Under the Facility, the Federal Reserve purchases short-term municipal notes issued by the states, the District of Columbia, eligible local governments, and Multi-State Entities. Eligible issuers must pay an origination fee of 10 basis points on the principal amount of notes purchased by the Facility. Notes purchased by the Facility may be called by the issuer at par any time before maturity. Unless extended, the Facility will cease buying notes after December 31, 2020. The Facility will be funded until its assets mature or are sold. Through this special purpose vehicle, the U.S. Department of the Treasury will provide $35 billion in initial equity to the program from its Exchange Stabilization Fund, as appropriated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The remaining funding, up to $465 billion, will come from the twelve regional Federal Reserve Banks.
Eligible local governments include counties with populations of at least 500,000 people, and cities with populations of at least 250,000. In addition, smaller states were given the option to designate a certain number of cities and/or counties to be eligible for the program, even if that city and/or county did not otherwise meet the population requirement. The number of allowed designations depends on the state's size, but the maximum was two designations. As both Maine and New Hampshire were considered to be smaller states, both governors were given the ability to designate a total of two cities and/or counties. Governors that have the ability to designate two Designated Cities and Designated Counties (on a combined basis) may choose any of the following combinations: (i) the most populous city and most populous county; (ii) the most populous city and second-most populous city; or (iii) the most populous county and second-most populous county. Massachusetts was not given the ability to designate any cities or counties based on its size.
In addition, state governors also can designate two "Revenue Bond Issuers" whose revenues are generally derived from operating government activities, such as utilities or airports, that could also sell bonds to the Facility. The municipal debt instruments eligible for purchase by the facility include tax anticipation notes (TANs), revenue anticipation notes (RANs), and bond anticipation notes (BANs), as well as other similar notes. Additionally, eligible debt securities must have terms to maturity of no more than 36 months from their dates of issuance. A given state, county, or city may have multiple entities, authorities, or instrumentalities that issue debt on its behalf. However, the Facility will limit itself to purchasing notes issued by only one issuer per state, county, or city. The Facility also will limit its purchases of notes from a given state, county, or city to an amount equal to 20% of its general revenues during its 2017 fiscal year. However, states may apply for exceptions under which the facility will buy notes in excess of these limits. The Facility is limited to 20% of a Multi-State Entity or Revenue Bond Issuer's gross revenue for fiscal year 2019.
In order to reap the benefits of this program, your municipality must meet the above eligibility requirements or have been specifically designated by the governor of your state as a Designated City or County. While the Facility is limited in eligibility scope and only aimed at new issuance, not secondary market purchases, the establishment of this program generated a positive response in the municipal bond market almost immediately upon its creation.
