State and local governments need Congress to fix one more mistake from financial reform

by Ron Crane, Published online by the Washington Examiner

Link to original content: Washington Examiner Article

"Last month, an impressive bipartisan majority in Congress acknowledged what has long been obvious to most Americans: Some of the reforms enacted in the wake of the financial crisis of 2007-2008 went too far.

Rules designed to contain bad actors on Wall Street instead frustrated creditworthy consumers and small business owners on Main Street who need access to capital to invest in the American Dream. The bill President Trump signed into law was a significant but incomplete step in correcting that regulatory overreach.

Another key regulation that needs to be fixed is a Securities and Exchange Commission, or SEC, rule enacted during the waning days of the Obama administration that put sharp restrictions on money-market mutual funds. The rule eliminated the use of stable net asset value, or NAV — the dollar-per-share valuation of nongovernment money market funds — in favor of a floating NAV valuation system that makes them impractical for state and local governments to use. This may seem like an obscure and hard-to-explain finance issue, but consider this: The change has caused more than $1 trillion of private sector liquidity to shift away from funds that invest in the economic infrastructure of our communities and into funds that invest strictly in U.S. government debt.

Despite the clear harm caused by the rule, the largest Wall Street asset management companies want you to believe the rule is a good thing. Well, it is for them, but it isn't for state and local taxpayers, main street businesses, and other drivers of economic development and job creation.

State and local governments, nonprofit hospitals, public schools, and universities, transportation agencies and economic development authorities are just a few of the institutions serving our communities that rely on money market funds as a source of low-cost financing, and as a tool for managing large cash flows. Because of the SEC rule, their financing costs have spiked far above the Federal Reserve’s rate increases over the past two years. And they have lost the ability to earn market rates of return on the investment of operating cash.

These additional costs and reduced incomes are straining budgets and creating upward pressure on tax rates. State and local governments have to make up that difference by finding new sources of revenue, or scaling back investments in schools, affordable housing, public infrastructure, and other important services to their residents.

Thankfully, there’s growing momentum in Congress for a solution. Earlier this year, the House Financial Services Committee passed bipartisan legislation to roll back the harmful 2016 changes to money fund rules. The measure, H.R. 2319, would give institutions like state and local governments, businesses, pension funds and nonprofit organizations the freedom to invest cash balances in prime money and tax-exempt money market funds, which can in turn invest in things our communities need to maintain economic growth. The Senate Banking Committee will consider similar legislation (S. 1117) at a hearing on June 26.

In the face of this momentum, several Wall Street firms that backed the SEC rule to avoid regulatory scrutiny of their own businesses practices in the wake of the financial crisis, are actively working to prevent enactment of this legislation, which is supported by over 400 national state and local officials and organizations representing municipalities, main street businesses, building trades, and nonprofit organizations.

In the past 10 years, money market fund investors and borrowers have twice become victims of Wall Street’s excess; first by a financial crisis that devastated communities and, second, by having to pay the price for a backroom deal that protects large financial companies from oversight designed to prevent a repeat of 2008.

The Trump administration and Congress can right this wrong by enacting legislation to restore the ability of money market funds to support the infrastructure and economic development needs of our states and communities by returning to a stable net asset value for money market funds.

Ron Crane is state treasurer of Idaho and the national chair of the State Financial Officers Foundation."