[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
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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
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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/
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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
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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
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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:]
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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:]
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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:]
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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.]
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