A battle that began decades ago and has been highlighted by such outbursts as California’s teachers’ retirement system opposing gun sales and a Texas comptroller rejecting an alleged boycott of fossil fuel companies is now spreading. across the country, a stark contrast to a time when public finance was considered much less controversial.
ESG (Environmental, Social, Governance) has become the latest and friendliest political dividing line that many believe was first drawn when the Democrats lost forty years of control over the House of Representatives in the 1994 midterm elections. Before the Republican Revolution, government-funded measures to build bridges and pave roads were often approved by bipartisan politicians eager to brag to voters about the country’s progress. That era came to an end in the mid-1990s.
“It all got harder to pass when President Newt Gingrich (R-Ga.) revealed his kind of confrontational, vitriolic politics, beginning in 1995,” said Bill Oliver, a city research consultant whose career as an analyst dates back to more than 40 years. .
“Transportation bills were routinely reauthorized. Once the government shut down on a debt ceiling reauthorization, politics was never the same. We never needed Infrastructure Week every year in Washington to promote the benefits of public infrastructure.”
With Republicans in charge of both chambers in 2017, another log was added to the political fire of public finance. The pandemic added another. “The first was the Tax Cuts and Jobs Act of 2017, which eliminated the ability of public finance entities to use tax-exempt bonds for early repayments,” said Tom Kozlik, head of municipal research at Hilltop Securities. “The second was the 2021 American Bailout Plan which allocated at least $650 billion to various sectors of public finance.”
Municipal bond issues have been labeled political boondoggle benefiting populous states and big cities that are often controlled by Democrats.
“Sometimes it’s seen that way, but it’s an unfair characterization,” said Chuck Samuels, a lawyer who has been involved in public finance lobbying for decades. “It’s true that some of the blue states are big bond issuers, but there are certainly many red states, like Texas, Florida and Arizona, that require significant public funding to support their growing populations. And, in many smaller red states , local governments Governments and non-profit organizations such as hospitals need support, especially in rural areas.”
Samuels also believes that gerrymandering, the practice of drawing congressional districts to become more partisan, has made matters worse as both parties move closer to extremes. “Redistricting and the sharp divide between red and blue states and districts has meant the loss of virtually all moderate Republicans and many moderate Democrats,” he said. “Most current members of Congress are more afraid of the far right or the far left than seeking the benefits of cooperation and bipartisanship.”
Joseph Krist, another longtime municipal credit consultant and analyst, traces political buzz in public finance back to the environmental movement of the 1970s and the continuing evolution of the media. “The real difference is the volume of political news that is available,” he said. “We used to have FCC equal-time rules and those were done away with in the 1980s. People began to realize that twenty-four-hour news could be effective in changing policy and changing views. Then we had the advent of the Internet and the case of Citizens United, which created an infrastructure and a flow of funding that basically didn’t exist.
The political tension that affects all facets of modern life has already become what coldly calculated funding decisions should be. Politics has always played a role. “In a democratic system, there is no other way,” said Frank Shafroth, an attorney and educator who previously managed congressional affairs for the Municipal Securities Regulatory Board. “One cannot be elected or re-elected without committing to help local leaders and communities meet their needs.”
“There is almost nothing related to public finance that is not entangled in politics,” Oliver said. “The size of public loans dwarfs many local budget activities, so everyone wants a piece. This ranges from selecting projects to be financed to choosing underwriters, bond advisors, feasibility consultants, contractors, vendors, participation of minority companies. and so on.”
The challenge of trying to regulate the effects of fiduciary policy is also occurring globally. “The question of whether environmental issues are affecting credit ratings, especially when it comes to oil and weapons, is a sensitive one,” Shafroth said. “There are differences between the US and the EU, where investors are required to comply with the Sustainable Financial Disclosure Regulation, while corporations face stricter mandates in the form of the Corporate Sustainability Reporting Directive. “.
As the Securities and Exchange Commission tries to figure things out in the US by exploring regulations targeting ESG, the industry remains insulated by years of regulatory inertia.
“The fact that state and local governments still have discretion over what and how much they disclose to investors is mind-boggling,” Oliver said. “The decision about what is material to investors is a matter for the investors, not for the underwriters and their various advisers who are employed by the issuers.”
The market may be facing another chapter in the saga as the midterms approach next month, and control of both chambers appears to be up in the air. Republicans have already promised a scrutiny of President Biden’s infrastructure spending should he gain control of the committees.
The idea of trying to regulate politics outside of the municipal marketplace strikes Samuels as bad policy.
“We have so much diversity and complexity in our emissions that trying to apply rules across the board right now, particularly at the federal level, is not a good idea,” he said. “We need more experience with actual financings before we can think about setting federal rules on ESG disclosures. On the other hand, there is no question that those promoting green bonds will likely face more questions and scrutiny than general financings.”