The Municipal Lending Facility has accepted two applications: the State of Illinois and New York’s Metropolitan Transit Authority. I’ve been examining whether and how school districts could benefit from the Federal Reserve’s unprecedented offer to backstop local governments in the pandemic crisis.
So let’s look at these loans and see what we can learn.
The Illinois loan is for $1.2 billion. It’ll be paid back in a year. The specific purpose of the loan is to help with revenue losses from the shutdown and tax delay. The State government announced the loan saying it had worked closely with the Federal Reserve to finalize it, and the legislature agreed to let the State borrow up to $5 billion.
When the IL loan went through I read a tweet that said “everyone expected Illinois to go for the MLF.” Why? It’s the state with the lowest bond rating, Baa3, or just above junk.
The reason why ‘everyone expected’ this loan is because the state’s bond rating is so low they couldn’t get a better deal elsewhere. Kind of sad, since the rate is 3.83%. That’s pretty high. And it couldn’t get a better deal on Wall Street.
This is interesting to me because the School District of Philadelphia’s rating is also Baa3. A lot of districts have much lower ratings, so the fact that Illinois is seen as an obvious applicant is off-putting.
I’d like more of a narrative about the process behind this loan and who the players were, how the application process went, etc. I haven’t found anything on that yet.
The Metro Transit Authority in New York City could haggle a little bit. Turned out the Fed had the best rates for their $465 million revenue bond sale. In this chart you can see all the firms that bid for the loan (they get an origination fee after all and money on the interest).
The Fed bested all these heavy hitters with a 1.92% interest rate. That’s because the MTA has an A rating.
You may have heard that the Fed dropped the basis points for their interest rate scale by 50 about a month ago. This deal went down right after that, so I’m pretty sure the MTA was like:
“Hey Fed, we’ll take your deal if you lower the price a little bite, like maybe a few basis points?”
The Fed was like, “Hrrrmmmmm, let me talk to my people.” Then they lowered the rates and the deal went through.
Negotiate! We have power!
This all goes to show you that things are fluid with the Fed and the MLF. If there are powerful bargaining partners who want to take advantage of the deal then the Fed will listen and respond.
Of course Illinois went for it given their credit rating. But the MTA haggled a little bit and got a better price over all these other banks.
The lesson is that we have power. This is a negotiation. The Fed isn’t a monster. It’s an institution with people trying to do their thing in a crisis. Like Saqib Bhatti says, we can collectively bargain here. If school districts got into a coalition and started haggling the Fed would respond, lower rates, etc.
Jerome Powell probably wants us to do that actually, since he can’t go to his neoliberal technocrat colleagues and just lower the rates. He’s probably saying, “help me help you!”