[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE ROLE OF MUNICIPAL BOND
MARKETS IN ADVANCING_AND UNDERMINING_
ECONOMIC, RACIAL, AND SOCIAL JUSTICE
=======================================================================
VIRTUAL HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
APRIL 28, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-19
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
44-667 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on Oversight and Investigations
AL GREEN, Texas Chairman
EMANUEL CLEAVER, Missouri ANDY BARR, Kentucky, Ranking
ALMA ADAMS, North Carolina Member
RASHIDA TLAIB, Michigan BARRY LOUDERMILK, Georgia
JESUS ``CHUY'' GARCIA, Illinois ALEXANDER X. MOONEY, West Virginia
SYLVIA GARCIA, Texas DAVID KUSTOFF, Tennessee
NIKEMA WILLIAMS, Georgia WILLIAM TIMMONS, South Carolina,
Vice Ranking Member
C O N T E N T S
----------
Page
Hearing held on:
April 28, 2021............................................... 1
Appendix:
April 28, 2021............................................... 27
WITNESSES
Wednesday, April 28, 2021
Fisher, William, Chief Executive Officer, Rice Capital Access
Program........................................................ 7
Hall, Gary, Partner and Head of Investment Banking
[Infrastructure and Public Finance], Siebert Williams Shank &
Co., LLC, on behalf of the Securities Industry and Financial
Markets Association (SIFMA).................................... 9
McDaniel, Chelsea, Senior Fellow, Activest....................... 8
Nadler, Jim, President and Chief Executive Officer, Kroll Bond
Rating Agency (KBRA)........................................... 11
Parsons, Christopher, Professor of Finance, University of
Southern California............................................ 5
APPENDIX
Prepared statements:
Fisher, William.............................................. 28
Hall, Gary................................................... 29
McDaniel, Chelsea............................................ 35
Nadler, Jim.................................................. 38
Parsons, Christopher......................................... 42
Additional Material Submitted for the Record
Green, Hon. Al:
Written statement of the Action Center on Race and the
Economy (ACRE)............................................. 44
Written statement of the Bond Dealers of America (BDA)....... 47
Written responses to questions for the record submitted to
William Fisher............................................. 53
Written responses to questions for the record submitted to
Gary Hall.................................................. 55
Written responses to questions for the record submitted to
Christopher Parsons........................................ 56
Parsons, Christopher:
Journal of Financial Economics article entitled, ``What's in
a (school) name? Racial discrimination in higher education
bond markets''............................................. 57
EXAMINING THE ROLE OF MUNICIPAL
BOND MARKETS IN ADVANCING--AND
UNDERMINING--ECONOMIC, RACIAL,.
AND SOCIAL JUSTICE
----------
Wednesday, April 28, 2021
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, DC
The subcommittee met, pursuant to notice, at 12 p.m., via
Webex, Hon. Al Green [chairman of the subcommittee] presiding.
Members present: Representatives Green, Cleaver, Adams,
Tlaib, Garcia of Illinois, Garcia of Texas; Barr, Mooney, and
Kustoff.
Also present: Representative San Nicolas.
Chairman Green. The Subcommittee on Oversight and
Investigations will come to order. Without objection, the Chair
is authorized to declare a recess of the subcommittee at any
time. Also, without objection, members of the full Financial
Services Committee who are not members of this subcommittee are
authorized to participate in today's hearing.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair, to minimize
disturbances while Members are asking questions of our
witnesses. The staff has been instructed not to mute Members,
except where a Member is not being recognized by the Chair and
there is inadvertent background noise.
Members are reminded that all House rules relating to order
and decorum apply to this remote hearing. Members are also
reminded that they may participate in only one remote hearing
at a time. If you are participating today, please keep your
camera on, and if you choose to attend a different remote
proceeding, please turn your camera off. If Members wish to be
recognized during the hearing, please identify yourself by name
to facilitate recognition by the Chair.
The title of today's hearing is, ``Examining the Role of
Municipal Bond Markets in Advancing--and Undermining--Economic,
Racial, and Social Justice.''
I now recognize myself for 4 minutes to give an opening
statement.
Today's hearing will assess the municipal bond markets as a
driver of systemic discrimination on one hand, and of
restorative justice on the other hand.
First, it will examine material disparities and costs of
capital raising for Minority Serving Institutions, more
specifically, Historically Black Colleges and Universities
(HBCUs).
Second, this hearing will explore the fact that municipal
bonds can drive positive change and promote fiscal justice, a
truly exciting area of finance today thanks to the efforts of
some issuers and investors and some of those represented among
the witnesses.
Research authored by one of today's witnesses demonstrates
conclusively that HBCUs use higher underwriting fees to issue
tax-exempt bonds compared to similarly situated institutions
that are not HBCUs, thereby materially increasing their costs
of capital. Notably, this analysis held constant. The issue was
credit quality and default risk by comparing HBCUs and non-
HBCUs having AAA credit ratings.
As a result, timely payment of municipal bonds analyzed was
virtually assured, and therefore, any cost differential would
not be the result of differing risk exposures affecting
investor behavior. Rather, as we will hear from our panel, the
disparities and fees were attributable to racial animus among
investor pools. This conclusion is buttressed by the findings
that cost disparities were magnified in States where anti-Black
racial resentment is most severe.
As the beneficiary of an HBCU education myself, these
findings are, at once, both deeply personal and profoundly
troubling. Specifically, the data show that HBCUs pay an
average of 20 percent more to issue bonds than similarly
situated non-HBCUs, with the size of this differential varying
by State.
To illustrate the magnitude of the disparity, consider that
HBCU bond issuers in Alabama, Louisiana, and Mississippi paid
30 basis points more in fees than non-HBCU issuers in the same
States. In all other States, by contrast, HBCUs paid issuance
costs that were 11 basis points more than non-HBCU issuers,
which paid an average of 81 basis points.
In closing, I would like to thank my long-standing
colleague, Representative Adams from North Carolina, for her
support of this hearing, and quite frankly, without her, this
hearing probably would not be taking place.
At this time, I would like to recognize the ranking member
of the subcommittee, the gentleman from Kentucky, Mr. Barr, for
5 minutes for an opening statement.
Mr. Barr. Thank you, Mr. Chairman. I appreciate you holding
today's hearing, and I thank all of our witnesses as well for
appearing today. The municipal bond market (muni market)
provides a reliable source of capital for municipalities to
finance their long-term growth and a stable avenue for
investors to put their money to work for the public good. It is
made up of a diverse group of over 55,000 issuers, ranging from
State and local governments to local transportation
authorities. Of the more than $3.7 trillion of municipal debt
in the market, over 50 percent is held by individuals, with the
remaining split between banks, mutual funds, insurance
companies, and other investors. The muni market is a strong and
reliable way for issuers to finance their operations.
During the pandemic, the muni market experienced
significant volatility and liquidity challenges. Widespread
lockdowns, stay-at-home orders, and government-mandated
business closures weighed on the economic well-being of States
and localities as taxes, tourism, and other revenue sources
declined. To respond to this challenge, Congress directed the
Federal Reserve to establish the Municipal Liquidity Facility
(MLF), and shortly after the establishment of this Facility,
the market normalized. The muni taxable and tax-exempt markets
are now performing well after the initial shock of the
pandemic.
The quick stabilization of the muni market is evidence of
the success of the Municipal Liquidity Facility. Some of my
colleagues have said that the MLF should be evaluated on its
take-up rate, suggesting the fact that only two issuers utilize
the Facility was somehow indicative of its failure, but I
believe the opposite. The mere existence of the Facility served
as a backstop that allowed the private market to function
properly in uncertain times.
I think we can all agree that our nation's infrastructure
needs improvement. We must repair, improve, and expand existing
infrastructure such as roads and bridges, and invest in
infrastructure for future generations, such as rural broadband,
to ensure an equitable path toward the future of work and
education. The question then becomes, how do we achieve our
shared goals of strong, comprehensive, and resilient
infrastructure?
Municipal bonds are a key funding source for State and
local governments to finance long-term infrastructure
improvement plans. As Congress and the Administration begin a
dialogue on how best to improve our roads, bridges, and
connectivity, we should assess all of the available options to
pay for it. Significant tax increases would reverse the
economic prosperity and growth realized over the last few years
since the passage of the Tax Cuts and Jobs Act. It would
certainly reduce wages, and it would compromise American
economic competitiveness.
Instead, we should look for ways to incentivize and
mobilize private capital. The muni bond market provides a
mutually beneficial avenue to match investors seeking stable
long-term returns with issuers seeking to improve their roads,
bridges, and schools.
I hope to use this hearing to investigate ways that
Congress can improve the municipal bond market both for issuers
and investors. There are bipartisan proposals such as
reinstating advanced refunding for municipal bonds that could
expand access to needed capital for issuers and improve
investors' access to municipal paper. I also look forward to
learning more about the ratings process for municipal bonds.
Bond ratings are an important factor that determines the
interest costs of a security and informs investors' appetite
for risk.
Last Congress, I worked, on a bipartisan basis, with my
colleague from Pennsylvania, Ms. Dean, to ensure equitable
access to the Fed's emergency facilities for issuers, to ensure
that issuers were not excluded from the Facility solely based
on the SEC-regulated rating agency they chose to work with.
This effort was intended to help small businesses find
liquidity and provide options for smaller municipalities.
I would also emphasize the importance for investors that
credit ratings be based solely on the creditworthiness of the
issuer and not compromised by non-material information. Credit
ratings based on subjective criteria derived from social or
other political goals would pose challenges for issuers selling
their bonds and may not properly inform the market of the
issuer's ability to repay its debt.
This hearing will also review a study which showed that
Historically Black Colleges and Universities (HBCUs) paid more
to sell their debt compared to their non-HBCU peers.
Discrimination in the municipal bond market is illegal and it
should not occur. To the extent that such discrimination
exists, Congress, regulators, and market participants should
work to ensure that it does not persist.
I share my friend and colleague, Mr. Green's, personal
interest in this. I didn't graduate from an HBCU, but I do have
the privilege of representing Kentucky State University, and
this is an important topic.
I look forward to hearing from our witnesses about the
important role the municipal bond market plays in our
investment ecosystem. And again, I thank the chairman, and I
yield back.
Chairman Green. The gentleman yields back, and the Chair
thanks the gentleman for his recognition of this most important
issue.
At this time, the Chair recognizes for one minute the
gentlewoman from North Carolina, Representative Adams, who has
been an autonomous advocate for HBCUs throughout her career.
Representative Adams, you are now recognized for one minute.
Ms. Adams. Thank you, Mr. Chairman, for granting me a
minute of your time. It is a privilege to serve on the
Oversight Subcommittee under your leadership, and I am grateful
to you for holding this hearing. It is critical that we better
understand the role that the municipal bond market plays in
advancing, or in some cases, limiting economic, racial, and
social justice. As a two-time graduate of an HBCU, and a 40-
year professor at an HBCU, I am particularly concerned that
Historically Black Colleges and Universities and other Minority
Serving Institutions are getting a raw deal when it comes to
accessing equal and affordable financing through the bond
market.
A 2019 study published in the Journal of Financial
Economics found that HBCUs pay higher underwriting fees to
issue tax-exempt bonds compared with similar institutions that
are not HBCUs, thus raising the cost of capital for HBCUs. And
this discrepancy is unrelated to the issuer's credit risk or
quality. It is approximately 3 times greater in geographic
areas of the United States where racial discrimination is most
severe.
I want to thank you for the opportunity to speak. I yield
back, and I look forward to hearing from our witnesses. Thank
you, Mr. Chairman.
Chairman Green. The gentlelady's time has expired.
At this time, the Chair would welcome our outstanding
witnesses, and I am pleased to introduce our panel: Chris
Parsons, who is a professor of finance at the University of
Southern California; William Fisher, who is the chief executive
officer of the Rice Capital Access Program; Chelsea McDaniel,
who is a senior fellow at Activest; Gary Hall, who is a partner
and head of investment banking at Siebert Williams Shank & Co.;
and Jim Nadler, who is president and CEO of Kroll Bond Ratings.
Witnesses are reminded that your oral testimony will be
limited to 5 minutes. You should be able to see a timer on your
screen that will indicate how much time you have left, and a
chime will go off at the end of your time. I would ask that you
please be mindful of the timer, and quickly wrap up your
testimony if you hear the chime, so that we can be respectful
of both the witnesses' and the committee members' time. And
without objection, your written statements will be made a part
of the record.
Once the witnesses finish their testimony, each member will
have 5 minutes to ask questions.
Mr. Parsons, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF CHRISTOPHER PARSONS, PROFESSOR OF FINANCE,
UNIVERSITY OF SOUTHERN CALIFORNIA
Mr. Parsons. Thank you, Chairman Green, and members of the
subcommittee. Thank you for the opportunity to share the
highlights of research I have conducted on the pricing and
issuance costs faced by Historically Black Colleges and
Universities (HBCUs). My testimony today is based on the
research manuscript, ``What's in a (school) name? Racial
discrimination in higher education bond markets,'' which was
published in the Journal of Financial Economics in December
2019, and which I have submitted separately to the committee.
My co-authors on the study are Casey Dougal of Florida State,
Pengjie Gao of Notre Dame, and William Mayew of Duke
University, who asked me to pass along their regards.
Economists have been interested in discrimination for many
decades, and indeed, have documented race and/or gender
disparities in wages, job placement and retention, home
ownership, mortgage rates, access to capital, and dozens of
other outcomes. A key empirical challenge, however, is that
simply documenting differences in average outcomes between
groups formed by gender, race, age, or other characteristics
may not always paint a complete and accurate picture.
The reason is because these or other characteristics may be
correlated with other determinants of the outcome of interest.
Consequently, it is rare to find examples where we can be
almost certain that we have accounted for such competing
factors, other than discrimination itself. Although no real-
world study can be 100 percent perfect in this regard, studying
municipal bonds issued by colleges and universities provides a
close approximation to this ideal.
There are three reasons why. First, when you buy a bond,
all that should matter is the financial return, that is,
whether you are paid back according to the contractual terms.
Compared to labor markets or other settings, this simplifies
the analysis, since the notion of the issuer's quality or
productivity is well-defined and relatively objective.
Second, there is a well-accepted way of measuring an
issuer's ability to pay called, ``credit,'' or ``bond
ratings.'' By comparing two issuers with the same credit
rating, we, as researchers, can account for credit quality in
the same manner that investors do.
Finally, in about half of the cases we will study,
universities with low credit ratings purchase credit insurance,
which allows them to adopt the credit rating of the parent
insurance company. In these instances, we can compare two
universities not only with the same credit rating, but with the
same insurance company, an extremely precise control for
creditworthiness.
With these advantages as a backdrop, we collected data on
4,145 college-issued municipal bond offerings between 1988 and
2010, of which 102 were conducted by HBCUs. Our analysis asked
two questions: first, do HBCUs pay more in issuance fees versus
non-HBCUs; and second, once HBCU bonds have been placed in the
market, do they trade at lower prices or otherwise show
evidence of discrimination by investors?
The answer to the first question is, yes. HBCUs pay about
20 percent more in fees to underwriters, which are the brokers
that sell, or place, the bonds with investors. This increases
to 30 percent if we focus on States with historically high
levels of racial animus, specifically in the U.S.'s Deep South.
These analyses account for the fact that HBCUs may be smaller
than non-HBCUs, may have different credit ratings, or may
differ in other important ways.
The answer to the second question is, maybe. On average,
HBCU-issued bonds appear to trade at somewhat lower prices than
otherwise similar non-HBCU bonds, but the differences are
small, and in most specifications are not statistically
significant. However, we do find that when HBCU bonds are
traded, it takes about 23 percent longer to find a willing
buyer.
What explains these results? Due to tax reasons, municipal
bonds offer the largest advantage to investors residing in the
same State as the issuer. What this means is that HBCUs, by
virtue of being located mostly in the American South and
Southeast, may face collective reluctance from what should be
their most receptive investor base. If wealthy investors in
their home States, due to racial animus, disproportionately
shun HBCU-issued bonds, we would expect to find results similar
to what we document in our analysis. Because underwriters have
a harder time finding willing buyers, they will charge a higher
commission.
Critically however, the effects of discrimination may or
may not manifest directly in bond prices, because the higher
selling efforts of underwriters should be, and appear to be,
sufficient to secure prices that are close to fair market
value. Of course, ultimately, this means that HBCUs do pay
higher costs for accessing debt markets in either case, whether
the bonds trade for lower prices, or whether they simply pay
higher issuance costs.
One possible policy tool to help remediate these challenges
documented by our study would be affording investors of HBCU-
issued bonds tax exemption from State and local taxes. The
effect of this policy would be to remove the tax disadvantages
an investor living in, for example, New York or California,
currently faces when potentially investing in an HBCU-issued
bond from another State.
Thank you for your attention, and I look forward to any
questions you may have.
[The prepared statement of Mr. Parsons can be found on page
42 of the appendix.]
Chairman Green. The gentleman's time has expired. Thank
you, sir.
Mr. Fisher, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF WILLIAM FISHER, CHIEF EXECUTIVE OFFICER, RICE
CAPITAL ACCESS PROGRAM
Mr. Fisher. Good afternoon, Chairman Green, and
distinguished members of this subcommittee. My name is William
Fisher. I have over 30 years of experience in the municipal
finance sector as a financial advisor, as an underwriter, and
as an issuer of tax exempt and taxable securities for State and
local governments. As a graduate of Howard University, I am
also the proud parent of both a Tuskegee University graduate,
and a third-year Morehouse School of Medicine student in
Atlanta.
I also have the privilege of serving on the board of
trustees for Jarvis Christian College in Hawkins, Texas. I
currently serve as the chief executive officer of the Rice
Capital Access Program, the designated bonding authority for
the Historically Black College and University Capital Financing
Program for the United States Department of Education.
HBCUs play a vital role in higher education that is not
easily recognized or appreciated by the capital markets. The
mission these institutions serve cannot be fully understood by
mere examination of standardized test scores, selectivity
metrics, and financial ratios. This lack of understanding
subjects these institutions to higher interest rates when
borrowing as well as restrictive covenants that impair
financial flexibility. As a result, investments in physical
facilities, student support initiatives, and academic programs
suffer.
These increased borrowing costs also increase the cost of
attendance at these institutions on several levels. For
example, increased costs associated with the financing of a
dormitory are borne by the student through higher student
housing fees. These increased student housing fees increase the
need for students and their families to borrow additional funds
to finance their education. This increased debt burden impacts
not only the students and their families, but also the
institution.
As the committee is aware, institutions with a high cohort
default rate are in jeopardy of losing access to Title IV funds
and possibly its accreditation. The impact of expensive debt is
not limited to the institution and its students. The local
economy in the local communities is also negatively impacted.
Several advocacy groups have completed economic impact studies
on the value that HBCUs bring to the local economy. In short,
the presence of an HBCU fosters a vibrant community by
providing employment opportunities, and the purchase of goods
and services. Expensive debt limits the institution's ability
to fully engage with the local economy.
When Congress created the HBCU Capital Financing Program,
not only did it provide access to low-cost borrowing, but it
created a path to financial stability. To further secure HBCU's
place in America and higher education, the feasibility of the
recommendations offered by the HBCU Capital Financing Advisory
Board include: (1) an increase in the borrowing capacity of the
program; and (2) expanding the use of the program to include
operating lines of credit merit consideration.
Thank you for the opportunity to appear before you.
[The prepared statement of Mr. Fisher can be found on page
28 of the appendix.]
Chairman Green. Thank you, Mr. Fisher.
Ms. McDaniel, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF CHELSEA MCDANIEL, SENIOR FELLOW, ACTIVEST
Ms. McDaniel. Thank you. Good afternoon, Chairman Green,
Ranking Member Barr, and members of the subcommittee.
Thank you for the opportunity to appear before you today
and discuss the role of municipal bond markets in advancing,
and undermining, economic, racial, and social justice. My name
is Chelsea McDaniel, (she/her/hers as pronouns), and I am a
senior fellow at Activest. Activest is an investment research
firm that quantifies fiscal justice risk within the municipal
bond market. We define fiscal justice as the analysis of public
budgets at the intersection of fiscal health and racial
justice. Our thesis is simple: Communities and public entities
that treat their residents and clients more justly realize
stronger fiscal outcomes over the intermediate and long term.
We are not only critics of the market, but also market
participants through efforts like the Fiscal Justice Municipal
Investment Strategy we developed alongside Adasina Social
Capital, or the Fiscal Justice Credit Rating Agency we are
launching this year. Our work blends economic modeling,
financial analysis, and social policy research, and we exist to
protect savers and everyday municipal investors from taking
hidden and uncompensated risks of the more egregiously unjust
corners of the municipal market.
Today, I would like to present a high-level sectoral view
of the post-secondary education institutions within the context
of the larger municipal finance market. Broadly, we have seen
that social and environmental risks have emerged within public
entities like local governments and schools as a result of
long-standing policies borne out of segregation-era views of
development and progress that have yet to be updated.
Whether it is the $70 billion in municipal revenue that
schools lose annually to corporate tax incentives, the $11
billion lost to exclusionary school discipline policies, the $2
billion for municipal sediments, or the $7 billion of excessive
fines and fees disproportionately extracted from BICOP
communities, inequitable budget, public budgets serve as the
supply lines fueling State-sanctioned, taxpayer-funded
exclusion and oppression.
U.S. local government finance is built on a long history of
sordid financial practices, and the current public finance
system does a poor job of integrating the true social and
fiscal costs of racial equity into the evaluation of cities and
bond issuances. The fiscal and budgetary cost of ignoring the
fiscal justice risk is growing as the reported incidence and
pricing severity of fiscal justice events are growing within
government entities, including post-secondary institutions. In
the world of post-secondary finance, Activest's research has
focused on ways in which Predominantly White Institutions
(PWIs) have been extractive as opposed to collaborative, let
alone peacefully existing with Minority Serving Institutions
(MSIs). Although PWI's fiscal justice risks have to this point
been unpriced, their materiality is growing in real time and
the long-tail risk of their behavior is likewise expanding.
Recent examples of this include the recent $577 million
settlement for HBCUs in Maryland, numerous institutions
granting funds or some form of relationship to descendants of
enslaved Africans who were sold into finance schools under
endowments, and finally, post-secondary schools that race to
become federally recognized Hispanic Serving Institutions
(HSIs) to capitalize on the growing Latinx population where
scholar Gina Garcia discusses what it means to move from simply
enrolling Latinx students to actually serving them.
From a credit perspective, we see MSIs as strong municipal
investments as opposed to PWIs, which are evidencing a growing
body of unpriced fiscal justice risks. Accordingly, we have
developed a series of recommendations to counter the
aforementioned fiscal justice risks in the post-secondary
market. The first of these is accounting for equity research.
We see the need for a study to track and quantify all of the
Federal and State funding withheld from MSIs from their
inception, and the estimated financial impact on States and the
Federal Government when these payments come due. This research
has been partially completed for Tribal Colleges and
Universities (TCUs) through efforts like the Land Grab
Universities Project, but more research remains for HBCUs,
PWIs, and HSIs.
I am just going to say that we anticipate at least two
components of this. The first would focus on long-term
liabilities, which would be historical accounting of the
financial support that was denied or stolen from MSIs since
their creation, and second, the elimination of current
liabilities. Thank you so much for your time, and I look
forward to any questions.
[The prepared statement of Ms. McDaniel can be found on
page 35 of the appendix.]
Chairman Green. Thank you, Ms. McDaniel.
Mr. Hall, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF GARY HALL, PARTNER AND HEAD OF INVESTMENT BANKING
[INFRASTRUCTURE AND PUBLIC FINANCE], SIEBERT WILLIAMS SHANK &
CO., LLC, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL
MARKETS ASSOCIATION (SIFMA)
Mr. Hall. SIFMA commends members of this subcommittee for
your collective focus on these important issues. I currently
sit on the board of directors of SIFMA, which is the leading
trade association for broker-dealers, investment banks, and
asset managers operating in the U.S. and in global capital
markets. I am also a partner and the national head of
infrastructure in public finance investment banking at Seibert
Williams Shank, the nation's largest minority-owned investment
bank and a SIFMA member firm.
As I describe in my written testimony, I am extremely proud
of my firm's, my family's, and my strong connections to HBCUs.
Hence, I would like to join SIFMA by expressing appreciation on
behalf of my firm, my family, and myself to the subcommittee
for bringing attention to HBCUs having fair access to the
public municipal bonds market.
My career in the municipal bond market includes serving as
an issuer, a lawyer, and a banker. I am the immediate past
chairman of the Municipal Securities Rulemaking Board, the
self-regulatory organization that safeguards the $4 trillion
municipal securities industry, therefore, I know firsthand how
municipal bonds are a critical funding source for
infrastructure in America.
As it pertains to the subject of this hearing, I would like
to first emphasize that SIFMA and its members are committed to
fair pricing. While I am always appreciative of being able to
learn from scholarly research and academic analysis, I do
believe there are certain contextual considerations that
weren't highlighted with respect to the study that spurred this
hearing. I detailed these considerations in my written
testimony, however, I can tell you that the municipal market
has undergone seismic changes with respect to pricing
transparency, regulatory framework, and technological
transformation that would mitigate many of the conclusions
reached in the study.
Again, my written testimony outlines these considerations
in more detail, and I am happy to answer any questions from
members of this distinguished panel, including my classmate,
Mr. Fisher. Despite my and SIFMA's concerns as it pertains to
the study, we fervently believe more can be done to assist
HBCUs with accessing the capital markets more cost-effectively.
Specifically, SIFMA supports authorizing triple exemption for
HBCU-sponsored debt. Ironically, the study suggests that
providing HPCUs with the ability to attract a larger pool of
investors would contribute to favorable pricing in the capital
markets. I believe this idea is spot on and perfect for the
current market environment given the strong appetite for social
impact bonds, a subset of ESG bonds.
Social impact investors with highly coveted HVCU-issued
debt, whether such was tax-exempt or even taxable. Hence, ways
to expand the taxable investor base for HBCUs include having
the Federal Government authorize a high subsidy direct pay bond
similar to disaster recovery bonds. Moreover, authorizing a
Federal guarantee on taxable, direct-pay bonds for HBCU-
sponsored debt would be a valuable credit enhancement to
attracting new class and investors for these bonds.
With respect to the overall bond market, please know that
SIFMA supports, as Ranking Member Barr mentioned, reinstating
tax exemption on advanced refundings of municipal bonds,
expanding private activity bonds, and reinstating a direct pay
program similar to the Build America Bond Program, especially
in light of the infrastructure legislation that is currently
under consideration. Adding these tools will be vital to
helping State and local governments both address critical
infrastructure needs and obtain savings that tilt down to
taxpayers.
Again, I commend the work of this subcommittee on this
important topic, and I encourage lawmakers to faithfully
consider the policy proposals that SIFMA supports. Thank you
for having me, and I look forward to answering your questions.
[The prepared statement of Mr. Hall can be found on page 29
of the appendix.]
Chairman Green. Thank you, Mr. Hall.
Mr. Nadler, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF JIM NADLER, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
KROLL BOND RATING AGENCY (KBRA)
Mr. Nadler. Thank you. Good afternoon, Chairman Green,
Ranking Member Barr, and members of the subcommittee. Thank you
for the opportunity to testify today. My name is Jim Nadler and
I am the president and CEO of Kroll Bond Rating Agency (KBRA).
Since KBRA's founding in 2010, we have been a vocal proponent
of the importance of open competition in the credit rating
space to protect investors and increase market liquidity for
underserved sectors, and we greatly appreciate the work of this
committee in advancing that goal, including by unanimously
passing legislation through the House last year.
Today, KBRA, an SEC-registered credit rating agency with
more than 400 employees in offices in the United States and
Europe, has issued more than 42,000 ratings, representing $2.2
trillion in rated issuances. KBRA is currently one of the five
largest rating agencies globally, and the largest established
after the great financial crisis. We rate over $364 billion of
the municipal debt, nearly 10 percent of the total outstanding
debt in the market. Our ratings add important insight for
investors across a wide variety of municipal issuers including:
States such as Texas; the Commonwealth of Kentucky; cities,
including Dallas, Chicago, and Los Angeles; transit systems
such as New York's MTA; airports like DFW, and Chicago O'Hare;
and large municipal utilities such as the Los Angeles
Department of Water and Power.
In observing the bond market in 2020, the municipal market
was significantly impacted by the outbreak of COVID-19. The
effect of the pandemic was uneven; it varied city to city and
State to State. Initially, the cost of issuing debt increased
considerably, especially for issuers with lower rated debt.
Municipal issuers did benefit from the historic Federal
Government intervention both in terms of direct infusion of
funds and monetary policy, and the municipal market today is
more stable than many municipal observers expected.
As we look to the future, we believe that some States and
municipalities will come out of the crisis stronger, but this
may not be true for those municipalities that had pre-existing
structural deficits in their budgets. Some States and
municipalities may find that their particular economy may be
fundamentally altered for some time, including those dependent
on long commutes to downtown office districts, as well as
leisure and business travel destinations.
Moving to the topic of racial and social issues, I would
like to address their impact on municipal bonds.
Municipalities, by their very nature, have material attributes
of positive social impact that deserve amplification. Some do
not and those that do not will suffer by tnot having that type
of analysis to show on their behalf. Many of these attributes
are not included in the separate ESG scores that are
proliferating in the market, particularly in the areas of
health, safety, housing, and education. In our view, investor
preferences will continue to drive pricing and liquidity in
favor of municipalities that have exhibited a commitment to
economic, racial, and social justice.
Mr. Chairman, knowing the subcommittee's interest in the
ratings of Historically Black College and Universities, I would
also like to provide our perspective on that topic. While KBRA
is not significantly involved in rating institutions of higher
education today, our general observation is that competition
among ratings and research has dramatically increased the
quality of research and underpinnings of those credit analysis.
As has certainly been our experience in the community bank
space, we believe that sunlight is the best disinfectant, and
that HBCUs would benefit from better, more thorough analysis
and research to ensure that their ratings are based on
consistently applied and fair assessment of credit quality.
Mr. Chairman, I thank you and the subcommittee for the
opportunity to testify today, and I look forward to any
questions you may have.
[The prepared statement of Mr. Nadler can be found on page
38 of the appendix.]
Chairman Green. Thank you, sir.
At this time, the Chair will recognize the gentleman from
Missouri, Mr. Cleaver, who is also the Chair of our Housing,
Community Development, and Insurance Subcommittee, for 5
minutes for questions.
Mr. Cleaver. Mr. Chairman, thank you very much. And I am
particularly thrilled that you called this hearing.
I am not sure if all of you, like Mr. Green--well, Mr.
Green is not a native Texan. I am a native Texan. I grew up in
in Texas and became quite familiar with a lot of the
communities around Texas.
I discovered early on when I moved to Missouri after HBCU
Prairie View at Indiana University that Missouri had, I think,
seven sundown towns. And one of the sundown towns has become
famous. It is called Ferguson, Missouri. Now, if you are not
familiar with what a sundown town is--I am sure that Mr. Hall
and others are--it means that if you were African American, by
the time the sun set, you had to be out of that town, or you
could face just about anything from beating to death. And these
towns were all over the country; they were not just in
Missouri. In Texas, we had a town with a banner up across the
street that said, ``The blackest land, the whitest people.''
And we had to deal with sundown towns in Missouri, of
course. It may be a surprise for you to know that Ferguson is a
town of about 21,000 people, and yet Ferguson police issued,
based on the Patterns and Practice Study of the Department of
Justice, 32,000 traffic tickets a year. That is, again, with a
population 21,000, the police issued an average of 32,000
tickets a year, traffic tickets. We call that policing for
profit. And they collected millions and millions of dollars in
fines to finance the government of Ferguson, Missouri, through
traffic tickets.
This is not based on an annual, ``Cleaver analysis.'' It is
not based on what I think. These are facts that were that were
brought out when the Patterns and Practice Report was issued on
Ferguson, Missouri. So, how does that fit in?
If you had a town where you had revenue-focused policing
and a declining tax base, it means that you are going to have a
difficult time getting anything done as a municipality. And so,
I would like the witnesses to accept the fact that--you can
challenge me if you want, but I will win. But you can challenge
what I have said. How many of you believe that socioeconomic
factors like poverty, incoming inequality, the availability of
affordable housing, unemployment or diversity of employment all
factor in on a risk of a municipality and their ability to get
significant bonding?
With all of the things I just mentioned, which is a fact,
it is a fact, what do you think Ferguson's ability to get
bonding would be, and how many people would say, well, what he
says has nothing to do with this, the city is just poorly? But
race has been the major factor in that City's inability to get
funding. So who would like to clear this up for me? And then,
give me some ways in which we can prevent this from continuing
to happen.
Mr. Hall. Representative, yes, this is Gary Hall. The only
thing that I would significantly challenge in your supposition
is you mentioned these towns having, sort of, restrictions. I
grew up in Chicago, and I would also say that neighborhoods
there had the same sort of restrictions that you mentioned, so
it is not [inaudible] to towns.
I don't know if the chairman wants to grant me additional
time to try to answer the question?
Chairman Green. The Chair will grant an additional 30
seconds.
Mr. Hall. The bottom line is that while I can't speak to
the specific credit nature of Ferguson, I can tell you that a
lot of considerations are taken into effect when we are going
into the municipal bond market. The socioeconomic background is
not as important as the economic power and the tax base, and
that is something that we evaluate a lot, working with our
issuers for access to the bond. As evidence of the fact that
during the pandemic, we did a transaction, my firm, for a
convention center in St. Louis, and as you might know, the
convention centers during the pandemic were not readily
visited. So, that is a statement to the ability to navigate
tumultuous, sort of, market conditions to even access the
capital markets during tough times.
Mr. Cleaver. Thank you.
Thank you, Mr. Chairman.
Chairman Green. The gentleman's time has expired.
The Chair now recognizes the ranking member of the
subcommittee, Mr. Barr for 5 minutes for questions.
Mr. Barr. Thank you, Mr. Chairman.
Let me ask Mr. Nadler first about market performance during
the pandemic and the Municipal Liquidity Facility. I was
somewhat surprised that there wasn't as much uptake. There has
been so much conversation about the plight of State and local
governments during the pandemic and the decline in revenues.
And, of course, we did find out that large municipalities'
revenues actually went up during the pandemic. But we were
somewhat surprised after supporting the MLF, that there wasn't
as much uptake, and throughout the pandemic, really, the
municipal bond market proved to be very resilient. The market
certainly benefited from support from the Federal Reserve
through the MLF, but maybe that was more psychological than
actually through utilization. But it did perform well, and we
avoided the worst-case scenario that some feared.
Mr. Nadler, where do you see the municipal bond market
moving in the future, post-pandemic? How has the market
changed? And can you speak to whether or not we actually needed
the bailouts of the State and local governments, if we had just
encouraged municipalities to utilize the MLF, maybe they would
have just been as well off?
Mr. Nadler. Thank you, Representative Barr. I think that
you mentioned a couple of things that are true. I do think that
we were surprised as well by the low number of people who took
advantage of the of the Facility. I do think that the mere fact
that the Facility, along with very aggressive monetary policy,
did have a very large impact on the psyche of both municipal
issuers and municipal investors. And so, I think that had much
to do with how quickly we saw the municipal market move back to
some semblance of normalcy.
The second thing I will say is that the impacts going
forward are going to be uneven. There were structural issues
before the pandemic, and we are going to see those exacerbated
after the pandemic. And they are going to be in towns that were
primarily vacation destinations. It is going to take a while
for those to come back. I mentioned towns that have a lot of
commuters coming into the city. It is going to be a while
before commuters feel comfortable getting on mass transit again
in large numbers. And so, I think the recovery, while it is has
been real and it has been great, and has been, I think, faster
than most participants thought, we will see an unevenness to
it, going forward.
Mr. Barr. Let me ask you about materiality. A bond rating
is a significant factor that affects the interest cost of a
security and helps inform investors' demand for bonds. What is
the process, Mr. Nadler, for evaluating a municipal bond for
the purposes of issuing a rating? What criteria go into
assigning a rating for a municipal bond? In other words, what
factors does Kroll consider to be material to a bond rating,
and why is materiality so important?
Mr. Nadler. Materiality is huge, and I think that is one of
the most important factors. So when you are thinking about a
bond rating and an actual credit rating, whether it is a
municipality or a company, you really need to make sure that
what you are analyzing really does have an impact on the fiscal
health of that entity, whether it is a city or a State.
Importantly, I think that we found that disclosure along these
lines is probably one of the most important aspects.
The second thing I will say is that there are aspects of
municipal bonds that impact the liquidity of that bond going
forward, and they may not necessarily impact the
creditworthiness today, they may not have a material impact on
it, but they would be interesting to investors, and investors
are asking for that type of information. And so, we are
advocates of more disclosure, particularly the type of
disclosure that may align with investor preferences over time
and may also give investors insight into the liquidity issues
around some aspects of bonds
Mr. Barr. In my remaining time, let me just turn to Mr.
Hall, very quickly. I am the co-sponsor of bipartisan
legislation, the Investing in Our Communities Act, which would
reinstate advanced refunding for municipal bonds. Mr. Hall,
could you detail how reinstatement of advanced refunding,
especially with low interest rates, would help municipalities
and issuers?
Mr. Hall. Absolutely. We are in an unprecedented time of a
low-interest rate environment and budgetary stress on State and
local governments. The ability to refund existing debt with
lower tax-exempt debt is invaluable, too, and really needs to
be reinstated.
Mr. Barr. Thank you.
I yield back.
Chairman Green. The gentleman's time has expired.
The Chair now recognizes the gentlelady from North
Carolina, Ms. Adams, for 5 minutes.
Ms. Adams. I thank the Chair. Again, thank you for hosting
this hearing today.
And I want to thank all of the witnesses. Professor
Parsons, first, I want to thank you and your colleagues for
your research which shows that HBCUs pay higher underwriting
fees to issue tax-exempt bonds compared with non-HBCUs. Without
this data, we would not be able to have this conversation
today, so I do thank you.
Your study found that, unrelated to user credit risk or
quality, underwriting fees are 3 times larger in certain areas
of the United States, and you also found that HBCUs pay an
average of 20 percent more to issue bonds that are similarly
suited to non-HBCUs. Very succinctly, can you share to what you
attribute this significant differential, and have you attempted
to quantify the collective costs to HBCU bond issuers of this
premium? And how would you begin to quantify that cost over the
decades?
Mr. Parsons. That it is a complicated question. The total
costs, if you just want to look at the dollar amounts that are
specifically implied by the differences in underwriting costs,
20 to 30 basis points on a $50 million bond issue is in the
hundreds of thousands of dollars. So, it is not several million
dollars, it is in the hundreds of thousands of dollars. Now,
hundreds of thousands of dollars, you can quantify that lots of
ways. That is a couple of professors; maybe it is 10
scholarships. But again, these are going to depend on the size
of the issue for any one bond.
One of the things that I wish our study could do that we
simply cannot do is look at the decisions to issue bonds that
were not taken because of higher underwriting costs. You can
compare the wages of two people in the job market. What you
cannot compare is the wages between someone who is in the job
market and someone who is not in the job market because they
don't have a wage. And so everything in our study, and indeed
every empirical study of this kind, is going to be conditioned
on bonds that successfully went to the market. That is going to
naturally lead you to an estimate that is a lower bound on the
all-in costs, because we don't observe what happens to HBCUs
that are not able to go to the market.
My intuition--and this is outside the realm of the study at
this point; this is a supposition--is that the cost is probably
significantly larger to the firms for the HBCUs that did not go
to market.
Ms. Adams. Okay, great. Thank you.
Ms. McDaniel, Mr. Hall, what are some other solutions that
you might propose to help address these disparities?
Mr. Hall. I will take the first crack at it, if you don't
mind. First of all, Congresswoman Adams, I just want to applaud
you for your advocacy for HBCUs and your work in ensuring that
over a billion dollars of financing was forgiven in the Capital
Financing Program. That was a huge benefit to HBCUs, so thank
you for your outstanding work.
The proposal, the study actually mentions this whole notion
of expanding the tax base for HBCUs, which SIFMA supports by
incenting by having a triple tax exemption for HBCUs, thereby
States' debt issued in North Carolina would be attractive to
investors in New York and California, where the State income
tax is high and the incentive will be higher as well.
Additionally, having a direct pay program similar to build
America bonds where the HBCUs can tax the taxable market, a
wider investment base over $9 trillion versus $4 trillion, will
be another way to allow HBCUs to increase the demand for their
bonds and close their overall cost to borrow.
Ms. Adams. Okay. Ms. McDaniel, do you have a comment?
Ms. McDaniel. Yes, thank you. I think from our perspective,
and when we look at the municipal bond and bond market in
general, we look at the things that aren't being accounted for
first. We here know that HBCUs are amazing and they outperform
in terms of producing, whether it is doctors, and graduates,
Black graduates at a higher success rate. And so, I think it is
looking at some of those different factors that aren't
typically folded into the creditworthiness assessment of
municipal bonds, including those and how we view HBCUs.
Similarly, how we are viewing PWIs that seem to get a positive
boost in their ratings, but don't have similar performance for
African-American students.
Ms. Adams. Thank you very much.
Mr. Chairman, I yield back. Thank you.
Chairman Green. The gentlelady yields back.
The Chair now recognizes the gentleman from Tennessee, Mr.
Kustoff, for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman. Thank you for
convening today's hearing.
Thank you also to the witnesses who are here.
Mr. Hall, when you look at evaluating a municipal bond
deal, can you talk about what are the most important factors
that impact the structuring of any issuance, fee structure, the
eventual cost of capital for the issue or the bonds?
Mr. Hall. Sure. Thank you for the question. First and
foremost, we have to evaluate the credit underpinnings of the
specific issuer, making sure that investors have confidence
that they will be repaid, and what are the sort of revenue
triggers that allow for a debt service to be repaid.
Second, and one of the things that I thought the study did
not highlight enough, is the actual size of the issuance and
whether or not it would actually be very liquid in the market.
Smaller bond issuances are less liquid than larger issuers.
Issuers who are infrequently in the marketplace are less liquid
than those who are frequently in the marketplace. And so, the
liquidity of the issuance would be a very important factor in
the actual residence of the bond in the market.
All of those things are taken into consideration when you
are evaluating the risks associated with the issuance, when you
are evaluating the likelihood of success in the bond market,
whether or not you would incur any sort of inventory risk in
having those bonds in your inventory, and how long it would
take to get the bonds out of your inventory and very important
to the overall receptivity of the bond in the capital markets.
Mr. Kustoff. Thank you, Mr. Hall. Can I also ask you, if
you would, to expand on working with higher education issues?
You all have talked about that somewhat in your testimony.
Specifically, can you talk about what the market is like for
those types of issuances for higher education and how does that
compare to other types of available debt within the market?
Mr. Hall. One of the key components of the credit structure
of higher education is the size of the endowment, the student
mix, and the different sort of sources of revenue that the
higher education entity has; this is critically important. I
would tell you, as I mentioned in my written testimony, that
there is peak demand for social impact bonds in the current
market.
Just to give you an example, we had over $150 billion of
social impact bonds placed in 2020. The year before, it was
less than $20 billion. And so, higher education even K-12
education, given the investment objectives of certain ESG
investors, is extremely attractive and and most incur a pretty
lost cost to bar and doing the competition for those bonds in
the current marketplace.
Mr. Kustoff. Thank you, Mr. Hall. Can I shift gears with
you for just a moment, and talk about the importance of
municipal bonds as a tool for individuals who use it for
financial planning and certainly for saving for retirement? Can
you speak about the individuals and the households who
incorporate municipal bonds into their financial planning, and
obviously the specific benefits of including municipal bonds in
an investment portfolio?
Mr. Hall. Absolutely, sir. We are pretty fortunate in this
country to have the ability for citizens to actually invest in
their own communities by owning municipal bonds, whether it be
the Erie Canal or the Golden Gate Bridge, all were funded by
municipal bonds, and the ability of actual citizens to take a
piece of those worthy investments.
For a long-term investment vehicle on a risk-weighted basis
where municipal bonds offer a pretty significant return
relative to a risk weight on a corporate side, if you think of
the active tax benefit. And the benefit of these bonds is sort
of evidenced by the fact that over 50 percent of our market is
held by mom-and-pop investors in their households. It is
changing. It is evolving as to how that access is granted these
days, but it is still an important feature of the investment
objectives of our everyday American citizens.
Mr. Kustoff. Thank you, Mr. Hall.
And I have about 30 seconds left, Mr. Chairman, so I will
yield back. I do thank the witnesses. And thank you for calling
today's hearing.
Chairman Green. The gentleman yields back his time, and the
Chair thanks the gentleman.
The Chair now recognizes the gentlelady from Michigan, Ms.
Tlaib, for 5 minutes.
Ms. Tlaib. Thank you so much, Mr. Chairman.
I know that whenever we experience an economic crisis, it
is the budgets of States and cities that are hit the hardest.
And I have seen that firsthand, the devastating impact of the
bankruptcy of the City of Detroit, and the impact it had on its
residents and also the retirees. Last year, despite more than
1.5 million public sector layoffs across the country, the Fed's
Municipal Lending Facility only purchased two municipal bonds,
amounting to less than one percent of the Facility's capacity.
And I know the Brookings Institution did find that the
Municipal Lending Facility's initial eligibility excluded
countless communities like mine, including not only Detroit,
but Atlanta, Baltimore, Boston, and Pittsburgh metro statistics
areas. Meanwhile, the Fed Secondary Market Corporate Credit
Facility purchased hundreds of millions in corporate bonds in
the energy sector, including from dirty polluters like
ExxonMobil, Chevron, BP, and Marathon Oil, right here in my
district.
So, Professor Parsons, at this point the Fed has been
unwilling and unable to facilitate meaningful emergency
assistance for State and local governments. How do you think
our role as Congress should step in to fill this gap in
fostering long-term investments in our communities?
Mr. Parsons. I would like to speak rather specifically to
the results of the findings specifically with HBCUs. And one of
the ways that I think about the triple tax exemption, is it is
almost a free market solution to a problem. One could
characterize it that way. If the problem is that the market is
too small in the sense that if you are an HBCU attempting to
place your bonds in the hands of less-than-willing investors
and that investor base is too small, triple tax exemption
essentially opens up the market to other States where you give
other investors a crack at it. So that is something I am quite
optimistic about, and I would support that very much if that
was on the table.
Ms. Tlaib. As COVID and the pandemic has threatened our
City and State Governments with fiscal crises, they are in
survivor mode right now. Unlike any other time or experience I
have seen, I know that public banks could offer a much more
accessible option for dealing with these debts than investing
traditional underserved communities. I know in 1919, the State
of North Dakota established a public bank, which conducts
business on behalf of the State, bringing down borrowing costs
on the State needs and offering limited banking services to
State residents. For example, I don't know if the chairman
knows this, but according to the Bank of North Dakota's 2020
report, the bank financed $36 million in school construction at
a lower cost.
So, Ms. McDaniel, do you believe that a public bank would
be more likely to consider other factors beyond mere profits in
issuing bonds compared to private bond underwriters? Compared
to a private bond underwriter?
Ms. McDaniel. Yes. Thank you for that question,
Representative. Based on the research by the Action Center on
Race and the Economy (ACRE), municipal banks definitely allow
cities to recapture local tax revenues and local funds
currently invested in market instruments, retain those tax
revenues currently siphoned off by payments of the principal
and interest municipal bond owners. So, that is a definite
advantage there. And they enable the municipality to channel
that back into affordable housing infrastructure, and economic
development.
I would definitely agree with what you said about public
banks and the advantages there, and being able to consider
different factors with that, and also providing potentially
more for the cities in terms of services that I previously
mentioned.
Ms. Tlaib. Thank you, Ms. McDaniel. What you said is
basically that the money stays within the community. And again,
it must be able to reinvest and again help, I think, improve
the quality of life of the many of the residents.
Professor Parsons, you heard what Ms. McDaniel said, and I
would love to hear from you about how public banking could
ensure that traditionally underserved cities like mine gain
access to resources and are better equipped to weather budget
crises that were created by COVID, another really critical time
in our country especially the last great recession in my City?
Mr. Parsons. My main observation about public banks is they
serve a role when the private markets are, for whatever reason,
failing or struggling, when there are frictions in that market.
During COVID, the Fed was buying up basically everything. They
were buying up municipal bonds and other fixed-income
instruments, and one could imagine a similar situation here.
Ms. Tlaib. Thank you.
I yield back, Mr. Chairman.
Chairman Green. The gentlelady yields back. Thank you.
And the Chair now recognizes the gentleman from Illinois,
Mr. Garcia, for 5 minutes.
Mr. Garcia of Illinois. Thank you, Mr. Chairman, and I
thank you and Ranking Member Barr for holding this hearing.
And, of course, thank you to all the very informative
witnesses for joining us. This hearing is especially important
to me, because we have to think a lot about the bond market
where I come from; I represent parts of Chicago and suburban
Cook County. Because our municipal bonds have attracted low
ratings, our borrowing costs are high. That usually cuts wages
and benefits for working-class people like the constituents I
represent, and results in bigger checks for bondholders. Many
of my constituents are from Puerto Rico, so they know this
dynamic very well. We even have some of the same Activest bond
holders like Aurelius Capital calling for cuts in spending. It
often means that the less money you have, whether you are
Chicago, Puerto Rico, or a small university trying to keep the
doors open, the more money you have to pay.
Mr. Nadler, it seems to me that a lot of what goes into
credit ratings is outside of issuers' control. For instance, if
Puerto Rico is devastated by a hurricane or Detroit loses
thousands of good jobs because of changes in national economic
policy, that would have a major impact on bond ratings. We know
that communities of color and working-class neighborhoods are
hit especially hard by these kinds of shocks.
Do rating firms consider whether their criteria have a
disparate impact on communities like mine, in your opinion?
Mr. Nadler. I think that they don't do a good job of that,
and I will give you an example in your own City of Chicago, of
the Chicago Public Schools. There was a point with the two main
rating agencies--the two largest rating agencies had Chicago
public schools and non-investment grade. We did a much larger
study and looked at the housing market, basically the
wherewithal of the City of Chicago and found that they could
sustain higher taxes if they needed it, and that there was no
reason that school district should be non-investment grade.
Now, they have sort of come back to the investment grade.
So I think that competition is important, because I think
that when you are looking at, whether it is Puerto Rico or
whether it is the State of California, making sure that you
have competing ideas and that you have enough research out
there for investors so that they can use their preferences to
choose where they want to invest their money is important. So,
I believe competition is important.
And I will also just say one other thing, that a lot of
times these incumbent rating agencies get into a rut, and they
just look at the same things every year, every month, instead
of re-imagining and re-looking at cities and States as they
grow and evolve. And I think it is important to take a new,
fresh look at all of the different entities that you pointed
to.
Mr. Garcia of Illinois. Thank you, Mr. Nadler.
Ms. McDaniel, it sounds like some bond issuers face
financial troubles that can't be fixed with more debt, whether
it is a university with a declining student body or a city with
a declining tax base. Is the bond market itself capable of
protecting these institutions from arrangements that just
extract wealth from local communities? And do you think that a
public bank or a national investment authority could provide
better results?
Ms. McDaniel. Thank you, Representative, for that question.
I think we have seen that in the case of certain cities--in our
recent past, as you mentioned, Puerto Rico. We can add Detroit
to that list and others. There has been unfortunate
exploitation, I believe, of these cities and their tax
populations, whether because there is a declining tax base or
other reasons and I think there is definitely a need for
different institutions that can hold both the impact to the
communities and the financial considerations at the same time.
So to your point, I think, yes, that may be something that
a community bank or a public bank could better serve in that
role, taking those things into consideration. Thank you.
Mr. Garcia of Illinois. Thank you very much.
Mr. Chairman, I yield back.
Chairman Green. Thank you. The gentleman yields back.
The Chair now recognizes the gentlelady from Texas, Ms.
Garcia, for 5 minutes.
Ms. Garcia of Texas. Thank you, Mr. Chairman.
And thank you to all of the witnesses who are appearing
today.
And, Mr. Chairman, as you know, this is also, for me,
something that is close and personal. In my first elected
position as the City Comptroller in Houston, I worked with Rice
Financial, and I worked with Muriel Siebert before the start of
the firm of Siebert Brandford Shank & Co.. So, these issues are
really important and it is regrettable that people don't
realize how important they are, as my colleague Representative
Garcia mentioned, how it is all connected to what happens in
the community with regard to the jobs and the wages and the
impact to the everyday workers. So, thank you for holding this
critical hearing.
And I do want to start with you, Mr. Hall. I want to
piggyback on some of the questions that my colleague, Ms.
Tlaib, was asking about the Municipal Liquidity Facility. It
just didn't work. A lot of it was the high penalty fees, and a
lot of it was that they initially excluded most of the Black
cities in America. My question to you is, is it needed? And if
we were to bring it back, what changes do we have to make?
Mr. Hall. Let me say two things at the outset. I happen to
know, personally and professionally, the people at the Fed
tapped to run that program, and I have the utmost respect for
them in both their professional and personal characters and
abilities. So, I think that is important.
But I also think it is important to know the time that
program was enacted. First of all, $500 billion was the size of
that program. That is larger than the entire municipal bond
market. We have never issued $500 billion. I think the intent
of the program is to be sort of shock and awe to make sure that
investors knew that the Fed and Treasury were behind a
municipal bond market. And I think that worked. We had $20
billions of outflows in early March of 2020, and we were really
suffering from a liquidity crisis.
After the MLF program came in, we started seeing access to
the municipal bond markets so much so that by the end in
October, we had the largest issuance of any month that we have
had in the history of our market. I attribute a lot of that to
the early efforts of Congress and the MLF in providing
stability. I know only it was only four issuances, and only two
issuers benefited from that, and they afforded a tremendous
amount of flexibility not just in the cost of borrowing, but
actually the terms that were really important for those
particular issues. But the overall benefit to the marketplace
and providing stability was a huge objective of the MLF, and
from that score, I think it really achieved its objectives.
Ms. Garcia of Texas. But do we need to do it, and then,
what changes, was the question.
Mr. Hall. Right now, the municipal bond market is extremely
resilient. And so, from that standpoint, I think access to the
municipal bond market in the public way is in due course and is
not necessary at this particular point. Having that as an
emergency backstop should there be shocks to our market in the
future is always important.
It is also important to note the difference between what
was used for the corporate market versus what was used for the
municipal market. The corporate market was a secondary sort of
platform, which helped those investors who already had actual
corporate bonds. The municipal liquidity was a direct loan to
issuers. Different ways of stabilizing the marketplace really
serve this purpose, and I think having that lever going forward
is important, but thank God we have a municipal bond market
that is extremely resilient.
Ms. Garcia of Texas. Thank you.
Mr. Parsons, my question to you, sir, is, I looked at your
study and your results, and I just wondered if you are familiar
or have seen a similar study that perhaps has been done on the
impact of the bond work and the costs as to Hispanic Serving
Institutions?
Mr. Parsons. No, I am not aware of that.
Ms. Garcia of Texas. Not at all?
Ms. McDaniel, are you aware of any study or work that has
been done in the area of the impact of borrowing costs and
higher fees as is related to Hispanic Serving Institutions?
Ms. McDaniel. Thank you for that question. I think the best
point to focus on there is I believe Excelencia does some great
work on that, but that it is segmented because you have
institutions that were predominantly White institutions
becoming HSIs and often have higher capacity with getting
bonds. And so there are some variants there with different
HSIs, but their research speaks to that. Thank you.
Ms. Garcia of Texas. I agree with your comment that it is
not just about including them in the population but actually
serving them. I thank you for that comment, and I think that is
true of any institution, that they need to serve all of their
population regardless of where they come from or what color.
So, thank you very much.
And, Mr. Chairman, I yield back.
Chairman Green. The gentlelady's time has expired.
The Chair now recognizes the gentleman from Guam, Mr. San
Nicholas, who is also the Vice Chair of the Full Committee. You
are recognized for 5 minutes for questions, Mr. San Nicholas.
Mr. San Nicholas. Thank you so much, Mr. Chairman.
And thank you to all of our witnesses here today. As a
Representative from a Territory, I can absolutely attest to the
fact that triple tax exemption for municipal debt does greatly
improve the market environment for the issuance of municipal
securities. Guam, as a Territory, does enjoy triple tax exempt
status for the bonds that we issue, whether they are revenue
bonds, or they are GEO bonds, or whether they are limited-
obligation bonds. And so, I would fully endorse, Mr. Chairman,
as an option, triple tax exempt status for HBCUs and for
Minority Serving Institutions as a solution for us to bring
down the cost of debt for these institutions.
Another option, Mr. Chairman, would be perhaps to also
consider having land grant institutions classified as agencies
of the U.S. Government similar to Fannie Mae and Freddie Mac.
That way, they also have their debt implied on the full backing
of the full faith and credit of the United States Government.
That would also greatly help in driving down the interest costs
for the debt at issue. I know that we are discussing the cost
of issuing debt particularly on the underwriter side, but I
wanted to highlight, Mr. Chairman, that the biggest cost of
debt, of course, is the interest rate paid on the debt. And the
triple tax exempt status would absolutely help to lower
interest rates for these institutions. In fact, Guam is so
successful that we oftentimes have our debt oversubscribed.
And so, Mr. Hall, I wanted to tap into your expertise here
on oversubscriptions, which basically drive down interest rates
even below the coupon rate. What is a typical oversubscription
that would be healthy?
Mr. Hall. That is a very, very, very important point, and
you are absolutely right that creating peak competition for
bonds drives yields downward. The good news is that our market
has had an infusion of regulatory changes in recent years, and
one of the important features now is the expanded inclusion of
municipal advisors in the process that have a very defined
fiduciary role. Why they are important in the underwriting
process is, when you get oversubscription in an offering based
on investor interest, typically municipal advisors, acting on
behalf of the issuers, ask that the underwriters actually lower
yields to reduce that subscription.
And so, that actually improves the pricing performance
during the course of a transaction of an issuer and that is one
of the sort of helpful support systems that the regulatory
framework now allows for to ensure that oversubscription inures
to the benefit of the issuer.
Mr. San Nicholas. What would healthy oversubscription
typically be like? Four times oversubscribed?
Mr. Hall. I am reticent to say, because it is always
contingent on the deal, size, and type of credit of that
particular day in those particular market environments. But I
would say a healthy subscription that would require maybe
revisiting the bonds offering price would be over 2 to 3 times.
Mr. San Nicholas. Thank you so much for putting that on the
record.
And, Mr. Chairman, I wanted to get this on the record,
because even if we do get triple tax exempt status for HBCUs,
there is still a danger that we are not going to get best
interest rate pricing due to oversubscriptions. And Guam, Mr.
Chairman, has a horrendous oversubscription problem, and I
think that kind of circles back to underwriters not pricing the
debt properly.
We had one example of a debt that was issued in the month
of June, and then another debt that was issued in the month of
August, both by the same agency, both are revenue bonds, both
for over $100 million. The coupon rate on the first debt was 5
percent. The coupon rate on the second debt was 3.61 percent.
The 5 percent was oversubscribed by 21 times, and the second
debt was oversubscribed by 1.2 times.
And so, as we seek out ways to reduce costs to our
institutions, we need to be very mindful of the fact that the
underwriting fees upfront are one thing, but we need to also
protect institutions from mispriced offerings that are going to
result in interest expenses. One hundred million dollars at an
89 basis point differential over 30 years of debt is a $26.7
million interest expense.
Thank you, Mr. Chairman.
Chairman Green. The gentleman's time has expired.
The Chair will now recognize himself for 5 minutes. And my
first question will go to Ms. McDaniel.
Ms. McDaniel, as it relates to this subcommittee, I think
you may have made history today by announcing your pronouns,
and I think I am going to join you in making history, and
announce my pronouns as he/him/his. So, maybe you are changing
the world today, Ms. McDaniel.
Language is very important, which is one of the reasons why
I appreciate this President, President Biden. He uses the
language of the suffering. If you want to change the status
quo, you have to change the language. You cannot use the
language of the status quo and change the status quo. And I
appreciate President Biden.
Which takes me to you, Mr. Parsons. Sir, you have indicated
that you found that HBCUs pay an average of 20 percent more to
issue bonds than similarly situated non-HBCUs. My question to
you, Mr. Parsons, is, is this a question or a case of this
being institutionalized, since it applies to HBCUs? And if you
will give me a brief yes or no, I will then follow up.
Mr. Parsons. Can you please clarify your question, what you
mean by ``institutionalized?''
Chairman Green. Is it such that the institutions that are
promoting, producing, promulgating, and perpetuating this
circumstance, are they doing it not because they want to
discriminate necessarily, but because this is institutionalized
in their habits and their norms?
Mr. Parsons. The results of our functions are consistent
with investors.
Chairman Green. Investors are owned by institutions, are
they not?
Mr. Parsons. About half of municipal bonds are owned by
just mom-and-pop retail investors, and about another half are
owned by institutions.
Chairman Green. Okay. Those that are representing
institutions, let's just talk about that, something that is
institutionalized.
Mr. Parsons. Our paper does not address that.
Chairman Green. I am just asking you for your opinion. No
penalties today.
Mr. Parsons. No, no opinion offered.
Chairman Green. Okay. Let's go to Ms. McDaniel.
Ms. McDaniel, do you see these circumstances as being
institutionalized, this 20 excess charge?
Ms. McDaniel. It would certainly appear that way. Sorry,
you asked for a yes or a no. I think it would be a yes, but it
seems that way.
Chairman Green. I tend to take people to the edge, so
please forgive me. But it is just something that a person who
is a liberated Democrat does. I am not a part-time freedom
fighter, so sometimes you bring your full-time fighting to the
arena where it can be most beneficial.
So if this is institutionalized, is it institutionalized
discrimination? Ms. McDaniel, is it institutionalized
discrimination?
Ms. McDaniel. It would certainly seem that way. Judging by
the outcomes, I would say, yes.
Chairman Green. Let's go to Mr. Fisher. Mr. Fisher, is this
institutionalized discrimination?
Mr. Fisher. I believe so, when we are discussing
institutional investors.
Chairman Green. Thank you. As it relates to institutional
investors, is a good preamble for my commentary, and I
appreciate you calling it to my attention as I move next to Mr.
Hall.
Mr. Hall, is this institutionalized discrimination?
Mr. Hall. Chairman Green, I have not studied that. I can
tell you that what I saw in the study that pointed to taste-
based discrimination is not something consistent with my
experience in the marketplace. And I don't think the study done
at the time that it was done really benefited from the
transformation that has taken place in our market. They would
make a study like that today a little bit more inductive. So I
can't conclude that I see that there has been institutional
racism, sir.
Chairman Green. Okay. The Chair appreciates all of the
answers. I have 22 seconds left, and I try to be a good example
for the rest of the committee, so I will just close with this
comment before I do my official closing. We know, and probably
can take judicial notice of the fact--I say, judicially as we
do it in court--that these institutions have been discriminated
against in the past. And I think that we probably have to do
more to acknowledge and work to acknowledge what the current
circumstance is. I will leave it at that and yield back the
balance of my time.
Seeing no additional Members to ask questions, the Chair
will now thank the witnesses for their testimony and for
devoting the time and resources to share their expertise with
this subcommittee. Your testimony today will help to advance
the important work of this subcommittee and of the U.S.
Congress in addressing lending discrimination and systemic
racial inequality.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 1:32 p.m., the hearing was adjourned.]
A P P E N D I X
April 28, 2021
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