How Texas taxpayers are already paying the price of bad politics

In November 2023, Texas voters approved tens of billions of dollars in new bonds for school districts, cities, counties, special districts and other local governments. Proceeds from these bond sales will be used to construct and maintain schools, parks, roads, utilities and other infrastructure projects.

Voters approved these borrowings with the understanding they will incur substantial interest costs. But would they if they were aware that a portion of the interest costs will be for no purpose other than to make a purely political statement? In fact, that is how a substantial share of the interest payments — hundreds of millions of dollars — will be used.

In 2021 the Texas Legislature passed, and the governor signed, SB 13 and SB 19 that prohibit Texas state and local governments from entering into contracts with banks that have policies restricting investments in oil and gas as well as firearms companies. The measures, targeted mainly at Texas pension funds, were intended to prevent the funds from investing in financial institutions that directly or indirectly support the anti-fossil fuel or anti-gun movements.

Unfortunately, Texas school districts, counties, towns and utility districts must also contract with these same financial institutions when they issue debt. Hence, they (and their taxpayers) are collateral damage of the legislation.

How so? When governments issue bonds they must rely on financial institutions to provide underwriting services. An underwriter purchases bonds directly from the issuer and resells them to investors. The municipal underwriting business is competitive, with scores of companies seeking the business of Texas governments. Not surprisingly, the larger, more well-established firms often have an advantage over smaller, more regional firms.

Owing to their size, they may not only be more efficient in performing the services expected of them, but also their national distribution networks are better able to market the bonds to investors. The result is that the larger firms can often enable the issuing governments to save on interest costs.

Ironically, these larger firms, such as Citigroup, JP Morgan Chase, Goldman Sachs, Bank of America and UBS, are the ones that have landed on the Texas comptroller’s list of ousted underwriters. As could have been anticipated, empirical evidence indicates that Texas governments did, indeed, pay a significant price for banishing them. A study by two economists, one from the Wharton School, the other from the Federal Reserve Bank of Chicago, estimated that based on $31.8 billion of bonds issued in 2022, Texas governments incurred between $300 million to $500 million of additional interest costs as a result of SB 13 and SB 19.

Even if one disputes the study’s interest cost estimate, most economists agree that providing governments with a choice among fewer financial institutions undermines the benefits of market competition. Ironically, in a different political environment, Republicans such as Gov. Greg Abbott and most of the Texas legislators who championed this legislation would likely be among the loudest opponents of this anti-competitive legislation.

Within the last several weeks Citigroup announced it was exiting the municipal bond underwriting business entirely. Experts believe other investment banks may follow. Policies of both Texas and other GOP-led governments on fossil fuels and guns are among the reasons cited. To be both fair and politically neutral, it should be noted that the problem of using the financial markets to make political statements is not confined to Republican governments. On the other end of the political spectrum, Chicago has restricted contracts with institutions on the “wrong side” of issues relating to prior ownership of slaves and gun control.

Oil and natural gas companies employ almost 350,000 Texans. Hence, it would make perfect sense for our Legislature to protect and promote that industry. However, there is no evidence these firms have received anything of economic value from the Texas legislation. It seems reasonable to suspect executives of Texas oil and gas related companies check their computers daily for the international price of oil, not the investment portfolios of municipal bond underwriters. The latter have no demonstrable impact on their firms’ investment or employment decisions.

The benefits of any legislation should exceed its costs. To be sure, it is not unusual for governments to enact measures to ensure that contractors advance beneficial non-economic social goals. For example, they may mandate that contracts give preference to minority-owned or disadvantaged businesses. But in SB 13 and SB 19 we have laws that produce only costs, no benefits other than misguided anti-woke darts.

Texas growth will require substantial amounts of new investment in infrastructure. That means increased borrowing. To protect taxpayers by minimizing borrowing costs, we need more competition among bond underwriters, not less. Taxpayers should not have to pay for empty political gestures. But if they must, let’s at least be honest and tell them what they are voting for when they go to the polls.

Michael Granof is the EY Professor of Accounting Emeritus at the University of Texas at Austin. Martin J. Luby is an associate professor at the LBJ School of Public Affairs at the University of Texas at Austin.

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