The Federal Reserve’s decision to extend loans only to the most-populous local governments may have a stark, if unintended consequence: excluding some of the cities and counties with the biggest share of black residents.
Only cities with more than 1 million residents -- and counties with more than 2 million -- will be able to take out loans from the central bank to cover short-term deficits as the coronavirus shutdown decimates their tax revenues.
As a result, according to a report released Tuesday by the Brookings Institution, none of the 35 cities with the biggest share of black residents will qualify. That includes Baltimore, Atlanta and Detroit, a formerly bankrupt city that’s been dealing with a major outbreak of Covid-19.
Brookings analysts Aaron Klein and Camille Busette said the minimum population requirements “unintentionally deepen what are becoming disturbing and obvious racial disparities of COVID-19.”
“Everything suggests the Fed was just acting quickly in unprecedented area -- the Fed has long objected to aiding municipal and state governments for good reason,” they wrote.
The move to lend as much as $500 billion to the fifty states, Washington, D.C., and the few local governments that qualify is the Fed’s first direct step into the $3.9 trillion municipal-debt market, which was battered by a steep sell-off last month as investors pulled out en masse on concern about the impact of the virus. The loans will ensure governments can keep operating without flooding the market with short-term debt, a step that could have caused interest rates to soar.
A spokesperson for the Fed declined to comment.
The lending may be needed in some black communities that are more at risk from a deep economic slowdown. McKinsey & Co. found that black Americans are almost twice as likely to live in the counties and work in jobs at the highest risk from a long-standing disruption. An estimated 39% of jobs held by black workers are at risk, compared with 34% for white workers, according to McKinsey.
The Fed program does allow states to borrow on behalf of cities and counties that don’t qualify on their own. But it’s not certain that states would be willing to take on the additional debt, given that it could hurt their credit ratings, make it more expensive for them to borrow or leave them at risk if a struggling city can’t afford to pay it back.
The Fed has indicated that it would consider extending further support to the state and local debt market if needed. And by absorbing debt from some of the biggest jurisdictions, the central bank may free up enough capital that smaller ones could easily borrow in the public markets. Including the states, about 75 governments would be eligible for the current program.
Klein and Busette said the Fed could drop the population limits or broaden them to cover the 50 biggest cities and counties to prevent black-majority communities from being excluded.
“Quick actions can have unintended consequences, and the Fed has time to fix this one,” they wrote.
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