By Arnab Datta and Skanda Amarnath

A Treasury Department spokesperson announced Tuesday that Secretary Mnuchin intends to put unallocated funding from the CARES Act into the department’s “general fund,” where Treasury Secretary-nominee Janet Yellen would require congressional approval to access it.

If he follows through, Mnuchin will likely be violating the law. These funds can only be moved to Treasury’s Exchange Stabilization Fund (ESF), the fund that Congress appropriated them to. Given Mnuchin’s stated intent to act in violation of the CARES Act, Chair Powell should reconsider his decision to transfer the funds back to Treasury, or at least clarify that they are for the sole purpose of being returned to the ESF. Anything less risks the Fed becoming a tool of partisan gamesmanship and will undermine its institutional capacity.

## Introduction

The funds appropriated in the CARES ACT for investing in the Federal Reserve’s facilities in the CARES Act continue to serve as an important backstop during the COVID-19 economic crisis. These funds were appropriated to the Department of Treasury’s Exchange Stabilization Fund (ESF) for the purpose of providing liquidity to eligible businesses, States, and municipalities “related to losses incurred as a result of coronavirus.” A portion of these funds were and will remain invested as equity stakes in special purpose vehicles (SPVs) administered by the Federal Reserve, including the Main Street Lending Program (MSLP) and the Municipal Liquidity Facility (MLF).

The COVID-19 crisis is far from over. While some economic indicators are recovering, the public health effects of COVID-19 have reaccelerated and risk imposing further economic losses. In light of this ongoing economic and policy uncertainty, these funds should remain in the ESF for policy reasons alone. While new investments cannot be initiated after December 31, 2020, these funds can still be used to modify, restructure, or otherwise amend the equity investments outstanding in the Federal Reserve’s SPVs.

As stated in the law of the CARES Act:

In a November 19 letter, Secretary Steve Mnuchin requested that the Federal Reserve return $455bn of unused CARES funds appropriated to support direct loans and a variety of 13(3) Federal Reserve credit facilities. The Federal Reserve is under no legal obligation to return these funds, as others have noted. Chairman Powell’s reply indicated that he would comply with the request, but his letter was sparse on details regarding how and when the funds would be returned. Under the CARES Act, these funds can only be lawfully returned to the Treasury’s ESF, where they must remain and be available for use under 4027(c)(1) and 4029(b) until January 1, 2026. Only at that time would a transfer of the$500B appropriation from the ESF to the general fund be lawful and in compliance with 4027(a). The Treasury reserves the right to use its $500B at the ESF to modify, restructure, and otherwise amend its equity investments outstanding in the Federal Reserve’s lending programs and facilities, even though it cannot make new loans, (new) loan guarantees, or other (new) investments. ### I. To comply with the CARES Act, outstanding funds can only be returned to the Exchange Stabilization Fund, and not to the Treasury’s general fund for deficit reduction. In the CARES Act, Congress appropriated$500bn to the Exchange Stabilization Fund. The purpose of the funding, as described in §4003(a), was solely “to provide liquidity to eligible businesses, States, and municipalities related to losses incurred as a result of coronavirus.” Accordingly, using the funds for any other purpose — like a transfer to the Treasury’s general fund for the purpose of reducing the national debt or deficit reduction — would likely be a violation of the law.

Congress limited how the funds could be used after January 1, 2021 in §4027(c)(1), but unambiguously provided three possible uses.. §4027(c)(1)(A), states that “in general,” remaining funds may be used only for “(A) modifications, restructurings, or other amendments of loans, loan guarantees, or other investments in accordance with section 4029(b)(1); and (B) exercising any options, warrants, or other investments made prior to January 1, 2021; and (c) paying costs and administrative expenses as provided in section 4003(f).”

§4027(c)(2) specifies that “On January 1, 2026,” funds remaining from the $500B ESF appropriation in CARES “shall be transferred to the general fund of the Treasury to be used for deficit reduction.” Though the 4027(c) provision does not explicitly disclaim transfer to the general fund for the use of the funds for deficit reduction prior to 2026, this provision demonstrates strong congressional intent that the funds remain in the ESF. The provision states that any “funds described in paragraph (1) that are remaining” be transferred to the general fund. It is facially clear that Congress contemplated that the funds would remain in the ESF until that date. The fact that Congress explicitly required funds outstanding on Jan. 1, 2026 to be used for deficit reduction, alongside the absence of any language in the rest of the subtitle declaring deficit reduction an allowable use, demonstrates a strong congressional intent for the funds to remain in the ESF for the purposes of the CARES Act until 2026. Additionally, per Chapter 15(B)(6)(b) of GAO’s Principles of Federal Appropriations Law: “If money received by a government agency must be deposited in the Treasury and an appropriation is needed to get it back out, logic would seem to dictate that statutory authority for an agency to retain specified receipts and to spend them for specified purposes is a permanent or continuing appropriation of those receipts. GAO has consistently applied this principle to a variety of revolving funds, user fee accounts, proceeds from sales of goods or services, etc. This principle is explored in more detail, with case citations, in Chapter 2, section B.1. Further support is found in the title 31, United States Code, definition of “appropriations,” which is not limited to direct appropriations from the general fund of the Treasury but includes “other authority making amounts available for obligation or expenditure.” 31 U.S.C. §§ 701(2)(c), 1101(2)(c).” The Treasury cannot claim that the funds are no longer reusable merely because they were previously pledged for Fed facilities. 31 U.S.C. § 5302 clearly specifies that “Proceeds of sales and investments, earnings, and interest shall be paid into the [ESF] and are available to carry out” the purposes of the ESF. As such, the$500B appropriation to the ESF must remain with the ESF until January 1, 2026.

If the Treasury were to repurpose the $500bn provided under the CARES Act to its general fund for “deficit reduction,”or any other use, it would very likely be a violation of the law. Chair Powell has indicated that he will comply with Secretary Mnuchin’s request to return unused funds to the Treasury. In order to ensure compliance with the legal obligations of the CARES Act, it is incumbent on Chair Powell to do all that he can to ensure that the funds are returned only to the Exchange Stabilization Fund. II. Funds remaining after January 1, 2021, can be used to modify, restructure, or amend existing investments in the Fed’s CARES Act facilities. §4003(b) of CARES describes how the$500bn appropriation to the ESF was to be allocated:

• (b)(1) designates that no more than $25B of the$500B be allocated for loans and loan guarantees for passenger air carriers.
• (b)(2) does the same for cargo air carriers, designating no more than $4B of the$500B
• (b)(3) does the same for businesses critical to maintaining national security, designating no more than $17B of the$500B
• (b)(4) designates that $454B plus any unused funds from the previous sections be allocated to loans, loan guarantees, and other investments in “programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States, or municipalities” “Other investments” the Treasury makes that are not in the form of loans or loan guarantees are strictly in reference to its investments in programs or facilities established by the Federal Reserve. If the authority to modify, restructure, or amend was not to apply to equity investments in the Fed’s SPVs, Congress could have simply removed “other investments” from 4027(c)(1)(A) and 4029(b)(1). After December 31, 2020, the allowable uses for the funds narrow further. §4027(c)(1) lists three uses for “any remaining funds available” of the$500B in the ESF. These funds may be used only for “(A) modifications, restructurings, or other amendments of loans, loan guarantees, or other investments in accordance with section 4029(b)(1); and (B) exercising any options, warrants, or other investments made prior to January 1, 2021; and (c) paying costs and administrative expenses as provided in section 4003(f).” This clause provides the Secretary of Treasury authority with respect to equity investments outstanding in Fed lending programs and facilities.

Though a large portion of the $500B appropriation remains unallocated, Treasury equity investments remain outstanding in each of the SPVs that the Fed created as a result of the CARES Act. Any discretion in redeploying the funds accorded to the Secretary of the Treasury is provided by §4027(c)(1)(A) which states,“modifications, restructurings, or other amendments of loans, loan guarantees, or other investments in accordance with section 4029(b)(1)”. Entirely in accordance with §4027(c)(1)(A), the Treasury may restructure or amend its existing agreements with the Fed and inject additional equity capital from the ESF into the SPVs related to the Fed’s outstanding lending facilities and programs. Treasury may also seek to modify the terms associated with its equity investments. Senator Toomey and Secretary Mnuchin are wrong in their claim that §4029 curtails the Fed’s authority to make new loans, loan guarantees, and other investments. In point of fact, it only constrains the Secretary of the Treasury. This is clear from the text of §4003(a) of CARES, which provides authority to “The Secretary [of the Treasury]” to “make loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed [$500B].” Accordingly, the termination clause for “loans, loan guarantee[s], and other investment[s] outstanding” under this subtitle only refers to the authority of the Secretary.

Critically for the Federal Reserve’s authority in administering these programs, §4003(b)(4) provides >\$454B for the Secretary to make loans, loan guarantees, and other investments in facilities established by the “Board of Governors of the Federal Reserve System.” These funds are held in the Exchange Stabilization Fund. Though CARES modified the law governing the ESF, it made no changes to the Fed’s authorities to lend under §13(3) of the Federal Reserve Act, the section under which CARES Act facilities are authorized. Accordingly, the termination of the Secretary’s authority does not impact the Federal Reserve’s authority to continue to inject capital in its SPVs using funds already allocated to the ESF.

Despite indicating that he would comply with the Treasury’s request, Chair Powell has been careful in his communications not to endorse Secretary Mnuchin and Senator Toomey’s interpretation of the relevant sections. In describing Mnuchin and Toomey’s claim Chair Powell used the second-person passive voice, writing “you have indicated that the limits on your authority do not permit the CARES Act facilities to make new loans or purchase new assets after December 31, 2020, and you have requested that we return Treasury’s excess capital in the CARES Act facilities.” Chair Powell should be equally cautious now to avoid enabling the Treasury Secretary’s express intention to violate the CARES Act.

Sec. Mnuchin and Sen. Toomey may go on to claim that prior allocations to the Fed returns may not be recycled, but this would be a dubious interpretation of the law. If the Fed decided to dissolve a facility because of inherent flaws and return capital that Treasury invested from the ESF, that investment would not be “lost” with no capacity for redeployment. Instead, it would return to the ESF where it could be redeployed for these same Federal Reserve facilities in future, without requiring the intervention of Congress, or a new appropriation.

To the extent that the term “outstanding” is ambiguous, agency deference doctrine would also provide a strong argument that the returned funds could be redeployed as necessary by the Treasury for use in the Federal Reserve’s lending facilities.

## Conclusion

The CARES Act was a historic and remarkable achievement, but the pandemic continues to ravage the country. Given the economic uncertainty created by the virus and the policy uncertainty created by a divided government and a transition in the Executive, the Treasury Department and Federal Reserve must retain as much optionality as possible in their response to the ongoing crisis. Though the Fed’s facilities have been less utilized than some observers anticipated, they may yet prove critical in stabilizing credit markets and state and local government finances. As such, the unallocated funding in the ESF must remain there, to be used to modify, restructure, or amend equity investments outstanding in the Fed’s lending facilities and programs.

It’s difficult to ascertain a reasonable motive for Secretary Mnuchin’s decision. On the surface, the request seems like a vindictive, ham-fisted attempt to prevent his successor from utilizing the crisis response tools already authorized and appropriated by Congress. If he follows through on his commitment, he will likely be in violation of the CARES Act. Chair Powell should do all that he can to avoid such an outcome.