Under the CARES Act (one of the federal coronavirus relief bills), the Federal Reserve has $500 billion with which to buy short term notes from states and certain local governments (“eligible issuers”). This municipal lending facility (MLF) is meant to help these governments “better manage cash flow pressures.” (The Fed reports that, as of May 6, the MLF was not yet operational.)

Yesterday the state treasurer’s office announced that Washington will not be making use of the MLF. The state can actually get better interest rates in the traditional municipal bond market than it would get for an MLF loan.

The local governments that are eligible to participate are the city of Seattle and King, Pierce, Snohomish, and Spokane counties. They will make their own decisions about whether to use MLF loans. The program also allows eligible issuers to lend MLF funds to other local governments that do not qualify under the program. But, as the treasurer’s office notes, if the state did so, it would then “bear the credit risk and be fully responsible for guaranteeing the repayment of any notes that it purchased.” According to Treasurer Davidson, this “would place additional pressure on our credit ratings and constitutional debt limit.”

Moreover, as I wrote last month, borrowing is typically an unattractive option in the face of budget shortfalls. The treasurer’s office adds, “Borrowing to cover lost revenue is a strategy akin to ‘kicking the can down the road’ that could have a disastrous impact 12 to 36 months from now when the loan must be repaid, and when the state will likely still be recovering from the COVID-19 financial crisis.”