Federal Government Gets Ready to Help States, Cities Mismanage Money

John Ransom
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Posted: Oct 01, 2013 12:01 AM
Federal Government Gets Ready to Help States, Cities Mismanage Money

Get ready for local government to get more expensive thanks again to our wonderful federal government. The federal government, under the guise of the Securities and Exchange Commission (SEC) is proposing to “help” local governments better manage their cash by adding onerous regulations to money market funds that would make it virtually impossible for cities, states and other local governments to use anything other than old-fashioned bank accounts to store cash.

Members of Congress, state governments and municipalities are all protesting the proposed rule changes as violations of the federal system that allows municipalities to raise money without the interference of the central, federal government.

“At its heart,” Rep. Randy Hultgren (R-IL) told Townhall Finance, “a municipal bond preserves federalism by allowing local communities to raise their own funds and carry out their own improvements without the help or intrusion of the federal government. Communities can invest locally, and gain locally.”

Hultgren, a member of the Capital Markets and Government Sponsored Enterprises committee in the House, opposes the proposed SEC changes to the muni money funds known as LGIPs.

Currently state and local governments use special money market funds called local government investment pools (LGIP) designed to better meet the needs of government cash-flow requirements. These pools aren’t deposits, like in a bank, and thus have some investment risk.That risk is that a dollar deposited in a LGIP won’t equal a dollar at withdrawal. The risk of that, however, is minimal.

It requires a unique set of circumstances for that to happen- circumstances that are unrelated to LGIPs per se. The regulations seem to be aimed at preventing muni money fund problems in the event of a general financial crisis, like 2008, which had the adverse effect of limiting a municipalities’ access to cash because of general liquidity problems in the financial system.

The SEC’s new proposed rule would solve that problem by… limiting the ability of municipalities to access cash through redemption restrictions.

Seriously.

The solution to the liquidity problem in a crisis, says the SEC, is to limit liquidity. However, liquidity, combined with a higher return is the whole ever-loving point of LGIPs and money market funds to begin with.

"The current proposal of …redemption restrictions we don't believe will work," Virginia State Treasurer and the National Association of State Treasurers President Manju Ganeriwala told Reuters. "If there's a run and if I'm an account holder in an LGIP ... then I won't be able to get everything out. I'll have to wait 30 days. And what if I have a debt service payment coming due?"

That could lead to a whole row of dominoes falling, one after another, as states and cities default on short-term obligations, making the liquidity crisis worse.

It would also require the investment pools to do some accounting that would limit the types of investments they could use in the pools, thereby reducing the amount of return on investment.

"The SEC's proposed rule changes would be detrimental to competition, efficiency, and capital formation for our members as well as cities, counties, and other municipal entities. We do not believe additional changes to money fund regulation are needed at this time," the treasurers’ association protested according to Reuters.

Also at issue is the federal system that separates federal government from state and local governments.

It’s long been an accepted legal reality that state and local governments are allowed to manage their own finances independently of the federal government. That’s one reason why state and local governments issue bonds that the federal government can’t tax. That tax-free status makes it less expensive for governments to raise money for projects.

But now states are running smack into the same regulatory buzz saw coming from the Obama administration that is cutting apart private industry, fragmenting our economy and adding expense to the normal course of business. These are the same type of financial regulations—Everyone Gets a Home Act, Sarbanes Oxley, Dodd-Frank—that brought on the financial crisis in the first place.

“The SEC’s proposed changes to money market funds could limit cities’ cash management options,” says Hultgren, “and make short-term financing more expensive. We need to maintain the availability and accessibility of municipal bonds for our communities.”

Even more, we need to ask the folks in DC who can’t even manage their own checkbook to stop micromanaging ours.