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.
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.
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