The bans stem from a 2021 anti-ESG (environment, social and governance) state law barring banks from underwriting municipal bonds if the bank is seen as boycotting or discriminating against the fossil fuel or firearm industries. The law pertains to any local government contract over $100,000, and has been enforced through investigations by Attorney General Ken Paxton.
So What Does That Mean for Dallas?
When voters approve a bond package, city officials go to major banks for the loans. Once local governments find underwriters for the bonds, Paxton signs off on the deals, per state law. With a $1.25 billion bond package approved by Dallas voters on May 4, the city now has to find a bank or banks to loan the money. But now they have fewer options than they did with previous bond measures.
The tightening of Texas’ municipal bond market is directly impacting taxpayers, a recent study by the Texas Association of Business Chambers of Commerce Foundation found. Decreased bond underwriter competition is leading to higher borrowing costs for the bonds, increasing the debt burden of city governments and interest costs for taxpayers.
"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," Houston Controller Chris Hollins said at the Austin conference. "Make no mistake, the twists and turns we must now navigate are contrived, devised and caused by select people here in Austin."
In Harris County, the 2021 law has not yet impacted county bonds, but Amy Perez, deputy executive director of the county's Office of Management and Budget, said the potential for differential pricing is a "concern." The county has begun seeking two broker dealers for investments "just in case one of them ends up on the list."
Representatives from the Dallas City Controller's Office declined to respond to questions for this report.
Why Banks Are Being Barred From Business
In January, London-based Barclay’s was banned from participating in Texas’ billion-dollar bond industry after being classified as a “fossil fuel boycotter.” The bank failed to provide the Attorney General with information pertaining to its “net zero” carbon emissions commitment upon request, leading to the ban.
UBS and Citigroup have also been barred from underwriting municipal bonds in the state. Wells Fargo and RBC Bankers met with staff from the Attorney General’s office last month as part of the banking probe, Bloomberg reports. Bank of America, JPMorgan Chase, Morgan Stanley and TD Bank are among others that are being investigated as potential members of the Net Zero Banking Alliance.
The alliance was set up by the United Nations and includes 130 banks, including JP Morgan Chase, which pledge to transition their investment portfolios to net zero emissions by 2050. Last fall, Jamie Dimon, CEO of JPMorgan Chase, warned that state investigations could discourage the bank from investing in Texas’ municipal markets, despite the state’s “pro-business” reputation.
"Texas has been an unbelievable place to do business," Dimon told Bloomberg. "I urge them to be very careful to stay a welcoming place."
