How a tweak to the Federal Home Loan banks could save cities

BY SourceMedia | MUNICIPAL | 09/16/20 12:01 PM EDT By Frank Scott

Today?s mayors face the dual challenge of expanding civic engagement and economic opportunity for all of their residents. This is especially acute now with the spread of COVID-19, a pandemic that affects everyone but devastates the most vulnerable.

Like other mayors around the country, our cities ? Little Rock, Ark., and Miami, Fla. ? are focused on addressing systemic inequality and responding to COVID-19. Yet, we confront mounting financial pressure from costs associated with these efforts, lower tax revenue and an increasingly unfavorable municipal bond market. And whether the state is red or blue, our critical infrastructure projects are slowed or stopped by declining revenues and resources.

Municipal bonds are an essential tool to help cities, counties and states recover from financial crises. The funding from these bonds supports everything from water treatment facilities and industrial development to hospitals, schools and other infrastructure. In Miami, we have leveraged our Miami Forever bond program to invest in climate adaptive infrastructure and economically inclusive policies. At a time when resources are being stretched, tax-exempt bonds can play a bigger role than ever in helping us to invest in our cities through new infrastructure projects, quality jobs and hope for a bright future.

Our nation?s ability to fully recover depends on the ability of its state and local governments to issue bonds that will fuel economic recovery, putting members of their communities back to work. Governments at all levels are facing the potential of declining bond ratings that can significantly increase the cost of obtaining bond funding. As responsible public officials, we, like mayors across the nation, are looking to leverage every public policy option available to boost the ability of localities to borrow funds and to lower the cost of debt financing.

This is why both of us ? a Democratic mayor and a Republican mayor ? are joining forces to ask our federal partners to put in place a series of much-needed, bipartisan legislative fixes that will ultimately improve the quality of life for working families and other city residents.

We want Congress to allow financial institutions to better utilize the Federal Home Loan Bank System. The 11 Home Loan banks provide low-cost funding to more than 6,700 financial institutions, including many focused on community lending. The legislative fixes will not cost the taxpayer but can empower these institutions to do more.

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In 2007 and 2008, the Home Loan bank system was critical to the recovery from the Great Recession. While other credit sources dried up, the system boosted the economy by channeling more than $1 trillion to lenders so that funding was available for home purchases and refinances. In some regions of the country, member institutions were the only lenders available to consumers because of the near total collapse of the secondary mortgage market.

Today, lawmakers need to better position the Home Loan banks to help institutions serving their municipalities. Legislation being considered in Congress includes authorization allowing the banks to issue letters of credit to support tax-exempt bonds and protect deposits by local government entities. These letters would allow local depository institutions to receive state and local government funds in excess of federal deposit insurance levels.

Moreover, these letters of credit could increase the marketability and lower the financing costs of tax-exempt bonds, despite uncertainty within the municipal bond market. This is the type of liquidity and support that mayors and municipalities around the country want Congress to bring off the sidelines and put into action to help fuel our nation?s economic recovery.

In fact, the U.S. Conference of Mayors, a nonpartisan organization of cities with populations of 30,000 or more, recently issued a resolution citing the Home Loan banks for providing ?strength and reliable liquidity? for community lenders. Further, the resolution urged Congress to support municipalities by lowering the cost to raise funds for housing, water and wastewater treatment facilities, industrial development, health care facilities and schools.

The time for action is now. We call on all Americans to pull together and collaborate with their neighbors to design and to implement solutions to shared problems. We are asking Congress to use no-cost legislative fixes to provide mayors with the tools they need to make cities across the nation stronger than ever to complement the hard work of the people in our communities.

Frank Scott, a Democrat, is the mayor of Little Rock, Ark. Francis X. Suarez, a Republican, is the mayor of Miami.

This article first appeared in American Banker.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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