More Help Is Likely on the Way for States and Localities and the Coronavirus-caused Recession — Including an Obscure Source of Federal Aid for Muni Bonds

Welcome to the Future of Finance, all in a tidy little package.

The New York Times memorialized the end of the first quarter with the midday headline, “Wall Street had its worst month since 2008, with the S&P 500 falling 12.5 percent in March as the coronavirus decimated the global economy.”

$2T + $2 Trillion to Rescue and Stabilize Economy – Less than a week ago, Congress passed, and the president signed, a record-setting stimulus bill to put the country back on track to restart the economy after the novel coronavirus swept the country into recession. Our research editor Joe Morris broke out the elements of the rescue package most closely tied to our wheelhouse — including state and local government ($150B), emergency supplementals ($240B) and election security ($400M) among others — for our sister site, Government Technology.

Even as the ink dries on the initial deal, the president is tweeting about doing it again, with another “VERY BIG AND BOLD” $2 trillion infrastructure bill. For her part, House Speaker Nancy Pelosi has not put an exact price on what would be a fourth stimulus package but itemized a list of priorities for it, “including increased protections and equipment for workers on the front lines of the coronavirus, expanded paid leave, a major new infrastructure investment and additional funds for state and local governments.”

Amid the chaos, a longtime friend of Governing and former finance columnist reminded us that, true to the axiom, extraordinary times call for extraordinary measures. There was one measure in particular that Girard Miller, CFA, a retired investment and public finance professional, and the author of Enlightened Public Finance (2019), hadn’t heard people talking about. Miller writes:

Putting the Federal Financing Bank to work for states and municipalities – The Federal Financing Bank is an obscure arm of the U.S. Treasury department, created in 1973 to consolidate federal agency debt. It provides the lowest cost funding available for governmental purposes. With the municipal bond market under stress, now would be a perfect time to open the FFB window to states and the largest municipalities. This will require an act of Congress, which can easily be done by a single paragraph in House Speaker Pelosi’s next round of COVID-19 legislation directed to assist states and localities.

As investors dumped their municipal bond funds, millions in bonds flooded the market, which became swamped and dysfunctional. Costs to issue state and muni debt have skyrocketed. With income and sales tax revenues plunging, and user fees shriveling, credit ratings and liquidity are in jeopardy.

The FFB can come to the rescue of the states and their subdivisions, if given authority to open its funding window for just one year. By borrowing at the lowest rates in history and passing along those T-bond interest rates to the states, the savings to taxpayers nationally would be immense. The Treasury’s bondholders would pay federal income taxes, unlike muni bond investors, so Uncle Sam actually collects new revenue on the deal! With prudent regulatory protections for federal taxpayers, such as requiring third-party commercial debt guarantees and a priority claim on all future federal grants, FFB can:

1. Provide an immediate credit backstop for maturing muni bond payments due for which the municipal treasury lacks liquidity. This will avert muni bond defaults and a run on tax-free bond funds, a critical mission on its own. Even the Federal Reserve’s window can’t fix that, it simply makes muni bonds eligible for bank collateral. 
2. Provide an immediate and fast-track funding vehicle for getting infrastructure projects launched. The debt would still be the state/municipality’s, but the FFB window can side-step the time-consuming referendum process of bond issuance to break ground, and could provide all the necessary interim financing and even the permanent financing. Some state laws may require revision to authorize these obligations, but without being general obligation bonds, FFB loans can have the characteristics of a COP (certificate of participation), which is how many governments regularly work around labyrinthian general obligation bond authorization rules.
3. Provide an immediate, opportunistic funding source for state and local governments and their pension funds to buy equities at distressed prices, which (a) reduces employer pension costs, (b) fixes much of their long-term underfunding problem, by replacing “soft debt” with “harder” debt at the lowest interest cost ever available, and (c) infuses billions, potentially a trillion dollars of fresh capital into the equity markets at the most opportune time. This will stabilize the nation’s capital markets and reduce investor panic worldwide.

States and municipalities clearly need federal financial assistance to counter their dramatic unrecoverable loss of income and sales tax revenues during this pandemic. Adding this temporary FFB authority won’t solve all their problems, but it can only help. Setting up a lowest-cost liquidity facility and a much-needed infrastructure funding platform is just good business. Having worked on drafting Treasury regulations earlier in my career, I would be honored to help craft the necessary implementation ground rules.  

If the argument resonates with you, Miller encourages you to send a copy of his op-ed — this whole column, even — to your representative in Congress. 

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There is mounting evidence that the economy as we knew it needs more, different and continuing intervention to ever resemble what it was just two short months ago – or if it is to undergo systemic change to become what we need it to be après coronavirus.


In its new 2020 Forecast, the UCLA Anderson School of Management predicts a coronavirus-caused recession could cost 2 million jobs and spike the national unemployment rate to over 5 percent, up from the current 3.5 percent. That estimate is dwarfed by the 20+ percent unemployment possibility about which U.S. treasury Secretary Steve Mnuchin speculated with GOP lawmakers. For state and local governments, the drastic reduction in tax revenues would come right at the time when they are spending massive amounts of money battling the virus.

Speaking of forecasts, Governing contributor Bill Eggers took to social media with a Cliffs Notes-style summary of his employer’s take on economy in the year ahead:

1. The COVID-19 recession (50 percent probability) — GDP falls by almost twice the amount of the average postwar recession but begins to recover in late 2020 as the disease is brought under control.
2. Financial crisis and deep recession (30 percent probability) — Economic activity plunges as the COVID-19 outbreak affects both the economy’s supply side and demand side. The shrinking economy uncovers a weak financial structure in some economies and sectors.
3. Long, hard trek to recovery (20 percent probability) — After falling substantially in 2020, GDP growth remains in the 1 percent range in in 2021, and unemployment remains high. Growth then picks up to 3 percent or more by 2023 and remains high for another year because of pent-up demand for big-ticket items, combined with very accommodative monetary and fiscal policy.

Bill explains that the coronavirus has earned its status as an “external shock,” a term favored by economists to describe a random event that disturbs the economy. [Deloitte Insights]

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State Money Moves – In the meantime, states are doing what they can to protect and promote their interests as the pandemic roles on.

• California lawmakers approved a pair of bills that commit up to $1 billion in state funds to battle the coronavirus pandemic. The measures appropriate $500 million for emergency response from the state’s general fund with an additional $500 million available if needed [CalMatters/L.A. Times].
• Tennessee Gov. Bill Lee (R) sent the Legislature a budget that rolls back planned raises for teachers in order to stockpile cash for tornado relief and reserves for dealing with the spread of the coronavirus. [AP]
• The Florida House and Senate unanimously endorsed a record $93.2 billion budget for next year. Gov. Ron DeSantis (R) anticipates using his veto pen to help balance the “economic dislocations” between the coronavirus crisis and the anticipated reductions in state tax revenue. [CBS12.COM]
• Massachusetts is facing scrutiny on two fronts as public markets collapse and pressure on government pensions for its nearly 300,000 public employees and retirees and budgets rise. The commonwealth’s credit rating could take the real hit in all of this. The Boston Globe reports “the business-backed Massachusetts Taxpayers Foundation, said a prolonged market slump could make it tougher for the state to reach its goal of fully funding its pension obligations by 2037. If the state falls short, bond rating agencies such as S&P and Moody’s will pay attention.” There is more fiscal tension around the state budget, according to Greg Sullivan, research director at the Pioneer Institute think tank in Boston. He worries legislators “might divert a large part of that $3.1 billion, as tax revenues of all forms crater amid this broad economic shutdown.” With that, Sullivan can see the possibility of “a run on the state’s unemployment insurance fund. Sullivan doubts the $2.7 billion promised to Massachusetts from the rescue bill approved in Washington this week will be “enough to offset these strains on the budget.”

Preppers, Scammers, and Rumored Runs on Banks

The coronavirus crisis unfolded as if scripted from a prepper’s playbook — that is, those who actively prepare for all types of emergencies, including, as it turns out, pandemics. Later in the playbook is the chapter on runs on banks. In recent weeks, there have been scattered reports of people trying to withdraw large sums of cash from ATMs and bank branches.

The Washington Post reports that “many banks have shortened branch hours or are pushing customers to use online banking exclusively to avoid transmission of the virus.” Seems legit. This has led more Americans to pull cash out of ATMs in some communities. Could be legitimate, could be a little prepping going on. The CEO of Southern Bancorp said the bank had ordered 30 percent more cash to keep up with withdrawals. Other banks are reportedly following suit.

That said, not all this activity is above board. Again, according to the Post, “The FDIC says it has seen an uptick in calls, text messages, letters and emails from scammers pretending to be FDIC employees, using names of people who actually work at the FDIC. The scammers falsely claim that banks are limiting access to deposits or that there are security issues with bank deposits. The scammers, along with trying to sow distrust, are also after bank account and other personal information.”