Mr. President, Here's Your Trillion Dollars
Passing the American Health Care Act in the House was a momentous step forward for President Trump, Speaker Ryan, and the Republican agenda. Yet, with every Democrat lined up against it, the vote did little to calm public concerns about the broadening partisan divide in Washington. Another big item on that agenda, the president’s $1-trillion investment in our aging infrastructure, could bridge the gap across the aisle, if only we could answer nagging questions about how to pay for it.
Mr. President, we’ve got the answer to that trillion-dollar question.
Less than a month before President Trump’s election, a little-known rule governing money market funds written by the Obama administration’s Securities and Exchange Commission (SEC) triggered a massive transfer of wealth from the states to the feds. The changes made to SEC Rule 2a-7 siphoned away $1.2 trillion from financing for local schools, water, hospitals, infrastructure projects, and businesses. Reversing that flow will not only help pay for President Trump’s infrastructure plan, it will also have tremendous economic benefits for communities across America.
Specifically, the new rule requires that money market funds no longer operate on a stable net asset value (NAV) basis. Instead, they operate on a floating basis with their value being reset every day. As a result, money market funds are no longer a viable cash management tool for corporate and state treasurers, public finance officers, pension fund managers, and other institutions that invest short-term cash.
The rule severely limits what state officials can do to help their states. For instance, state treasurers can no longer invest state tax revenues in short-term funding vehicles. And cost-effective financing options for fixing water and sewer issues, affordable housing projects, and new infrastructure have also been stymied. Taxpayers are paying the price.
All told, $1.2 trillion exited prime and municipal money market funds and moved into federal government funds. In other words, $1.2 trillion of low-cost, capital markets financing for state and local government and businesses is now gone thanks to the “Washington-knows-best” approach of Obama’s SEC.
So far, the effects on states have been severe (if under-reported). According to a paper produced by Treasury Strategies, municipal funds, a key source for these projects, have experienced a 50 percent decline. Prime funds have seen a 72 percent loss of funding at the corporate level. Moreover, private sector borrowing costs rose by tens of billions of dollars, with municipal short-term costs rising over 70 basis points in less than one year.
When Idaho State Treasurer Ron Crane testified on this issue in front of the Senate Banking Committee last year, he said:
For more than three decades, stable value tax-exempt money market funds have been a stable source of short-term financing for cash flow, as well as important funding for public infrastructure and economic development … Money market funds are the lowest cost form of borrowing for us.
According to the Mississippi Economic Council (MEC), Treasurer Fitch’s home state of Mississippi will need an additional investment of $375 million a year to address its most vital road and bridge needs. Investing in that infrastructure today means more jobs and a stronger economy tomorrow. With Mississippi and many other states still struggling, now is certainly not the time to be limiting state and local government investment options.
Last week, Representatives Keith Rothfus (R-PA), Gwen Moore (D-WI), and Steve Stivers (R-OH) introduced bipartisan legislation called “The Consumer Financial Choice and Capital Markets Protection Act of 2017.” The bill would reverse the negative consequences of the Obama-era SEC rule. Similar legislation was introduced in the Senate last year and was recently introduced again by Senators Pat Toomey (R-PA), Mike Rounds (R-SD), Joe Manchin (D-WV), and Bob Menendez (D-NJ). If successful, these bills will restore and revive prime and municipal money market funds and, in turn, reestablish the flow of cost-effective funding for key infrastructure projects.
The Obama administration decided that the best way to help states was to keep the money in D.C., with the federal government deciding how and when to dole out money to help states. The better approach is to put states back in control of financing to meet their own priorities. All sides can agree that investing in our aging infrastructure is an important priority. Preserving stable value money market funds can help provide the funds to pay for it.
Treasurer Lynn Fitch is the State Treasurer of Mississippi and the National Chair for the State Financial Officers Foundation or SFOF. SFOF is a non-profit organization committed to educating the public, private sector, and state leaders on various financial issues from a free market perspective.
Jon Christensen serves as Federal Counsel for the State Financial Officers Foundation and is a former member of Congress having served the 2nd district of Nebraska from 1995–1999.