The Board of Governors of the Federal Reserve System (the “Federal Reserve”) has taken strong steps to support near-term liquidity in the nearly $4 trillion market for municipal bonds issued by states and local governments. The Federal Reserve’s expansion of the Municipal Liquidity Facility (the “MLF”) represents the most significant step so far by the Federal government to provide direct financial assistance to cash-strapped states, cities and counties facing a double hit from the COVID-19 pandemic: higher costs to deal with the public health crisis coupled with reduced or delayed revenues from taxes and fees.
On April 27, 2020, the Federal Reserve announced an expansion of the scope and duration of the MLF. As detailed further below, this expansion substantially increased the number of eligible cities and counties and extended the maturity date of, and the termination date to purchase, Eligible Notes (as defined below). This expansion of the MLF additionally shows the Federal Reserve’s expectation that increased measures are required to stabilize the municipal bond market and casts a considerably wider net geographically on the municipalities to which assistance can be provided. The changes also indicate a willingness to adapt the MLF as the COVID-19 situation unfolds and suggest a growing realization that, at a minimum, the liquidity problems of state and local municipalities will continue beyond Q3 at least to year-end 2020.
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