Texas issuers say they feel pinch from state anti-‘boycott’ laws

Bonds

Local government officials in Texas are increasingly feeling the sting of 2021 state laws that banned big banks from underwriting municipal bonds for “boycotting” or “discriminating” against the fossil fuel or firearm industries.

Several aired their grievances at The Bond Buyer’s Texas Public Finance conference in Austin last week, noting the impact of the laws, which pertain to state and local government contracts worth $100,000 or more, has spread beyond bond underwriting to other functions, such as the procurement of letters of credit and investment and depository services. 

Houston Controller Chris Hollins, who took office in January, chastised state officials for targeting banks for their environmental or gun safety stances. 

“You can agree or disagree with our process,” said Texas Comptroller Glenn Hegar, “but we are going to be open, we are going to be transparent and we’re going to let you know this is the test.”

Michael Dorman

“That decreased competition drives up the cost for taxpayers and it makes the work that we do to dig our cities out of financial holes harder,” he said in a Tuesday speech at the conference. “Make no mistake, the twists and turns we must now navigate are contrived, devised, and caused by select people here in Austin.”

As a result of the laws, the ranks of investment banks have thinned at the same time Texas became 2023’s top volume state for the first time since 1981 with $59 billion of debt sold.

Barclays, UBS, and Citigroup have so far fallen victim to the laws, with the latter two announcing plans last year to shrink or end their muni operations nationwide.

Bank of America, JP Morgan Chase, Morgan Stanley, RBC Capital Markets, and Wells Fargo remain under a review launched by Texas Attorney General Ken Paxton’s Office in October over their involvement with the Net Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050.

In his keynote address at the conference, Texas Comptroller Glenn Hegar, whose list of 15 financial companies deemed to be fossil fuel industry “boycotters” includes only one investment bank, UBS, called for “intellectually honest” public policy discourse.

“You can agree or disagree with our process about how people get on or people get off (the boycott list), but we are going to be open, we are going to be transparent and we’re going to let you know this is the test upon how you got on it or how you get off of it,” he said, adding he ultimately wants financial institutions to be able to do business in Texas. 

Banks banned from underwriting are also pulling away from other services provided to governments in Texas, according to Houston Deputy Controller Vernon Lewis. 

“On the liquidity side, … it sucks,” he said, noting Houston has a $2.8 billion commercial paper program, which relies on banks for credit facilities or to act as a dealer.

The liquidity market in Texas is suffering as a result of limitations imposed by the laws and the Net Zero review, according to Dave Brayshaw, a managing director at Masterson Advisors.

He highlighted repurchase agreements, which governments use to invest funds on a short-term basis for liquidity, noting there is now only one provider in Texas compared to 13 before the laws were passed. 

Brayshaw also said it is very difficult for Texas issuers to modify existing contracts for derivatives like interest-rate swaps because bank counterparties are uncertain if any changes would constitute a new agreement. 

Amy Perez, deputy executive director of Harris County’s Office of Management and Budget, said for investments, the county doubled the number of broker dealers to two “just in case one ends up on the list we can still do business with the other.

“That’s been an additional cost to us,” she said. “It’s not a huge cost, but it is a cost.” 

She added the pricing of the county’s bonds has not yet been impacted by the 2021 laws.

“However, anytime you lose competition of any kind it is a concern, it should be a concern because it could possibly get to a point where we see a differential in pricing,” Perez said.

Studies have concluded the underwriter bans, which have been duplicated in other states, depress competition, leading to higher interest costs.

Conference speakers also raised concerns about the potential for a private school voucher program, as well as last year’s passage of a big property tax cut for the fiscal 2024-25 biennium, which put the triple-A-rated state on the hook for a greater portion of school funding to compensate for lower local tax collections.

Bennett Sandlin, executive director of the Texas Municipal League, said the tax compression was doable because of the state’s huge budget surplus and that not making the tax cut permanent will be difficult. 

“Perhaps that surplus goes away in future sessions,” he said. “It’s really hard to undo some of that from a political point of view.”

Karen Smith, Cypress-Fairbanks Independent School District’s chief financial officer, raised the potential for prorated funding. 

“So when we haven’t had an increase in school funding and then they cut your funding on top of that, that’s definitely a concern,” she said.

In December, Fitch Ratings warned “there is some risk to the state in funding a significant new ongoing expense with accumulated balances that by definition are one-time in nature.”

S&P Global Ratings Analyst Stephen Doyle, a conference panelist, raised concerns about schools’ increased reliance on the state’s fiscal health. 

“While the state has a huge budget surplus, how do you estimate that threshold for the point of pressure where that is not a sustainable situation especially when we saw the lieutenant governor’s charges for additional property tax relief,” he said. 

Earlier this month, Texas Lt. Gov. Dan Patrick, who also serves as Senate president, ordered chamber committees to examine ahead of the legislature’s 2025 session further property tax cuts, with the Finance Committee tasked with reporting on the cost of eliminating portions of or all property taxes.

“Determine the fiscal consequences of each action, including whether revenue reallocations would be required for public education funding and local government funding, and impacts on the state’s ability to respond to disasters and other urgent priorities,” Patrick’s 2024 Interim Legislative Charges list said.

The Senate’s Local Government Committee was asked to recommend “methods to improve voter control over tax rate setting and debt authorization, and mechanisms to dissolve taxing entities such as municipal management districts and tax increment reinvestment zones when they have outlived their purpose.”

School officials said a voucher program was likely to pass next year. Gov. Greg Abbott has been actively supporting Republican legislative candidates who support a state-funded school choice program after lawmakers in the House blocked its passage last year.

“I wish we were on a level playing field so if a private school student is going to get $10,000, give a public education student $10,000,” Elaine Cogburn, deputy superintendent for finance and operations at the Dripping Springs Independent School District said. “That’s not what we were seeing in the past proposed laws.”

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