The London Interbank Offered Rate (LIBOR)is a global benchmark interest rate calculated daily, and is the most widely used benchmark in the capital markets. State and local governments often see this rate in swaps/derivatives products intertwined with municipal debt, as well as in floating rate notes, lease contracts, bank loans, direct placements, and other types of financings and credit enhancements.
LIBOR will be phased out over 2021 and on December 31, 2021, will cease to be used on new financial documents.
State and local governments need to know that existing contracts that reference LIBOR will need to be revised to perform as intended and new contracts will have to reference a new benchmark, such as the Secured Overnight Financing Rate (SOFR).
How is GFOA Involved?
The Federal Reserve along with the Federal Reserve of New York, has established a working group with GFOA and other stakeholder groups – the Alternative Reference Rates Committee (ARRC) – to ensure a transition for the financial markets from LIBOR to a new rate, the Secured Overnight Financing Rate (SOFR). In some cases, state and local governments may see other rates used for some financing products. The ARRC is comprised of a diverse set of private-sector entities that have an important presence in markets affected by USD LIBOR and a wide array of official-sector entities, including banking and financial sector regulators, as ex-officio members.
Where to find your LIBOR exposure?
Governments should make a list of all potential sources of exposure and track throughout 2021. Check off exposures that have been eliminated. Also, remember that some contracts may require governing board approval for change and issuers should make time for that process. In addition, GFOA recommends that you call your municipal/swap advisor and bond counsel prior to making any changes.