Municipal Liquidity Facility (MLF): What It is, How It Works

The Municipal Liquidity Facility (MLF) was a Federal Reserve (Fed) program to buy up to $500 billion in debt from state and local governments that suffered revenue declines as a result of the COVID-19 pandemic. Under the program, the Fed bought short-term municipal notes from the states and the District of Columbia, certain city and county governments, and multistate entities.

In addition, the Fed monitored liquidity and credit conditions in the primary and secondary markets for municipal securities to decide whether it should take additional action.

Because of coronavirus-related shutdowns, state and local tax revenue plummeted. Sales taxes fell because people purchased fewer goods. Income taxes dropped amid rising unemployment. To help make up the shortfall, the Fed’s program purchased municipal notes, allowing state and local governments to continue functioning through the crisis.

On Nov. 19, 2020, then-Treasury Secretary Steven Mnuchin said he would not reauthorize extending the MLF past Dec. 31, 2020. The program stopped purchasing notes on Dec. 31, 2020.

Details on the Municipal Liquidity Facility

The Municipal Liquidity Facility (MLF) made direct purchases of short-term notes issued by the 50 states and the District of Columbia. The Federal Reserve (Fed) also bought the notes of county governments with a population greater than 500,000 and city governments with a population greater than 250,000. The Fed initially had set population requirements at 1 million residents for cities and 2 million residents for counties, but it lowered those thresholds on April 27, 2020. It also added the notes of multistate entities (compacts between states) to the program.

On June 5, 2020, the Fed again modified terms to give cities and counties in less populous states a chance to qualify. Governors of certain states could designate their most populous city or county (or both, if they qualified) to participate in the program. In addition, the Fed widened the program so each state could designate two “revenue bond issuers,” such as a utility or an airport, to be eligible.

The MLF was a special purpose vehicle (SPV). The U.S. Department of the Treasury provided $35 billion in initial equity from the Exchange Stabilization Fund (ESF), as appropriated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The remaining funding came from the 12 regional Federal Reserve Banks.

The municipal debt instruments eligible for purchase included tax anticipation notes (TANs), revenue anticipation notes (RANs), bond anticipation notes (BANs), and other similar notes. Eligible debt securities had to have terms to maturity of no more than 36 months from the date of issuance.

A given state, county, or city may have had multiple entities, authorities, or instrumentalities that issued debt on its behalf. The MLF limited itself to purchasing notes issued by only one issuer per state, county, or city.

The MLF also limited purchases of notes from a given state, county, or city to an amount equal to 20% of its 2017 fiscal year general revenue. However, states could apply for exceptions under which the MLF would buy notes in excess of these limits. The same 20% cap applied to multistate entities and revenue bond issuers, based on their 2019 fiscal year gross revenue.

Eligible issuers had to pay an origination fee of 10 basis points on the principal amount of notes purchased by the MLF. This fee could be deducted from the proceeds of the note issue. Notes purchased by the MLF could be called by the issuer at par any time before maturity. On Aug. 11, 2020, the Fed lowered the interest rate spread on tax-exempt notes by 50 basis points. The difference in rates between taxable and tax-exempt notes also was lowered.

The MLF ceased buying notes after Dec. 31, 2020. The Fed has continued to fund the MLF until its assets mature or are sold.