Mnuchin: States can borrow to cover revenue lost to coronavirus

Treasury Secretary Steven Mnuchin on Monday encouraged states “that have cash flow issues” to take advantage of low interest rates and borrow money to cover revenue lost due to the coronavirus pandemic.

Mnuchin said during a Monday interview with CNBC that President Trump and Republicans are unwilling to support aid for states to handle long-standing financial issues unrelated to the outbreak and suggested that cash-strapped governors turn to a Federal Reserve facility created for local governments.

“There is not going to be bipartisan support that bails out states from previous problems,” Mnuchin said in an interview with “Squawk Box.”

“With interest rates very, very low, states can borrow this money,” he continued, adding that some might need to make deeper spending cuts to comply with balanced budget laws.

States are facing severe budget shortfalls due to a combination of rising unemployment claims, the costs associated with fighting COVID-19 and plunges in tax revenue. While Congress has already approved billions of dollars to help states cover the costs of pandemic, lawmakers are deeply divided over further aid.

Trump and most GOP lawmakers have rejected helping states handle past financial mismanagement, but have said little about supplementing lost revenue. Democratic leaders, however, are set to propose around $1 trillion in additional aid for states in an upcoming coronavirus relief plan.

Mnuchin said he and Trump were discussing the “complicated” issue of supplanting lost state revenue with lawmakers, but that their priority is protecting the jobs of medical and emergency personnel on the front lines of the pandemic.

“The CARES Act gave a lot of money to the states, and that money was intended not for lost revenues. It was intended for COVID-related issues,” Mnuchin said, referring to the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act signed by Trump in late March.

The CARES Act allocated $150 billion to state governments to cover pandemic-related expenses and $500 billion to the Treasury and Federal Reserve emergency relief programs, including a Fed lending facility for state and local governments.

The Fed’s soon-to-be-open Municipal Liquidity Facility is available to cities with at least 250,000 residents and counties with at least 500,000. The central bank will purchase up to $500 billion in short-term debt from state and local governments as part of a broader $2.3 trillion emergency lending initiative. 

The Fed in March slashed its baseline interest rate range to 0 to 0.25 percent in a bid to stabilize the economy and keep credit flowing through the financial system. Fed Chairman Jerome Powell, Speaker Nancy Pelosi (D-Calif.) and Mnuchin have said the U.S. should take advantage of the ability to borrow at virtually no cost to save the economy from an unprecedented downturn.

“One of the reasons I do feel comfortable with us spending all this money is because interest rates are very low. And we’re taking advantage of long-term rates,” Mnuchin said.

The new deficits, he added, could be managed without buying back debt.

Niv Elis contributed.