Local governments and non-profits are impacted by the current COVID-19 pandemic in much the same way as small and mid-size businesses: severe and unplanned loss of revenue. In the case of governmental issuers, budget gaps are created by delays in the receipt of tax revenue. Non-profit organizations have suffered losses due a decline in demand for services that are not essential – health care organizations are not performing elective procedures; colleges and universities have been forced by the circumstances to return tuition and housing payments as they focus on on-line learning programs.

The CARES Act created a $150 billion Coronavirus Relief Fund, which benefits state, local, and tribal issuers – principally counties – that have populations greater than 500,000 residents. The counties within the Commonwealth of Pennsylvania that are eligible for grants from the fund listed here

Most issuers will look to the bond market for financing solutions. The municipal bond market, however, has been volatile recently and financing solutions are scant. But, as the nation progresses toward recovery, public finance strategies are emerging. This Alert focuses on two prospects, the Federal Reserve’s Municipal Liquidity Facility, and recent proposals submitted to Congressional leaders to inspire demand in the bond market. 


On April 9, 2020, the Federal Reserve adopted a Municipal Liquidity Facility program that will permit the Fed to purchase up to $500 billion of short-term notes from large governmental issuers. A term sheet that describes the details can be accessed here .

Under this program, the Fed will create a special purpose vehicle (an “SPV”), into which it will initially invest $35 billion. The SPV will purchase notes issued by states, counties with a population of at least 2,000,000 residents, and cities with at least 1,000,000 residents. The note purchases are designed to provide immediate liquidity to the largest issuers in the country, who arguably are hardest hit by the deferral of tax payments. Under the Facility, the Fed will lend funds to its SPV, and the SPV will purchase notes that can take the form of tax anticipation notes, bond anticipation notes and similar structures that have a maturity date of no later than two years from the date of issuance.

The program has some interesting features that will inspire discussion and will have legal implications. First, only one issuer per eligible state, county, or city can sell its notes to the SPV, and the amount of the borrowing is limited to 20% of its general revenues from 2017. Second, the large issuer can use the proceeds of the sale of its note to purchase obligations of smaller issuers, such as local municipalities and school districts, that are not themselves eligible.

The Fed has signaled its support and willingness to create liquidity in the municipal bond market. The details of the acquisition process, and a process that state and county issuers can allocate proceeds to smaller municipalities, school districts, and other issuers will likely develop. Obermayer’s public finance attorneys will watch these developments closely.

II.                     LEGISLATIVE PROPOSALS

Also, on April 9, 2020, the National Association of Bond Lawyers (“NABL”) proposed to Congressional leaders several amendments to the Internal Revenue Code and interpretive guidance that, if implemented, would serve the overall goal of promoting liquidity and demand in the bond market and reducing issuers’ borrowing costs.
NABL is advocating for the following legislative relief (among other things):

1.      Create of a new category of state and local bonds, called “American Infrastructure Bonds.” These bonds would provide for a “direct pay” feature that is similar to Build America Bonds, where issuers would receive a direct payment from the government equal to 40% of the income tax that that is payable by investors on these taxable bonds;

2.      Reinstate advance refundings of tax-exempt bonds, in order to lower borrowing costs to issuers with liquidity needs;

3.      Revise limitations on low-income housing regulations to permit all tax exempt bonds issued by a 501(c)(3) organizations to be issued on a tax exempt basis as long as the housing is to be used by the organization for its exempt purposes;

4.      Temporarily remove the prohibition on guarantees of tax exempt bonds by the federal government; and

5.      Relax limitations on “private use” restrictions on property financed with tax-exempt bond proceeds.

There is no guarantee or indication, presently, that any of these suggestions will become law. However, as Congress considers additional action to soften the economic impact of the COVID-19 crisis, governmental issuers that are not directly helped by the recent CARES Act will hopefully be part of the picture.

Obermayer’s public finance attorneys are closely monitoring programs that may benefit state, local government, and non-profit issuers. We continue to be available any time to consult with you or your constituents.

This alert is intended to notify its readers of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have . We are fully operational during this pandemic and we stand ready to assist your business with any of the aforementioned applications. Please do not hesitate to contact any of our attorneys with your questions and concerns.
Visit our COVID-19 Legal Response Team Page here