Municipal Liquidity Facility Leaves Most Georgia Counties and Cities On Their Own

The Federal Reserve announced on April 9, 2020 that it was creating a Municipal Liquidity Facility (the “MLF”) to help states and local governments manage cash flow pressures caused by the COVID-19 pandemic. The MLF can purchase newly issued taxable or tax-exempt short-term debt with a maturity of up to 36 months from eligible states, counties, cities, multi-state entities, and designated revenue bond issuers (“Eligible Issuers”). Unfortunately, the population size requirements for eligible counties and cities, and the limitations on states’ ability to designate eligible counties and cities, mean Cobb County, DeKalb County, Fulton County, Gwinnett County and the City of Atlanta are the only local governments in Georgia eligible to directly access the MLF. Other Georgia counties and cities looking to bridge their cash flow needs with short-term borrowings must look to traditional approaches, such as tax anticipation notes (“TANs”) and their attendant restrictions.

The State of Georgia, any county with a population exceeding 500,000 residents (based on U.S. Census Bureau estimates for July 1, 2019 as of April 6, 2020) and any city with a population exceeding 250,000 residents (based on U.S. Census Bureau estimates for July 1, 2018 as of April 6, 2020) may directly sell short term notes to the MLF with maturities of up to 36 months, in one or more issuances of up to an aggregate amount of 20% of the general revenue from own sources and utility revenue of the applicable issuer for fiscal year 2017. Based on these population thresholds, the State of Georgia, the City of Atlanta, Cobb County, DeKalb County, Fulton County, and Gwinnett County qualify as Eligible Issuers and can sell short term notes to the MLF up to the aggregate amounts shown below:

Source: Federal Reserve Bank of New York FAQs: Municipal Liquidity Facility, Appendix A, updated June 3, 2020. States that do not have at least two cities and counties (on a combined basis) that meet the population thresholds may designate additional cities and counties for participation in the MLF irrespective of population size, subject to certain limits.

Under the state Constitution, counties and cities may issue debt in excess of the 10 percent limitation and without a referendum to accept and use funds granted by and obtain loans from the federal government or any agency thereof pursuant to conditions imposed by federal law (See Ga. Constitution, Art. 9, § 5, ¶ IV). For the City of Atlanta and the handful of Georgia counties that are Eligible Issuers, this allows them to take advantage of the three full years available under the MLF. Additional terms regarding use of proceeds, ratings, source of repayment and security, pricing and fees apply.

To our knowledge, none of the Georgia Eligible Issuers have attempted to utilize the MLF yet. As of June 4, 2020, the Federal Reserve Bank of New York (who operates the MLF) reported the total outstanding borrowings under the MLF was $0; the MLF had entered into one agreement (with the State of Illinois) for borrowings but the transaction had not yet settled at the time of the report (available here).

Although the MLF permits Eligible Issuers (for example, the State) to use the proceeds of Eligible Notes sold to the federal government through the MLF to in turn purchase the notes or otherwise assist any political subdivisions or other governmental entities (e.g., other Georgia counties or municipalities not eligible to directly access the MLF), Ga. Constitution, Art. § 5, ¶ 5 and O.C.G.A. Section 36-80-2 limit county and municipal temporary loans to the current calendar year (“such loans shall be payable on or before December 31 of the calendar year in which such loan is made”), thus making it impossible for most counties and municipalities to take advantage of the three year duration of the MLF.  Currently, no effort is underway by the Georgia General Assembly to amend this limitation on short-term debt.

Thus, most counties and municipalities in Georgia must continue to look to TANs or elsewhere to bridge their short-term cash flow needs, subject to the temporary loan provisions of Ga. Constitution, Art. § 5, ¶ 5 and O.C.G.A. The principal amount of a TAN is a function of Georgia law, federal tax laws and the actual cash flow needs of the local government. See our previous article for an explanation of TAN sizing and arbitrage rebate requirements (available here).

Other states likely have similar statutory limitations on short term borrowings, which would explain the low utilization of the MLF to date.  The MLF may end up being a program with good intentions but no legs.