
that recession. You wrote, ``Spending on a stimulus package 
would be funded by additional government borrowing, and the 
burden of that borrowing would fall on young people and future 
taxpayers.'' You wrote that in a section you titled ``Rising 
Federal Debt is Fiscal Child Abuse.'' Are those your words?
    Mr. Edwards. Yeah, that is right. I believe it is.
    Mr. Ramamurti. So that phrase, ``fiscal child abuse,'' in 
my view is a pretty shocking thing to say, especially when you 
look at what States are being forced to do right now because 
they are not getting Federal aid. Here are just some of the 
examples: Alabama and California are cutting funding for early 
childhood education programs; Wyoming is cutting $10 million 
from its public pre-school program for kids with disabilities; 
Oregon is delaying a program to help children from low-income 
families with mental health issues; and Missouri, New Jersey, 
and Texas are slashing funds and lay- 
ing off workers dedicated to protecting children from actual 
child abuse.
    All of these changes will have lasting effects on this 
generation of kids, especially the most vulnerable among them. 
So, Mr. Edwards, how much actual harm to kids today are you 
willing to tolerate based on your concern about so-called 
fiscal child abuse?
    Mr. Edwards. Those children will grow up, and Federal, 
State, and local governments have been enormously irresponsible 
by getting the United States enormously into debt. The Federal 
Government has $20 trillion of bond debt now. Those costs are 
being pushed forward, so in the future either those spending 
programs that you mentioned will have to be cut or taxes will 
have to be raised. An increasing share of the earnings of young 
Americans in the future will have to go, for example, to pay 
the foreign creditors, which reduces the U.S. living standard--
--
    Mr. Ramamurti. Okay, so, look, Mr. Edwards--I am sorry. My 
time is short. But it sounds to me like your answer is you are 
going to accept quite a bit of harm to kids today based on the 
concern that, I do not know, I guess the debt will go up, and 
maybe corporations in America will have to pay slightly more in 
taxes in the future.
    Look, it is incredibly cheap for the Federal----
    Mr. Edwards. Those programs you mentioned are State 
programs, so the State governments, they should make--they 
should balance the costs and benefits of funding those 
programs.
    Mr. Ramamurti. Mr. Edwards, look, the point I am making----
    Mr. Edwards [continuing]. --Federal issue----
    Mr. Ramamurti. Excuse me, sir. The point I am making is 
that it is incredibly cheap for the Federal Government to 
borrow right now. The interest rates are under 1 percent for a 
10-year repayment term. And I think it is, frankly, perverse to 
cite your concern for children to justify cuts that will do 
actual harm to children right now. And I think it is especially 
perverse coming from a lot of the same folks who happily 
supported adding $2 trillion in debt a couple years ago to hand 
tax cuts to big corporations and the rich.
    But, look, even setting aside this moral question of 
whether we should make our kids suffer lasting harm today 
rather than borrow at record low interest rates, it is also 
just terrible economic policy. Experts across the political 
spectrum agree that every dollar of Federal aid to State and 
local governments produces more than a dollar's worth of 
economic growth. Mr. Zandi has said that. Glenn Hubbard, who 
was the Chair of President George W. Bush's Council of Economic 
Advisers, has said that. And the nonpartisan Congressional 
Budget Office has said that. They have each found that a dollar 
of State and local aid produces about $1.20 or $1.30 in growth.
    But, Mr. Edwards, you dispute that point in your testimony, 
citing a single study. You write, ``A 2019 review of the 
academic literature by the University of California's Valerie 
Ramey suggests that a dollar of Federal aid would actually 
result in less than a dollar of growth.'' Is that right?
    Mr. Edwards. Yeah, that is absolutely right, and it was not 
just a single study. She reviewed all the academic economic 
studies over the last decade, and she concluded that the 
multiplier for government spending was probably less than one. 
There is no certainty here, but she thought probably. I would 
say also----
    Mr. Ramamurti. Okay. Thank you. Mr. Edwards, thank you. 
That is all I wanted to know. But, look, I actually took a 
careful look at the study, and it also says later that when 
monetary policy is very accommodative--in other words, when 
interest rates are low and will be low for a long time--
government spending in the United States can generate $1.50 or 
more in return for every dollar. So as I am sure you know, Mr. 
Edwards, interest rates are currently at zero, and the Fed 
announced yesterday that it was percentage to keep them that 
through 2023.
    So do you agree that the study you have cited actually 
suggests a return of far more than a dollar on every dollar we 
dedicate to State and local aid right now?
    Mr. Edwards. No. I think that there was a lot of 
uncertainty with what she said about--she called it ``zero 
lower bound.'' Her main central conclusion was that the 
multiplier was from about 0.6 to 0.1. And if you look at her 
other studies on her Web page over the last decade, similarly, 
you know, they suggest perhaps lower multipliers than other 
people have found. Dr. Zandi----
    Mr. Ramamurti. Thank you, Mr. Edwards, just because my 
time--and I want to be respectful of the Chair. Look, I agree 
that there was some uncertainty, and I wanted to be extra sure 
about all this. So yesterday I called up the author of the 
study, Professor Ramey, to ask her specifically what she 
thought, and she wrote me a short letter in response, which I 
would like to submit for the record. And Ms. Ramey says, ``My 
estimate of the likely multiplier for Federal grants or loans 
to State and local governments, conditional on the current 
economic and policy situation, is likely to be somewhere 
between 1.2 and 1.5.'' So I am glad that we resolved that 
question.
    [The letter follows:]
    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Ramamurti. Look, I am running short on time, but if 
this is the best case against more Federal support to State and 
local governments, then I think that position is pretty 
laughable.
    Thank you, Madam Chair.
    Ms. Shalala. Congressman Hill.
    Mr. Hill. Thank you, Madam Chair.
    Mr. Gee, let me express all of our thanks to you for 
helping navigate COVID-19 for Metro St. Louis, and also thank 
you for your leadership for government finance officers across 
the country. I cannot think of a more challenging period or 
more interesting period for that work.
    We have talked a lot about the Municipal Liquidity Facility 
today, but we have also talked about the billions of dollars 
that have been sent to the States. I know listening to the 
Missouri congressional delegation, there has been some 
complaining about the Governor of Missouri's sharing of that 
money with State and local governments. And I note in the U.S. 
Treasury IG report that about 26 percent of the money sent to 
Missouri has been spent to date.
    But I looked at St. Louis County, particularly, that got 
$173 million directly to St. Louis County, and yet in that same 
IG report, only about 6 percent of it has been spent, $11 
million. And I wondered, has St. Louis County shared any of the 
CARES Act money with you in your official capacity in the sewer 
and water aspect of Metro St. Louis?
    Mr. Gee. Well, thank you, sir, for the question. Let me 
just start off by pointing out with governmental entities, 
there is a difference between spent and encumbered. I would 
argue that the majority of the funds have been encumbered, 
meaning that they have been earmarked for specific use. It is 
true that you may have instances in which those dollars have 
not been spent, but the funds have been encumbered.
    With respect to your question regarding the St. Louis 
County government, we have not requested any CARES Act funding 
from that governmental entity. I cannot really speak to their 
finances. I am not part of St. Louis County government.
    Mr. Hill. Have you asked for any CARES Act funding from any 
entity in Missouri, the city of St. Louis, the county of St. 
Louis, the State of Missouri?
    Mr. Gee. We have not requested any CARES Act funding. We 
have requested some funding from FEMA that would cover some of 
our PPE-related expenditures.
    Mr. Hill. Right, well, I recognize your point, and I accept 
it on encumbered. That number is a moving target in the States. 
They will initially legislatively approve a large allocation 
and then end up not needing it, and so that number is a moving 
target. In Arkansas, it is well over 80 to 90 percent 
considered by the legislative council on what they would like 
to spend the money on, but they have spent far less than that.
    Has the State of Missouri, to your knowledge, allocated 
money to the smaller cities and counties outside St. Louis? To 
your knowledge, has the Governor allocated money for their use?
    Mr. Gee. It is my understanding that funds have been 
allocated to the counties and the cities, and the counties have 
allocated funds to some of the smaller cities that were not 
eligible for a direct allocation.
    Mr. Hill. Thank you.
    Dr. Zandi, to you, thanks for all your work with our 
States. I believe we use your forecasting model in the State of 
Arkansas for our revenue forecasts, so we are grateful for your 
influence across a lot of economics in our country. And you 
have been describing the stress that you see in State and local 
revenues going out to 2022. Do you think the U.S. economy will 
rebound and have a positive GDP growth in the fourth quarter of 
this year? And, also, do you think it will have a GDP increase, 
positive increase, for the calendar year of 2021?
    Mr. Zandi. Well, I think it depends on two things, one, the 
pandemic and how it unfolds, but let us just put that to the 
side and let us assume that the pandemic remains roughly where 
it is today in terms of infections and deaths. But the second 
is whether Congress and the Administration are able to come 
together and pass some additional fiscal rescue support to the 
economy in the next couple, 3 weeks before you go away for 
recess.
    If you do and it is a substantive package that includes aid 
to State and local government, then I think we will get a 
positive quarter. We will get growth that is somewhere 3, 4, 5 
percent annualized in Q4. If you do not, if there is no 
additional support, I think we will likely go back into 
recession by the end of the year with negative job numbers and 
rising unemployment. So I think a lot depends on what happens 
in Washington, D.C., over the next 2 to 3 weeks.
    Mr. Hill. Considering that recessionary risk and the 
pandemic risk, would you recommend in 2021 a $4 trillion 
increase at the Federal Government level?
    Mr. Zandi. I am sorry. A rescue package of $4 trillion?
    Mr. Hill. No. Would you recommend a tax increase at the 
Federal Government level of $4 trillion in fiscal year 2021?
    Mr. Zandi. No. I think until the economy is back on its 
feet and we are, you know, closing in on full employment, I 
think it is important for the Federal Government to continue to 
provide significant support both through significant additional 
spending and I would not raise taxes in any significant way 
until we are close to full employment.
    Once we are at full employment, I do think we need to pivot 
it, and we need to really focus on our long-term fiscal 
situation as a Nation. That will require tax increases and 
government spending will shrink, both----
    Mr. Hill. Thank you very much. I yield back.
    Mr. Zandi. On that I think we need to be very aggressive. 
Thank you.
    Ms. Shalala. Thank you.
    On behalf of the Congressional Oversight Commission, I 
would like to thank all of our witnesses for their time and 
testimony today. A special thanks to the Senate Finance 
Committee for allowing us to use their hearing room. I also 
want to thank our Commissioners, my fellow Commissioners, for 
their participation today and for their thoughtful questions; 
and, of course, our staffs for their assistance with this 
hearing.
    Commissioners may also submit followup written questions 
for the record.
    This hearing is now adjourned.
    [Whereupon, at 11:44 a.m., the Commission was adjourned.]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

                                 [all]